Sunday, February 16, 2014

Double-entry bookkeeping system also works across a pair of firms

We're traditionally made to believe that the double-entry system used in accounting is applicable only on an intra-firm level, that is, on the account books inside a firm. So any financial transaction a firm conducts has the effect of debiting at least one account and crediting at least one other account in the firm's books.

Taking this idea one step further, the double-entry bookkeeping system is actually also applicable on an inter-firm level. For example, suppose firm A supplies some goods to firm B, then in firm A's account books, the transaction will be recorded as a debit in the ledger of firm B. Conversely, in firm B's account books, the transaction will be recorded as a credit in the ledger of firm A.

Looking closely, this is nothing but yet another form of the double-entry bookkeeping system. This system, on an inter-firm level, ensures that the ledgers two firms maintain of each other [firm B's ledger in firm A's books and firm A's ledger in firm B's books] are mirror copies of each other [assuming no bookkeeping errors occur on either side].

Once again, just like in the traditional definition of double-entry bookkeeping system, the sum of all credits must equal the sum of all debits, even on an inter-firm level.

Saturday, February 15, 2014

Some real-life examples of the economic theory - the tragedy of the commons

These days I'm thinking about the tragedy of the commons, and it seems to me that several problems around us are actually examples of this theory.
  1. Military-industrial complex: In this problem, which is most pervasive in the US, some or several defence companies get the ruling government to allocate/release funds for defence projects by greatly exaggerating the threat to the security of the nation [in this example, the US]. This results in some of the taxpayers' money unnecessarily getting diverted to the defence companies [the companies' private gain], resulting in slightly less government services available to each citizen [public loss, distributed over the entire population].
  2. Disclosing secrets behind magic tricks: When a magician ties up with a TV channel to do a show in which he is supposed to show the public the secrets behind popular magic tricks, he is actually a casualty of the tragedy of the commons. He agrees to reveal the secrets for a good fee [his private gain], while the disclosure of the secrets hurts the entire magician community [the loss, in the form of less curious and less impressed public, is shared by the entire magician community].
  3. Cutting of wild trees: When someone cuts and sells a wild tree on an unclaimed forest land, the gain from the sale of wood is his private gain, whereas the loss to the world [in the form of slightly reduced oxygen, slightly reduced habitat for other creatures, and slightly less flood-stopping ability] is distributed over a very  large population, so no one even notices.
  4. Hunting of endangered animals: Similarly, when someone hunts an endangered animal, the gain [enjoyment derived through hunting + profit from selling the animal's body parts] is his private gain, whereas the loss to the society does not affect a single individual but is distributed over the entire population [and thus gets diluted on a per capita basis].
  5. Parents bringing infants to cinema halls: The infants cry loudly, disturbing everyone who is watching the movie, and parents are able to enjoy the movie, even if partially. The private gain of the parents comes against the loss to the other movie-watchers.
  6. Puppet ruler [Oct'14]: A puppet ruler practically sells the country to outsiders, destroying its culture, economy, heritage and independence, in order to get private gains [bribes, etc., from the masters - his private gain]. Since this puppet ruler holds decision-making power over the entire nation, the bribes he receives result in a total sell-off of the nation. An example is Petro Poroshenko selling Ukraine to the West. Herein lies the answer to the West's question ["...why do Russia’s neighbours trust it so little?"]. It is not Russia's neighbors who trust Russia little. Rather it is the puppet ruler who has covertly accepted West's bribes in order to give the world a false impression that the nation he presides over fears Russia [allowing the West to justify extending its influence to that nation].
  7. Transfer of best-practices/know-how/secrets/technology [Dec'14]: When a Swedish-American executive takes a job at a major Russian carmaker and promises to overhaul it in order to bring it in line with leading global carmakers, he's basically playing out the tragedy of the commons. In order to receive private gains [a high salary], he decides to disclose/share knowledge and practices/processes that will eventually do harm to his previous employers as well as to the people of his previous countries [presumably Sweden and USA], by strengthening the Russian carmaker.
These examples show that many common real-life problems are actually examples of the tragedy of the commons. This shows that this economic theory is quite important, as it explains many of our problems.

Update [Dec'15]: A related thought on mortality is here.