From Cambridge to Here: “Accounting, Measurement and Metric”

 

“People Respond to Incentives,” or does the Harvard prof. Gregory Mankiw suggest as Principle 4 of Economics. In the market economy as well as in economics, the incentive is offered after accounting for the performance over a certain period. The baseline: As to “Rational People Thinking at the Margin” (ditto 3), the marginal benefit in a particular period is the incentive and the time spent for the performance is the marginal cost.

             In the public place including the market, public accounting in modern times is always in terms of the sovereign currency unit. Or, the currency unit is the metric of accounting, or “the unit of account.” For simplicity, we name the dollar sign ($) as the unit.

 

The Incentive. Generally speaking, incentives are offered in terms of the particular piece of paper, often called a “bill,” with the face of George Washington in the front. Practically, the vast majority of incentives  are not in the real dollar bills but “book entries” to bank deposits of the makers. Bills and entries are virtually valueless or  "thin-airy" in themselves, but their association with the name “dollar” is invaluable.

             In short, the small rectangular piece of paper with George Washington on the face is the legal currency, also called “legal tender.” The metric of legal tender is of course the dollar only in name. The dollar sign is never on the  same plane of  the dollar as medium of exchange.  

The Performance “in Real.” Performance in general is measured in indefinitely diverse units of account. For instance, physical performance is in real quantities of all different tangible things.

             Particularly in economics, we are interested in the performance of physical goods and psychological services “finally” ready for consumption on one hand and completed physical and intellectual assets for investment on the other hand. By definition, goods and services are consumed away in the current period of accounting. The assets endure over multiple period rendering goods, services and productive powers.

             The metrics in practice of accounting for final goods in “real quantities” are in five categories and indefinitely many scales. The five are the natural unit, the length, the area, the volume and the weight (mass-cum-gravity). These categories are the base of metrics for “physical performance,” as it were. Here it may be noted that the “natural unit” is of pure mathematics and as a consequence free of dimensions.  

The Time. We know that the time is in substance our currency. The unit of account for time is usually the hour or hora in Latin. Particularly at the national income accounting, the period is a quarter, a half or the whole of the year or annum.    

Home Alone. Legal tender is of no use at least conceptually. In its stead, the hour as currency is the metric of accounting, more often than not.  .

In the Market. The market price is usually taken as the proxy of utility. As we are very much well aware, the individual price at each exchange needs two sides for the naming, demand and supply. More specifically, “the price” is the opportunity cost to the buyer while the opportunity benefit to the seller. The individual price is of course on the dollar standard. Individual prices per accounting period are often averaged out to be the “equilibrium” price. Again, taking the average is everywhere ex post.

             All in all, the price, individual or in average, is literally the incentive to the seller while on par with the utility as incentive to the buyer.   

In Mathematics and in Macroeconomic Models. Metrics are unwanted or otherwise of no use. For instance, one Big Apple and another small apple mathematically make two: that is 1+ 1= 2.  

             Likewise, macroeconomists for the sake of convenience move more or less freely from M∙V= P∙Y to M= k∙P∙Y (with constancy of V) to log M= log P+ log Y (with normalization of V). Just run “the printing press” additionally with P expediently “sticky.” And, the real GDP will grow just as speedily. Viva!