"who saw it coming": ej gets a mention at ft.com/alphaville
#5 on the list
Who saw it coming and the primacy of accounting
Posted by Tracy Alloway on Jul 13 14:49. Massive hat tip to Chris Cook for pointing out this fascinating paper.
In it, Dirk J Bezemer of Gronington University attempts to show that certain contrarian economic models — and economists — anticipated the credit crisis and the ensuing recession. In contrast, mainstream economic models, and by extension most economists, did not.
We’ll save you the suspense and present you with Bezemer’s list of analysts ‘who saw it coming’ right away. Click to enlarge.
The entire paper itself, however, and its potential implications for the supremacy of certain economic models makes for interesting reading.
Here’s Bezemer on the purpose of the paper:
[The analysts presented in the table above] belie the notion that ‘no one saw this coming’, or that those who did were either professional doomsayers or lucky guessers. But there is a more important, constructive contribution. An analysis of these cases allows for the identification of any common underlying analytical framework, which apparently helps detect threats of instability. Surveying these assessments and forecasts, there appears to be a set of interrelated elements central and common to the contrarians’ thinking. This comprises a concern with financial assets as distinct from real-sector assets, with the credit flows that finance both forms of wealth, with the debt growth accompanying growth in financial wealth, and with the accounting relation between the financial and real economy.
These are what Dirk Bezemer calls accounting or flow of funds views of the economy. They have certain Austrian School characteristics, like a distinction between financial wealth and real assets, as well as the separate representation of stocks and flows, and modelling the financial sector separately from the real economy. Those are in contrast to traditional neoclassical economic models which tend to focus on equilibriums, according to Bezemer.
A graphical representation of the two systems is below, which demonstrates the idea pretty well. While stuff like finance and real estate feature prominently in the accounting/flow of funds schematic — they are entirely absent from the traditional model:
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