I 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 many require detailed consideration that I could not do yesterday.
The first reason for this post today is, then, to apologise to those who are waiting for their comments to be published, with a response if appropriate.
The second reason for this post is to explain how yesterday's post came about, because I think that is, in itself, important if it is to be understood.
I will leave the explanation of some of the issues arising to another post, because I think that may be justified.
So, how did I come to write this post whilst on holiday on Friday, and publish it yesterday?
Accounting reform
First, I have always been interested in accounting as a form of communication. As I have said repeatedly on this blog, accounting is not a neutral or objective form of communication, and anyone who claims it is, in my opinion, denies the truth. As a human construct, accounting seeks to answer the questions its creators might wish to pose. That means that if the question changes, so must the structure of accounting.
I have played with this idea for decades. With clients, my own companies, and in my own firm, I explored ways of reporting that had little to do with a conventional accounting framework, but which did assist decision-making.
As a consequence of my concern about the environment, I thought about how accounting might address this issue long before I ever considered tax justice to be a focus for my work, partly because I considered ideas like the triple bottom line accounting that some proposed in the 1990s, I think, not to answer the need. I have now created sustainable cost accounting to address this issue, just as I created country-by-country reporting to address issues surrounding multinational corporations' tax haven abuse.
As a result, I have considered an issue that very few accountants seem aware of, which is the existence of an underlying capital maintenance concept in all accounting of any sort, and what it might mean if this were changed. I even considered this a significant issue as a third-year undergraduate student, when I became very interested in inflation accounting, which was decidedly topical at the time.
So why discuss accounting for the cost of labour now? Before discussing that, let me acknowledge that I think Prem Sikka and I discussed this issue at least 25 years ago, sitting in his slightly chaotic office in Essex. We were, I think, discussing capital maintenance in general at the time, and we both agreed that there was no reason why labour could not become the focus of financial reporting. I am not sure either of us has done very much with the idea ever since.
Imagination
So, then I come to Friday. Over the course of last week, I worked on materials for our event in Ely on 3 October (for which there are, at most, three tickets now left), where a session is dedicated to solution-focused campaigning. Let me leave what that might be aside for the moment, with a promise that I will return to it. Instead, I will note that when I discussed this with Jacqueline, she noted that the first impediment to discussing solution-focused campaigning is imagining that a better world is possible.
We then discussed the difficulty of this issue, and why this imagining process is so important.
Heisenberg
As a consequence, one of the leaps in our conversations that tend to characterise them occurred, and we discussed how Werner Heisenberg retreated to the island of Heligoland in 1925 while working on the problems then confronting quantum theory.
The detail does not matter for the purpose of this story. What does matter is that Heisenberg realised that progress required changing what the theory treated as fundamental. Instead of trying to describe the unobservable paths supposedly taken by electrons within atoms, he constructed his approach around quantities that could be observed, including the frequencies and intensities of radiation associated with transitions between atomic states.
In doing so, Heisenberg developed an unfamiliar way of manipulating arrays of quantities, which he substituted into existing formulae used to analyse those paths. Max Born then recognised that this involved matrix algebra, and he, with Heisenberg and Pascual Jordan, then developed it into what became known as matrix mechanics.
I comprehend only a little of this mathematics, at best, and it appears elegant, but that was not the point for the purpose of this story. What I immediately latched onto was something much more important. Heisenberg took a problem that existing theory struggled to explain and changed what it treated as fundamental. That change in perspective produced a radically different way of understanding the problem. The resulting work became one of the foundations of quantum mechanics and, ultimately, led, amongst much else, to Heisenberg's uncertainty principle.
The question that came to me at that point was, what would happen if we did something analogous with regard to accounting? Suppose we kept all the rules of double entry and the basic structure of accounting in the form of an income statement, a cash flow statement and a balance sheet in place, but instead of focusing upon maintaining financial capital, as is the prevailing norm within financial accounting, as laid down by the International Financial Reporting Standard Foundation in most of the world and the Financial Accounting Standards Board in the USA, we replaced the return to financial capital, which we call profit, and substituted a return to labour in its place?
It took very little time at all to sketch out what that would mean. The important point, echoing what interested me about Heisenberg, is that it is possible to take an existing problem and transform our understanding of it by changing what we choose to treat as fundamental.
Importantly, in the case of accounting, most of the framework need not change. In other words, anybody who could account at present could account using this arrangement.
In fact, the only potential technical accounting difficulty might be in deciding what the required rate of return to equity capital might be, but given there is ample evidence of average returns in stock markets on what these returns might be (and they are quite low), and that the amount of equity capital in many smaller businesses is normally insignificant in proportion to the scale of their activity, this is very far from insurmountable. After that, everything could fall into place quickly.
Accounting differently
I then wrote the piece, thinking of it as an exercise in exploring the use of imagination to suggest that other worlds are possible to replace that which I find unacceptable that we have. At a superficial level, that is exactly how the article came about. It was simply an experiment in thinking differently.
However, as some who seemed to have comprehended the idea have noted, the potential within it is revolutionary, and that may be precisely because so much within it is, in fact, entirely consistent with what we already know. The idea of treating labour not as a cost, but as the resource whose income is to be maximised as a consequence of economic activity, could massively change the way in which we organise our economy, simply by changing its accounting.
At this moment, that is the point I wish to make. If we want to create change, we must imagine that something different is possible. That is what this exercise was about. If I explore it further, as I think I now must, that will remain its initial purpose, but the point is that what I imagined is important, in itself.
Creating change
Creating a world that is focused upon the generation of returns to financial capital, when financial capital is unlimited (a claim to which I will return) and is only a human construct (a point with which I think most rational people would agree), makes no sense at all when the priority of all human activity should be meeting the needs of people, whoever they are, wherever they are, in whatever state they might find themselves, and whenever that might be.
Emphasising the return to labour does, in this situation, make a great deal more sense because it aligns the objective of the economy, as I think most people would see it, with the accounting, and so the decision-making, within that economy.
The point is that by changing an assumption, and by imagining that something else is possible, the world can be changed.
I wrote the article to make that point, but I now see it might have significance beyond that, so there will be more to come on this issue.
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!
I think that the points you make resonate with me.
These days, what we get in the public sector is funding that is of and on, has to be bid for and compared with others for ‘value for money’ etc. It’s as if government funding accepts a shortage, and then does a ’round robin’ of expenditure – everybody getting something one year, but not the next and waiting their turn when it comes around again. Or something that is ‘new’ gets the funding and existing liabilities are ignored.
This is typically modern in that it is micro management posing as macro management. It ignores the reality of sovereign money creation by the state. So I think you are on the right track.
On Sundays, I find myself drawing theological parallels, remembering the importance of asking challenging questions, rather than privileging one dogmatic interpretation, in order to throw new light on an old problem, or challenge a dominant interpretation that one context (mine) has imposed on the text.
So, with a religious text, be it economic holy writ from the Treasury, or a god-book like the Bible…
1. This is what it says – this is how it applies to you, these are the scribes, authorised to interpret it (not you), now, go, do what it says. (thus we have justified colonialism, racism, war, ethnic cleansing, genocide, eugenics, sexism, slavery, gross, increasing inequality, injustice, oppression, planetary destruction and other bad things, in the name of economic dogma or religion.
Or
2. This is what it says. This is what was going on at the time, for the writers, their friends, their enemies. What are the similarities & the differences to our current context? What questions does that raise (because of the similarities and the differences)? What do other people have to say about all this, from outside my culture/gender/age/class/continent? What have I learned, been challenged by, shocked by? Does this change me? So what do I DO now?
The reason your post about accounting has apparently switched on so many lights inside people’s heads, including mine, is because you have followed approach No.2.
The problem with approach No.2 is that it disadvantages the scribes, the clergy, the high priests and teachers of the law. It liberates the scripture from their hegemonic grasp. So they call it heresy.
(I’m a retired cleric/bible teacher, and since retiring to Knowle West, S. Bristol, almost all my interpretations of holy writ are under daily challenge, whether relating to economics or religion. Exciting but exhausting. KUTGW!
Someone could perhaps write a critique of political economy taking labour as the substance and immanent measure of value, and so having none itself?
Maybe by pursuing the effects of an accounting identity between its measure and the value its product, say.
I take the Marx reference, and I assume some irony is intended.
There is clearly an overlap. Marx asked fundamental questions about labour, value, ownership and who ultimately benefits from production. Those questions remain highly relevant.
But I am not trying to recreate Marx’s labour theory of value, nor am I arguing that labour time provides an objective measure of the value of everything produced.
My question is different.
I am asking why accounting assumes that labour is a cost whilst financial capital is entitled to the residual return, when financial capital does not itself create value.
My argument is that human endeavour, including labour, knowledge, skill, innovation, organisation and enterprise, creates value by using available resources. Financial capital facilitates that activity but does not create the value itself.
That leads me to an accounting question rather than Marx’s theory of value: what happens if we recognise labour as the residual claimant instead?
There may be echoes of Marx in asking the question. I don’t think the answer I am exploring is Marx’s.
Ok, as far as my reading of Capital goes the financial sector’s dealings in property claims are a fictitious form of capital, one that circulates alongside productive capital and tends to become parasitic not only on labour, but also predatory on productive capital. The main import of the classical labour theory of value was to identify that economic rent. Marx took that critical function to its logical consequence – labour would increasingly have to reproduce the value of invested capital, becoming, in function and form, a service class for a stagnating economic oligarchy.
As you may have seen, I have written quite a lot about recent events. The site is easy to search now, using the box in the sidebar.
I’d like to think if I was running a company it would be ‘Not For Profit’, but that might imply it’s a charitable organisation
But then I thought of an amendment ‘Not for Profit BUT for Society’
🙂
Many charity structures look like Capitalism with a smiley face. There are some though that completely break away from investor-dominated governance, with alternative structures distributing power based on membership, purpose, or community status, rather than financial investment. But it would still be helpful to appoint an accountant who knows that two-plus-two equals Love.
Just thinking about Labour’s obsession with ‘working people’ their parallel obsession that all those who don’t work are one way or another shirking work. Interesting to ponder on the change in underlying policy assumptions were labour to become the recipients of the residuals generated from their labour. And not only in relation to ‘working people’ but also asylum seekers who are at present prevented from seeking employment.
Sometime back in the early nineties I sat down in a meeting with the Director of the museum I work at, and my other senior management colleagues, to write a “mission statement”. Oh, dear, how I miss those days (not).
However, to whet our enthusiasm the Director tabled some other mission statements he had come across. Intriguingly. one of them (I think it was from some professional consultancy outfit) stated that it’s mission was to provide a good standard of living for its staff. That was all. They didn’t bother to say anything about their field of work, nor the quality of their output, nor anything to do with company profit or doing the best consultancy work ever.
I have no idea what happened to that company, but it was a refreshing alternative take on the average corporate mission statement (aargh).
So yes. If I was prime minister I would ask what is the objective of government. And that surely has to be healthy well-educated people, properly housed, well fed, with interesting jobs, able to develop themselves to the full and contribute to the society they live in… and all without wrecking the planet please. Economic growth, profit and being “pro business” wouldn’t feature at all, except insofar as they were identified as key to achieving to the desired end…
I suspect they did well.
I had missed your original post when you first published it, but just wanted to say I thought it was a brilliant idea and wanted to encourage you to develop it further. It looks like you’ve received quite a lot of encouragement already which is excellent. Thanks for all you do!
Thank you. It was 9n Saturday
Hi Richard and Readers
I very much thank you for the brilliantly clear expositions culminating in this latest.
You kindly replied once that you saw my idea of an adjustable financial flow mechanism (actually two or 3) perhaps not shaped well enough to be practical. Certainly not expressed well enough, indeed.
However what i suggest does drive at the heart of your correspondents’ responses about the “long road.”
Accounting in the way as you say is a very good start. For people like me with a fair amount of hand-skill running an account (as you are saying, in our heads), sort of builds a solid argument for your utopian ideal.
Hence my first current suggestion of “green and public good” eventually a One-Third Principle for all money-creation. These days initially an idea just for EcoFit as 20-year fixed-rate 1.5% money (screen money, non-repayable commercial-bank money, justifiable if they retain house-price uplift LOANS. That is about half of what the Treasury once replied to me deserved the attention of “Office of Fair Trading” when rates were Base 5% and Mortgage 7% variable. These days i recommend ceiling of 5% with 3% base, both fixed “ceilings.” And hopefully a ‘floor’ of 3% on deposit savers rates. Wouldn’t that fit with Trumps low-interest thinking too and be practical?
The example of EcoFit works like this and (repeating, typically) for a £40k facility could cost owners only £50 per month, less than a tenth of profit for a ‘paid-for’ landlord-rented property
Enabling thorough envelope at least at sides and rear, including dug-in external insulation to foundation strata, double-insulated £10k roof and rooflight for extra-storey summer venting if there was a summer-gathered heat-store in micro-cellar (10k). Dug-in polystyrene outside the foundations (excess spoil into planters). etc.
Wouldn’t that fit well (start) with the accounting innovations?
From a weekly Christian newsletter – an article about accounting
https://www.wordonthestreets.net/Articles/740108/What_if_profit.aspx
Referring to Prof Jeremy Nicholls, Liverpool, “The Accounting Paradox”
He too, is seeking radical changes on business accounting,to include accounting for “harm”.
This is an argument for my sustainable cost accounting. See the glossary.