Richard Stone: Accounting is Coming

Accounting. A word that has struck terror in many an economists heart. Seeing so much math with zero theory involved usually causes a lot of people to not pay attention, myself included. However, some accounting contributions were important enough to warrant winning a Nobel prize. We shouldn’t take that lightly, and hopefully by the end of this we’ll at least grudgingly accept accounting.

Found photo of me trying to understand accounting

Richard Stone won the Nobel prize in economics in 1984 “for having made fundamental contributions to the development of systems of national accounts and hence greatly improved the basis for empirical economic analysis.” Specifically, he brought the idea of using double entry bookkeeping on the international stage, which is still used by many governments today. To explain double-entry bookkeeping, let’s start with a small example.

Let’s say you own a business like a food truck, and suddenly you’re hit with a heavy expense. Maybe the engine breaks down and you need to completely replace it. You head over to the bank and ask for a $3,000 loan to pick your business back up off the ground. Single-entry bookkeeping would simply show a transaction to you of $3,000. However, it isn’t that simple, you don’t just get $3,000.

Double-entry bookkeeping shows the transaction more honestly. Not only would you mark in your record book an increase of $3,000 cash but also a $3,000 credit, or decrease, heading to the bank. Double-entry bookkeeping shows each transaction having equal but opposite flows of money.

I’m really excited for the next season of Game of Thrones, so let’s use Westeros as an international trade example instead of the real world. Instead of dollars, the currency of Westeros is gold dragons (GD).

War is expensive, and King’s Landing has accrued a lot of debt from it. They decide they want to take a loan from the Iron Bank of Braavos of 1,000 gold dragons. In the accounting, this would be marked as 1,000 GDs being given to King’s Landing, and 1,000 GDs of credit given to the Iron Bank.

Double-entry bookkeeping doesn’t only pertain to loans and debt, though. For example, maybe King’s landing uses that 1,000 GDs to buy as much lumber as they can from their northern allies to bolster their defenses. This would mark as 1,000 GDs heading to the north, and 1,000 GDs worth of lumber heading to King’s Landing.

Of course, the real world is a bit more complicated. Credit cards add extra steps and for the small business owner, the change in language of debits and credits instead of adding and subtracting can be confusing. On a larger scale, dividing national income into different accounts can get complicated enough to earn you a Nobel prize!

Even the mention of the word accounting usually causes my brain to shut down most times, but Richard Stone’s contributions have been instrumental in showing how dynamic trade can be. Also, since it’s used by many national governments, it shows the methods our countries use to determine their national income, which is important if we ever want to look at the data. I guess given some time, accounting might grow on me.

In order for a Lannister to always pay his debts, they have to mark them down first. It would be a lot easier if they used the double-entry bookkeeping system. Maybe this upcoming season, we’ll be able to see more debts repaid. Until then, at least we have Richard Stone and national income accounting to keep us company.

Richard Stone, looking suave

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