Re: Fundamental Flaw of National Accounting

[Bruce McFarling <ecbm@xxxxxxxxxxxxxxxxxxx>]

Per wrote:
>    I threw in that "virtually" to give a sense that your view of
>commensurability is a matter of degree, of "more or less". Aggregation
>matters have been dealt with quite exhaustively before in the economic
>literature (vide e.g H.A Greens 1964 book on the subject). But the thing is
>your hairsplitting about aggregation techniques are completely beside the
>point.

        I don't mean 'to a degree' as in, "absolutely conmensurate,
plus or minus a small margin for error and fuzziness around the edges".
I mean 'to a degree' as in 'to a degree: ranging from completely
conmensurate, to completely inconmensurate, and filling the range in
between".  So where you are reading me as saying conmensurate "to
*a very great* degree", I actually intend to say what I have been
saying, "to a degree".

        You are missing my argument entirely if you read me as hairsplitting
on aggregation techniqes, so it is not surprise if, on reading my argument
in that light, you find it beside the point.  If I have any hairs to split
on aggregative techniques, I will refrain from introducing them until and
unless I am persuaded that your argument holds together.  I do not care
whether the quantity index is generated using initial weights, final weights
arithmatic or geometric mean weights.  The index number problem is
subordinate to the measurement problem.

>    You say there is no philosophy involved here, and I say there is. You
>take the "atomistic" stance, arguing that the basis of comparison are the
>components of those great vectors of physical quantities. I say the basis of
>comparison are the volume indices, thus taking the "organicist" or
>"holistic" stance. If this is not a basic philosophical issue, I don't know
>what could be such an issue.

        You've got my argument upside down, because you *believe* that
a quantity index is a holistic basis for comparison.  That is, your
'holistic' stance is a stance regarding the nature of an index number.
I start out from a holistic stance regarding the economy.  I don't
start out believing that an index number is more than an indicator
regarding the economic system.  GDP is different from a quantity
or price index in this respect, because monetary transactions involve
a common unit -- as a characteristics of our economic systems -- and
GDP is a measure of transactions in that common unit.  GDP is not a
mere indicator of system state -- it one measure of the state of the
economic system.
        The reductionist's challenge to the holist might be summarised
as: if the characteristic of the system is not in the parts of the
system, where is it?  There are holists who feel no need to provide
a serious response: 'there is obviously something there that isn't
in the parts, and I will talk about that in its own terms.'  The
system perspective is that the challenge must be answered, and that
the answer tends to have the same general form: 'what is not included
within the parts of the system is the *organisation* of the parts of
the system'.
        Now if you identify yourself as working with the transaction
principle, your observables are money being transferred in one direction,
accompanied by a corresponding transfer of title to goods or performance
of services.  Whether or not you impute that all back to work in exchange
for the money, that is the observable transaction.  However you attempt
to generate an indicator for the volume of goods and services that
correspond to a given aggregate expenditure, the goods and services are
heterogenous.  There is an identification problem in *measurement* if
you use the price of the goods and services to meaure the aggregate
'volume' corresponding to expenditure, since the expenditure is the
aggregate of price-weighted quantities.  How do we get around this
identification problem?

        (1) Don't reduce the volume of output -- leave it in its natural
terms.  Then the index number is recognised as nothing but an indicator,
and its accuracy is degraded by changes in the quality and distribution
of the flow.  I view Boulding's approach in this light.  It has much in
common with the conventional approach, and in particular needs updated
to remove a theory of economic behavior (utility maximising theory)
that is inconsistent with a holistic approach.

        (2) Shift the focus from the market to the organisations receiving
the expenditure.  Then the output may be identified by expenditure, as
long as there is identification of inputs that is independent of price-
weighted quantities of input.  I view Keynes labor unit in this light.

        (3) Monkey around with the aggregate of price-weighted quantities
using additional distributions and constraints, and generate a synthetic
measure of volume that we treat *as if* it were an independent measure of
volume -- or, if you prefer the alternative language you suggest, we
treat as 'axiomatic' that the synthetic measure is equivalent to the real
measure -- so that we can act *as if* we have solved the identification
problem.  I view your approach in this light.

And then all this leads back in a loop back to the questions that I have
posed.

        If you supposedly have a holistic theory, how do you take
a theory of economic behavior -- the utility maximising theory -- which
is only tractable for a 'society' of atomistic individuals?  You can't
seriously expect anyone to be persuaded by your appeal to the mainstream
reliance on utility theory as support for using it while you simultaneously
reject any conclusions of utility theory that are inconvenient to your
purposes.  The people who will accept the first half (Per doesn't need to
justify using utility maximising theory, because its the most common
theory within economics) will reject the second half (Bruce doesn't need
to do more than point out that the most common utility-theoretical stance
is that interpersonal utility comparisons are invalid, since individual
utility can only be identified to an ordinal scale by individual choices,
and arbitrary changes in the scales used for interpersonal comparisons will
reverse the order of the comparison).  So I take that as nothing but a
rhetorical ploy while you try to work out a more serious response.

        If you supposedly have a holistic theory, why is it a *goal* of
your volume index to be invarient with respect to changes in income structure
(that is, the choice of plutocratic weights).  If you have an indicator that
has this invarience, where is your measure that is invarient to 'volume' and
indicative of income structure?

        And since the economy is an evolving system, any holistic measure
of the output of the system must recognise that the form of that output and
the utilisation of that output is evolving through time, and so that
degree of conmensurability is eroded steadily over time.  That is a
characteristic of the system, and even an indicator that provides
a relatively accurate comparison of states of the system over a short
period of time will lose either accuracy and/or precision if the comparison
is extended over longer periods of time: accuracy if the comparison is
performed *as if* the economy were not evolving, and precision if
it takes the evolution of the economic system into account (and
in the former case it may be losing a degree of precision in any event,
while in the latter case it may be losing a degree of accuracy in
any event).

        So, in short, I see the *economy* in holistic terms, its
just *your indicators* that I see as partially founded on atomistic
models of the economy.  If you view your indicators as equivalent
to the macroeconomy, that would account for the confusion between my
reaction to your indicators and my perspective on the economy and
hence the emergence of McMises.
Virtually,

Bruce McFarling, Ourimbah, NSW
ecbm@xxxxxxxxxxxxxxxxxxx