Wednesday, November 9, 2011

It's Academics v. the Politicians . . . v. Economic Reality, Part I: Accounting

Deviate from Keynesian economics As She Is Taught, and you risk getting labeled an economic ignoramus. According to Dr. Jonathan Lanning, a professor at Bryn Mawr who teaches introductory economics, neither the Democrat nor the Republican candidates have a "truly comprehensive understanding of even basic economics." (Charles Riley, "Economics: Presidential Candidates Slip on Econ 101," CNN Money, 11/09/11.)

We couldn't agree more. Unfortunately, that "comprehensive understanding" of basic economics derived from fundamental concepts such as private property, money, credit, banking, finance and (lest we forget) accounting continues to elude academic economists as well. The article is filled with thinly (and not-so-thinly) veiled contempt for the presumably nutty ideas being espoused by the current crop of presidential candidates, with special emphasis on those spouted by the Republican Crazies, who tend to be slightly less socialist than the Democratic Dements.

Take, for example, accounting. Accounting is the "language of business." Business is what we call it when people engage in producing marketable goods and services to meet the wants and needs of themselves and others. Economics is the study of how people meet their wants and needs. Thus, accounting is the language of economics.  Nevertheless, we're tempted to put money down on the chance that not one academic (or other) economist in 10,000 can explain the "accounting equation" in meaningful terms: "Assets = Liabilities plus Equity."

You know why? Because the accounting equation is a statement based on the concept of private property. On the one side you have "Assets," that is, what is owned. On the other side you have "Liabilities" and "Equity" — who owns (has a legal claim on) the "Assets." Equity is what is the amount of the assets of the business owned by people inside the business. Liabilities are what people outside the business own.

Finance? Finance is the science of figuring out how to pay for capital. Rule Number One in finance is, "Don't buy any capital that doesn't pay for itself." Period. Don't do it. Do it, and you'll go bankrupt . . . unless the government decides you're too big to fail and bails you out, but that's another story.

That's all for today. Tomorrow we'll look at . . . banking!


No comments: