I have published this video this morning. In it, I argue that every politician should understand double entry. If they did, then they might work out the consequences of their actions and the ridiculousness of many of the claims that they make about government spending.
The audio version is here:
The transcript is:
Double entry is the most incredibly powerful language that I know is available to explain economics.
Double entry is usually associated with the art of bookkeeping and that art is dying because it's largely being taken over by computers. People say that in the future AI will entirely eliminate it as a human skill and that would be a terrible thing to happen because this double entry bookkeeping is based on a very simple premise.
That premise is that every action has a reaction.
Now, science tells us that.
Physics is built on that idea.
And so is accounting.
You cannot, for example, spend money in a business or as a person without there being a consequence. Yes, you've got less money, but you did get something in exchange. You either bought something, or you owe somebody less than you did beforehand.
There is a reaction as a consequence of the first action.
And that's true throughout the business world. Nothing happens without there being two sides to every event.
This is an understanding that our politicians do not, however, seem to share. For example, they talk about public spending - government spending - as if it's pouring money into a black hole from which nothing will ever emerge.
That's obviously wrong. There is a quality to public spending that is important to appraise, because the spend is on something, and some things are quite simply more beneficial than others in terms of the impact that they have on the economy.
Spending money subsidising the pensions of the already wealthy does very little for the economy as a whole.
Spending money on relieving child poverty would have a massive impact upon the lives of a million children, and their parents or carers.
Spending money to improve education very obviously has a long-term benefit in terms of the outcomes that those children will deliver for us all in the future.
Spending money on health care gets people back to work.
And social care does the same thing because it frees the logjams in hospitals.
Understanding that the quality of public spending and what it is on, and that it's never wasted in the sense that there is never no recipient - which the idea of the black hole of public spending which politicians put forward implies - but is instead something that can stimulate economic activity of benefit within the economy - then if only our politicians understood that we would have a better quality of economic and political debate in this country.
But because they don't understand double entry, they don't understand the very building block on which business is built, and they don't understand the consequences of their own actions. They don't discuss, in a meaningful way, what they're actually going to be responsible for.
I genuinely believe every politician should be taught double entry. I actually think a lot of people should understand double entry as if it's a form of basic literacy about the way in which the world operates. Because if they did, you'd always have to think, I'm doing this, who am I impacting, and is that a useful outcome? And then the world would be a better place.
It's odd to suggest that something so basic could have such a big impact, but I genuinely believe it could.
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I guess you can also look at the converse: not spending produces nothing.
If you don’t ensure that Bob and Alice have a job, then they’re not going to produce/build that house, make sure people are well, grow some food.
All of the latter have value, arguably more value than the cost to produce them, and that makes them worthwhile. Every £1 put into making them happen, produces more than £1’s worth of value (growing the economy). Not doing this shrinks the economy.
Every £1 put into making them happen, produces more than £1’s worth of value (growing the economy).
@ Ian
That would be a multiplier effect, and not an example of double entry where there is an equal reaction, or balancing item on the ledger.
Someone has been mixing their definitions here in order to make a commentary undermining politicians. There are quite enough of people doing that already, mainly politicians themselves!
Excellent Richard: clear & concise – how could anyone not understand that?
Thanks
Tom Holt: accountants are like fish – they see the world differently from the rest of us (Flying Dutch – which is partly about erm… accounting).
I agree with all the points. But. It assumes that knowing/understanding would affect narratives (we ‘ave no money etc). All the politicos know that the poor are over taxed and the rich are under taxed. It is a short step from that to: “so if we gave money to relieve child poverty we’d get much of it back – quickly?” – yup.
But this narrative never takes place, either publicly (apart from the pages of this august organ) or in private/in the heads of LINO/the media. Hypothesis: even if they fully understood double entry bookeeping and its implications – it would make no difference – because you are dealing with adherents to neo-lib theology – belief – our markets which art in heaven. etc (divine right of kings, L’etat est moi…).
Politicos are not reasonable people & for the most part are more interested in what the (know-nothing) media is saying than their constituents – elections aside.
Thank you for another essential article!
Might it be that without the concept and related attitudes and skills of double entry book keeping no one is decently educated?
Are politicians, civil servants and journalists all badly educated, follow a fashion not to use and promote double entry book keeping, or operating as a cartel to hide double entry book keeping, or what?
You can’t do that, Richard. You will just confuse the economists because they aren’t taught double entry either; and that means they won’t understand politicians; and that means they will not be able to manipulate politicians any more. You are threatening their livlihood. How are they going to earn a living if politicians do not give them a privileged status over political discussion of the economy? Everybody else will stop using them.
Very much so Richard.
The common phrase is ‘oh yes you can always throw money at it’ – as if any spending it’s going into a black hole.
In today’s Newspeak, it is not permitted to suggest that spending on the NHS or other public services – is spending actually going INTO the economy . The very phrase ‘public spending’ is treated as though its a definition of ‘waste’. Just as ‘tax’ seems to be a definition of ‘theft’.
Agreed
Perhaps a subject for the school curriculum? (Instead of trigonometry for instance?)
And surely a definite for Political Science students?
(OK I’m daydreaming, I know.)
We keep hearing the IFS warning that any new govt must raise taxes or make cuts. I heard £18 billion today.
I get the impression they don’t take account of multipliers.
We also keep hearing from the Conservatives that the IMF say we will grow faster than European countries. It seems because we are catching up from six months of recession -as you forecast.
The OECD gives a different picture which I haven’t heard discussed.
https://www.bbc.co.uk/news/articles/cq5n2d8en8wo
The IFS doesn’t do macro though, do they? Unfortunately, for them (and us), the real economy does.
You get the impression that the likes of Sunak, Hunt, Reeves and Balls must have been off university sick when their courses presumably covered macroeconomics to at least some degree.
Ditto for everyone who works at the IFS.
Many of those working at the likes of the ASI, TPA and IEA probably understand macro, but they aren’t paid to admit that!
I agree with your statement that politicians should understand accounting, but two comments about the difference between governments and business.
1. Non-exchange transactions, of which taxation is the most obvious example. Not every time you spend money do you get something back (or in the case of government, not every time you receive money do you have to give something away).
2. Businesses use money to make more money; governments use money to create social impact. In other words, businesses are trying to accumulate resources, whilst governments are giving them away.
OK. Let’s talk about some non-exchange transactions:
1) Bank interest – paid for a commodity made costlessly
2) Rent, paid for land that was there anyway
3) Super normnal profits over and above market rate because of market power
How much of the econpmy is explained by these? All are amrket failures, in effect. Explain why you like them when they add no value, but tax does.
And now let’s think about what govermnet spends on:
– Education
– Health
– The environemnt
– Housing
– Transport
And much mnore. None of them result in money generation? Really?
Your comment really is crass, to be blunt.
Every think tank and its dog is telling us it’s either shrink the state, ie cut public spending and make the poor poorer or raise taxes (but not like in Taxing Wealth Report) or borrow more (and increase the “debt”).
They correctly identify that public services and infrastructure and investment are in a dire state (well, the dog could have told them that) but they haven’t a clue about how to address the problem using government’s ability to create money and tax it back by targeting the wealthy. Do they never read anything other than Hayek and Friedman, never question the decades old neoliberal assumptions which have failed, never actually think?
Look at who funds them and the suspicion has to be that they say what they’re paid to say. They perpetuate the false paradigm, most educators and most media folk too, because their salary depends on them doing it. Is it a conspiracy? Certainly looks that way, doesn’t it?
Stephen Flyn focused on the IFS ‘built-in’ £18Bn in cuts during the debate, toh good effect. Neither Rayner nor Mordaunt rebutted. The IFs today on Sky News underscored that neither Labour nor Conservative have explained how they are going to fund it. There is silence on the obvious resort; to borrowing – because they can do it, of course but the only thing that can never be done, is ever to admit it All you so is increase the national debt, and increase the austerity; so you can claim that you are not doing it; when you are. You simply rely on the fact that the electorate haven’t a clue about how the monetary system actually works.
Does double entry apply to the Ways & Means Account?
It applies to everything
A visual representation of the Ways and Means Account might help. It could include the £billions created from nowhere in the Debit column together with sketches of medical folk carrying out the nation’s Covid response in the Assets column. Similar sketches could be made using your suggestions above, essentially the money created and spent paired with the socially beneficial consequences of that spending, the idea being to get the point across that that’s how it works. The BoE make no secret of how money’s created by banks when they lend and also that it paid for Covid by extending what it chooses to term the govt’s overdraft with it, an awkward term when one considers that the BoE itself is part of govt, so they’d have difficulty trying to reasonably and coherently argue against repeated use of the facility. The aim overall is to communicate that it could be done and has been done already, to have the general population asking, why isn’t it being done more and as a matter of routine?
Can you look at the charts in chapter 16 of the Taxing Wealth Report?
Richard says “it (meaning double entry bookeeping) applies to everything”. I agree it should apply to everything in national bookkeeping with the possible exception of GERS, where single entry accounting is used in order to “massage the figures”. How convenient! – costs can be increased and revenue ignored or reduced at will in order to arrive at a suitably embarrassing faux picture of Scotland’s income & expenditure, which in turn will be reported widely by the UK MSM as if it were gospel. Job done!
Meanwhile the Scottish Gov (like the other devolved nations) must provide a ‘balanced set of books’ (using double-entry bookkeeping of course) on an annual basis. Needless to say the MSM rarely mention this as it demonstrates that the Scottish Gov is managing to control its economy despite the Block Grant being reduced as a result of UK Gov austerity measures. A very simple analysis will show why Scot Gov’s plans had to be curtailed due to the Block Grant being reduced. When is someone from Scot Gov going to point this out and draw the MSM and public’s attention to the shady fiction of GERS and the reality of the annual accounts?
I wish they would
Single entry is the ‘flat earth’ version of the monetary universe.
Therefore, it follows that you may deduce that neoliberal economists, and virtually all politicians are ‘flat earth’ believers. you didn;t actually believe we arrived in this economic mess, merely by accident, or adverse events alone?
Thank you – as an extension to double entry – OpenStrategies https://openstrategies.com/ more explicitly who the beneficiary is (Uses) and how the Benefit arises from multiple projects in an ecosystem.
In Phil Drivers most recent book ‘Flow’ it is clearly demonstrated that in outsourced services most of the risk is still retained by the ‘purchaser’, with the tax payer as the back-stop.
I admit I could not, from a bref view, work out this bias in this work. So I oost this w9ith a note of caution attached.
Perhaps the best way to educate politicians would be to educate journalists first. For example, Mel Stride, when being interviewed last Sunday by Trevor Phillips on Sky News talked about the Government ‘spending’ £400 billion on Covid payments. This went unchallenged when it could have been pointed out that much of that money will have been spent back into the economy. If politicians were challenged more in this way it would force them to both understand financial transactions and to stop scare mongering about public finances.
It wouldn’t have hurt either to point out this money came from the BoE extending the govt’s ‘overdraft’ at the BoE ie the Ways & Means Account, the Magic Money Tree itself, making a nonsense of any political suggestion we can’t do this that or the other because ‘the country can’t afford it’ or ‘there isn’t the money’.
A couple of points that come to mind.
1. Not all economic ‘good’ can be quantified, including, for example, a safe environment and life expectancy. These things are undoubtedly part of a nation’s assets and can be incorporated into the Balance sheet. The liabilities on the other side of the double entry is the accrued benefits conferred by these assets owed to citizens in the future. Similar to intangible assets or goodwill. Money invested in building up these economic ‘goods’ is invariably well spent, although not always appreciated.
2. Japan is a very successful country by nearly all economic measures. It also has a debt to GDP ratio twice that of the UK, financed largely by its citizens. And yet, in UK, the gov is panicking about going just over !00% debt to GDP ratio. We are in a crisis that could easily be mitigated by higher gov investment which citizens will eventually have to finance. The key word is ‘eventually’. The crisis is now, and economists need to step forward and try to adapt the Japanese model to our current predicament.
Not sure if you’ll have seen this Richard, but it appears that Kevin Bridges is in agreement with you on the value of giving money to people who will spend it.
https://www.youtube.com/watch?v=c8mRWW3C_Kk
🙂