Capital Flow Analysis is a sub-technique in the general field of flow of funds analysis. John Dawson, the leading expert on flow of funds analysis, said that “Flow of funds analysis is an undefined and partially hidden field of study”.

(See: “Flow of Funds Analysis: A Handbook for Practitioners“)

The flow of funds accounts themselves were developed in the 1940s and 1950s by Morris Copeland, an economist with the Federal Reserve Bank and were later expanded and polished by Stephen Taylor, the Chief of Flow-of-Funds of the Federal Reserve.

At that time, the compilation of flow of funds statistics was a branch of “social accounting”, which itself was a major sub-field of economic statistics. The initial technique followed guidelines of financial statements and therefore was oriented towards financial markets and people of the real world rather than theoretical economists.

Unfortunately, during the 1950s and 1960s there was a major turf war between practical economists and academic theoreticians who were pushing Keynesian concepts and the latter won. The victory was so complete that after 1974, economic statistics was no longer even in the field classification of the American Economic Association.

Prof. Dawson Explains

John C. Dawson, Grinnell College, Professor Emeritus of Economics, (see: “Flow of Funds Analysis”, cited above), who described himself as an “institutionalist, practical in orientation, and skeptical of economic doctrine”, explains what happened:

“It is possible that many economists — especially those of recent vintage — will hardly have heard of flow-of-funds analysis and will hardly understand social accounting to be a discipline within economics. … Academic economics — the economics of academic institutions and academic journals — has in recent decades come to focus increasingly on economic theory as its important work, especially theory that connects itself to traditional or current economic doctrine. This increasingly mathematical model analysis now carries the prestige of academic economics. As Copeland once pointed out, economics behaves as if the way toward improved is to combine more and more theory with less and less fact.”

In other words, flow of funds analysis was a victim of what Professor Paul Ormerod calls “The Death of Economics“, saying that “conventional economics offers a very misleading view of how the world actually operates … and needs to be replaced.” and that “orthodox economics is in many ways an empty box. Its understanding of the world is similar to that of the physical sciences in the Middle Ages.”

We have John C. Dawson, Stephen Taylor, and economists in the Flow-of-Funds section of the Federal Reserve to thank for keeping the flame of Morris Copeland’s idea alive during the long dark Keynesian winter.

This entry was posted on Saturday, October 23rd, 2004 at 11:22 am and is filed under Capital Flow Analysis. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

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