A Foundation of Economics
When I studied economics, I did not initially realize that the discipline lacked a proper foundation. In the introductory courses, we jumped straight into Cobb-Douglas utility functions, preferences, and optimization problems. Then, I learned about sweeping theories in the macroeconomy, such as the Phillips curve. Only later did it struck me: unlike mathematics, which has logic, or computer science, which has computation, economics seemed to be missing a clear bedrock. Economists have tried to borrow mathematics as their foundation, but to me, that never felt sufficient, as there are too many unfounded assumptions. Over time, I have come to believe the foundation is surprisingly concrete: double-entry bookkeeping. Not just as a tool for businesses to keep track of their accounts, but as the basic grammar of all economic activity, from individuals to entire nations.
At its core, double-entry bookkeeping says that every transaction has two sides: a debit somewhere, a credit somewhere else. Nothing appears out of thin air. If I lend you $100, my cash decreases, and my claim on you increases. If a government issues bonds, citizens' savings accounts transform into government liabilities. When you frame the economy this way, concepts like debt, money creation, or even growth, stop looking mystical and instead become rearrangements of ledgers.
This lens also addresses some common myths. For example, government deficits: They are often discussed as if the state is not spending beyond its means. But in bookkeeping terms, one side of the government's deficit is necessarily the private sector's surplus. Maybe the government is forced to run a deficit because the private sector is spending or investing all the income. Or consider the idea that banks would lend out deposits. Only after breaking the process down into atomic bookkeeping steps one will figure out what happens. When a bank issues a loan, it simultaneously creates a new deposit. Assets and liabilities expand together. Analyzing economic phenomena in double-entry bookkeeping makes them far less mysterious. It also helps us to see the full picture of the economy. Journalists would not only need to write about how horrific it is that worldwide debt has yet again increased. They would also need to write about who now owns the other side of all that debt.
Even phenomena like inflation can be reframed in this way. Inflation is not some magical force. It is what happens when, for example, banks create mortgages for which there are not enough architects, civil engineers, and construction workers to build all these additional houses. The prospective homeowners would chase after them, likely accepting higher prices to win a contract. If such a process ripples through the entire economy, we would see something like inflation at the aggregate level.
The beauty of this perspective is that it grounds economics in something testable, auditable, and universal. Every transaction is a pair of entries. Every story told about the economy should be reducible to those pairs. If it can not, then maybe it is not economics at all, just word games. In that sense, double-entry bookkeeping is not merely a tool of accountants. It might be the bedrock on which real economic understanding rests.