Double Entry: How the merchants of Venice shaped the modern world – and how their invention could make or break the planet
‘What advantages does the merchant derive from Book-keeping by double entry? It is amongst the finest inventions of the human mind.’ Goethe, 1795
‘Historians often forget. Even the most mundane professions have their history, and those mundane professions increasingly run the capitalist world.’ Norman Davies, 1996
‘The rise and metamorphosis of double-entry bookkeeping is one of history’s best-kept secrets and most important untold tales … Through its logic we have let the planet go to ruin – and through its logic we now have a chance to avert that ruin.’
Our world is governed by the numbers generated by the accounts of nations and corporations. We depend upon these numbers to direct our governments, organisations, economies, societies. But where did they come from – and how did they become so powerful?
The answer to these questions begins in the Dark Ages, with the emergence in northern Italy of a new form of accounting called double-entry bookkeeping. The story of double entry reaches from the Crusades through Renaissance Venice to the factories of industrial Britain and the policymakers of the Great Depression and the Second World War. At its heart stands a Renaissance monk, mathematician and magician, colleague of Piero della Francesca and Leonardo da Vinci, and his celebrated treatise for merchants. With double entry came the wealth and cultural efflorescence that was the Renaissance; a new, scientific worldview; and a new economic system: capitalism.
Over the past one hundred years accounting has flourished to an astonishing degree, despite the many scandals it has left in its wake. The figures double entry generates have become a sophisticated system of numbers which in the 21st century rules the global economy, manipulated by governments, financial institutions and the quant nerds of Wall Street.
And the story of double entry is still unfolding – because today it might be our last hope for life on earth.
Double Entry tells this remarkable story for the first time.
Double Entry is published by Allen & Unwin. The paperback edition was published in February 2012. You can find information about buying ebook versions here.
Double Entry will be published by Allen & Unwin UK in the United Kingdom in September 2012 and by WW Norton in North America in October 2012.
CONTENTS
Preface: Bobby Kennedy and the wealth of nations and corporations
1 Accounting: our first communications technology
2 Merchants and mathematics
3 Luca Pacioli: from Sansepolcro to celebrity
4 Pacioli’s landmark bookkeeping treatise of 1494
5 Venetian double entry goes viral
6 Double entry morphs: the industrial revolution and the birth of a profession
7 Double entry and capitalism – chicken and egg?
8 John Maynard Keynes, double entry and the wealth of nations
9 The rise and scandalous rise of a profession
10 Gross Domestic Product and how accounting could make or break the planet
Epilogue
What a wonderful intro to Double Entry Accounting! I am assembling an accounting in a nutshell that is an accelerated method for learning d. e. accounting as part of the financial drivers license for teens. Can you share more of your book and how can I get a copy?
Best Wishes,
Daniel Osmer, Sebastopol, California
Associative Economics Cafe
Thanks Daniel, that’s great to hear. My book’s out in Australia at the end of next month and according to my publisher at Allen & Unwin you’ll be able to order it online. So far it’s not being published in US. And yes, I can share more of my book – a chapter outline might be best thing? I don’t have it to hand but I’ll post it here soon.
Thanks for your interest. I like the sound of what you’re doing too. More anon.
cheers, Jane
Thanks for the reply. I’ll look forward to your post about double entry. I am curious as to how you came to your conclusions about the essential importance of accounting and the perspective it brings? Thanks Daniel Osmer Sebastopol, CA
Hi Daniel – I’ve just put the contents of my book up (see above) which should give you a better idea of how I’m approaching the subject. I’m not planning to write more about it just yet but probably will when the book’s out in November.
As for how I came to my conclusions, I’m not sure I could put it in a sentence or two, it’s just a sense I had when first studied accounting and nothing I’ve read since has convinced me otherwise – especially while researching the book. It seems to me this is where value is, if not created, then crystallised or quantified.
Hello Jane, Thanks for the outline. I look forward to reading the book when it comes out. I have been writing about Luca Pacioli since 1998 when I first learned of his story from a Marc Desaules presentation when he was visiting California from Switzerland. The new perspective in art was compared to the new perspective possible in double entry accounting as new ‘organ of perception’.
I am currently attempting to synthesize d. e. accounting into a form that can be presented to middle school/high school students. Best of luck to you. Daniel O.
Wow how interesting, Daniel, that you’ve been writing about Pacioli since 1998! I first heard the name Luca Pacioli in an aside from my accounting lecturer and was intrigued. Yes, the connection between perspective in art in 15th century Italy and DEB is very thought provoking.
From what I can gather online, what you’re doing sounds fascinating and important. (I’ve just googled Marc Desaules too, he seems to be involved with your work in California, is that right?) All the best to you too. I’ll be following your work with interest. cheers, Jane
Hello Jane. Yes, our little group will be very interested in your book when it comes out. If you don’t mind, I would like to write a book review for the economics journal ‘Associate’ and the yahoo user group. Christopher Houghton Budd and Arthur Edwards are the editors and my son who lives in Switzerland hosts their website. Daniel O.
Hello again Daniel – I’d certainly not mind if you reviewed my book! That would be wonderful. I wonder if there’s a way of sending you a review copy? I believe finished copies are due this week. cheers, Jane
That would be terrific! I’d get right on it.
Daniel
Daniel Osmer
Box 2557
Sebastopol, CA 95473
(707) 292-5281
I am currently a real estate professional, weekly science buzz cafe host and a former educator trained in standard elementary teacher training as well as Waldorf training. I also have articles printed in an economics journal from England (31 years old) over the course of the last 8 years.
this is an interesting book.
modern accounting is always thought to be originated from the western world, i.e. Venice merchants. how about the history of accounting in the oriental world, e.g. ancient China.
i hope that it shall be an interesting topic for your next book
cheers
Thanks James.
And yes, you’re absolutely right to mention the non-western origins of modern accounting. In my book I do trace the possible origins of Venetian/northern Italian accounting to the Arab world and India (there’s anecdotal but not much documentary evidence supporting this) but the contributions of China to modern accounting do not come into my book.
If I were to continue to write about accounting I’d certainly pursue this line of enquiry (especially as by pure chance my father had a passing involvement with the economist who set up the Chinese national accounts in the 1950s).
Hi Jane and James,
I would agree that there is early evidence of advanced accounting practice in other cultures including South America, the Near East, India and China. However, a book about the history of accounting in China or any other country would fall flat in comparison to the unique confluence of events and world story that the book ‘Double Entry’ documents. Luca Pacioli did not invent Double Entry Accounting but he was in the peculiar position of being alive soon after Gutenberg’s Press made it possible for mass distribution of a complete description of an already existing accounting technique, now codified for the first time. In addition, Pacioli’s pedagogical brilliance should not be underestimated, for he was a brilliant and innovative educator at a time and place in history where the creative intelligence of the individual human being was beginning to be celebrated and emancipated. For whatever reason, this did not occur in other cultures to the extent that it did beginning with the Renaissance centered in Northern Italy.
In economics, it is a well-known phenomenon that any route that leads to the temple will experience heightened economic activity from the increase in traffic. Jane rightly points out that the fact of the Crusades and its focus on Jerusalem inaugurated hyper economic activity in Northern Italy that set in train an unprecedented accumulation of surplus capital that continues today. I would also like to suggest that there was a change in human consciousness that is indicated in the new found technique of perspective in art, perspective in accounting, the new science of optics and the sea change occurring in mathematics. Ironically, many of the necessary elements needed for this great story were provided by the brilliance of previous Arab and Indian accomplishments, including the Arab translations of Aristotle and Euclid.
With little exception, the fact of generally accepted accounting practice is virtually a universal language used in most every culture of the world. From one point of view it is the language of capital and modern finance. As was pointed out on page 11, accounting does not just refer to ‘counting’ but also to story telling. Those individuals who know how to ‘read’ and ‘write’ the language are able to perceive the ‘story’ behind the numbers, the tale told in the relationships of the various figures in the financial statements (past insight) and the financial forecasts (future foresight).
I am still in the midst of reading the book and I look forward to the comments and insights of other enthusiastic readers.
Cheers,
Daniel O.
N. California
Thanks Daniel for your fascinating comments. Yes, I think you’re right to argue that the unique conditions in 15th century Italy and especially the printing press made the Italian/Venetian contribution to the history of accounting the most significant of all, because it is this system that shaped our contemporary accounting practices.
And I also completely agree that for whatever reason (some attribute it to the rise of the merchant class itself) there was a change in consciousness around the 14th century which was associated by a new spirit of measurement and counting, as you say, manifested in perspective painting, optics (the first spectacles for correcting eyesight), time telling (clocks), maritime charts, etc. It’s fascinating!
I caught your interview this morning with Geraldine Doogue on Saturday Extra, Jane. I must look for “Double Entry”. It sounds fascinating. However, to me, the highlight of your interview was at the end when you said something to the effect that it is becoming clearer we don’t factor the value of our natural resources into account.
Amen to that! And the world is now paying in spades for economists failing to realise the quantum of the publicly-generated rent of our land and natural resources in the economy. http://thedepression.org.au/?p=7812 Of course, this leaves it open to the 1% to privatise this value owed equally to all of us.
Thanks for your comments Bryan. I too am especially interested in the valuing of natural resources. And how fascinating, the way you put it, your point about the world now paying for economists failing to realise the quantum of publicly-generated rent of our land and natural resources. Thanks for your link, I’m going to study this more over there. And yes, that’s always the danger, that the 1% will privatise this value.
I’ve been following the work being done in Bolivia (and elsewhere) on enshrining the rights of nature in law, which the Bolivian parliament did earlier this year. It seems a very hopeful avenue to me. At least it gives nature similar legal rights to corporations, etc. Anyway, will now check out your link! Thank you.
Maybe there’s a book in it for you, Jane!
Hey! But I’m still going to get “Double Entry”.
Hi – can I buy an eBook version of this wonderful looking book? I can’t find it on iTunes. Thanks, Peter
Thanks Peter.
Here’s the link to the publisher’s website. http://www.allenandunwin.com/default.aspx?page=94&book=9781741757552. It has a list of the ebook outlets, which include Booktopia, gleebooks and Readings. It also says this, about reading it on apple devices:
‘You can find and read Allen & Unwin ebooks on your iPhone, iPad or iPod through the Borders, Ebook Reader, Kindle and Kobo apps. These apps can be downloaded at no charge from the Apple App Store on iTunes.’
Many thank – alas I am in the UK, and all those sites are saying the book in not available in the UK. Do you know when the UK release will be?
Need a worldwide release in this internet age I think!
Oh right, I didn’t realise that. I’ve just heard from Allen & Unwin that arrangements for UK are still in progress. But in the meantime, apparently you can order the hard copy from the A&U website.
And yes, totally agree with you about worldwide releases in internet age – think that day is fast approaching, if not already arrived.
Just finished it, Jane – and just had to blog about it. http://thedepression.org.au/?p=8747
Despite the last line in my blog, I’m not really setting you homework, Jane, but if I can ever help?
Buy “Double Entry” folks – it’s a great read!
Thanks for a great review of ‘Double Entry’ Bryan, which I’ve just read and commented on over at your blog. As I say there, I can see your thinking on economic rent is an incredibly fruitful way to approach the costing anomalies I’m trying to get at in my book and I’ll be reading your blog and mulling over your thinking over the next month or so. Stay tuned!
Thanks again so much. best, Jane
I am a disillusioned accountant – not with double entry – but with its MISUSE.
Your book, “Double Entry,” is great. Your description of the life and work of Luca Pacioli is fascinating. He truly changed the way commerce grew from 15th century on. He produced order and that is what accountants in the 19th and the first half of the 20th century thrived on. “Double Entry” reveals much about my chosen profession of accounting and the development of capitalism that should be better known to all my colleagues. Thank you!
As you say, the story of double entry is still unfolding. However, I can’t agree with your conclusion that today “it might be our last hope for life on earth.” Not for commerce and not for the national accounts of governments. I come to a different conclusion using the evidence in your book.
Let me discuss that misuse of double entry with some very good examples straight from your book.
You show the development of double entry when the Venetians first used it in the 15th century for business ventures. These ventures all had a beginning and an end in time. You show how double entry was adapted by businesses that were ongoing. Until the 19th century, and even now, the value of double entry is that it substantially reduces clerical error through the need to balance the books with a trial balance. It is a record that reduces fraud. Furthermore, double entry not only inspires confidence, it was instrumental in overcoming the religious objection to usury.
But double entry lost its way. For the past half century, the misuse of double entry continues to hold back the accounting profession. Here are some of your examples that show that we accountants continue to let our profession down:
Page 143 – “Ironically, if Hudson and other nineteenth-century railways tycoons had been obliged to comply with today’s more comprehensive accounting standards, it is possible the vast railway systems of the nineteenth century would never have been built.”
Page 198 – “The collapse of massive enterprises like Enron and the Royal Bank of Scotland raises serious questions . . . In particular, especially given that the Enron case was followed by the demise of its accountant and auditor Arthur Anderson, it raises questions about the accounting and auditing of corporations in general, particularly of large multinational companies whose complex and exotic accounting practices obscure their true financial state and make possible these sudden and spectacular failures.”
Page 199 – “However, not only has no such fall ensued” (i.e. the predicted fall of the accounting profession because of this and other problems) “but it turns out that these accounting scandals are a regular feature in the landscape of accounting. They are as old as the profession itself, dating back to the earliest days of the formalised use of collective capital: the corporation. Corporations and accounting scandals go together like Gordon Gekko and greed. The nineteenth and early twentieth centuries are rife with corporate collapses of the magnitude of Enron’s and comparable in their elements. And they all stem from significant accounting misstatements orchestrated by senior managers.”
Pages 200/1 – “The requirement that company accounts be audited was a chief component of this regulation. It seems, however, that in the nineteenth century a culture of ‘auditing excuses’ was created, which permitted accountants to deny a primary responsibility for detecting accounting irregularities perpetrated by management, and this culture continues today. Auditors were required by law to focus exclusively on accounting records and the balance sheet, and not to question the honesty of senior managers or tell them how to manage.”
Page 209 – “The demise of ABC Learning is similar to the cases of HIH and One-Tel. All three companies attempted to expand their market share as rapidly as possible, a strategy which entailed significant risks which were not clearly reflected in their financial statements.”
You also quote Howard Ross (page 194) when he says “It would be interesting to know how many of those whose hearts leap up at the announcement of an increase in earnings per share have any idea of the estimates, judgments, and conventions that must go into all such calculations.”
When the economy falters, misleading figures come to light. Companies that mislead the public, intentionally or otherwise, come crashing down. As Warren Buffett is reported as saying: “It is only at low tide, before we know who is naked.”
Doesn’t all this go a long way to demonstrate that double entry has been misused? Why don’t the accountants, financial analysts, economists and indeed governments, who all recognise the deficiency of annual profit reporting, throw it out? Instead, as you say on pages 199/200:
“Equally, the responses of lawmakers and watchdogs have been the same over the past one hundred years: Tinker around the edges of the law, found new watchdogs, proclaim a new era of greater scrutiny and let accountants and auditors out to play with the managers of vast sums of other people’s money. Never are the fundamentals of this arrangement questioned – the corporate structure itself or the role of accountants as its referees.”
Why is that? When I first learnt double entry in high school, I was fascinated by its promise of certainty and accuracy, its apparent ability to tax fairly and prevent fraud. Probably all students of accountancy accept this. Yet two decades later, I was so disillusioned with financial statements, I returned to university to strengthen my belief in our profession. Even though I earned a Masters degree, I was then even more concerned that we accountants had lost our way. I was concerned that my professors and my colleagues only wanted to, as you say above, tinker around the edges of the law. They refused to consider that reporting annual profits for large complex organisations in the present form was arbitrary and ineffective. They all know this, yet they persist.
One quote from my studies summed up my concern because it approximates the true situation that I saw all the time:
“Annual reported profit of a corporation is what the CFO says it is unless the CEO can persuade the CFO that it is something different.”
Unfortunately, I have lost the exact words of the quote and its author but that was the gist of it. I believe annual profit reports are as simple as that. Despite strict arbitrary rules, they reflect the conscious or unconscious biases of those in control.
The reason why accountants persist in reporting these misleading, unreliable figures is the same reason as almost all religious faiths persist. There must be several million accountants in the world all educated in a similar way and all have devoted their working life to these procedures. Hugh Mackay in his book “What Makes Us Tick” sums it up (page 88/9):
“Once we’ve embraced a particular set of convictions – religious, astrological, political or scientific – we constantly seek reinforcement of them. We love to hear people saying things that confirm them. We even enjoy, in a limited way, being attacked, because the experience of defending ourselves against attack is itself a reinforcing, affirming experience.”
On the last point, I remember a speaker being ridiculed by the audience at an accounting conference by suggesting that the profession should concentrate more on forecasting. Looking forward instead of always looking back!
However, I am not throwing double entry out. It is still very useful to maintain accuracy, reduce fraud and to provide historical cash flow statements. But in today’s world, double entry produces annual profit and loss statements and balance sheets that do not (except in a narrow legal sense) give a true and fair view of the Company’s financial position and of its performance for the year.
As the accounting profession is shown to be wrong so often, why do governments, economists and even other financial professionals base decisions on these misleading profit reports? For example, examine these five discussion points:
1. What was useful for financial reports for small businesses such as tradesmen, small shops and professions is now being used for large corporations with massive fuzzy figures in their balance sheets. When you examine the valuation of huge plant and equipment, mines, inventories, goodwill, to name a few – accountants all know that the values rarely represent their current market or potential values at the date of balance sheets. These values may be considerably higher or lower and, in the case of goodwill, often left out altogether.
2. My accounting and auditing education emphasised the need for using verifiable figures. Forecasts were derided. However, just what is verifiable in the value of a depreciating cost of a Building that everybody knows is going up in value year by year? What is verifiable in the value of inventory that can be valued in any one of several different ways? And why is there no Goodwill on a balance sheet simply because the company developed goodwill over many years and did not purchase it outright? And what is the value of Accounts Receivable in a bank’s balance sheet when a financial institution can juggle the Provision for Bad or Doubtful Debts and the resultant annual profit?
3. What about dividends? We want to be sure that the value of the company is not degraded by the distribution of too much dividend. Do we really need this arbitrary profit figure to guide us? Already most companies pay out only a proportion of their profits in dividends. Trusts often ignore actual profits in their distributions. What is important is that the payment of dividends is limited to the amount that can be paid out without denigrating the company’s ability to carry on business. This can be determined more easily by cash forecasts.
4. What about income tax? Show me an accountant who does not look at the way income tax affects decisions and I’ll show you an incompetent accountant. Yet the rules of taxable income have locked the accounting profession into accommodating the arbitrary rules of income tax. Yes, I know there are adjustments made in the financial accounts to overcome this – but the income tax rules generally inhibit the profession changing its own rules.
Politicians and bureaucrats will say we need income tax and therefore we need the annual profit figure. Surely taxing consumption sends better signals to the economy than taxing effort and income. More importantly, the very rich can choose (legally or otherwise) whether they pay any income tax and, if so, how much. This really means income tax has become a tax on the middle class only and has lost its economic utility when compared to consumption tax.
5. Finally, the auditor arrived – and following GAAP they certify the records and the profit reports even though they cover themselves in legal exceptions – but this gives the appearance of certainty to a very vague profit figure.
Double entry will show the net gain or loss for a corporation over its whole life. What it can’t do is divide the profit into annual or monthly portions except by applying estimates and arbitrary rules. Income tax departments, corporate regulators as well as auditors force accountants to produce an arbitrary dissection of profit or loss into years – but the greater the value of the balance sheet, the greater is the arbitrary irrelevance of the annual profit.
You can argue that using known figures is better than forecasting. Really? If the only verifiable temperature you have is the one for Hawaii – would you use that to estimate the temperature in Auckland? A silly example, maybe. But any analyst can tell you that the audited profit of a highly capitalised complex corporation is a long way from telling you if this is a company whose shares should be bought or sold.
When I studied accounting, there were many standards that were needed for financial statements. These included consistency, conservatism, verifiability, quantifiability and relevance.
Unfortunately, necessary as they appeared to be, some harmful effects developed including –
• the use of the consistency concept to retard new accounting developments;
• the use of the doctrine of conservatism to hide resources;
• the use of verifiability to keep our direction firmly on the recorded past; and
• the use of quantifiability to ensure we ignore the influence of inflation on values.
Yet, as discussed, these standards have been already been eroded in Balance Sheets. The fourth standard – relevance – is being constantly updated in the Balance Sheet with estimates – but these estimates are mostly irrelevant to the calculation of reported annual profit.
The more capital intensive a corporation and the longer the time frame for investments, the fuzzier are its Balance Sheet figures. With the distortions caused by mergers, inflation and technological change, the figures are even more meaningless. For example, how meaningful are reported annual profit figures for:
• A large commercial skyscraper subject to depreciation or appreciation over many years.
• The development and long term value of a mine, especially in a foreign country.
• The development, production and sale of a new pharmaceutical drug.
The same problems apply fully to all capital-intensive industries and to a lesser but yet significant extent to all other projects. It becomes even more complicated in multi-product and multi-national companies. All this applies without deliberate fraud. It happens in companies that act in good faith who try to be as honest as they can be with their figures.
What do investors and analysts do with fuzzy figures now reported? They turn them into P/E ratios and use them to fuzzily value the worth of the company. Of course, analysts may adjust them with their own fuzzy numbers, but without internal knowledge these can be even further from reality. Analysts then take their fuzzy figures and attempt to forecast future cash flows and use present value estimates to determine the worth of each company.
As the profit reports are awash with estimates, for what are we waiting? Why not go all the way and have forward estimates that are directly meaningful, produced by company staff?
Well-managed companies already forecast their future cash flows – why not use their figures? They exist already. The company could list its assumptions as well as provide figures indicating how sensitive the future cash flow is to variations in their assumptions. The company could also declare how various risk factors would affect the future cash flow and the net present value derived from these forecasts.
Auditors would still be necessary – not to certify the figures (how do you certify a forecast?) – but to provide their view on the suitability of the systems used for forecasting and their agreement that the sensitivities of the assumptions are fair.
Even with all these checks, the results are still forecasts – so nobody will make the mistake that now occurs of thinking the figures are exactly right.
Each year, the auditors can also report on how the previous forecasts varied from what actually occurred, explain why and suggest improvements in the forecasting methods.
Reported annual profits are too arbitrary, too easily manipulated and nowadays not directly relevant to investors. Can’t we see, it can’t be done? Instead the accountancy profession should adopt a new direction and determine ways to improve company forecasts to make sure they are relevant and useful and have those forecasts published.
There is no perfect answer but at least let us work towards one. Let us use double entry the way it was designed – for accuracy, for reporting past events and to provide historical cash flow statements.
Let us scrap these failed fuzzy annual profit reports. Substitute the best cash flow forecasts the company can produce and calculate the net present value accordingly.
One final thought unrelated to the discussion above. Your extension of double entry to GDP puzzles me. Probably as an accountant, I find it hard to mix financial transactions with vague feelings for environmental assets, the value of health and education. I believe GDP should stick to monetary transactions. These other economic issues should be dealt with separately comparing the costs of fixing them with the losses if you don’t.
Finally, thank you very much for your book. It explained my profession better than I have seen elsewhere and made me think more deeply about accounting.
Thank you so much, Alfred Gans, for your fascinating comments and queries about my book. You have given me much to think about! I suspect it will take me some time to consider all you say about reforming corporate accounting.
In the meantime, in answer to your query about why I say – or quote a Guardian journalist who said – that accounting may be our last hope for life on earth: I included that quote because I think it demonstrates how crucial it is that we rethink the way we account for national wealth. The way we currently account at a national level encourages us to run down resources and treat nature as free, among other things. Unless we address what I consider to be these fundamental issues of measurement and value at a national level there is a systemic incentive to destroy the planet.
As for my extension of double entry to GDP – I didn’t extend it to GDP. Maynard Keynes, Simon Kuznets and the other economists who constructed the national accounts for USA and Britain during the 1930s and 40s did. And I agree: I too find it hard to mix financial transactions with things like the value of health and education (although we give them monetary value all the time).
I do think it’s possible to value environmental assets in monetary terms, eg in terms of rent. I think that giving a monetary value to environmental assets is as arbitrary, or not, as valuing human labour in monetary terms. I think we’re just not used to doing it; it does not go along with our particular current set of convictions (to extend your quote from Hugh Mackay) about money, nature and value.
I will read your comments about corporate/business accounting more closely over the next week or so and hope to have more to say here in reply. In the meantime, after speaking to some accounting professors who also gave me some feedback, I’m very inspired by the idea of questioning the corporation itself, as business and management thinker Charles Handy does here: http://www.youtube.com/watch?v=oRawB5d7EjY
I so appreciate all your thoughts – they are extremely stimulating and thought provoking. Thank you very much.
A most intriguing run-down, Alfred! I tend to agree with you that GDP is a good measure and will never be able to value some imponderables. However, it would be an excellent start (for we and the planet) if we are able to acknowledge that almost 50% of GDP is represented by the imputed rent of land and natural resources, but the economics textbooks claim this is only 1% to 2% of the economy. This is surely where we start to go wrong, because these unearned economic rents, generated by the community, are owed back to the community instead of being largely captured by the 0.1% so that we have to pay taxes on our EARNED incomes.
Sorry to go on about it, but this piece by Steve Keen and the comments that follow are also starting to get to the heart of the matter. Jane may be interested too: http://www.debtdeflation.com/blogs/2012/01/28/economics-in-the-age-of-deleveraging/
Think we posted simultaneously, Bryan. I’m definitely interested in your link above and also, as I’ve said, in trying to work your thinking into mine, so to speak. (You’ll note I use the word ‘rent’ above. A very superficial incorporation of your ideas but your concept and language are v useful.) I’m interested in your idea of unearned economic rents.
I’ve just started reading ‘Green Economics’, which goes beyond concepts of measuring and valuations, obv very radical economics but fascinating to me and where my thinking is heading. Slowly evolving, as part of my PhD.
Thanks for this discussion – I’m loving it. Esp good to have strong intelligent criticisms, very good for my thinking.
A synopsis and review by Daniel Osmer for Associative Economics Cafe of the new book by Jane Gleeson-White – ‘Double Entry’. March 7, 2012
Double Take
It is difficult not do a double take when reading that an invention is so significant that it can ‘make or break’ the planet! But that is just what Ausie Jane Gleeson-White claims in her new book, “Double Entry” published by Allen & Unwin this past autumn. Not only that, she calls it history’s best-kept secret and most important untold story that has at its heart a Renaissance monk, mathematician and magician – Luca Pacioli. The invention she is talking about, double entry accounting, began in its simplest form with the first settlements around Jericho when agriculture, salt mining and an economic surplus arose. The long evolution of bookkeeping (accounting) went through a major metamorphosis during the Middle Ages when some of the northern Italian city-states practiced a rudimentary form of the new Double Entry. This technique was first codified and published by the mathematician monk, Luca Pacioli (1494), who was also friend and collaborator of Leonardo da Vinci, Piero della Francesca and Albrecht Durer.
In the preface, the author refers to her economist hero John M. Keynes and his theory of the system of national accounting developed in the 20th century as one of the reasons for writing the book. The research revealed that his system was influenced by Pacioli’s Venetian bookkeeping. It is proposed that double entry bookkeeping made the wealth and rise of the Renaissance possible, enabled capitalism to flourish and evolved into a sophisticated system of numbers that now governs the global economy. Thus, this ancient technique is still in daily use throughout the world today. In ten packed chapters Gleeson-White attempts to make the case that, through this worldwide technique relied on by most nations, the planet is being ruined. She is also convinced that the reverse is true! Is there more to double entry than accuracy, measuring and ordering the world’s resources for consumption and profit?
Through a fascinating and diverse historical cast of characters almost rivaling the cast of thousands in the Ten Commandments film, Gleeson-White weaves an intricate tale from Jericho, Mesopotamia and the Renaissance to the Industrial Revolution, the World Wars to Wall Street and the modern global economy. She reminds us that accounting isn’t just about numbers; it is also a form of storytelling that reveals the intentions and economic actions of the entity that is being accounted for.
Ancient Origins; Modern Practice
Over 10,000 years ago writing derived from counting according to the cited research of French archaeologist Denise Schmandt-Besserat. She also discovered that ancient accountants used fired clay tokens shaped as cones, cylinders, ovoids and spheres representing grains, animals and commodities that were placed in clay envelopes imprinted with signature seals to record possessions. Early accountants learned to press the token shapes into the wet clay of the envelopes and eventually flattened them into the first clay tablets.
Pacioli became the leading mathematician of the Renaissance by studying under Francesca and discovering a copy of Fibonacci’s Liber Abaci. He popularized, in the vernacular, the new Hindu-Arabic numbers and algebra to a wide audience, leaving behind the Abbaco method of algebra. The newly available Guttenberg press made all the difference! His Summa of 1494 not only contained the 27 pages of Double Entry but also laid the foundation for the use of mathematics for solving abstract arguments and prepared the way for modern science. As a teacher, Pacioli was known as an innovative and effective educator who introduced many students to double entry bookkeeping as well as the new mathematics of the day. Over two centuries later accounting enthusiast John Mair in 1765 commented on the value of accounting: “The theory of this art or science is beautiful and curious, very fit for improving the minds of youth, exercising their wit and invention, and disposing them to a close and accurate way of thinking.”
As Venice moved to the background, the center of commerce and accounting moved to the Netherlands, which acted as a training ground for future accountants as commerce traveled further west from Britain and eventually to America. Richard Dafforne’s ‘The Merchant’s Mirror’ published in London in 1636 was written as a series of questions, answers and ‘rules of thumb’ that included: “Whatsoever cometh unto us for Proper, Factorage, or Company account, is … Debitor. Whatsoever goeth from us … is Creditor.” Even the German writer, poet and scientist Johann W. von Goethe in ‘Wilhelm Meister’s Apprenticeship’ published in 1796 through the character of Werner, makes reference to Double Entry Bookkeeping: “By means of this he can at any time survey the general whole, without needing to perplex himself in the details. What advantages does he derive from the system of bookkeeping by double entry? It is among the finest inventions of the human mind; every prudent master of a house should introduce it into his economy.”
Chapter six documents the effect of double entry on the Industrial Revolution. Fast-forward to the large factories and the rise of the joint stock companies established in England toward the end of the 18th century. In 1772 Josiah Wedgewood’s industrial pottery factory was so successful it was difficult to meet demand and serious cash flow issues arose, prompting the adoption of double entry bookkeeping. From this process he discovered the importance of distinguishing between fixed and variable expenses, as the company created a significant surplus allowing him to invest in the voyage of his grandson Charles Darwin on the Beagle. By 1900 America became the largest economy in the world from the fortunes created by du Pont, Morgan, Carnegie and Rockefeller. This was in part due to their reliance on double entry. Rockefeller began as a bookkeeper and attributed his wealth and success to his mastery of double entry bookkeeping.
In chapter seven, Double Entry and Capitalism, German economist Werner Sombart is cited as describing the emergence of capitalism and the appearance of double-entry bookkeeping in the thirteenth century as causally related. From his 1902 six-volume work on capitalism: “It is simply impossible to imagine capitalism without double entry bookkeeping; they are like form and content.” The usefulness of capital is confused with capitalism, which is the appropriation of capital by a few to the exclusion of others. The advent of the corporation also influenced and was influenced by double entry, as the role of the auditor turned bookkeeping into a full-fledged accounting profession. Gleeson-White cites the origins of auditing from detailed research and her keen sense of a ‘good story’. Fourteenth century Chamberlains in London had to be audited (from the Latin ‘to hear’) or heard, because very few people could read or write. Written records only came into use later, in the seventeenth century.
Double Edged Sword
Gleeson-White identifies and emphasizes Keynes ‘theory of effective demand’ from his 1936 publication “The General Theory of Employment, Interest and Money” as providing the theoretical basis for a new ‘System of National Accounts’ (SNA) based on Double Entry Accounting. With the help of Stone and Kuznets it became the foundation of international accounting that introduced the Gross National Product (GNP) as the key economic indicator for a nations economy (now GDP). Keynes ‘demand management’, the international clearing house idea and hoarding avoidance was, according to his biographer Robert Skidelsky, at the “heart of the matter” for preventing unemployment. The idea was to close the ‘output gap’ created by decreasing employment, by increasing demand (spending) in the right amount. How all this was ultimately implemented under the influence of Washington, DC made the architects of these innovations question the validity of their own work. According to the author, the increased reliance on mathematical equations and statistics turned their innovations into a beast rather than the blessing it could have been.
A Financial Ecology
In summary, her premise: capitalism, corporations and nations depend on double entry accounting in order to guide economic activity, yet the all important GNP and GDP are flawed numbers that now govern the modern world. Our transactions with the earth and the well being of people are not taken into account. Is it accounting that has not learned to account for the value of everyone on the planet as well as earths resources like the rivers, oceans & air, or is it the lack of a true understanding by double entry accounting practitioners?
An important unexamined detail is the fact that nations do not attend to the balance sheet like corporations tend to do. They only focus on the flow, the income and expense, and not on the stock or resources and agreements needed – the balance sheet. Overseeing the cash moving between the two types of accounts, I & E and B/S, then becomes all the more useful for guiding economic actions and making more perceptive decisions. Thus, universal accounting practice and sharing replaces econometrics as the guiding light for modern economics. The new perspective art and mathematics of the Renaissance were accompanied by the newly acquired perspective and perception of double entry accounting (bookkeeping). This remarkably simple yet profound technique and practice is a two-way street. Past financial statements and future forecasting statements together enable penetrating and precise insight and foresight – the story behind the numbers.
Perhaps another book is in the offing? In the further adventures and secrets of double entry accounting the deeper nature of this universal language may still be revealed. Accounting does not really need to treat land (the planet), labor (people), capital (profit) and money (token) as commodities, they can be considered tools and boundaries of the economy. What would double entry accounting look like with this new financial ecology? Rather than looking to create a new kind of green or eco-accountant, all that may be needed is to make the universal language more universally known. Rather than just focusing on the accounts of nations and corporations, the next fruitful step could be accounting literacy for all, especially young people that are just beginning to make their way into the economy. The story accounting can tell has to do with guidance and economic perception toward the future, whether for a whole nation, a company or any individual. How else can we accurately see each other’s needs without transparently sharing are accounts? Thanks to Jane Gleeson-White’s fascinating and engaging book the conversation has begun.
Jane Gleeson-White has a Bachelor’s degree in economics and accounting and is a writer living in Sydney, Australia. She was also an intern at the Peggy Guggenheim Museum in Venice.
Daniel Osmer is a real estate professional in northern California and hosts Associative Economics Café. He is a founding participant, Economics Conference of the Goetheanum, Dornach, Switzerland (Associative-Economics).
Hi Jane,
I have been a student of computer-driven bookkeeping for the past 32 years. I learned a sophisticated bookkeeping that included cost-accounting and time tracking when I was an apprentice at a large manufacturing organization 50 years ago. My daughter and I created a small business experiment that was run by a computer driven bookkeeping system that I programmed modelled on the system I learned as a young apprentice. In the store experience run by my daughter, and with other studies since, I learned that a proper book-of-accounts is a natural phenomena. And that the book is complete only when it records a reusable history. I have, in my thirty years, not located a single computer driven bookkeeping program that generates a proper book-of-accounts. In fact, none that even come close.
Have you written anything on the topic of what constitutes a proper book-of-accounts? Proper in the sense that it yields a complete set of audit-trails, does an internal cost accounting, and can include the accounting of time contributed by individual contributors to the bottom line.
Hi Dan – thanks for your question, it’s extremely interesting and pertinent in this age of electronic accounting.
I’ve not written anything specifically on the topic of what constitutes a proper book of accounts. My interest in accounting is more general, more historical.
Perhaps someone visiting this blog will be able to answer your question.
best, Jane
Hi, Jane.
I have just finished your wonderful book. What a fascinating and brilliantly researched and written piece of work! As a studier and teacher of Systems Thinking, you explain so well how this (simple) starting point has influenced not only the structures we put in place to manage our world but how it has so influenced our thinking about the world and our place in it. The environmental and social problems we continue to create for ourselves can be traced to the essentially unconscious beliefs (mental models) we hold about things. Sadly, I suspect that we are now so much in the grip of this ‘economic’ metaphor that we cannot change and that it will utlimately be our undoing. Even the potential ‘solutions’ hinge on a continuance of this same metaphor, i.e. finding ways to value things differently/better within this same system. I think you have presented this dilemma extremely well and I do hope that your book enteres the shelves and minds and thinking of many.
Thanks so much again, Jane.
Paul (Melbourne)
Hi Paul – thank you for your wonderful comment. I agree with all you say about environmental and social problems, especially your concern that any potential solutions to these problems hinge on ‘a continuance of this same metaphor’ (I love this phrase). I’d be extremely interested to hear more about your work on Systems Theory, which is something I’m currently exploring (kind of tangentially, for my PhD).
very best wishes, Jane
I recall that British-born, but Australian by adoption, Colin Clark was involved in measuring the foreruner of GDP well before the Second World War. I have a copy of his “The Conditions of Economic Progress” in my library (I confess largely unread) but it shows the early approaches
in formulation what was to be measured and how. He was of an age to have ‘mixed it’ with Keynes and in fact was teaching (statistics) at Cambridge while Keynes was there (see Wikipedia entry) and produced early studies on National Income Accounting during the 1930s.
I met Dr Clark during the 1970s while he was at Monash and attending a conference of economists, where he gave a presentation of great lucidity.
So work was under way to derive a measure of national activity well before the Second World War, and I suspect Clark was aware of the shortcoming of producing a single numerical measure as a summary of a nation’s progress.
Locally, discussion of the virtues or otherwise of a pulp mill are leading to (or have led to) a focus on what might a generation ago have been strictly collateral issues (a useful Americanism), but are now accepted as factors that need consideration alongside the more strictly economic aspects of the project.
Thanks for your comment Brian, very interesting. Yes, Colin Clark also came up in my conversation with Prof Geoff Harcourt on 4 April. The work was underway to construct national accounts in UK before WWII and in US they were constructed during the Depression. I’m interested to hear you think Clark would also have been aware of the shortcomings of producing a single numerical measure for a nation’s progress. It seems all those involved in those early days were, including Simon Kuznets who led the US account construction. It’s just that most of us – especially politicians and markets – forget this now.
Also very interested to hear your local example of what might a generation ago have been called ‘collateral issues’ (or ‘externalities’) now being accepted as factors that need to be considered. Change is happening.
There is a very interesting article on the specifics of Bahi Khata as a double-entry accounting system in existence in India long before books were written about it in Europe. If you are not into accounting details the history discussion is very interesting.
The title is “Baji-Khata: The Pre-Pacioli Indian Double-entry System of Bookkeeping” by B.M. Lall Nigam. It is in the Journal ABACUS Volume 22, no. 2, 1986.
Thanks for mentioning the Lall Nigam article. Yes, I’ve read it and discuss it in ‘Double Entry’ – it’s a fascinating possibility, more like a probability, that our accounting systems ultimately come from India, as does our mathematics.