Economics, Accounting and the True Nature of Capitalism

Capitalism, Ecology and Democracy

Jacques Richard, Alexandre Rambaud

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000484052
• Edition: 1
• Topic: Business
• Subtopic: Contabilità
• Index: Business

Almost all economists, whether classical, neoclassical or Marxist, have failed in their analyses of capitalism to consider the underpinning systems of accounting. This book draws attention to this lacuna, focusing specifically on the concept of capital: a major concept that dominates all teaching and practice in both economics and management.

It is argued that while for the practitioners of capitalism – in accounting and business – the capital in their accounts is a debt to be repaid (or a thing to be kept), for economists, it has been considered a means (or even a resource or an asset) intended to be worn out. This category error has led to economists failing to comprehend the true nature of capitalism. On this basis, this book proposes a new definition of capitalism that brings about considerable changes in the attitude to be had towards this economic system, in particular, the means to bring about its replacement.

This book will be of significant interest to readers of political economy, history of economic thought, critical accounting and heterodox economics.

Part I

The battle about the concept of capital

DOI: 10.4324/9781003194132-1

First volume: Economics, accounting and the true nature of capitalism

“There is no term in economics which has given rise to so much controversy as capital” (Eatwell, 2016). This brief quotation poses the problem we have to deal with at the start of this volume. That of a real battle over the concept of capital. We will first give the context and the fundamental elements of this battle.

Introduction to Part I

By way of an introduction to justify our focus on accounting issues, we show the importance of accounting today in the first chapter. In the second chapter, we analyse the fundaments and the origins of the “money-capital” concept defended by Hodgson based on his interpretation of the history of accounting. In Chapter 3, we give our view of what is really the conception of capital in traditional modern accounting with reference to a thorough historical analysis connected with the evolution of capitalism. The fourth chapter shows the development and victory of the classical accounting concept of capital. Chapter 5 is devoted to the enigma of the erroneous position of almost all economists in matters of capital. The sixth chapter discusses the particular case of two false friends of accountants: the cases of Luca Pacioli in the 15th century and Irving Fisher, his follower in the 20th century, who have both attempted to attack the classical model of accounting with a new financial model. In the conclusion of this first part, we present the two main conflicting conceptions of capital in the history of capitalist accounting and economics.

1 How a capitalist accounting constitution dominates the world economy

DOI: 10.4324/9781003194132-2

Introduction

Thanks, notably, to liberal economists like Smith and Hayek and also, indirectly, to the disastrous experience of Soviet communism, the defenders of capitalism have largely succeeded in spreading the belief that capitalism rhymes with minimal state intervention, a thesis originating in a long liberal tradition with authors like Hume, Burke, von Savigny, Maine, Carter and so on. According to these liberals, existing laws are the product of conventions, that is, rules determined freely by civil society. They depict a process without any state intervention or, at the utmost, with very limited intervention, reducing itself to the sole compilation of past customs. As Sugden (1986, 5) believes, there is a “simple formalization of conventional behaviour”. Greif (2006, 8) even argues that institutions reflect human actions as a private order. This kind of Darwinian process of selection of the best customs as a basis of laws contrasts with the lessons of anthropologists and legal historians who demonstrate that a line must be drawn between societies dominated by customary rules and those creating laws. In fact, the appearance and evolution of law involve conflict resolution, powerful institutions such as the state and transcendence of mere customary arrangements. It is possible to quote a list of historical cases that demonstrate how many early legal systems relied on the state, for example, the enforcement of contract rules by the town guilds in the Middle Ages and even earlier. Thus, Farnsworth (1969) holds that the legal basis of contracts emerged in ancient Rome to settle disputes. Private ordering models based on individual coordination equilibria or group reputational effects are inadequate to explain the enforcement of property rights in the real world. The mere codification or proclamation of a rule is insufficient: it could simply be ignored. In complex systems, simple imitation or customs do not work. Because of the great number of laws, an institutional authority is required. Under these conditions, it is not possible to admit the positions of Coase (1937) and Williamson (1975), who confuse law with custom and notably do not treat in detail the legal personality of the firm. In contrast, we may praise Commons (1924) for demonstrating that common law is more than custom, Seagle (1941) for declaring that there are no laws until there are courts and Redfield (1950) for showing that the beginning of law is associated with the beginnings of the state. We can thus draw the conclusion that it is utopian to think that customs will be respected without the intervention of a state or courts: legal institutions are at the core of capitalism. Notably, the firm is an institution made not by private ordering but through the interactions of business with the established rules of contract and company law. This is contrary to Alchian and Demsetz (1972), who hold that market transactions are not eliminated within the firm and consider the act of creating a company as an ordinary contract between private people. In the same way, we disagree with Jensen and Meckling (1983), who see the firm as a nexus of contracts: it is, on the contrary, a functional entity (see Chapter 11). This position permits us to see that the shareholders are not the owners of the corporation: they are only owners of their shares. Thus, in line with Marris (1964), Gower (1979), Ireland (1996), Blair and Stout (1999), we view the corporation itself as a propertied agent. These lawyers have correctly shown how the state plays a fundamental role in matters of creating public companies, chiefly, the possibility for them to be considered as a legal moral entity. However, they completely omitted the fundamental role of accounting laws in their demonstration, meaning the rules of management of the firm. The state has not only been an agent for the determination of the structure of the firms, but also, and more importantly, their goals – their criteria of performance. This has prevented these lawyers from a more encompassing view of the question. We will now demonstrate that, with the help of liberal and social-democratic states, capitalists have succeeded in creating a mandatory global accounting constitution that dominates all economic and social activities: a kind of super-law above all other laws. The nine following theses embody this demonstration.

First thesis: Markets and the whole economy are dominated by accounting laws

Since the publication of the Wealth of Nations (1776) by Adam Smith, most liberal economists repeat permanently, particularly in this period of economic globalization, that every firm is constrained by the harsh law of the market. We are asked to believe that the market (or an ensemble of markets if we take its components) dominate(s) the world. It is asserted that it has its own law, which must be respected. We are told to be a realist and obey as there is no escape from it. So-called economic experts constantly appear on TV to reiterate this argument and persuade us that nothing can successfully oppose the law of the market economy. This thesis of the “law of the market” and of its self-regulatory character is generally backed up with mathematical devices such as the famous supply and demand curves so as to reinforce its inexorable character. It has become a common belief of all modern mainstream economists and has been glorified by Hayek’s “market order or catallaxy” (1967, 529). It has gained ground in many domains, including that of philosophers. For example, Habermas speaks of the “self-regulation of economic growth” (1968, 29) and Comte-Sponville develops the same idea in his book of 2004. Political experts also stress the power of markets. For example, Rosanvallon (2020, 55–62) shows the importance of the extension of “anonymous” and “free” exchanges and characterizes the populist movements as movements of resistance against the markets for the sake of protectionism, meaning practically a return to national controls of the movements of goods. In our view, this idea or, better, this ideology of anonymous and free markets, conceals the reality of capitalist markets. The mistake committed by all those who defend it originates at best in a lack of analysis of the real functioning of markets or, at worst, in the will to manipulate the thoughts of people. It goes back, as we have said, to Adam Smith, who played a major role in its promulgation. This founder of economic science is reputed for having shown how “the invisible hand of markets” governs the whole economy like a dreadful iron hand.¹ The problem with the Scottish economist is, first, that he adopts a natural price doctrine, which has little to do with capitalism.²He also totally bypasses one major element of the functioning of the capitalist market. Indeed, if Adam Smith has seen the “invisible hand of the market”, he has not seen the visible hand of the accountants who rule this market with the support of commercial laws imposed by the state.³ We will prove that, practically since the end of the Middle Ages, it is the accountants as agents of “flesh and bones” capitalists rather than abstract mathematical curves that fix the basic rules of the functioning of the capitalist market.⁴ Thus, there has never been any kind of impersonal power of the Market or mathematics. There have never been totally free exchanges or free competition since the beginning of modern capitalism.⁵ There has been more and more regulation to such an extent that, since 1945, with the help of different socialist and liberal governments, the proponents of capitalism have even succeeded in creating an international accounting law that governs markets. Thus, contrary to the belief of Smith, and the declarations of most economists today, the main force driving the economy is not that of anonymous markets, but the actions of capitalist accountants of big firms who fix the rules of the game for these markets. As early as 1967 (333–34), Hayek denounced state intervention that “allows some rights to collective interests of particular groups”. And, like Smith, he believed in the spontaneous functioning of the market. Thus, he was unable to see the reality of the forceful efforts of capitalists to strictly regulate their accounting system, meaning the heart of their business. He also did not see that this regulation was intended to serve “particular interests”, the very thing he denounced throughout his book. His mistake is much more unforgivable than Smith’s since the latter lived in a time when this accounting regulation was still of modest dimension. Of course, all these liberal economists may refer to the fact that Aristotle already clearly distinguished the political questions governing the relationships inside the City from the economic ones. Aristotle deemed the former to be governed by laws and judges (Nicomachean Ethics Book V), while the latter, as described in Book I of Politics, should only refer to the nomos, meaning private domestic norms, what he called the “oikonomia”. But this conception was only possible in the context of an economy essentially marked by a familial and agrarian activity. This has nothing to do with modern capitalism, which has developed since the end of the Middle Ages, notably in northern Italian cities, with an international European dimension. Since that time, a kind of regulation of accounting emerged, governed by city-states such as Florence and Genoa, and later by nation-states such as France (see below). The historical lesson is that every modern capitalist market requires laws and legal rulings promoted and backed by mighty states and human beings who participate in them.⁶ Thus, very specific accounting laws prepared by flesh and blood accountants give markets very specific features depending on the type of interests they intend to defend. Zeff (2016, V) put it well: it has “not been self-evident that financial accounting has economic, political and social consequences”. Even Weber, a sociologist aware of the importance of accounting, did not perceive the significance of accounting laws: he thought that the management of firms was chiefly a private affair (1920, 28–29). Rousseau, as it is well known, believed in the dominant role of politics in every society and was, thus, much more of a realist than Smith, Weber and Hayek. Due to this specific regulation of the economy by accounting laws it follows, as already alluded to before, one cannot generalize the concept of the Market (with capital M). We necessarily deal with very different types of markets, of which the capitalist markets represent only a specific subset amidst other possibilities. In this respect, the concept of cost (production cost notably), which serves as a basis for the formation of prices plays a fundamental role. Depending on whether costs cover all the crucial components to protect all types of capital employed, or whether they only cover a share of them, very different types of markets emerge with totally different impacts on these capitals. We will show that these concepts of costs are essentially conceived in the “realm” of accounting by accountants on the basis of specific concepts of capital to be conserved. As Laville (in Merlant et alii, 2003, 107) pointed out correctly “the price does not find its origin in uncertain action of exchange […] it is socially organised”. There are, thus, no eternal and objective laws of the Market, but only specific laws relative to specific markets regulated by specific accountants who may have different philosophical, moral and political conceptions of capital and of the cost of production.⁷ Proudhon (1846), a fiery author, but often very perceptive, commented that “the accountant is the true economist from whom a coterie of fake literates has stolen his title”. This assertion is certainly exaggerated but it contains a kernel of truth. It is difficult to deny that accountants and the auditors of accounts, notably those of big firms, have played a fundamental role in the creation and regulation of capitalist markets. In this sense, they may appear as economists. We could say that there is a kind of division of labour between two major types of economists. On the one hand, accountant-economists who lay the foundations of capitalist markets with their concepts of capital, costs and profits. On the other hand, “pure” economists like Turgot, Quesnay, Smith, Marx, Walras and so on analyse the laws of functioning of these markets already placed under the constraints of capitalist accounting. Some of them go further, as, for example, Keynes: they propose some kind of state intervention to impose certain supplementary social or societal constraints, such as minimum wages. But their proposals rarely aim at modifying the concept of capital as defined by accountants. Keynes has never proposed to change the concept of accounting capital and, more largely, the capitalist type of accounting. Even Marx, who devoted his entire life to the study of “Das Kapital”, never truly studied the capitalist accounting system and, for that reason, has been unable to conceive of an alternative (see later). Up to now, the concept of capital, as conceived by accountants, has never been seriously challenged by economists, not even in the so-called communist countries and the Yugoslavia of Tito (see later). Nowadays, most economists who seek to build an ecological economy do not propose to question the accounting of capitalist companies and their traditional concept of cost. Thus, we can assert that the concept of capital that dominates markets today is practically still the same as that which appeared at the end of the Middle Ages. More than 700 years after the foundation of modern capitalism, today’s economy, in spite of its varieties or diversity (Jessop, 2011⁸), remains dominated by the same basic accounting tools. The books devoted to the different forms of capitalism, like those of Schonfield (1969), Albert (1991) and Crouch and Streeck (1996) have generally not taken account of these types of tools and their permanence. We must, on the contrary, underline the extraordinary stability of the fundamental characteristics of modern capitalism: its ...