Why Economists Don’t Understand Accounting, or Business
I just searched Harvard, U Chicago, and a few other top econ departments’ course offerings and major requirements. The string “account” barely appears.
Chicago says quite explicitly:
Courses such as accounting, investments, and entrepreneurship will not be considered for economics elective credit.
Much less requirements!
No wonder so many economists:
• Have such profound misunderstandings of the National Income and Product Accounts and the Fed Flow of Funds reports (and how they relate to each other). Nobody ever taught them how to read or understand the darn things.
• Have such crazy notions about how producers think when they’re setting prices.
Cross-posted at Asymptosis.
I’ve been saying this for years but no one cared because I’m “just an accountant.”
Nearly 100% of business and accounting majors study at least the principles level of economics.
One can earn a PhD in economics without a single business or accounting course.
To earn a graduate degree in accounting one must usually study some graduate level economics. Ditto for finance.
Most UChicago undergrad do take a basic financial accounting course. Can’t speak for the other schools.
Most UChicago undergrad econ majors*
good you pointed that out. careful reading would raise the question
“courses such as accounting… don’t count for economics ELECTIVE credit” could mean two things, one is that if you are not a major but need an economics elective, they don’t want you claiming accounting as that elective. seems reasonable to me. the other possibility is that if you are an econ major, they don’t want your accounting class to count against the economics courses you have to take. nothing was really said here about whether econ majors are required to take accounting.
and this… not reading carefully… raise a question i had about the other thread… it seems to me that reifying accounting identities may invite two errors… one is, as far as i know, accounting assumes a zero sum universe of discourse. economics does not, or should not, though many “economists” talk as if the accounting identities are “explanatory” when of course all they are is definitional and may or may not be useful in describing the world.
the other error is related to a problem i am having with OMB’s “budget concepts.” they seem to be willing to call surplus income to SS, a legally separate entity from “the budget”, which is lent to the budget “revenue” and subtract it from the “on budget” deficit. there may be perfectly good bookkeeping reasons for doing this, but to the extend it tends to disguise the fact that money borrowed by the budget from SSTF is legally required to be repaid to SSTF… that is, it is debt owed by the budget… talking about “the budget” as though it was a description of the actual legal status of the TF is misleading…. and is used to deliberately mislead “debate” about SS.
ran on too long here: the point is that “economists” relying on “accounting” may be fooling themselves about the significance of accounting, which is a way of keeping track of things for some purpose, and not a description of causes and effects.
Thanks for the info, Lance. I went looking to see if there were any classes like Understanding National Accounting or such, which is importantly different because of the necessary quadruple (or more) entry accounting, and those odd accounting constructs called banks. Didn’t find anything.
A student could possibly go through a bachelors, masters and PhD in econ and never set foot in the business college.
Some econ programs are liberal arts based, others are based in the business college, and that can make a difference. Some econ PhDs had math or some other bachelors and then into an econ grad program.
So it depends.
Actually I’m not so concerned about reading NIPA or FFF.
My concern is that economists do not understand what happens at the business entity level.
Why does this matter?
In tax debates economists, having studied casue and effects at some macro level, then sometimes pontificate on how taxes impact (or not) business entities. Economists sometimes predict payroll tax cuts will cause X amount of hiring, for example, looking at national aggregate numbers. Managers and managerial accountants do not think the way economists preduct they will think.
I get this sort of rage every time I hear Baggertarian economists rant about how tax cuts or wage cuts or yada yada will make businesses hire. Uhm, no. I have a degree in Data Processing with a minor in Business Administration. I’ve run my own business. I can tell you 100% that my #1 issue as a businessman was maximizing my profits — I was *not* a charity, and taxes had nothing to do with my hiring decisions, *demand* was what caused me to hire. If there’s no demand there is no wage higher than $0 that will cause me to hire an additional person for my business. If there’s no demand even *negative* taxes (i.e., me getting paid rather than paying taxes) will cause me to hire additional people — I might take advantage of a new hire tax subsidy to hire subsidized employees to replace employees who leave due to natural attrition, but I’m certainly not going to increase my headcount at a time demand is flat!
I mean, c’mon. Even the dumbest pizza delivery storefront manager knows this stuff, that’s why they spend so much time trying to pare their (employee) hours down to the minimum required to get the pizzas boxed and to the customers within a reasonable period of time. But apparently far too many economists haven’t the foggiest notion how businesses *really* work. Gah, the stupid, it burns, it burns!
– Badtux the Business Penguin
Hey folks I read your article and I think you’re blog will be one of the bests if you keep up the good work!
Worth saying twice. After a spelling and grammar check. And—
Oh never mind. Guess I need to figure out how to regain my moderation powers.
How odd. Economics and accounting is a common degree in the UK. Certainly it’s the one I did at the LSE…..
Exactly Vance. Lots of economists majored in math or physics not economics. Personally, I majored in biochemistry. I have a PhD in economics and never took a course in accounting.
Ohhhh but wait, that’s not the only reason, Harvard U where I studied did not, at the time, offer a course in accounting to undergraduates at the time.
Steve – I disagree with you. It isn’t the coursework. People can take as much coursework as they want and it won’t matter. I’ve met a number of business school professors who have no clue how businesses are run either and they can run rings around me in accounting. Some of them can run rings around me in finance too.
I think Bad Tux put his finger on it, but didn’t state the problem explicitly. Coursework and theory has very little to do with how businesses are run in the real world.
Rodney Dangerfield put it this way: http://www.youtube.com/watch?v=YlVDGmjz7eM
That clip should be mandatory viewing every Monday for every ‘economist’ and teacher and politician in the US. I still laugh at the scenes in the movie. Captures the view of the ivory tower perfectly.
Islam will change
“What’s a widget?”
personally, i get a little worried when i see an economist point to an accounting identity and thinks he is saying something about cause and effect.
For a long time accounting was considered “too vocational” for liberal arts colleges.
In the last few decades liberal arts colleges discovered that 1) accounting majors get jobs, 2) poetry majors do not. Suddenly vocational was cool, as long as the numbers were not too big.
Biochem is a really interesting field, wish i was smart enough to comprehend what they do.
Badtux: two wrong ideas from various economists
1) taxes are always a major factor in business decisions
2) taxes are never a major factor in business decisions
Heh. Yeah. I once worked for a computer manufacturer where the VC’s put in charge a new CEO who had been very successful at his prior job as CTO at a major network infrastructure company. A job where they created *software*, not *hardware*. But hey, it’s got something to do with computers, right? Needless to say it was a disaster — he didn’t understand manufacturing computers, had no *hope* of understanding manufacturing computers, ended up driving away any employees who knew how to manufacture computers, and the company ended up crashing and burning… all because VC’s answered the question “What’s a widget?” with “It doesn’t matter.”
save_the_rustbelt: “1) taxes are always a major factor in business decisions
“2) taxes are never a major factor in business decisions”
On average, they’re right. 😉
Taxes certainly are a factor in business decisions, in that my business is to make a profit, so if I can make more profit because certain behaviors get a better tax treatment, well. But hiring decisions aren’t one of those things unless you’re *paying* me to hire people, because employees are an expense that is entirely avoidable by, well, *not* hiring employees, if that option is available to me. The only way I’ll hire people is if I *have* to hire people because otherwise I can’t meet demand for my product (or don’t have a product at all, in the case of R&D people). ‘Cause I run a business, not a charity, and a business is in business to make a profit, not to employ people just to employ people.
Accounting should be required in secondary (high school) and all colege majors.
It is that valuable.