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
@ Alan Surtees “Nial Ferguson, Andrew Neill. Both are from well-off middle class families in Scotland, both privately educated.”
Andrew Neill (father an electrician & mother a cotton Mill worker in WWII then Housewife?, lived in a Paisley suburb) went to the local state primary school, passed the 11 plus and so went to Paisley grammar.
Niall Ferguson (parents: father a doctor & mother a physics teacher, lived in Ibrox) went to ‘The Glasgow Academy’, a private school
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.
All money? I thought money was also created by the private banks when they loan?
Only under government licence
@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. ?
Karen, you failed to define “living within yor means”.
Simple illustration…
Treasury civil servants decide that they will increase the allowance for Rich Tea Biscuits – each civil servant in the Treasury is now allowed two packets per day.
Paying for them is not a problem, the change was allowed for in the Finance Bill (Civil Service biscuit dunking allowances, Section 4:9, as amended, 2026) parliament increases government budget and the finance for biscuits in the budget, BoE creates the money via the Ways and Biscuit account, and the intern toddles down to the local shop with a suitcase (last used during Covid to buy Downing Street booze for “work events”). Back in the Treasury, an accountant does the double entry on the financial transactions so far.
Intern comes back – problem – the shop doesn’t have 500 packets of Rich Tea on the shelf. (They already got sold to the MOD intern earlier that day as Defence is the current priority and they have more spare biscuit buying interns – the early intern gets the worm, as they say).
The Treasury has the MEANS to buy the extra biscuits but the shop can’t supply them. The government is running out of biscuits, not money. It is living beyond its means, yes, but not by spending too much. The problem is one of biscuit supply, not debt.
That, in a nutshell (or a teacup) is MMT. Your comment is imprecise, and holds together no better than an overdunked rich tea biscuit.
You are confusing accounting with biscuit manufacture, and confusing economics with politics. MMT keeps them separate.
Very, very good…..
@ Karen Brice: “doesn’t prevent governments from having to live within their means” is your assumption, and nothing else you write is evidence for that.
However, the fact that economies have persistent “debt” is evidence to the contrary to your assumption : The UK for ~332 years and the US for ~190 years. The US paid off all its debt in 1835, soon followed by a major crash and currency crisis, it’s been in debt ever since and was every year before and has only run surpluses on about seven brief occasions, each followed by a depression. Between 1930 and 2023, the US government ran fiscal deficits in 81 of the 95 years, 85.2% of that period.
In the UK in the 1950s, a period of increasing real disposable income and decreasing National debt and increasing public spending, often portrayed as an ‘economic golden age’, the UK ran a deficit in most years, in the region of 2-3% of GDP after 1953.
There is also clear evidence that, major functioning, economies at least, can run long term trade deficits in a fiat currency because they have, I doubt anyone would claim there are no economic consequences of doing so, however economic collapse has not been one of them thus far. The US has been running consistent trade deficits since 1976 and the UK only had a trade surplus in those “golden 1950s” in 1956-58. From 1948 to 2019 the UK only recorded a trade surplus in 18 out of the 71 years.
The evidence says “live within their means” in any simplistic monetary or trade balance sense is nonsense.
Totally agreed.
Yes, and also true that Ferguson’s attempts at economic history are vitiated by selecting and bending episodes to fit his not specially shaded micro propositions. The opposite of how historical investigations are normally mined to refine abstract propositions especially by qualifying their applicability in particular contexts. Always astonished me that he nevertheless obtained a prestigious academic appointment in the States . A preferment which remains highly suspect.
Gemini AI notes: Philip Tetlock analysed two decades of predictions from hundreds of experts on economic and political trends, including GDP growth, inflation, and market shifts. His core finding was humbling: the average expert’s forecasting accuracy was roughly equal to a “dart-throwing chimp” or simple statistical algorithms.
Source: Expert Political Judgment: How Good Is It? How Can We Know?
https://www.jstor.org/stable/j.ctt1pk86s8
🙂