A commentary on Mark To Make Believe

I was deeply honored to receive an insightful and affirmative email about my article “Mark To Make Believe” from Father Vicente Marasigan of the Loyola House of Studies. Father Vicente Marasigan is a 91-year old theologian and mathematician who received a master’s degree both in philosophy and mathematics, and a licentiate degree in theology from three Jesuit Universities, Ateneo de Manila, Fordham and Woodstock Theological Center in Georgetown. Strongly influenced by Lonergan’s theology as reflected in the book “Macroeconomic Dynamics: An Essay in Circulation Analysis” (MDECA), Father Marasigan developed in-depth views on financial reporting and applied economics.

Father Vicente Marasigan has actively participated in a new crusade for the Economy of Communion (EOC), launched in section 46 of the new papal encyclical on Charity in Truth. From a motive of true charity, EOC directs all the participants in the global economy to communicate and share its fruits, named social dividend in MDECA, with all the sectors of the global community, especially with the poorest of the poor. The EOC crusade advocates for the construction of a suitable juridical and fiscal structure in developing economies, like the Philippines.

Please take time to read Father Marasigan’s email below. It discusses some insights from the book MDECA and his strong views on the disclosure requirements imposed by the new accounting standards.

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Dear Mr. Causon,

I enjoyed reading the first part of your fine article “Mark To Make Believe.” I was led into it upon reading in The Philippine Star and discovering that there was such an agency known as the “International Accounting Standards Board.” This was for me a pleasant discovery. (Not too pleasant were the four paragraphs about reclassification; they looked like just another form of make-believe that tried to conceal the sad reality brought on by the bigger context of the global crisis, including accounting standards. No amount of reclassification could have corrected the mistaken expectations of the market.)

To discover the very existence of an IASB is very pleasant. Why so? Because accounting is in great need of standards that effect a more radical overhauling, to insure against a repetition of the Great Depression of 1929 and of the global financial crisis of September 2008.

This need arises from insights discussed in “Macroeconomic Dynamics: An Essay in Circulation Analysis” (MDECA) by the late Bernard Lonergan, SJ. (published in 1999 by the University of Toronto Press), where the present ways of accounting are shown to be inadequate for a “normative, explanatory analysis” (MDECA page 26, note 26): such accounting only led the growing economy to a “greater height from which to fall” (MDECA 162). As you have pointed out, “nobody complained at that time” when profits were rising to a “greater height.” But MDECA is now complaining very loudly. Moreover, it points out convincingly how and why the fall had to follow after such accounting.

Yes, I am happy to know of the existence of the IASB and its partner agencies like the IFRS and FASB. And I am hoping that accounting will now be completely overhauled in order to make it adequate for a “normative, explanatory analysis.”

MDECA macroeconomics is “normative economics” and is different from “positive economics”. The latter prefers to see economics “as it IS” whereas the former sees it “as it ought to be”; this norm defines economics as “the transformation of the potentialities of nature into a standard of living for the whole community.”

A very large part of the global community fell below the standard of living during and after the Great Depression of 1929 and, despite some short-term recoveries, is falling again in the long term that began with the crash of September 2008. What is the “explanatory analysis” common to these two falls?

Lonergan begins his analysis with a classification of the flows of payments needed for the on-going production of goods and services in a balanced way: the flows of payments need to maintain dynamic equilibrium despite situational variations. In turn, this equilibrium requires a redistributive function of outlays and incomes. One source of incomes, named by Lonergan as social dividend, is a notion of special significance (but this significance differs from that of other notions similarly named).

The social dividend is not money to be spent or saved. It is money to be invested (1) to keep the “surplus” production at least “in its attained volume”, and (2) to enable the “basic” production in “raising the standard of living of the whole society” (MDECA 82). Basic production is production of consumer goods and services. Surplus production is production of producer goods and services. Basic production stands to surplus production in a way somewhat similar to how the first derivative in the calculus of a flow stands to its second derivative, i.e. analogously. This partial similarity involves a “functional distinction.”

This functional distinction between basic production and surplus production is an important part in MDECA’s explanatory analysis in normative economics. It is generally ignored in positive economics. It has been observed in history by eminent economists like Hayek, Kant, Schumpeter, and others. (Ironically, positive economics ignores this historical fact.) It has not been explained analytically by them but only by Lonergan in MDECA: the functional distinction is the logical source of “the dynamics between surplus and basic production, surplus and basic expansions, surplus and basic incomes” (MDECA 82).

The formulation of this dynamics starts with a search for the few significant variables on which all the other variables logically depend, and goes on to the 47 equations that coherently quantify the basic/surplus interactions. It can now be truthfully affirmed that this dynamics answers the question asked on Sept. 2, 2009, by Paul Krugman: “How Did Economists Get It So Wrong?” (http://www.nytimes.com/2009/09/06/magazine/06Economic-Krugman has no satisfactory answer to his own question. MDECA has. But the MDECA answer cannot be implemented unless the IASB radically overhauls accounting. Here is why.

The accountants (in every firm or corporation involved in the global economy) have long been accustomed to lumping their raw data as though there were no functional distinctions between their surplus and basic production, surplus and basic expansions, surplus and basic incomes.  Therefore such lumped data can only give a false picture of the economy.  Economic decisions based on such falsehood are bound to fail to transform the potentialities of nature into a standard of living.  

I am now looking for a way of sharing this with the IASB, IFRS, FASB, etc., in the hope that they will implement the radical overhaul of methods of accounting. 

Paul Bernard D. Causon is a Partner for Audit Services of Manabat Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.

The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected] or [email protected].

If you wish to reach Father Vicente Marasigan, you may email him at [email protected].)