Group Title: role of accounting in the economic development of the modern State
Title: The role of accounting in the economic development of the modern State
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Title: The role of accounting in the economic development of the modern State
Physical Description: ix, 282 leaves : ill. ; 28 cm.
Language: English
Creator: Most, Kenneth S
Publisher: s.n.
Place of Publication: Gainesville FL
Publication Date: 1970
Copyright Date: 1970
Subject: Accounting   ( lcsh )
Economic development   ( lcsh )
Genre: bibliography   ( marcgt )
theses   ( marcgt )
non-fiction   ( marcgt )
Thesis: Thesis--University of Florida.
Bibliography: Bibliography: leaves 267-280.
General Note: Manuscript copy.
General Note: Vita.
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Bibliographic ID: UF00098433
Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: alephbibnum - 000549747
notis - ACX4044
oclc - 13291153


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This work is the result of many years of stu.dv and

reflection, and acknowledgment is due to those scholars

and teachers whose ideas I have used without stint, in-

cluding some with whom I have had occasion to differ.

I am particularly grateful to Dr. R. Blodget-c,

who not only was kind enough to act as Chairman of my

Supervisory Co..mmittee, but also has been a repeated source

of enlightenment, encouragement and helpful criticism.. I

am also grateful to Dr. S. C. Yu for his advice and a=sis.-

arce, and to Dr. C. H. Dcn,.)an and Dr. C. A. M-atthew.s for

their s-:-Pport, and to all of these for acting -:-.'-rs

o" my S"-.' ..I,.ory Cor~initte- .

Finally, I '*-;,2ld like to acknowlIda.; a mcral debt

to Dr W..lliard .. ton.e, without .h- ': n c fri?'.d-

ain a:' 2nt: i-.- .. debt tc r, ..:;..r.' :.!v, .reA x.'__

r .:es:'T2-. .0 .._cf ,.ijsin s'- i.L- '-.o,:.ics ",'i th ? ":, iv..: :s-.t... o'

:. ,-r,.=j... .i-h, c.: ..icse a:a.:l a;c ....-ce%. : S Z/o': ai d -: c.-.
ihi av,'e bL Esr. i :- r ta '- 3-t i-e .


ACKNOWLEDGMENTS .....................................

LIST OF FIGURES ................. ......................... v

ABSTRACT ............................................ vii


I. INTRODUCTION ................ ................

II. ACCOUNTING AND ECONOMICS .................... 18

Accounting Methodology ................. .. 18
Definition of the Field ................ 18
Accounting Distinguished from
Statistics ........................... 22
The Uses of Accounting ............. .... 24
Economists' Uses of Accounting ........... 30
Macro-economics ........................ 31
Micro-economics ............................ 35


Sombart and the Rise of Capitaism ....... 48
The Origins of Capitalism ............... 48
The Business as Accounting Entity ...... 51
Yamey and the Sombart Propositions ..... 53
The Sombart Hypothesis Brought
Up-to-date ............................. 63
Sombart's Assumptions Criticized ....... 63
An Alternative Hypothesis .............. 69
Accounting, Planning and Control ....... 75


The Economic Theory M odel of the Firm .... 84
The Financial Model of the Firm .......... 103
The Cybernetics Model of the Firm ....... 114
Conclusion ............................... 121



Chapter Page


The Organization and Processes of
Production .......... ................. 130
Investment and Capital ................. 130
Equipment, or Investment in
Capacity ............................. 135
Finance and Working Capital .......... 138
Operations, or Costs and Production .... 141
Sales Revenue, or Distribution ......... 146
The Production Process Accounting
Model of the Firm .................... 150
The Accounting Model Applied to the
Nonprofit Firm ......................... 156
Valuation and Government Revenue ...... 156
The Nature of "Money" and
"Valuation" .......................... 164
Conclusion ........ ........................ 167

VI. SOCIAL ACCOUNTING ............................. 172

History of Social Accounting ............. 173
The Soviet System ........................ 179
The U. S. System ......................... 183
Social Ancopnting Critically
Appraised ................... ............ 187
Conclusion ..................... ........... 198


History and Organization ................. 207
The Period 1947-62 ....................... 213
Progress Since 1962 ..................... 215
The Psychological and Technical
Problems ........ ......................... 219
Psychological Problems ................ 219
Technical Problems .................. ... 222
Conclusion ............................... 226


A New Theory of Accounting ............... 231
Value and Additivity .......... .......... 234
The Importance of Accounting in
National Planning ..................... 240
Conclusion .............................. 243

TABLE- OF CONTETS--.o:'. tin-d


APPENDIX ..................................... ...... 247

BIBLIOGRAPHY ...................................... 267

BIOGRAPHICAL SKETCH ................................. 281


Figure Page

1. RicaidlAan Model of the Firm .................. 88

2. Static Price Theory Model of the Firm ....... 90

3. Managerial Decision Model of the Firmn ....... 91

4. Model of the Firm ............................. 105

5. Model of the Firm. ............... ............ 106

6. Cash Flow Statement .............. ........... 110

7. Information System ........................ 117

P. Organization of a Business in Relation to
Its Operatina Requirements ............... 147

9. The Accounting Model of the Firm ........... 151

10. A Nat:ional System of Social Accounts ........ 188

11. Proposed Model of the Social Product
Acc. ount ....................... ............ 197

Abstract of Dissertation Presented to the Graduate Cou:Lcij.
in Partial Fulfillment of the Rcquireeirnts foi. the
Degree of Doctor of Phil.osophy



Kenneth Samuel Most

June, 1970

Chairman: Ralph H. Blodgett
Dep artment: Eccnomics

The aim of this study is to determf-ine :';b, ho,:; nd;

t-o '..:h'at ex:teit the retlhoo.iogy cf accovntinig has a part to

play in the cc-c-'.ric development of the nmod.lrn state. I .

is argued that acroaniting is more usefuJ..y seen as r la.--

nicng methodology, che control function being derived fro!.i

thr planning function.

The importance of abandoning unnecessary assumptions

is emphasized, in particular, the assumption of profit-

max:<.imrn-i beL.c...'.cr which underlines tradi tio::al work in

account'ina th lory. .' nI'.e accounting theory i- based on

the count an2 th- identification of a:: acceptable set of

belift's concerningg t.he r--al wor?.1o t--o which h it r.must b.

related. Criticisms of accounting e:i.tnatingq tr-cm accu-.nta-Lnts


and economists are stated in order to specify the objections

which a new theory of accounting must overcome.

The "Sombart Propositions" are critically examined,

particularly in the light of Yamey's attacks on them. An

alternative hypothesis to Sc:.bart's view of the rise of

capitalism is put forward, which permits the restatement

of the Sombart propositions in support of a theory of ac-

counting as a planning and control methodology. A trans-

lation of the relevant passages from Sombart's Der Moderne

Kapitalismus forms an appendix to the study.

The foundations of accountingg theory are shown to

rest upon the assumption of price theorists that investment

and production can be studied from the consumer pole. Many

theorists assume that behavioral factors relevant. for a con-

sumer model of the economy are equally rel-.vanL for a prc-

ducer model, in spite of the o:serv..tion that Say's law no

longer applies. The w..a'iknc.s:- which results frc.Tn this error

is the absence of a usable model of a production economy,

in particular, of accepT.ahle beliefs about the i:rganA.iz tion

and processes of cbe firm. Ar. alternative model derived

from corpo::atLor. finance is e-:am ined; this is shc.wn :to be

based on the ass.1mpticnr of a nonexistent :.';.yical "fi."

cf liquidity. The cy'jbernetics models of thE fmin are like-

wise rejected, c.: tlne ,-'oun.d that there onl'y beliefs abut

rea itL ; which the:- :inro.rprrac- are, .in- fct, irncaes of the



An accounting model of the firm is presented. This

model is sho,.-n to have great generality, ard to be arpli-

cable to nonprofit firms, such as government acgncies, inr

both the planning and control phases.

The two principal approaches to social accounting

are examined in the contexts of the U. S. an, Soviet s"sttems;

these are seen to display the same defects ats are found in

business accounting theories. The accounting model of the

firm is shown to be adaptable to the prcductiorn econoCm' cf

a nation, leading to the conclusion that natioinl F rc'uct

and national incor.e are distinct concepts.

The French ex_.erimennt in using accounting explicitly

as a social planning and control in.-trzument 1.S d.scrib-ed

and evaluated. IL is chow.'n th- t t-he moc.del. thi?

French experiment is. essentiall y th, scame as th.e ccoL;iting

model presented in this study.

In concluilion, conventi.-nal criticisms of accountiLng

are refuted. The error in'.'cled i.n viewing v'a]uatio;: as

measurrremvent, akin to those meas:urerLnnt.s used in the physical l

sciences is in relation to the aiddi-tivity f

values, and it is asserted that, since all values ar- sub-

jective, objectivity lies in ijterpc.rsonal., agreeiLment and

not in existe-Itial phenomena. The study points the

direction in which h a developing mc.oern state wouldl d be able

to move with t:he 3id of accoun.tir L' menci'.cdology.



The aim of this study is to determine why, how and

to what extent the methodology of accounting has a part to

play in the economic development of the modern state. It

will not be necessary to assume for this purpose that ac-

counting methodology plays a principal part in such develop-

ment, or a major one, nor need we devote attention to those

other methodologies which have a claim to be considered in

this context, such as the DoPmar--Harrod. growth models, the

econometric models of Klein and Tinbergj--., or the models of

"optimum theorists" such as Von Neumann, Samuelson an;

Morishima.1 7t is not even necessary to exclude the rale-

vance of simple macro-economic models of the so-called

"classical" and "Keynesian" types. Each of these method-

ologies is potentially useful to the analyst and planner,

who will presumably consider all available mathematical

models, including those of linear and nonlinear programming,

simulation and probabilistic str ateies, and a variety of

others both heuriscic and strchast-ic, to in the

proc:s..c;: of pLanning and control. I-:e r f h s will be

exarin,_,d h.r, and we shall be ccnce'rred .-clusiv.'.;l ith

- -

- 2 -

It is common knowledge that acco'.:nting has flourished

in those states we categorize as prosperous, and that, as

their prosperity declined, so did their accounting. Typical

was the situation of the pre-Christian Chaldeans ar. Greeks,

who left many records of their wealtri and economic trans--

actions in a form which can be recognized as accounting,

together with descriptions of their accounting and auditirn

methods. The post-Christian dark ages, which began when

Goths and Vandals disrupted established patterns of inter-.

national tr-ade, drove this tradition underground; it e!erfclen

only after the Crusades reopened thc old trade- routes to t>.

East. Modern dates from the Renaisrance ricL-

the Crusades made possible.

Students cf the history of accournLir.rg tende.

to see itz rol.-- in ancient and medleva] tiu.ies primarily in of the stewardship of wealth. According to this

hypothesis, the creation or accumulating of we-ilth lead

to the formation ot institutions for its preservation, :.nd

with th.em goes a respLonrsbili cy to account frc the p;-:cces

whereby the wealth is ad ministe-re-i. This hypothesis urndr-

lies the 'various "inveestor" t a iiEL ;Ci cO2i.; IL.rnL --Z- i ..I

proprietary thocry, the entity theory the- fund theory, a-.d

so on. As a v.ypc.hesis, it purpcrts to 'xlaii the d-eve.Lp-

Tment of accounting at. the level of the institutions with>i;

the state, th!e stcata itself, and even ;t.-?_'-t:-.tionall- as,

for ex;, in baladn'e of p a'.yr.ernt accouintng.

- 3 -

There are, however, a number of modern instances of

political recognition that accounting may have a significant

role to play in the process of economic development. Per-

haps the most striking is the French National Accounting

Plan following the second World War. Prior to that war the

French people had enjoyed what was in some ways the highest

standard of living in Europe, but they ended it with their

economy at a standstill, and much of their capital destroyed.

It was evident that any postwar government would stand or

fall on its ability to restore per capital income and con-

sumption to their prewar levels, in a fairly short space of

time. One of the first legislative acts of the postwar

French government was to establish a National Office of

Accounting in the Ministry of Finances, v.hich proceeded to

regulate the practice of the profession of accounting and

to lay down a framework for accounting at the macro- and

micro-economic levels, with the aim of strengthening its

functioning in government, industry and trade. Similar

tendencies, albeit less marked, can be seen in Holland,

Greece and Japan and other countries Dttemptrinq rapid

economic develorn-ent: it is also noLe'.orth'y ,tnat some

former Eritish cc.ooniial anid roteL, terrlt;ori.'s cre tr'ave.l-

ling the s:mire road, for e::a::i~ le., Singa. orre and ai;l5.ysia..

It ra, pp; cs, that the Lte.; ar .-, hip ro.- may a

considerably loss important par't in these che.e than

- 4 -

the traditional thaory would imply, and that accounting as

a tool of planning and decision-making, which historians

suppose to be a relatively modern development. should be

given precedence in any theory of accounting. David -'.

Linowes recently commented2 on his experiences during visits

to three developing nations. He found that leaders in those

countries envisaged a more extensive role for accounting than

wouJd be recognized in the United States. In particular, he

drew attention to the view that accounting should be part or

the central planning- process which such nations find essen-

tial to rapid expansion of industry end agriculture a vie..

which can also be identified i:- the unified budgetary systems

of the centrally planned economies of E stern Europe. Linowe.-

referred to his own particip.saion, under the auspices, of the

U. S. StaLt Dtepartment or the United Nations, in missions to

Turkey, Iran ard Pakistan, aimed a-: stabl....hing accounting

professions in those countries.

It was brought home to himi in this work that th-e

scope of ac.=co;ting' had to be broadened to include the meas-

urement of available resources and control of their use.

In develocin.g countries, the problem of providing planners

with adlequate information becain:- crJtical, and could be

resolved by the use of accou-tin- de-ta; hence the. urgency

and import-nce. of creating an accounting procession. A

sirmil.r conclusion *.as reached bc 'tEen a a result of

5 -

his experiences with the Investment Department of the

International Finance Corporation between 1964 and 1967.'

Enthoven starts from the investor theory of accounting and

ascribes the growth of accounting in modern times tc its

usefulness for showing the effects of changes in wealth.

He sees cost accounting as a separate and recent development

which culminates in "management accounting," and the second

of the articles cited describes the many ways in which

management accounting can be used as "economic development


We see frcm this the paradoxical situation that

greater importance is placed on accounting for poor and

developing states than for wealthy, established ones, and

this observation throws doubt upon the validity of thlse

theories which treat accounting as primarily a record-

keeping and repoL-:tii.g function. We sha'.) therefore advance

an alternative hypothesis, namely, that the methodology of

accounting constitutes a conceptual framework, of the nature

of a nonexplicit behavioral model of a closed system, designed

purposely for planning and control functions rather than in

the light of caz..Ilactic or custcdial needs.

In Chapter :I we shall atte:-;t to delinrate t.he

field of accour!t.i:r.g ani establish its links w,.itIL economic

science; in .ioing this we shall cldr'.a att-entiorl to con-

flicting views concern-ing he usefulne~ s : f a.ccu"t:inl.-

- 6 -

Chapter III will be devoted to a critical evaluation of the

Sombart proposition, that accounting was a necessary factor

in the rise of capitalism following the European Renaissance

in the thirteenth and fourteenth centuries, which has, ob-

vious ielevcnceu La our hypothesis. In Chapter IV we shall

identify the assumptions which underlie some of the more

significant contributions to accounting theory, and the

reasons why it has proved impossible to build a consistent

theoretical structure upon them; in Chapter V we shall exam-

ine another model, which is capable of reconciliation with

accounting theory and practice, which is consistent with

the relevant parts of economic theory, and which supports

the planning hypothesis. This chapter will also show how

the model can be applied in the important area of control

of public expenditure. In Chapter VI we shall discuss the

implications of the model for social accounting and the

representation of the national income. Chapter VII will

describe the French experience with a uniform chart of

accounts, and in Chapter VIII we shall state the conclusions

we derive from this study which may be of interest for the

economic development of the modern state.

We shall endeavor to make clear our assumptions at

appropriate places throughout, but a preliminary word on

the general nature of the problem involved may be apposite

here. The conteCmporary taste for an axiomatic approach to

- 7 -

the development of theories in the behavioral sciences has

had several unfortunate results. In the first place, we

see a tendency to assume that the required axioms are

relatively few in number; this assumption seems to have

made its way into accounting theory from economic theory,

and into economic theory from the physical sciences. Quite

apart from the question of scientist, this assumption does

not appear necessary for the conduct of our inquiry, and we

shall not rely upon it.

In the second place, we may note the rise of

"methodological nominalism," a term coined by Karl R. Popper

to designate the assumption that usefulness in prediction

is the criterion by which to evaluate an assumption.4 This

viewpoint has been adopted by Milton Friedman,s ,-:ho argues

that an assumption is admissible if it leads to conclusions

which predict successfully better than 50% of the observa-

tions for which it is used. Friedman provides an illus-

tration of the use of such an assumption in the statement

that "the distance travelled o- a falling body, is equal to

one-half the gravitational constant iultiplied l:-y the square

of the time the body falls," *:ic.ich depends ipon the unreal-

istic assumption that the object is falling in a comTlet.


We shall distinqiuish between :nthodologicai

assu: options of this type, reser.blingg th.-e .-. t. .; a. -'n:.~"

- 8 -

assuormption used so successfully in economic theory and th-;

"going concern" assumption of accounting theory, .nd

behavioral assumptions, particularly those which inv.ol'.-e

attributing behavior to concepts. The former ar-: intrin-

sically equal, and choice between them can .nl.y ba made on

the basis of usefulness; scientific progress is a continuous

abciandorinenL of assumptions which have cutlived their use-

furless. Behavioral ass,-mptions, on the other hand, are

al.w:iys true in the sense that corresponding behav-ior can

be observed in people, yet their usefuln.-:es ca n IIevr:r -

demonstrated. 6 To say that businessi-.en are :rot.ivated tc

maxiaii:ze profits, or '.:-eaith, i.s demonstrably correct, no

matter how~ these concepts are defined, -,t this is quite

inade-luate for explaining actual decisions unl-es roedu.e:l

to a taultology. To say that connsumers- L- marcximi;e

utility leads to a cimpa.rable impasse. To s',eak of public

expenditures or busine-ss costs "behaving" in certain ways,

by contrast, is pure anthropomrorphisrL:..

W... shall adopt the viewpoint that behavioral

assuirnticr.s re ort intrinsically equal; some assumptions

are better tha-n others. Not only ,.ust they be empirically

dercrnstrable, but it must also be shown ::.actly how. they

affect any result obtainc.d. 1W shall therefcre not: start

with assu:np ns of utility- or profit-r.a: i..izat i.on; th:!

specific reason for the latter '.i.ll Fb excp]a i.ned later e ri

- 9 -

this chapter. Nor shall we make all the other assumptions

economic theorists consciously incorporate in their price

theory, which underlies most formal work in economics and

on which accounting theorists, often unconsciously, base

their systems of ideas. We shall assume the fundamental

institutions of private property, a degree of freedom of

enterprise, and the relatively unrestricted operation of

a monetary system. We shall also assume a scarcity of means

relative to ends, as this lies at the base of all value

theory, and take as given the distribution of capital and

income and a large measure of economic stability. All of

these can be readily identified as features of the modern

"mixed economy" state, and,indeed, we shall attempt to

show that some of the problems which arise when communist

states turn to accounting methodology can be attributed to

the absence of one of these features.

We shall not assume certainty, pure competition,

full employment, homogeneous functions, discrete time periods

or products or factors of production, or diminishing returns

to factors or to scale, nor shall we require assumptions of

constant prices, resources, incomes, tastes, products,

.capacity, technology, taxes or subsidies. In particular,

we shall have to discard the assumption that everything

happens instantaneously, for time, as a mental construct,

enters directly into our field of observation and affects

- 10 -

our results. We shall make an assumption of rationality,

in that we shall require actions to conform to the physical

and institutional constraints perceived by us, and co any

postulated objectives of the businessman, civil servant or

other decision maker. It is hoped that this will not lead

to tha teleological assumption of rationality which Veblen

criticized so severely, and which the foregoing discussion

was designed to avoid.

It may be argued that the failure to base our study

on :more rigorous lines lays us open to the charge of o'.er-

generalization. This issue has been faced before by the

French economist J. Marchal:

In atLtempting thus to reconstruct price theory on a
more realistic basis, by taking into account all the
complexities of human nature., by classi-.'ing according
to the form anC strucLure- of markets, by introducjng a.
reaJ time element instead of a: b.'r .ctio, n r'ns
the indisputable risk of producing a less rigiro:s
construction, on less pure li:ine, iand oiiln wh%:ich 'ic"y
disappoinc all those who have been serducedJ by the:
simplicity and perfect-on of the classical analysis.
But one can hope, at the same time, to produce a theory
which connects better, not only .with the theory cf
general equilibrium and the theory of business cycles,
but with all that we know of systems and of structures.'

Abandoning a profit--maximnization assunuption will

be particularly distressing to Anmerica! (arnd -u.str.alian)

accounting theorists. With the possible exception of one

or two works on economic accounting, all of the writings

of these theorists assume that the centerpiece of their

theory must be the- corporate financial st=atemeits, and that

- 11 -

the principal aim of accountants is the measurement of

business income. We do not share their view of the impor-

tance of the corporate financial statements; just as regular

political journalism in England began in the Civil Wars,

when King and Parliament competed with one another in

writing, so the financial statement, as we know it, originated

in the struggle of the nineteenth century industrialist to

finance his manufacturing plants. His need fox publicity

in this connection was hardly less acute than that served

by the political journalist in the other. But a newspaper

is not literature, and a balance sheet, even with a profit

and loss account attached, is not accounting, and any attempt

to formulate a theory of accounting which requires such an

assumption is virtually certain to fail. The manner in

which this failure has so far manies'ed it.-:-l'f. wiii be

described in due course; at this point .!'e ,hL-l. restrict

ourselves to identifying the under..ying cause.

The logical error made by both -.ccon:tiLn and.

economic theorists i., to confuse the probl]..ns of production.

with the problems of consumption. prelirrrnaL.rv obse2rvatior

establishes these t.'...o poles of econcruic- acti'viit, whichh

have nonecorno;ic foundations and to %,whic all action must

be traced if economic phenomrena are t'o be analyzed for

purposes of proedlction and lann'~r.j. Th t,,,ypic imace

of an economy looks like this:

- 12 -

Factor Markets



SProducers Consumers )

Goods and Services

~ Payments

Product Markets

Having taken this first step, the theorist proceeds

to conduct his analysis from the standpoint of one of the

poles, namely, consumption, and the motivations of producers

and consumers are found to manifest themselves in essentially

consumption terms--maximize income for the former, satis-

factions for the latter. There is no reason, however, why

the motivations of these two classes of activity must be

expressed in terms relevant to one of them; otherwise put,

there is no social mechanism, at the present time at least,

which can ensure that production and consumption are

simultaneously determined. Say's law does not apply.

That they may, and even must, be brought into some kind of

a relationship through time and, in a long enough time

period, can be brought to equality, is admissible, but the

essentially distinct decisions involved must be treated

separately in any formal analysis.

- 13 -

If we were to concern ourselves with behavioral

assumptions, we should be obliged to postulate that the psy-

chological forces underlying production decisions are dif-

ferent from the psychological forces underlying consumption

decisions, because the producer seeks to cater for the

satisfactions of others, while the consumer seeks only the

satisfaction of self. This would permit the same individual

to behave differently according as he was acting in his

role of producer or consumer;9 it would also help to underpin

the argument which is conducted in Chapter VI in favor of

a restructuring of the national income accounts. The dif-

ferent functions of money, which tend to confuse the mone-

tary theorist who thinks in consumption terms, can be

readily fitted into a conceptual framework which s=u3 some

of them as producers' functions and others as consumers'.

We shall not pursue this line of inquiry here, as we find

it unnecessary to rely on behavioral assumptions of this

kind; we simply observe that some individuals undertake to

produce goods and services to be consumed or otherwise

utilized by others. Nevertheless, we cannot resist the

temptation to draw attention to a similar statement which

has recently been .,iade by a noted behavioral scientist.

Urwick has reconsidered the basis of Douglas

McGregor's contr.asing theories of human behavior, known

as Theory :. and Theory L. X assumes that man is resistant

- 14 -

to changes, and that he will only implement managerial

decisions if rewarded or punished for refusal. Y assumes

that man is basically goal-oriented, and that he will

support changes if they can be seen by him to help him to

achieve his goals. Urwick points out that man as a consumer

is not allergic to changes, but as a producer he is more

cautious, because of a fear of losing the source from which

his consumption flows. The trend of modern life is to

separate the functions, not only in production terms, but

also in social situations--men and unmarried females produce,

wives and children consume. The whole economic process con-

sists in relating the behavior of the individual consumer

to the behavior of the same individual as a producer or

distributor. This he calls Theory Z, and he demonstrates

by means of a diagram the points at which a lack of coici-

munication may make itself felt.'0

It is easy to see how the income (= profit)

maximization assumption, which was found necessary in

order to explain production in terms of consumption, led

accounting theorists to seize on income determination as

the prime objective of accounting; the observation that

the bulk of accounting work lay in the commercial area of

production and distribution provided an additional support

for this hypothesis, and the inconvenient fact that ac-

counting had its origins in the public sector was suppressed,

- 15 -

or treated as an oddity. The choice of income determination

as a prime objective was particularly unfortunate since

business net income (in this context, profit) is a residual,

the result of offsetting value movements in two opposite

direction n, -nd as s uch inherently incapable of ana lysis

In this study we shall substitute the production concept

of profit for the consumption concept of income wherever

the context calls for its mention, and refrain from a

profit-maximization assumption, not because of the demon-

strated difficulty of making such a construct operational,11

but simply because it is unnecessary for explaining the

role of accounting in economic development.12

The philosophy of this study has been expressed in

the following words:

An accounting system is not a failure if it does not
present data in a way that will most please everyone,
but it is a failure if its accounts do not enable the
greater part of persons interested in them to glean
facts for a variety of problems.'3

It is one of the main objects of this study to show

that it is possible to formulate a theory of accounting

which is equally relevant to financial accounting, managerial

accounting, tax accounting, social accounting and corporate

accounting, and which is equally applicable to all types of

institutions, public or private, to human individuals and

to households. In this way, the complexity of modern

economic life can be seen to be manageable with the help

of the accountant.


1. J. R. Hicks, Capital and Growth (New York and Oxford,
1965), reviews and compares these models.

2. "The Role of Accounting in Emerging Nations," The
Journal of Accountancy, Vol. CII (January, 1969),
p. 18.

3. Adolf J. H. Enthoven, "Finance and Development,"
International Monetary Fund, Vol. 6, No. 2 (June,
1969), pp. 16-23 and Vol. 6, No. 3 (September, 1969),
pp. 24-29.

4. The Open Society and Its Enemies (Princeton, 1950).

5. The Methodology of Positive Economics (Chicago, 1953).

6. For a discussion on this point, see Gunnar Myrdal, The
Political Element in the Development of Economic Theory
(Harvard, 1955), pp. 200-201.

7. J. Marchal, Le Mecanisme des Prix (Paris: Librairie
des Medicis, 1948), p. 15 (our transl.).

8. J. A. Schumpeter, The Theory of Economic Development
(New York: Oxford University Press, 1961), pp. 4-5.
(First pub. 1934.)

9. In private conversations with the author, a psychiatrist
has observed that one of the common features in serious
marital disputes is the presence of two fundamentally
distinct attitudes to money. The wife sees in money a
means of payment, the use of which is to acquire con-
sumption goods and services; the husband sees it as a
unit of measure which is useful in planning the pro-
duction of goods and services for future consumption,
often by the wife.

10. L. F. Urwick, "Theory Z," Advanced Management Journal,
Vol. 35, No. 1 (January, 1970), pp. 14-21.

11. R. N. Anthony, "The Trouble with Profit Maximization,"
Harvard Business Review, Vol. 38 (Nov.-Dec., 1960),
pp. 126-134.

- 16 -

17 -

12. It is interesting to note that Chambers; with whom we
shall find ourselves in marked disagreement, identified
this problem without addressing himself to its solution.
He wrote, in Accounting, Evaluation and Economic Be-
havior (New Jersey: Prentice-Hall, Inc., 1966), at
p. 66: "The goals of production and consumption are
different in kind, and entirely different modes of
behavior may be observed as a man's calculations shift
from one role to the other. . Entities engaged in
trading, manufacturing, and ancillary operations may
thus be deemed to have no consumer role."

13. John P. Powelson, Economic Accounting (New York:
McGraw-Hill, Inc., 1955), p. 10.



Defin ~t itio: of the Field

For the purpose of this study it is. not necessary

to define "accoLun'inr" narrowly. In accounting. as in

other fields of empirical inquiry, we analyze trhe relaticn-

bet\etn observable data,' and we shall assume that in this-

field we find a number of problems thrc...'n togq'ther for

convenient preference, -the cc:rrnmn fe-ture beii:g the us2-, of

a particular methodology to solve th;r.. In par'-.cul-r,

we do not assume that "double--n"tr,'y" is a r.ce.ssa element

of accounting; scnc- ~lwe posculaer the fact that accountants.

make as many entries as are required L' the purposes of

their analysis; the- popular precccupation ,-:ith double-entry

bookkeeping is a mere historical survival. It also leads

to unfortunate metaphysical speculations, such as Miattessich's

treatment of the "duaiicy principle."' No orne, apparently,

disputes the inclusion of single-entry accounting in the


A method may bc defined as a family of models. and

a model as a construction in which selected elements of a

state or processs ..hich -e desire to investigate are. ccmblned

- 13 -

- 19 -

in order to study their interrelations and interactions.

The account is a model in this sense, being a construction

in which movements of values are combined; the concept of

"value" will be examined in more detail subsequently, and

here it will suffice to say that we mean by this term a

representation in money. The bilateral form which we are

accustomed to think of as an account, since it is invariably

used for illustrative purposes, is no more essential to the

model than the wheel to transportation, but it is useful

for didactic and expository reasons.

The characteristic features of the account are:

the name of the value, the description and dimensions of

a two-way flow (in and out, or from and to) and the dates

of the components of this flow. `.y ar-angir.. ths.c elements

in a significant for.c. :. can see the result of the flow

through time.

Name of the account

Date Flow in (from) AmountjDate Flow out (to) Amount

The quantitative representation of the result of

the flow is called th'ie .ba, ac7 ; it may be < C. There is

no particular iarificance to the fact that inward flo',s

are shown on r.h- left-hand (debit) side and cut'.:a'd fo'.-.s

on the rilht-h.r.nd (credit) side, except that consistency

calls for a rule, and the one in use appear, to offer

pracr.ical ad;antage.s.

- 20 -

The model has the virtue of ubiquity; it can be used

at all levels of aggregation. Just as we can imagine an

account for a particular economic value, so we can imagine

an account for the totality of values of a selected kind,

or even for all values moving within an identifiable

economy. This feature permits both aggregation and disag-

gregation to be performed within a logically consistent


In order to construct an account we require a

written language, a model of time, a currency of account,

the technique of addition and one or more valuation models.

The first four present no special problem; we can use any

language, the universal calendar and any currency, even

an artificial measure like the Egyptian shat which had no

circulation. The choice of valuation model is more dif-

ficult, since it brings us face to face with the problem

of value. The Aristotelian concept of an equivalence of

what a man gives and receives is clearly attractive in this

context, and we shall see that accounting theorists and

practitioners have relied on it to a great extent. It has

long been realized, however, that since "both parties to

an act of barter or sale must necessarily gain by it .

there can be no equivalence between the 'subjective' or

utility values of the goods exchanged or between the good

and the money paid or received for it."5 We can agree with

- 21 -

Schumpeter that "metaphysical speculations about objective

or absolute value" can be dispensed with. A valuation

model is defined here simply as a construction which per-

mits quantitative representation in money, that is, the

assignment of currency units to an object; thus, the ob-

jective value of a good or service is "the magnitude defined

and nothing else."6

We should note at this point, however, the cost

theory of value attributed to Duns Scotus and St. Thomas

Aquinas, under which the "just" price of a thing is equated

with its competitive common value and called its "cost."

The term "cost" has at least three different meanings in

accounting; it may mean depending on the context, value in

exchange, value in use, or necessary sacrifice. The same

situation has arisen in economic theory; the "ju.;t price"

becomes variously a quantity of labor (the labor theories

of value), opportunity cost (value in the next best use)

and replacement cost (sacrifice involved for the possessor

if he were deprived of a good cr service and wished to

recover it). It is easily assumed that some of these con-

cepts are more objective than others; we reject this as-

sumption, and postpone examination of the concept of cost

as a surrogate for value to a later place.

- 22 -

Accoz, ntiz',n' D S tZtIngi-. la from S3 a'i8s ic- s

It wi.l be seen that accounting is a branch of

numerical analysis applied to economic activity, and some

writers have viewed it as a branch of statistics.7 It is

clear that accounting data are available for statistical

uses, and both macro- and micro-econcmi c studies have pro-

ceeded from this observation; business statistics include

accounting data together with other measurements. Scott

looked for-ward to an integration of accounting and statis-

tical processes, and postulated as the logical outcome of

this "evolution" a "consistent hierarchy of rules and

principles proceeding from the specific and detailed to

the more and more general until the broadest accounting

principles mer;ed into still broader p-:incip]es of :-;ocial

organization. while it is not disputed that accounting

and statistics are related r.etho.:ilogies, or that both car.

find a place :within a socio-economicnic conceptual framework,

it is important here to establish the diffe-rences between


In the first place, statistics (as the name implies)

is esSentially static, whereas accounting, as we have shown,

is chased on dynamic elements. A static mcdel is one in

which important variables are assumed to be unchanginq,

and in this sense all models have static aspects, including

accounts. The :key variable in this context, however,

- 23 -

is time; whereas statistics abstracts from the effects of

time, accounting expressly includes time by dating all

observations. Again, static models can be made dynamic

by dating procedures, but the basis of the distinction

remains; statistical method does not always include time

as a variable.

Secondly, statistics is "State Arithmetic, a system

of computation by which differences between individuals

are eliminated by the taking of an average."9 "For the

most part, Statistics is a method of investigation that

is used when other methods are of no avail."10 Statistical

method is required when we are faced with a large population

and are forced to assume that the average (however computed)

is representative of the whole. Gini has complained that

modern statistics displays a growing propensity for

formulae, which he looks upon as a sign of weakness in

statistical method; he believes that the representative

assumption is too readily made on inadequate evidence con-

cerning the population. i The characteristic feature which

distinguishes accounting here is that, given a definition

of a value oL set )f values, it is possible to pLoceed to

manipulate those vaiiues through time without any of the

assumptions of consistency and comparabilicy which Ire

essential to the operation of! th-- la-.-s of chance, to

correlation an'- the sta.ndar deviation, and to those

- 24 -

other mathematical models which we group under the heading

of "statistics."12 Thus, statistics begins where accounting

ends, in that, given assumptions of consistency and com-

parability, statistical method can be applied to accounting

data~ We may refer to financial ratio analysis as an

example of this.

Thirdly, and in contrast to statistics, accounting

is holistic. We shall observe in the next chapter that this

has not always been the case, and that early forms of ac-

counting were based on a selection process similar to that

which characterizes statistical method at the present time.

In using statistics, we start from a hypothesis concerning

the key variables to be studied; in accounting, we devise

a closed system within which all identifiable economic values

can be accommodated, no matLer how little they mray appear at

first sight to affect the result. This brings us to the

fourth difference; accounting methodology includes models

which prescribe the manner in which observations are to be

made; this is the subject-matter of bookkeeping. The rules

and techniques of bookkeeping cannot be divorced from the

subject of accounting, which may be the reason why they

are so often confused.

The Uses of Accounting

Accounting theory is teleological, and as Schumpeter

has pointed out, teleology may be a proper manner of

- 25 -

approaching the study of purposive human actions. "The

improper use of teleology consists in exaggerating the

extent to which men act, and shape the institutions under

which they live, according to clearly perceived ends that

they consciously wish to realize in the most rational way."'3

If "it is not possible to draw a theoretical line

between economics and politics in the manner and with the

significance so much stressed by most economists in their

methodological discussions,"'4 then it is perhaps advisable

to adopt an express empirical hypothesis concerning this

point. We shall use initially the mental construct of a

policy-maker who is at the same time a planner and an

executor of his plans, and concern ourselves with the con-

ceptual framework of this hypothetical businessmann.3 At

a later stage we shall see what modifications the analysis

must undergo if we introduce a separation between policy-

making and planning, and between planning and execution, as

well as a plurality of decision-makers. This device will

permit us to abstract from behavioral factors, such as

motives and goals, while retaining the general idea of a

purposive human being (Chambers' "actor"'6) in the context

of a given socio-political environment. The danger to be

avoided is i].licit csychological reasoning from the indi-

vidual to society as a .'hole.7

- 26 -

We face here a number of philosophical alternatives.

If prediction is meaningless, ;we have no subject for study.

If prediction can be made deductively, not frcm experience

but from some general principle or principles alleged to be

logically certain, as in modern theoretical physics, we

must: establish the axioms which will underlie our theorems;

such behavioral axioms must be derived from observation of

man in society. Or, we can make generalizations from

experience which, while they can be valid inferences, ars

not made with certainty; in this case, traditional deductive

logic would appear to be inapplicable. Finally, we can

subscribe to an induction-deduction process of reasoning

from the present to t'ie future, such as characterizes what

has become known as "the sciantifir: method." r' all cases

a description of the environment must be undertaken, and

it is to this task of Jistinguishing the historical from

the logical that we now turn.

The fact that accounting has invariably been

asscciatcd with societies where business has floirishe:- was

to Hatfield "so obvious that I offend by explanation."

He was referring to the latter part of the 19th century,

and to A Ierica, England and Germany; we wish to show thac

this observation can be extended back through time as far

as history will take us. Scotland in the 18th century,

the Low Countries in the 17th, Florence in the 14th, Genoa

- 27 -

in the 13th, Rome at the birth of Christianity; Greece,

Egypt, Persia, Babylon and elsewhere in the pre-Christian

era-all of these civilizations were characterized by a

developed structure of trade and industry, and have be-

queathed to us accounting records.19 "Wherever trade

flourished, the practice of double-entry could be found,

lending colour to the views that trade followed double-

entry, or that double-entry followed trade."20

Again, we can verify the fact that accounting did

not develop or occupy a significant role in ages and places

where trade and industry were subordinated to conquest and

military adventure, where the aristocratic ethos took

precedence over the bourgeois, no matter how wealthy the

peoples concerned may have been. Spain and Portugal. in

their glorious centuries, feudal Europe in jtr "dark ages,"

the ancient empires of Ghengiz Khan and Attila the Hun, have

left us no legacy of accounts.

Obviously, accounting was a result of the invention

of money, and the origins of both are lost in the mists of

antiquity. Discussing the need for a metallic currency in

pre-capitalist times, Sombart says:

"Now, a money econonrL. accustcms people to look at the
world in a purely quantitati-.e way. '-Jlhen the habit of
applying money LIs a canon or rule -for all things ,ias
grown for years and centuries, tih natural &ttitcde
of mind which regards the iriherent and c'alitative
differences in things die3 out. Arit:r,-l:.eic.l valuations--
weight, .maszs etc.-c-ome tc be taken as a matter cf course
in everyday li-fe."''

- 28 -

We need not accept Sombart's assumption that the

quantitative and the qualitative are mutually exclusive to

see the point of his observation. There is a well-known

hypothesis that writing began in Sumer before 4000 B.C. as

a symbolic accounting, to keep temple records of goods

received and issued.22 It is, therefore, not entirely

fantastic to see the origin of a quantitative approach to

life in a need to keep accounts. Wherein lay the basis of

this need?

The customary answer to this question points Lt che

stewardship function, a requirement to account for the

stewardship of wealth. A typical view is that of Richard

Bro;nr, in his classic work on accounting history: "The

development ct social life and especially the for;.-a;:-.on

of states o severeignties levyirg any foLm o" .axacion

necessitated . a power of hiding count and rcckoniccg.

In this we find tne origin of the science of accoL:ntin-r."'-D

And later, on the subject of au-iting: "Whenever tie advance

of civilization brought about the necessity of one .man being

entrusted to some e::tent with the property of another the

advisability of some kind of check upon the fidelity of che

former would become apparent." 4

It would be tiresome to trace the recurrence of this

theme, but we may note the recent statement, by a prominent

accounting educator, that accounting today is investorr

- 29 -

oriented"; he also claims that this orientation has

prevailed "throughout most of the history of accounting."25

The similar observation of Enthoven has already been men-

tioned.26 We have rejected this hypothesis, however, since

several contradictory observations have rendered it unac-

ceptable. In our view, the following alternative hypothesis

accords better with the evidence.

In order to accomplish his objectives, man develops

conceptual frameworks consisting basically of representations

of reality-models-in a form which permits their.elements

to be manipulated for the purposes of prediction, planning

and control. Should I wish to spend my evening at a

particular cinema, I can identify a set of conceptual

frameworks required: a linguistic structure, a knowledge

of certain technical equipment, a monetary system. We may

consider additional quantitative models of this kind: if

I am to arrive at my destination, I must possess a geograph-

ical conception of the area in which both I and the cinema

are situated; in short, a mental or physical map, complete

with distances. If I wish to be sure to see the whole

picture, I must also have a system for measuring time,

which must be identical with that used by the operator of

the tnt-:. All of there are abstractions.

It is sugestci that accounting is a combination

of ccnceptu-l frae.:'-;orks, including hose of language,

- 30 -

money, time and arithrretic, used by businessmen in their

relations with each cther, for purposes of prediction,

planning and control. If this is correct, then the

stewardship function of accounting can be seen to occupy

a secondary role, in importance and in time, to the role

of accounting in economic development, for example, the

creation of wealth or the achievement of such other goals

as may be identified from the behavior of businessmen.

F., o*' O i s s Kses o A'f, o '.4 .. y:,

The 20th century interest of economists in

accounting can be viewed as arN aspect of their cortinuingg

effort to "grasp the economic order as a unified whole and

to comprehend all its InanifesLations in a logically coherent

system'."'' If we accept Myrdal's subsequent argum'.ent, tlat

economic theorists have a concern for the imiprc"ement of

human welfare, it is not inconsistent to assert nhat they.

are interested, in the first place, in describing and

explaining the w'.orld as they see it.

The work of the marginalists in the 19th century

culminated in the general equilibrium models of Walras and

Pareto. which demonstrated again (for the point had already

been made by the Physiocrats) that all economic actions

are interdepndent. Influenced by thiF need for a

holistic vie4, economists have relied largely upon price

- 31 -

theory as a conceptual framework to contain their

observations in all fields. It is possible to discern,

in the 20th century, a renewed interest in accounting as

a complementary aid in grasping the economic order whole.


A striking feature of macro-economic theory in the

second half of the 20th century is the use of accounting

methodology for planning and control at the level of the

state: ". .. a method of obtaining an over-all picture

of economic activity is essential. This is the function

of the national income accounts "2

The first four chapllers of the typical macro-economic

textbook from which this quotation is taken are devoted to

the accounting fre.rnew.rork and its relation to the "super-

structure" cf Keynesian economic theory within which it

can be placed.29 The general acceptance of this approach

can be traced to the work of several economists (notably,

J. R. N. Stone and J. R. Hicks) -..ho, in the 1910's, dre....

attention to the possibility of presenting in this form

quantitative data fcr macro-economic studies. At the same

time, a didactic purpose can be discerned:

S the chapters on definitions, which formed so
indigestible a portion of the old te:.:t-books, hia.. been
kindled into life by the ...ork of economic statisticians;
and also bL-. co:e of the ne,..:er developments of economic
theory. They hav'.e gro'.n intc a distinct branch of
ecor.omnic:, a branch w'.!ic.' is being pursued w.itth very
special success at the present tin, and which h is,

- 32 -

nevertheless, particularly suited to serve as an
introduction to the science in general. If we want
a name for it, it might be described as Social Account-
ing, for it is nothing else but the accounting of the
whole community or nation, just as Private Accounting
is the accounting of the individual firmn. 3

The accounting approach to macro-econoTics is not

an entirely new departure, having also been attempted by

the Physiocrats in the 18th century; Mlattessich has den:cn-

strated the Tabs-ec: E-co oiqu as a rudimentary system of

national income accounts." Studenski identified 50 national

income estimates for Britain and France down to the end of

the 19th century,32 and a nur.urber of other Eurocpan countries,

as well as the U.S.A. and Australia, e.-:perimented in this

field prior to the 1930's. Several factors cobi.nred to

concentrate achievements ir. economic accounting, ore of

which is certainly the wSritings of Fish.erh. 'ich

will be discussed later. Much theoretical w'or. .-:as done

in the 1920's, notably in the U.S.3.R., hicic e.-tablished

national bu-dgets and centralized accounting. control aLter

the 1917 Revolution. The great increase in the size and.

scope of gcuerrnment activity after 1900 led the countries

mentioned to collect statistics which had not previously

been available, and the extreme economic fluctuations which

accompanied 7orld .-Jar I, the boom of the 1920's and the

Great Depression, focused attention on the need for data

to support ccnomic forecasting. It is noteworthy, that,

in reply to criticisms raised by Kunr:ets, a group of

- 33 -

economists and statisticians who had been involved in the

formulation of the U.S. scheme of national income accounting

placed emphasis on the analytical, definitional, pedagogical

and statistical benefits to be derived from collecting this

data in the form of a system of accounts.33 The objectives

of prediction, planning and control underlie these technical

considerations; at least we can assert with some confidence

that the stewardship concept is not much use in this instance,

since it is impossible to determine who is answerable to

whom for the custody and administration of the national


The use of accounts for planning purposes is not a

new feature of government; it is frequently forgotten that

businesses took the practice of budgeting from the public

sector. Accounting for public fundr was known in the

kingdoms of the Nile and the temples of ancient Greece;

one of the fascinating byways of European history reveals

the English, Norman and Flemish rulers using accounts in

the process of converting their tax systems from a commodity

to a money basis. Public finance theorists have long used

government accounts in their empirical studies; we shall

consider the limitations of this source in Chapter V. We

may also note here that the mainstream of ideas in modern

public finance can be traced to Sweden, whose King operated

a double-entry budgeting system on the accrual basis for

- 34 -

the state treasury from 1623 on:..:ard. Enthoven makes

reference to the fact that Simon Stevin's interest jn ac-

coUnts was stimulated by the efforts cf the Dutch princes

of the 15th and 16th centuries to improve the techniques of

public administration.35

Interest in accounting as evider:ce for a positive

theory of public finance has grown with the availability

of national income accounting models; public finance

theorists are also concerned with the problems of planning

ard control.: "As the economic functions of government

expand, the techr.nal aspects of finance, of public ac-

counting and of the control of expenditure, assume a ne-.:

importance.""6 Pryor has r.-ently attempted to formulate

a positive thcry of public .finan-a based on smpirical

evidence as .:ell .Js intuiti.c idc.loy. 3;

Kurihara, in surnnarizini ---h.= economic developments

leading to Keynes' Generalr ,:.,', provides further clues

for the incipient rediscovery of acccuntir.n, although '. e

do not agree with his reasoning.36

Kurihara Our Comments

1. Industrialization and The growth of capital-intensive
urbanization in gener- firms and crediit institutions
al and mass production destroyed the nexus bet,-'een re-
in particular. ceipts and income, payerients and
expenditure, thus increasing
the need to develop dynamic
models of the economy.

- 35 -


2. The increasing public
sectors of the econo-
my and the welling
importance of the role
of government finance
for stability and

3. The growing complex-
ity and multiplicity
of the phenomena af-
fecting modern eco-
nomic life require
more and more over-
all information.

4. The Great Depression
of the thirties.

Our Comments

But the emergence of a large
nonmarket sector argues against
the development of dynamic mod-
els based on neo-classical
price theory.

This argument works against
dependence on intuitive sim-
plifications and places great
emphasis on analytical obser-

But this and other similar ob-
servations draw attention to
the need to incorporate expec-
tations in planning and con-
trol models.


In spite of the evident interest of early economists

in business practices and accounting data, classical and

neo-classical economists have tended to ignore accounting

methodology. This drew the strictures of Irving Fisher,

and Schumpeter regretted that the consequence has been that

economists have had to discover painfully phenomena they

could easily have observed from business sources. Marshall

was obviously familiar with these sources, so much so that

Hansen referred derogatcrily to his work as "cost accounting.' 39

The refersnceL to P:arshall relate to the calculation of cost;

Erich S:ine-idar sumiiarizes hi's approach bh saying: "By

the costs of a particular outout .we understand the money

- 36 -

value of the quantities of means of production necessary

for producing and selling this amount of goods . (the

proliem;s of valuation which arise belong to the field cf

business administration." ~ There seems to be no dispute

concerning the relevance of accounting methodology to the

cost aspect of price theory.

More recently, the interest of economists in

accounting at the level of the firm has becon:e marked,

notably as a result of Fisher's seminal work.-41 ;e are

of the opinion that Fisher's knowledge of accounting was

not sufficiently extensive to carry the load which subse-

quent theorists have attempted to make it bear, but there

can be. no question of the importance o. his contribution

to capital theory, or its influence on eccr.cnic and

ac:counting theories. Indeed, Fisher's definitions and

assumptions have been largely incorpcrated into present-

ay' national income accounting, '.;here they wreak incal-

culable harm. '3 The influence on accounting theory was

transmitted through Fisher's pupil, Canning, whose work is

an attempt to evaluate accounting in the light of Fisherian

concepts of capital and income."

Two developments can b ident-ified as flowing from

this repival of interest in accounting. The first, which

can ai.o be traced to Wicksell, is the attempt to base

- 37

economic decisions on accounting models, such as the

"cost/benefit" approach to government taxation and pub-

lic expenditure. In Wicksell's terminology, "cost" and

"benefit" bear the same relationship to one another as

"cost" and "revenue" in the profit and loss account of

the firm. In the field of micro-economics, discontent

with the marginal approach to price theory has led some

economists to consider "average cost pricing," which uses

the profit and loss account model of the firm for explain-

ing price formation; most of the work in this field has

been done by questionnaire, however, rather than on the

basis of account information.

The second of these developments, which is also

not new, is the use of account information for erioirical

work in other branches of economics. A good example is

Krzyzaniak and Musgrave's study of corporate income tax

shifting, which applies statistical techniques to account-

ing data."6 The principal use of accounts in this way

has been in the field of finance, where a considerable

body of work has accumulated in the U. S. and the U. K.

during the past thirty years.

In spite of th's, the usefulness of accounts for

economic analysis has been challenged by several critical

eco.nomist. We sh.ll -'1 iscuss "-amesy's position in Chapter

III; her je .ehal' take Eo'ilding and Flanders as represen-

tative. Eculd. Lna'' finds ec~n omics and accounting concerned

- 38 -

with the same subject matter, but sees thc, as occupying

different worlds. Scholars from the one field do not

study the other in any depth, although many economic

questions have been derived from accounting practices,

and some methods have been developed to answer

economic questions. The point of contact, he says, is

the theory of the firm, where the accountant concentrates

on net worth changes, i.e., on the measurement of profit,

or net income. The valuation process which underlies this

computation must necessarily accommodate unknown future

events, but the economist regards such a task as an impos-

sible one, so that much of accounting is, to him, ritualis-

tic, providing assurance rather than answers. Boulding

looks to information theory and decision theory as possible

sources from which the integration of accounting and eco-

nomics may proceed.

His pessimism is reflected by Flanders in two

articles which attempt to guide accountancy into the paths

of economics. In the first of these,49 Flanders was reply-

ing to a professor of accounting who had suggested that

accountants were wrong to neglect social accounting as a

field of study; he was prepared to place severe restrictions

on the relevance of accounting to economic theory. In the

context of social accounting, a knowledge of specific

economic theories was required for understanding the

- 39 -

meaning and uses of a given system of social accounts, and

a knowledge of "general economic theory" to comprehend the

relationships between the different systems of social ac-

counts. The accountant could be no more than bookkeeper;

he "can tell you what accounting methods and techniques to

apply" but "must rely on economics to interpret and explain

the economic significance of the values discovered by the

accounting process." Interdisciplinary studies could

arise through the economist's reliance on accountants in

complex situations which could not even be analyzed with-

out the kind of data accountants produce. The determination

of what economic values to quantify was "in the realm of

economic theory."

Flanders' views echo those of the outstai:ing

American accounting theorist, A. C. Littleton, .'ho argued

that the tasks which accountants urdo,'-take should be re-

stricted to the area of business money flows, and Flanders

quoted with approval Littleton's identification of account-

ing theory with accounting practice. A later article by

Flanders pursues this argument to the conclusion that

accountants should adopt the behavioral, equilibrium and

restraint relatirishiip used by economic theoriscs. cr

see their func-ions increasingly filled by operations

research men .vino :ill covrnine accounting data and economic Flandrers' logical error is to confuse economics

- 40 -

with price theory, and to assume that accountants do not.

use economic models because they do not use price Lheory

models, but his belief that economics is concerned with

human behavior: and accounting with the given results of

behavior, would find a favorable reception in many quarters.

His assertion that accounting is "mechanisLic," and

Boulding's view of it as "ritualistic," raise questions

which must be answered if the theme of this study, is to

be accepted.

Some accountants have also challenged the validity

of accounting in similar terms. Perhaps the most fluent

statement of this criticism is that of Mattessicn, himself

an accountant:

Thus accounting is being criticized for many reasons
that it is based on irrelevant historical costs instead
of opportunity costs; that it provides only a descrip-
tion of the past, but no prediction of the future; that
its models consist exclusively of identities but lack
behavioral functions and do not lend themselves to opti-
mizatior procedures; that it ignores psychological fac-
tors and uses "arbitrary" allocation procedures .
that the balance sheet is not comprehensive enough
because its incli.sion-criterion cf measurability is
too superficial; that the additivity assumption on
which it operates is illusionary [sic]; that its
measures are not accompanied by error estimates, etc."

Mattessich refutes these accusations on the grounds

that it would cost more than it would be worth to improve

accounting methtc;:logy' in the desired direction, but this

is surely the weakest of arguments; if the criticisms are

justified, the cost argument implies that the opportunity

- 41 -

cost of doing better would be very low indeed. We shall

attempt to show that all these criticisms stem from a

misunderstanding of the basic features of accounting, and

disappear when we accept the idea of accounting as a closed

system which represents certain aspects of the realities

of human intercourse, and when we abandon the unnecessary

assumptions of profit maximization and income (profit)

determination. In short, we sympathize with those who

are impatient with the shortcomings of accountants, but

attribute them to human weakness and lack of application,

rather than to inherent deficiencies of accounting theory.


1. Gunnar Myrdal, The Polit ial c err.e :t in tze De1 loi ,oe t
of acnoai.. Theory (Harvard, 1955), p. 154.

2. Boullet and Serieys have shown that double-entry book-
keeping is simply a special case cf integrated multiple-
entry bookkeeping. See "Les movens de traitement
641ctroniques et 1'dvolution des concepts traditionels
de comptabi)it6," Paris, La Re':c r.ancaise de'
Comptabilit,'t (February, 1967), p. 55. Cost account-
ing typically involves triple-entry; national income
accounting, quadruple entry, which becomes sextuple
entry at times.

3. R. Mattessich, Acco:oti;Z a.d A..::lti ca;.: e ethode
(Homnowocd: Richard D. i-rin, 1964) pp. 26-27.

4. J. R. Hicks, Capital and Crowt' ( er.-: York and C:ford,
1965), p. 2?.

5. J. A. Schunipeter, His tori~ of Eo'ri" '- .h.alsis (Ne'.'
York: Oxford University Press, 1951), p 61.

6. Ibd.

7. DR Scott, "The Influen.-e of Statistics upon Accounting
Techniques and Theory," The Ac.cF .c .ti.g Revic.- Vc.l. 24
(January, 1949), pp. 81-87.

8. Ibid., pp. E4-95.

9. M. J. Moroney, Facts fr.omri Figurs (3d Cd. ; Lcndon:
Penguin Books, 1961), p. 1.

10. ibid. p. 2

11. C. Gini, "On the Characteristics of Italian Statistics,"
Jourza2 of the Rcyal Sociec Vol. 122,
Part I (1965), p. 105.

12. Examples of the use of averages can be found in
accounting, e.g.: the weighted average cosr method
of pricing nmaerials issued from a stock.

- 42 -

- 43 -

13. Schumpeter, p. 58, n. 4.

14. Myrdal, p. 11.

15. The method is similar to that adopted by Knight in
his discussions of uncertainty. See Frank H. Knight,
Risk, Uncertainty and Profit (New York: Harper
Torchbooks, 1955), Chs. XI and XII.

16. R. J. Chambers, Towards a General Theory of Accounting
(Adelaide, 1961), p. 5, et. seq.

17. Myrdal, p. 13.

18. Henry R. Hatfield, "An Historical Defense of Book-
keeping," repr. in W. T. Baxter (ed.) Studies in
Accounting (London: Sweet and Maxwell, 1950), p. 10.

19. See, for a chronological list of significant dates in
the history of accounting, George Abs. et at., "His-
torical Dates in Accounting," The Accounting Review,
Vol. 29 (July, 1954), pp. 486-93. See also: A. C.
Littleton, Accounting Evolution to 1900, (New York:
American Institute Publishing Co., 1933); S. Paul
Garner, Evolution of Cost Accounting to 1925 (Alabama,
1954), espec. Chs. 1 and 2; Joseph H. VJaemminck,
Histoires et Doctrines de la Comptabilitd, Brussels:
Eds. de Treurenberg (1956); David Murray, Chapters in
the History of Bookkeeping, Accountancy and Commercial
Arithmetic (Glasgow: Jackson, Wylie & Co., 1930).

20. B. S. Yamey, "Scientific Bookkeeping and the Rise of
Capitalism;" repr. in Studies in Accounting, op. cit.,
p. 16.

21. Werner Sombart, The Quintessence of Capitalism, transl.
M. Epstein (New York: E. P. Dutton & Co., 1915), p. 309.

22. William H. McNeill, The Rise of the West (Chicago,
1963), p. 54.

23. R. Brown, A History of Accounting and Accountants
(Edinburgh: T. C. and E. C. Jack, 1905), p. 16.

24. Ibid., p. 74.

- 44 -

25. Sidney Davidson, Arthur Young Professor of Accountina
at the University of Chicago, in "Accountina and
Financial Reporting in the Seventies," The .ith.,r
Yo'.:n rJc r ': Z (Spring/Surrmmer, 1969). The. view
echoes Knight, pp. 303-4.

26. Supra, p. 5.

27. Myrdal, p. 26.

28. T. F. Dernburg and D. M1. McDougall, A'1 cro--tco ;.5r,,; cG
(2d ed. ; New York: McGra .--Hill, 1963) p. 2.

29. See alsc Gardner Ackley, ,.ac-rCCroc nonc T:eo,:E (New
York: Tn-. Macmillan Co., 3961), Chs. I-IV.

30. .. . Hicks, T;-e Social Fra Fr : .or; (with A. G. Hart)
(Nt~, York and Oxford, 1945) p. xii.

31. Op. cit., pp. 106-18.

32. Paul Studenzki, Tp:. Irc, of V..:tirs (Hew York,

33. M. Gilbert, C. Jaszi, E. F. Denison and C. F. Schwartz,
"Objectives of National Ir.come Ieasulrement: A Reply
to Professor Kuznets," s ;,- of ,m.;.c aid Sta-
riat-.c-c., Vol. 20 (August, 19 8), pp. 179-95.

34. Per V. A. Hanner, Gsoeral Ledger- vf ,L ;- :' do f
S'dn:, U2 (Stockholn 19.52).

35. Adolf J. H. Enthoven, "Finance and Development,'`
in -.ternar.i, .al ,:eWo ,' 7 :Ud, v7o 6, No. 2 (June,
1969), pp. 16-23.

36. Ursula K. Hicks, PbEL-c F .o,.ce (Cambridge, England,
1955), Preface, p. ix.

37. Frederic L. Pryor, EP:b! ie, Expe1n.:'it .re. s i 7n C,.-,"n: 'K C
a.d Capitali st.' atic2 (Home';ood: Richard D. Irwin,
Inc., 1966).

38. Xenneth K. Kurihara, In"trod:.ctio; c : '.k'ey,.c',a:.
D-rna.ics (London: Geo. Allen & Unwin, Ltd., 1964),
p. 17.

- 45 -

39. Alfred Marshall, Principles of Economics (8th ed.;
New York: The Macmillan Co., 1948), espec. pp. 360,
394 and Book V, Ch. VII, Book VI, Ch. VII; also
p. 406.

40. Pricing and Equilibrium, transl. Esra Bennathan (New
York: The Macmillan Co., 1962), p. 79.

41. Irving Fisher, The Nature of Capital and Income (New
York: The Macmillan Co., 1906).

42. Ingvar Ohlsson, On National Accounting (Stockholm:
Konjunkturinstitutet, 1953), p. 48.

43. See infra, Ch. VI.

44. John B. Canning, The Economics of Accountancy (New
York: The Ronald Press Co., 1929).

45. Knut Wicksell, "A New Principle of Just Taxation,"
transl. J. W. Buchanan, in R. A. Musgrave and A. T.
Peacock, eds., Classics in the Theory of Public
Finance (New York: The Macmillan Co., 1958),
pp. 72-118.

46. M. Krzyzaniak and R. A. Musgrave, The Shifting of the
Corporation Income Tax (Baltimore, 1963).

47. In the U. S., see the National Bureau of Economic
Research Series, particularly the compilation on
"Research in the Capital Markets," a supplement to
The Journal of Finance, Vol. XIX (May, 1964). In
the U. K., see the publications of the National
Institute of Economic and Social Research, Cambridge
University Press, notably Studies in Company Finance,
eds. Brian Tew and R. F. Henderson (1959), and Tibor
Barna, Investment and Growth Policies in British
Industrial Firms (1962).

48. K. E. Building. "Econnmics and Accounting: The
Uncongenial Twins," repr. in Studies in Accounting
Tk^hor, eds. W. T. Baxter and Sidney Davidson
(Home'.-ocd: Richard D. Irwin, Inc., 1962).

49. Dwight P. Flainders, "Accounting and Economics: A
Note ,iTh Special Reference to the Teaching of Social
Accounrting," T';.? cco:n ti,: Ri'vie Vol. 34 (January,
1959) Po. 6.-73.

46 -

50. Dwight P. Flanders, "Accountancy, Systematized Learning
and Economics," The Acc ountg Review' Vcl. 36 (Oc-
tober, 1961), pp. 564-76, espec. p. 576.

51. Mattessich, p. 414.



We have stated that accounting is in the first place.

a conceptual framework useful for planning economic activ-

ities, aind that its control function is derived from iLt

planning function. A similar proposition, or set of pro-

positions, was formulated by Sombart, whose erudition in

this field has not been challenged.1 We shall outline

Sombart's position, and Yamey's criticisms of it, and show

how we differ from both Sombart and Yamey in our interpre-

tation of the evidence which they adduce, and on which we

also rely in great measure.

The Epstein translation was originally Dublished

in German in 1913, under the title Der Bourgeois, and the

brief comments on accounting contained in that early work

were subsequently expanded and more fully documented by

Sombart, in a work which does not appear to have received

translation into English.2 Because of the significance of

the relevant passages of the later work for the ideas devel-

oped in this chapter, we have prepared a fairly complete

translation of Sombart's comments on accounting and the

growth of scientific business management, which will be

found at the end of this study.

- 47 -

- 48 -

Somba-.t and th, Ri,- of Capi ta lismr

The Origins of Ca;iuaZ sm

Somb-rt attempts to trace several causal factors

which led eventually to the emergence of a capitalist

civilization. He defines capitalism thus:

By "capitalism" we mean a particular economic system,
recognizable as an organization of trade, consisting
invariably of two collaborating sections of population,
the owners of the means of production, who also manage
them, and. propertyless workers, bound to the markets
which they serve; which displays the t.o dominant prin-
ciples of wealth creation and economic rationalism.

Tne essential features are the profit motive and

rationality; an exchange economy, in Thich the material

requirements of several trades are satisfied by free ex-

change? of equivalent. goods or money, ma"-y be either arLi-

sanal or canitalistic.'

Sombart takes as his point of departure a precapi-

talistic feudal society in early medieval Europe, when a

sufficiency for existence was the goal of ever','man. He

then poses the question: by what means was society trans-

formed into a different one, in which the profit motive

replaced the satisfaction of basic wants as man's main

driving force?

The spirit of enterprise manifests itself in per-

sonalities like the "freebscter," the "specauator" and

the "projector," who rely on robbery of economic surpluses

- 49 -

created by others to form the capital necessary for their

undertakings. Such men can be found throughout history,

but the qualities of the bourgeois capitalist are not so

common; they include an organizing ability, a facility

for rapid calculation, and the art of planning outlays.5

What turns the craftsman into a manufacturer? In two

words, he must be able to calculate and to save.6 Sornbart

sees the transition as a function of mental or spiritual

changes which resulted in man ceasing to see himself as

the center of his universe, and replacing himself with the

institutions and material objects of a capitalistic society.

This change in attitudes was dependent upon, if not actually

caused by, the mensuration process.

Thought in economic activities, then becomes imore
definite and conscious, in other words, more rational,
and modern technical science has tended to make it so.
But it has also helped to make it more exact and punc-
tual, by providing the necessary machinery for meas-
uring time.
Clocks have played a very important part in the
mental history of the business man. Pendulum clocks
are said to have been invented in the 10th century,
while the first clock worked by wheels was that made
by Heinrich von Wick, in Paris in 1364, for King
Charles V. . Now, the exact measurement of time
became possible only when the necessary instruments
were available, just as the exact calculations in
terms of money became possible only when technical
progress was able to provide a reliable currency.

The two elements are combined succinctly in

Benjamin Franklin's dictum: Time is money.

The ability to calculate can create wealth when

combined with the requisite institution: The capitalistic

- 50 -

enterprise. In Der Moderne Kapitalismus Sombart describes

the special.features of this institution: ". . the

complete independence of the business, raising an inde-

pendent economic organization above the individual economic

men involved in it; the combination of all concurrent and

successive business operations into a conceptual entity

which then appears as the performer of the individual

economic actions, and leads a life of its own extending

beyond the lives of the persons concerned."8

Such entities had existed previously, but always

tied to a named group of partners, family, villagers. The

new concept of "the business" effectively separated the

economic relations from the persons; property rights were

depersonalized, permitting "it" to pursue profit without

regard to any other goals.

Three causal factors contributed to the independence

of the capitalistic enterprise:

1. The law "Firma" (the firm)

2. Business management leading "Ratio" (the account)
techniques to

3. The market "Ditta" (credit)

That is to say, the business could be viewed as a

legal entity, an accounting entity and a credit entity. We

are concerned here with the business as accounting entity.

- 51 -

The Business as Accounting Entiby9

The invention of accounting was vital to the

development of the capitalistic enterprise. In particular,

double-entry bookkeeping permitted the full representation

of the flow of capital through a business: ". . from

the capital account to the transaction accounts through

the profit and loss account and back into the capital ac-


This facilitated concentration on the idea of

creating wealth; the "wealth producing sum" or amount in-

vested for the purpose of obtaining profits was separated

from all want-satisfaction objectives of the persons in-

volved. In double-entry bookkeeping there was only one

objective: the increase of a sum of money.

The concept of "capital" could only be formulated

under these conditions; prior to double-entry bookkeeping

there was no "capital"; thus, capital could be defined as

the property of wealth represented in a double-entry system

of accounts. Double-entry bookkeeping also led directly

to the principle of economic rationality- Since the book-

keeper recognized no economic processes outside the books

of account, and nothing could be recorded in these unless

it was capable of expression in monetary terms, production

and consumption could be reduced tc calculation.

Economic rationality w.cnt hand in hand with

planning and control; the acwcol.ntin; system permiLted the

- 52 -

analysis of business operations and the establishment of

plans for their progressive and systematic improvement.

In this way did the invention of double-entry bookkeeping

create the necessary conditions for the essential principles

of capitalism to develop. Further, it created the concep-

tual framework which was required in order to grasp the

nature of a capitalistic economy, by means of concepts

such as the classification of assets into fixed and circu-

lating, the ascertainment of costs of production, and so

on. The scientific equipment of economic theory, insofar

as it related to captialist economies, was taken from

double-entry bookkeeping.10

Finally, since the separation of the business from

its owners was a necessary feature of the capitalistic

enterprise, systematic bookkeeping gave material aid to

the creation of the capitalistic enterprise. The business

replaced the entrepreneur; the firm, represented by its

capital, appeared as an accounting entity and the person

of the entrepreneur was clearly shown to be a separate

entity, more like a creditor than an owner.

Sombart does not claim to produce evidence that

this theoretical argument can be empirically verified;

indeed, he complains on several occasions of the paucity

of historical materials available to him. He does claim

to be able to see the slow development of double-entry

- 53 -

bookkeeping taking place side by side with the growth of

juridical concepts of the firm as a separate entity, and

that these changes coincided with what he terms "the period

of early capitalism"; he also refers to parallel develop-

ments in a number of European countries as evidence of a

tendency. Further, the rise of capitalism took place

unevenly, so that artisanal and other precapitalistic

features can be discerned in the business enterprises of

the period. The organized and systematized business man-

agement which accounting made possible is perhaps an ideal

type, represented by only a few outstanding examples, while

the majority of businesses remained rooted in traditional

inefficiencies; nevertheless, he concludes with conviction

that, starting in Italy in the 14th century, new pr:i;:iples

of business management were adopted, and their application

depended upon accounting systems based on double-entry


Sonmbat's work has been assimilated intc the

mainstream of economic history and his view'. of the nature

and origins of dcuble-entry bookkeeping into accounting

theory.11 However, in two parprs published at an interval

of fourteen years, Yamey has expressed criticism cf C-at

he calls "the Scrr-bart propositions" relating to the

connection between dc'-uble-entry bookkeeping and the rise

of capitalism. 2

- 54 -

In the first of these papers, Yamey denies that

the management objectives identified by Sombart--clarity

of contractual relationships, economy of expenditures---cn

be pursued only through double-entry bookkeeping; he sug-

gests that single-entry will do as well. As to the crigins

of the former, while he harbors some confidence in the

assertion that double-entry bookkeeping had its origins in

medieval Italy, he says: "But in the nature of things we

are on less sure ground when trying to explain the process

whereby earlier collections of incomplete and unorganized

commercial accounting records become transformed into a

systematized and simple yet elegant arrangement of inter-

locking accounts."

He puts forward four possible hypotheses, viz.,

1. The single inventor

2. The spirit of the Renaissance

3. The result of chance or accidental. influence

4. The necessary outcome of a purposive evolution

Yamey is unw..illing to subscribe tc any. of these;

while he is prepared to see some utility in accounts, he

finds that evidence of h ko they were used is missing. In

his view, "narrow" bookkeeping purposes predominated, in-

volving comprehensive and orderly records of past trans-

actions, an-d checks on accuracy and completeness. Financial

stateimnts of profit and loss cr of capital, assets and

liabilities were relatively unimp ortant.

- 55 -

In the second paper Yamey addresses himself again

to the refutation of the Sombart propositions that book-

keeping aided the rise of capitalism and that double-entry

bookkeeping made possible the separation of the business

from its owners. He examines the simple question

provoked by the thesis, namely, the contribution of double-

entry accounting to the solution of problems in business

organization and administration." He would show that the

contribution was small, and "not made by those features

of the system or in solving those business problems par-

ticularly emphasized by Sombart . I also suggest,

incidentally, that in the context of the solution of

business problems, double-entry bookkeeping was not greatly

superior to less elaborate methods of accounting."

Yamey expresses the strange view (strange, that is,

for an economist) that abstraction may lead to less suc-

cessful decision-making, since the decision-maker ". .

would have had to view the complexities and detail of

reality through the drastically simplifying and possibly

distorting screen of his accounts." He finds little or

no evidence that accounts were used in the decision proc-

esses of 17th and 18th century entrepreneurs whose books

of account he has examined, and, indeed, would be surprised

to find any, since "steps in the dark" lie at the heart of

- 56 -

capitalistic ent :rereneurship. "Thus, when the busines'-man

expresses himself most emphatically as entrepreneur he is

necessarily without benefit of accounting records pertaining

to past events and experiences." "Insofar as the early

centuries of capitalism can be described as a period of

dynamic change frcm a static base-itself a dangerous sim-

plification--one would have to discount heavily the ccn-

tribution made by systematic accounting or accounting


He also draws upon the evidence provided by the

accounts of partnerships and join- sctck companies to shcw

that the business could be: and ,as, treated as distinct

from its proprietor- even in the absence of a double-entry

bookkeeping system complete witch capital and profit and loss


Yamey corrmmences his paper with the. stater-ment that

"Soimbart's work gave prominence and prestige to the humble:

art of accounting by ascribing to it w'.ide economic signif-

icance." He concludes that "In the achievement of other

aspects of successful enterprise . accounting records

and accounting systems have cnly a humble, buc nevertheless

interesting, contribution to make."

In taking a position on these arguments we shall.

concentrate on the later paper. It will ba apparent from

Chapter II that we agree generally with Yamey's criticism

- 57 -

of the Sombart propositions, particularly insofar as we

see no special significance in double-entry bookkeeping

other than that it permits accounting functions to be

performed efficiently.

It is undoubtedly true that the mechanics of

double-entry bookkeeping cannot be observed before the

14th century, but we may remark that, when observed, the

system is so well formed that it is unlikely to have been

a new invention. The accounts of Pope Nicholas for the

year 1279-80 and the expenditure book of Florence for the

year 1303 are fairly complex examples of simple bookkeeping,

but the books of the City of Genoa for 1340 display a

double-entry structure which must have been long in the

making. In this respect we tend to agree w.ih Soirmbart

that the method must have been ". . well established

for a long time."13

Nevertheless, Yamey's claim that single-entry

will do as much reveals that he has overlooked Sombart,'s

remark, admittedly expressed in a bibliographical note,

that Pacioli's double-entry did not grow out of single-

entry bookkeeping, the latter being a "crippled" version

of the former, and of later date. 1 Business accounts of

the early Middle Ages were quite different in form; Sombart

calls them "sparse and confused" collections of notes.

- 58 -

This point acquires some significance in relation to the

arguments of the second paper.

They begin with this statement:

knowledge of the total profit of an enterprise for a
period, either absolutely or in relationL to the amount
of capital in the enterprise, is rarely necessary or
useful for business decision-making within that enter-
prise. In a continuing enterprise, knowledge of the
total or aggregated profitability or rate of return on
capital is not relevant to current decisions which
are concerned with changes in the use of part of the
resources at the firm's disposal, and these, in turn,
are related to the expected profitability of the various
separable activities constituting the firm's total
activity and of other activities under consideration.1

There is obviously a '.aluation problem here; if the

immediate past use of capital is a continuing alternative.

the past rate of return constitutes thec opportunity cost

of capital and is a necessary element of a decision mcdel.

Generally speaking, one cannot chance direction rationally"

without knowing where one happens to be, and the relevance

for the future of the profit of past period:- is a question

of fact in each case. Perhaps the view of Lhe. entrepreneur

as Janus is obscured by' a tendency to read "year" for

"period," a natural result of the preoccupation w.ith

financial journalism to which we have drawn attention; a

declining trend of weekly profits would certainly not be

irrelevant to a baker or brewer.

We must agree with Yamrey's st-atem-ent (p. 120) that

calculations of profit or of total capital can be made

- 59 -

independently of a system of double-entry bookkeeping, since

"profit" and "capital" may be defined in such a way that it

must be true. The proprietor of a "small business" (such as

Marshall's locksmith employing thirty hands, or a motel with

twenty rooms) may be able to accumulate data under his hat,

but the emergence of a hierarchical structure in a business

automatically separates the entrepreneur from the source of

his data, and renders formal record-keeping obligatory.

Double-entry bookkeeping, in our view, is simply an effi-

cient and widely-accepted method of doing this, in both sim-

ple and complex business situations.

We must also consider the possibility that the

single-entry bookkeeping systems referred to by Yamey were

in fact truncated double-entry systems like the one popular-

ized in the 18th century by the indefatigable Jones of

Bristol. The use of aggregates is common to both single-

and double-entry bookkeeping, and it is not essential in

the latter system for each individual entry to be made twice,

once on each side of an account. The basic equation of

double-entry bookkeeping

Assets = Liabilities + Proprietors' Capital

leaves to the individual accountant the task of determining

hcw these aggregates are to be derived; the number of pos-

sible solutions to this problem is ii.finite. As long as a

- 60 -

balance sheet and profit and loss account dovetail into one

another through the profit (or loss) figure, the equation

can be established. It is fairly commcn to find double-

entry accounts which have not been formally completed by

writing up a balance sheet and profit and loss account in

the ledger, although the continental European tradition

would see such a deficiency as more grave than it appears

in the U. S. A. or in Britain. In such systems, these ac-

counts can be seen as loose-leaf parts and are no different

in kind from the loose-leaf sales account (composed of cop-

ies of the sales invoices) or the somie:ha.t bizarre hits ana

pieces of an electronic data processing accounting routine.

Yamrey himself refers to the possibility that these inc'om-

plete, or single-cnt;,y, systems were completed in an infor--

mal manner, one less likely to leave traces than the bound

books which contained the transaction ecccunts.

Further, Yamey admits that ". . it is generally

impossible to deduce f,-om the records (or textbook discus-

sions) precisely what was intended or achieved by the pro-

cedures in question."'" We may therefore conclude that the

way is still open to the acceptance of the Solmbart hypoth-

esis, that double-entry bookkeeping assisted the rise of

capitalism Ly providing the capitalist with a powerful

instrument for the management of a business.7

- 61 -

The assertion that double-entry bookkeeping was not

a necessary condition for the separation of finance from

production, which occurred during this period of early cap-

italism, is also debatable. It will be appreciated that

the only accounts affected by the ownership of a firm are

those relating to capital and profit. The only way in which

accounting could have aided the creation of independent

enterprises, therefore, is by techniques of accounting for

capital and profit. If such accounts were not made up, as

Yamey suggests, then his assertion is obviously true. Again,

where the enterprise was not separate from its proprietor,

as in the cases he mentions, these accounts would not have

been called upon to perform any special function.

Early forms of corporate enterprise were of a

temporary or "joint venture" kind. Trading operations,

consisting very often of voyages by land or on sea, were

treated as separate cycles, and on their conclusion the as-

sets of the venture were divided the participants in

proportion to their investments. The dividend liquidated

the firm. Maintenance of capital and measurement of profit

were of little significance to plural o'.:ners of this kind,

although highly important to owners of banks and factories,

as the accounts of the Medici, Datini, Fuggers and others

demonstrate cleal y.

With the growth of continuing businesses, hcwe:ver,

such as the chartered companies in Britain, the problem of

separate personae of owners and managers manifested itself.

The maintenance of the firm's capital cculd no longer be

the direct responsibility of the individual proprietor, and

he care to rely more and more upon a balance sheet presen-

tation to satisfy him on the condition of his investment.

More important than this, however, and resulting from the

fact of a changing body of shareholders, the profit and loss

account begins to take on a different function from the one

mentioned by Yamey, of reviewing overall business results

(p. 119). It becomes necessary to ascertain "a" profit

figure in order to treat equitably successive groups of

shareholders. The profit of the firr. is a jointly owned

residue and must be arportioned betucen periods, a feature

which underlies all problems of profit measurem.ent.

The point Yamey makes is that some 17th and 18th

century companies whose records hav'.e survived did not keep

capital and profit and loss accounts, and therefore that

these account? cannot have been necessary for the separation

of the business from its owners. We find the evidence in-

conclusive, for reasons already given; on the other hand,

we cannot envisage the continuance cf such a separation for

any length of time without a necessity to render account

making itself felt. The spectacle of a succession of Brit-

ish companies acts in the 19:h century, each of which placed

great importance on financial reporting and auditing, and

- 63 -

the fact that this was done in order to protect financial

investors in companies, is highly suggestive, to say the


It is only fair to point out that in his

"Introduction" to Studies in the History of Accounting1'

Yamey took some pains to emphasize that he was concerned

only with criticizing the tendency to exaggerate the econom-

ic significance of double-entry bookkeeping, rather than

accounting generally.

The Sombart Hypothesis brought Up-to-date

Sombart's Assumptions Criticizcd

Although we have failed to find much substance in

Yamey's detailed criticisms of "the Sombart proposit:.,ns,"

we do not accept Sombart's views as they stand, and some

distance separates our thesis from his. It will be found,

however, that this separation does not lead to conclusions

which are diametrically opposed.

Sombart was undistinguished as a forecaster.

Writing shortly before World War I he predicted an end to

large-scale wars, a declinir.g world population and the in-

pending d.lsap;-earLance of capit"li-mi.L. ,Bes.ides a defective

telescopic vision, hc-.:ever, he also displayed attenuated

historical prsipct-ive, attributable in some .3asure to the

paucity of source material r.hen at his disposal. anotherr

64 -

reason for his failure was methodological; in the preface tc

the second edition of his work on the rise of capitalism, he

confessed to a tendency not always to distinguish clearly

between the empirical and the theoretical, a trait which had

been brought to his attention, in the friendliest mainncr, by

Max Weber.

On the other hand, we cannot ignore his great

contribution to the subject which is the field covered by

this study. In the first place, Sombart was one of the

first modern socio-economic theorists, attempting to weave

together threads from several disciplines in order to create

his tapestry of the origins of modern capitalism. Secondly,

and with one exception which will be noted later, he care-

fully examined all the soi'rce materials'i availai'.e to

him, and did not hesitate to dra.J conclusicrns from eremn even

if these contradicted the ccnvea-ticnal 1*',aio:I of his time.

Thirdly, the manner in which he integrated his knowledge of

accounting into his socio-economic framework is far more

sophisticated than any other attempt which has been made to

combine accounting with econorLics for purposes of evaluation,

and eventually, prediction. One can only speculate on the

progress of social accounting if Fisher, Hicks or Stone had

possessed a comparable grasp of accounting theory. Finally,

as we have mentioned several times, his propositions lie

- 65 -

close to the central postulate of the present study and have

probably contributed to its formulation.

It is significant, however, that Sombart made no

mention of Niebuhr's claim to have discovered, in the Vati-

can fragments of the oration Pro Fonteic, evidence that the

Roman quaestors used double-entry bookkeeping, invention of

which could not, therefore, be attributed to the Lombards.'9

This claim has been denied by other historians20 but refu-

tation had not been made when Sombart wrote; on the other

hand, it is hard to believe that he, with his great erudition,

was unaware of the contents of Niebuhr's German language

masterpiece, particularly since it was over one hundred years

old at the time he wrote Der Moderne Lcapitalismus. The evi-

dence would, of course, have been fatal to his thesis that

double-entry bookkeeping ;vas a creation of the period of

early capitalism, although it micht not have destroyed the

validity of his wider propositions. Interestingly enough,

de Ste. Croix in his lengthy treatise arguing against the

view that double-entry bookkeeping was known to the Greeks

or Romans, makes only one brief reference to Pro Fonteio, in

another connection al:ogether.

How, then, do '.:e differ from Scmbart? Like him we

have chosen a cribological approach to cur subject matter,

but during the interveening sixty years his appeals for

- 66 -

additional historical materials have been answered in large

measure. Not only have accounting historians such as Melis,

de Roover, Yamey and Mommen contributed to our knowledge of

this field, but also archaeologists (Woolley), antiquaries

(de Ste. Croix, Elizabe-th Grier) students of the adminis-

tration of medieval manors (Hudson) and of Roman Law

(Jolowicz, de Zulueta). We may also refer here to

Schumpeter's important contribution of a theory of economic

development 2" and to the many investigators of the history

of scientific thought, who have taught us to be wary of the

very idea of "invention." As a result of these researchers'

efforts \we can no longer see the rise of capitalism in the

same historical light.

Mandeville, in his Fble of thze Le.e, o-, ?'-c.;

Vis3?, Ptblic' Bs~:efitc, pointed out that the prosperity of

a nation depends upon the acquisitive efforts of its citi-

zens, and ultimately on such immoral qualities as ambition

and a desire for pouer and luxury. The social problem is,

and always has been, to reconcile this with justice, charity

and equality. The Roman triumvirate of Pompey, Crassus and

Caesar, taking for themselves the spoils of the !Mihridatic

War, may be classed as speculators, or even as robbers, but

the Roman colonists who settled Africa were as strongly mo-

tivated to create wealth and by economic rationality as any

- 67 -

late medieval capitalist. The history of Carthage shows

that, prior to its destruction, large-scale manufacture of

furniture, beds, mattresses and pillows was undertaken for

the Roman market, and problems of organization and manage-

ment no doubt arose. Although we can never be certain, from

the evidence now available to us it would appear that the

capitalist-entrepreneur has been known at all periods of

human history. Those socio-economic studies (Huberman's

Man's Worldly Goods is another example) which start with the

concept of a medieval precapitalistic society, ignore the

fact that there were earlier periods when a "sufficiency for

existence" was not the goal of everyman, ages when the domi-

nant sectors of society pursued the aim of increased wealth

through production and distribution by means of trade,

rather than through robbery and speculation.

Nor can we accept Sor.ibart's psychological assumption

that man occupied the central place in human thought in pre-

capitalist times, but was ousted by institutions and mate-

rial things in the period of early capitalism. It was in

this period, after all, that Pope wrote "An honest

man's the noblest work of God"23 and echoed Charron's dictum:

"The proper Science and Subject for Man's Contemplation is

Man himself.'.2 Al..though Maine's view of history as a move-'

ment from status t:o contract no longer seems irreversible,

- 68 -

the statement still rings true cf the period under

consideration, and it was not until the 20th century that

Sweeney replaced Samson c.gO:.istea.

The humanitarian social initiatives of the 19th

century would have been unthinkable in the 11th cr 12th,

but we are not on that account entitled to conclude that

people then were somehow different, emotionally or psycho-

logically. We must assume from the great mass of historical

evidence that, in respect of all relevant characteristics,

human beings have not changed during the past thousand years.

The spirit of undertaking, So:-bart points out,

combines the qualities of the conqueror, the organizer and

the trader: ".. he by peaceful m-ans influence

masses of people %.hor. he does not know so to shape their

conduct that lie will derive benefits from it."'' Sombart

connects the freebooLer with the birth of capitalism, but

the freebooter was primarily a species of robber, not one

who operates by peaceful means. Consider also Sombart's

vic w of specL.lation as the noncalcclator,, approach to busi-

ness, the attempt to participate in an "irherert and qu-li-

tative" manner in processes which are essentially quantita-

tive and rational.2" We rather see speculation at one

extreme in the spectrum of calculator activities, lying

immediately beside games of chance, which are easily

accommodated in the calculus of probabilities.

- 69 -

He quotes with approval Heine's words in English

Fragments (1828), Chapter iv: "Were it possible for the

Irish by a sudden coup de main to attain to the enjoyment of

wealth they would seize upon it with alacrity. But ask them

to get rich slowly by cultivating double-entry, sitting over

miserable accounts until they are round-shouldered, and they

cannot do it." When the time came for the Irish to choose,

they in fact chose the Sweepstake, an activity almost en-

tirely carried out by "sitting over miserable accounts."

Finally, we reject Sombart's assumption that the

concept of capital resulted solely from the abstraction of a

process of wealth creation (profit), since it is clear that

"capital" was ascertainable separately from market trans-

actions involving the purchase or sale of a business, or a

share in one. As we have already attempted to make clear,

this rationalization of Sormbart's hangs together with his

assumption that systematic accounting and double-entry book-

keeping are the same, and we do not subscribe to this view-


An Alternative Hypothesis

We shall pose two historical questions:

1. How does a Lebanese money-changer become an
international banker, or an Iowa farrr boy con-
struct an enterprise big enough to put the world
on wheels?

2. Why are ccurences of this phenomenon increasingly
apparent in Europe, starting with Ital- in the

- 70 -

14th c-.rnt.ur and culminating in the great
entrepreneurial explosion of the 20th century?

Only by _keeping these two questions separate are we

likely to throw light on the subject of our debate.

In Sombart's view, "projectors" such as Tonti,

Caratto and Cagliostro turn into "promoters" of the order

of a Law, de Lesseps, Rockefeller or Mond, through the in-

vention of a conceptual framework which permits them to dis-

criminate between ideas for wealth of the order of fantasies,

and profitable plans which are capable of execution. This

conceptual framework is a combination of double-entry book-

keeping and connercial arithmetic. We subscribe to a similar

hypothesis except that we attribute its origins to multiple

causes and a much earlier period in time; we do not rergacd

the assumption that the plans must be profitabl. to be a

necessary one; and we view accounti:-g as a self-contained

conceptual framework different fror., although clearly re-

lated to, the. models of commercial arithmetic.

We assume that the human mind seeks certainty, and

creates rationalizations in order to displace the unbearable

idea of a purely stochastic en.'ironment.2 7 All conceptual

frameworks are designed to this end; prediction, planning and

control are the essence cf rationalism and ,by their means we

liberate ourselves from the tyranny of birth, copulation and

death. This desire for a certainty of the mind is often

aggravated by religious, political and social upheavals, so

that the individual, robbed of one haven, seeks refuge in

another. Sombart relates the observation that the U. S. A.

represents the apogee of economic rationality to the up-

rooting of its immigrants, and the strangeness of their


We would replace the Sombartian hypothesis of profit

motivation with the Keynesian view that: ". . it is prob-

able that the actual average results of investments, even

during periods of progress and prosperity, have disappointed

the hopes which prompted them. . If human nature felt no

temptation to take a chance, no satisfaction (profit apart)

in constructing a factory, a railway, a mine or a farm, there

might not be much investment merely as a resulL of cold cal-

culation. "8

The desire to create a capitalistic enterprise

arises out of a desire to bring goods and services to those

who do not now enjoy them, and the basic problem faced by

the entrepreneur is how to finance his enterprise, that is,

how to acquire capital in order to bridge the time gap be-

tween investment, or the allocation of scarce resources for

production, and realization, or the receipt of payment in

some form from the market to be served. The creation of

wealth and the recognition of profit are separate phenomena,

- 71 -

- 72 -

although related; Bohm-Bawerk first pointed out that lapse

of time in the production process was one of the factors

permitting profit to arise, and Knight confirmed this obser-

vation: "Profit arises out of the inherent, absolute unpre-
.ictabil th.ngs. ,ut of the shee blrute facLt
--- --U -. J-- L. L. L LI L._

the results of human activity cannot be anticipated and then

only in so far as even a probability calculation in regard

to them is impossible and meaningless."2s

If the entrepreneur does not face this critical

financing problem, he may select whatever conceptual frame-

work seems to him appropriate; not having any necessity to

communicate his plans to others he may formulate them in

any way he chooses. Business history is full of examples

of achievers who failed at the moment when it was necessary

for them to exteriorize their systems. The historical nov-

elist, Zoe Oldenburg, describes a feudal lord planning to

build a road through his estate, presumably to bring its

economic surplus to a market; he would not have needed ac-

counts to convince a banker of the soundness of his project.

It seems to us, as indeed to Sombart, that the use

of mathematics in the scientific preparation of decisions

is a quite separate phenomenon from the development of a

conceptual framework which will enable financial plans to

be communicated to financiers and others. The techniques

of "commercial arithmetic" were all known to, and used by,

- 73 -

the Romans, and to even earlier civilizations. The use of

accounts for planning and control is likewise of great an-

tiquity, but accounting is not built out of compound in-

terest, ratios and percentages. That the two subjects were

treated together by Luca Pacioli and others may have led to

some confusion on this question.

It is suggested here that accounting was not the

product of "the period of early capitalism" but was, in

fact, introduced into the public sector much earlier in time,

for planning and control purposes. The customs of the an-

cient Greek temples and Roman patricians are perhaps open

to historical misinterpretation, but not so the practices

of the Norman curiae in the 1lth and 12th centuries or of

the medieval manors of the same period. Lyon and Vehuilst

have described in detail how accounts were used by the

Flemish, Norman and French royal courts in the task of mo-

bilizing the countries of Northwest Europe and converting

them from a subsistence to a money economy.30 The records

of the monastic manor of Norwich in England have informed

us about the use of accounts in the management of the me-

dieval religious manors.31

It is easy to understand, therefore, why, although

double-entry bookkeeping is not observable before the be-

ginning of the 14th century, '.w7he observed it displays the

- 74 -

principal features recognizable in modern accounting

practice. Music is another example of a conceptual frame-

work which took several hundred years to develop, from a

simple octave recorded by an 8th century monk to the

polyphonic forms with which wc arc today familiar. Tt is

important for our thesis, however, to see that the slow proc-

ess of constructing complex systems of interlocking accounts

began long before "the period of early capitalism," and is

attributable to economic growth situations of many different


The march of events as we see it can be shortly

stated: the decline of the Roman Empire was followed by

several centuries of anarchy, from which Europe emerged only

when feudal systems established a measure of political sta-

bility. This political stability permitted the exploitation

of economic surpluses, which the Normans and others sought

to mobilize, and it is perhaps not without significance here

that the revival of commerce and industry which preceded and

accompanied the Renaissance was restricted to those lands

which had once known the benefits of Roman administration.

The Roman trading laws and customs appear to have been re-

vived, for example, in the Jugements ou RoZes d'Otron,

which are one of the principal sources of mercantile law,

and these included the use of accounts, which were first

- 75 -

applied to public administration and then taken up by

private bankers, manufacturers and merchants.

Unlike Sombart, who attributes the primitive

business records of the early Middle Ages to man's preoccu-

pation with value in use rather than value in exchange,32

we simply see in this evidence of the lack of educational

facilities at that time, and point to other, earlier, pe-

riods when exact calculation and meticulous record-keeping

were fairly common. As educational facilities expanded,

through the efforts of the investment-minded rulers of the

time, so the number of persons able to use accounts in-

creased, and with them, the numnbcr of potential entrepre-

neurs. Combining this with a money economy, the important

technical innovations of the t.i:e- (arabic numerals; the

clock; the printing press; the gun) and capital, however

acquired, we arrive at a picture of conditions which were

extremely favorable for the growth of capitalistic enter-

prises, to an extent previously unknown in human history.

Accounting, Planning and Control

The idea of accounting as a conceptual framework is

clearly brought out in this statement by a German business-


The object of the businessman's ;work, of his worriess ,
his pride a-,d his aspirations, is iust his undertaking,
be it a cormT.ercial company, factory, banr., shipping
concern, theatre or rail .way. The undertaking seem.

- 76 -

to take on fc-rm and substance, and to be ever with him,
having, as it were, by virtue of his bookkeeping, his
organization and his branches, an independent economic
existence. "

Clearly, Rathenau could not have believed that his

business was a real entity; he was describing a system which

he had constructed. The use of accounts for this purpose

is also hinted at in the following confession, from

Rockefeller' s M;' r::.o irs :

From my earliest childhood I had a little book in which
I entered what I got and what I spent. I called it tm
account book, and have preserved it to this day."3

The modern entrepreneur may phrase it .-ifferently,

but the idea has net changed:

What, then, do we chief executives expect no'.wadays
from our information systems? First, continual and
sensitive checks on our present progress. We need to
know at once when we are off target. We need to iden-
tify where we have gone astray, so that- we can take the
necessary action quickly. . Isolating the relevant
information and pruning away the irrele-ant is an all-
imporcant accountancy function.
Second, w:e look for a really professional financial
evaluation of the alternatives facing us in the major
policy decisions we have to take. Decisions on such
matters as capital expenditure projects, pricing policy
and so on .3 -

Or this forthright statement:

You may take deferred cash flow, or any other method
of comparing a business, but if those figures do not
balance with the annual statement of accounts they are,
in my view, folly and extremely dangerous . I
personally never use any figures that do not balance
with the annual statement of accounts, . .3

The separation between accounting and matheniatics

is very marked in these quotations.

- 77 -

When interpreting statements of businessmen, it is

important to remember that they are primarily engaged in

creating values, not in transacting. As Knight pointed out,

productive arrangements are made on the basis of antici-

pations, and in an uncertain world these anticipations may

vary from subsequently experienced reality.37 The essential

fact is that men are acting and competing on the basis of

what they think of the future:

The whole calculation is in the future; past and even
present conditions operate only as grounds of pre-
diction as to what may be anticipated.38

Decision involves comparing a subjective judgment

of the significance of a commodity to the decision-maker

with an estimated future price, and it is in the elaboration

of the subjective evaluation that accounting srve-. the

planning function. Its use as a control mechanism follows

from its planning function, since we CdIfi:ln control as the

systematic measurement of performance against predetermined

standards, with the objects of evaluation and prediction

linking it up again with planning.

The context within which this process takes place

has been described by Mey, using the Limpergean formulation

characteristic of the Amstercan school of business eco-

nomics.3" We assume a flow of values--Quesnay's product

social seen in terms of Schumpeter's ?re.'. a.f--which starts

- 78 -

from gifts of nature and ends with final consumption. This

flow requires the intervention of business firms, or pro-

ducing entities, which are organized into branches, trades,

industries and sectors; in the last we include organs of

national and local government, without the cooperation of

which production could not take place. These subdivisions

are connected by markets.

The entrepreneur contemplating participation in

this process by contributing a product or service to a mar-

ket must distinguish between the functions of:

1. The acquisition of means of production, resulting
from investment.

2. The human tasks of utilizing These means of

3. The marketing of the product, or its distribution.

Each of these functions has financial implications,

and ;nerre means of payment are involved in both acquisition

and distribution, money measures can be imputed to invest-

ment and the wcrk involved in production. The entrepreneur

elaborates his business decisions using data derived from

such an imputation, and represents them to himself and to

his financiers in the form of accounts and financial state-

ments. This is the planning function. Suosequently, he

collects data, or measures performance, in the same way,

and it is this control operation which .we recognize as-

accounting. The planning operation, or "accounting for the

future," is not different in kind. Our argument is that

79 -

the control function of accounting presupposes a prior

planning function, which is implicit in all accounting

systems but only made explicit, in the form of business

budgets, in a minority of cases.

We shall consider in Chapter IV the different models

of this imputation process which have been used by accounting



1. Werner Sombart, Der Bourgeois (Munich and Leipzig:
Duncker & Humblot, 1913), transl. by M. Epstein as
The Quintessence of Capitaism (New York: E. P.
Dutton & Co., 1915).

2. Werner Sombart, Der Moderne Kapitalismus (3d ed.;
Munich and Leipzig: Duncker & Humblot, 1919).

3. Ibid., (Vol. I, 1, p. 319 (our transl.).

4. Ibid., pp. 92-3.

5. Sombart, Quintessence, p. 102.

6. Ibid., pp. 201-2.

7. Ibid., p. 326.

8. Vol. II, 1, Chapter X, p. 101 (our transl.).

9. The following is a summary of the contents of the

10. Echoing Proud'hon: "La comptabilit6 est toute
l'4conomie politique et le comptable le veritable
6conomiste a qui une coterie de faux litterateurs
a vole son nom."

11. See W. W. Cooper, "Social Accounting: An Invitation
to the Accounting Profession," The Accounting Review,
Vol. 24 (July, 1949), p. 233.

12. B. S. Yamey, "Scientific Bookkeeping and the Rise of
Capitalism," Economic History Review, second series,
Vol. I (1949), pp. 99-113, repr. W. T. Baxter, ed.,
Studies in Accounting (London, 1950), pp. 13-30; and
"Accounting and the Rise of Capitalism: Further Notes
on a Theme by Sombart," Journal of Accounting Research,
Vol. 2, No. 2 (1963), pp. 117-36.

13. Quintessence, p. 128.

14. Dar KodKP46 K:p'tap?'ZFn II, 1, p. 115.

- 80 -

- 81 -

15. Yamey, "Further Notes," etc., p. 119.

16. Ibid., p. 126, n. 17.

17. Quoting Sombart, and also H. M. Robertson, Aspects of
the Rise of Economic Individualism (Cambridge, England,
1933) (which appears to be a bowdlerized version of
Sombart). Yamey's n. 25, p. 128 appears to confuse
Sombart's planning hypothesis with the conceptually
distinct hypothesis that accounting assisted business-
men to prepare decisions scientifically. See Der
*Moderne Kapitalismus, Vol. II, 1, p. 121.

18. Ed. A. C. Littleton and B. S. Yamey (Homewood:
Richard D. Irwin, Inc., 1956), pp. 1-13.

19. B. G. Niebuhr, Roemische Geschichte (2d ed.; Berlin,
1830), Vol. II, p. 673, n. 1319. This note is omitted
from the English translation (London, 1844).

20. The principal reference is G. E. M. de Ste. Croix,
"Greek and Roman Accounting," in Studies in the
History of Accounting, pp. 14-74.

21. Tribology = the technology of interacting surfaces.
The term "interface" in cybernetics has a related

22. J. A. Schumpeter, The Theory of Economic Development
(New York: Oxford University Press, 1961) (first
German ed. 1911).

23. A. Pope, Essay on Man, Ep. IV, 1. 248.

24. P. Charron, Of Wisdom, Bk. I, Ch. I (1601), Stanhope's
translation. See Pope, Essay on Man, Ep. I. 1. 57.

25. Quintessence, pp. 52-4.

26. Ibid., p. 312.

27. Fcr a similar statement, see Schumpeter, Theory cf
Eonorc 3 ,o 7 1 t, p. 85.

28. J. M. Keynes, TO,. Gjr:era: Thecr, of Ep1o t,
Inrtcrret and ;.'y (Now York: Harcourt, Erace &
World, Inc., 1965), p. 150 (firsr pub. 1936).

- 82 -

29. Frank H. Knight, Risk, U:ce-rtai>t and Profit (New
York: Harper Torchbooks, 1955), p. 311.

30. BrYce Lyon and A. E. Verhulst, Mediaeval Fi3:.:ace
(Brown University Press, 1967).

31. Kenneth S. Most, "New Light on Mediaeval tianorial
Accounts," London, The Acco:ntart, Vol. 160, No. 4910
(January 25, 1969), pp. 119-21.

32. Qz( itessenc~',, p. 18.

33. Ibid., p. 173.

34. Ibid., p. 237.

35. Sir Kenneth Keith, U. K. investment banker, reported
in The Acc.,9o2tant, Vol. 161, No. 4952 (November 15,
1969), pp. .12-3.

36. A. Chester Eaettie, Chairman, Selection Trust, Ltd.,
reported in The .ccC-o,,Tta2nt, Vol. 158, Nlo. 4374
(May 18, 1968); p. 668.

37. Frank H. Knight, p. 272.

38. Ibid., p. 273-4.

39. Abram Mey, "Le circuit Lconomique et sa relation avec
la th4orie de ia valour et du calcul rationnel de
1'4ccnomjie industrielle,"' Paris, Reihsv de .'EZcc.'.nc,,
Poiitiqcre, Eds. Sirey (1960), espec. pp. 8 and 12.



In putting forward the proposition that accounting

antedates the rise of modern capitalism, and that its ob-

jective was primarily to aid planning and control rather

than the stewardship of wealth, we place ourselves in direct

opposition to some notable historians of accounting.

Littleton argues that accounting is a recent invention,

and although Garner disagrees with him in this, he never-

theless sees cost accounting as a 19th century phenomenon.1

It is, of course, difficult to avoid the temptation to mis-

read records of the past, and the modern meanings of the

words "account" and "accounting" ray well be fundamentally

different from the meanings of similar words used by Zenon

and Cicero. On the other hand, we have suggested that the

views of accounting theorists have been formed as a result

of a technical preoccupation with the features of double-

entry bookkeeping, and we shall now examine the thesis that

a more fundamental obstacle in the path of understanding is

the fixation with techniques of imputation characteristic

of accouptina literature of the last hundred years. This

would explain che fact that Garner's conclusion is so

patently at cdds with the cumulative effect of the historical

- 83 -

- 84 -

evidence adduced by him in the first two chapters of his

work. In our examination of the imputation process we shall

attempt to shcw that recent formulations in accounting theory

are fully consistent with our planning and control hypothesis,

and indeed, fit badly into a conceptual framework which sees

accounting as record-keeping having, as its main object, the

discharge of stewardship obligations, together with a set of

reports to investors. It will be seen that the imputation

problems which have preoccupied accounting theorists are a

special case cf the general problem of valuation, which ac-

quires its particular importance through managerial needs

in relation tc the planning ar.d control functions.

The greater part of accounting thecries deals with

business or corporation accounting, and we shall, therefore,

concentrate on irrmput7tio.n '.n the context of the business

firm. We shall than examine to ';hat extent the models of

the firm can be modified to embrace other fields in which

accounting is found. The models cf the firm can be clas-

sified into the econo: ic, the financalZ and the CL ~yr':etiC.'

The F.c ,,,'rc,: T[.vr-, Mcdc -, f t:e., Fir.n

One proximate source of an economic model of the

firm is Irving Fisher, whose ideas recur in the literature

of accounting theory, and wh7o has been cited for

this purpose by Canning and Mattessich, among others.'

- 85 -

Fisher defines wealth as "material objects owned by human

beings," and the significance of "material" is that the ob-

jects in question can be physically measured. Valuation is

a species of physical measurement "involving the principle

of exchange," and appraisement is a method of pricing which

supplements actual exchanges in markets. Although an ap-

praisement must proceed from a knowledge of the purpose for

which it is carried out, "price or prices do actually exist

without ambiguity." The physical unit of measurement can

be multiplied by a price, and the resulting price'data

aggregated to produce values, this last process being wholly


The significance of the phrase "owned by human

beings" is that it incorporates the idea of property rights,

which are rights "to obtain and enjoy the uses of wealth,"

i.e., to future services. It is clear that Fisher is

thinking in terms of consumption as the object of owning

property; property rights are "desirable changes effected

by means of wealth," and desirability is equated with

satisfaction and utility. This construct is not confined

to consumption, however, but extended to investment. "We

may speak of the desirability of a fruit orchard to a

particular person cn January 1, 1905, but the pleasure

derivable from that crchard is only to be experienced during

future years, as it bears fruit and the fruit gives en-

joyment to those who eat it."'

- 86 -

Wealth may be a stock or a flow, but income is a

flow of services, i.e., those future services described by

"property rights." Fisher disregards distinctions between

"income," "gain," "profit" and "benefit," and in his later

work this restriction is made explicit, indicating that he

is working with a static model throughout.6 "Income is a

series of events," but they are events of a particular kind:

they are the rights to services enjoyed by an individual;

these services produce satisfaction, so that income is es-

sentially a psychic phenomenon. The services can be taken

to represent psychic income, anri money payments for the

services are a surrogate -.hich can be used in economic


If we were to try to structure Fishcr's tim.z theory

of production, it. would probably resemble the constructs used

by Jevons and Bhbm-Baw'erk. The problem is to describe in

a way suitable for mathematical analysis the process w;here.:-y

the product of a given quantity of labor increases with

every increase in the "dose" of capital applied, capital

being defined as the intermediate products which are used

in final production. The state of technology is given.

Jevons adds successive units of time to a given amount of

resources, e.g., one month's labor. The amount of investment

capital, which has a time dimension, is divided by the amount

of capital invested, whichc h has no time dimension, to give

the B3hm-Ba'uerkian "period of production."

- 87 -

Let m's represent n quantities of physical resources

that are being applied at n points in time t1 . t to

the production of a consumer's good that is sold and con-

sumed. This involves either identifying these physical

resources with a single homogeneous agent--Jevons and

B6hm-Bawerk chose homogeneous units of labor (subsistence

equivalents)--or the assumption that these resources consist

of doses of invariant composition. For axis we choose time,

and the zero point is the time at which the consumer's good

is sold. The t's are all to the left of this zero point,

hence negative (the expression is made positive by prefixing

a minus sign) and decrease numerically as we proceed from

the first act of investment in tj to the right, toward the

zero point. The expression

mrtn + m2t2 + m t
T = .n n
mi + m .. +

has only a time dimension, since the m's cancel out. This

is the "period of production," the average of the time

distances from the (negative) investment to the sale of

the product.8

This device permits Fisher to construct a theory of

capital in which capital Is simply the present value of

income, and the valuation model which result- is called

by Canning "direct valuation." Canning contrasts this with

the "indirect valuations" uZad by accountants, which he

- 88 -

regards as second-best figures, to be used where direct

valuation is impossible or inconvenient. Canning does not

make explicit the assumptions which are necessary in order

to arrive at Fisher's result, and which restrict the appli-

cability of his model to situations in which the process of

production is not of the essence, nor does he discuss the

particular point that, in order for the B6hm-Ea:ierkian

structure of capital to be made analytical, this structure

must be comparable physically. It is instructive to trace

the implied model of the firm to its Ricardian origin, in

order to demonstrate the significance of this observation

for accounting theory wnich seeks to explain business or

corporation accounting.

The Ricardian model, Hicks has suggested, is a model

of the farm. Hicks depicts it as follows:


I P..

r \
Figure 1. Ricardian Model of the Firm

Sourc.-: J. R. Hicks.- Capital, d GCc t, (Oxford, 1965), p. 44

- 89 -

The horizontal axis measures output of corn, the

vertical axis, the capital/gross output ratio, both terms

in corn. The length OH is unity, so that the rectangle OHPN

represents the same quantity of corn as input (of capital)

as the output OH. At output ON, RN is the marginal capital/

gross output ratio; given diminishing returns RN is an

increasing function of ON, suggesting a marginal "curve"

AR. At the margin one unit of output (PN = OH = 1) requires

RN of capital to produce it, leaving PR as profit. The

rate of profit PR/RN is a constant, which is show by pro-

ducing RA backward to meet the horizontal axis at T and

then joining TP, cutting the vertical axis at B; now

BA/AC = PR/RN. If we take the rectangle OHPN to represent

total output, the three parts are: (1) CARN, the replacement

of capital, (2) BARP, the profit, and (3) HBP, the rent.

If output must be expanded, N moves the right, the AR curve

is unaffected and therefore T remains the same; TP must

swing downwards, showing that the rate of profit falls while

rent rises.

The theory of the firm in price theory was

substantially modified in the 1930's, but it is probably

correct to state that the earlier .icardian model remained

a formati-.e influence throughout the first half of the 20th

century.9 We shall not attempt to trace the use of this

model in economics, but we shall offer a suggestion as to

how it has been used by accounting theorist;.

- 90 -

$ per unit

Capital + Labor + Land

Goods or Services
Capital Labor


Q/t Q/
Inputs (in output 0 Output

Figure 2, Static Price Theory i-.~ocl of the Firm

Figure 2 sho..s a different p-efer.ntation of the firm

of micro-econcmic theory. It is assumed to be small enough

to contemplate anr unlimited supply of hoImogeneous irnpts of

capital and labor at prices unaffected by the volume of

its output. Land, however, is a set cf fixed quantities

of varying qualities, displaying the characCeristic of

diminishing returns, and expan3icn raises the price of

land relative to the unit of output until the margin, where

the cost of production equals selling price, and beyond

.which output will not be taken. The model is conceived

in stock terms; in flow terms it might be viewedd as in

Figure 3, where we use accounting terminology to describe

the factors of production. In this new model, materials

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