Double Entry

Modified image from Alex Zaharia

We all know Elon Musk is the wealthiest man on the planet, right? Well, maybe not as accounting 101 shows a different picture as how exactly accounting works differs from what this rube has mistakenly assumed about how accounting actually works for far too many years. :)

To whit.

There is a real economy and an unreal economy. Confusingly, the unreal one is called just ‘the economy’ and the real one is generally ignored. Understanding this distinction is crucial to understanding how fucked we are, and where we need to be.

Unreal Engine

The unreal economy is all the markets, GDP figures, and most of the metrics we use to measure reality. They say you get what you measure, and what we measure is unreality. To understand this, just look at the wealth of the ‘world’s richest man’. It’s not real.

To understand that, however, we need to go back to the Renaissance, when the accounting of Musk’s wealth really started.

Luca Pacioli, about to drop science on y’all

Luca Pacioli Sleeps With The Fishes

People from Iraq to China have been ‘accounting’ forever, merchant ledgers are some of the oldest known forms of writing. Capitalist accounting, however, is a whole-ass Renaissance art.

Luca Pacioli, Leonardo Da Vinci’s math tutor and homie, codified modern accounting in the 1494. The art may have come via India or the Muslim world (along with Hindu-Arabic numerals), but I’ll refer to Pacioli here. Not only did he advocate using numbers as we know them, he codified the same system that lets us ‘know’ Elon Musk’s wealth today.

How accounting really works. :)

from Jane Gleeson-White’s fascinating book Double Entry

The word Assume applies ...

Whereas working people think of wealth as cash on hand, ‘cash’ is just one entry in an accounting book. Datini could have 10,000 florins in Florence, but 10,000 florins worth of armor on a boat, and he had to account for both. Counting tells you what ships have come in. Accounting tells you about the ship that’s yet to come. This is an important method for ‘perceiving’ complex business dealings, but as you can see, it’s inherently prone to being wrong.

At the end of the day, you simply don’t know if your ship will come in. That’s why Renaissance accounting books, including Datini’s, were almost always dedicated to God.

Gleeson-White’s really does attempt to answer these questions, 

I can’t recommend it highly enough

Unreal Wealth

Today we have Elon Musk ‘worth’ $265 billion based mostly on a company which has retained earnings of less than $500 million. That is to say, in 18 years of operations the company has lost money every year except two, digging them just barely out of the hole. The legally-adult company has earned only $500 million total. This is less that one day of Amazon profits, but Musk is somehow worth more than Bezos.

How is this so? Because investors are betting not on ships that have come in, but ships that are yet to come. And they’re betting on other people believing in the same thing. You can see how this speculation spirals, ad absurdum.

Thus you have a car company with less revenue than Hyundai, valued higher than every other car manufacturer—people producing many more cars and certainly more cash. Thus you have a man who’s wealth is not in his hand, but in other people’s minds. Elon Musk’s wealth is their belief that his ship will come. There’s no real cash or cars to justify it. It’s just the belief that there’s something over the horizon.

The rabbit hole beckons and yes, I bought the book. :)