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Macroeconomic Measurement Versus Macroeconomic
Theory 1st Edition Merijn Knibbe Digital Instant
Download
Author(s): Merijn Knibbe
ISBN(s): 9780815353348, 0815353340
Edition: 1
File Details: PDF, 3.69 MB
Year: 2019
Language: english
Macroeconomic Measurement
Versus Macroeconomic Theory

Ideally, scientific theory and scientific measurement should develop in tandem.


In recent years this has not been the case in economics. There used to be a time
when leading economists, or their students, established or led statistical offices
and took care that the measurements were consistent with the theory and vice
versa. Not anymore. Macroeconomic theorists and macroeconomic statisticians
do not even speak the same language any longer. They do use the same words,
such as ‘consumption’, ‘investments’ or ‘unemployment’ but the meanings they
attach to these words are often wildly different.
This book maps the conceptual and definitional differences between
macroeconomic theory and measurement and explores them in some detail while
also tracking their intellectual, historical and, in some cases, ideological origins.
It also explores possible policy implications. In doing so, the book draws on two
separate strands of literature which are seldom used in unison: macro-statistical
manuals and theoretical macro-papers. By doing so, the book contributes to the
effort to bridge the gap between them without compromising on the idea that
a meaningful science of economics should, in the end, be based upon individual
people and households and their social, political, juridical and cultural embedding
instead of a ‘representative consumer’, or Robinson Crusoe figure.
This work is essential reading for students, economists, statisticians, and
professionals.

Merijn Knibbe was born in Veldhoven, The Netherlands. He studied economics


at the Rijksuniversiteit (University of) Groningen. He published on production,
income and institutional changes in Dutch agriculture between 1850 and 2015
as well on and a habilitation on developments in Frisian agriculture between
1505 and 1832 and worked at the Centraal Bureau voor de Statistiek in the
Netherlands. He has also published on historical flows of feed, food and minerals
in the Netherlands as has written many blogs on economic developments and
economic theory after the Great Financial Crisis and the extent to which economic
metrics and models can be used to map and analyze the nature of this crisis.
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Complexity, Post Keynesian and Ecological Economics
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The Dark Side of Nudges


Maria Alejandra Caporale Madi

Inequality and Governance


Andreas P. Kyriacou

A New Approach to the Economics of Public Goods


Thomas Laudal

Marx’s Capital after 150 Years


Critique and Alternative to Capitalism
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The Political Economy of Prosperity


Successful Societies and Productive Cultures
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Macroeconomic Measurement Versus Macroeconomic Theory


Merijn Knibbe

For more information about this series, please visit: www.routledge.com/books/


series/SE0345
Macroeconomic
Measurement Versus
Macroeconomic Theory

Merijn Knibbe
First published 2020
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
52 Vanderbilt Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2020 Merijn Knibbe
The right of Merijn Knibbe to be identified as author of this work has
been asserted by him in accordance with sections 77 and 78 of the
Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or
reproduced or utilised in any form or by any electronic, mechanical,
or other means, now known or hereafter invented, including
photocopying and recording, or in any information storage or retrieval
system, without permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks
or registered trademarks, and are used only for identification and
explanation without intent to infringe.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
A catalog record for this book has been requested
ISBN: 978-0-8153-5334-8 (hbk)
ISBN: 978-1-351-13670-9 (ebk)
Typeset in Galliard
by Apex CoVantage, LLC
Contents

List of tablesix
List of graphsx
List of figures and diagramsxii
Prefacexiii

1 Introduction 1
Introduction 1
1.1 Why this book? 2
1.2 Conceptual differences extend to the cores of neoclassical
macro theory and statistical macro-measurement 5
1.3 The two very different meanings of ‘micro-founded’ 9
1.4 The differences between macro-models and macro-statistics
have a history 10
1.5 Macroeconomic events outside the framework of neoclassical
macroeconomic models as well as macroeconomic
statistics 12
1.6 The changing boundary of our idea of ‘the (macro)
economy’ and the immensely measurable nature of monetary
transactions 14
1.7 Hey, national accounts are political accounts 22
1.8 Overarching integration: the modern flow of funds /
national accounts 23
1.9 An overview of the key differences between DSGE macro-
models and macro-measurements 25
1.10 Mitchell-style business cycle indicators, the accounts and
DSGE models 28
1.11 The conceptual model of the book (1): five interrelated phases
of development of a macro-statistical variable 30
1.12 The conceptual model of the book (2): cases 31
1.13 The conceptual model of the book (3): meta-formulas 32
vi Contents
2 Money, prices and pricing 38
2.1 Introduction 38
2.2 Transactions 38
2.3 Prices and pricing 41
2.4 Money 42
2.5 The nature prices and pricing in a monetary society 47
2.6 The nature of the statistical production boundary 59
2.7 National accounts as an instrument of control 68

3 Money and how it’s estimated 75


3.1 Introduction 75
3.2 Money and its measurement 75
3.2.1 Monies, manuals and measurement 75
3.2.2 The flow of funds as an overarching model 77
3.2.3 The monthly monetary press release of the ECB
and the macroeconomic formula of everything 84
3.2.4 Single accounting concepts of the account of
money (1): Friedman and Schwartz 88
3.2.5 Single accounting concepts of the amount of
money (2): Divisia indices 91
3.2.6 Quadruple accounting aggregates: money
and debt 94
3.3 Money and the models 97

4 Labor and unemployment 105


4.1 Introduction: the discussion at the heart of
macroeconomics 105
4.2 The concept of involuntary unemployment 106
4.3 Measured employment, unemployment and
labor flows 112
4.3.1 Where do the concepts and definitions come from?
A bit about the International Labor
Organization 112
4.3.2 The ILO definitions of employment and unemployment
and the influence of the US Congress 113
4.3.3 The ILO ‘periodic table’ of monetary and
non-monetary work, unemployment
and leisure 116
4.3.4 The difference between people and jobs 118
4.4 Neoclassical ideas about labor and the working of the labor
market 121
Contents vii
4.4.1 Concepts and definitions: leisure and the difference
between people and hours 121
4.4.2 Deconstructing the future 125
4.4.3 Fundamental and non-fundamental ways to make the
models consistent with high unemployment 125
4.4.3 Models which take the statistics at face value 127
4.5 Voluntary and involuntary declines in hours of labor and
unemployment during the Great Depression and beyond 129
4.5.1 The anomaly 129
4.5.2 The institutional/statistical explanation
of the anomaly 130
4.5.3 The neoclassical explanation of labor during
and after the Great Depression 135
4.6 Summary 140

5 Capital (and land) 145


5.1 Introduction 145
5.2 The (r)evolutionary nature of capital 145
5.3 Capital and the statisticians 150
5.3.1 Concepts and definitions 150
5.3.2 Measurements 154
5.3.3 Valuations 156
5.3.4 Volumes 159
5.3.5 Natural capital? 162
5.4 Capital and the neoclassicals 164
5.4.1 The concept, implicit or otherwise 164
5.4.2 Back to the way ahead 167
5.5 A comparison 170

6 Consumption 177
6.1 Introduction: the concept 177
6.2 Consumption in the national accounts: definitions
and operationalizations 178
6.3 Consumption in the DSGE models 185
6.4 A comparison 194

7 I stands for gross fixed capital formation 198


7.1 Introduction 198
7.2 Concepts: the changing nature and definition of gross fixed
capital formation 199
7.3 Statistical definitions 202
viii Contents
7.4 ‘Investment’ as a variable in the DSGE models 205
7.5 Time consistency 211
7.6 Measurement and our intertemporal understanding of
the macroeconomy: the rise and decline of the investment
rate of the Western world, ca. 1807–2018 212
7.6.1 The USA: exceptionalism 213
7.6.2 France and the UK: catching up versus falling
behind 214
7.6.3 Germany, the Netherlands and the Nordics:
archetypes 215
7.6.4 Italy, Spain 216
7.7 Overview 220

8 Unreal production 226


8.1 Introduction: how real is ‘real’ production 226
8.2 Single and double deflation 227
8.3 Putting formulas to the test: superlative index numbers
and Dutch agricultural production and prices,
1851–2016 233

9 Macroeconomic unit labor costs as we measure them are


no indicator of competitivity 243
9.1 Introduction 243
9.2 NULC, RULC and ULC 243

Epilogue251
Index254
Tables

1.1 An overview of the key differences between DSGE models


and the flow of funds/national accounts 25
2.1 Number of domestic servants, selected years, 1899–1981
(thousands)63
3.1 An excerpt from the flow of funds, US Federal Reserve
Board (use and source table)78
3.2 From whom to whom matrix, long-term loans, 2017 end
of third quarter ex. pension assets and liabilities 82
3.3 The ECB definition of the eurozone monetary aggregates
M1, M2 and M3 (including deposits which are left out of
these aggregates) 84
4.1 Flows of labor, UK, 2001–2018 119
5.1 Fixed capital items listed in the SNA 2010 152
8.1 Use and prices of artificial fertilizer in the Netherlands,
1914–1923239
Graphs

1.1 Credit advanced to Irish resident private-sector enterprises: real


estate, land and development activities – outstanding amounts
and transactions 6
1.2 Real private consumption, real private investment and real
government consumption plus investment, USA: year on year
change (%) by quarter, chained 2012 USD, seasonally adjusted
annual rate 29
2.1 Other accounts receivable and payable, flows, Ireland 45
2.2 Farm gate milk prices, the Netherlands, before and after
globalization of the market 52
2.3 Workers of the world 55
3.1 Distributional accounts, USA, top 1%, next 9%, next 40% and
bottom 50%, assets and liabilities (selected assets and liabilities
as well as totals), USD millions 83
3.2 From MFI credit to M3 money 87
3.3 Stock and flow of ‘long-term loans’ (mainly mortgages)
of Irish households 88
3.4 M3 money and Divisia money year on year growth rates,
eurozone, original 12 members 93
4.1 Unemployment and year on year change of earnings (%),
UK, 1850–1939 106
4.2 Unemployment, UK and the Netherlands, 1910–2015 109
4.3 Headline and broad unemployment, USA, 1955–2017 110
4.4 Gross job gains and losses, USA, quarterly data,
2Q1992–2Q2018120
4.5 Declines in number of hours worked, USA, 1929–1933 and
1944–1949130
4.6 Unemployment, USA and Germany, 1910–2018 133
5.1 Resident non-financial companies, Ireland, long-term loans
(liabilities): total and per lending sector, EUR€ millions 151
5.2 Ownership of fixed assets, households, the Netherlands, 2016 154
5.3 Worldwide vehicle registrations, 1960–2016 167
6.1 Historical development of different components of household
consumption, Germany and Greece 180
Graphs xi
6.2 Components of household consumption (% of GDP),
Germany and Greece 181
6.3 Worldwide production of cars, regional data 185
7.1 Nominal gross fixed investment rate, Sweden, 1807–2018 199
7.2 Nominal gross fixed investment rates, USA (% of GDP) 214
7.3 Nominal gross fixed investment rate, France and the UK,
1815–2017215
7.4 Nominal gross fixed investment rate, Germany and the
Netherlands, 1807–2017 217
7.5 Nominal gross fixed investment rate, Finland, Denmark
and Ireland, 1844–2017 217
7.6 Nominal and a ‘real’ gross fixed investment rate Italy and
Spain, 1850–2017 218
8.1 Intermediate inputs (% of gross output), Dutch agriculture,
1851–1950, current and fixed prices 230
8.2 A Törnquist and a chained Fisher Price Index, Dutch gross
arable output, 1851–2016 235
8.3 Producer prices of arable and livestock products, the
Netherlands, 1851–2016 236
8.4 Gross arable and livestock output, Törnquist deflated volume,
the Netherlands, 1851–2016 236
8.5 Gross arable and livestock production (% of total gross
agricultural production), current and fixed prices, 1851–2016 237
8.6 Prices of different kinds of artificial fertilizer, plus Törnquist
and chained Fisher Price Index 238
9.1 Nominal unit labor costs, selected countries in the eurozone,
2000–2018245
9.2 Compensation of employees per hour worked (% of German
compensation), selected eurozone countries 245
9.3 Labor share, highest and lowest share per sector, sectoral data,
the Netherlands, 2008–2013 246
Figures and diagrams

2.1 A Dutch stamp from 2017: private money 43


4.1 Proposed classifications of people in the labor force framework 116
4.2 Examples of search behavior 117
5.1 The relation between the national accounts and ‘natural capital’ 164
6.1 Sectoral consumption flows according to the SNA 181
Preface

A book like this, comparing theoretical and empirical concepts and definitions
of (neoclassical) macroeconomic variables with the concepts and definitions of
the (macro-)statisticians had to be written. As there isn’t one while considerable
differences do exist. Which leads to misunderstandings. To be able to do write
such a book, one has to be a ‘Jack of all trades’. I qualify. But as this proverb goes
there is a trade-off to this: I’m a master of none. I’m not professionally occupied
either with labor statistics or data on consumption, capital or, investment or with
constructing ‘real’ variables (although I have constructed and estimated such
estimates). For all these subjects there are people better equipped to write about
the concepts and definitions, even when the economic history approach I use in
this book does add value to the often technocratic analyses of the specialists. Also,
I did not publish any DSGE model (and do not intend to do so. A systematic
comparison of the statistical and the theoretical concepts is, however, lacking – so
somebody had to bite the bullet. As far as I know, this book is the most system-
atic and in-depth overview available of the differences between the concepts and
definitions of theoretical, neoclassical macro-economics and the macro-statistics
as embedded in the National Accounts, the Flow of Funds and the Labor Statis-
tics. As knowledge about the differences between the theoretical and statistical
concepts is pivotal to the interpretation of the data as well as the models, it fills a
void – it is for instance important to know that, generally, the neoclassical macro
concept of consumption deals only with non-durable, non-government goods
and services. My endeavor will often be wanting, shallow or even plain wrong,
but it does show that such differences can and have to be pointed out if we want
to move to a better science of economics. It is a call to arms.
Not many economists share an interest in comparing basic traits of the statistics
to those of neoclassical macro-theory even when many are interested in either the
statistics or the theory. Some, however, do. Nathan Tankus provided me, unwit-
tingly but intentionally, via his Twitter account, with invaluable links to articles
and authors. The ideas of the economist Means, which are pivotal if one wants
to move from a theory based on market prices only to statistics based on market
but also on administered and regulated prices, would not be in this book without
him. Early attempts of several of the chapters in this book have been read and
criticized by Josh Mason and Dyane Coyle, while an early draft of the chapters
xiv Preface
on money has been presented to Daniel Mügge, Professor of Political Arithme-
tic, and colleagues at the University of Amsterdam. I owe a debt of gratitude to
all of them. The ideas of Frits Bos, long ago a fellow student as well as a former
colleague at the Centraal Bureau voor de Statistiek, permeate the book. The idea
that rigorous quantification of social processes does not exclude a genuine and in
depth interest in the fate of real ‘common people’, and even is a necessary part of
investigating their lives, which is one of the guiding principles behind this book,
is a clear consequence of long term contacts with the Economic History group at
the University of Groningen.
1 Introduction

Introduction
This book discusses the complex conceptual differences between macroeconomic
measurements and neoclassical macroeconomic theory, which this chapter out-
lines in three parts:

• First part of Chapter 1. Paragraph 1.1 The ‘why’ of the book, the three
basic questions as well as some sources and methods of investigation.
• Second part of Chapter 1. Paragraphs 1.1–1.10. Theoretical backgrounds to
the framing, discussion and interpretation of the results of the investigation.
• 1.2 Conceptual differences extend to the cores of neoclassical macro
theory and statistical macro-measurement;
• 1.3 The two very different meanings of ‘micro-founded’;
• 1.4 The differences between macro-models and macro-statistics have a
history;
• 1.5 Macroeconomic events outside the framework of macro-models as
well as macro-statistics;
• 1.6 The changing boundary of our idea of ‘the (macro) economy’ and
the immensely measurable nature of monetary transactions;
• 1.7 Hey, national accounts are political accounts;
• 1.8 Overarching integration: the modern flow of funds (FOF) / national
accounts;
• 1.9 An overview of the key differences between DSGE macro-models
and macro-measurements;
• 1.10 Mitchell-style business cycle indicators, the accounts and DSGE
models.
• Third part of Chapter 1. Paragraphs 1.11–1.13 Elements of the structure
of the story.
• 1.11 The conceptual model of the book (1) – five interrelated phases of
development of a macro-statistical variable;
• 1.12 The conceptual model of the book (2) – cases;
• 1.13 The conceptual model of the book (3) – meta-formulas.
2 Introduction

1.1 Why this book?


What is macroeconomics all about? After 2008, I re-educated myself as a macro-
economist, and this became a pressing question, one that ideally has two answers.
An empirical one and a theoretical one, which are supposed to be two sides of
the same coin. But it turned out that in macroeconomics this is not always (and
has not always been) the case. Until 2008 the theoretical side – as embedded in
the neoclassical dynamic stochastic general equilibrium (DSGE) models – had
dominated the field for several decades. But the worldwide economic downturn
showed that theoretical macroeconomics provided insufficient answers to the
events of the downturn as stated in terms of the national accounts, the flow of
funds and the labor data. The measurement of macro-economic data had greatly
evolved but not in unison with the development of theory (see Card (2011)
about this for an in depth overview of ‘Labor’ and ‘Unemployment’). Two kind
of ‘currencies’ had developed and the exchange rate between these two curren-
cies was and is not easily tractable (Andrle, Brůha and Solmaz 2017). It turned
out that even when the same words are used, the theoreticians crafting the mod-
els and the statisticians estimating the real world are not always talking about the
same thing. Consumption as it’s measured is not ‘consumption’ as it’s used in the
models, capital is not ‘capital’ and ‘unemployment’ is not ‘unemployment’. Also,
different words are used to denote, at first sight, comparable concepts. Quite
some neoclassical theorists among whom quite some Noble laureates for instance
use the word ‘leisure’ to denote wat statisticians call ‘unemployment’. This lin-
guistic confusion is not new. In 1944 Haavelmo noted, pondering the relation
between economic theory and the then-burgeoning craft of measuring the mac-
roeconomy, ‘the confusion . . . caused by the use of the same names for quantities
that are actually different’ (Haavelmo 1944, p. 7). Another example: according
to the majority of models, all government expenditure, called ‘government con-
sumption’, is wasteful. By definition. It uses resources but adds nothing of value.
This means that, according to the large majority of DSGE models, government
expenditure on education or health care does not add to prosperity. According
to the statisticians, though, ‘government consumption’ does add value which is
the very reason to call it ‘consumption’. Clearly, two remarkably incongruous
concepts of consumption are used. Ceci n’est pas une science? Yes, there are DSGE
models that do accept the possibility that government expenditure might actually
produce useful public goods or services (Stähler and Thomas 2011; Iwata 2012).
But the core central bank models used to inform policy (Bokan et al. 2016) and,
crucially, models used in education (Sims 2015) do not follow this road. These
models argue that government expenditure is wasteful, while statisticians hold an
opposite view.
So, it turns out that we have to answer two questions, not one. The first is
about theory: ‘what are neoclassical DSGE macro-models all about?’ The sec-
ond is about measurement: ‘what are macro-statistics all about?’ Answering these
questions is not always easy, especially when it comes to theory. As indicated, not
all DSGE models use the same conceptualization of variables. Furthermore, many
Introduction 3
neoclassical macroeconomists are less than precise when it comes to d ­ efining
variables. I’m not the first one to notice this. According to Thorstein Veblen,
this fuzziness is a defining feature of what he called neoclassical economics. He
stated about the tendency to translate everything into an unobservable internal
discounting of pleasure and pain by atomistic individuals:

It is not simply that the hedonistic interpretation of modern economic phenom-


ena is inadequate or misleading; if the phenomena are subjected to the hedon-
istic interpretation in the theoretical analysis they disappear from the theory;
and if they would bear the interpretation in fact they would disappear in fact.
(Veblen 1909, p. 175)

It was one of the reasons for him to coin the phrase ‘neoclassical’ for this
kind of economic discourse; this book can be understood as an endeavor to
check if this Veblen quote still has truth to it, over one hundred years later.
Anyway, this lack of precision and the often implicit nature of assumptions
makes it quite complicated to investigate the concepts of the variables used in
the neoclassical models. The all-important concept of consumption which is at
the heart of neoclassical macro has to be gleaned from occasional remarks in
papers, footnotes and by reading between the lines. Macro-statisticians, to the
contrary, take great care to define their variables. When it comes to consump-
tion, Eurostat states:

Actual individual consumption . . . refers to all goods and services actually


consumed by households. It encompasses consumer goods and services purchased
directly by households, as well as services provided by non-profit institutions and
the government for individual consumption (e.g., health and education ser-
vices). In international comparisons, the term is usually preferred over the nar-
rower concept of household consumption, because the latter is influenced by the
extent to which non-profit institutions and general government act as service
providers.
(Eurostat 2018c)

Impressive tomes are written detailing and operationalizing these definitions to


enable consistent measurement and even to enable measurement at all, while
modelers conveniently often leave the government and also non-profits out
of their concept of consumption, most of the times not being explicit about
this. Such differences in culture – occasional footnotes versus impressive tomes,
explicit and detailed statements versus implicit use – make it difficult to compare
the concepts and definitions of the theoretical models with those of the stat-
isticians. Sometimes, concepts can even only be understood by spotting omis-
sions. Non-profits (churches, unions, amateur sports clubs, charities like the UK
National Trust which with 2.551 square kilometer is the largest private land-
owner in the UK) are an explicit sector in the statistics. But I’ve never seen them
mentioned in the models, not even between the lines. They are seemingly left
4 Introduction
out of the neoclassical production and consumption boundary. Another example:
most DSGE models not only exclude government production of public goods
and services from their consumption concept but also exclude durable consump-
tion goods, like cars or the proverbial use value yielding chair of Alfred Marshall
(Marshall 1920). I only understood this when I ran into a DSGE model which
explicitly included them and mentioned that including durables was the excep-
tion to the neoclassical macro rule. Another difference: statisticians by definition
look at the recent or, sometimes, distant past. The models, choice oriented as
they are, look at the near but also at the distant future. The main actor of the
models, the ‘representative consumer’, makes, within the in the long run binding
confinement that the economy always returns to a benign equilibrium, choices
which designate this future (in a subsequent chapter I’ll discuss HANK models,
models which have more than one representative consumer). The reason con-
sumer durables are often not included in the models is related to this: existing
consumer goods restrain the representative consumers in their choices (having a
chair influences the discussion to buy a chair) which complicates modelling this
future and enabling the ‘representative consumer’ to choose freely. Statisticians
however have to include purchases of consumer durables as they are part of total
monetary expenditure which means that you can’t leave them out with running
into inconsistencies (why is paying for the services of a taxicab considered ‘con-
sumption’ and buying a car not?), which points to another difference: the choice
theoretical background of the models requires that the representative consumer
is not constrained by other people. The measurements, to the contrary, are fun-
damentally about such constraints: transactions like buying a car are always with
other people or organizations. The models with one representative consumer
rules out such transactions by definition. You do not have monetary transactions
with yourself.
Summarizing: the differences between the models and the measurements are
large and fundamental. This book sets out to flesh out and discuss some of these
differences. Which means that a third question has to be added: ‘what are the
main conceptual and definitional differences between the DSGE macro-models
and the macro-statistics?’ Subsequent chapters will set out to answer the three
questions as I’m not aware that any book doing this in a systematic fashion
exists. The rest of this chapter will provide some background information and
explain the multilayered structure of the book as well as the basic methodol-
ogy used to answer the questions. Some additional remarks: in the first sub-
question I introduced the word ‘neoclassical’. The reason to use this phrase
is simple but pressing: the DSGE models are a conscious effort to embed the
ideas of neoclassical economics about the nature of capital, labor and, especially,
the homo economicus in a macroeconomic framework. There are other macro
models, these will not be investigated. The attentive reader might have noticed
that I did not use the phrase ‘gross domestic product (GDP)’. This variable is
a keystone of the national accounts – but a keystone can only be a keystone in
relation to a building. When I relate to measurements it is to the building, not
the keystone.
Introduction 5

1.2 Conceptual differences extend to the cores of


neoclassical macro theory and statistical
macro-measurement
Differences between neoclassical macro-theory on one side and macro-measurement
on the other are manifold. This is not just the case when it comes to mere defini-
tions. The rift extends to the foundation the statistics and the models are built
upon, to how concepts are related as well as to the basic approach of how sci-
ence should be done. Statisticians go to great length to define their variables as
precisely as possible, engage in discussions about these concepts and are eager to
adapt time series to definitional changes. These ideas are written down in spe-
cialized articles and elaborate handbooks. Unemployment is a case in point. It
consists not only of long and short-term unemployment but also, among other
things, of involuntary part time work and of people available for work but who,
for whatever reason, are not seeking work. The manuals are clear on this. But:
what is the binding element of all these statistical variables? The same question
can be posed for the models. It took me some time to realize that Edward C.
Prescott, one of the winners of ‘The Sveriges Riksbank Prize in Economic Sciences
in Memory of Alfred Nobel’ (TSRPiESiMoAN), when using the word ‘leisure’,
actually writes about what statisticians define and measure as ‘unemployment’
(Prescott 2016). He is far from the only TSRPiESiMoAN winner who does this
even when no neoclassical manuals seem to exist which explain this specific use of
language. Why do they do this? But there is more to this. What is the foundation
of their belief that calling unemployment ‘leisure’ is warranted? Such questions
lead us to the core of theory and measurement. A smart non-economist observer
blessed with undue perseverance and starting to read neoclassical macroeconomic
theory and trying to answer such questions about unemployment might, after
reading tons of often bland and boring journal articles and central bank work-
ing papers, answer the question ‘what are Neoclassical DSGE macro-models all
about’ with a single word:

Utility! Utility is the non-monetary psychological variable which is central to the


‘representative consumer’, the single person also called ‘social planner’ which in
the workhorse neoclassical macro-models stands for society and whose preferences
about today and tomorrow permeate the models from beginning to end. Or bet-
ter: from top to bottom. True, in more advanced models there may be more per-
sons or even banks and entrepreneurs – but these maximize ‘utility’ too. It is the
relentless maximization of utility present and utility yet to come which makes
the model-word go round! As work does not yield utility but, to the contrary,
disutility being unemployed is better than being employed! Which means that
unemployment can be called ‘leisure’.

This ‘utility’ of the ‘representative consume’, who stands for society, is somehow
related to the variable with the same name in the microeconomic models of the
homo economicus, a variable which pervades economic theory and which has done
6 Introduction
so for quite some time (Marshall 1920), even when no mechanism for adding
individual utility of individual people is provided.1 But ‘social’ utility is why neo-
classical DSGE economists equate unemployment with leisure. Optimizing util-
ity, and not money, makes the world go round in the models.
But ‘utility’ is not at the heart or even the fringe of economic measurement.
Far from it. An equally smart non-economist observer blessed with an even larger
amount of perseverance would answer the question ‘what are macro-statistics all
about?’, after reading tons of always bland and boring manuals about the NA
and the FOF and after investigating screen after screen of data and scores of press
releases, also with one word. But a quite different one:

Transactions! Whatever the statisticians measure, it’s not ‘utility’. They do not
even try. They measure transaction based monetary flows of income, production,
labor, all kinds of expenditure and also credit in a granular way. Hey, you
really should take a look at the data about domestic credit to the Irish construc-
tion sector before and after 2008, information which is routinely available in
the datasets of the Central Bank of Ireland!
They also measure stocks of financial assets (including different kinds of
money) and they measure sectoral debts and the monetary value of fixed assets.
And they also directly measure one non-monetary variable: paid labor. And
unemployment. And they measure prices and interest rates and, neat, the flows
are interconnected. A change in one flow is by accounting necessity connected
to offsetting changes in other flows. They do this by bottom up aggregating

120,000

100,000

80,000

60,000

40,000

20,000

–20,000

Outstanding amounts (stock) Transacons (flow)

Graph 1.1 Credit advanced to Irish resident private-sector enterprises: real estate,


land and development activities – outstanding amounts and transactions
Source: Central Bank of Ireland, financial statistics Table A.14
Introduction 7
individual transactions by individuals, companies and government entities and
even charities and churches. But they do not measure ‘utility’. They do not even
try. Transactions, not optimizing utility, show how the world is going round.

That’s also why statisticians call unemployment ‘unemployment’: people with-


out work want to enter an employment transaction but aren’t able to find a
counterpart meaning that they are ‘un-employed’.
So it’s looking forward against looking backward, utility against transactions,
bottom up against top down, granular data against stylized sectors and explicit
optimizing against the evolution of society. Other models, more consistent
with the statistics do exist (one example: Godley and Lavoie 2007). In this
book I will however restrict my attention to the neoclassical ‘DSGE’ macro-
models. The very design of these models complicates comparing statistical
with theoretical concepts and definitions – as the theoretical ones are equated
with psychological variables while a rather limited production and consump-
tion boundary is used. Remember the absence of consumer durables, non-
profits, public goods and services and indeed even, as we will see, money and
financial markets. As Willem Buiter stated about pre crisis DSGE models, pre-
cisely one century after Veblen: ‘Both the New Classical and New Keynesian
complete markets macroeconomic theories not only did not allow questions about
insolvency and illiquidity to be answered. They did not allow such questions to be
asked’ (Buiter 2009). Consistent with Veblen’s prophecy, money and transac-
tions disappeared from theory and fact. As present day DSGE models state:
they are based on ‘sound’ analysis of ‘deep’ and ‘fundamental’ psychological
relations which escape the laborious and gritty work of actual measurement
and day to day action and hence the discussion about the fact one wants to
measure and how this should be done. According to Arjo Klamer, this emphasis
on deep, abstract and eternal truth below the factual surface is typical for the
modernist view of life (Klamer 2001). Unfortunately, it also means one has to
dig hard and deep and to read between the lines to find out what the modelers
are really writing about. Even then, as there are no official manuals and formal
definitions one DSGE model might use a concept in a slightly different way
than another. Digging hard and deep however does yield results. Returning
to the concept of consumption in the models, neoclassical authors state the
next things: ‘Dynamic stochastic general equilibrium (DSGE) models typically
(as do most models) treat government spending as wasteful; such spending does
not contribute to enhancing private sector utility or productivity’ (Russel Kincaid
(2008). Or to quote Daragh, Jacquinot and Lozej (2014, pp. 4, 5): ‘Neoclassi-
cal economic theory typically assumes that government expenditure is wasteful’ and
‘Regarding consumption goods, we maintain the assumption from many models
that government consumption expenditure is wasteful’. Such sentences have to
be taken literally. It is about all government spending, including spending on
roads, education or healthcare. Mind that statisticians do not define government
consumption as intermediate use by the government but as the production of
public goods and services. But what if for instance as happened in the UK, the
8 Introduction
postal services are privatized? A DSGE model about the situation after privati-
zation is, taken the model literally, about another economy than a DSGE model
about the situation before privatization. The boundaries do not change – but
the area within does. The citations above are clear. But they are also hard to
find. The models are silent on this – even when the citations above do seem to
be consistent with the verdict of Veblen.
There is more to this. The neglect of government production is remarkable. In
the larger body of economic thought, expenditure on public goods and services –
either individual consumed ones or public ones – is considered to be a part of
total consumption (Samuelson (1954). The entire fifth ‘book’ of The Wealth of
Nations (Smith (1784, first edition: 1776)) is dedicated to this. And analysis of
government expenditure is of course a viable branch of the tree of economics.
It’s not as if economists turn a blind eye to the government. The problem of the
models is however already indicated in the last sentences of the famous 1954
Samuelson three page article about government expenditure:

To explore further the problem raised by public expenditure would take us into
the mathematical domain of ‘sociology’ of ‘welfare politics’. . . . Political econ-
omy can be regarded as one special sector of this general domain, and it may
turn out to be pure luck that within the general domain there happened to be a
subsector with the ‘simple’ properties of traditional economics.
(Samuelson 1954, p. 389)

Traditional aka, in the definition of Samuelson, political economy means, in this


context: the neoclassical analysis of markets. Somehow, it’s not easy to use this
apparatus to analyze non market transactions. But even then some DSGE models
do accept the idea that government expenditure can be a boon to society (Stähler
and Thomas 2011; Iwata 2012). A comparable situation exists for consumer
goods. Often durable goods, like cars, are excluded for reasons of convenience:
leaving them out circumvents the problem of how ‘use-value’ of durable goods
after the purchase adds to utility.2 Most models exclude them. But some don’t
leave this out (example: Monacelli 2009). It can be modelled, which means that
defining government expenditure as wasteful by definition and omitting cars and
chairs out of the models is a conscious choice which defines the core of the mod-
els. It’s all about utility. And activities yielding utility in most models are quite
restricted, however this is often not well described in the models.
Statisticians take the opposite approach. Take, again, consumption. When statis-
ticians make international and historical comparisons, the concept of ‘Actual Indi-
vidual Consumption’ (AIC) is used. This is an aggregate of household purchases
of private durable and non-durable goods and services plus government expendi-
ture on individual consumed public goods and services like education and health
care but excluding collective public goods like roads and law and order, which are
measured separately (Eurostat 2018b). There are good reasons to do this. Impor-
tantly statisticians are more or less forced to include ‘government consumption’
like education into their concept of consumption as there are non-trivial differences
Introduction 9
between countries as well as large historical changes within countries when it comes
to the boundaries between individually consumed ‘private’ and ‘public’ goods and
services. Healthcare is a case in point. The UK National Health Service (NHS) is
public but some of the services provided by the NHS are private in the USA. Tak-
ing the inner conceptual consistency of DSGE models serious – which I do – means
that the models consider expenditures on the NHS ‘wasteful’ while they consider
comparable expenditures in the USA as ‘adding to utility’. The statisticians however
look at transactions: as long as the services are part of the ‘money economy’ and
based on transactions, like wages paid to nurses, they are within the production
boundary, it does not matter if they are provided by the government, companies or
even households themselves or non-profits, like churches (or ‘NPISH’, non-profits
institutions serving households, in the terminology of the national accounts). Pri-
vatizing the postal service does not matter for the measurement of AIC. Monetary
transactional activities are the core of macro-measurement – a net cast wide. If we
want a consistent body of macro theory as well as macro measurement, the DSGE
models will also have to cast their net wide, much wider than at the present. Neither
the core variables – utility and transactions – or the production and consumption
boundary of the respectively the statistics are consistent with each other.

1.3 The two very different meanings of ‘micro-founded’


The differences between statisticians and theoreticians stretch into semantics.
Both use the phrase micro-founded. It’s the core idea holding DSGE models
together. But modelers give it another meaning than the statisticians. The theore-
ticians assume that the neoclassical microeconomic utility formula which defines
their homo economicus also applies to society as a whole. There is, according to
them, one neoclassical ‘microeconomic’ utility curve for the entire macro-society,
which means that the macroeconomic ‘representative consumer’ (their model of
society) behaves in the same way as the microeconomic homo economicus. The
relation between social and individual utility is not clear – the aggregation prob-
lems mentioned by Veblen (1909), Marshall (1920) and Arrow (1950) still persist
today. But a utility curve for entire societies shaped like a utility curve for the
homo economicus is still assumed. All of society acts as one giant homo economicus.
Hence the phrase ‘micro-founded models’, which is shorthand for ‘neoclassical
macroeconomic models which assume that a society behaves like one neoclassi-
cal individual’. In the case of a number of representative consumers with either
different preferences, different power or different constraints on their actions this
still holds: all of them behave like the micro economic homo economicus. Hence
the phrase ‘micro founded’. Statisticians also use the phrase ‘micro-founded’. But
with a totally different meaning. For them it means that their aggregate data
are, in the end, based upon measurement and aggregation of myriads of mon-
etary micro-transactions. Only one example: the title of an OECD paper by Coli
and Tartamella (2015): ‘The Role of Micro Data in National Accounts. Towards
Micro-founded Accounts for the Household Sector’. Instead of describing the influ-
ence of top down decisions on future states of the world it’s about bottom up
10 Introduction
aggregation. The theoreticians and statisticians do not always seem to be aware
of this difference – the words imprinted on their respective coins sound the same
but are part of different languages and people do not seem to be aware of the
existence of different languages. Also a transactions based measurement system
like the national accounts (NA) or the flow of funds (FOF) by definition impli-
cates that the macro-statistics are fundamentally not about a single ‘representative
consumer’ but about relations between multiple people and companies and the gov-
ernment and banks and non-profits. The idea of a single representative consumer
is opposite to the foundations of the NA/FOF. The accounts map and aggregate
the monetary flows engendered by an incredible complicated maze of persons and
organizations which all have monetary transactional relations which each other,
in the case of debt and credit and in fact many production and consumption
contracts even of a long-term nature. It is the opposite of the ‘representative
consumer’ which, in the models, does not trade but who does have ‘trade-offs’
between the present and the future. Good things are happening. Especially since
2008, the models have been extended with more consumers, banks, foreign coun-
tries and even class: institutional detail is added and transactions are becoming
important. Also, academic economists like Thomas Piketty and Moritz Schularick
are extending the use and scope of existing statistics, also by adding their new own
long term estimates of economic variables to the existing body of knowledge. And
they are not the only ones making long-term and very long-term data are made
available (Reinhart and Rogoff 2009; Dimsdale, Hills and Thomas 2010). But the
rift is still deep and wide. Micro-founded is, by many an economist, still under-
stood as a phrase which harkens back to theoretical neoclassical micro-economics.
And by statisticians as a method of measurement and aggregation.

1.4 The differences between macro-models and


macro-statistics have a history
The dichotomy between neoclassical theory and measurement is not a recent
occurrence. The transactions central to the statistics are part of the same
‘money economy’ which was emphasized by the theory and measurements
of Thorstein Veblen’s best student and one of the dominating economists of
the first half of the 20th century, Wesley Mitchell. In 1916 he stated: ‘Among
recent tendencies in economic theory none seems to me more promising than
the tendency to make the use of money the central feature of economic analysis’
(Mitchell 1916, p. 140). He pitted this against the psychology and utility ori-
ented approaches of John Stuart Mill and especially William Stanley Jevons, in
the event approvingly quoting a 1915 article of a young Cambridge professor
by the name of J.M. Keynes. He is however quite positive about Alfred Mar-
shall as, in line with the criticisms of Veblen and contrary to earlier utility ori-
ented economists, Marshall emphasized real prices actually paid, which means:
the transactions central to macroeconomic measurement (in this book, the 8th
edition of his Principles of Economics from 1920 will be cited, Mitchell cites
the 6th edition of 1912).
Introduction 11
Mitchell would, during the rest of his long career, put monetary transactions
where his mouth was. He published the first real national income accounts of the
USA, for the 1909–1919 period (King et al 1921) and the much more detailed
companion book (King et al 1922), stressing the importance of these data for
especially an analysis of the distribution of income. Later, he guided econo-
mists like Simon Kuznets and Morris Copeland and helped to conceptualize and
organize their work on NA and FOF. Next to this, he was crucially involved with
statistical business cycle analysis while he also stood at the cradle of the Friedman
and Schwartz book about the monetary history of the United States (Friedman
and Schwartz 1963). The hypothesis that no other 20th century economist con-
tributed more to estimating the ‘money economy’ and translating the criticisms
of Veblen of utility and neoclassical economics into measurable concepts can’t
easily be refuted, which all serves to underscore the idea that the dichotomy
between neoclassical macro-utility on one hand and macro-estimates of the mon-
etary economy and the aggregate value of different kinds of transactions was
already visible during the first decades of the 20th century. And while aggregate
transactions were already measured in detail in King et al (1922), the problems
with aggregating utility were also already clear to the mind of perceptive econo-
mists. To quote Alfred Marshall:

the task of adding together the total utilities of all commodities, so as to obtain
the aggregate of the total utility of all wealth, is beyond the range of any but the
most elaborate mathematical formulae . . . if the task be theoretically feasible,
the result would be encumbered by so many hypotheses as to be practically useless.
(Marshall 1920, p. 521)

This problem of measuring utility is still not solved: ‘utility’ in the models is not
aggregated from the bottom up but introduced in the models as a top down
unmeasured variable. A relation between individual utility of real persons and
utility of the representative consumer representing society is not specified or
mentioned. This circumvents but does not solve the aggregation problem already
mentioned by Alfred Marshall and more thoroughly analyzed by Kenneth Arrow,
an analysis which led him to coin the impossibility theorem (Arrow 1950). Now-
adays, these criticisms still stand (Morreau 2014). Unless everybody is exactly
equal it is not possible to aggregate individual preferences into consistent social
preferences. The statisticians to the contrary do not use utility but ‘monetary
transactions’ as their core variable. As every profit and loss account shows, there
is a clear and identifiable relation between individual and aggregated transactions
and, within the confines of a company or a person or an economic sector or even
a country, between different kinds of expenditure. Macro-measurement is as such
almost the antithesis of the models, while utility defies measurement and aggre-
gation, monetary transactions are immensely measurable and enable aggregation
in a big way. In the meanwhile the concept of micro-utility has regressed to the
purely psychological variable already criticized by Thorstein Veblen and has not
become a more advanced version of the ‘use-value’ related variable defined by
12 Introduction
Alfred Marshall and dear to modern marketeers. It still defies measurement.3
While the NA are by now measured as a matter of routine, on a quarterly basis
and the world over. In a sense and when it comes to macroeconomics, economic
science has come full circle since the criticisms of Veblen. Albeit, when it comes
to the models, on a more sophisticated level of mathematical description. And
when it comes to measurement, on a much higher theoretical as well as practical
level of statistics and measurement.
The differences between models and measurement also extend to the social
realm. Modelers often work at universities, are pressured to ‘make a name’ and
do not have the same publication avenues as the often anonymous statisticians.
‘Heroes’, to borrow a phrase from the analysis of corporate culture, are people
who published a lot in prestigious journals and who get cited a lot. But who are
our statistical heroes? I’ve lauded Wesley Mitchell, an economist-statistician who
in his age was very well known. But while lesser contemporaries like John Bates
Clark, Alfred Marshall and Irving Fisher are still well known he is all but forgot-
ten. John Bates Clark, one of the neoclassical economists starting to tinker with
the concept of a classless, genderless and race less society modelled with the con-
cept of the representative consumer even has a very prestigious price named after
him. A Wesley Mitchell prize of economic measurement is lacking. . . . It’s not
just that there is no such price. It’s also that economic statisticians do not seem
to feel the need for it. Their culture is not aimed at making a name or becoming
a scientific hero. But it’s aimed at measuring the economy in an anonymous way,
while theoreticians literally need to make a name to keep their job and are part of
a culture which glorifies individual honor bestowed upon them by society. The
highest honor, TSRPiESiMoAN, is not awarded to institutes. Statistical work
for various reasons often requires anonymity while main results are often anony-
mously published by institutions. As stated: differences are huge – even when
TSRPiESiMoAN winners like Jan Tinbergen, Milton Friedman, Simon Kuznets
and George Stigler started out as economist-statisticians – the last three of these
at the national Bureau of Economic Research (the total number of prize winners
associated with the NBER is 27). But the social and cultural world of the statisti-
cians is not the same as that of the theoreticians.

1.5 Macroeconomic events outside the framework


of neoclassical macroeconomic models as
well as macroeconomic statistics
Also, even when a variable like unemployment is covered by the statistics but not
(at least not in a way consistent with the definitions and measurements of the
statisticians, as we will see) by the models, both do not seem to bother to directly
measure financial bubbles, even though these can be and are, to an extent,
inferred from the quarterly NA data and even when upswings and downswings
were the explicit subject of investigation of Mitchell (1913, 1927); Burns and
Mitchel (1946) and Tinbergen (1939) and even when Friedman and Schwartz
(1963) made an explicit distinction between what now are called financial crises
Introduction 13
and ‘normal’ upswings and downswings of the business cycle. The statisticians are
large and by satisfied with measuring data on a yearly and not on a cyclical time
scale. Also, modelers left many if not most of the causal variables identified by
Tinbergen (1939) as well as the monetary variables identified by Friedman and
Schwartz (1963) out of their models. Figure 1.1 shows credit to the construction
sector in Ireland. As is well known, there was a construction bubble (and bust) in
Ireland between 2000 and 2009. Which is perfectly visible in the data on credit
(mind that the flows are quarterly data). These data are part of the integrated
NA/FOF data – they are routinely available on the Eurostat website, among
other places. But even when the event is measured the statistics do not label it ‘a
bubble’ in any formal way. The NA data enable the identification of bubbles – but
do not formally measure them. They focus, taking the year as their fundamental
time unit, on expenditure, income and production and the way these flows are
financed. The flow of funds also take lending and borrowing into account, as
well as stocks of credit and debt, looking at banking but also at receivables and
payables. As the FOF uses the same (sub-)sectors and terminology as the national
accounts this means that the systems can be and are integrated. A major feat of
economic measurement. To be more precise, in the modern integrated NA/
FOF accounts ‘income’ is not equal to expenditure but {income plus net credit}
is equal to {expenditure on goods and services as well as expenditure on new and
existing financial assets}, which enables the measurement of bubbles. But ‘bub-
bles’ are not part of this conceptual apparatus as the actual measurements are
based upon years and quarters meaning that multi-year events are outside of the
conceptual scope of formal measurement. In paragraph 1.10 we will see that cycle
instead of calendar oriented statistics do exist, however.
For quite some time bubbles also where outside of the conceptual set up of
the DSGE models (Buiter 2009). Banks – one of the well-defined sectors of the
national accounts – were for decades left out of the models. During the last years,
theoreticians as well as institutional inclined economists have tried to extend their
models with banks to enable their models to show bubbles. Claudio Borio coined
and operationalized the idea of the financial cycle (Borio 2012). In this book the
model of Bokan et al. (2016), an elaboration of part of the core DSGE model
used by the European Central Bank, will often be used as a kind of default DSGE
model. This model enables bubbles to exist. Contrary to Borio, Bokan et al. how-
ever do not use the measurements of time series data of the integrated accounts,
even if these do show bubbles. The rift still exists. Another exemption: economic
class. Economic class is not based on income and education but on ownership.
Some people have to work for a living, others can live from the ownership and
capital and land. Bokan et al. (2016) re-introduce a class they call ‘entrepreneurs’
which literally owns and rents out all the capital into their model. But they do
not even bother to check if such a class exists and how it has to be conceptual-
ized, defined and measured while this can be done. Fessler and Schürz (2017),
who also tackle the question of ‘capitalists’ in the modern economy, go to great
lengths to investigate if such a class exists, how it can be measured and how large
it is. Their results are based on more or less the same classical, ownership related
14 Introduction
economic definition of class which, among many other 19th-century economists,
was adopted by Marx:

Intergenerational wealth transfers are a main driver of class location. Our


class typology can serve as an excellent proxy for the position of a household in
the wealth distribution. We discuss why this class typology has many potential
advantages with regard to the measurement and analysis of wealth. Class is key
in order to understand wealth inequality.
(Fessler and Schürz 2017, summary)

Bubbles and busts and ‘class’ are, as yet, not an integrated part of the accounts or
the models, let alone of an integrated science of economics were measurements
and theory tally, even when Wesley Mitchell pioneered the estimation as well as
the dating of business cycles while ‘class’ as an economic category was prevalent
in the writing of many 19th-century economists. At present, monthly measure-
ments of producer of consumer sentiment or industrial production are used to
measure cycles while the work of Bokan et all. and Fessler and Schürz show that
the class gap can be tackled, too. But class and the swings of the business cycle
data are not yet well tied to either the national accounts or the models. Next to
mending a rift there is a road to travel, too.

1.6 The changing boundary of our idea of ‘the (macro)


economy’ and the immensely measurable nature
of monetary transactions
One can pose the question if the rift between macro-theory and measurement has
always been as large as it is today. As shown, the rift has been present for quite
some time but it can be argued that it has not always been as large as it is today.
To show this, this paragraph contains a short introduction into historical aspects
the development of national accounts and, somewhat later, the flow of funds,
mainly focusing on the ‘production boundary’ or the question what is and what
isn’t covered by theories and measurements. And how this differs from neoclas-
sical economics. The focus of this investigation will be the government: should
government production be covered by theory and measurement or shouldn’t this
be the case? This won’t cover the entire production boundary but it will serve
to show that boundaries changes, albeit in in the case of macroeconomics in an
opposite way when it comes to the measurements and the models.
We’ve seen that the NA/FOF include government expenditure in ‘final
demand’ as it adds a boon to society. As stated, most of the models take the
radical libertarian position that government expenditure is a waste, by defini-
tion. Recall the statement of Samuelson about the realm of what he considered
to be ‘traditional economics’ – government expenditure was simply not covered
by ‘political economy’ as he defined it, as this kind of political economy was
only occupied with markets. Is it right to use this particular definition of ‘politi-
cal economy’ and, more importantly, can we call this kind of exclusive market
Introduction 15
oriented thinking ‘macroeconomics’? Did ‘political economists’ indeed purge the
government from their thinking and is defining the macro-economy as solely the
realm of consumer choice of private goods sound economic procedure? There
are reasons to doubt this. The government has for a long time been an important
element within the production boundary as defined or used by generations of
economists. Mitra-Kahn (2011) argues that it was Keynes who introduced the
government into the accounts while earlier economists left the government out
of their production boundary. He discusses Adam Smith, who in 1776 published
The Wealth of Nations (Smith 1784, first edition 1776). According to Mitra-
Kahn (who also discusses earlier developments) this book had a large influence
on our definition of the macro-economy. It is about the transactional monetary
economy. Smith labelled many paid services (but not all) ‘unproductive’, an idea
which, according to Mitra-Kahn, influenced government statistics (which, to be
sure, at the time were a far cry from the modern national accounts) but some-
how Mitra-Kahn is silent about Smith’s ideas about the government and seems
to assume that Smith excluded the government from the production boundary.
The boundary proposed by Smith was, according to Mitra-Kahn, around 1900
successfully challenged by Alfred Marshall who included more services but not
yet the government in his idea of productive work and whose students, when
they started to rise through the ranks of the UK bureaucracy, managed to change
the statistics accordingly. The concepts of Marshall were at the end of the 1930s
brushed aside by John Maynard Keynes, who (therewith extending the work of
Colin Clark), introduced the production of the state into the national accounts to
enable an analysis of non-inflationary wartime spending (Keynes and Rothbarth
1939; Keynes 1940). To be able to do this he also established the present day
Office for National Statistics (ONS) in the UK, which had to measure the vari-
ables defined by Keynes while he also managed, during his trips to the USA, to
get his ideas accepted in the US government offices, therewith sidelining Simon
Kuznets and his more welfare oriented approach to national accounting. As a
consequence, national accounting was set on a track which was meant to ena-
ble an analysis of a war economy and a central role for the government which,
despite some tinkering at the margins (Bos 2003, 2013; Eurostat 2013), basically
endures to this day. A system which, according to Mitra-Kahn, is not fit for an apt
analysis of welfare oriented policies.
The ideas of Mitra-Kahn are highly interesting. But they are UK-centered. And
they need elaboration. The main conceptual contribution of Keynes to national
accounting was not the introduction of the government into the accounts. The
role of the state had long been stressed by economists like Adam Smith. And
not just by him. It has been included in national accounts and preceding esti-
mates of the national economy from the very beginning. In 1608 Simon Stevin,
a Flemish/Dutch polymath who among many other things also invented or at
least perfected decimal notation, improved windmill design and developed an
ultra-fast ‘wind powered beach carriage’, published ‘Vorstelicke Bouckhouding’
(‘Accounting for Princes’) (Stevin 1608). This book (actually: chapter of a larger
book) was inspired by an earlier French example. It was about keeping accounts
16 Introduction
for the estate of the prince, not about accounting for the state or the nation. But
such approaches to the wealth of the sovereign instead of the commonwealth
would wane. A few decades later William Petty, a polymath who among other
things developed a device for ‘double writing’ and who charted Ireland, wrote his
Political Arithmetick (published in 1690 but written around 1676). This book
argued and estimated among other things ‘That the Power and Wealth of England,
hath increased above this forty years’. It was not about the estate of the prince. It
was about the state of the nation. He wrote about employment, expenditure and
wealth and made some comparisons with other states like the ‘Hollanders’ and
the French. According to Mitra-Kahn (2011) this was not the first or last individ-
ual endeavor to define and estimate national prosperity. But it serves to illustrate
the growing focus on the nation or, as Petty also called it, the ‘Commonwealth’.
It also paid special attention to the productive role of the government, as the
title of the second chapter alleges: ‘That some kind of Taxes, and Publick Levies,
may rather increase than diminish the Common-Wealth’. This last point was not
lost on Adam Smith when he published his Wealth of Nations about one century
later. Not mentioned by Mitra-Kahn (and many other economists) the entire
fifth and last part of the Wealth of Nations is devoted to productive government
expenditure and the increasing role of the state. Clearly, ideas about productive
government actions have a long pedigree when it comes to ‘political econom-
ics’ – the use of Samuelson of this term is clearly idiosyncratic even when, in a
rhetorical sense, it enabled him to showcase his analysis. Anyway, Stevin as well as
Petty as well as Smith focused on the money economy. This would change. Like
the emphasis on the role of the government.
Marshall is accredited by Mitra-Kahn with refocusing the attention of econo-
mists on markets and individuals and including many, albeit not all, services but
not the state in the productive economy (Mitra-Kahn 2011). Reading Marshall’s
Principles of Economics (8th edition, Marshall (1920)) shows that services are
indeed included and a focus on individuals and markets is prevalent. As such his
thinking was heavily influenced by economists focusing on ‘utility’ like Jevons
and Böhm-Bawerk. According to him, the economy was in the end not about
producing furniture, but about the utility a chair yielded even when real money
prices did play a role on markets. For Marshall it however did not matter if the
chair was produced by the market or the government. He admits the existence
of government factories as well beneficial government policies related to health
while he notes the relatively fast growth of the number of government employ-
ees. But despite this and contrary to Adam Smith (and while writing at the very
height of British colonial power) he does not devote any special attention to the
government as such, which is a mayor deviation from Petty and Smith. Also,
national income or, as he prefers to call it, ‘the national dividend’ does play quite
a role in his book. But he was behind the times when it comes to this subject.
The extensive list of literature on national accounting in Bowley (1942) shows
that in 1920, when the 8th edition of Economics was published, there already was
quite an extensive literature about this ‘national dividend’. The idea propagated
by Mitra-Kahn (2011) that it were mainly the ideas of Smith and Alfred Marshall
Introduction 17
which influenced the measurement of the wealth and income of the nation is
clearly incorrect – scores of economists tried to estimate and define it and made
large progress. Somehow Marshall missed this and did not use this literature to
define the ‘national dividend’ in any precise way, though his ideas seem to be
related to the flow of income (see also Bowley 1920). Much more attention is
devoted by him to aspects like utility and consumer surplus – fundamentally non-
monetary variables – than to the boundaries of the money economy. It is well
possible – my knowledge of the history UK statistics is not extensive enough to
be able to corroborate this – that his students indeed changed the nature of UK
statistics by putting more emphasis on services. But did they, as the work of Mitra-
Kahn implicates, also like Marshall more or less forget about the government as
a distinct category of the national economy? If so, they were clearly behind their
times. To show this we have to cross the ocean. Around the same time as Mar-
shall published his 8th edition, an economist of the same stature but working in
the USA was already making his mark: Wesley Mitchell. He became the head of
the newly established National Bureau of Economic Research (NBER). As an
economist, he did not put emphasis on utility but on the ‘money economy’ and
its measurement, being well aware that the ‘money economy’ was not just about
earning money but also about the challenging task of wisely spending money –
for instance by housewives (Mitchell 1912). Comparing this with the bland state-
ments of Marshall about the ‘utility’ of furniture, Mitchell was decades ahead. In
Mitchell’s thinking, there was conscious life and dedicated effort, and not just
furniture, at the other side of the monetary production boundary. Anyway, one
of Mitchell’s most remarkable results was an early NBER study, ‘Income in the
United States: Its Amount and Distribution 1909–1919’ (King et al 1921). This
book, which estimates value added in the different sectors of the USA economy,
discusses the production boundary in a much more specific way than Smith or
Marshall. In its little read detailed companion volume (King et al 1922) we can
find the next phrase in the chapter abut the government, written by King (King
1922, p. 201):

In dealing with the product of government, the same criterion is used that has
been applied in the industrial fields previously studied; namely what book or
money income do individuals, as such, derive therefrom. Evidently, govern-
mental units expend great amounts for wages and salaries, but they pay no
dividends. Large sums are, however, disbursed in interest, mostly to private indi-
viduals, but to no inconsiderable extent to banks.

Clearly, the government was included in the first major national accounts study of
what already was the major economy in the world, based upon a purely monetary
criterion: government employees are paid a wage. Including the government in
the ‘national dividend’ was – contrary to the remarks of Mitra-Kahn – not an
invention of Keynes. More important: actual measurement forced economists
to be much more precise and clear about what they were talking about than
Smith and Marshall ever were forced to be, which eventually led to concepts like
18 Introduction
‘actual individual consumption’, which includes the consumption of individually
consumed goods and services provided by the government, like large chunks of
education. Excluded are the depletion of stocks of natural assets as a negative and
also excluded household work (King et al. 1921) but this omission is explicitly
mentioned and a very rough estimate of the importance of household work is
provided. Inclusion of the depletion of stocks of natural resources as a negative
still has to be incorporated in the accounts.
The influence of people like Mitchell but also Bowley and Colin Clark (who
estimated integrated accounts for the UK (Clark 1937) can also be witnessed
in the work of Keynes himself. The Economic Consequences of the Peace (Keynes
1919) still used a large amount of not well integrated data to prove Keynes’s point
about the state of an (admittedly fragmented) national economy. Eighteen years
later, in the autumn of 1939 when he published the articles which would become
his ‘How to pay for the war’ in the London Times, he used national accounts
data based upon the work of Colin Clark but (guided by Keynes) extended and
updated by Rothbarth (Keynes and Rothbarth 1939). There are several inter-
esting parts to this epoch making piece. First, it showed the power of national
accounting as a tool for policy. Second, it contained income estimates per income
group, a mayor advancement and a deliberate goal. As Keynes (1940) stated in
the acknowledgments: ‘I have been assisted throughout on the statistical side by hlr.
E. Rothbarth of the Statistical Department, Cambridge University, who is respon-
sible, in particular, for the estimated division of total income between the income
groups’. Third, it rightly envisioned government expenditure as expenditure with
the same main goals as private expenditure: consumption and investment. This
enabled Keynes to provide a much more systematic analysis of the economy than
he could provide in ‘The economic consequences of the peace’: his work was finally
up to the standard of King et al. (1921). He was well aware of the distributional
effects of high wartime inflation: the poor would suffer most. Eager to prevent
this he was able to state, with some quantitative precision, how much disposable
income of different groups of consumers had to be restrained to lower consump-
tion expenditure to be able to free resources for the war effort while keeping the
purchasing power of the lower income group afloat at least to an extent. Impor-
tantly, he used the three basic national account approaches (income, expenditure
and production) in combination. Nowadays, such data are a staple of GDP press
releases in the shape of the ‘supply and use tables’ (Eurostat 2018a) though it has
to be stated that the standard national accounts do not contain data on different
income groups – Keynes’ main national income innovation has been discarded!
See also Tily (2009). There is a nasty twist to this. Patnak (2018) argues that,
at least inspired if not guided by John Maynard Keynes, during World War II
the British government pursued a policy of ‘profit inflation’ in India, increasing
profits and decreasing the purchasing power of the poor to free resources for the
war effort – a policy which led to the Bengal famine of 1943–1944 which claimed
the live at least three million people (though Keynes might not be ‘credited’ with
rejecting the free grain offered to the British government for use in Bengal by the
USA and Canadian governments).
Introduction 19
Mitra-Kahn is right to point out the flabbergasting feat that, while not a gov-
ernment employee, Keynes managed to establish an entirely new government
office to measure the data he needed, and to stress his influence on the devel-
opment of the national accounts in the USA in the same period. His catch that
Keynes himself admitted that it was only in 1939 that he, according to his own
testimony, really figured out why the models of Colin Clark were not fit for his
purpose of designing a non-inflationary war effort – they left out ‘supply and use’
by the government but also, not mentioned by Mitra-Kahn and probably more
important, the distribution of income – should be in the textbooks (Mitra-Kahn
2011, p. 211). But Mitra-Kahn misunderstands why Keynes shed his last Mar-
shallian feathers. He assumes, that Keynes did not want to show an estimate of
private sector GDP which declined because of the war effort and hence opted for
a definition of GDP including the rapidly growing war effort of the government –
which would show an increase of GDP. This really is of the mark. The entire
goal of Keynes was to estimate how much private consumption and investment
could and had to shrink. Part of his calculations implied that, as the government
produces output and uses resources, too, a reduction of private expenditure of
10 percent won’t lead to a reduction of total expenditure with 10 percent as
private expenditure is less than 100 percent of total expenditure. His analysis was
no doubt influenced by his memories of the inflation of 1917–1920, which must
have taught him that any model used to analyze the situation had to be coherent
and consistent and hence to cover aggregate expenditure and total final demand
instead of only private expenditure of it or the amount of money going around.
And the logic of the model required him to estimate the total tax base in the UK,
including government employees, and total investments, including investments of
the government. Mitra-Kahn is also not right that the more welfare oriented GDP
definitions of Simon Kuznets were ‘sidelined’ by Keynes. Hirschman mentions
that Kuznets himself had a decisive influence on the planning of the US war effort
with an analysis which, tough production and not income oriented, was highly
reminiscent of ‘How to pay for the war’ (Hirschman 2016, pp. 82–83) and basi-
cally a kind of input-output analysis. And tough Kuznets (a student of Mitchell)
indeed tried to engineer a more welfare oriented concept of GDP the production
oriented approach was not a new concept. Actually, the first chapter of Kuznets
National Income and Its Composition, 1919–1938, Volume I (assisted by Lillian
Epstein and Elizabeth Jenks) is called ‘concepts, classifications and procedures’ and
contains a whole taxonomy of different kinds of concepts of ‘national income’
based upon basically the same accounts (see also Bos 2003, pp. 9–16, 2013) for
more extensive analysis of such points) while Kuznets (1955) includes military
equipment in its definition of fixed capital. The idea that Smith and Marshall
influenced statistics is right. But it is not right to state that their ideas decisively
influenced the accounts. The development of the accounts knew an own, transac-
tion and measurement based logic while there surely was an international and not
just a UK community of economists and statisticians developing national account-
ing. The very fact of measuring ‘the economy’ forced economists to grapple with
concepts and definitions in a way they had never done before. This development
20 Introduction
gained momentum when measuring national accounts became institutionalized.
Hirschman (2016) states that, before the 20th century, no country published
national accounts data even when economists were tinkering with the concepts.
This would, however, soon change. A non Anglo-Saxon example: between 1939
and 1941 Jan Derksen published as an employee of the Dutch Centraal Bureau
voor de Statistiek (CBS) and no doubt inspired by Jan Tinbergen, a whole string
of national account studies for the Netherlands which tackled conceptual and
measurement questions (CBS 1939; Derksen 1940, 1941). After the war he
would go on to become the head of the national accounts division of the United
Nations, coordinating the international discussion about what should be meas-
ured and what shouldn’t. The already mentioned literature in Bowley (1942)
is arranged by country, which abundantly shows the international character of
developments in national accounting and the many persons influencing this devel-
opment. The point was that ‘the economy’ was defined not just by a limited num-
ber of well-known Anglo-Saxon economists but also by an international group of
economist-statisticians who defined but also discovered the transactional macro-
economy. It were these statisticians who added rigor, coherence and precision to
the concepts and definitions and Keynes could clarify his concepts only after grap-
pling with these statistics. It has to be noted that these statisticians and economists
often were no students of neoclassical economists like Marshall but of institutional
economists like Veblen and Mitchell (Kuznets got a training as an institutional
economists at the Institute of Commerce in Kharkiv, Ukraine). And the most
prominent (neo)classical educated economist playing a decisive role in establish-
ing the (measurement) of the national, Keynes himself, put ample emphasis on
the time and trouble it took him to get rid of old ideas. As a consequence of such
actions and consistent with ideas of those like Samuelson (1954), which were very
widely accepted, separate accounts for the government were established. Also,
concepts like government consumption (i.e. consumption of individual house-
holds of government produced goods or services like education) and AIC were
developed. It was a clean sweep. The government produces value, however con-
ceptualized and measured and was included in the production and consumption
boundary which were increasingly measured by specialized institutes. Even neo-
classical models of the government became more explicit and rigorous. But for
one exception. The DSGE models for whatever reason and without discussion
purged the idea of a productive government from the models and stuck to the
ideas and methods of what Samuelson called ‘traditional economics’. The govern-
ment was excluded or at least the idea that the government was any good was
denounced. Even if several authors showed that government production can be
included as a positive. Excluding the government was, and is, a conscious choice.
So, the macroeconomic production and consumption boundary changed. On the
side of measurement it became much clearer and precise. On the side of theory
the government was also was increasingly included in the neoclassical models.
Until the rise of DSGE models after around 1970. A major regression.
At this point it is necessary is necessary to dwell on the nature of the logic of
the national accounts which, unlike the logic of the periodic table, evolves over
Introduction 21
time as economies evolve over time. These accounts are, despite a multitude
of imputed posts, deeply rooted in the monetary nature of our economy. This
monetary nature of the economy does not only consists of monetary prices but
also and by accounting necessity of the social nature of transactions and flows of
income and spending, which enables aggregation. This leads to the possibility
to classify and measure household income, consumer credit provided by banks,
investment expenditure of manufacturing or agricultural production. Monetary
transactions – the ‘money economy’ of Wesley Mitchell – are by their very nature
eminently and immensely measurable and show, when aptly classified, relations
between sectors. The whole point of an individual price is its public and sticky
nature. In a market the seller and the buyer both need to know the fixed money
price, quality (including delivery conditions and transport) and quantity of a
transactions (or at least the procedure how these are decided) ex-ante. In the case
of taxes, which are more one-sided than market transactions, the way taxes are
set also has to be known in advance. Any transaction enters into at least two sets
of sometimes informal but more often formal accounts; the account of the seller
and the account of the buyer and, in case of income taxes and VAT, also into the
accounts of the government. Three sets of accounts measuring one transaction!
In the case of companies, the value of sales is of course decisive for the ability
to pay contractual factor incomes and purchased inputs. Bos (2003) shows that
there are in fact eight accounts which, on the aggregate level, have to match.
And although delineating sub-sectors like ‘transport’, ‘construction’, ‘education’
or ‘agriculture’ is not always as easy as boundaries shift over time it is possible
to do this. The same holds a fortiori for the sectors – households, companies,
non-profits, financial institutions and the government – and economic categories
(wages, profits, interest, rent). These change over time but surely stay recogniz-
able in the short, medium and often also in the long term. Economic actors are
interconnected by the flows and stocks of incomes and sales denominated in the
unit of account: like wages, profits, interest, sales, credit, debts. The ‘empirical
discipline’ of measuring this economy forced economists to think more deeply
about this economy than they had ever done before – the issue of actual indi-
vidual consumption which raises its head once international or historical compari-
sons of household consumption are made being only one example. Also, all the
actors had to be included in the model. Leaving out criminal organizations would
yield, by accounting necessity, a black hole in the system. This transaction based
logic of the measurements has been pivotal to the development of the national
accounts and even more so to the flow of funds and has its implication for scien-
tific economic theory. As Haavelmo stated:

The practical conclusion of the discussion above is advice that economists


hardly ever fail to give but that few actually follow . . . that one should study
very carefully the actual series considered and the circumstances under which
they were produced before identifying them with the variables of a particular
theoretical model.
(Haavelmo 1944, p. 7)
22 Introduction
In national accounting, the economists actually did this, which led to the modern
NA/FOF data which do not only allow an analysis of the Irish bubble but which
the basis for physical as well as monetary input output tables which enable econo-
mists to analyze how final demand is related to sectoral production of, say, CO2.
Or to measure the labor share of income. Sound measurement: a mayor feat of
the science of economics, enabled by the social and immensely measurable nature
of monetary transactions.

1.7 Hey, national accounts are political accounts


Many of the choices made by modelers and statisticians are influenced by val-
ues. Most obviously: the national accounts are called ‘national’ for a reason. The
nation is preponderant even when recent developments in financial technology
and international value chains start to make this choice more burdensome. In
this process, social strive played and plays a role. A recent example of the issues at
stake: Cravino, Lan and Levchenko (2018) show, using the consumption basket
used to estimate consumer price inflation and looking at different incomes, that
consumption of middle incomes deviates from the average in a way that makes
them more vulnerable for increases or decreases in interest rates than other con-
sumers. In such a situation, not using the consumer price index but for instance a
broader index also comprising interest will affect different income groups in a dif-
ferent way. Stapleford (2009) analyses the battles between, among other actors,
the government, unions and companies about the concept of the ‘consumer price
index / cost of living index’ in the USA. He relates the very existence of the
consumer price index to the wish to shift class struggle about the purchasing
power of wages from companies and organizations to the more ‘civilized’ realms
of statistical offices and official indexation clauses, which is not surprising. The
accounts are used for the management of national economies. Keynes (1940) is
the primeval example. Which means that they are permeated from their design
to their publication by political considerations. This is not the same thing as stat-
ing that they are just a dreamed up description of the ideal state. The boundaries
between sectors like construction and agriculture have not just been drawn for
political and ideological reasons but also because of practical as well as techno-
logical and economic reasons. The same holds for the separation between the sec-
tor households and the business sector or, to an extent, for a variable like Gross
Domestic Product (GDP) (Office of National Statistics 2018) or the consumer
price index. Delineating ‘households’ instead of churches or dormitories as a
sector is a choice. But households can be delineated: they are not just a statisti-
cal artifact. The latest version of the national accounts emphasizes ‘ownership’
however more than previous versions, which, as we will see, can lead to funda-
mentally different estimates of ‘the economy’. Choices have to be made. The data
can only be understood against the background of these choices. And the choices
will have a political element. But: other choices could have been made. In the
15th century, there would have been sound economic reasons to delineate ‘The
Church’ as a separate sector, while nowadays central banks, which in the 15th
Introduction 23
century did not exist and which would not come into existence for centuries to
come, are the only companies with and own sub-sectoral delineation – economies
evolve. The accounts have to evolve with them. The fact that ‘national’ accounts
become increasingly troublesome because of international flows of income and
ownership shows that even the system of nations evolves. The Irish accounts have
in fact already be adapted to the unusual large income and ownership flows into
and out of this island economy. But even that is in the end a political decision,
even if made by the statisticians.

1.8 Overarching integration: the modern flow


of funds/national accounts
The flow of funds are less well known than the national accounts which means
that a short introduction might help the reader. They are not designed to esti-
mate the ‘non-financial’ flows like income, production and expenditure but to
estimate flows of lending and borrowing in combination as well as to estimate
stocks of financial liabilities and assets. They are of relatively recent origin. In
1944 the NBER (headed by Wesley Mitchell) assigned Morris Copeland with the
task to develop, together with the Fed (the central bank of the USA), a financial
corollary to the rapidly evolving national accounts:

About the circuit flow of payments and its relation to national income and out-
put, our knowledge is exceedingly vague. We do know, however, that the flow of
payments does not adjust itself automatically to the flow of goods men are able to
produce and need to consume. Indeed, several theorists have argued that cyclical
fluctuations in business activity are due primarily to recurring changes in the
relative size of these two flows. The findings this investigation promise should put
us in a far better position to diagnose our recurrent chills and fevers, and to:
seek remedies.
(Mitchell 1945, pp. 61–62)

Copeland successfully accomplished the task, and only about a decade after
Mitchell’s statement was made central banks all over the world started to
estimate monetary statistics with the FOF as the overarching framework. The
agenda set out by Mitchell still is the agenda of the flow of funds, as shown by
a recent quote of the Office for National Statistics (ONS) in the UK which,
even when less eloquent, conveys the same message as the Mitchell quote
above:

An understanding of the economic performance of the UK is especially impor-


tant for effective policymaking and improving welfare. The non-financial
accounts have long been extensively monitored as a health check for the econ-
omy, but they do not fully capture the build-up of financial risk. For instance,
changes to the underlying resilience of the UK’s source of funding can impact
the economy in a way that is not obvious from studying fluctuations in income
24 Introduction
or output. . . . We have partnered with the Bank of England to address this,
by enhancing the coverage, quality and granularity of financial accounts sta-
tistics for the UK.
(Office of National Statistics 2018)

An example of how these accounts are used can be found in the monthly mon-
etary press releases of the ECB. These show the creation of money as a function
of sectoral growth of credit: how much money is lent by the banks, how much is
borrowed by households, non-financial companies, the government of financial
companies as well as how much of this money ends up ‘abroad’. The credit data
shown in Figure 1.1 are part of these statistics on the national level: the money
borrowed by Irish construction companies from money creating banks or, as
they are called in the accounts, ‘Monetary Financial Institutions’ (MFIs) adds to
money growth in the Eurozone. This is however not just about the flow of credit
to Irish construction companies and the ‘GDP economy’. An example are data
on balance sheet of banks. Mortgages have become by far the largest asset on
the balance sheet of the consolidated banking sector and quite often also by far
the largest debt on the balance sheet of households. As sales of existing houses
do not add to the flow of new goods and services (aside from fees for real estate
brokers and the like) and are hence not included in the national accounts, even
when they are central to vulnerabilities and might readily lead to economic ‘chills
and fevers’, as also argued by the ONS (2018). Interestingly, estimating the flow
of funds forces the statistician to use a quite broad concept of money. Many trans-
actions, especially between businesses, are initially financed by payables/receiva-
bles, not by commercial credit or direct payments. These payables/receivables
are promises to pay with legal tender or deposit money and are a legal way to buy
something: a change in ownership takes place. They are a means of exchange.
They are also an asset, as they are a classical item on company balance sheets and
hence a store of value. The flow of funds by necessity treats these promises to
pay as money, which shows that the FOF are not just about money as we pay it
but also about other money-like items like payables and receivables or long-term
savings and a host of other financial instruments. Another example: when entities
like shadow banks are not included in the FOF, ‘black holes’ will appear. In fact,
the whole apparatus to measure credit bubbles is available, while the statements
of Mitchell in 1944 as well as the more recent statements of the ONS indicate
that measuring such bubbles is a prime goal of the FOF. Unfortunately, there still
are no official bubble measurements (see however Borio 2012).
The modern national accounts have at present incorporated large parts of the
flow of funds, which has quite some consequences for economics 101, whose
textbooks state that

{Income = Expenditure};
modern national accounts to the contrary state that;
{Income plus net credit = Expenditure of goods and services plus net acquisi-
tion of real and financial assets}.
Introduction 25
These assets include changes in cash and deposits which clearly shows that if peo-
ple save more money and channel this to savings accounts expenditure on goods
and services has to fall, unless net debt increases. Analyses using this framework
are for instance Keen (2016) and Ryan-Collins, Werner and Castle (2017). But
it has to be stressed that it is included in the basic framework of the modern
national accounts and also wealth inequality statistics as these, recently, have been
added to the flow of funds by the US Federal Reserve (Batty et al. 2019). This
all leads to the next general comparison of the models and the measurements.

1.9 An overview of the key differences between DSGE


macro-models and macro-measurements
Summarizing the discussion, the main differences can be stated as follows:

Table 1.1 An overview of the key differences between DSGE models and the flow of
funds/national accounts

National Accounts/Flow of DSGE models


Funds

Basic model The circular flow of various One, two or three


monetary streams of incomes, representative households
expenditures and productions, which optimize social
powered by myriads of utility by making a
monetary transactions made choice between labor,
by millions of households and consumption and
businesses as well as by the investments now and in
government. the future.
Production/ All monetary production of new Market production minus
consumption/ goods and services, including production of banks
income non-market government minus public goods and
boundary production and production services minus durable
by ‘NPISH’ (churches, consumer goods. Non
unions, sports clubs etc.) and money-creating banks are
including money yielding increasingly incorporated
criminal activities. There are into the models.
some imputations, however, Consumption is taken to
the most important being one be the psychological value
for the assumed value of rent of purchasing of goods
of owner occupied houses. and services. If convenient,
Another, ‘FISIM’, is not it is defined as the use
discussed here of goods. Production
of NPISH is neglected.
Some models incorporate
government production,
some incorporate banks,
some incorporate
consumer durables. I do
not know models which
do all of this

(Continued)
Table 1.1 (Continued)

National Accounts/Flow of DSGE models


Funds
Are variables well The national accounts and the There seem to be no formal
defined? flow of funds data and labor compendia which describe
statistics have internationally and define the variables
recognized official compendia in the DSGE models in
which extensively and a rigorous, sound, non-
intensively conceptualize and trivial way. Sometimes
define the variables. different concepts of
variables are used in
different models without
making this explicit.
Relation to The model is expenditure The sum of present and
welfare or oriented and has no direct (discounted) future
prosperity relation to individual prosperity. ‘Social utility’ is taken
The ‘volume’ of total to be the metric of
production can be calculated prosperity and society is
(real GDP) and is often taken assumed to optimize this,
to be a metric of the level and given constraints. No
growth of prosperity, partly for clear definition of utility
its own sake and partly because is given, no independent
it is often closely related to (un) estimates of utility and
employment. The composition the discount rate are
of production and consumption provided.
is also measured but not used
to indicate prosperity.
Relation to Partly classical (the definition of Neoclassical in a restricted
economic capital including non-produced version.
‘schools’ capital), partly (old)-Keynesian
and old-institutional. Examples
are the emphasis on total
monetary expenditure, sub-
sectoral divisions; the possibility
of involuntary unemployment,
the inclusion of NPISH, the
treatment of the government
and the pervasive role of
lending and credit. Some
imputations however have a
clear neoclassical character.
Market clearing No. Profits/losses and changes in Short run Pareto efficient
required? income related to involuntary market clearing assumed.
unemployment as well as Unexpected shocks can
changes in stocks and the wreak havoc but it is
current account are crucial assumed that society will
balancing items in the accounts. adapt.
Nature of the Heterogeneous and historical. Homogenous and static.
goods and Qualities and quantities and Intertemporal relative
services relative prices change over prices and quantities are
time which leads to a changing set; in a sense the rational
sectoral structure of the expectations about
economy. probabilities of future
events influence todays
structure of prices and
productions.
National Accounts/Flow of DSGE models
Funds
Basic Markets, the governments, Market transactions
coordination NPISH and household including expected future
principles transactions, future transactions, ex-ante
transactions only when based pareto efficient market
upon explicit or implicit legal clearing assumed (in the
contracts. No ex ante market absence of ‘shocks’).
clearing required. Prices
contain a rent element and
can change the distribution of
wealth and income in a non
Pareto efficient way.
Structure of Detailed sectoral and subsectoral No or limited sub-sectoral
production subdivisions including subdivision, sectoral
of financial companies, division excludes MFI’s
government production and but includes central bank
NPISH and/or non-monetary
financial institutions,
sometimes implicitly
included in the sector
households.
Basic actors Households, firms, government, Households, central bank,
external sector, financial companies, sometimes
institutions banks.
Basic method of Aggregation of micro-data, Use of often detrended
estimation continuous source criticism. cherry picked macro-
Care is taken to make data to calibrate main
historically and internationally variables. These are
consistent estimates. Especially however not measured in
new products and changing a consistent way.
relative prices make this
complicated.
Linkages to other Labor market accounts, flow of Detrended national account
models funds, input-output models, variables are used to
environmental accounts (like calibrate and to estimate
relation of CO2 production the resource constraint
to the structure of production (the latter excludes labor)
and final demand).
Nature of money Credit originates monies and Loanable funds,
money like assets. Credit government created if
(including trade credits) are created at all.
originated via transactions
between often private agents;
credit and lending enables
ex-post accounting identities
to be ‘true’, even without
market clearing.
28 Introduction

1.10 Mitchell-style business cycle indicators, the


accounts and DSGE models
In 1947 Tjalling Koopmans published a famous article titled ‘Measurement
without Theory’ (Koopmans 1947). In economic discussions this article is often
understood to be a criticism of the national accounts. It isn’t. It criticizes a book
written by Arthur Burns and (again) Wesley Mitchel, Measuring Business Cycles
(Burns and Mitchell 1946, also Mitchell 1913, 1927). This book described how
monthly data on heterogeneous individual economic variables can be combined
into a synthetic variable to measure business cycles, using cycles instead of quar-
ters or years as the central measuring unit. It kind of precedes present day VAR
and especially principal components analysis (see Andrle, Brůha and Solmaz
2017). It can be understood as another kind of macroeconomics, less occupied
with the level of output, sectoral production, sectoral distribution and accounting
relations and more with cyclical swings and the empirical propagation of financial
and other shocks. Important is the distinction between leading, coincident and
lagging indicators. Some variables tend to lead business cycles, some tend to
lag. These business cycle series were often based upon monthly sub-series. Since,
quarterly accounts have been developed, which has diminished the difference
between the two approaches as this enhanced the possibilities to use national
accounts data for business cycle analysis. At the other side, the business cycle
analysts developed indices of leading, coincident and lagging indicators as well as
indicators used to measure economic sentiment which eases the accounting iden-
tities inherent in the national account and the flow of funds. The development of
business cycle analysis is still closely associated with the National Bureau of Eco-
nomic Research and methods are used by statistical institutes the world over, one
example being the grey bars in the famous ‘FRED’ graphs, indicating the lengths
of downturns. Figure 1.2 shows that the cyclical indicators neatly coincide with
declines in GDP – but do not capture the growth – the change in level – of GDP.
Neither do they capture relations between sectors of the slow build-up of finan-
cial vulnerabilities. On the other hand, the national accounts data neatly show the
volatility of investment as compared with consumer and government spending.
We will come back to this.
But first it is worthwhile to look at the complexity of the data in figure 1.2.
Nominal data are gathered, using an extensive network of contacts and based
upon explicit laws. Subsequently they are aggregated using the delineations and
interrelations of the NA. Next, these aggregated data are deflated using a deflator
which estimated in a comparable way. The resulting data are seasonally adjusted
and changed into a seasonally adjusted annual rate of growth by multiplying them
by four. Second, the role of business cycle indicators in DSGE models is more
important than often understood. Lucas, one of the founding fathers of DSGE
modelling, was explicit about his endeavor to explain to explain these fluctuations
(the grey bars) using a general equilibrium framework and a ‘micro-founded’
methodology while he did (at this time) not try to explain the level or even
the movement of GDP or to use information about the interconnectedness of
Introduction 29

Graph 1.2 Real private consumption, real private investment and real government
consumption plus investment, USA: year on year change (%) by quarter,
chained 2012 USD, seasonally adjusted annual rate
Source: U.S. Bureau of Economic Analysis, retrieved from FRED, Federal Reserve Bank of
St. Louis; https://fred.stlouisfed, GCEC1, GPDIC1 and LB0000031Q020SBEA, accessed 12
May 2019

sectors (Lucas 1977), which means that the theme of this book – comparing
the concepts of DSGE variables with the variables of the national accounts –
might be perceived as somewhat dishonest: the DSGE project did not start out to
explain national accounts and flow of funds developments in the first place. The
recent models however do use the national accounts terminology (consumption,
investment etc.) and the authors of the models often calibrate the models using
national accounts variables as well as, in the background, the national accounts
identities that production is equal to the different kinds of expenditure. But in the
beginning Lucas focused on another item: business cycles as identified by Wesley
Mitchell. Though not all of the variables included in these cycles. It is, at prima
vista, not clear why he left employment and involuntary ­unemployment – key
variables of Keynesian theory and macro-measurement – out of his description
of the stylized facts of the ‘Mitchell’ cycles. He also only focused on the minor
cycles as identified by Friedman and Schwartz (who used an explicit Mitchellian
framework as shown by Rockoff 2006) and left the mayor cycles identified by
these authors and at present better known as financial cycles outside of his scope.
The 2008 crisis did not fit the DSGE research agenda for a reason, DSGE models
were not meant to explain or encompass such events. But only to explain smaller
30 Introduction
up and downturns. On the other hand, the graph does show that Mitchellian
business cycle indicators do correlate with the national accounts data on, for
instance, private investment even when these have been thoroughly deflated, sea-
sonally adjusted and changed into growth rates. In Chapter 7, we will return to
the deflation procedures used.

1.11 The conceptual model of the book (1): five


interrelated phases of development of a
macro-statistical variable
One of the elements which in a loose way will structure the next chapters of this
book are the phases of development of a statistical variable. These phases are not
applied in a rigorous way but will pop up in every chapter. Frits Bos (2003) dis-
tinguishes, when analyzing the development process of economic statistics, four
interrelated phases with many forward and backward linkages. All these phases
are necessary (albeit not always in a hierarchical way) to enable measurement of
an (economic) variable. Here, a fifth one will be added.
The first phase: conceptualization. This is a rather philosophical phase which,
when restricting ourselves to consumption, functions to answer the question
‘what is consumption anyway?’ An example from the ESA 2010, lemma 3.93:

Two concepts of final consumption are used:

(a) final consumption expenditure;


(b) actual final consumption.

Final consumption expenditure is expenditure on goods and services used by


households, NPISHs (Non Profit Institutions Serving Households, MK) and
government to satisfy individual and collective needs. In contrast, actual final
consumption refers to its acquisition of consumption goods and services. The
difference between these concepts lies in the treatment of certain goods and ser-
vices financed by the government or NPISHs but supplied to households as social
transfers in kind.

Note, again, the importance of government goods and services but also the fact
that not all consumption has to be purchased by households. Even then, it is
about the acquisition of goods and services, not about their actual use.
The second phase: definitions. A shorter, more practical summary of the
concept with often clearer delineations:
An example from the ESA 2010, lemma 3.94:

‘final consumption expenditure consists of expenditure incurred by resident insti-


tutional units on goods or services that are used for the direct satisfaction of indi-
vidual needs or wants or the collective needs of members of the community’. Note
that, in an implicit way (the ‘resident institutional units’ mentioned) national
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*** START OF THE PROJECT GUTENBERG EBOOK THE RADIO


GIRLS AT FOREST LODGE; OR, THE STRANGE HUT IN THE SWAMP
***
THE RADIO GIRLS AT FOREST LODGE
“DON’T MOVE, JESS. I AM COMING UP.”
THE RADIO GIRLS AT FOREST LODGE
OR

The Strange Hut in the Swamp

BY
MARGARET PENROSE
AUTHOR OF “THE RADIO GIRLS OF ROSELAWN,” “THE RADIO
GIRLS ON STATION ISLAND,” “DOROTHY DALE
SERIES,” “MOTOR GIRLS SERIES,” ETC.

ILLUSTRATED

NEW YORK
CUPPLES & LEON COMPANY
PUBLISHERS
BOOKS FOR GIRLS
By MARGARET PENROSE
12mo. Cloth. Illustrated.

RADIO GIRLS SERIES


THE RADIO GIRLS OF ROSELAWN
THE RADIO GIRLS ON THE PROGRAM
THE RADIO GIRLS ON STATION ISLAND
THE RADIO GIRLS AT FOREST LODGE

DOROTHY DALE SERIES


DOROTHY DALE: A GIRL OF TO-DAY
DOROTHY DALE AT GLENWOOD SCHOOL
DOROTHY DALE’S GREAT SECRET
DOROTHY DALE AND HER CHUMS
DOROTHY DALE’S QUEER HOLIDAYS
DOROTHY DALE’S CAMPING DAYS
DOROTHY DALE’S SCHOOL RIVALS
DOROTHY DALE IN THE CITY
DOROTHY DALE’S PROMISE
DOROTHY DALE IN THE WEST
DOROTHY DALE’S STRANGE DISCOVERY
DOROTHY DALE’S ENGAGEMENT
DOROTHY DALE TO THE RESCUE
MOTOR GIRLS SERIES
THE MOTOR GIRLS
THE MOTOR GIRLS ON A TOUR
THE MOTOR GIRLS AT LOOKOUT BEACH
THE MOTOR GIRLS THROUGH NEW ENGLAND
THE MOTOR GIRLS ON CEDAR LAKE
THE MOTOR GIRLS ON THE COAST
THE MOTOR GIRLS ON CRYSTAL BAY
THE MOTOR GIRLS ON WATERS BLUE
THE MOTOR GIRLS AT CAMP SURPRISE
THE MOTOR GIRLS IN THE MOUNTAINS
CUPPLES & LEON COMPANY
Publishers New York
Copyright, 1924, by
CUPPLES & LEON COMPANY
The Radio Girls at Forest Lodge
Printed in U. S. A.
CONTENTS

I. Great Expectations
II. The Counterfeit Bill
III. Henrietta
IV. An Accusation
V. To the Rescue
VI. The Start
VII. The Wrecked Bridge
VIII. Risky Business
IX. On the Hunt
X. Ghosts
XI. Phrosy
XII. Queer Actions
XIII. The Race
XIV. In the Mud
XV. Lost in the Woods
XVI. From the Swamp
XVII. Payment of a Debt
XVIII. Alarmed
XIX. In Danger
XX. The Fire
XXI. A Terrible Battle
XXII. The Escape
XXIII. Suspicion
XXIV. Imprisoned
XXV. A Capture by Radio
THE RADIO GIRLS AT FOREST LODGE
CHAPTER I
GREAT EXPECTATIONS

“I don’t know much about your Aunt Emma, Burd, but I am quite
certain I shall adore her.”
Burd Alling, pudgy and good-natured, looked at Amy Drew and
slowly grinned.
“Good for you, Amy,” he said, returning to his plate of ice cream
with renewed vigor. “People either hate Aunt Emma or love her. I am
glad you have decided on the latter.”
“She must be a strange sort of person, your Aunt Emma,” said
Jessie Norwood, the third of the little party seated around the table
at the Dainties Shop. “I like people who have positive characters.”
“Oh, Aunt Em is positive enough, if that is what you like,”
chuckled Burd. “The worst thing about her is that she doesn’t seem
to approve of that characteristic in others.”
“You say this Aunt Emma of yours owns this place called Forest
Lodge?” Jessie interrupted eagerly. “Where is it, Burd?”
“In a forest, I suppose,” murmured Amy Drew.
“How bright you are,” scoffed Burd. “Forest Lodge is on Lake
Towako, about forty miles from New Melford,” he added to Jessie.
“Aunt Em wants to spend a week or two up in the woods, and she
was bemoaning the fact, by letter, that she had no one to go with
her. I mean, no ladies. Of course, I’m already booked to go.”
“How about us?” interposed Amy, smiling her sweetest. “Wouldn’t
we do?”
“Would you like to?” cried Burd, his face lighting up over the idea.
“Amy, how could you propose such a thing!” interposed Jessie,
demurely. “Don’t you know you practically asked for an invitation?”
“Leave out the practically and you will have it,” returned Amy,
unabashed. “Besides, didn’t you hear Burd say his poor dear aunt
would be lonely away up there in the woods by herself? Be
charitable, Jessie! Be charitable.”
“But, say, if you girls really think you would like to go, I know
Aunt Em will be more than glad to have you,” said Burd. “She will
greet you as gifts from heaven.”
“Well, Jess may look like an angel, but I am sure I don’t,”
remarked Amy, paying fond attention to the remaining portion of her
George Washington sundae. “Never mind the compliments, Burd.
Tell us more about your aunt.”
“Do you think Nell Stanley could go too?” broke in Jessie, eagerly.
The prospect of a two weeks’ added vacation at Forest Lodge was
becoming alluring.
“Sure thing! The more the merrier,” Burd answered, heartily. He
finished his ice cream and motioned to Nick, the clerk, to bring more
George Washington sundaes. “She is a jolly old soul and never is
happy unless completely surrounded by young folks.”
“Oh, is she so very old?” asked Amy.
“We-ell, not so old as to be exactly decrepit,” said Burd, judicially,
though his eyes were merry. “She can still hop around pretty lively
when occasion requires. But I will not tell you another word,” he
added, his round face as severe as so habitually merry a
countenance could ever become. “Whatever else you learn about the
lady, you will have to learn from her personally. I refuse to give away
a blood relative.”
“But, Burd, all this is so very wonderful!” cried Jessie. “I never
dared hope we would have another chance for fun this summer
before school opens.”
“Oh, Jess, remind me not,” commanded Amy, with a groan. “As
Miss Seymour would say, ‘Why intrude so gloomy a thought upon
this joyous hour?’”
The Miss Seymour of whom Amy spoke was a teacher of English
in the high school which Jessie and Amy and their friend, Nell
Stanley, attended.
The Radio Girls had returned from a wonderful vacation on Station
Island only a few days before this story opens. And now had come
this possibility of spending the short remainder of their school
vacation at a typical hunting lodge in the heart of a forest. Small
wonder that with this alluring prospect before them they could not
bear the mention just then of school and studies, for to their eager
minds the possibility of the visit looked like certainty.
“Have you told Darry yet?” Jessie asked, and Burd favored her
with a look that was almost pitying. Darry, or Darrington Drew, to
give him the benefit of his full name, was Amy’s brother and Burd
Alling’s closest chum. The two boys, though utterly unlike in looks
and disposition, were inseparable.
“Sure, I’ve told Darry,” he said, in reply to Jessie’s question. “His
enthusiasm over the project knows no bounds. Says it has been his
lifelong ambition to get in close contact with the forest rangers and
study their methods of fighting forest fires.”
“Oh, do they have fires up there, too?” queried Amy.
“Wherever there is a forest, there are bound to be fires once in a
while,” Burd informed her, from the heights of his superior wisdom.
Darry and Burd, being in college, were several years older than the
high school girls, and it was seldom that they missed an opportunity
to impress that fact upon Jessie and Amy. “That’s where the forest
rangers come in. And, believe me, sometimes they have their work
cut out for them, too.”
“Oh, Burd, please tell me more about it,” begged Jessie.
“I can’t tell you much,” replied Burd, modestly, “because I don’t
know a great deal about the work of the forest rangers—nothing, in
fact, except what I have read. But I know there is one thing that will
interest you girls mightily.”
“Bet you another George Washington sundae I know what it is,”
said Amy, quickly, and when Burd laughingly took her up she
pronounced the one word “Radio!” with proud emphasis.
“Oh, I know,” broke in Jessie, before Burd could speak. “I heard
Daddy Norwood talking about it one night to Momsey, and it was
awfully interesting, even though at that time I was not particularly
interested in radio. They use it—radio, I mean—fighting fires and
things, don’t they?”
“Especially things,” agreed Burd, with a grin. Then, becoming
suddenly conscious of the check at his elbow, he looked up and
found Nick’s worried gaze upon him. The Dainties Shop was filling up
and their table was needed.
The girls took in the situation at a glance and rose laughingly
while Burd went over to settle with Nick, much to the relief of the
latter.
Burd seemed to be having some trouble getting his change, and
while they waited for him outside the door of the Dainties Shop the
girls gayly discussed this new prospect.
“I am dreadfully anxious to meet Aunt Emma,” Amy was saying
when she felt a slight touch on her arm and turned sharply about.
A tall, slender girl was standing there, and on her face was a dead
white pallor that amazed and shocked the robust girls.
She was holding toward them a five-dollar bill and Amy, the
irrepressible, laughed suddenly as her gaze fell upon it.
“Thanks, so much,” she murmured; “but I don’t happen to need it
just now.”
“Oh, Amy, hush!” cried Jessie, as she saw the mouth of the
strange girl set in a thin straight line and her eyes grow hostile.
“I wanted to ask you if you would change this for me,” said the
stranger in a colorless voice that matched the pallor of her face. “But
if you don’t care to——”
She turned away, but Jessie caught her quickly by the sleeve.
“Oh, wait a minute, please,” she said. “I am sure I can change the
bill for you.”
She fumbled in her bag, but Amy, instantly regretting her flippant
speech, found the money first in her own small bag and handed it
with an apologetic smile to the girl.
“I’m sorry I was rude,” she said. “I didn’t understand.”
This apology meant a great deal, coming, as it did, from Amy, but
the tall, pale girl seemed scarcely to notice. She accepted the five
one-dollar bills, giving her own five-dollar note in exchange. Amy
stuffed the bill in her pocket, and with a muttered word of thanks
the stranger turned and walked off swiftly. She did not turn back,
and in another moment a street corner hid her from view.
“I must say she isn’t very polite,” grumbled Amy, as Burd joined
them. “After humbling my perfectly good pride in the dust and
everything. Imagine me apologizing!”
“If I had not seen it I certainly would not have believed it,” agreed
Jessie, cheerfully, and Amy shot her an injured look.
“You mean heard it,” she corrected frigidly. “If I cared to be
unkind, my dear, I might remind you that an apology can never be
seen!”
Burd went with them as far as the Norwood place in Roselawn.
There he left them, intimating that he and Darry had important
business in town and would not see them till later.
“Make it as much later as you like,” Amy told him cheerfully. “We
shan’t pine away and die in your absence.”
As a matter of fact, the girls were far too busy for the remainder
of that afternoon to give the boys more than a passing thought.
They chattered like magpies of the possible trip to Forest Lodge
while, with skilful fingers, they overhauled the radio set which Jessie
and Amy themselves had set up in the pretty and spacious living
room of Jessie’s own suite of rooms in the Norwood house. Jessie
had brought a new detector from town and was bent upon trying the
effect of it upon her set without delay.
“We must be ready for the special radio concert to-night,” Jessie
reminded her, when Amy protested against the “hard labor” her
friend imposed. “It wouldn’t do to miss it, and you know this
detector is working badly.”
Mrs. Norwood, known fondly to her daughter, and to most of her
daughter’s intimate friends as well, as “Momsey,” was away from
home that afternoon—a matter of great regret to Jessie, who had
hoped to talk over with her at once the invitation for Forest Lodge
and ask her consent to the project.
It was late before she returned, and by that time the girls had
“jacked up” the radio set until it was working perfectly. They fell
upon Mrs. Norwood simultaneously, bombarding her with facts and
questions until Mrs. Norwood laughed in helpless bewilderment and
begged them to begin all over again from the beginning and “go
slowly.” This they did, and had hardly finished when the telephone
bell rang.
“Miss Alling would like to speak to you, Mrs. Norwood,”
announced the maid, coming into the room.
The girls could hardly wait for the telephone conversation to come
to an end, and, in their eagerness, did no more than stutter their
questions when Mrs. Norwood returned, a smile on her face.
They were overjoyed to find Mrs. Norwood pleasantly willing to
give her consent to the Forest Lodge project, especially now that
Emma Alling had given them her personal invitation to accompany
her. It seemed that at some former time Mrs. Norwood and Miss
Alling had worked together in some benefit scheme, and Mrs.
Norwood had been strongly attracted to the rather eccentric but
good-hearted woman.
“All of which is very lucky for us,” remarked the irrepressible Amy.
“Though I must say,” Mrs. Norwood added, with a smile, “I don’t
particularly envy Emma Alling her present undertaking!”
Jessie’s eyes twinkled as she said reproachfully: “Don’t you think
that is rather hard on us, Momsey?”
Amy hastened home to gain permission to make the visit at Forest
Lodge, but was persuaded without much difficulty to return for
dinner, and as soon as the meal was over, the girls ran up to Jessie’s
room to “listen in” on the special concert that was scheduled for that
evening.
They tuned the set to the wave length of the broadcasting station
of the Stratford Electric Company and almost immediately heard a
man’s voice speaking. The first words were sufficiently unusual to
catch and hold their attention.
“Before proceeding with the program, we wish to make a special
announcement,” said the voice. “There is positive evidence that a
counterfeit five-dollar bill is in circulation in this locality. The bill has
a small v-shaped notch in one corner of it and the marking on the
under side is indistinct. We wish all who hear this announcement to-
night to be on the lookout for the counterfeit money, so that any one
finding it in his possession may report it to the authorities.” That was
all.
The girls removed their head phones and stared at each other
intently for a moment. It was evident that they were both thinking of
the same thing. That five-dollar bill which the strange girl had asked
Amy to change that afternoon!
Amy reached for her purse and opened it.
“If that girl wished a counterfeit five-dollar bill on me,” she
declared, “I will pursue her to the ends of the earth and get it back.”
“Quick! Let me see that bill,” urged Jessie.
Together, heads almost touching, they examined the greenback
which had come so strangely into their possession. To their
inexperienced eyes there was nothing wrong with the marking. Then
Jessie suddenly uttered an exclamation. She pointed to a tiny, v-
shaped notch in one corner of it.
“Amy, it is, it must be, one of the counterfeits!” she breathed.
CHAPTER II
THE COUNTERFEIT BILL

Eagerly Jessie and Amy scrutinized the bill again and, with the v-
shaped notch to help them, they saw, or thought they saw, that the
marking on the under side of the bill was a trifle blurred and
indistinct.
Even then they were not satisfied, but must run down to show the
note to Mr. Norwood, who sat chatting with Momsey in the living
room.
“Daddy Norwood, if you tell me this bill is a counterfeit, I will
never forgive you,” was Jessie’s greeting to her father, as she
dropped on the arm of his chair and thrust the bill into his hand.
“What’s this, what’s this?” exclaimed Mr. Norwood, smiling at the
two girls. “What is all this talk about counterfeits? Am I to
understand, my daughter, that you have turned criminal?”
“And she is so young, too,” murmured Amy, beneath her breath.
“Please look at it, Daddy Norwood,” urged Jessie, indicating the
bill which dangled carelessly from her father’s hand.
“Well,” said the latter, mildly, “I am looking at it. Now suppose you
tell me what all the excitement is about.”
Between them the girls told him of the announcement by radio of
the dangerous counterfeit five-dollar bill that was in circulation.
As they proceeded, the lawyer’s face became grave and he
examined the bill carefully and with a sudden intense interest.
“Hm! I have heard about this counterfeit money,” he said, after a
pause during which the girls, and Mrs. Norwood, too, regarded him
expectantly. “And it is a very serious matter, let me tell you.”
“But is this bill counterfeit?” asked Jessie, impatiently.
Mr. Norwood looked up at her with a peculiar smile, then down at
the note again.
“It certainly is a remarkably clever imitation,” he said.
“Then it is a counterfeit!” declared Jessie, and turned to face Amy,
whose expressive face was a mirror of conflicting emotions.
“Now I will have to keep my vow,” wailed the latter, “and follow
that wretched girl all over the world!”
“What for?” asked Mrs. Norwood, with an indulgent smile, for she
was well used to Amy’s extravagances.
“To recover my perfectly good five dollars, of course! Oh, dear,
what a bore!”
“Oh, so a girl palmed this off on you! Suppose you tell me some
more about it,” said Mr. Norwood. “I am intensely interested.”
Jessie and Amy told him about the strange girl who had accosted
them before the Dainties Shop and gave as faithful a description as
they could of her. Then they suddenly remembered the interrupted
radio concert and dashed off to Jessie’s room to enjoy what was left
of it.
Madame Elva, a great favorite of the girls, at the broadcasting
station of the Stratford Electric Company, gave several charming
selections and the remainder of the program was so unusually fine
and interesting that the girls became completely absorbed and
forgot for the time all such matters as tall thin girls and troublesome
five-dollar bills.
It was not till the following morning that Jessie revived the
subject. The four of them, Jessie, Amy, her brother Darry, and Burd
Alling were sitting on the Norwood veranda talking over plans for the
trip to Forest Lodge. The girls had already, earlier in the day, talked
with Miss Alling over the telephone.
It was a fine morning and the handsome Norwood estate had
never looked pleasanter and more luxurious than it did in the full
glare of the morning sunlight.
The smooth sweep of lawn, sloping down to the broad, shaded
boulevard, was dotted with flowering shrubs. Beside the house and a
little to the rear, began the beautiful rose gardens which were the
pride of Mrs. Norwood’s heart, and of all Roselawn as well.
In fact, this section where the Norwoods and the Drews lived had
been dubbed Roselawn by reason of the beautiful and gorgeous rose
gardens that abounded in that district.
On the farther side of Bonwit Boulevard was the home of the
Drews, a rambling old house which had once been a farmhouse but
had been remodeled by Mr. Drew into an up-to-date and handsome
building. There dwelt Wilbur and Sarah Drew, the parents of Amy,
Amy, herself, and her brother Darrington—the latter, however, only
on those rare occasions when Yale “relaxed her grip on him.”
The four young people had had many good times together and
since Jessie and Amy had “discovered” radio their adventures had
been replete with thrills and excitement.
The two girls had astonished their friends and relatives by
successfully installing a radio set in Jessie’s room.
Then one day had come a mysterious call out of the air, and how
the girls went to the rescue of a girl wanted as a witness in an
important law case has been told in detail in the first volume of this
series, entitled “The Radio Girls of Roselawn.”
Since that time the girls had made the acquaintance of the owner
of a large sending station and through him had been permitted to
get “On the Program,” much to their satisfaction. Then they had
gone to “Station Island,” and later had taken a trip on board the
Marigold, a steam yacht willed to Darry by his uncle. The vessel took
fire, and how the young folks had to fight to escape in safety is
related in the volume before this, called “The Radio Girls on Station
Island.”
It was of this last adventure that they were thinking and talking
now as they sat in idle luxury upon Jessie Norwood’s porch.
“The poor old Marigold is almost a total loss,” Darry said,
regretfully. “I have laid her up for repairs, and, judging from the
amount of work there is to be done on her, it looks as if she would
be in dry dock a considerable time.”
“Oh, dear! No more chance to inspect the bottom of the sea!”
sighed Amy. “I think you are too mean, Darry Drew.”
“Well, say,” interrupted Burd, rising from the depths of a
comfortable chair and stretching luxuriously, “loth as I am to break
up this happy party, I fear I must be going.”
“He has a date and won’t let us in on it,” remarked Amy,
reproachfully.
“I sure have,” chuckled Burd, unabashed. “And wait till you see
the lady!”
Darry raised his eyebrows and grinned.
“Aunt Emma, Burd?” he asked.
Burd nodded and started for the steps.
“Promised to meet her at the train in the old bus,” he said. “And if
anything should make me late I should never hear the end of it.
Coming, Darry?”
The latter laughingly shook his head.
“Go ahead, old lad,” he said. “I am not looking for punishment
just yet.”
“Why, don’t you like Miss Alling?” asked Jessie, surprised.
“I do. She is the salt of the earth,” replied Darry, emphatically,
adding with a rueful smile: “The only trouble is, she doesn’t like me.
Has a fixed opinion that I am a bad influence for Burd, or something
of the sort.”
“Well, aren’t you?” asked his sister, maliciously, adding quickly, as
Burd seemed about to depart: “Oh, let me go along, Burd, I feel a
severe attack of curiosity coming on. I must meet Aunt Emma.”
“All right, come on—but your blood be upon your own head,”
warned Burd, with a grin.
After they had gone Jessie and Darry looked at each other and
laughed.
“I am almost as curious as Amy to meet Aunt Emma,” confessed
Jessie. “She must be a very unusual person.”
“She is kind-hearted and full of pep and fun, but as domineering
as they make ’em,” pronounced Darry. “Just the same, this trip to
Forest Lodge is a mighty fine idea. I prophesy we won’t have a slow
minute while we are up there.”
“How do we go, and when?” asked Jessie, with a mounting
impatience to start on this adventure.
“As soon as you girls are ready, I suppose,” returned Darry. “And
as for our means of transportation, I gather from what Burd has let
drop that we will drive up in Miss Alling’s car—Aunt Emma driving,”
he finished, with a chuckle.
“Well, as long as Aunt Emma doesn’t try to put up our radio set
for us, we won’t complain,” laughed Jessie.
CHAPTER III
HENRIETTA

“Speaking of radio,” Jessie said suddenly, the matter of the five-


dollar bill coming to her mind, “have you heard anything about the
circulation of counterfeit money, Darry?”
The latter shook his head and looked surprised. Jessie told him of
the special radio announcement that had come to them the night
before and of their subsequent finding that the five-dollar bill in
Amy’s possession was a counterfeit.
Darry listened with interest, but his chief concern seemed to be
for Amy and the loss of her five dollars.
“Hard luck,” he laughed. “Now she will have to do without George
Washington sundaes for the next six months to make up.”
“But the poor girl who gave her that five-dollar bill——”
“Poor girl!” exploded Darry, sitting up straight in his seat to stare
at Jessie in astonishment. “I am used to your kind heart, Jess, but
this is more than I could expect, even of you. Why pity a girl who
passes a counterfeit bill? She probably is one of a gang of
counterfeiters.”
“Oh, I should hate to believe that,” said Jessie, quickly.
“Somehow, she didn’t look exactly dishonest.”
“Yet she gave you—or Amy, rather—a counterfeit bill in exchange
for five good ones,” Darry argued. “That doesn’t seem exactly
honest, you know.”
“Just the same, I don’t intend to believe any one guilty until the
guilt is proved,” said Jessie, stoutly, and Darry, from the superior
heights of his age, bent upon her a tolerant smile. Despite his
slightly patronizing manner, Darry really regarded this chum of Amy’s
as one of the squarest, most companionable girls he knew. For her
age, he conceded, magnanimously, she sure was a wonder!
“All right,” he said. “Believe anything you like. And now, to change
the subject to something more pleasant, Miss Alling told Burd that
you girls would set the time to go; so, just when will you and Amy
be ready for the trip to Forest Lodge?”
That, indeed, was the all-important question to the Radio Girls in
the days that followed. Although they had numerous costumes for all
occasions, they suddenly discovered that their wardrobes contained
nothing that was really suitable for a vacation in a real, honest-to-
goodness forest. This sad state of affairs, they decided unanimously,
must be remedied immediately.
“Because one cannot possibly have a good time,” Amy had
argued, flippantly, “until one has the proper kind of clothes.”
“It will be a dreadful bore to have to go shopping just now,” said
Jessie, who was impatient of anything that would delay the
wonderful trip. “But if we must, we must.”
“You always have such a clear way of putting things, honey,” said
Amy, irrepressibly. “And, oh, I saw the darlingest sports suits and
things in Letterblair’s window.”
Letterblair’s was a fashionable shop in the downtown district of
New Melford where the girls and their mothers did most of their
shopping. It was from this shop that Jessie had won a beautiful
sports coat, offered as a prize to the girl in New Melford who could
think up the cleverest and most unique idea for a charitable bazaar
that was to be held on the lawn of the Norwood estate. Jessie’s idea
—the prize one—had been the devoting of one “concession” on the
bazaar grounds to radio. The radio tent had been a tremendous
success and, oh, how Jessie had enjoyed wearing that sports coat!
So now it was to Letterblair’s that they went in search of suitable
apparel for this newest outing.
On the way to town they determined to stop and see Nell Stanley.
Although they intended to urge her to accompany them on their trip
to Forest Lodge, they had very little hope that she would be able to
go.
Nell was the eldest daughter of the Reverend Doctor Stanley, a
minister much beloved in New Melford. “The Reverend,” as Nell
affectionately called him, was a widower with four children, three
younger than Nell. Although the income of the Stanley family was
small, Nell managed wonderfully. Strong, healthy and capable, the
young girl presided cheerfully over the parsonage and cared for her
two younger brothers and her little sister, to whom she was elder
sister and mother as well.
Because of her many responsibilities, it was only upon rare
occasions that Nell could share in the fun of the other two girls. But,
in spite of all this and hard as her life might seem to some, no one
had ever heard Nell Stanley complain.
Nell herself greeted them as they came up to the parsonage. She
was wearing a clean gingham dress and a dust cap and her
handsome face was shining with health and hard work.
“Hello!” she cried gayly. “You two look like conspirators. Come in if
you can find room,” she invited, leading the way into the cluttered
front room of the parsonage. “Sally and the two boys muss things up
more quickly than I can straighten them out, I think.”
Nell listened sympathetically while the two girls told her of the trip
to Forest Lodge, but shook her head regretfully when they said Miss
Alling wanted her to accompany them.
“I don’t see how I could manage it,” she said, adding thoughtfully:
“Though I might get Mrs. Tompkins to take care of the children and
keep house——”
“Nell, you have a wonderful mind,” said Amy, with conviction.
“Mrs. Tompkins was the very person I was about to suggest!”
“I suppose the children would run wild,” said Nell, hesitating.
“Let ’em. It would do them good for two weeks,” said Amy.
“Nothing very bad could happen in that short time,” Jessie added,
pleadingly. “And, Nell, we would have such fun.”
“Don’t you suppose I know it?” retorted Nell, longingly. But she
added, as she picked up a few of the scattered playthings in an
attempt to restore the room to order: “I will ask the Reverend about
it, anyway; and if I can get Mrs. Tompkins I may go with you yet.
Now run along downtown like good children. And you might bring us
some ice-cream cones on the way back. The young ones would
appreciate it particularly.”
The girls agreed gayly, after winning from her a promise that she
would come over some evening soon and “listen in” with them.
“And bring Fol with you,” Amy added, as they went off. “He is a
rather nice boy, considering his age.”
In answer to this sally Nell laughed good-naturedly and made a
face at Amy, an action—and Nell herself would have been the first to
admit it—that was not at all a good example to set her ever-watchful
and imitative little sister, Sally.
Once at Letterblair’s, the girls discovered numerous other needs
which had not occurred to them before, and it was past noon when
they had successfully finished their shopping.
“Now for home and lunch. Jess, I have an idea—” Amy paused
and regarded her chum meditatively. “Why not run into that darling
little new restaurant down the street and have a bite to eat there? It
will be a lark.”
“Suppose we do,” agreed Jessie. “I feel as though I would not be
able to walk home without partaking of some nourishment first.”
“I declare, it is late,” said Amy, as she glanced from the store
clock to her wrist watch. “If I had had any notion you were going to
keep me so long in this place, Jess Norwood, I would not have let
you come with me.”
“I like that!” laughed Jessie. “Especially since I have been waiting
for you to get through for the past half hour.”
“So are the righteous slandered,” sighed Amy. “My friends have
formed the habit of putting all the blame upon my frail shoulders—
Hello, what have we here?”
She brought up short just outside the door of the shop and Jessie,
following hurriedly, nearly ran into her.
“Why the sudden halt?” she inquired. And just then came a
shriek, whether of joy or anguish it would have been hard to tell.
The next moment a small cyclone flung itself upon Jessie and held
on to her, still shrieking—much to the delight of the passersby.
“Help, call out the reserves!” chortled Amy, her voice choked with
laughter, while Jessie tried vainly to disengage herself from the
clutches of the small cyclone. “Henrietta Haney, do stop that
shrieking. Oh—oh, you will be the death of me, yet!”
By this time Jessie had been able to push her small assailant away
from her, and, by holding very tightly to a pair of waving arms,
found it possible to look into a small pointed face upon which every
freckle stood forth.
“Henrietta Haney—Hen,” admonished Jessie, with what severity
the occasion permitted. “Do stop making so much noise, my dear.
Why, everybody is looking at us.”
“Well,” said this surprising child, “I shouldn’t mind their lookin’, if I
was you, Miss Jessie. Ma Foley always says no amount of lookin’
ever hurt no one.”
Jessie shot a helpless look at her chum, who was convulsed with
mirth. Little Henrietta Haney, who had first introduced herself to the
Radio Girls as a little waif from Dogtown—a down-at-heel district
encroaching upon Roselawn—in search of her missing cousin, Bertha
Blair, had since figured largely in their adventures. Owing to the
interest of Mr. Norwood and Mr. Drew—both lawyers—the little girl
had recently come into possession of part of Station Island.
Henrietta, or “Hen,” as she was familiarly called, was inordinately
proud of her inheritance and seldom overlooked an opportunity to
make reference to “her island.”
Now Jessie and Amy moved the child to a less conspicuous spot
and questioned her concerning her presence there.
“You surely did not come to New Melford all alone, Hen,” said
Jessie, in concern, for she really would not have been greatly
surprised at anything the wild child might do. “Isn’t somebody with
you?”
“Well, Bertha come with me,” said the child, complacently; “but I
left her.”
“You what?” gasped Amy.
“I left her,” repeated Hen, patiently. “We was comin’ along, and all
of a sudden I looks over and sees you and Miss Jessie and I just run

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