Accounting for Rationality (Carruthers, B. & Espeland, W.) PDF link Part 1

PDF: http://www.sociology.northwestern.edu/people/faculty/documents/Carruthers-Accounting.pdf

The premise:

Social theorists (Weber, Schumpeter, and Sombart) thought double-book accounting was key to the development of rationality and capitalist methods. The authors of this paper agree with their claims, but take their analysis further by not only viewing double book accounting as a technical tool/method, but as a rhetorical device. 

Why I chose this paper (besides the fact that I had access to it): 

I wanted to see how someone could analyze accounting, a business practice universally accepted, and bring it into the bigger discussion of the emergence of capitalism. What could a sociological analysis bring to this business tool? Also, what does it mean for a business tool to be a rhetorical device? 

I should mention that one of the reasons I'm interested in economics is that many of its business practices were not immediately intuitive to me (how does money have a time value?. For instance, this paper is about double-entry bookkeeping, which for the longest time, confused me. How can something be put into two different accounts? What does it mean for something to be a debt and a credit? So understanding the historical development of this idea is useful to me just to even figure out how the tool works. 

I know this isn't a classic or founding text of economic sociology, but I found it was easier to read because it was written recently and explained things more simply and accessibly than older books/articles. 

Type of economic sociology: Uses historical methods

Outline and Summary

1. DOUBLE ENTRY, RATIONALITY, and CAPITALISM

• The authors admit that accounting is a pretty boring, which is why sociologists have ignored it. 
• But the famous 20th century social theorists Max Weber , Joseph Schumpeter, and Werner Sombart  thought accounting was crucial to the emergence of capitalism and rationality! Here's their basic line of thought:
• The process of accounting is useful because you can value your acquired assets/capital and compare it to the value at the end of the process, and find profit opportunities! (Weber)
• Accounting uses money as the baseline for comparison. Money isn't invented by capitalism, but becomes a useful tool for cost-profit analysis necessary to capitalist enterprise (Schumpeter)
• The category of capital (the wealth used to make further profits) could be said to be invented by double entry bookkeeping, which emphasizes ideas of acquisition and rationalism (Sombart)
• Businesses could reflect on the consequences of past decisions to make future decisions (all)
• According to WSS, double-entry bookkeeping is successful because of its a great technical tool
• Businesses using double-entry bookkeeping survived b/c of rational money-accounting which ensured profitability (Weber)
• In antiquity, couldn't use rational cost accounting bc of slave labor (not sure I agree with this but ok)
• Modern accounting textbooks readily claim the assistance of accounts to business decision making, by providing accurate information/assessment
• also works in context of rational choice model, where people choose between alternatives and find the highest paying choice
• Lots of research has been done on the history of accounting practices

But if these social theorists thought accounting was so important, why haven't sociologists done any research connecting the specialized history of accounting to the broader claims? 

Here is where our enterprising authors come in and save the day! 

• Our authors look at the development of accounting and analyze why people found it useful, and whether WSS's claims about the technical superiority of accounting actually explain why people began to use it. Our lovely authors believe that "the best way to understand such broad and sweeping historical changes as 'rationalization' is to decompose them." Awwwww yeah economic sociology breaking down preconceived notions! 

• Authors' evidence: historical records from Italy and England (middle ages to 19th century) bc they were leaders in capitalist techniques, accounting textbooks from the Goldsmith=Kress Library of Economic Literature
• Authors' arguments: rationalization as rhetoric 
• rationalization is not just the ability to make better (more rational) decisions, but also changed how decisions are represented
• this is important because individuals represent/frame their actions towards themselves and to others, and their interpretations can be as important as the acts themselves
• frames establish legitimacy of action
• double-entry bookkeeping as interpretive frame
• usually seen as technical, rational info bc u can precisely measure (WSS note these aspects)
• authors argue that bc rhetoric aspects are seen as less important/weaker than technical ones means that we can actually see how important the rhetoric is
• People accept accounts as rational/honest because they look factual and objective. Companies often manipulate their accounts to look honest/profitable <--RHETORIC
• authors also argue that accounting shaped cognitive understanding of classifying business transactions (along the lines of Sombarts' claim) 
• so not only did double-entry bookkeeping keep track of transactions, but shaped the way people understood transactions

and so we move on to.....

2. RHETORIC AND DOUBLE-ENTRY ACCOUNTING

• Frater Lucas Pacioloi, a Franciscan monk and mathematician, wrote a textbook on double-entry bookkeeping in 1494, about two centuries after the technique had been put in practice by northern Italian merchants
• Double-entry bookkeeping (what is it?)
• all transactions are entered twice, once as debit and one as credit
• the total of debits = total of credits
• Pacioli's rhetorical agenda - wanted to convince readers of usefulness of method AND why commerce was legitimate
• used a form of Ciceronian rhetoric (by following an ancient Roman's guide to rhetoric, it legitimizes the whole argument I guess)
• invoked the name of God when making accounting lawful lent legitimacy to accounting
• partly to stop questions about usury (making sure both sides received their due), since usury, or making money grow, was seen to be "against nature"
• so accounting's balance sheet would show the integrity of the firm
• Even though usury is no longer suspect, accounting is STILL a rhetorical device, bc it tries to convince people of something
• theory didn't change over time, but audience of the message did
• however, the application of accounting principles greatly varied depending on audience

3. RHETORICAL APPEALS TO CHANGING AUDIENCES

• People have always kept some sort of record of transactions
• early 14th c. England used very detailed, narrational accounts of how things were transacted (seriously the example they give is so detailed in terms of who did what when!)
• included details such as date, time, place, people, and mainly served as mnemonic devices
• audience was mostly the businessman; question it answered: what do I have? 
• Middle ages to 18th c., the Divine was also an audience
• many records began with a "in the name of God' type introduction, seeking God's blessing
• Bookkeeping was also recognized as a way to transform yourself, to improve one's mind by learning the 'science' of bookkeeping
• on the flip side, not following accounting practices raised suspicion of the person being lazy and a cheat, and would even suffer bodily consequences of keeping such evil to themselves!
• Here is where I and the authors see a connection to Weber and a capitalist, rational ethos:
• accounting "signaled a prudent, disciplined mind" and it became a personal, moral thing to do
• making rational decisions based on the discipline of the books would contribute to a rational ethos 
• DEB also affected businesses that had many levels/branches and had a potential principal-agent problem
• ex: the Medici used audits to keep track of branch managers making large transactions, or English lords who used managers for their estates 
• because this information needed to be used by many people across time/space, the system had to be more organized and standardized than the narrative accounts
• first they were kept in paragraph form according to type of transaction, only later were they kept as a running tab for each client
• audience: the principal (manager, overseer, etc. and NOT the record keeper); question it answered: am i being cheated?
• Yet another audience! The person whom the businessman does business with! 
• having accounts to look at reduced suspicion and avoided litigation
• Bookeeping could be used to help ventures with multiple investors
• DEB first found in northern Italy, which also happens to be where capitalism based on credit appeared (according to Schumpeter)
• other ventures having many investors, like commercial voyages, could use accounts to check income/expenses
• later, this became so important in the 13th century for voyages that ships were required by law to have scribes
• audience: investors, partners; question: what is my fair share of the revenues?
• enterprises moved from being short term to long term--DEB used to keep track of capital vs. profits
• e.g. the East India Company in 1600 only had a few voyages operating, and once they returned they would divide the capital and profits
• but by 1657 these voyages became ongoing enterprises, and it was necessary to use DEB to separate capital (for future voyages) and profits (for investors)
• Businesses moved from sole proprietorships to partnerships/joint-stock
• when one person is in charge they could mix up personal and business transactions, but with a partnership, needed to be kept separate, and classified as someone taking it out of their own profits
• with joint-stock, investors might know even less about the business, so accounts provided information
• 19TH CENTURY - INDUSTRIAL REV. -- TWO BIG CHANGES!
• Industrial Revolution meant big, fixed scale investments (machines etc.)
• 1) changes valuation of assets bc depreciation of machines needs to be accounted for
• 2) fixed capital = continuous capital, so it becomes harder to clearly determine profit every year
• People recognized depreciation esp. w/ advent of railroads, acknowledged that capital couldn't be maintained w/o taking depreciation into account
• but people didn't agree on how to deal with depreciation in accounting
• expansion in number of joint-stock companies meant shareholders and creditors could pressure govt. to REGULATE! 
• audience: govt. regulators!; question: are investors being cheated? is capital being maintained?
• e.g. England in 1844 joint stock companies act required companies to have a balance sheet for shareholders, to reduce fraud and protect shareholders 
• 1900 companies act --all registered companies had audits
• legislation helped standardize accounting practices
• conclusion of this section:
• in general audience shifted from particular to general/institutional (government, shareholders) 
• all the requirements of these audiences satisfied by DEB, it could differentiate between profit/capital, distinction b/t private/business, serve as accurate record
• contemporary rhetorical device: accounts manipulated to serve a desired impression, managers trying to skew the number
• why does DEB work? it's an abstract formal system