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Published 26 January 2012 09:59, Updated 02 February 2012 05:17
The history of double entry accounting – the practice of recording each business transaction as a balance of debits and credits – might seem to be of academic interest only. However, in the hands of Sydney author Jane Gleeson-White it becomes a wider treatise on the accounting system and its place in our latest financial problems.
The first half of the book explains how double entry accounting replaced single entry accounting. Whereas the latter showed only the total profit figure of a business, the former allowed users to calculate increases and decreases in their wealth or estate. These were recorded in the capital account, at the end of every venture, leading to an assessment of the principal drivers of what we now call capitalism: profit or loss.
The second half of the book advances a considerably more intriguing narrative about the way double entry accounting became a central artifice to the development of capitalism. It was critical to the revival of the Wedgwood empire and helped with capital formation for the railways in England. It was important in the thinking of Karl Marx, Charles Darwin, Max Weber and the economist Joseph Schumpeter – and even led to historian Oswald Spengler’s equating Venetian mathematician Luca Pacioli, whose pioneering work was key to the developing of double entry accounting, with Copernicus.
Double entry accounting was important to the development of national economic statistics, especially the initiatives undertaken by John Maynard Keynes between the world wars. Double entry accounting, it seems, was everywhere – important not just to the rise of capitalism but also the progress of scientific method.
Gleeson-White then advances the argument that, now that we live in the thrall of the double entry world, we need to bring accounting to account, especially in relation to the despoliation of the environment. Developing a double entry system that properly accounts for our environmental peril can, she claims, help us avoid the risks.
Gleeson-White’s conclusions are at once important and fragile. Who can argue with her comment that accounting models need to be examined more closely, brought more to account?
Financial models are based on simple, usually simplistic, historical artifices and the history of the creation of such artifice is not only rarely considered, it is actively avoided. To do so would undermine that belief among economists, and to a lesser extent accountants, that their practices are scientific and that monetary practices are like natural forces, a natural order of things that must not be violated.
Such presentation of finance as science is dangerous nonsense. Its malign implications were seen during the global financial crisis in 2008 when complex mathematical trickery, derived from physics, was used to create the massive amounts of “meta-money” that went close to destroying the global monetary system. The failure by governments and regulators to see that money is a social artifice rather than a commodity or a “thing” that “flows” around the world (something like a fluid) led to the irresponsible practice of allowing traders to make up their own financial rules.
Accordingly, Gleeson-White’s reminder that the whole thing is based on an artifice from 14th century Venice can help prick the illusions of finance and economics – and perhaps also the dispiritingly successful bullying of finance “experts”.
She provides a reminder that the rules of finance are artificial – although perhaps not “arbitrary” as she comments – rather than principles of the universe that shape societies.
Instead, societies have created them and they could have done it differently. Imagine, for instance, how differently we would view the world if gross domestic product statistics included unpaid housework, as was originally proposed in the 1930s. Or if environmental damage were recorded as a constraint on economic growth.
GDP as a measure is, these days, heavily biased towards the transient exchange of consumer goods because they can easily be recorded in a double entry system. Longer-term wealth creation, like infrastructure or the development of skills, are far harder to record so get ignored.
Gleeson-White’s corrective is salutary but it is easy to claim too much for double entry accounting. It has undoubtedly deeply affected the metaphors we use to understand
The stability of the underlying models has allowed the creation of mathematical systems that have been used to substitute for reality. Those mathematical systems are now reaching levels of utter
absurdity with derivatives and high frequency trading.
But double entry accounting has not caused the intense materialism of modern capitalism, nor is it to blame for the rampant positivism (the belief that something is real only if it can be measured). To understand these, the net of history needs to be cast more widely.