On Loose definitions of Stock Flow Consistency

Jo Mitchell on Noah Smith claiming

Some heterodox macroeconomists, it’s true, do have quantitative theories. One is “stock-flow consistent” models (a confusing name, since mainstream models also maintain consistency between stocks and flows).

 

He rightly notes that the name is confusing — any correctly specified closed mathematical macro model should be internally consistent and therefore stock-flow consistent. This is certainly true of DSGE models.

No DGSE models cannot be called Stock-Flow Consistent

A correctly specified closed mathematical model will only have a ‘netting’ of flows to zero in one case – equilibrium.  In that case you have all stocks no flows – but it cannot handle any out of equilibrium case of its time path – the real world.   Because orthodox Neoclassical models are not defined in strict accounting terms – as a balance sheet of assets and liabilities that are unable to model consistency of relations that are defined as assets and liabilities, simple things like assets, debt and money.   Crude attempts to overcome this – such as measuring in flows and outflows to a blobby body such as K the stock of capital have irresolvable issues of dimensionality through over over-aggregation.

Whatever the arguments over the definitions of neoclassical and orthodox, and the not always helpful chasm this attempts to define, it is clear that economics cannot get out of its funk unless it redefines its basic principles an an accounting and dimension consistent foundation of mathematical identities, starting with the fundamental equation of accounting. 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s