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Problems in the Political Economy of Accounting

Aneirin Sion OwenManchester Metropolitan University

Derives from Smith, Ricardo Marx and Baran and Sweezy a model of PoliticalEconomy as an ‘economic system’ and identifies the philosophical strengths andweaknesses of this approach. Uses this philosophical background to critically evaluatethe work of Tinker, Cooper and Sherer, Bryer and Armstrong on the subject of thePolitical Economy of Accounting (PEA). Identifies a need to integrate the character ofaccounting as a commercial practise with its character as a professional practise andidentifies a contradiction between the models offered within the PEA. Suggests thatPEA needs to more explicitly integrate the Nominal and Real domains and clarify thestatus of the Labour Theory of Value. Concludes that PEA has a well-founded, logicaland unique contribution to make to Accounting Research

IntroductionThe derivation of a ‘Conceptual Framework’ for Accounting has proved difficult.

However, Bryer (1999) has been successful in deriving such a framework from the

Political Economy of Accounting (PEA), making particular use of Marx’s Theory of

Surplus Value and Circuits of Capital. To date, PEA has given interpretations of

specific accounting problems: the Political Economy of Inflation Accounting, or, the

Political Economy of Goodwill Accounting etc. The specification of a general theory

of accounting derived from PEA represents a significant breakthrough. It also

suggests that a more detailed understanding of what constitutes PEA, an understanding

of the particular intellectual space it occupies, is now required.

The logical starting point for a better understanding of PEA is Political Economy itself.

In order to generate a working definition of Political Economy both the primary and

secondary literature is here reviewed. This review suggests that Political Economy can

be understood as a model of an ‘Economic System.’ This model is then shown to have

certain important weaknesses and problems such as the lack of a specified role for the

individual, a weak form of causation, difficulty explaining systems change and the

problem of combining both Real and Nominal domains. It also has certain strengths

such as a multifaceted view of the economic and the ontology of connectivity.

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This account of the strengths and weaknesses of Political Economy provides a basis for

a review of the existing contributions to PEA. This covers the contributions of Tinker

(1980, 1982) Cooper and Sherer (1984) Bryer (1986, 1991, 1993a, 1993b, 1994, and

1999) and Armstrong (1985, 1986, 1987a, 1990). Despite the weaknesses of Political

Economy this review finds that the PEA is successful, particularly when based on the

ontology of connectivity. However, a number of problems are uncovered. In their

respective ideas about the relationship between Accounting and Capital, Bryer and

Armstrong contradict each other. Bryer’s (1993) ‘Accounting to Investor

Capitalism’ suggests that Accounting serves Capital. Armstrong’s (1985,1987)

Interdisciplinary Competition suggests that Accounting can manipulate Capital.

Between Bryer and Armstrong lies an unresolved question: the relationship between,

the relative power of, Capital and Accounting.

PEA has tended to theories Accounting as merely a professional practise. Modern

accounting is in fact characterised by two separate Institutional forms: the Accounting

Firm and the Professional Institute. As a result PEA has to theorise accounting as both

a commercial and a professional practise. The possibilities for the unification of the

Nominal and the Real are not fully developed in PEA and as a result it leans to the

Realist. This Realist leaning contradicts the necessity for any Political Economy to be

holistic, a unity of the Real and Nominal. The Labour Theory of Value and Theory of

Surplus Value emerge as the specific theoretical framework that Political Economy has

always lacked. Yet, fundamental objections remain in secondary literature. Many of

these problems may be resolved by further work in this exciting area of Critical

Accounting Research.

Political Economy

In recent years a number of texts have appeared which attempt to grasp the nature of

Political Economy, including Frey (1978) and Stanilands (1985). Taken as a whole

this Literature fails to deliver a working model of Political Economy. Frey (1978)

states at the outset that Political Economy:

studies the interdependence between the economy and polity of a country (Preface)

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and, that it is characterised by broadness of approach, empirical orientation and

simplicity. The author goes on to catalogue a number of different 'Variants' of

Political Economy including: Cambridge Capital Theory, Radical Economics, Social

Science Systems Theory and Systems Dynamics, Systems Analysis and Policy Science,

Public Choice and Applied Economic Policy.

This long list shows that the term Political Economy covers a wide range of

approaches. It cannot be identified with a single model, aim or methodology. As a

result it is questionable if it is a practical basis for the study of accounting.

Staniland (1985) attempts an application of Political Economy, to the area of 'Social

Theory and Underdevelopment'. Rather than make a choice between the various

approaches to Political Economy, Stanilands (1985) gives consideration to a general

model, broad enough to encompass all the different variants. He argues that Political

Economy is best viewed as an agenda, not a theory, and one with a strong normative

element. Within this agenda a number of approaches naturally develop, which attempt

to explain the relationship between politics and economics. However, these

approaches, it is argued, can only be properly understood as evolving in time.

Stanilands (1985) describes an intellectual dialectic, producing theories of Political

Economy, which has passed through the following broad stages:

1. Orthodox Liberalism, regarding the individual as fundamental.

2. Social criticism of Liberalism.

3. Economism, the argument that politics is secondary and that economics is primary.

4. Politicism, the argument that politics is primary and that economics is secondary.

The notion of an intellectual dialectic, reciprocity between concrete structures and the

theories which interpret those structures, is a fascinating one. But, it is a very broad

vision, reflecting Staniland’s ‘world’ perspective. It is also mercurial. It does not

represent a fixed point from which to develop an analysis of accounting.

These two contributions show the difficulty in deriving a working model of Political

Economy. Frey (1978) delivers a long list of possibilities while Staniland’s (1985)

attempt at a generalised Political Economy, too general to be of use. There is a lot

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more secondary literature on Political Economy that could be reviewed, Reuten and

Williams (1989) is a recent and very interesting example. However, recourse to the

Primary Literature delivers a clearer picture.

Political Economy originally developed through the work of Adam Smith (1776),

David Ricardo (1817) Karl Marx (1864) and, in the present century, Baran and

Sweezy (1966) [1]. In relation to modern accounting research this body of work

represents archive material. However, what is required for a PEA is a distillation of

the ideas, the identification of the themes common to all the authors. From these a

simple model of Political Economy can be derived. Detailed work on the individual

authors is not required.

The purpose of Smith's 'The Wealth of Nations' (1776) was to show the benefit to all

of allowing individuals to pursue their self-interest. The book was based on

observation and was written for a wide audience. It was not theoretically sophisticated

e.g. it incorporated more than one theory of price, but it gave a detailed treatment of

the division of labour

Ricardo's 'Principles of Political Economy and Taxation ' followed in 1817. This was a

much more theoretically sophisticated work, which turned attention towards the

distribution of wealth, rather than its creation. The concern with distribution was

linked to that of class and class conflict.

In 1864 Marx published 'Capital: a Contribution to the Critique of Political Economy.'

The purpose of this work was to understand the form of wealth rather than its amount.

It represented an advance to a more sophisticated theory particularly as regards value

theory. The work was not clearly written and, as a result, is not widely read or

understood.

During the present century economics has pushed Political Economy to the periphery.

However, some scholars have kept the tradition alive. In 1966 Baran and Sweezy

published 'Monopoly Capitalism: an essay on the American Economic and Social

order'. Like Smith (1776), it was based on observation, the corporation taking the

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place of the market as the institutional focus. It rejected value theory, in favour of

Economic Surplus (p. 23) [2].

The first thing that is common to all these contributions is that they all represent a

grand vision of society, which contrasts sharply with the study of minutiae that

characterises the modern research process. They draw on very broad conceptual

categories such as 'the market' or 'the division of labour' and they make generalised

distinctions such as 'working class.' Therefore, if we are to speak of Political Economy

as a unified argument we have a mind something very generalised. As well as being

generalised, the vision of Political Economy has another characteristic. It is a holistic

view of society: an approach that does not seek to separate out domains, but rather

seeks to explain social realities simultaneously. Another way of expressing this

tendency is to term it systemic, that is to say it can only be understood as a complex set

of inter related parts. A more modern expression of this approach is found in

‘Information Systems.’

Secondly, it is noticeable about these authors that the economic seems to play a more

important role that the political or the cultural or the social. Smith (1776) argues that

the free market is key, Ricardo (1817) argues that distribution is key, Marx (1864)

argues that Capital is key, Baran and Sweezy (1966) show that the development of

corporations is key. In all, the economic form is more important than the other forms.

As a result Political Economy can be characterised as a model of an ‘economic

system.’

Frey’s (1978) characterisation of Political Economy as the study of the relationship

between the economic and the political is inadequate because it fails to bring out the

specific character of the primary contributions to Political Economy. It does not

highlight the holistic character of Political Economy, nor does it place a special

significance on the economic.

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Problems in Political EconomyThis simple model of Political Economy is a useful starting point for understanding

PEA. However, before developing it further it is worth considering the philosophical

problems inherent in it. The primacy of the economic, characteristic of Political

Economy, is suggestive of ‘economic determinism,’ the sterile and mechanistic view of

causation that suggests that the economic is the sole explanatory variable for all other

phenomenon. The common form of ‘economic determinism,’ being the argument that

an economic ‘base’ determines the entire social ‘superstructure.’

Political Economy is not a form of ‘economic determinism,’ because its’ idea of the

economic is something rich and diverse, not something sterile, and its idea of ontology

is complex, not mechanistic. Firstly, the economic in Political Economy is multi-

faceted. It includes all of the following:

• What is to be Produced

• Methods of Production

• Exchange of goods and services

• Distribution of economic rewards

Inherent in these different facets of the economic are concerns usually thought of as

outside the economic sphere. ‘Methods of Production’ encompasses work place

discipline, power and the ordering of the individual. Distribution is closely linked to

the question of fairness and unfairness. What is produced reflects the Division of

Labour. As a result, the economic in no way suggests a loss of richness or diversity,

rather, it unites a variety of disciplines.

Secondly, the primacy of the economic should be understood as an expression of the

particular ontology inherent in the idea of a ‘system.’ At this point it is useful to have

recourse to Burrell and Morgan’ s (1979) well know classification of the philosophical

foundations of research paradigms, which has already been used successfully in Critical

Accounting Research e.g. Armstrong (1991). They propose that theories about

society can be conceived of in terms of four paradigms based on different assumptions

about the nature of social science and about the nature of society.

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The economic includes the distribution of goods and services between individuals.

This process of sharing out naturally leads to arguments about fairness, or, more often,

unfairness. As a result Political Economy carries with it all of those arguments about

unfairness. The particular contribution of Political Economy is that it treats fairness

systemically, not just as a product of the individual mind. This concern with fairness

gives rise to the strong normative element that Stanilands (1985) noted. Burrell and

Morgan (1979) termed this assumption about the nature of society as the ‘Sociology

of Radical Change.’

The first of the assumptions about the nature of social science is ontology, an

assumption about what reality is. There are two aspects here, firstly, Burrell and

Morgan’s (1979) important distinction between the Real and the Nominal. In

particular, does society really exist independent of our minds. Secondly, the particular

ontology of a systems approach. This is an ontology that finds truth in the connections

that hold the system together.

Firstly, the Nominal Real distinction. The idea of an ‘economic system’ suggests, at

first sight, a grand Victorian mechanism that is observable and quite easy to evidence

through rules, contracts and institutions like corporations and capital markets. This

suggests a Realist ontology. This is reinforced by the location of Political Economy in

the ‘Sociology of Radical Change’, because the argument that society is not just or fair

requires an assumption that society does actually exist. The adoption of Nominalist

ontology would amount to arguing that injustices existed purely in the mind [3].

Since the emergence of what I think can be legitimately called the post modern

approach, it is increasingly recognised that the economic works as much through the

domain of the mind as much as it does the real. The disciplines that underpin the

economic can be evidenced in written rules and procedures, but their functioning is

directly on the mind of the individual. As a result Political Economy has to address

both the Real and the Nominal domain. The difficulty with this is that most research

methodologies address either the nominal or the real, but not both. The necessity to

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address both makes it difficult to identify clear methodologies (or epistemologies) for

Political Economy.

The particular ontology of the systems approach finds truth in the connections that

hold the system together. As a result, truth is not located in firms or individual or

states. Rather, it lies in the connections that hold together all these different

institutional aspects. Truth lies in the connectivity of the system. Within Political

Economy the economic can be viewed as the specific means by which this connectivity

can be grasped. The reason that the economic plays this specific role is because of its

multifaceted nature.

There is no assumption in Political Economy that the economic will dominate the other

forms. It is possible to argue logically about the dominance of the economic and there

is a lot of evidence to illustrate the dominance of the economic, but those are not the

arguments of Political Economy. In the context of Political Economy the economic is

important because it captures the pathways and connections that hold the system

together. It is perfectly possible within Political Economy to show that the political

can thwart the economic.

Burrell and Morgan also count assumptions about human nature as defining the Nature

of Science. They point out two common assumptions about human nature: that it is

either determined from outside or it comes wholly from within. The idea of an

‘economic system’ does not rely on any idea of human nature. Individuals are within

the system and their mental processes are determined within the system. However, the

difficulty is explaining the specifically human characteristic of individuality. The

feature of human nature that allows one individual to accept injustice while another

will fight against it. Political Economy lacks an explanation of this, so it lacks a

proper account of the individual. The failure to account fully for the individual is a

major shortcoming, however, it is an equally an advantage that Political Economy does

not make prior assumptions about human nature.

Another point about the idea of an economic system is that causation and the dynamic

of the system is hard to explain. Unlike most other approaches Political Economy

studies the whole. The idea of the whole means that the distinction between

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Endogenous and Exogenous Variables is not available. It is not available because

everything is Endogenous to the whole. In Economics, Exogenous Variables are the

main thrust of Causation e.g. unemployment is caused by labour market inefficiencies.

In Political Economy the art of causation is therefore a difficult one, since there are no

Exogenous Variables to rely on. In fact, the only idea of causation offered is that

everything relies on every thing else. Political Economy seeks to explain so much, it

hardly explains the cause of anything.

One of the challenges in Political Economy, first addressed by Baran and Sweezy

(1966), is the identification of the difference between modern capitalism and that of the

nineteen century. Because Political Economy has a weak from of causation it cannot

specify the causes of system change. As a result questions about the changing nature

of the capitalist system go unanswered. Dialectics is one of the means of

understanding systems change within Political Economy. The idea of ‘self evolving

substance’ neatly allows systems change without the need of exogenous variables.

In summary, a working model of Political Economy can be defined, but the nature of

its science is complex. Intuitively it seeks a realist position, yet it understands that

nominalist, concerns are also important. It has a weak form of causation and it has

difficulty explaining systems change. Its account of the individual is incomplete.

Finally, and probably as a result of all the above, it lacks specific theoretical tools and

methods. However, in its multifaceted idea of the economic and in its ontology of

connectivity it offers considerable potential. This background will prove to be useful

when reviewing the substantive contributions to the Political Economy of Accounting.

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Contributions to the Political Economy of Accounting.The starting point for the PEA was Tinker’s landmark (1980) paper, which was

inspired by the 'Capital' debate [4]. The substance of this debate was that the critics of

neo-classical economics suggested that capital was not a meaningful concept and,

therefore, that profit could not be understood as a return on capital and, further, that

profit was not determined in the neo classical system.

This argument was a largely theoretical one and had little immediate relation to the

practicalities of accounting. However, Tinker (1980) saw in accounting a way of

breathing life into the debate. Wisely, the paper was termed 'towards' a Political

Economy of Accounting, because it did not attempt to give a full exposition of what a

PEA might entail. It powerfully made the point that the distribution of profit is a social

process.

Earlier it was argued that Political Economy lacks specific theoretical tools. This

creates an immediate difficulty in Tinker (1980), in that there are no specific theoretical

tools with which to craft a Political Economy of Accounting. However, working from

within the ‘Capital’ debate, Tinker (1980) starts out from the concept of Capital. He

chooses to work with two dimensions of Capital: the physical and the social. These

are the Social Relations of Production and the Forces of Production.

Tinker (1980) argues that these two dimensions are linked by the ‘Institutional Realm.’

Here different types of society create the Institutions (legal, political, educational etc)

to organise physical production. Interestingly, Tinker counts culture and beliefs as

within the ‘Institutional Realm’ and, therefore, the model does have the capability of

combining the Real and the Nominal. For example, it could be used to show how

accounting can be a legal Institution as well as a ‘power knowledge’. Note that the

two domains of capital are inter-related. It is not the case that Social Relations of

Production has a mechanistic determining role. Changes in physical production, such

as technical change, can influence Social Relations of Production.

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The empirical input is a case study, the detail of which contrasts sharply with the grand

theoretical framework. The Case Study involves financial information from an African

company over a forty six year period. This information shows the distribution between

different Capitalist Agents and African Constituents. The forty-six years is broken

down into periods: Early Colonial, Late Colonial and Post Colonial. The periods

represent different Institutional Regimes. The figures show that as the level of

colonialism declines, distribution patterns change. However, the change in the pattern

of distribution is not radical. Also, it is not clear whether the decline in Colonialism

represents an ‘Institutional’ change, or, a change in the Social Relations of Production.

Another limitation of Tinker’s (1980) Case Study is that no changes to the physical

aspects are incorporated. So the dialectic between the social and the physical is not

present in the Case Study.

Evolved as it was from the ‘white heat’ of the ‘Capital’ debate, nothing was more

natural than to start out from the concept of Capital. However, there are a number of

aspects or dimensions of Capital, including:

• Physical machines or Fixed Assets, in the sense of capital investments.

• Money invested by a capitalist(s), in the sense of partners capital or share capital.

• A specific Social Relationship between workers and employers.

• Capital Markets, such as Stock Markets, Foreign Exchange etc.

• Money

Because there are so many dimensions of Capital, a justification needs to be given for

the selection of just two.

In discussion of Tinker (1980), Cooper's (1980) main concern was with the criticism of

neo classical economics. In so far as it is concerned with Political Economy of

Accounting, Cooper (1980) suggest that Tinker (1980) is successful, but does have

misgivings about making generalisations from the Case Study, the appropriateness of

the Periodisation and the fact that the model does not account for increasing black

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salaries. Some ideas for future research are advanced, in the areas of knowledge as

capital and accounting as ideology. Both, notably, tending to the Nominalist realm.

Tinker et al (1982) was a methodological paper that did not directly promote a PEA.

It gave a detailed treatment of the Labour Theory of Value, a theoretical device closely

associated with Political Economy, and it developed further the combination of the

Real and the Nominal. In this paper Tinker et al are highly critical of the Realist

position. They trace the development of value theory to illustrate the fact that theories

reinforce the societies that create them: a technique they call ‘Historical Materialism.’

The authors suggest a Historical Materialism allows theory to become part of reality.

The paper lacks a full exposition of what Historical Materialism involves. How does

one actually do ‘Historical Materialism? Is it possible to have a verifiable truth in this

paradigm? The emphasis on the close relationship between theories and facts is

correct, but it is not detailed how this relationship works. How are theories created,

maintained, modified and finally disposed of? Interestingly, the development of value

theory in the paper is very much like the intellectual dialectic suggested by Staniland

(1985).

Cooper and Sherer (1984) were not inspired by theory or philosophy, but something

nearer to the practices of modern accounting: the concept of users of accounts, which

has been a very strong one in the development of mainstream understanding of

accounting. This perspective suggests that accounting information should meet the

needs of users, that different accounting may be needed for different users and that, if a

single set of accounts are offered, they must be a compromise between users. Cooper

and Sherer (1984) criticise existing approaches, because they do not accept accounting

as social, and offer up a Political Economy approach.

The lack of theoretical tools again presents a difficulty for the authors. This is tackled

by sketching PEA in terms of features and imperatives. In the light of the difficulty in

defining Political Economy, I think the authors need to provide more evidence to

support their choice of ‘features and imperatives.’ The lack of such justification

weakens the impact of the paper.

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The authors identify three features of PEA. That it recognises power and conflict in

society, that it should be placed in a specific historical and institutional environment

e.g. monopoly capitalism and that it should involve a more emancipated view of human

nature i.e. it should be aware that self interest is not a universal motivation. The first

two fit well within the model of an economic system developed above, but the third

does not. Although the account of the individual offered by Political Economy is

incomplete, that cannot be corrected by the imposition of an assumption about human

nature. Any idea of human nature has to be systemic, it cannot be something imposed

from outside.

Cooper + Sherer (1984) also identify three imperatives of PEA. The first imperative is

that the researcher should be explicit in stating the normative elements in their work.

The other two imperative are to be descriptive of the real life of accounting (reflecting

an ideographic methodology) and to be critical, that is show an awareness of the fact

that accounting knowledge tends to serve interests groups in society. Like Tinker

(1982), Cooper and Sherer's (1984) paper reflects a rejection of the Realist e.g. in the

recognition of the need for openness in the normative, they implicitly recognise that

theories become part of reality.

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Accounting To Investor Capitalism

The work of R. A. Bryer over the period 1982-1999 represents the first sustained

research effort on the PEA. It is characterised by close study of the capitalist system

mainly in the UK and meticulous attention to the text of Marx’s Capital. Interestingly

Bryer's work does not initially seem to have been inspired by the contributions of

Tinker (1980, 1982) or Cooper and Sherer (1984).

Bryer et al (1982) performed a 'financial analysis of the failure of British Steel.' This

was not a Political Economy of Accounting, but placed accounting very close to the

issue of mass redundancies. The facts of the British Steel case exemplify the

importance of accounting in modern political and economic process. Bryer and

Brignall (1986) start to develop an understanding of the power of investors and the

relationship between investors, managers and financial accounts. The evidential

material related to Inflation Accounting. The paper progressed as follows:

firstly, we show that the conventional model of financial decision making withinaccounting and finance is based on financial reporting and investmentmanagement systems which are designed to ensure that investors interestpredominate. Secondly, we show that the role of inflation accounting is to ensurethat financial reports remain an adequate basis for investment and divestmentdecisions in a period of changing input prices. Thirdly, we argue that thedevelopment and implementation of inflation accounting was designed both tomotivate managers and to make divestment decision from manufacturing, and toprovide information which allows investors to monitor them. Finally, we deal withthe conflict between our view.... and the widely expressed view that 'there isconsiderable uncertainly as to the purpose of adjusting historical cost statementsfor changing prices'Abstract

These points develop PEA further than Tinker (1980). Here, accounting does not just

reflect social ordering, it is an active participant in a system of order e.g. Investors use

accounting to order plant closures. In this paper Bryer clear identifies accounting as

directly serving investors interests.

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Bryer (1991) tackles the subject of the UK Railway Manias. In this paper certain

important tendencies in Bryer’s thinking become more evident. It is a more explicitly

Marxist Political Economy. It is more consciously a PEA and it is explicitly aware of

other contributions to Critical Accounting Research e.g. Armstrong (1987) and Tinker

(1980). It shows a concern for understanding the ways in which risk is diversified and

it places considerable importance on the Capital Asset Pricing Model. In common with

Bryer (1986), it links accounting with investment decisions.

This huge paper starts by noting the size of the investment required to develop the

railway network, taking up a significant portion of GDP (An interesting case of the

relationship between Tinker’s (1980) physical and the social aspects of production).

As all students of British economic history know, the development of the network has

been widely understood as a ‘mania’. The mania itself has been understood as a

natural part of the free market system.

Bryer (1991) notes that Marx suggests a railway ‘swindle’. He looks closely at the

railway accounts of the period. He finds that:

The accounts published by railway companies were deliberately manipulated aspart of an orchestrated scheme perpetuated by the ‘London wealthy’ on themanufacturing and middle classes who were lured into investing into the railwaysduring the ‘mania,’ and were forced to sell out at a loss (page 483)

Just one of the methods used was the failure to Depreciate Fixed Assets and, thereby,

overstating profits. Despite the mass of evidence presented, Bryer suggests only that

the swindle hypothesis warrants serious consideration. He does not argue that the

evidential material constitutes a proof of the hypothesis.

In 1993 Bryer published two papers which bring his PEA to full maturity. The first

directly tackles Managerialist ideas and the second the question of Double Entry

Bookkeeping. Bryer (1993a) explicitly contrasts two models, Investor Capitalism and

Managerial Capitalism. A Managerialist Political Economy was championed by Baran

and Sweezy (1964), above but the Managerialist idea has developed a wide variety of

versions such as Cowling (1982). The notion that managers are powerful in their own

right has become widely accepted, however, it has yet to be show how Managers

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escape the power of Shareholders. This is the arena of ‘Agency Theory’ or perhaps

more accurately the ‘Agency problem.’

In criticising Managerialism the character of the 'Accounting to Investor Capitalism'

model becomes clear. It can be summarised as follows:

1. Managers report to Capital Markets, and take decisions to suit Capital Markets.

2. Financial Accounting is used to ensure that Capital Markets observe, and therefore

are able to control, Managers.

3. Financial accounts are reliable, if they are manipulated it is for the benefit of the

Capital Markets not managers

4. Discipline by Financial Accounts is effective enough to overcome 'Agency

Problems'

5. Individual shareholders (capitalists) can move into and out of companies freely in

order to maintain a balanced portfolio.

Bryer brings together evidence to suggest that the early development of financial

accounting can only be explained as 'Accounting to Investor Capitalism'.

Conventional accounting history explains the rise of modern financial accountingin the late nineteen century...as a response to the emergence of ‘managerialcapitalism,’ the divorce of ownership from control. It is almost universallysuggested that Modern Financial Reporting has no clear conceptual foundationand that management were able to manipulate published accounts in their owninterests… It is argued here that Modern Financial Reporting was clearlyconceptualised, and the hypothesis is explored that its emergence and functioning… can more plausibly be explain as a response to the rise of ‘investor capitalism,’the generalised socialisation of capital that Marx predicted.

It is argued that the rise of Modern Financial Reporting can be explained as a response

to the demand of investors collectively for help in Managing the new social relations

which emerged between them and management.

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Bryer (1993b) turns his attention to double entry bookkeeping in the context of

Medieval Northern Italy. Double entry booking is the foundation of Financial

Accounting and, therefore, the origin and development of Double Entry Book keeping

is important to understanding Modern Financial Reporting. This paper starts out, like

Tinker (1980), with the ‘Social Relations of Production’. Bryer points out that, in

Northern Italy, capitals accumulated in the era of the Roman Empire remained intact

through to medieval times. The activities of Merchants grew to such an extent that

they had to raise capital. This they could do in a number of ways, quite unlike a

limited company, but still amounting to a pooling of capital and risk. This made certain

demands on Bookkeeping. In particular, this form of financing demanded an equal

return for equal capital. As a result the accounting system had to be able to show the

return of capital at any time. Double entry bookkeeping allows the constant

calculation of the return on capital. Importantly, this paper also shows that the pooling

of capital is an ancient practice, not a modern invention.

Bryer (1993b) argues that other explanations of Double Entry fail to explain its

‘double’ character. Double Entry can be an aid to decision making, but single entry

records can also. It has also been argued that Double Entry provides a solution to the

Agency problem. Here, Bryer makes a key point against Agency Theory. The

Principle Agent relationship is a bilateral one. However, the pooling of capital in

Medieval Northern Italy was not a bilateral affair. Rather, it was a multilateral one.

Bryer’s evidence about the socialisation of capital shows that it transcends bilateral

Agency Relationships.

Other scholars have sought to explain Double Entry as just an application of scholarly

skills, a Foucauldian ‘Power Knowledge’. However, Bryer (1993b) points out that the

‘Power Knowledge’ approach cannot explain the ‘double’ character of Double Entry

Book Keeping. The ‘Accounting to Investor Capitalism’ model is an exclusively realist

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affair because it uses the Social Relations of Production to explain accounting.

However, it is widely known the accounting acts powerfully on the mind of the

supervised and it is a necessary part of a holistic approach to explain both the real and

the nominal. For these two reasons the ‘Accounting to Investor Capitalism’ model

needs to be developed to unify the real and nominal domains.

Bryer (1994), in fact written before the Bryer (1993a) [5], takes up the Labour Theory

of Value. This is one of the most contentious areas in economics particularly the

transformation problem debate which raged in the 1970’s (Steedman, 1977)

regarding the possibility of transforming labour values into prices: a dispute never fully

resolved. Bryer (1994) starts from the origin of profit.

At the heart of all theories of accounting lies a theory of value and the origin ofprofit. Two theories of value have dominated western thought marginalist andlabour theory. (Abstract)

The Marginalists see profit as the change in the present value of expected future cash

flows. The Labour Theory of Value, or theory of surplus value, identifies profit with

unpaid labour. It is a characteristic of Accounting research that it uncritically accepts

marginalist theories because of the fact that Economics has eclipsed Political Economy.

Bryer argues that Marx’s ideas about the Circuits of Capital provide a good

explanation for many accounting practices e.g. the practice of depreciation. The

theory of surplus value states that where machines are in use in the production of

goods the machines are purchased at their value. Capital knows the required return for

the investment. It can calculate the number of goods that the machine will have to

produce. The value of those machines is transferred to the goods produced by those

machines. This transfer is not a physical one, nor is it one that can be calculated by the

individual firm. Rather, value is transferred on the basis of the calculation of how

many units of output the machine might be expected to produce. This is the same as a

depreciation calculation.

Bryer (1994) is a very ambitious paper, crammed with important points, some of which

are not fully developed e.g. the Transformation Problem. The fact that Political

Economy lacks specific research methodologies caused difficulties for both Tinker

(1980) and Cooper and Sherer (1984). The Labour Theory of Value, although not a

methodology, represents the nearest thing that Political Economy has to a specific and

19

practical theoretical framework, within which to conduct research. As such, when

Bryer (1994) discusses Labour Theory of Value, he discusses whether Political

Economy is a practical possibility. Bryer’s (1994) reading of the Three Volumes of

Marx’s Capital suggest to him a coherent expression of the Labour Theory of Value.

Many other authors have failed to find such coherence, possibly because debates in the

secondary literature have provided a diversion from close study of the three volumes. I

order to win this argument it will be necessary to address the issues in the secondary

literature. Many scholars may be dismayed at the possibility of opening up the

Transformation Problem and Abstract Labour Debates. However, such reworking of

old material cannot now be avoided.

Bryer (1995), like his (1986) paper, turns his model of 'Accounting to Investor

Capitalism' on to a specific accounting question, Goodwill. Bryer (1995) argues that

conventional goodwill accounting allows Capital Markets to observe the generation of

profits. The anomaly of SSAP 22 is that it allows the distortion of profit by allowing

the write off of goodwill directly to the Balance Sheet. This distortion always tends to

overstate profit because no amortisation is charged to the Profit and Loss Account.

Bryer explains the anomaly by the particular need of the capital markets at that time.

Bryer (1999) directs his gaze on to the question of a conceptual framework for

accounting, the greatest and most controversial debates in accounting research. He

identifies the weakness in mainstream research as its characterisation of the business

process, as follows.

business corporations are seen as raising money from ‘savers’ those who wish to‘invest cash saved to bring in more cash in the future.’ According to this theory theinvestment decisions of individuals and business are essentially the same, simplythe investment of money for more money.(Page 3)Thus FASB concluded that Financial Accounting should ideally provide individual

investors and creditors with economic valuations based on Cash Flow Forecasts. On

this basis the figures presented on Profit and Loss Account are irrelevant. I am sure

that it has occurred to many accountants that rather than the Profit and Loss Account

being irrelevant, it was the logic of FASB that was wrong.

20

Marx characterised the production of Capital as a circuit in which the production of

goods is one part. In this circuit, money can only be returned to the investor after it

has been put to productive use and the goods produced have been sold. Bryer (1999)

uses Marx’s Circuit of Capital to derive definitions of revenue, expenses, profit, assets

and liabilities. He argues that this provide the conceptual framework for understanding

accounting. Note that the strength of Marx’s arguments are illustrated by their

superiority to neo-classical ideas.

In evaluation of Bryer’s contribution, we have already seen that the ‘Accounting to

Investor Capitalism’ model needs to be developed to incorporate a unity of the Real

and the Nominal. We have already seen that so far as the Labour Theory of Value is

concerned further engagement with the secondary literature is essential. However, the

model itself remains robust because it develops the strongest part of Political

Economy, the ontology of connectivity. The role that accounting plays in the model

can be characterised as that of a connector: accounting as the medium through which

messages are conveyed from capital markets to managers.

There is one more point to make about the ‘Accounting to Investor Capitalism’ model.

Inherent in Political Economy is seeking out connections and relationships. Political

Economy never seeks to separate out different domains. The ‘Accounting to Investor

Capitalism’ model shows that accounting lies between capital markets and managers.

In that position of being between, accounting is neither one nor the other, it is

something separate. Therefore, in its role as connector accounting is characterised as

something separate.

Accounting has always been organised into accounting firms. These firms are

organised for profit just like other firms. These accounting firms have a long history.

They existed before accounting achieved its professional status, they thrived during

professional regulation and, through their mergers, they now threaten to out grow

professional regulation. As a result, while accounting mediates the relationship

between capital markets and managers, it is in no way separate from commercial

practice. Accounting is not a separate domain, rather it is within the commercial

domain regulated by professional institutions. The ‘Accounting for Investor

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Capitalism’ model tends to characterise accounting as a separate from the commercial

domain: it is not.

Interdisciplinary Competition

There is one more contribution relevant to the PEA that needs to be recognised, that of

Armstrong (1985, 1986, 1987, 1989 1990, 1991, 1993, 1994). In answering Murray

and Knight's (1990) criticisms, Armstrong summarised his ideas as follows:

I set out a theory which sought to explain the generation of new strategies ofcontrol of the labour process in terms of group level inter professional competitionfor access to key decision making positions within capitalist managementhierarchies

Armstrong, like Bryer, is within the Marxist tradition, which is a broad church.

Kolakowski (1978) points out that it is possible to speak of a whole range of Marxist

thinking, including ‘Frankfurt School’, the ‘Labour Process’ Tradition, Class Analysis,

Dialectics, Value Theory and many others.

Armstrong comes from the ‘Labour Process’ tradition, the starting point of which is

Taylorism, or, scientific management. Taylor recommended to manufacturers that they

break down work into smaller tasks. This lead to the modern production line.

Braverman (1974) suggested that Taylorisation was a means of controlling labour

rather than an efficient way to organise production: de-skilling for the purposes of

control. This sparked a lively controversy in Industrial Sociology, rather than in

Political Economy. It drew on classical sociological categories such as power and

class, which are, themselves, closely related to the concerns of Political Economy.

During the Labour Process debate it was pointed out that there are many means of

control, not just de-skilling, and that resistance to control was also important.

For the purposes of the study of accounting, this sociological background had a

distinct advantage, in that the ‘sociology of the professions’ was already in place: a

body of theory ready to be applied to accounting. The sociology of the professions has

been dominated by the question ‘what is a profession.’ The leading Marxist

contribution has been that of Johnston (1976) who:

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offered an analysis of the profession base on the existence of three differentpower relations involving the practitioner and the client. The first is where theprofessional defines the need of the client. … In order to ensure that control isnot miss used the professions go to great lengths to police members' activities.This is the collegiate control… See other forms of professional relationship wherethe client defines what is needed and how. One type is corporate patronage.Most professionals are employees of the corporations(Roslender, 1992, page 23 )

Notice that, like the labour process debate, this centres around which groups in society

are powerful enough to define, shape and control the work of others. This sociological

background provided the basis for Armstrong’s work.

Armstrong (1985) gave the first airing to idea of Interdisciplinary Competition. This

paper starts from the empirical observation that accountants are more strongly

represented in the management of UK companies than they are in Germany and Japan.

The paper seeks to understand why. Within sociology there was a tendency to

‘structural functionalism,’ i.e. looking at the structures in society as performing a

function. In the 1970’s the title ‘functionalist’ was a term of abuse. Armstrong has

carried on this practice, and seeks to expose the weakness in any argument that

dictates that social realities emerge because they perform a function. Armstrong

(1985) looks at the suggestion that the emergence of scientific management can be

explained by the fact that it performs the function of controlling the labour process.

Armstrong does not argue that this is incorrect. Rather, he points out that it is

necessary to identify by what precise means did scientific management emerge as a

solution. The notion of simple functional causation is what Armstrong is against. He

demands the detail of how things came about. However, as I noted above, strong

statements of cause are not characteristic of Political Economy.

Armstrong’s (1985) point is that the emergence of the techniques of management is

not the result of need, but rather the result of competition between professional

groups. Engineers were is a good position to offer scientific management but they

23

failed because they knowledge base was poached by other managerial professions in

particular accountants

Armstrong (1986) looks at teaching syllabi and sees how these are shaped by success

in Interdisciplinary Competition.

the British idea of what constitutes management has changed over time, partly inresponse to changes in corporate structure but also as a function of the dynamics ofthe British ‘management movement’ itself. The current end result is a conceptionof management centred on the direction of enterprise strategy rather than on theimprovement of productive efficiency at the operational level.(Abstract)

The evidential material is well focused, teaching texts and the syllabi of management

education over a considerable period. This paper shows that what management offer

and what are the real needs of industry, are two different things.

Armstrong (1987a) is one of the most widely quoted papers in Critical Accounting

Research. It describes in more detail the steps taken by UK Accountants to achieve

their strong position, starting in liquidation and audit, developing through wartime

controls and into the era of corporate take-overs. As a result it deals with changes that

have effected the capitalist system in UK, a topic that presents particular problems for

Political Economy.

Armstrong (1987) uses Carchedi’s ‘General Functions of Capital’ to grasp the changes

to the capitalist system. The work of Carchedi has been subject to considerable

criticism by Johnson (1985), Roslender (1992) and Carter (1996). Carchedi’s work

concerns Class, an issue traditionally associated with Political Economy. It addresses

the question ‘what is the middle class’ in Marxist analysis.

There are a number of possible approaches to the changing nature of capitalism. One

approach might be to perform a comparative static analysis. Look at old capitalism

then look at new capitalism, then identify the differences and trace the process by

which these differences emerged. Another approach might be to do a chronological

analysis. However, Carchedi does not take either of these approaches. Rather, he tries

something more sophisticated based on two levels of analysis. He argues that certain

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aspects of the capitalist system are fundamental (or pure) and cannot change. Other

aspects of the system can change. This is the distinction between

Pure Capitalist Structure

And

Capitalist socio-economic system,

Pure structure is the same as essential Social Relations of Production. The secondary

conception suggests different types of systems, which still retain the pure relations.

The distinction between systems is secondary to there essential unity.

Carchedi identifies four pure relations

1. Producer Non Producer Relationship

2. Owner Non Owner Relationship

3. Labourer Non labourer Relationship

4. Relations of Distribution

These are not grounded in an empirical work, nor logically justified. As such they are

assumptions and as a result they provide no proper basis for understanding the

changing nature of capitalism. Because Carchedi makes assumptions about what pure

capitalism is, he assumes away the very question at issue.

Armstrong’s use of historic evidence is very like that of Bryer. In consideration of the

evidential material, it is a huge period that Armstrong considers. A mass of evidence

would be necessary to prove the Interdisciplinary Competition hypotheses. In Bryer’s

(1991) terms enough evidence exists to suggest taking the hypotheses seriously, but

more evidence is required. Specialists within the different periods that Armstrong

covers might be able to disprove the interpretation.

Armstrong (1989) returns to the theme of labour process approaches to management,

which he had previously criticised as Functionalist. Armstrong points out that

Braverman

argued that the entire apparatus of administrative control had become a LabourProcess, exactly analogous to the manual labour process. That is, the routineaspects of capitalist functions, as distinct from the intellectual labour of production,are now said to constitute a labour process.(Page 308)

25

The struggle between capital and labour explains why labour is de-skilled, so it can be

controlled. Armstrong finds it illogical to then say that management, the means of

capitalist control, is also de-skilled. However, Armstrong (1987) often associates

‘management’ with ‘hierarchy’: two things closely associated in his mind. The purpose

of the hierarchy is for senior management to control lower management. There is no

reason in principle why de-skilling should not be a technique for doing so.

Armstrong (1989) regards the management labour process as contradictory because it

does not relate to ‘the means for securing the material bases of human existence.’ At a

high level of abstraction, it is possible to see that labour provides the material basis for

human existence. In the capitalist era labour also became de-skilled. Later, managerial

labour emerges, but other labours were still being de-skilled. Finally managerial labour

becomes de-skilled, while at the same time de-skilling other labour and at the same

time providing the material basis of human existence. All of that is a perfectly logical

argument. Whether it is borne out by facts is a separate matter. However, if the de-

skilling of management stopped de-skilling in general then that would be a

contradiction.

Armstrong (1990) is a bad tempered reply to the criticisms of Murray and Knights

(1990). Because Armstrong was closely associated with Labour Process tradition,

Murray and Knights (1990) wrongly ascribed to him views that are widely held in that

tradition, but which Armstrong does not hold. Amusingly, they accuse Armstrong of

Functionalism, which is something that Armstrong had argued against for some time

[6].

On the question of criticising Armstrong, there is a weakness in his hypothesis that

Murray and Knight (1990) failed to pick up. It is the same criticism that was levelled

at Bryer above, that of treating accounting as separate from the commercial practice.

In the Interdisciplinary Competition model the domain of professional practise has a

causal effect on commercial management practise. Clearly, the domain of professional

practise is theorised as separate from the domain of commercial practise. However, as

argued above, the professional practise of accounting is also a commercial practise,

and as such it cannot be designated as separate.

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Armstrong (1991) goes on to look at Agency theory, but the agency approach is not

integrated with that of Inter disciplinary Competition. Armstrong (1993) looks at the

syllabi of management accounting. He notes that the increased success of management

accounting has had the effect of making it less specialist and more generalist.

Armstrong (1993) notes a number of tensions in the mobility process including the fact

that the management credibility of professional knowledge is in tension with its

possession and that the credentialism of professional knowledge is in contradiction to

pragmatic management culture.

Armstrong (1994) it is relevant because it throws light on the Realist Nominalist

distinction as well as the status of the Individual. Armstrong (1994) brilliantly

summarises Foucault as follows:

Early in the nineteenth century there occurred a radical discontinuity in theimmediate exercise of power characteristic of Western Societies. Under earlierregimes of sovereign power punishment took the form of symbolic and publicreassertion of the possession of the subject by the sovereign. Theses typically tookthe form of torture, amputation or the seizure of property. In the prisons, clinicsand asylums of nineteenth century France sovereign power gave way to quite adifferent form of power exercised in the name of behavioural reform, as this wasdefined by the emerging human sciences. Besides defining desirable norms ofbehaviour these sciences also define the practitioners of reform, its human objectsand the relationship between them. Since these relationships were importantlycharacterised by an asymmetry of power, Foucault used the word ‘powerknowledge’ to refer generically to the human sciences. (page 27)

He criticises this argument because it suggests that the modern entails acting upon the

individual when in fact it was the creation, development and promotion of the

individual that characterised the modern. In the same issue, but in response to

Neimark's points, Grey (1994) takes the following view

Disavowal of the materialist ideal dualism might be seen as a key feature ofFoucault’s work. For example Foucault’s now famous account of the panopticaninvolves an architecture which allows the surveillance of prisoners and the exerciseof disciplinary interventions upon them, the effect of which is to inculcate selfregulation. It is not possible to separate the ideal and the material aspects since themateriality of the prison is not separate from the idea (page 9)

27

Which gives a fascinating insight into how accounting can help achieve the unity of the

Nominal and the Real.

In evaluation of Armstrong, he rightly warns against the dangers of simple functional

causation. He rightly demands the detail about how accounting has emerged as a force

in modern society. However, the quantity of evidence required to prove the

‘Interdisciplinary Competition’ hypothesis is greater than that provided by Armstrong.

Also, statements about causation do not fit easily into Political Economy. Of course

Armstrong did not set out to right a Political Economy, but a sociology based on

Theory of Surplus Value will suffer the same difficulties. The ‘Interdisciplinary

Competition’ model (from now on IDC) needs to be evolved to incorporate accounting

as a commercial practise, as well as a professional practise. Finally, Armstrong needs

to find a more subtle tool than Carchedi’s ‘General Functions of Capitalism’ to deal

with the dynamic of the capitalist system.

One of the most interesting aspects of the IDC model is that provides a counter

argument against Bryer’s ‘Accounting to Investor Capitalism’ (AIC). Although similar

in many ways, the model offers a contradictory account of the relationship between

Accounting and Capital. AIC suggests that Accounting is in the service of capital. It

provides the information that allows social capital to supervise management. The IDC

model suggests that Accounting can manipulate Capital. It argues that Accountants

have defined the ‘key problems’ facing capitalism and have taken the best from other

disciplines to construct themselves as the solutions. Clearly there lies an unresolved

issue at the heart of PEA the relationship between, the balance of power between

Accounting and Capital.

To illustrate the difference consider the meaning of a ‘True and Fair View’ which has

been so important in mainstream understanding of accounting. The ‘True and Fair

View’ has always seemed strangely indeterminate. The two models give two different

reasons for this indeterminacy. On the one hand, within the AIC model, this

indeterminacy can be interpreted as meeting the needs of Capital to manipulate

Financial Accounts. Within the IDC model indeterminacy allows accountants to retain

the exercise of professional judgement over Financial Accounts.

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ConclusionsTinkers original (1980) paper sparked off a research project that has steadily grown in

stature to the extent that it is now providing solutions to the most difficult questions in

Accounting research. The philosophical space occupied by PEA has much to

commend it, however, the following problems have been uncovered. The two main

theoretical models are contradictory in their theories of the relationship between

Accounting and Capital. The PEA needs to incorporate the fact that accounting has

both a commercial and a professional nature. Since the emergence of the large

accounting firm, it is no longer adequate to theories just its professional nature.

PEA leans towards the Real and does not take sufficient account of the Nominal.

Inherent in the economic and in accounting and in Political Economy is the need to

unify the Real and the Nominal. PEA lacks a core theory, although Labour Theory of

Value has emerged as a strong contender. There is an urgent need to clarify the status

of Labour Theory of Value and tackle the Transformation problem. Finally, PEA

needs to find a way of explaining the process of development to more social forms of

capitalism.

Notes

1. A number of other authors made contributions to Political Economy including R.Malthus, J. S. Mill and W. Petty.

2. Other work by the authors suggests that they did regard value as an importantcategory. Sweezy (Ed.) (1949).

3. An idea that will certainly appeal to neo-classical economists.4. The papers early roots can be observed in Lowe and Tinker (1977)5. Thanks to the author for pointing this out.6. Not so amusing to Armstrong himself I suspect.