Steve Keen wrote this on Substack yesterday:
YouTube popped a video into my feed of Niall Ferguson (the author of The Ascent of Money: a financial history of the world) being interviewed on the TRIGGERnometry show. He was asked the inevitable question about governments “living beyond their means”, and gave the standard answer that governments which spent more than they collected in taxation are on the road to ruin.
This argument is wrong, but it's believed by people who, in another guise, are experts on money. Ferguson is an expert on the history of money; I prefer the work of Graeber, Martin and Gleeson-White, but his work on this front is scholarly. And yet he is entirely wrong about government finances, as were his interlocutors on the show, because they are all ignorant of the double-entry bookkeeping by which money is created.
Ferguson quipped that he had invented “Ferguson's Law” recently: “any great power that spends more on interest payments than on defence won't be great for much longer”. That led me to invent “Keen's Law”: that “virtually everyone who claims to be an expert on money doesn't understand double-entry bookkeeping”. The only exceptions—and I'm only being partially tongue-in-cheek here—are myself and Richard Murphy.
I was amused.
But Steve is also right: unless you get double-entry, you cannot understand money or the economy. It really is that straightforward.
The rest of Steve's Substack explores the double entry that shows Ferguson is wrong. Some will find it hard work, I admit. It is worth the effort.
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Once most people believed the earth was flattish, but navigators still set sail for the horizon. We need news of the Leif Eriksen and John Cabot of double-entry bookkeeping and joined-up economic thinking to be loudly proclaimed. If the ‘experts’ are pushing back, they must be feeling the pressure? An informed public will amplify the signal. My MP is going to get another letter.
Thanks, Anne.
I don’t see anything in double entry book-keeping which says that deficits should always increase. Someone has taken an accounting identity and imposed it on their fiscal view that deficits should never be cut in order to give their view some kind of intellectual support. This is an error.
For heaven’s sake: engage your brain before commenting and stop making a fool of yourself.
Sir (which he is now) Niall Ferguson has had quite an elevated view of himself for sometime now.
Agreed
My God being technically inept at “following the money” gets you a knighthood! They’ll soon be giving them away with dish washing liquid!
I thoroughly agree with the main point on double-entry bookkeeping. Where I have difficulty with it is how it copes with new engineering/scientific/technological ideas. In my experience, these can occur in any situation, not necessarily even at work. Maybe when driving and musing on a problem, in the shower, out walking . . These ideas can potentially have great value, may fail (usually) or succeed. How can double-entry cope with this kind of novelty? Patents? very expensive, and worthless unless there’s the money to defend them. Likewise commercial confidentiality. I can give more concrete examples if anyone is interested.
Double entry cannot cope with that. It copes with money – but if we get money wrong we have no foundation for the rest of the way we think about the economy. It is an essential building block – not the answer to everything.
I like Nial Ferguson’s take on history up to a point, but he is unapologetically anti- socialist in his political views which makes him a neoliberal from head to toe. It must be his upbringing, which is very similar to that of Andrew Neill. Both are from well-off middle class families in Scotland, both privately educated.
Being a canny Scot, it’s a pity he didn’t familiarise himself with double entry bookkeeping at some point. It’s not too late for him to do it. It’s not too difficult and very historic, going back to the renaissance.
I read his ‘The Pity of War’ in which in my view he seemed to blame the World War 1 generation for their blood lust and loss of life and thus getting the establishment off the hook. In Ferguson’s world the fallen are fallen because it was their fault – nothing to do with the politicians or the government – the people should have known better apparently than to fall for Kitchener’s posters, raising you own regiments with your mates to fight the Hun and being scared of white feathers. There was no pity in his book – just a sneer at brave people badly used in a war that was a bad mistake by those in charge, and I threw it away when I read it right to the end in disgust.
Ferguson is either an apologist or just a contrarian and probably both. His dirty secret is that he looks down on those who suffer in history and looks up at those who create the suffering. He has the tools to be a excellent historian but uses them badly and for vested self interest. He is firmly on the side of the establishment and like all those who side with them he will be looked after.
Thanks
Despite what you like to claim, ‘double entry’ doesn’t prevent governments from having to live within their means – in a global economy and in a country reliant on imports for essentials like energy and food, as well as materials for manufacturing, it is essential that the government spending in the economy can be supported by government income I.e. taxation.
Of course this is required over the long term, it in every year, but to suggest otherwise is a denial of economic reality. That is the key.
Oh dear.
You do know all money is created by government spending, don’t you?
And you do know that tax only exists to take it out of circulation – and not to fund anything?
And that unless a government runs a deficit there is no money supply?
Now try explaining how I am wrong – because I can guarantee I am not.
You do realise that the UK doesn’t exist in isolation and that many things are not priced in GDP – things like energy are priced in USD, for example.
So please explain what will happen to the value of our currency (and hence the cost of imports) if the government keeps spending money beyond what it takes in tax, requiring it to borrow more and more (or print more and more)?
The economy grows.
GDP rises.
Markets grow.
The value if the currency rises as we are less import dependent.
But don’t reply. You are very obviously trolling.
@Richard: Sorry if this is either wrong or too simplistic. Please delete if you feel so.
@ Karen Brice: Personally, I found the use of double entry bookkeeping as a starting point incredibly helpful. I was shown it as a teenager, but struggled with the numbers, being dyscalculic. That doesn’t stop me from grasping the principles though.
As I understand it, the point was that if money was in the ‘out’ column, it would appear in somebody else’s ‘in’ column and vice versa. This being especially true of bank statements. In Ye Olden Days cash changed hands (like in Thatcher’s housekeeping purse) but it doesn’t now. So the analogy doesn’t work any more, because d-e bookkeeping is no longer a record of a physical transaction.
Nowadays, in MODERN monetary practice, I make an electronic transfer and a figure immediately moves to my ‘out’ and appears in somebody else’s ‘in’. The bit I couldn’t get my head around at first is that there IS NO ‘REAL’ MONEY anymore.
I think you’re partially correct about governments having to live within their means, because in the UK the DEVOLVED governments do have to. I think of it as a Victorian wife getting a housekeeping allowance from the pater familias and having to show how she spent every penny. Overspending isn’t allowed.
But Westminster OWNS THE BANK. The govt doesn’t go cap in hand to the BofE, ask for money and have the stern Bank Manager suck his teeth and say, “Sorry, you haven’t enough tax payments in your account. Try again next month.” It creates the money by sticking a large figure in their ‘in’ column, so the govt can’t run out of money.
It can, however create too much money as it spends it into personal, business, public ‘in’ columns. So, to prevent flooding the country with cash, it claws excess money back via tax to prevent inflation. To “balance the books” (where’ve I heard that phrase recently?)
Overly simplified, but I’m a simple person.
It’s good.
What a pointless post since you never define “means”! What are they Karen – money, things, people, solar or wind energy, laws, etc. ?