There have been several developments in economics in last 20 years. Although these have been developed by different groups of economists, there are common relations among all of them. Because of Institutional silos, many of these developments are not shared. My attempt is to compile them here in this post and other previous related posts.
IMF Balance Sheet Approach (BSA) – From-Who-To-Whom
Balance Sheet Economics/Asset Liability Matrices (ALM) of Tsujimura
Financial Input-Output Analysis (F-IO Tables)
F-SAM ( Financial Social Accounting Matrix)
Interrelated Balance Sheet Approach of Perry Mehrling and Zoltan Pozsar
Stock Flow Consistent Modeling – Marc Lavoie, G Zezza, W Godley
Extended Supply and Use Tables (E-SUT)/UN SEIGA Initiative
Supply Chain Finance/Financial Supply Chain Management/Operations and Finance
Trade Finance/Global Value Chains/Accounting for Global Value Chains
Integrated Macroeconomic Accounts – NIPAs and Financial Accounts
From Balance Sheets, Transaction Matrices and the Monetary Circuit
Chapter 2 of book Monetary Economics by M Lavoie and W Godley 2007
The lack of integration between the flows of the real economy and its financial side greatly annoyed a few economists, such as Denizet and Copeland. For Denizet, J.M. Keynes’s major contribution was his questioning of the classical dichotomy between the real and the monetary sides of the economy. The post-Keynesian approach, which prolongs Keynes’s contribution on this, underlines the need for integration between financial and income accounting, and thus constitutes a radical departure from the mainstream. 1
Denizet found paradoxical that standard national accounting, as was initially developed by Richard Stone, reproduced the very dichotomy that Keynes had himself attempted to destroy. This was surprising because Stone was a good friend of Keynes, having provided him with the national accounts data that Keynes needed to make his forecasts and recommendations to the British Treasury during the Second World War, but of course it reflected the initial difficulties in gathering enough good financial data, as Stone himself later got involved in setting up a proper framework for financial flows and balance sheet data (Stone 1966).2
In trade relations, if goods flow from X to Y, then Money (Payments) flows from Y to X.
Intra Firm amd Inter Firm relations between Accounts Receivables and Accounts Payable
UNITED NATIONS STATISTICS DIVISION SEIGA Initiative
Under System of Extended International and Global Accounts (SEIGA) Initiative
United Nations is developing:
UN Handbook on Accounting for Global Value Chains
Presentation from 2017 Seminar on Accounting for Global Value Chains
From Financial input-output multipliers
From Sectoral interlinkages in balance sheet approach
Network Economics of Block Chain and Distributed Ledger Technology
Quadruple Accounting System
Morris Copeland, and Hyman Minsky emphasized quadruple entry accounting system envisioning interrelated interlocking balance sheets of economic agents. Interlocking balance sheets create a network of economic agents.
I attach a slide from a presentation by Marc Lavoie given at Minsky Summer school in 2010 at the Levy Institute of Economics (Bard College).
There are several FINTECH innovations which are bringing about dramatic changes in the financial services business.
Block Chain and Distributed Ledgers
Retail P2P Payment services
Domestic Real Time Payments and Transfers
Cross Border Near Real time Money Transfers
Block Chain and Distributed Ledgers, in my opinion, are/can be implementation of quadruple accounting principles envisioned by Morris Copeland and Hyman Minsky. Two economic agents engage in financial transactions which are recorded in distributed ledgers.
Some of the key components of distributed ledger technology are:
Distributed Data Storage
In contrast with centralized ledgers, distributed ledgers store data at each node in the P2P network. So there is no need for an intermediating institution. From a payment system perspective, each node in the P2P network can be thought of as a bank. Each node will have its own ledger and balance sheet which will record assets and liabilities.
Ripple is a Cross Border money transfer solution which is based on block chain technology.
Recent rise of retail P2P payment services such as
indicates a trend toward real time payments/money transfers domestic and international. This trend also indicates decoupling of these services from traditional deposit/lending banks. XOOM is a service provided by PAYPAL for international Money Transfers. Money transfers are within a few minutes.
In USA, there are new P2P services offered to facilitate faster near real time payments/money transfers through mobile and online interfaces.
Zelle (clearXchange Network)
There are also social media payments available now through which consumers can quickly send money using social media applications such as
Facebook (through Messanger app)
Snapcash (through SnapChat)
Apple PayCash (through imessages app)
TenCent via WeChat
Rise of payment banks such as PayTM is one such example. Reserve Bank of India has granted PayTM a payment bank status. But transfers are still between bank accounts of transacting consumers where deposits are kept. Payment Bank acts as a technology provider and acts as an intermediary.
As per the RBI guidelines, payments banks cannot lend they can only take deposits or accept payments.
There are four payment banks in India now.
PayTM Payment Bank
Airtel Payment Bank
India Post Payment Bank
FINO Payment Bank
Mobile payments using secured wallets is another such example.
Banking on Distributed Ledger Technology: Can It Help Banks Address Financial Inclusion?
By Jesse Leigh Maniff and W. Blake Marsh
Distributed ledger technology in payments, clearing, and settlement
Mills, David, Kathy Wang, Brendan Malone, Anjana Ravi, Jeff Marquardt, Clinton
Chen, Anton Badev, Timothy Brezinski, Linda Fahy, Kimberley Liao, Vanessa Kargenian,
Max Ellithorpe, Wendy Ng, and Maria Baird (2016).
Finance and Economics Discussion
Series 2016-095. Washington: Board of Governors of the Federal Reserve System,
Distributed Ledger Technology: beyond block chain
A report by the UK Government Chief Scientific Adviser
Bitcoin, Blockchain & distributed ledgers: Caught between promise and reality
Distributed ledger technology in payment, clearing and settlement
An analytical framework
NIPA – Simon Kuznets, Wesley Mitchell, Richard Stone, James Meade
Flow of Funds Accounts – Morris Copeland
Input Output Tables – Wassily Leontief
Social Accounting Matrix – Richard Stone, Graham Pyatt, Erik Thorbecke
Morris Copeland and Financial Accounts
From THE ORIGINS OF FINANCIAL ACCOUNTS IN THE UNITED STATES AND ITALY: COPELAND, BAFFI, AND THE INSTITUTIONS
In 1944, Copeland was commissioned by the National Bureau of Economic Research (NBER) to create a statistical framework for the money circuit. The project was carried out in collaboration with the Federal Reserve, in particular the Board’s Division of Research and Statistics. After the First World War, Wesley Mitchell had built annual estimates of national income while working at the NBER.2 Copeland started from an unpublished memo that Mitchell had written in 1944, in which the economy was divided into four groups of units. Each group makes payments to and receives payments from the others. In double-entry accounts, the payments made by each group are recorded on one side and the payments received on the other. All payments appear among the liabilities of one group and the assets of another.
Copeland’s work was first published in 1947, in an article in the American Economic Review. His principal work, published in 1952, analysed the moneyflows of U.S. institutional sectors from 1936 to 1942.3 The initial project envisaged two sectors – households, and an aggregate of the other sectors – and six types of moneyflows. The analysis was later extended to eleven sectors: households; farms; industrial corporations; business proprietors and partnerships; the federal government; state and local governments; banks and US monetary funds; life insurance companies; other insurance carriers; other financial intermediaries not included in the above categories; and the rest of the world.
Copeland identifies four origins of moneyflows, or motivations: households’ distributive shares, households’ product transactions, secondary distribution (i.e. transfer payments), and flows through financial channels. There are fourteen types of moneyflows, all of which can be traced to one of these four motivations. Four moneyflows can be attributed to households’ distributive shares: wages and salaries, cash dividends, cash interest, and net owner take-outs. A further four are the result of production transactions: customers’ payments to firms for goods and services; rents; instalments to contractors; payments for real-estate sales. Five moneyflows – insurance premiums, insurance benefits, taxes collected, tax refunds, and public purpose expenditures – fall into the category of transfer payments. The fourteenth moneyflow consists in financial transactions and constitutes the fourth motivation.
The statistics built by Copeland provide information on the distribution of moneyflows between production transactions, transfer payment transactions, and transactions through financial channels. Every sector has its own balance sheet, with its own assets and liabilities. A distinction is maintained throughout between aggregates measured on a cash basis and those on an accrual basis, although Copeland himself prefers the first method. Moneyflows are presented as an extension of the national accounts, on which Copeland had written extensively since the end of the 1920s; moneyflows are constantly compared with the concept of national income, underlining analogies and differences. Copeland states that both his approach and the national income one are based on the notion of the economy as a circuit. The moneyflows approach makes it possible to analyse debit and credit movements that are not part of the concepts of production and income distribution.
Copeland describes his work as an extension of ‘social accounting to moneyflows measurement’,4 highlighting the advantages of his approach over the equation of exchange. In particular, the disaggregate approach produces ‘money inflows’ and ‘money outflows’ for each sector. Despite the different definition given to the institutional sectors, Copeland maintains that Leontief’s work is similar to his own.5 Moneyflows go from one sector of the economy to another, with liabilities financing assets. Leontief talks of inputs producing outputs. There is a visual similarity between the two approaches, as the phenomena are measured by constructing large double-entry matrices.
In addition to moneyflows, Copeland also considers stocks, which are measured by loanfunds, that is financial assets and liabilities of institutional sectors. He cites Irving Fisher’s The Nature of Capital and Income of 1906, which draws a distinction between stocks and flows. Copeland stresses the importance of using financial statements in economics, following an approach already adopted by Robertson, Mitchell, Hawtrey, Lutz, Hicks and others.6 He recalls the difficulty of communication between accounting and statistics, principally because of the different conventions they employ.
Copeland makes a sharp distinction between consolidated statements, in which positions between sectors are net of reciprocal transactions, and combined statements, which include all transactions between sectors. He examines issues on which economists and statisticians are still working, such as the differences between real accounts and financial accounts, and, in the case of business proprietors, the distinction between assets belonging to the business and assets of the proprietor’s family. He points to the difficulties of ‘balancing’ the total assets and liabilities of the economy caused by three differences: in the timing of entry of transactions; in their classification of identical items; and in the evaluation criteria applied to assets and liabilities.
As mentioned earlier, Copeland’s work ties in with various lines of analysis, which are themselves linked to one another. The first connection is with the developments in national accounts that followed Keynes’s General Theory. As Federico Caffè recalled, Keynes invented not only a discipline, but also the words to describe it, setting the national accounts on a new basis. The process was not an easy one. Blanchard described macroeconomics before the Second World War as ‘an age of confusion’. After Keynes, progress in national accounts can be attributed mainly to Kuznets, Stone, and Hicks (the first edition of The Social Framework is dated 1942); a major effort of organisation produced the United Nations’ System of National Accounts (SNA) of 1947. Copeland had already studied the national accounts before the Second World War, publishing papers in the NBER series Studies in Income and Wealth. His essays of 1935 (‘National Wealth and Income – An Interpretation’) and 1937 (‘Concepts of National Income’) were cited by Richard Stone in the preparatory work for the SNA. Afterwards, when the concepts of real national accounts had been codified, it was a natural step to move on to the notion of financial accounts.
Another inspiration for moneyflows was the debate on the business cycle, in particular Mitchell’s efforts to collect relevant statistics. Mitchell and Copeland were very close and the moneyflows project was the last Mitchell undertook before retiring. Moneyflows are part of the American tradition of institutionalism – stretching from Veblen to Commons and from Ayres to Mitchell himself – which stresses the importance of an empirical approach to the interpretation of economic phenomena and the need to build statistics based on time series.10 It is not an obvious approach: Koopmans’s cutting verdict, ‘measurement without theory’, appeared in 1947 in a review of Burns and Mitchell’s book on the measurement of economic cycles.11
Copeland’s approach was also predominantly empirical. He reproaches Keynes that the latter’s theoretical approach was one of the reasons the General Theory had been assimilated in the Neoclassical Synthesis.12 Copeland had already attacked the abstraction of the neoclassical approach in 1931, causing Frank Knight to express several reservations.13 However, it would be wrong to classify Copeland’s contribution as empirical only, and to level against him the same accusation that Koopmans made against the Burns-Mitchell duo. Copeland has in mind not only the work of Keynes, but also that of Hicks, notably Value and Capital, which was first published in 1939, and in particular Chapter 14 on the difficulties of defining and measuring an economy’s income, and Chapter 19 on the demand for money. He asserts that a similarity exists between his ideas and those put forward in Value and Capital, underlining that Hicks focuses only on households and firms. Basically, Copeland has a vision of an economic system with a wealth of specialised and interconnected activities that is co-ordinated by institutions of the law: property rights, regulations governing contracts and negotiable instruments, rules on compensation and bankruptcy, and freedom of association. Money and other ‘pecuniary institutions’ are further elements that allow an economy to function.14 After the essays on moneyflows he remained interested in money, particularly the origin of monetary economies and the development of bank money. His interest in all the institutional sectors of the economy led him to study the US general government debt, with strong emphasis on relations between the federal government, on one side, and state and local bodies, on the other.15
Key Sources of Research:
FLOW-OF-FUNDS ANALYSIS AT THE ECB
FRAMEWORK AND APPLICATIONS
by Louis Bê Duc and Gwenaël Le Breton
Balance Sheets, Transaction Matrices and the Monetary Circuit
Lavoie and Godley 2007
Book of Monetary Economics chapter 2
The Flow-of Funds Approach to Social Accounting: Appraisals, Analysis, and Applications
Integration of Real and Financial sectors of economy.
Balance-sheet accounting approach
From Post-Keynesian Stock-Flow Consistent Modeling: A Survey
PK-SFC models are a specific kind of Post-Keynesian macro model that follows distinctive accounting rules, ensuring the consistent integration of the stocks and flows of all the sectors of the economy. The models have three important methodological innovations: first, the consistency of the overall economy is maintained, since one sector’s outflows are always another sector’s inflows just as one sector’s liability is always another sector’s asset; second, the integration of the real and the financial side of the economy; third, the construction of the long run as a chain of short run periods. Nothing is lost, neither in space nor in time. These constraints are crucial in modeling modern macroeconomies which are highly complex, integrated systems.
The roots of PK-SFC models can be identified in the work of Morris A. Copeland (1949), who, with his study on “money flows,” is the father of the flow of funds approach. His intuition was to enlarge the social accounting perspective to the study of money flows. Copeland laid the foundations for an economic approach able to integrate real and financial flows of the economy. A concrete example of his legacy is represented by the quadruple-entry system: since someone’s inflow is someone else’s outflow, the standard double-entry system of accounting is doubled in a quadruple-entry system.
Copeland’s work certainly had a great influence on economics -mainly as a source of financial data- but its potential disruptive impact on the study and modeling of the interdependences between real and financial flows failed to occur. It was only in the 1980s, with the work of Nobel Laureate James Tobin, that these efforts culminated in the organizing theory advocated by Cohen. The article Tobin wrote with co-authors (Backus et al., 1980) perhaps best represents his path-breaking contribution in the foundation of PK-SFC models. Indeed, in developing an empirical model of the US economy in both its financial and non- financial sides, Backus et al combined the theoretical hypothesis on the behavior of the economy with a rigorous accounting framework based on the flow-of-funds social account developed by Copeland. The result is a stock-flow consistent model that includes some of the characteristics still peculiar in the literature, such as the matrices-based accounting approach and discrete time and other features, such as the stock- flow identity, which are fundamental in any model of this type.
Next to Tobin, the other scholar who played an essential role in the development of this family of models is Wynne Godley. Godley, head of the New Cambridge school in the 1980s, started developing models coherently integrating stocks and flows. His efforts culminated in the organized framework he developed in his more recent publications, with which he collected the legacy of Tobin. Godley’s contribution probably finds its peak in the seminal book he wrote together with Marc Lavoie (Godley and Lavoie, 2007), which is still the main reference for current PK-SFC practitioners. This paper focuses on the tradition descending from the work of Wynne Godley, hence the choice of talking of PK-SFC models rather than just SFC models.
Key Sources of Research:
Bezemer, Dirk J.
“The economy as a complex system: the balance sheet dimension.”