I have been thinking about something that is so obvious within conventional accounting that almost no one thinks to question it. It is the assumption that labour is a cost.
Every accountant thinks this. A business has sales, and from those sales it deducts the costs incurred in generating them. Those costs include materials, energy, rent, depreciation and, most importantly for many businesses, wages and salaries. What is left after those costs have been deducted is called profit.
But suppose we ask a different question. Suppose that the purpose of a business was not to maximise the return to capital but was instead to maximise the sustainable return to labour. What would accounting look like then?
I think the answer is that it would look very different indeed, and there is no reason why this need not be the case, and why it should not be. That is because there is unlimited financial capital in this world, and limited labour, which is why it makes complete economic sense to presume that the return to labour is what an economy should maximise.
Critically, this matters because accounting is not neutral. Accounting decides what we record, what we ignore, where we draw boundaries and, crucially, what we call income. Those decisions profoundly influence how we understand economic activity, and the treatment of labour proves the point.
Who gets the residual?
Conventional accounting broadly assumes that revenue, less labour costs and other costs, leaves profit attributable to capital. Of course, actual accounts are more complicated than that, but the essential logic is clear. Labour is treated as a cost. The payment of wages reduces profit. If wages increase by £1 and nothing else changes, profit falls by £1.
From the perspective of the owners of capital, that makes complete sense. In the currently accepted accounting framework, the worker's gain is their loss. But there is no natural economic truth in this accounting. Instead, that accounting has adopted a perspective. It has been decided that the return to labour is a cost, while the return to capital is the residual we call profit. That is a choice.
What if we choose differently? Suppose instead that the purpose of the company is to maximise the sustainable return to labour whilst maintaining the capital required for the business to continue. The calculation might then be revenue, less external inputs, less the cost of maintaining capital and an appropriate required return to capital, with what remains being the return to labour.
Suddenly, wages have a very different character. They are no longer simply a cost incurred on the way to calculating the return to capital. They are part of the return that the organisation exists to generate.
Imagine, for example, a company with sales of £1 million. It buys £300,000 of goods and services from elsewhere and pays £500,000 to its employees. Suppose another £50,000 is required to maintain its productive capital (which is the estimated cost called depreciation provided in most accounts) and to provide an appropriate return to those supplying financial capital. Conventional accounting would then say that there is £150,000 of profit left out of which a dividend might be paid over and above the return already required by those supplying capital.
But why should that £150,000 be the measure of success? Why does the £500,000 paid to labour count as a cost whilst the £150,000 left for capital counts as the residual whose maximisation supposedly indicates that the business is doing well? There is nothing inevitable about that conclusion. It only follows from the perspective from which the accounts have been prepared.
An alternative accounting could say that £50,000 is the necessary cost of maintaining and rewarding financial capital, leaving £650,000 as the return generated for labour. Of that sum, £500,000 has already been distributed as wages, leaving another £150,000 available for employees, whether as additional pay, enhanced pensions, improved working conditions, reduced working hours, better training, greater employment security or other provision for their future benefit.
Nothing about the underlying economic activity has changed. The company has sold exactly the same things, employed exactly the same people, used exactly the same physical resources and generated exactly the same amount of value. All that has changed is the question that the accounting is designed to answer, which is who is it that has a claim on this return?
Accounting as political economy
This change in perspective has significant consequences.
If the company in my example increased wages by £100,000, conventional accounting would report that its profit had fallen by £100,000. On the conventional measure, its performance would appear to have deteriorated. But if the purpose of the company was to maximise the sustainable return to labour, precisely the opposite conclusion might be reached. The company would have succeeded in distributing another £100,000 to the people whose work helped create its value.
The accounting definition of success would have been reversed.
There are, of course, limits to this argument. Labour still has an opportunity cost. A business needs to know how much labour is required to produce something. It needs to know whether resources are used efficiently, and it cannot simply ignore what it pays employees when making decisions, although it might more appropriately consider their time. But none of that requires us to assume that labour must be treated as an expense whilst the return to capital must be treated as the residual measure of success.
That assumption reflects a particular theory of the firm. More specifically, it reflects a theory in which the company exists primarily for the benefit of those who own its capital but who, in many cases, have no legal involvement in its affairs. Accounts designed around the needs of capital inevitably answer the questions that capital wants answered. They do not necessarily answer the questions that employees, communities, governments or society need answered.
Value distribution
We could instead produce accounts that began with the value created by an enterprise and then showed how that value was distributed.
They could show:
- what is required to maintain productive capital,
- what provision is required to ensure sustainability,
- what return is necessary to secure the financial capital the business requires, and
- what return is generated for labour.
That last return could include wages, pensions, benefits, training, improved working conditions and whatever surplus remains available to enhance the wellbeing and security of those who work within the enterprise.
The resulting measure of performance would not be profit maximisation. It would be the maximisation of the sustainable return to labour, subject to maintaining the resources required to ensure that the enterprise could continue to meet need in the future. The going concern principle would still, in other words, apply, which is what almost all workers desire, and have most interest in maintaining.
That point matters. No business can distribute today what must be retained to ensure that productive capacity, human capability and environmental resources remain available tomorrow. Capital maintenance, properly understood, is essential to any meaningful calculation of income and is specifically provided for in what I note above. But once that requirement has been satisfied, there remains a profoundly important question about who should receive the residual.
Conventional accounting provides an answer without ever admitting that it has asked the question. Its answer is capital.
I suggest we could answer labour instead.
Once we realise that possibility, something significant follows.
What accounting is for
Accounting would not then simply describe the economy it is presumed we have. It might also help us understand what that economy is for. If labour is always described as a cost whilst profit is described as the principal measure of success, we should hardly be surprised that businesses seek to suppress wages in pursuit of higher profits. The accounting framework tells them that doing so represents improved performance.
Change the accounting objective, however, and increasing the return to labour can become evidence of success rather than failure.
The accounts would still balance. Double-entry bookkeeping would remain entirely intact. The transactions would be exactly the same. What would have changed would be the purpose for which the information was organised and the question that the resulting accounts were intended to answer.
That suggests that accounting is considerably more political than most accountants like to admit. The decision as to whether labour or capital gets the residual is not a bookkeeping necessity. It is a choice about whose interests the enterprise exists to serve.
Maybe it is time we designed accounting systems that recognised that possibility. Maybe, in other words, we should start accounting as if work, and the people who do it, really matter, and matter most of all, because without it there could be no return to capital.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
[…] morning's post on accounting with labour as the residual is the sort of thing that happens when I take an idea for […]
” No business can distribute today what must be retained to ensure that productive capacity, human capability and environmental resources remain available tomorrow.”
Unless of course you are an English water company!
True!
Thanks to all for such outstanding lateral thinking!
Might taxation thinking and practices be modified to accept, faciliate and eccourage practicalities from this original thinking?
Yes – but that’s not for today
Many Many years ago somebody pointed out to me that Ordnance Survey maps are about travel – getting from A to B and that it would be possible to redraw them to reflect a different purpose – he suggested Pubs serving Real Ale or you might want ones with Bird Information on them.
So yes its a different version of the same theme, what else can we repurpose in the same way?
A good question
I have been working on it this week….
What does the word “ordnance” mean? The maps were originally about aiming guns.
Correct.
Now it is legacy description.
My thoughts immediately turned to those businesses whose function is already maximising the return to CEOs, & senior executives, in addition to shareholders. Eg: – banks and water companies. They already move the accounting goalposts to achieve some of what you suggest – but at the expense of sustainability, legality, their creditors, and the public good.
As examples, take Thames Water and J.P. Morgan, both currently lobbying gov’t hard to organise things so that state of affairs can continue, especially benefiting the income of their CEOs.
But they beautifully illustrate how a business and its accounts can and do already function to maximise the return to (a tiny proportion of the workforce (as long as the government keeps bailing them out).
As they already operate partially this way, there can be no objection in principle to extending the idea across the whole of their business, with a revolution in accounting. Thames Water seem open to doing their accounts in a radical new way (cancel our debts, cancel our fines, relax the regulations) , but unfortunately not for the public benefit.
In short, you are suggesting a change in accounting methods to promote public benefit. I want to remind your detractors that they already have bent, twisted and obfuscated accounting rules to their own minority, private advantage, and damaged the rest of us. What you suggest would make a pleasant change!
Thank you
It reminds me of what some American economist once said (was it Paul Krugman?) who said that ‘everyone’s wages is someone else’s wages’.
Your post underlines to me what the big issue with modern capitalism is – it’s ALWAYS about achieving monopoly – domination rather than accommodation like the Quakers/Puritans might have done.
Even when the modern capitalist has corrupted politicians and all the laws, they still think that they carry all the risk and should be rewarded for it. It goes back to pleonexia again – allowing wealth to grow so much actually destroys what is human in the rich and they disconnect – they are both victim and oppressor. The accounting you describe is just ‘machine accounting’ – looking at each quarter for more and more, with no sense of where ‘more’ is coming from.
You get it….
A thought-provoking reframe, but a few technical issues undermine it. First, this isn’t new — it echoes 1970s-80s “value-added statements” and stakeholder theory, both largely abandoned. They failed because they proved non-comparable across firms (no standardised basis for “required return to capital” or capital maintenance figures, unlike audited profit measures), were easily gamed by manipulating the capital-return assumption to inflate the labour residual, and never gained traction with regulators, lenders or investors who need a consistent, verifiable performance metric across companies and time. Second, “unlimited financial capital, limited labour” is empirically wrong — capital is scarce and priced, which is precisely why interest rates and equity risk premiums exist. Third, capital bears downside risk that labour doesn’t; relabelling the residual doesn’t change who absorbs losses when the numbers go wrong. The idea has moral appeal, but as an accounting standard it lacks the rigour, comparability and enforceability that make double-entry bookkeeping useful in the first place.
That has blown my mind away and made my day. Thank you Richard
Thank you
I remember my reaction to first reading about the government policies in the 1920s to reduce wages. Are these people completely stupid?! Do they not understand that their employees are also their customers?! I have since come to learn that common sense is not as common as we might wish it to be.
For the majority of businesses, taken overall, maximising the return to labour is the same thing as maximising the demand for their own products.
You pretty much get it.
In my experience, what people really mean by “common sense” is what is obvious to them and therefore has to be obvious to everyone else, and anyone to whom it isn’t obvious clearly has something wrong with them.
The call of the campsite lured me again, with time to read Susan George’s book ‘Shadow Sovereigns’, and time to muse. I just thought, this is nuts, whatever they are selling, the mega corporations need customers, they, and the customers, need a liveable planet, but in pursuit of wealth and power, they are destroying the pie they are wanting to own. Robots and software have no purchasing power, but can take some work away from people, reducing spending power. Like other commentators, I wondered if some of the Davos set are figuring out how to do without the rest of us, and had to go for a restorative swim.
A business trying to maxmise the return to labour is called a partnership. There are plenty of those and they follow exactly the same accounting principles as other businesses which can be summarized as: revenues minus costs. End of.
You are completely wrong.
`
A partnership declares a return to the owners of its capital. It treats employees as a cost.
You have totally misread what I have said.
You are not alone. But anyone claiming what I have written relates to a partnership or employee conned company has missed the point. They all declare returns due to the owners of their capital.
I am saying the return should be recorded as being due to employees. It seems that this is so shocking you cannot even comprehend it.
`
No, Jason, emphatically NOT end of..
I used to work as an employed vet in a veterinary partnership (in the old days before our professional rules allowed venture capital into professional practice). The vets who were partners and their accountant, definitely did NOT prioritise the wages of the employed vets like me, + nurses, receptionists, pharmacy & office staff. They maximised the return to the partners and saw the return to labour as a cost.
Nowadays, the purpose of the “corporate-run” practice is to maximise the return to the venture capital investor, and the professional vet partner is second in the queue. But in both cases, labour is accounted as a cost, to be minimised.
Someone mentioned Waitrose/John Lewis. Not everyone working there is a partner. The lowest paid are outsourced to contractors and aren’t “partners” anyway. It keeps the COST of their labour down – sometimes below living wage levels.
But however it is organised, labour is accounted as a cost. Richard is asking, “WHY?” (IFRS rules) and it is a very good question. Seriously, Jason, do you think the present system of sharing the returns is WORKING in an AI world?
End of…?
No, rather, the BEGINNING OF… (an accounting revolution).
Thank you. You get it.
I’d give this 5 stars if I could. Original and mind changing, examining assumptions which shape behaviour. Next level thinking.
Thank you.
I acknowledge I discussed something like this with Prem Sikka, a long time ago
What you have described it a partnership, where every worker has a share of the equity. Or a co-operative. Or an employee owned company, where all of the shares are held for the benefit of the employees.
No, I described an accounting system.
IFRS would not permit any of them to account as I suggest.
That was my point.
I appreciate that employee owned companies do not draw up accounts in the way that you’ve suggested. But ultimately any net profits do belong to the employees. Typically allocated through a discretionary trust. Often there is an annual “dividend” like a co-op.
I don’t know how IFRS deals with partnerships, but many of the accounts I have seen distinguish between partnership allocations dealt with as an expense (eg fixed share or salaried partners) and partnership allocations dealt with as divisions of the residual profits (for the equity partners). You appear to be describing an “all equity” model with zero employment expenses.
What happens in a loss making year? Do employees get nothing? Might they have to pay in their own capital and out it at risk in the business?
RobertJ mentioned “those businesses whose function is already maximising the return to CEOs, & senior executives…”
From my position of complete ignorance about either company finances or accounting, I did wonder about that too. Is remuneration for executives lumped together in the accounts with the wages for the “ordinary” workers, and treated like them as a cost? I had the impression that senior pay packages are often negotiated individually – and given the eye-watering sums companies seem willing to shell out to “attract the best talent”, do they see it more as an investment than a cost? I suppose my question is, how would your (very commendable) labour-centric accounting deal with executive pay?
It’s also occurred to me that, with employers starting to shed workers in favour of AI, maybe the ship has sadly already sailed on this one? Though I would still like to see it put out there – now more than ever we need challenges to established ways of thinking.
Almost no company can survive without employees – unless it is about rent extraction.
My point is, if AI is universal, labour is even more important.
Would you say that the employee ownership model goes some way towards running a business with the focus your approach promotes, while continuing to operate within the assumptions of the conventional accounting framework? I’m thinking that it doesn’t directly challenge the focus on profit but, by changing the balance of who benefits from it to something more equitable, it can encourage a management ethos with a more holistic view of its purpose.
So why not change the focus on profit?
That is my whole point.
I understand your argument to change the accounting focus and in a sense thereby change the purpose of the company; but even so, the issue of how much of the surplus to retain as reserves, how much to invest in new opportunities and how much to distribute, still remains. So there needs to be a governance mechanism to decide that: a supervisory board, works council, co-owners’ elected board, or similar – rather than shareholders’ meeting? Some employees may want to reduce distributions in order to improve the company’s longer-term prospects by investing beyond just capital maintenance level, for instance.
I think you are right. Once labour has the residual claim, the question immediately arises as to how that residual should be used.
Some will need to be retained as reserves. Some should finance investment. Some might be distributed. And employees will quite reasonably have different views on the appropriate balance between those choices.
That inevitably requires new governance arrangements, whether through elected boards, works councils or some other mechanism.
But I see that as a consequence of the change I am proposing, rather than something that must be designed before the change can happen.
The first step is to change the accounting assumption that financial capital has the residual claim and labour is simply a cost.
Once that happens, governance must necessarily follow because someone has to exercise the rights that the new accounting relationship creates. But that should not prevent the change. And the fact that some boards might fail is not an objection: they fail in the current system as well.
But what you suggest is what happens when fundamental assumptions change. They have consequences that require other institutions to change with them. But the change in accounting comes first.
You say that every accountant thinks that labour is a cost.
Prem Sikka is an accountant and does not think this, going so far as to lament the smaller than expected number of jobs to be created by new data centres. And strangely he does not get monstered in the comments.
I think this suggestion that labour isn’t a cost has been around for as many decades as I’ve lived.
I agree.
Prem and i discussed something like this idea many years ago.
That is two then.
How many more?
Very clever (dare I say revolutionary?) idea :
“…there is unlimited financial capital in this world, and limited labour, which is why it makes complete economic sense to presume that the return to labour is what an economy should maximise”.
I’m no expert but isn’t this basically what employee ownership is supposed to be?
I wonder why it doesn’t seem to be as successful as it should be – so Waitrose employees are consistently paid less than Aldi’s and they are left waiting to see if they catch up with Aldi (or not) via their end of the year employee bonus.
Also it would take very careful rules because when, for example, you are a working sole trader with employees and providing the capital either directly yourself or via a personally guaranteed bank loan if times are bad, the proprietor can on occasions earn less then the employees…
No, this is not what employee share ownership does to accounting.
I am talking about changing IFRS to require this, whatever the entity.
This is brilliant, Richard. I really like where you’re going with this.
Sadly, all the vested interests in the world will use their wealth and power to fight as dirty as only they can to resist any possibility of your argument gaining practical traction.
Thank you.
There will be more.
This post has given me a whole host of different ideas and I am not really sure what to reply with. Would it make any sense for a firm to publish 2 sets of accounts. One set produced in the traditional manner with capital return as equity and another as an alternative with labour as equity rather than as a liability.
No, I don’t think two sets of accounts are the answer, because that would still concede that conventional accounts, with financial capital at their core, provide one legitimate representation of economic reality.
My argument is more fundamental than that. Financial capital is an artificial construct. Accounting has chosen to make its preservation and return the central purpose of the accounts, with profit being the residual attributable to its owners. Labour is consequently treated as a cost to be minimised.
I am suggesting that this framing is wrong.
We need accounts that reflect the real economic process. Human beings use their labour, knowledge, skill and enterprise to transform resources into goods and services. Financial capital facilitates that process, but it does not itself create value.
So I would not simply produce alternative accounts in which labour replaces capital as another form of equity. I would rethink what the accounts are trying to measure.
That means putting labour at the centre and treating the return to labour as the residual claim after the other costs necessary to sustain production have been met.
That is a much more radical proposition than producing two versions of the same accounting framework.
This was a light bulb moment for me. A simple proposition which reorients the whole perspective. I still need to think it through in terms of how a set of accounts in overview would look in various scenarios. But it seems genuimely revolutonary an idea.
Thak you.
Thank you.
I could do that restarememt if I found the time.
As I digested what you propose I realised that this would completely revolutionise the power within society. As I understand it if this were standard practice in every business the control and power would be removed from the owners of the capital and belong to producers of the goods and services, ie the ordinary workers. This is not about employee ownership or co-operatives but universal.
In some senses this would be better for society than any government initiative however democratic!
You are much closer to what I am exploring than many commentators. You are seeing its radical objective, and the consequence I am trying to create. I am not sure why others are not, but thank you.
As you note, this is not as such an argument for cooperatives, employee share ownership or transferring existing financial capital from shareholders to employees. Those approaches still tend to accept that ownership of financial capital is the basis on which the residual return from economic activity should be allocated.
I am questioning that assumption.
If financial capital is an artificial construct that does not itself create value (as I suggest it is), why should its owners have the residual claim on the value created by an enterprise?
Labour, which I include here as encompassing skill, knowledge, organisation, innovation, effort and enterprise, is what actually creates value by making use of available resources. If labour became the residual claimant, the distribution of economic power would change profoundly.
Financial capital would still have a role. Businesses would still need finance, and those providing it could receive an appropriate return for providing a service. But providing finance would no longer confer an overriding claim upon everything left after everyone else had been paid.
So yes, the implications go far beyond accounting. Accounting would simply be the mechanism through which we recognised a fundamentally different understanding of the firm.
And because that would apply universally, rather than depending upon particular forms of employee ownership, its potential implications for the distribution of power within society could be enormous.
This feels like the start of a very long journey!
I previously had some thoughts in this general direction, whether reducing (or even temporarily waiving) corporation tax on cooperatives could refocus priorities across the economy.
Unfortunately, those in charge of most companies & economic institutions are so locked into the profit extraction model that they would need some kind of major incentive to alter course.
I agree that this is the start of a very long journey, because what I am suggesting challenges one of the most deeply embedded assumptions in accounting and economics.
I am less persuaded that corporation tax relief for cooperatives is the answer. Cooperatives can certainly change the relationship between labour and ownership, but giving them tax advantages still leaves us working within a system in which profit is the measure of success and tax is being used to compensate for that.
I want to question something more fundamental.
If labour is the residual claimant, rather than financial capital, then the purpose of the company changes. Maximising the return to shareholders ceases to be its presumed objective. Financial capital becomes something the enterprise uses and pays an appropriate cost for, rather than the interest whose interests dominate everything else.
You are right that existing corporate management will not voluntarily embrace this. That is why accounting reform cannot stand alone. Company law, corporate governance, taxation and the rights of employees would all have to change with it.
The accounting matters because it changes what we measure. But ultimately we also have to change whose interests the company is legally required and institutionally designed to serve.
The more I wrap my head around what you’re suggesting, the longer the journey seems.
It is so revolutionary, on such a basic level. If I understand correctly, it’s altering the bedrock of the entire financial system.
Not so much outside the Overton Window, as round the back of the Overton House!
I wish you the best of luck with this indeed. The headwinds will be strong.
I think you are right about the scale of what I am suggesting. The more I explore the idea, the more radical its implications appear to be.
But I am not sure that should deter us.
The existing accounting framework is also based upon a radical assumption: that financial capital is entitled to the residual return from economic activity whilst labour is treated as a cost. We have simply lived with that assumption for so long that it now appears natural.
I am questioning whether it is.
If human endeavour creates value and financial capital merely facilitates that process, then our accounting should reflect that reality. Once it does, changes in corporate governance, investment, ownership and economic power necessarily follow.
So, yes, this may be somewhere round the back of the Overton House at present.
But every fundamental change begins outside what conventional opinion considers possible.
The task is to make the argument sufficiently rigorous that it can no longer simply be dismissed.
If capital is simply, only, to be paid ‘a reasonable rate’ and not have a claim on the variable residual (‘profit’) then is capital in effect only provided in a form similar to bonds? A fixed rate of return, with included in it a premium on the rate depending on some assessment of the level of risk of loss of capital if the company fails or is unable to pay the bond interest?
Where does that leave the idea of venture capital or angel investors, who participate in the direction, strategy etc?
I think this raises an important distinction between capital and enterprise.
If someone simply provides finance, then yes, I envisage their return being broadly analogous to interest: an agreed return reflecting the provision of finance and an appropriate allowance for risk. They would not have an unlimited claim on the residual simply because they supplied money.
But venture capital and angel investment can involve something else. An investor might contribute knowledge, ideas, contacts, management expertise, judgement and strategic direction. Those things can create value.
My argument is that this contribution is not a return to capital. It is a return to enterprise, and enterprise is a form of labour.
So an angel investor who genuinely works within a business should be rewarded for that contribution. What they should not receive is an unlimited residual return simply because they also supplied the money.
Separating those two roles is essential. We have become accustomed to combining finance, enterprise, ownership, control and reward into a single concept called capital.
I increasingly think that is precisely the confusion that needs to be unravelled.
For interest and comment:
A Dragons’ Den story from Bristol, which I found interesting, in the lightof the doscussion about entrepreneurship, venture capital value, the return to labour, and sustainability – because they are all under discussion in the piece:-
https://www.bristolpost.co.uk/news/celebs-tv/bristol-based-business-owner-blown-11149064
Thank you
Interesting read! The idea of looking at labour as an investment rather than simply a cost gives a different way of thinking about business and the wider economy.
When I read your article https://www.taxresearch.org.uk/Blog/2026/09/10/has-capitalism-failed-or-has-neoliberalism-destroyed-it/#gsc.tab=0 I was going to suggest that you might write a glossary entry on ‘capitalism’ as I wasn’t sure I understood your definition of capitalism.
I also read your article https://www.taxresearch.org.uk/Blog/2026/09/11/we-need-a-revolution-2/#gsc.tab=0 which identifies that people must, then, come before organisational preservation as a fundamental part of that revolution.
This present article on labour replacing owners of capital as having claim on residual returns strikes me as going beyond capitalism as it exists altogether, it’s revolutionary and demonstrates perfectly how we are generally so conditioned in our thinking by underlying assumptions. That owners of capital right of claim on residual returns is entrenched in an international accounting standard demonstrates how actually existing capitalism has become naturalised or normalised.
Even “revolution” has been normalised as involving violence and barricades when acting as midwife to a fundamental paradigm shift can be revolutionary in another way.
A glossary entry is coming….
At your request
Very interesting idea. Labour can perhaps be seen as human capital? And, as accountants have been discussing in recent years, other “capitals” (intellectual, environmental, social) could also have a claim to a share in profits, could they not?
They could, indeed, hence the idea.
This idea reveals the hidden assumptions that capitalism has long buried and taken as givens. Thinking a little further, we should also question the assumption that just because a business might make a profit (however distributed) that is should be allowed to trade – or at least incentivised to do so. The idea that we prioritise those that work in this way is part of a greater consideration about maintenance and improvement of life for all of us and everything around us.
Not all businesses will serve this end. And even those that do should recognise the Georgist principle that success is predicated on the myriad contributions of state and others to provide the conditions of success. The profit should perhaps be more widely distributed than just the employees of the company. A focus on the welfare of people and the planet could transform everything.
I address this issue in sustainable cost accounting. Details are in the glossary.
I warmed to the idea of producing two sets of accounts, one with a focus on the tradititional return on financial investment and another with the return on labour investment (if that works as a description). However, for me this would be purely an educative exercise as a way to help us to begin to comprehend how doing the latter would re-orient priorities, decision-making and valuation. This would be a prior step to moving from one to the other. It’d be a limited exercise because it would have improving understanding as the goal at this stage.
There’d have to be a simplified ‘headlines’ version for non-specialists like me (a charity I’m a trustee to has a treasurer who produces an overview to help understand the details later in the report; that’s the sort of thing I’m thinking of).
I don’t agree. Producing two sets of accounts risks turning this into an educational gesture when what I am interested in is changing what accounting actually does.
The problem with conventional accounting is not that people fail to understand it. It is that it puts financial capital at the centre of the enterprise, treats labour as a cost and then allocates the residual to the providers of financial capital.
I want to reverse that.
Financial capital should be treated as an input to production for which an appropriate return can be paid. Labour, including knowledge, skill, innovation, organisation, effort and enterprise, should have the residual claim because human endeavour creates value.
Of course, we will need to explain what such accounts mean, and a simple headline presentation would be essential. But I don’t want alternative labour accounts sitting alongside conventional accounts as an interesting comparison.
That would make them an optional intellectual exercise.
The objective has to be replacing one conception of accounting with another because the existing conception misrepresents where value is created and, as a consequence, profoundly distorts the distribution of economic power.
I think I’m not disagreeing with you. I’m merely suggesting that the educative dimension to this might do well to have some specimen accounts to help non-accountants like me to grasp how it plays out. I absolutely agree that the point is to replace not offer an interesting thought experiment. However, the longer term project requires building capacity to understand. I’m merely suggesting one way to help do that minor piece of work.
That is on my agenda
@Andii – I think it may be more than a ‘minor piece of work’!
At least as far as the business/accountancy community are concerned, it’ll be a radical ‘metanoia’ change of mind/worldview. They (‘we’? since I used to be there and now teach about it…) are fundamentally based on the idea of ‘the bottom line’, managing costs and investments to maximise returns (after tax, so working with depreciation charges can be ‘useful’ to reduce tax…) and ‘free cash flow’… all predicated on the idea that owners, investors and ‘capital’ for some reason deserve to capture the maximum return, including the whole of any surplus. The fundamental mind-set of capitalism: the label says it all!
The restatement is relatively minor in accounting terms, but massive in its implications.
[…] published a post here yesterday that has attracted a lot of comments, not all of which I have been able to deal with as yet because […]
Yes a powerful argument. For me it reinforces the important point, evaded by neoclassical economics, that mere ownership produces nothing: only work produces goods and services, so denying workers any rights over what happens to the business’s revenue is fundamentally unjust. Is it not absurd that an employee can work hard in a job for decades without ever having a say in this, while a rich outsider who need not know anything about the nature of the work can buy the business and do whatever they like with it?
I think that gets very close to the heart of the issue.
Mere ownership does not create value. Financial capital does not get out of bed in the morning, have ideas, acquire skills, organise production, solve problems or provide services. People do those things.
Yet accounting treats the return to those people as a cost to be minimised, whilst giving the owner of financial capital the residual claim on what remains.
The consequence is precisely the absurdity you describe. Someone can devote decades of knowledge, effort and commitment to an enterprise and acquire no meaningful claim over its direction or the value they have helped create. Meanwhile, someone with sufficient money can acquire ownership and, with it, extraordinary power over both.
That is not a natural economic order. It is a set of legal and accounting conventions that we have chosen to create.
My argument is that we can choose differently. Changing who receives the residual return would not just change accounting. It would change power.
It always makes me laugh when I hear a company boast that their staff are their greatest asset. I bet if I looked at their accounts they’d be listed as a liability.
Unless they are a football club
That does introduce an interesting anomaly I would suggest.
This topic aligns with biological history.
Family, tribal, supra-tribal affinity all reinvest returns to the golden goose. The question is: how much?
The traditional answer was: “as much as needed.
Once aristocrats created “economists” to excuse excess, the hired agents labeled prior systems as “pass-through economies.”
In pass-through economies – (ants, wolves, herds/families/tribes) – reserve-capacity/capability was an fact of life overtly tied to distributed reinvestment (sharing).
It worked better in practice than the assumption that hoarders better direct adaptive reinvestment. Do hoarders incentivise some to hide & hoard? Yes, but not all. Otherwise we’d charge fetuses for expenses from the day of conception. Does impatient hoarding hurt more than it helps, overall? Depends on whether you ask the colonizer or the colonized. We don’t have enough controlled studies to convince all. We’re still transitioning from tribal to supra-tribal cultural methods, randomly “re-ritualizing” our economies, from religious icons to megalithic construction to aimless individual consumption.
That’s an adage from engineer CH Douglas; “Social Credit”
Aberhart led the Social Credit Party in Alberta, 1935.
Proposed giving people enough money to boost consumption.
Federal courts and banking laws blocked issuance of local currency or dividends.
Go figure!
The City of London certainly understands the implications of extending DEB to all policy. They don’t want YOU to understand it.
Most post-tribal versions of physiological “economics” treat all the variables as absolutes instead of managing dynamic variance. No one said it was easy. It’s been 10,000 years and we haven’t solved the altered interaction and data-flows patterns required to transition from tribal to supratribal organization. Output Gaps track Organizational Lags. The City of London adds nothing Sargon of Akkad hadn’t.
see https://www.academia.edu/32754774/How_did_wealth_turn_into_surplus_profit_From_affluence_to_scarcity_in_prehistoric_economies
Thank you
[…] Saturday, I wrote a piece entitled What is labour was not a cost? It generated a lot of comments, including one noting that I had never written a glossary entry on […]
[…] What if labour was not a cost? […]