Economic Betterment and Improvement

I have received several emails, some of which caught my attention. From the first email, I would like to quote the following sentence:

“Even today, most people in Europe do not understand where the causes of this crisis lie.”

I was also genuinely troubled by this question:

“Should we prepare for difficult times, and what will they look like?”

I believe that Ankara has already given us an indication. This reflection was also prompted by the following text I found online:

“The economic policy of a state comprises various measures aimed at managing public finances and influencing economic activity. The main objectives of fiscal policy include stabilising the economy, promoting growth, combating inflation and redistributing wealth. These objectives are intended to achieve macroeconomic stability and stimulate economic growth.”

I shall begin with the question raised in the email: where do the causes of this crisis lie?

I am therefore devoting today’s reflection to a serious problem faced by every economy: economic betterment—the qualitative improvement, strengthening and advancement of the economy. Unfortunately, the institutions that are supposed to have this matter under control appear to have forgotten about it.

Our economists, including those in the European Union, speak constantly and almost exclusively about growth. Yet the betterment of the economy—the improvement or expansion of production—is equally important, particularly because we are genuinely heading towards a crisis.

Expressions such as improving the grain harvest, increasing production, improving welding methods or expanding the range of products can equally be applied to the economy as a whole. We must improve the way the economy functions and enrich the methods by which it is represented, including through the use of mathematical models.

The issues that dominate contemporary Europe include security, the integration of migrants, demographic trends and, above all, a profound crisis of public confidence in political, media and judicial elites. Unfortunately, this is true. But I must ask: are these the only issues?

The economic development of the EU member states, including Slovakia, is equally serious and perhaps even more fundamental. Yet policymakers do not know how to achieve it. Economic science, however, does know how to help bring about better times.

Since the dawn of humanity, people have used tools: a club to kill a mammoth, a flint blade to cut it open, and fire to cook it. Economic science, too, is a tool with which we can “cut open” the economy and see what lies inside it. The resulting picture is presented in Table 1.

Table 1: Social Accounting Matrix for the Economy of the Slovak Republic, 1994

Above all, economic policymakers must have at their disposal an effective instrument for designing economic policy—one that simultaneously allows them to calculate and compare several alternative policy scenarios.

Such a scientific instrument has long been known to economists: the Social Accounting Matrix, or SAM, presented in Table 1.

Its theoretical framework requires the matrix to possess certain properties. For example, the total of each corresponding row must equal the total of the corresponding column. We constructed such a matrix for Slovakia as early as 1994. See J. Husár, Possibilities of Macroeconomic Analysis Based on Social Accounting Matrices, inaugural lecture, October 1996.

We selected the following macroeconomic variables for inclusion in the matrix:

Gross domestic product – Y
Net national product – Yn
National income – NI
Disposable income – Yd
Consumption expenditure – C
Government expenditure – G
Net exports – NX
Net foreign investment – If
Net domestic investment – Id
Household income – Rp
Domestic transfer payments – Td
Transfer payments abroad – Tf
Household savings – Sp
Government savings – Sg
Corporate savings – Sb
Direct household taxes – Tp
Direct corporate taxes – Tb
Indirect taxes – Ti
Depreciation – D

These are fundamental macroeconomic variables. Their numerical values for the Slovak Republic are shown in Table 1.

I must emphasise once again that, within a relatively small space, the reader can observe the number and importance of the connections among businesses, households, the government and the foreign sector. These relationships can be seen in the first four rows of the table.

The reader may compare the numerical values in the final column, labelled “Total”, with the values in the final row, also labelled “Total”. They will find that the corresponding values are identical. This is the first requirement established by economic theory.

The economic substance of the table ensures that:

• no financial flows disappear from the economic accounts;

• the coherence and consistency of the data are preserved;

• the matrix shows how the economy can be improved and strengthened.

Moreover, as readers will discover when they examine the matrix more closely, it helps to explain the essence of many complicated phenomena and facts.

Without knowledge and without the appropriate analytical instrument, it is impossible to intervene meaningfully in the functioning of an economy.

Today, this is far from self-evident.

The set of macroeconomic variables contained in the matrix is also important. GDP alone does not tell us what is happening in the economy. From the numerical value of GDP, we cannot see the level of corporate savings or the amount collected in indirect taxes. Nor can GDP alone tell us whether the economy is in equilibrium.

A matrix may, of course, contain a different set of variables. Its contents are determined by its author and by the purpose of the analysis.

Suppose an economic policymaker wants to increase the economy’s output because new export opportunities have emerged. Such a policy must be designed professionally, using precisely this type of table together with the relevant mathematical relationships and models.

To demonstrate another useful feature of this instrument, I shall formulate two equations based on the principles of the matrix. These equations demonstrate the coherence of the data. They are fundamental macroeconomic identities that make economic analysis possible.

Let us first examine the first column of Table 1. Provided that we understand the definitions of the relevant economic concepts, it allows us to establish, for example, that:

GDP ≡ C + G + (X − M) + Id + D  (1.1)

398 ≡ 251.89 + 79.48 + 4.09 + 27.47 + 35.07

Gross domestic product is the sum of the expenditures of all sectors of the economy.

Once again, the first column also shows that net national product is:

Yn ≡ C + G + (X − M) + Id

and therefore:

362.93 ≡ 251.89 + 79.48 + 4.09 + 27.47

We can see that net national product represents the net addition to the flow of goods and services available to individuals, whether supplied directly by domestic and foreign businesses or by the government, together with the increase in the value of capital.

Net national product is therefore equal to gross domestic product minus depreciation. This is its second definition.

The reader will recognise that this also represents an entirely different way of establishing facts—of identifying economic facts and understanding economic reality. This is the most important stage in every science.

To allow the reader to appreciate the contribution of the SAM-based approach, I formulated several equations based on the principles of the matrix. These equations algebraically described the relationships within the Slovak economy and its actual condition in 1994.

They are fundamental macroeconomic identities that enable what I would call a profound and comprehensive analysis. They provide reliable guidance concerning the relationships and interdependencies within the economy. In this way, the data acquire a new cognitive and analytical value.

By examining such a set of data in depth over a sequence of years, an economic policymaker could thoroughly understand the causes of the European Union’s crisis—provided, of course, that Social Accounting Matrices were available for all member states.

We cannot make decisions without science. We cannot identify the available options, carefully assess their advantages and disadvantages, and select the most appropriate alternative without scientific analysis.

Just as X-rays became one of the most important instruments of medical diagnosis, the Social Accounting Matrix must become one of the most important instruments of economic diagnosis.

If only one of our politicians could follow the example of our great Vojtech Alexander and begin experimenting with Social Accounting Matrices.

Conclusion

An economist must, figuratively speaking, be able to see inside the economy.

The instrument that makes this possible is the Social Accounting Matrix. It allows us to identify and understand what is happening and how the economy functions. A model based on the matrix then becomes an instrument of forecasting.

We have been groping in the dark for thirty-six years. Our economy must be cultivated, strengthened and improved. The European Union cannot make decisions without science. This is not a trivial controversy comparable to the attention attracted by inconsistent FIFA penalties for red cards.

I believe the reader will have recognised that the proper organisation of data and the application of mathematical relationships primarily ensure the coherence and consistency of the information.

The relationships derived from the matrix clearly demonstrate the extent to which our understanding of the currently neglected connections among macroeconomic variables can be developed and expanded.

It is also extremely important that GDP—the best-known measure of an economy’s production—can be calculated in several different ways. It can therefore be calculated in a manner that corresponds to the particular aspect emphasised by an analyst’s specific economic objective.

My purpose has been to demonstrate the necessary foundation and methodology for the formulation of economic policy.

Mathematical exposition is not confined to my own works. It is a method of applying economic logic to economics and to the relationships examined by economic science.

Today, an economic policymaker must not act in a manner that is morally and economically shameful and politically catastrophic.

We should not arm ourselves; we should improve and strengthen the economies of the entire European Union.

We must also see and understand the problems present in today’s economic reality. These problems themselves demonstrate the necessity of improvement.

Without the application of science, we shall remain disoriented.

Prof. J. Husár

Rohovce, 12 July 2026