The Glory that is Ritchie!

He\’s done a long interview. Here.

Anyone who wants to teach economics or accountancy these days has to subscribe to neoliberal economic thinking.

Blatantly untrue. Prem Sikka is a Prof of Accounting and he\’s certainly not a neo-liberal. George Irvine most certainly ain\’t a neo-liberal and he\’s a Prof of Economics. Murph might not have noticed that he\’s actually working with academics who refute his very own contention.

In my first year of economics and accountancy at Southampton University in 1976 to 1979, I realized that the assumptions that underpinned the course—including that competition was “perfect” and that this would always lead to “correct” outcomes in the markets—bore no relation to reality.

Absolutely no one at all believes this. Here, for example, are some extracts from the 2005 GCSE Economics syllabus.

The ownership, control, finance, management and aims of different forms of
business enterprise
Candidates should be able to:
 distinguish between different ways of organising production through private and
public enterprise;
distinguish between different ways of organising production through sole trader
and plc;
 distinguish between different ways of organising production through cooperatives;
 distinguish between different ways of organising production through municipal

The aims and effects of government intervention on producers
Candidates should be able to:
 illustrate knowledge of advantages and disadvantages of competition within an
economy (knowledge of theories of monopoly and perfect competition is not

So we\’re actually teaching the 14 year olds that there are advantages to not-competition?

The role of public enterprise and the arguments for and against privatisation
Candidates should be able to:
 give examples of public enterprise and privatisation;
 assess the arguments for and against privatisation.

The determination of the allocation of resources in different economic systems
Candidates should be able to:
 analyse the main features of market, state planned and mixed economies and
assess the advantages and disadvantages of each;
 distinguish between private and public goods.
The determination of price in market economies
Candidates should be able to:
 construct demand and supply curves from basic data;
 explain shifts of the curves;
 understand the market forces that determine equilibrium;
 explain the impact of government intervention e.g. taxes, subsidies, minimum and
maximum prices.

We\’re really not teaching them that competition unadorned is perfect, are we?

Differences and changes in factor rewards
Candidates should be able to:
 analyse the effects of changes in demand and supply;
 give arguments for and against government intervention e.g. wage and rent

I don\’t think that Ritchie\’s quite managed to prove that idea that the neoliberals have taken over the basic teaching of the subject, do you?

One of the things I recognized as exceptionally dangerous was the discounting of future cash flows, which entered mainstream economic theory in the 1950s and became prevalent in accounting from the 1970s onwards. What I found extraordinary about this was the assumption that you could dismiss the future consequences of current behavior and appraise it only with regard to its impact on the present. Of course that drives a short-term mind-set where business pays no heed to future consequences of its actions, one where all that matters is peak performance now.

Snigger. Discounting future cash flows is to bring the future in to influence the present. He\’s got it entirely arse about tip.

Modeling is now the bedrock for the teaching of all financial disciplines. However, future consequences are never built into the models, since they are literally “discounted,” which is a very close synonym of “dismissed.”

No, discounting is how we assess future consequences.

It has been undermined by the requirement that all accounting academics must have a PhD, which is quite a hurdle to jump and rules out a lot of talent.

Translation: I couldn\’t get an academic job when I left my marriage and company.

Ho hum

41 thoughts on “The Glory that is Ritchie!”

  1. Unbelievable . Utterly misunderstood discounting. Where did get the idea anybody thought perfect competition was realistic? (although some markets come close to it)

  2. Both an ass and an arse: plus a bit of a tax dodger.

    One newspaper above all others would seem to be his natural habitat.

  3. Not just that he’s wrong – it just seems a little – I don’t know, overconfident ? – to decide as an undergraduate of accountancy and economics
    that you and you alone have spotted the flaws that no one else has.

  4. When he follows the blog (as he will), maybe he will understand why he needs a Phd as a minimum requirement to pontificate?

  5. wow, what a misunderstanding of discounting; its use reflects that there are possible alternative uses of money in the meantime rather than letting it sit under the bed in a sock.

    I really don’t want a mental image of any sock one might find sitting under Ritchie’s bed

  6. Philip Scott Thomas

    …my first year … 1976 to 1979

    Eh? How many times did he have to do that first year?

  7. The Glory that is Timmy for having the stamina to read that from front to back.. I’d sooner play snooker with my own testicles

  8. Jeebus. As an actuary, discounted cash flows are my stock in trade. Page 1 of the actuarial textbooks explain the time value of money and then moves on to present values.

    I’ve had discussions and debates with accountant colleagues, and there are wider debates between the two professions, about the use and abuse of discounted cash flows. However I have never seen such a wilful misunderstanding as this.

    Normally I would give the benefit of the doubt and assume that they had been misquoted, but the rest of the piece shows that this is not the case. And his past form shows that this is a deliberate distortion of cash flow modelling.

    How can someone be so spectacularly dense yet refuse to listen? It’s the sheer illogicality of it all.

    And yet the BBC continue to use him as an “expert”. Unbelievable.

  9. I wonder how he would go about deciding whether to take £900k now or £100k a year for 10 years if he won one of those competitions?

    And when he was in business how did he decide which project to invest in? And how will his green bank asses the returns on the various projects that will be clamouring for funding when he can’t fund them all?

    He’s beyond parody, he’s dangerous.

  10. Bloody Hell. That really is extraordinary.

    Any fule can understand “time value of money”, particularly if you imagine that rates of return are high. Bit trickier to get your head around since it involves infinity and eternity, but if you didn’t discount the coupons from a perpetuity, then presumably you’d have to ludicrously conclude that all consols should be infinitely valuable. More straightforward: go back in a timewarp to the 1930s and ask my education-back-then-ended-at-11 grandmother whether she’d like to be given £400 to buy her house right now, or, if it’s all the same to her, is it okay if we just pop the same amount into her bank account in the 1980s. She wouldn’t have needed a PhD to sort that one out.

    “One of the things I recognized as exceptionally dangerous was the discounting of future cash flows, which entered mainstream economic theory in the 1950s”

    Is it really that late? My presumption would have been that the basics would have been understood by some of the earliest numerate lenders, who would have experienced and needed to evaluate opportunity costs across time. Wikipedia points out that “Irving Fisher in his 1930 book “The Theory of Interest” and John Burr Williams’s 1938 text ‘The Theory of Investment Value’ first formally expressed the DCF method in modern economic terms” (as a method of stock valuation). But isn’t the idea older? The Institute of Actuaries was founded in 1848, and I’m sure they’d have had a clue. And consols have been around since 1751, so someone must have got their head around that an eternal cashflow isn’t infinitely valuable.

  11. “One of the things I recognized as exceptionally dangerous was the discounting of future cash flows”

    If my accountant didn’t discount future cash flows I would punch him in the face, fire him, and report him to the ICA for incompetence. In that order.

  12. Well, being in the on the investing side of things, I not find myself questioning why any of my Venture Captial freinds ever invest in anything. Or why companies with negative earnings for the next year or two are still trading at positive value. Or why my own DCF models have several years and stages of forecasts.

    You know, I often feel bad for my interns and new hires who have to realize that valutations don’t have clear answers, and that forecasting is as ugly as sausage-making. But they all knew that the real world doesn’t have the nice assumptions of an answer-set. Has Ritchie never had a sit-down by an older accountant who explains that the g=10%, r=5% assumptions don’t hold in the real world, and that he has to THINK? I mean, I’m sure he has. Of course he knows better. And he knows that people coming out of undergrad will have some tools but not the experience to solve problems. So he’s just pandering then?

  13. His stupidity is actually now distracting me from my work. I’m trying to understand his logic and it’s causing me headaches.

    Is he honestly saying that a company which goes to the efforts of forecasting future cashflows, choosing an appropriate discount rate and then discounting these to the present day is only concerned with the present? Seriously? I mean seriously?????

    I can’t believe I’m saying this, but I had actually over-estimated his abilities. Until now I didn’t believe that anyone could be so stupid. Seems I was wrong.

  14. MBE
    Probably even earlier than 1751, may even be part of our DNA.
    If you ask 3 year olds if they prefer a sweet today or 2 tomorrow half of them will choose 2 tomorrow. 6 year olds will generally accept a wait of a week to get 2 sweets instead of 1.
    And so forth. So you can derive an interest rate from these choices.

    And of course historians do just that. They have estimated (I think) an average rate of 25% for Phoenicia, a bit less for Rome, about 20% in the Middle Ages, from no official data at the time.

  15. A good example of that old adage, better to keep your mouth shut and be thought a fool, etc.

  16. @ 9:

    “He’s beyond parody, he’s dangerous.”

    Indeed he is; and congratulations to Tim for spotting this early on.

  17. Discount rates and interest rates are two sides of the same coin. But in Murphland the coins only have one side. Settlement in balls, then.

  18. Having read it, I don’t know how he hasn’t been given the Nobel prize! He is sooo brill. he discovers things as an undergrad that Nobel prizewinners haven’t. Wow.

    So sure of himself, so clear and solid.

    The most dangerous kind of ignorant person. He oozes arrogance. Yuck, yuck and yuck!

  19. Weirdly, the thing that annoys me the most about him is his constant use of the word ‘candidly’.

  20. Though shit like this runs that close: ‘maximizing profit invariably involves plundering the Earth and screwing up other people’s lives’


  21. That error on discounting is pretty fundamental and catastrophic for an understanding of economics. It’s like somebody purporting to be a physicist who thinks neutrons orbit the nucleus or something. It beggars belief, really.

  22. Uh, Ian B, surely you mean to say “purporting to be a physicist who DOES NOT THINK neutrons orbit the nucleus”? Or do you still think neutrons are studded into the surface of the nucleus like plums into a Christmas pudding?

  23. Just remember, he was, according to his own statement “a senior partner in a firm of accounts”.

    With the care he shows in his statements, he’s going to be challenging Dr Clarke for adherence to the Incompleteness Theorem.

    NB: I know there will a Muphry Law example in my comment. Not helped either by the iToy or the lack of preview. Be kind 🙂

  24. Crikey. How the hell do you determine whether the future return on a project is going to make it worth your while bothering to do it unless you use DCF? I’m not a bloody accountant, but I spent 17 years running projects and EVERY ONE had to be justified on discounted cash flows. Because it’s the only way a project manager can work out whether or not they are wasting their time and someone else’s money. How exactly is that short-termism? How is that “all that matters is peak performance now”? The whole point of DCF is justifying FUTURE activity!

  25. As GlenDorran can confirm, one of the differences between Actuaries, who use discounted cash flow to value things and Accountants who use amortised historic cost is that we look at the future (including the long-term future) while they look at the past.
    Murphy says ““discounted,” which is a very close synonym of “dismissed.”” So at current gilt yields discounting cash flow by 0.7% is very close to valuing next year’s income/expenditure at zero – what is 99.3% between left-wing friends?

  26. blokeinfrance: a good point, there is a natural human tendency to discount future rewards, although my understanding is that people tend to be “present-biased” and discount in a way that is time-inconsistent (i.e. not exponentially distributing at a fixed rate). See for example

    I’d definitely be interested to know when the mathematics became available to crunch the numbers; I’d be shocked if it was as late as Ritchie suggests.

  27. Ian,

    Neutrons are part of the nucleus, along with the protons. Electrons occupy orbitals around the nucleus.

    Not what the man said. How do you think the neutrons behave within the nucleus? Especially given the energy levels involved.

    Or, on the other hand and channeling the Fukushima thread, if neutrons aren’t in some sort of dynamic relationship, how come alpha radiation? Or, of course, beta, except that most of the neutron stays put …

  28. Neutrons are part of the nucleus, so they can’t reasonably be said to orbit the nucleus. However, according to the nuclear shell model and its derivatives, nucleons occupy orbitals within the nucleus.

    That is, IanB is right, but has missed the obvious implication of what Richard Allan was saying.

    Incidentally, the term “orbitals” is misleading, both in the nuclear shell model and the atomic shell model. An “orbital” in this context is wave function, not a sort of planetary path.

  29. An “orbital” in this context is wave function

    One of the mathematical solutions to the wave function, surely? Or, depending on your adherence to the Copenhagen interpretation, one of the real-world examples of the wave function.

  30. No, a wave function is a solution to a wave equation.

    Incidentally, the concept of the Time Value of Money was known to the School of Salamanca in the 16th Century. Perhaps Murphy meant to say that it entered mainstream economic theory in the 1550s.

  31. MBE
    Hyperbolic discounting is complicated maths. (No wonder the child psychologists haven’t got round to it.)
    But I doubt it’s modern maths, I’d hazard a guess that Galileo, Newton and Kepler used hyperbolas.

  32. With all due respect, I wasn’t trying to trigger a debate on quantum mechanics 🙂

    To continue with the pedantry, the “plum pudding model” Richard Allan refers to was a first guess by JJ Thompson (discoverer of the electron) as to how the atom was arranged, with electrons stuck in it like a plum pudding. Nobody at the time knew that neutrons even existed. The next model was the idea of a nucleus with electrons orbiting it. And then quantum mechanics arrive, and we were left with clouds of probability and wave functions.

    My apologies for not picking something less controversial.

  33. PaulB “the concept of the Time Value of Money was known to the School of Salamanca in the 16th Century” – ta for that. Do you have a reference? (Not doubting you, just sufficiently interested that I’d have a read of one!)

  34. MBE (#36), Wikipedia says that Martín de Azpilcueta, one of the Salamancans, first rationalised the time value of money, but I’m not convinced that he actually got that far.

    Here’s his book, helpfully translated by the Acton Institute:,%20Martin–Commentary%20on%20the%20Resolution%20of%20Money.pdf

    It’s not easy to read, but he certainly seems to have understood opportunity cost – he allowed merchants to charge more for later payment, but only because they have been deprived of their working capital in the meantime:

    “Merchants may take more if they have to wait for their payment until the second fairs than if they wait until the first ones”

    But although that’s part of the time value of money, it’s not all of it. And he says:

    “This is the limit to where they can extend their profit [i.e. interest]. We have extended it as much as possible.”

    For the Salamancans it is therefore only merchants, who would otherwise use the money to buy and sell in their business, who can charge what’s effectively interest. If you don’t have any use in your own business for the money, then you don’t have any opportunity cost so can’t charge interest.

    And no, the fact that you could instead lend it to someone else and charge interest isn’t good enough – that would make you a filthy usurer:

    He who “devotes all his money to exchange [a disguised form of lending at interest] from fair to fair for a certain or uncertain interest, is mortally sinning”

  35. MBE: Good question; I confess that I was repeating a meme rather than reporting the results of my own scholarly research.

    The source for the meme seems to be Schumpeter’s History of Economic Analysis, which is not on my bookshelf. For background on the School of Salamanca you might look at this.

    Both authors are of the Austrian School, which usually abjures empirical evidence but takes an interest in the monetary experiment Spain conducted in the 16th century by stealing vast quantities of bullion from the Americas. The commentary on the SoS will be coloured by the Austrian School’s idiosyncratic analysis.

    It is of course possible that Murphy has conducted a detailed study of 16th century economics, and concluded that 1550 is not in fact the right date.

  36. bilbaoboy (first comment)

    You think a Ph.D would give him the right to pontificate?

    May I refer you to a certain Dr. Eoin Clarke who likes to produce lots of dodgy statistics in support of failed lefty arguments. He has a Ph.D, but that doesn’t make his numbers or his reasoning any better.

    Be careful what you ask for.

  37. There is a glaring omission from Murphy’s list of models that have wrecked the world. I don’t expect him to criticise Black-Scholes and its derivatives, because I reckon the math is beyond him. But I do think he might have had a go at Modigliani-Miller. The tax adjusted form of that is significantly implicated in the prevalence of highly-geared business models – including banks. Not that the problem lies in the model itself, of course. The problem lies in the tax system that encourages debt finance at the expense of equity.

  38. @ Frances #40
    “The problem lies in the tax system that encourages debt finance at the expense of equity.” Yes, but its made even worse by the various changes in insolvency legislation – bankruptcy originally mean that your bench was broken so that you not trade any more – now we have one year in the naughty box for personal bankrupts and pre-pack administrations for limited companies so a director can re-start his business the next day having shed all its liabilities to its suppliers. Murphy is not going to object to that because he wants everyone savings, except himself, to bail out spendthrifts.

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