Thursday, December 19, 2013

The Invention of accounting

I've occasionally referenced M. King Hubbert's comment that our economic systems have evolved from "folkways of prehistoric origin." I hope the previous article made clear just how true that actually is. They key phrase in that post was, "There is nothing either natural or God-given about the use of money. It's just a historical process, quite a complicated one, that's built up over time." I don't think many people get that.

There is no universal conception of what money is (see this). Money evolves over time and in line with the needs of society. Some of us see fiat money credited to various accounts as simply the next evolution of money. As David Graeber's book "Debt The First 5,000 Years" points out, debits and credits based on faith was actually the original money, so there's nothing "sinful" about fiat money. Fiat money is money, it works as money, the key is that it must be managed properly (which it all too often is not). But that's the problem - and trading with gold coins is not the solution. Money should be a social tool used to mobilize resources, when all too often it's used as a weapon of the wealthy and the bankers to wield against the rest of society. Money can best be seen as a tool, or a kind of technology.

So, the next step on our historical money journey, is from the use of gold for trade to the evolution of debts and credits that forms elementary bookeeping and undergirds all modern economics. This was a product of a trade revolution in Renaissance Europe. Here is a fascinating account of the originator of this idea, Leanardo da Vinci's pal Luca Pacioli:

Episode 407: A Mathematician, The Last Supper And The Birth Of Accounting (NPR)

And How a Medieval Friar Forever Changed Finance (Echoes)
As his encyclopedia was going to press in Venice in 1494, Pacioli added a 27-page summary of a new form of accounting that had first emerged in Italy around 1300 and been perfected by the merchants of Venice. He called the addition a “special treatise which is much needed” to help merchants keep their accounts in an orderly way.

Known in the 15th century as accounting “alla Veneziana,” the system is now called double-entry bookkeeping and is standard practice throughout the world. In 1494, it was exceptional -- and in his treatise Pacioli recommended it above all others.

In their ledgers, Venetian merchants separated debits and credits, dividing them into two columns. As Pacioli wrote: “All the creditors must appear in the Ledger at the right-hand side, and all the debtors at the left. All entries made in the Ledger have to be double entries -- that is, if you make one creditor, you must make someone debtor.”

Pacioli’s system was revolutionary because it allowed merchants to calculate increases and decreases in their wealth, recorded in their capital account. In other words, it allowed them to determine that driver of capitalism: profit (or loss). Pacioli wrote that the purpose of every business was to make a lawful and reasonable profit, which could be tallied with Venetian bookkeeping. And thus the seed of capitalism was planted.
But notice that while Pacioli's accounting innovation of double-entry bookkeeping revolutionized trade, this accounting identity got carried over into the management of the nation-state, when in fact, it actually predates the notion of the nation-state and modern currency. Initially, there were no such things as nations or national budgets. What became national budget evolved out of the king's personal accounts. Eventually this became the concept of a "national debt," also called a "sovereign debt" - see the historical connection there? From the above article:
Both Roosevelt’s program and Keynes’s theory entailed the creation of national accounting systems, a massive undertaking that was carried out using the principles of double-entry bookkeeping.

At Keynes’s instigation, the first British accounts were made during World War II. Following the war, national accounts were created in countries across Europe as part of the framework of the Marshall Plan. And under the aegis of the newly created United Nations, national accounts were subsequently adopted by almost every nation on Earth.

Today, we depend on the numbers generated by the accounts of nations and corporations to direct our governments, businesses and societies. And so it happened that a medieval Italian accounting system codified by a friar in 1494 now governs the global economy. 
A company can be in debt, say, for purchasing new equipment. You and I can be in debt, theoretically for loans taken out of our own free will. But what does it mean for an entire nation to be in debt? Why is this concept even useful? In truth it isn't. It's time to move beyond this. We're stuck with these identities, but there's no reason to tear apart civil society because of them. In fact, it turns out that what the public debt really is is a credit to the private sector. This is counterintuitive, but it's merely a side-product of using accounting identities to manage national finances - a convention, nothing else. But countries aren't merchants. Counties are issuers of their own currencies. Countries can't disband, dissolve themselves, or go out of business. And they cannot become insolvent or be "broke." (see this)

No one's truly "in hock" because of these debts.- it's all just a way to shuffle money around to get some sort of result. But what result - a healthy functioning society, or rich plutocrats in a land of suffering and misery?

Note that "the national debt" is used to justify everything from not constructing high-speed rail lines to eviscerating the social safety net. Note that's never used to argue against going to war with some God-forsaken corner of the planet, spying on American citizens, throwing Americans in jail, corporate subsidies, or bailouts for Wall Street. Who's fooling whom? Why is it that we can ship pallets loaded with dollar bills to an airfield in Afghanistan to be looted by warloads, but if we shipped those same pallets of dollar bills to Stockton, California or Canton, Ohio, the same politicians would be screaming to the high heavens and beating their breasts in anguish? Note that interest payments on national debts are what is keeping many third-world countries mired in poverty and misery.

Thus, to say that the U.S is "broke," or that we're desperately in debt for the money we owe mostly to ourselves and our descendants is nosense. Somehow politicans have convinced us that paying down the debt and letting states and cities go bankrupt, houses go into foreclosure, and millions go without work is "sound financial managment." It's nothing of the sort.

The idea of a national debt has held society back for way too long. Stop listening to the bought-and-paid-for politicians and corporate-owned media and start thinking more deeply about where this arrangment comes from, and who the beneficiaries are.


  1. Ok, so... I don't really understand, when you say "public debt really is is a credit to the private sector. This is counterintuitive, but it's merely a side-product of using accounting identities to manage national finances - a convention, nothing else."

    Can you chunk it down and give an example? My mind is having a hard time with it.

    1. One of the best introductions to these ideas is an e-book by Warren Mosler available here:
      See also: Nine deficit myths we can't afford.

    2. See this too:

      A good video in case you don't have time to read. Stephanie Kelton has other good talks too onYouTube. Search her name + MMT or Remini (where the lectures were given)


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