Accounting History and the Rise of Civilization, Volume I

Gary Giroux

• Publisher: Business Expert Press
• Year: 2017
• Print ISBN: 9781631574238
• eBook ISBN: 9781631574245
• Topic: Business
• Subtopic: Financial Accounting
• Index: Business

Volume 1 of Accounting History covers the first 10, 000 plus years of the rise of accounting and civilization. Conveniently, accounting was part of the developing culture from the start. With fortified villages, accumulating wealth meant inventory accounting, first using tokens (clay balls) and eventually writing plus the abstract concepts of numbers. Cultures evolved in Mesopotamia and elsewhere. After the Crusades, Italian city-states created merchant wealth based on the creation of double-entry. Luca Pacioli's Summa described the Venetian system, which traveled north thanks to Gutenberg's printing press. Enhanced forms of manufacturing, banking, and merchant trade continued. England proved to be a special place, where the Industrial Revolution was born. Along the way, accounting sophistication rose as entrepreneurs discovered the need for complex information to survive. Accounting became a profession as business became big and important enough to employ professionals. The United States went from an agrarian backwater to an industrial power in 100 years. Accounting sophistication matched business complexity, as manufacturing accounting and control techniques developed capable of providing information needed to run giant firms. Railroads became big, requiring complex accounting system. Andrew Carnegie used his railroad experience to adapt the railroad accounting systems to steel manufacturing. Industries consolidated and the need for effective accounting control became imperative. Du Pont proved to be the most effective innovator and this knowledge expanded at General Motors, systems that dominated beyond the mid-20th century. Accounting History is written for accounting and business students plus business professionals. It's not written for accounting historians, although they may find this book useful. The writing is basic without much jargon, so the general public will also find this book insightful.

SUPPLEMENT C

What Is Capitalism and Why Is It Important to Civilization?

Capitalism came in the first ships.

—Carl Degler

Capitalism is defined as a system where the means of production are owned and used by the private sector, a relatively unhelpful explanation. These characteristics are generally true but exceptions exist (consider modern China) and it does not begin to explain why it took root and has been extremely successful (but with major down sides). A good starting point is Feudal Europe. Definitely not capitalism, except for developing pockets of industry, especially in somewhat independent cities. Guilds were Medieval and not capitalist; they produced goods and services but received monopoly rights and protections. Merchants and bankers (sometimes the same individuals and partners) got their start in cities. They sought as much freedom from government interference as possible, except for monopoly privileges when available at a reasonable price.¹

Key characteristics in developing capitalism were property rights (as part of rule of law), competition, markets that were relatively free, and ability to raise and accumulate capital. Capital was originally associated with money, later expanded to represent all assets with a commercial value. Modern concepts of paid labor developed later. The developments of trade across Europe and into Asia expanded in the late-Middle Ages, along with the growth of multistate banking and related financing such as insurance. Merchant capitalism (also called emerging capitalism) had most of the characteristics now associated with capitalism: private parties, competition, developing contract and property rights, transportation routes, increasingly sophisticated banking, and incentives for vast and growing wealth.² The increasing complexity required double-entry bookkeeping, which the Italian merchants developed basically out of necessity. Its monetary success brought in the Renaissance and, at least indirectly, the Enlightenment.³ The 16th- and 17th-century Dutch expanded financial capitalism with the innovations of the joint stock company and stock exchanges. They soon developed key strategies and instruments to exploit the market, including futures and options, short selling, and multiple forms of manipulation and speculation. They also discovered bubbles and busts, made especially famous from Tulip Mania in the 1630s. European mathematical discoveries would add to the knowledge of risk and uncertainty. Markets made capital a commodity, subject to both speculation and risk. England’s chartering of the Bank of England in 1694 would lead to central banking to, hopefully, limit financial extremes and potential collapse.

Many authorities consider capitalism starting with industrialization and the factory system (conveniently called industrial capitalism), causing amazing increases in productivity and wealth creation. First Britain, then the United States and much of Europe adopted machine manufacturing and the steam engine, then built railroads and steamships. Components of industrialization according to Kocka included:

First of all, innovations in technology and organization, from the development of the steam engine and mechanization of spinning and weaving in the eighteenth century to the digitization of production and communications in the late twentieth and early twenty-first centuries; second, the massive exploitation of new energy sources (initially coal, later electricity from different sources, then oil, atomic energy, and renewable energies) that has fundamentally changed and endangered the relationship of humankind to nature; third, the spread of the factory as a manufacturing plant that, in contrast to the old putting-out system, was centralized, and in contrast to a craft workshop, used motors and machine tools and made a clear distinction between management and execution.⁴

Increasing incomes (especially as labor gained power) created a middle class, but with the downsides of continued business cycles, substantial poverty, and continued income inequality. A major component of the overall problem of economic fluctuations was unregulated finance, with the ability to generate vast wealth through risky ventures and the concomitant potential of mass financial disaster.

A major problem of developing industrial capitalism beginning with Britain was the growing income equality gap, with workers (often farmers thrown off their land) working long hours in unsafe conditions for a pittance and subject to layoffs in depressions. With a zero safety net workers could expect no help for government, particularly bad living conditions with rampant diseases, and no education. Stealing bread apparently could be punished with long jail time or even execution. This existed when Karl Marx was researching capitalism and coming to the conclusion that the system was unstable and would be overthrown. Instead, social relief and increasing power to labor were eventually forthcoming.⁵

Economic and sociological concepts of capitalism go back at least as far as Adam Smith’s 1776 Wealth of Nations. Smith was a believer in free markets, laissez faire, self-interest, and introduced the term “invisible hand” for how markets (at least for consumable goods) behave. Smith considered a regulatory system necessary, requiring at least limited government action to promote efficient use of markets and enforcement of contracts. Later thinkers built on the Smithian model. A key point recognized by Smith was the complete change of culture to the “commercial society,” such as the importance of time to clock in and out. Economists developed first classical then neo-classical models. The Austrian School and others focused on a libertarian perspective, while Karl Marx led the charge for the complete overthrow of capitalism in favor of a socialist system. The socialist critique by Marx and others included injustice, exploitation of workers and many others, plus moral erosion.⁶

German sociologist Werner Sombart, writing around the turn of the 20th century, contrasted “early capitalism” (before the Industrial Revolution) from “high capitalism” (beginning in the mid-18th century).⁷ Sombart gave considerable credit to Jewish business people, excluded from guilds and other Medieval European institutions, for developing competition and other elements of capitalism. Sombart considered double entry a key precondition to capitalism. Maximillian “Max” Weber, a contemporary German sociologist of Sombart, viewed culture as a key to understanding capitalism and viewed the “Protestant ethic” essential to industrial capitalism.⁸ Weber and others emphasized the relationship of markets, competition and the search for profits relative to political and legal social elements (e.g., the enforcement of contracts and property rights).

Austrian economist Joseph Schumpeter, writing in the mid-20th century, considered innovation a major component of capitalism and the catalyst for economic development. The result is business cycles caused by creative destruction because new technologies and strategies make older systems obsolete.

In summary, one definition of capitalism:

Emphasizes decentralization, commodification, and accumulation as basic characteristics. First, it is essential that individual and collective actors have rights, usually property rights, that enable them to make economic decisions in a relatively autonomous and decentralized way. Second, markets serve as the main mechanisms of allocation and coordination; commodification permeates capitalism in many ways, including labor. Third, capital is central, which means utilizing resources for present investment in expectation of future higher gains, accepting credit in addition to savings and earnings as sources of investment funds, dealing with uncertainty and risk, and maintaining profit and accumulation as goals.⁹

Capitalism Around the World

The concept of “Western Civilization” seems rooted in capitalism. The economic growth from industrial productivity made the capitalistic West different from most of the rest of the world. Many (even in the West) fought against the materialism and self-interest built into the system, but the solutions to urban problems (e.g., drinking water and sanitation, public health, near-universal education, mass transportation, economic opportunity) were hard to resist. Political order became a common characteristic, based on a professional administration (bureaucracy), rule of law, and accountability through democracy and accounting or auditing systems.

The West, in fact, now has mixed economic systems, with government playing a large role, not only regulations but ownership of some means of production (particularly “natural utilities” such as gas and electric companies). Northern European countries tend to have larger government shares and more regulation than the United States, although this has run in cycles. The United Kingdom moved toward socialism with the Labour government of Clement Attlee in the late-1940s, then switched to the right with the Conservative government of Margaret Thatcher beginning in 1979. Scandinavian governments (“Nordic social democracy”) tend to have large shares of public spending, a substantial welfare state, and powerful labor. Free markets are stressed, but with a big share of state-owned enterprises (sometimes called “cuddly capitalism”).

Global trade brought imperialism, sometimes useful (consider Hong Kong or Singapore), sometimes disastrous (much of Africa), largely based on relative political order and who took charge.¹⁰ Much of the world adopted some characteristics of capitalism, democracy, and rule of law, but usually deviating from the “West” in major ways. Japan industrialized under the Meiji Empire beginning in the 1870s. Mitsubishi and other powerful conglomerates (called zaibatsu)¹¹ were given substantial government support—including a subsidy system to promote national interests to develop major export markets. Capitalism, but with characteristics quite different from most of the West. Other Asian countries (especially Taiwan and South Korea) generally followed the Japanese model after World War II. As summarized by Studwell:

An historical review of east Asian economic development shows that the recipe for success has been as simple as one, two, three: household farming, export-oriented manufacturing, and closely controlled finance that supports these two sectors. The reason the recipe worked is that it has enabled poor countries to get much more out of their economies than the low productive skills of their populations would otherwise have allowed at an early stage of development.¹²

China is a special case, a communist dictatorship adopting a unique capitalistic model beginning with Deng Xiaoping in the late-1970s. An empire with a strong bureaucracy developed two to three thousand years ago with a strong cultural identity rooted in Confucianism. After so-called agricultural reform, China privatized some state enterprises—with ownership concentrated in the elites. Ian Bremmer called this “state capitalism,” authoritarian regimes using state-owned companies and select private companies generally to maximize state power.¹³ The strategy relied on low wages, exploited workers (a relative term), and mass exports (somewhat similar to the earlier Japanese example). Although China remained a corrupt totalitarian state, the economy expanded and a gigantic middle class created.

After the collapse of the soviet system around 1991, Russia became a case study of an attempted but failed shift to capitalism. Privatization meant the creation of wealthy oligarchs. Income inequality exploded and the economy basically retrogressed. The government under Vladimir Putin remained a corrupt police state, subject to his whims and those of the energy market.

The story of capitalism is mixed, with the potential for unprecedented economic progress, but also potentially bad social consequences, included increasing corruption, “crony-capitalism,” and market or economic volatility. History suggests the importance of the capitalist system, but the need to “get it right”: appropriate regulation including rule of law and taxes, relatively free markets subject to professional oversight, the need for accountability (especially transparency and inspections or audits), plus a balance of corporate governance, customer rights, fair treatment of workers, and consideration of the public and environment.¹⁴

CHAPTER 4

The Early American Experience

Merchants such as John Hancock were sent to London to learn accounting as apprentices.

—Jacob Soll

The English colonies in North America were founded to practice religion in peace or find riches. The Plymouth Colony is the one most remembered, based partly on fact and partly myth. Most colonies were structured as joint stock companies and funded by British investors. These required royal charters and prospects for wealth. Gold was not found and none of the stock companies actually made much money. Consequently, other means of success were found. Each colony had a unique structure and history and, in the beginning, little contact with other colonies. Early on, survival was key rather than profitability.

The Virginia Company (a joint stock company interested in generating income for investors) established the first permanent settlement, the Jamestown Colony in 1607. Others included the previously mentioned Plymouth Colony in 1620, the Massachusetts Bay Colony in 1630, and so on. The last colony was Georgia in 1732, established as an alternative to debtors’ prison and other “worthy poor.” America started with a focus on profit-making, a good starting point for capitalism, where production and distribution of goods are set by private markets based on supply and demand. The major attraction was vast stretches of land and long established British property rights (with little regard given to the native Americans).

Most colonists were farmers, some 95 percent of the population in 1770.¹ The South in 1770 was the most populated section with 1.5 million inhabitants, with about a half million each in New England and the Middle Colonies. The soil and weather made the South ideal for agriculture and major exports included tobacco, rice, and indigo. Generally, these were traded directly with Britain. The Middle Colonies of Pennsylvania, New York, and New Jersey produced livestock and grain, exported mainly to other colonies rather than Britain. New England had small, mainly self-sufficient farms. They exported timber, fish, and whale oil. With extensive shipping, New Englanders became shipbuilders and merchants.²

The four major port cities in America became thriving commercial centers. By 1770, these cities were importing some 137 tons of cargo: Philadelphia at 47,000 tons, Boston 38,000, Charleston 27,000, and New York 25,000. The colonies relied on trade and some 15 to 20 percent of incomes came from foreign trade.³

Because of British regulation there were no banks and no (legal) domestic mints for coinage. Bank of England banknotes and English coins were not common in the colonies, by regulation. Some colonies issued paper money, especially in times of war and various foreign coins were used. The Spanish eight reales coin became the “Spanish milled dollar,” the most common currency in America. At the same time, colonial merchants relied on credit from British merchants, especially in the South. In turn, colonial merchants gave credit to their customers. As part of the process, bills of exchange could serve as nominal paper money.

Colonial Grievances

The colonies were thrust into European history because of the continuing conflicts among the European superpowers over the 17th and 18th centuries. There were many wars, which would involve the colonies and increasing restrictions consistent with Britain’s mercantile system. After the Treaty of Paris ended the French and Indian War (Seven Years War in Europe) in 1763, regulations, taxes and other restrictions became more severe. Britain won and had control of the seas and trade routes, not to mention the American and Canadian colonies as well as various Caribbean islands. Britain also accumulated massive debt, hopefully to be partially funded by the colonies. Various British regulations from 1763 to 1776 and stricter enforcement led directly to the American Revolution.

Under the mercantile system, colonies were expected to ship raw materials to England and buy English finished goods (the Industrial Revolution was beginning). Various regulations and mother country officials were in place to insure compliance and limit colonial autonomy. However, these colonies had been relatively autonomous for over a century and taxes were mainly local. Regulations could be obeyed and appropriate custom duties paid; however, colonial merchants were good at evading taxes and regulations (both local and British) and disrupted the new English tax bureaucrats especially when obedience meant economic ruin. For example, the Molasses Act of 1733 required molasses to be exported only to British markets (including Caribbean colonies). However, French Caribbean markets were larger and necessary for profitab...

Table of contents

• Cover
• Title
• Copyright
• Acknowledgments
• Introduction
• Supplement A: Ride Through Accounting History
• Supplement B: Double Entry: A Brief Primer
• Supplement C: What Is Capitalism and Why Is It Important to Civilization?
• Supplement D: Panic Attack: All Those Pesky Bubbles and Crashes
• Notes
• Bibliography
• Index
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