New The Numbers Don't Lie (But Our Accounting Does)

A Final Word on Economic Reality

Author

Beau King
June 24, 2025

There's an old saying in business: "What gets measured gets managed." The corollary should be: "What gets mismeasured gets mismanaged." And boy, have we been managing based on some spectacularly wrong numbers.

Over this series, we've explored how Buffett's textile mill problem has gone global, why complementary development beats zero-sum competition, and how better trade accounting could transform international relations. But there's a deeper story here about measurement itself—how the tools we use to understand economic reality shape the reality we create.

The iPhone isn't just a trade accounting problem. It's a mirror reflecting everything wrong with how we measure value in the 21st century.

The Corporate Mirror: When Profits Aren't Profits

Before we fix trade accounting, let's understand why even corporate accounting can lie. Consider a company that reports $100 million in profits. Sounds great, right? But what if that company required $800 million in invested capital to generate those profits, and the cost of that capital (debt plus equity) was 12%?

The real story: The company needed $96 million just to cover its cost of capital. True economic profit? Only $4 million. That's Economic Value Added (EVA)—and it reveals that this "profitable" company is barely creating any real value.

This is why reformed accounting matters at every level. Just as trade statistics hide where value really comes from, traditional corporate metrics can hide whether value is actually being created.

EVA forces the hard question: Are you generating returns above the cost of capital, or just consuming it? It's the difference between a business that creates wealth and one that destroys it while looking profitable on paper. Many companies with positive accounting profits have negative EVAs—they're consuming more capital than they're creating value.

This corporate-level insight illuminates the national problem. Countries chasing export volumes without measuring true value-added are like companies chasing revenues without measuring EVA. They look busy, the numbers go up, but wealth creation may be going backward.

The Supply Chain Finance Shell Game

Modern corporations have developed sophisticated ways to make their numbers look better through supply chain finance—and it's creating the same distortions we see in trade statistics.

Picture this: A U.S. company orders $50 million worth of components from Asian suppliers with 90-day payment terms. But instead of the suppliers waiting 90 days to get paid, a bank steps in, pays the suppliers immediately (minus a fee), and the U.S. company pays the bank later.

On paper, this looks like improved cash flow and working capital. In reality, it's just hidden financing that makes operations look more efficient than they are.

The suppliers get immediate cash, the buyer extends payment terms, and everyone reports better metrics. But trace the actual economic flows, and you'll find the efficiency gains are largely cosmetic—hidden bank debt masquerading as operational improvement.

Sound familiar? It's the same shell game we see in trade accounting, where the iPhone assembly value gets attributed to China while the real value creation remains invisible. Both problems stem from measuring financial flows rather than economic value creation.

The TiVA Revolution: Seeing Through the Fog

Trade in Value Added (TiVA) accounting doesn't just fix the iPhone problem—it reveals the entire "global factory" that traditional statistics obscure. When the OECD and WTO developed TiVA, they weren't just creating better bookkeeping. They were building X-ray vision for the global economy.

Consider that in 2008, manufacturing appeared to account for 67% of global trade while services managed only 20%. But measured by actual value-added, manufacturing dropped to 39% and services soared to 41%. We've been measuring the shadow instead of the substance.

This isn't just academic. These mismeasurements drive real policy decisions:

  • Tariffs on "Chinese" goods that primarily tax American intellectual property

  • Industrial policies that subsidize low-value assembly rather than high-value innovation

  • Trade wars fought over statistical artifacts rather than economic realities

  • Investment decisions based on gross flows rather than value creation

TiVA reveals that many "trade deficits" are actually successful value creation strategies that happen to involve global production networks.

The Factoryless Revolution

The rise of "factoryless goods producing firms" (FGPFs) perfectly illustrates why our accounting categories are obsolete. Apple, Nike, Qualcomm—these companies control product design, customer relationships, and brand value while outsourcing physical production. They're manufacturers without factories, service companies that happen to coordinate global production.

Traditional statistics classify these companies outside manufacturing, making America's true industrial strength invisible.

FGPFs concentrate their assets on trademarks and patents, retaining high-value activities like R&D while outsourcing commodity production. They exhibit higher productivity and wages precisely because they focus on value creation rather than value assembly. Yet trade statistics count their products as "imports" from wherever final assembly occurs.

This classification error isn't just wrong—it's dangerous. It makes American economic strength look like weakness, driving protectionist policies that could destroy the very capabilities that create American prosperity.

The Political Economy of Bad Numbers

Here's the tragic irony: Bad accounting doesn't just hide economic reality—it actively destroys it by driving destructive policy responses.

Current trade statistics make successful countries look like failures and complementary relationships look like competitive threats.

When the U.S. "imports" iPhones from China, it looks like Chinese success and American failure. The reality—American design expertise combined with Chinese manufacturing efficiency creating value for both countries—becomes politically unsustainable. Bad numbers drive good relationships toward conflict.

Reformed accounting would fundamentally change this dynamic:

  • U.S. trade deficits would shrink dramatically as service exports become visible

  • Manufacturing countries would see their true value capture (often quite low) and focus on moving up value chains

  • Policy makers would optimize for value creation rather than gross flows

  • International cooperation would enhance network effects rather than pursue zero-sum advantage

The Network Effect: Why This Matters Now

We're at an inflection point where measurement systems matter more than ever. The global economy increasingly operates as a network where value creation depends on complementary capabilities across countries and companies.

In network economies, the wrong metrics don't just hide value—they actively destroy the relationships that create value.

Consider how Taiwan Semiconductor Manufacturing Company (TSMC) and American chip designers create mutual value. TSMC's manufacturing excellence makes American chip designs more valuable; American innovation makes TSMC's capabilities more valuable. This complementary relationship creates wealth for both sides.

But traditional trade accounting makes this look like American weakness (importing chips) rather than American strength (exporting designs). Bad metrics could drive policies that sever these value-creating relationships in pursuit of statistical "balance."

When we optimize for the wrong numbers, we get the wrong outcomes.

The Choice: Clarity or Confusion

The accounting revolution isn't just about better bookkeeping—it's about seeing economic reality clearly enough to build something better. We can choose clarity or continue with confusion.

Clarity means:

  • Measuring value creation, not just financial flows

  • Recognizing complementary strengths rather than only competitive positioning

  • Optimizing for network effects rather than zero-sum victories

  • Building policies on economic reality rather than statistical artifacts

Confusion means:

  • Fighting trade wars over accounting mirages

  • Destroying value-creating relationships in pursuit of meaningless "balance"

  • Subsidizing low-value activities while neglecting high-value capabilities

  • Making enemies of our most important economic partners

The stakes couldn't be higher. We're not just choosing accounting methods—we're choosing the kind of global economy we want to build.

The Ultimate Question

Warren Buffett understood that better looms wouldn't save his textile mill because all the gains would flow to customers. The lesson isn't to stop improving looms—it's to get out of the commodity business entirely.

The same logic applies to countries and companies. The goal isn't to win the commodity competition—it's to escape commodity economics altogether.

Reformed accounting shows the path: focus on value creation rather than volume production, build complementary capabilities rather than competitive redundancies, measure what actually matters rather than what's easy to count.

The numbers don't lie—but our accounting does. And until we fix the accounting, we'll keep optimizing for the wrong things, fighting the wrong battles, and missing the real opportunities.

The question isn't whether we can afford to reform our economic measurement systems. It's whether we can afford not to.

Because in the end, what gets measured gets managed. And what gets mismeasured gets mismanaged into crisis.

The choice is ours: Do we want to manage based on economic reality or statistical fiction?

I vote for reality. How about you?

Sources and Further Reading

Trade in Value-Added Research:

  • OECD Trade in Value-Added (TiVA) Database: oecd.org/sti/ind/measuring-trade-in-value-added.htm

  • Koopman, R., Wang, Z. & Wei, S. (2014). "Tracing Value-Added and Double Counting in Gross Exports." American Economic Review

  • Johnson, R. & Noguera, G. (2012). "Accounting for Intermediates: Production Sharing and Trade in Value Added." Journal of International Economics

Economic Value Added (EVA):

Supply Chain Finance Analysis:

  • "Leverage and Cash Flow Effects of Supply Chain Finance." The Footnotes Analyst

  • Fusion CPA (2023). "Accounting Challenges in the Modern Supply Chain Business"

Factoryless Goods Producers:

  • Bernard, A. & Fort, T. (2015). "Factoryless Goods Producing Firms." American Economic Review

  • Bayard, K., Byrnes, D. & Smith, D. (2015). "The Scope of U.S. 'Factoryless' Manufacturing"

Previous Running Signal Analysis: