Origins of Positive Theories

Accounting, Organizations and Society, Vol. 7, No. 2, pp. 167-200, 1982. 0361-3682/82/020167-36 $03.0010

Printed in Great Britain. @ 1982 Pergamon Press Ltd.

THE NORMATIVE ORIGINS OF POSITIVE THEORIES: IDEOLOGY AND ACCOUNTING THOUGHT*

ANTHONY M. TINKER, BARBARA D. MERINO and

MARILYN DALE NEIMARK

Schools of Business, New York University

Abstract

“Positive”, “descriptive” and “empirical” theories are frequently promoted as being more realistic,

factual and relevant than normative approaches. This paper argues that “positive” or “empirical”

theories are also normative and value-laden in that they usually mask a conservative ideological bias in their accounting policy implications. We argue that labels such as “positive” and “empirical” emanate

from a Realist theory of knowledge; a wholly inadequate epistemological basis for a social science. We

use an alternative philosophical position (of Historical Materialism) together with a historical review

of the concept of value to illustrate first, the partisan role played by theories and theoreticians in

questions concerning social control, social conflict and social order; second, the ideologically con-

servative underpinnings of positive accounting theories; and last, some indications of alternative

(radical) approaches to accounting policy.

It is commonly believed, inside and outside the ac-

counting community, that accounting is independ-

ent and neutral as regards major social struggles

and conflicts. This paper contends that, far from

being neutral, accountants have been highly

partisan in such matters. Specifically, we argue

that (partly by choice and more often by default)

accountants have been unduly influenced by one

particular viewpoint in economic thought (utility-

based, marginalist economics) with the result that

accounting serves to bolster particular interest

groups in society.

The social allegiances and biases of accounting

are rarely apparent, usually they are “masked” by

pretentions of objectivity and independence.

Academics have contributed some of the more

sophisticated “masks” in the form of accounting

theories (theories in accounting) and epistemo-

logical theories (theories about theorizing in

-

accounting) such as Positivism, Empiricism and

Realism. Whatever their specific form, we argue

here that these theoretical masks act to mystify

the socially partisan role of accounting and elevate

instead its technical, factual and seemingly object-

ive aspects.

We begin our exposition by examining one of

the epistemological masks that enjoys widespread

popular support in the current accounting litera-

ture: that of Positivism (or Realism). We contrast

Positivism with an alternative philosophy of

Historical Materialism, and show that the former is

an inadequate epistemological foundation for

accounting, requiring too many acts-of-faith and

leaving too many questions unanswered. The

notion of a positive accounting theory is shown

to be an illusion because research in accounting (or

in any science) cannot be value-free or socially

neutral. Researchers who remain oblivious to this

l The authors are grateful to the following for their helpful suggestions and comments: George Benston, University of

Rochester; Charles Christenson, Harvard University; and the faculty seminars at Baruch College and New York Univer-

sities. Special thanks are due to Anthony Hopwood for his perceptive comments on an earlier draft of the paper. Any

errors and shortcomings in the paper are the exclusive responsibility of the authors.

167

168 ANTHONY M. TINKER‘ BARBARA D. MERINO and MARILYN DALE NEIMARK

fact are open to becoming tools of the funding

agencies of special interest groups. We suggest that

Historical Materialism offers a more plausible basis

for accounting theorizing.

We illustrate the application of Historical

Materialism by means of a brief history of Value

Theory. Our review highlights the central role that

arguments about the meaning of value have played

in social struggles throughout history. For al-

though the term “value” is one of the most com-

monplace in the language of accounting, there is

little in the accounting literature that acknow-

ledges its controversial nature. We also introduce

concepts of value that differ from the utility-based

(marginalist) concept of value (with all its attend-

ent social allegiances) which dominates contem-

porary accounting and which forms “the norm-

ative origins of positive theories”.

In the last part of the paper we suggest that

alternative ways of conceptualizing value offer the

prospect for a radical realignment of the ideo-

logical, political and social predispositions of

accounting. We explore the implications of this

realignment for areas such as multinational ac-

counting, corporate accounting; management

accounting; behavioral accounting; social account-

ing; tax accounting; accounting law etc.’ We show

that, in each of these areas, a reconstituted con-

cept of value enables us to investigate a range of

critical social issues and questions that are “over-

looked” by the present literature. For instance,

how should we evaluate the pricing policy of

public and private monopolies? Can we assess the

degree of unequal exchange that occurs (through

multinationals) between developed and under-

developed societies? Does behavioral accounting

enhance or diminish the social value of produc-

tion, i.e. is it a manipulative practice that increases

alienation or a legitimate improvement in pro-

duction technology?’ What were the historical

conditions that led to greater corporate account-

ability? Has auditing increased that account-

ability? Is there any cost to work that is demand-

ing and tedious? Is there any value to work that is

stimulating and enriching?3

REALIST PHILOSOPHY

Accounting is not the first discipline to wit-

ness a struggle between positive and normative

approaches, indeed their philosophical counter-

parts of Realism and Idealism have been at odds

throughout the history of western science (Harre,

1972; Caws, 1965; Hudson, 1969; Pirsig, 1974).

Realist philosophy asserts that reality objectively

exists “out there” and is independent of our per-

ceptions and thus reality is ultimately the same for

every observer. Given this, we may come to know

this one, ultimate reality by searching out the

underlying laws and mechanisms that regulate its

behavior. Note that this philosophy holds out the

possibility of discovering one single, absolute,

objective reality and that this “truth” exists in-

dependently of individual perceptions, idiosyn-

cracies and biases. Thus ultimately, there is only

one truth facing the Pentagon, Polit Bureau and

the Catholic Church. Final agreement is con-

sidered (in principle) possible on such questions

as “what is”, “what causes what” and “what

exists”, because researchers need merely to consult

“facts” about our shared reality in order to

* We use this “conventional” categorization of the subject merely to expedite our discussion; this should not be taken

to mean that we concur with this “structuring” of accounting. On the contrary, in our opinion, many of the problems

that afflict the subject arise from the kind of partitioning that is entailed by these conventional categories. The segrega-

tion of the “historical” from the “social” from the “financial” from the “behavioral” aspects are some of the more

damaging divisions (Lowe & Tinker, 1977; Tinker & Lowe, 1980, 1981, 1982).

2 For concepts of value that embrace the notion of alienation, see for instance Braverman, 1974; Ollman, 1976;

Elson, 1979.

3 We do not attempt to explicate value theories that address all of the above questions; such an objective would be

most unrealistic for a single paper. What we do provide is an introduction to literature on different value approaches and indicate some of the theoretical and political reorientations that they suggest for accountants.

THE NORMATIVE ORIGINS OF POSITIVE THEORIES 169

determine the truth (Giddens, 1974; Novack,

1971; Morick, 1980).

Controversies over Realist philosophy have

been especially pronounced in the social sciences

because of the difficulties of verifying propositions

involving man-made intangibles and constructs. 4

In what sense can we touch an equilibrium, see a

bliss point or smell an income number and verify

their character and existence in the same way that

we can (say) with an element or a sulphur crystal?

Are personalities, market prices, pluralistic ideo-

logies, role structures, costs, growth paths, culture,

dissonance, motivation and leadership, items that

we can show, unequivocally, exist “out there”; or

are they imputations, contrivances and projections

that originate from within ourselves and our social

relations?

Can we say that the “laws” of supply and de-

mand are “natural” laws like gravity, or did we

put them “out there”? If they do originate from

within ourselves, even in part, then whose truth

and whose reality is to provide the correct basis

for accounting theory and policy making? If the

social world that we observe and study is a world

that we have helped contrive, are the usual

(physical science) criteria of explanation and pre-

diction adequate for evaluating these creations? 5

-

Realism, or Positivism, became an authentic

philosophy for accounting researchers when

Friedman gave it his stamp of approval in 1953

(see Hakansson, 1969, pp. 137-144; 1973, pp.

153-160).6 Friedman had taken his cue from

Keynes. Thus, in 1980, Zimmerman cited Fried-

man (1953) who quoted from Keynes (1891) that

a positive science is “a body of systematized

knowledge concerning what is” and a normative

science is “a body of systematized knowledge dis-

cussing criteria of what ought to be”. Friedman

expanded his argument for viewing economics as

a positive science in Capitalism and b’recdom

(1962, p. 86) claiming that while “the economist’s

value judgments doubtless influence the subjects

he works on and perhaps, at times, the conclusions

he reaches . . this does not alter the fundamental

point that, in principle, there are no value judg-

ments in economics”. These statements, on the

same page, appear quite contradictory; but per-

haps Friedman is suggesting that if the researchers

make all their value judgments (i.e. in choosing the

problem, the variables, the characterization, the

causal ordering and the posited relationship) at the

outset of the research, then the results will be

objective and value free. If this is true, then all

4 Realism has also had its difficulties in the so-called natural sciences (see, for instance, Kuhn, 1970, pp. 55-68).

Thus, early physicists climbed mountains in search of “aether” that subsequently turned out to be a figment of their

theoretical imagination (Kuhn, 1970, pp. 52-59). In contemporary physics, certain particles behave “as though” they

had different personalities, thereby raising the question for some academics as to whether a personality-theory of

particles is needed (Capra, 1975; Zukav, 1979).

’ The above is not intended to ignore questions related to the social construction of the physical world. There is a

substantial body of literature (e.g., Mendelsohn & Whitlcy, 1977; Knorr et al., 1980) that argues that the theories and

epistemology of the natural sciences are formed by and continually interact with the broader social order. Further, to-

day’s researchers are no longer merely investigating (and interpreting) the world; they are creating the world they are

investigating in genetic engineering, space research, waste disposal, forestry control, industrial planning etc. (Boulding,

1969).

’ The epistemological roots of “Positivism”, as the term is used in accounting, are muddled at best. Its proponents at

the University of Rochester are not “Positivists” in the sense of any of the common uses of the term. For example, in

asserting that the term “theory” should be reserved “for principles advanced to explain a set of phenomena” Watts &

Zimmerman (1979, p. 272) seem to reject Friedman’s positivist (really instrumentalist) epistemology - that the criteria for theory acceptance is “the precision, scope and conformity of the predictions it yields” (1953, p. 4). On the other

hand, Christenson (1981) shows that their research is inconsistent with the standards of both 20th century logical

positivism (e.g. Popper, 1959) or “Verificationism” (Positivism’s 19th century form). In linking Positivism in all its manifestations with Realism, we are not ignoring the differences between these forms of Positivism. Rather, we are

suggesting that despite these differences, all versions of Positivism share a common Realist foundation - a belief that the “facts” stand “out there”, somehow independent of our theories about them.

170 ANTHONY M. TINKER, BARBARA D. MERINO and MARILYN DALE NEIMARK

that follows is trivial, for the important pre-

analytic decisions (in Schumpeter’s terms) are out-

side the theory formulation and therefore are not

subject to critical analysis or discussion.’

The recent accounting literature of the efficient

market-related research contains numerous ex-

amples of attempts to deny or diminish the

significance of value-jugments embodied in pre-

analytical decisions. In this literature, various

intellectual maneuvers have been used to achieve

this desired separation of “fact” from “value”. In

a landmark paper in 1974, Gonedes & Dopuch

argue that researchers can only assess the “effects”

not the “desirability” of alternative accounting

procedures.8 In the same tradition, Watts &

Zimmerman have argued that theories can be

divided into those that commit value judgments

(normative theories) and those that do not (posi-

tive theories). They propose that positive account-

ing research (such as efficient market studies) be

used to form accounting policy.g In a similar

manner, Dopuch (1980, p. 74) welcomes em-

piricism in accounting research and lauds attempts

to eradicate (value-laden) theorizing in the stand-

ard-setting process. He asserts that theories can be

divided into “empirical” and “non-empirical”

(later becoming positive and normative) and that

while normative theories are not dead, he hopes

they will be discontinued because they are unlike-

ly to produce any further benefits (op. cit.).

Underlying much of the above is the view that,

either theories may be unambiguously segregated

into “normative” and “positive” or, in those cases

where a theory has been infected by values, the

very act of recognizing the value-judgments (usu-

ally called “stating one’s assumptions”) somehow

exorcises the theory of the troublesome element.

It seems that confessing one’s assumptions (e.g.

that the market is efficient; that we can ignore

wealth endowments; that informational efficiency

is an important indicator of real economic well-

being; that we can add utils together) is taken by

some researchers as absolution from all that logic-

ally follows from the assumptions (however out-

rageous and unrealistic the assumptions may be).

Some of the efficient market research assump-

tions, for example, are so unrealistic that they

more closely resemble “articles of faith” than

plausible premises (Katauzian, 1980, pp. 45-83).

There are several, crucial “articles of faith” that

lurk imperceptibly under the positivistic mask

that dignifies and authenticates efficient market

research. First, there is the tenuous connection

between informational efficiency and economic

efficiency: that the speed with which new inform-

ation is impounded into stock market prices

correlates directly with the efficiency with which

real goods and services are produced. Second, the

assumption that the stock market remains a signifi-

cant economic institution under contemporary

capitalism when only a small fraction of new

capital is secured through the stock market: the

primary source of corporate finance being reten-

tions.” This is in addition to assuming that partial

’ Friedman’s 1953 essay resulted in a decade-long controversy in which Friedman’s arguments and his instrumentalist

epistemology were sharply criticized, e.g. Grunberg (1957); Nagel (1963); Bunke (1964); Boland (1979) and Blaug (1980). For example, Nagel (1963) concluded that Friedman’s thesis ranged from trivial to absurd depending upon

which of his several meanings of “assumptions” one chose (Christenson, 1981, p. 41).

8 Nowhere do Gonedes & Dopuch discuss the criteria (values) they have used in their work that enable them to reduce

“effects” to “security price effects”.

9 Zimmerman has “refined” this categorization by suggesting that theories can be further compartmentalized into

descriptive, positive and normative (Zimmerman, 1980). The motivation behind this analysis remains the same as before

however; if, by isolating the normative “seed”, we can purge positive and descriptive accounting research from value

judgments, then all accounting policies that flow from this research will be blessed with an objectivity and impartiality

that transcends particular class, institutional and other interests.

lo A July 1962 study by the Machinery and Allied Products Institute found that between 1947 and 1961 internally

generated funds provided 85% of corporate capital requirements. Net stock issues in the same period accounted for less than 4% (Baumol, 1965, p. 68). Baumol concludes from this and other studies “that a very substantial proportion of

American business firms manage to avoid the direct disciplining influences of the securities market, or at least to evade

the type of discipline which can be imposed by the provision of funds to inefficient firms only on extremely unfavor-


equilibrium in the capital market translates un-

ambiguously into a general equilibrium for the

economy as a whole, despite all market imper-

fections (Ronen, 1974; Keynes, 1936; Baumol,

1965; Stiglitz, 1972; Jensen & Long, 1972; Mays-

har, 1978). Since the ultimate object of economic

activity is to reproduce the (real) means of sub-

sistence, with stock prices merely “paper” inter-

mediaries in this process, the linkage between

stock prices and the production of real goods and

services is critical and cannot be taken for granted.

Third, both general equilibrium theory and effi-

cient market research have been criticized for

assuming (rather than demonstrating) that markets

exhibit equilibrium-seeking properties (Hicks,

1965, p. 15; Shaikh, 1981, pp. 270-278);” for

the implausible causal assumptions that are used to

explain observed behavior (Kregel, 1973, pp. 12-

14);12 and for the errors in logical inference that

are frequently committed by researchers in inter-

preting from stock market data (Ronen, 1979).r3

Fourth, there are “the facts” that “efficient

marketeers” choose to ignore: Leasco and Reh-

ante; National Student Marketing; Mattel; Equity

Funding; Penn Central, etc. The manipulation of

accounting data, the financial losses to investors,

the effect on stock prices and the damage to in-

vestor confidence resulting from these cases has

been established by legal, journalistic, SEC and

other investigations.14 Collectively, these invest-

igations have used empirical methods that have a

legitimate claim to be more exhaustive and reliable

than “peering at life” through Compustat tapes.

Efficient market research “washes-out” the vari-

ance belonging to such results with large samples:

such results are dismissed as “mavericks” and “out-

hers”. What efficient market studies lack is a sense

of the social loss-function that appears to be

associated with these scandals: single, unique cases

have been quite sufficient to mobilize public out-

rage against the profession. A minimax objective

function (for example) would be more appropriate

in these circumstances since we are no longer

interested in the efficiency of the market as a

whole, but in success at every individual level.

Although perhaps over-dramatic, the response of

efficient market researchers (through their mass-

sampling) seems analogous to arguing that inci-

dents like Three Mile Island are not a problem

because most surveys show that the majority of

nuclear power stations are not melting down.

We reserve our main philosophical critique of

Realism and Positivism for the following section

where we are able to highlight the deficiencies of

these approaches by juxtaposing them against the

alternative of Historical Materialism. We should

point out however, that Positivism itself has its

own long and checkered history and can be (and

- able terms” (ibid, p. 70). The Wheat Report (1969, p, 59) noted that between 1961 and 1967 the ratio of the trading

volume of new issues to those of established stocks declined from 5.3 to 1.6%.

l1 For instance, Shaikh has persuasively argued that market prices are subject to a form of “tendential regulation”

rather than equilibria&g tendencies. Tendential regulation provides for the possibility of disequilibrium situations

occurring.

l2 Kregel and Robinson have both challenged the omniscient abilities that are attributed to Walrus’s mythical auc-

tioneer. Walrus’s auctioneer is an imaginary “person” (symbolizing the tatonnement process) who, like a stock market specialist, supposedly “causes” the market convergence towards an equilibrium price by issuing a series of prices, based

on successive schedules of bids from buyers and sellers. Kregel notes that Walrus’s infamous auctioneer is like most

religious apparitions, only seen if believed. Kregel adds that, even if we could be sure that this imaginary person exists

in some sense, the information requirements, computational ability and foresight required to act, just like a real broker (but for the whole economy) makes the proposition totally absurd.

13 A particular set of stock market prices may signify either equilibrium or disequilibrium in a macroeconomic sense.

Efficient market theory cannot distinguish between equilibrium and disequilibrium structures.

l4 Although investors may increase their individual discount rates to allow for such contingencies, a higher overall

(social) discount rate reduces the amount of investment and therefore, the level of economic growth. Thus, actions which seem advantageous to the individual investor may, in the longer term, impoverish him/her as a member of a less-

well-off community.


has been) criticized as a philosophy independently

of its links to Realism. The origins of Positivism

lie in the works of Madame de Stael, Saint-Simon

and subsequently Auguste Comte (Giddens, 1974;

Hayek, 1952; Christenson, 1981). A rather garbled

version of these early ideas has been translated

into accounting research from the writings of

Hayek (1952), Keynes (1891) and Friedman

(1962). (For a discussion of this “translation” see

Christenson, 1981; Zimmerman, 1980.) In the

view of early Positivists, the methodology of

natural science offered the prospect of “positive

knowledge” about “what is” (Harre, 1972). This

initial presumption was followed by two deduc-

tions; both of which have been accepted by

accounting positivists and both of which were

shown to be invalid by the philosopher David

Hume (1888). The first assumption was that, from

knowledge about “what is”, it is possible to solve

questions about “what should be” (Hudson,

1969). The second assumption involves the prob-

lem of induction: that is, it is possible to justify,

on purely logical grounds, inference (prediction)

from experience. Both assumptions are still held

by accounting positivists (Christenson, 1981, pp.

14-16) even though, since Hume, they are regard-

ed as erroneous in conventional epistemological

thought (see for instance Novack, 1971; Christen-

son, 1981; Morick, 1980; Cornforth, 1971, 1980;

Giddens, 1974).”

Realism, operating in the clothes of positive

theory, claims theoretical supremacy because it is

born of fact, not values. We contend that this

separation of theorizing into descriptive, positive

and normative is designed to create an illusion of

impartiality and independence to support norm-

ative policy type decisions.16 As an epistemology,

we find such a linear representation of the com-

plexities of the scientific imagination unaccept-

able, and offer an alternative epistemology, a

materialistic theory, as a guide for future research.

A MATERIALIST THEORY OF

ACCOUNTING THOUGHT

Materialistic philosophy provides an alternative

epistomolygy to that of Realism. A materialistic

philosophy contends that knowledge of the world

is as much an invention as it is a discovery. “Facts”

never speak for themselves and therefore consult-

ing the “facts” about reality is never a sufficient

explanation as to how we come to know what we

know (Abercrombie, 1980; Shaw, 1978). The

psychological predispositions of researchers

(Brown, 1974; Mitroff, 1974); their cultural and

social environment (Domhoff, 1979; Lecourt,

1981; Strickland, 1972; Shaw, 1975); and their

institutional affiliations (Baritz, 1960; Muthern,

1981; Debray, 1981) are all relevant to how we

construct knowledge in the fashion that we do;

whether that knowledge pertains to surgical

practice (Ehrenreich & English, 1973); genetic

engineering (Reich, 1971); economic management

(Routh, 1975); motor-cycle maintenance (Pirsig,

1974); or the practice of accounting (Burchell

et al., 1980).

There are many examples that show scientific

knowledge to be artifact rather than merely the

outcome of a search for absolute truth. Break-

throughs in scientific theory frequently occur in

times of crisis for a discipline or its underlying

social system. For example, Edmund Burke’s

ideas came in response to the challenge of forces

for democratization; Adam Smith’s thought served

as an important theoretical justification of laissez-

faire; Marxism was an attempt to provide an expla-

nation of the more disturbing consequences of

capitalism; marginal analysis was a counterblast to

Marxism;17 Weber’s bureaucratic theory can be

’ 5 Our critique of Realism extends to all variants of Positivism, including Logical Positivism, which some research com-

mends as the new epistemological Nirvana for accountants.

l6 Zimmerman (1980) and Watts & Zimmerman (1979) are among the leading proponents of positive theories. But, in

the final analysis, the only reason for conducting positive research is to formulate normative policy-type decisions. How

theorists interpret “facts”, (i.e. why variables are related) without also subscribing to some normative preconceptions,

(i.e. usually what ought to be) has not been explained.

l7 Solow (1963) has acknowledged that marginalist capital theory in the 19th century resulted in part from a non- marxist backlash and fulfilled the social function of providing an ideological justification for profit. (See Harcourt.

1972, p. 380.)


viewed as a rationalization and, therefore a theo-

retical justification of the contradictions of large-

scale German monopolies operating within an en-

vironment of laissez-faire ideology; Keynesian

economics was an intellectual and pragmatic

response to the crisis of mass unemployment and

the inability of neoclassical economics to locate

the cause (Allen, 1975, p. 72). In a similar vein,

the philosopher Wittgenstein has argued that even

mathematical theory is better understood when

viewed as an invention rather than just a discovery

(Bloor, 1973; Young, 1975).

Materialist philosophy differs fundamentally

from Realism in that it recognizes that “theory”

may come to form part of the reality that the

theory purports to describe. In this way a theory

comes to have a life of its own - it is reified - and

therefore may be experienced as external to the

theorist. Thus for example, how is the validity of

Monetarist or Keynesian theory affected by the

fact that they are employed to both act upon and

describe reality? Are features of economic ration-

ality (such as acquisitiveness; selfishness; com-

petitiveness) inherently natural to human kind, or

are they products of theoretical interventions

(reifications)? There are examples from both

management and financial accounting that under-

score the relevance of a materialist philosophy.

In management accounting, it is commonly

acknowledged that budgets are not merely “best

estimates” of what will happen; they are also

targets used to motivate managers to adopt

particular courses of action (Hopwood, 1974;

Stedry, 1960). In this respect, it is not the for-

casting ability of a budget that is important, rather

it is the desirability of the situation that it helps

create. Similar examples abound in financial

accounting (although this is less commonly re-

cognized): for example, many U.S. oil companies

and utility firms have, in recent years, protested

their high tax burden. They cite, as evidence, the

expense items in their income statements and the

footnotes, which show effective tax rates that are

often in excess of 40% of profits. Yet payment

of this expense is deferred, often for many years,

and in certain cases indefinitely. AT & T, for

instance, showed a deferred tax liability in excess

of $11 billion on its 1978 balance sheet. Market

analysts estimate that this will not become due

until the mid-1990s at the earliest (Business Week,

17, July, 1978). If the current expense associated

with this future payment was estimated in present

value terms, the current effective tax rate would

fall considerably. The fiction is maintained of

course because accounting statements and foot-

notes are not disinterested best estimates of profits

and expenses, they are “certified documents” that

can be used politically to resist government regula-

tion and to lobby for a more favorable business

climate (Sloan, 1976). From a materialistic view-

point therefore, financial statements should be

seen as “creatures” of business reality rather than

objective descriptions of historical “dead facts”.

The difficulty with the Realist assumption (that

truth comes from facts) is that it fails to recognize

that theory plants some of the facts. Realism pre-

supposes a subject-object split: we (the subjects)

can observe and analyze reality (the object) in a

completely detached objective fashion. Neverthe-

less the subject-object split is a false assumption:

observers (subjects) are a product of the reality

(objects) they observe (and so therefore are their

models of observation and perception). Moreover,

the object (reality) is changed by the results of the

subject’s analysis and theorizing.

The rejection of the subject-object split leaves

Realism and the promoters of positive accounting

theories in something of an epistemological

quandary. How can we talk of discovering the

truth about the workings of the socio-economic

world if our theories have helped create the

institutional and ideological aspects of the reality

we are examining? The problem, in essence, is one

of trying to discover human nature empirically,

when much of human nature is created by society

and its theories.

The task we have set for ourselves in the follow-

ing secrion is to illustrate, with a specific example,

how a materialist viewpoint may enhance our

understanding of the evolution of accounting

theory. The example we have selected is the

historical development of the concept of value in

economic theory. Two questions require attention

before we proceed, however. First, as many ac-

countants would view the history of Value Theory

as only tangentially related to the evolution of


accounting theory, what constitutes the proper

domain of study for accounting researchers who

are concerned with the development of accounting

thought? Second, what kind of evidence should be

admissible in such an historical inquiry? Both

questions raise exceedingly complex but funda-

mental issues. To insist that accounting history

research should be confined to (say) primary

sources about bookkeeping practices would be to

prejudge research questions before they have

been articulated. Danto (1971, pp. 9-13) has

argued that such questions as “What is history?”

“What is economics?” “What is philosophy?”

state the mission of a subject. Therefore, we

feel that a question such as “What is account-

ing history?” should be taken as problematic;

Value Theory has been so central to the de-

velopment of economic thought that Georgescu-

Roegen (1971) has said that “a broad perspective

of the history of economics emerges as a struggle

with the problem of value”. We argue that Value

Theory has also been central to the development

of accounting. While Value Theory has tradition-

ally provided the logic for exchange relations,

accounting has provided the system for measuring

and reporting reciprocity in exchange. We will

argue subsequently that it is impossible for ac-

counting to avoid aligning itself with one brand of

Value Theory or another. The real question is

which one to choose. If this choice is to be an in-

formed one, then accounting researchers need to

take the nature of social conflicts as problematic

Social change and changes m the concept of value”

Rlcardion Socialists

Canomst

School

(Aquinus

1250)

\

(Smith, 1776; Ricardo, 1817)

/

\

-Marxism (1850) *

-Srafforlans----) (1960)

Mercantillst

School (Barbon, 1690; Pol lexfen, 1700 ; Cory, 1719)

Lousonne

(Gossen , 1854 ;

FEUDALISM--MERCANTILISM- EARLY CAPITALISM

STATE AND -MONOPOLY

CAPITALISM

*The dates ore the opproxlmote dotes of publication of major theoretlcol contrlbutlons The orrows denote some of the moln interrelations between ideas.

Fig 1.

something to be discussed and investigated by

scholars, not prejudged by equating historical

research to “hard” accounting or bookkeeping

data.

and to understand the active role that the concept

of value has played in wider social struggles. To see

this however, one must view the changes that have

occurred in the concept of value, not in Realist


terms as an accumulating wisdom about a fixed

reality, but as an ideological positioning of the

social imagination designed to explain contempo-

rary social conflicts and concerns. In this way we

may gain a better perspective on the partiality of

our contemporary notions of value, as well as a

feeling for the compromises and assumptions we

must commit in accepting such notions.

A MATERIALIST HISTORY OF

VALUE THEORY

Figure 1 is a route map for the following dis-

cussion, which traces the development of the con-

cept of value from the Middle Ages to the 20th

century. As suggested by the parallel streams in

the diagram, the concept of value has developed

along two competing themes - value based on

socially necessary labor (i.e. production side valu-

ation) versus value based on subjective utility (i.e.

demand side valuation). It will be seen that the

social struggles in each historic period are mani-

fested in, and stimulated by these two generic

concepts of value, which share a common theo-

retical mission - to simultaneously explain exist-

ing production and exchange relations and to

prescribe how such relations should be structured.

Figure 1 summarizes a great deal more than the

evolution of two streams of economic abstrac-

tions: the two lines of thought correspond to

perspectives that are fundamentally opposed:

philosophically, politically and ideologically.

Moreover, insofar as accounting has used eco-

nomic thought as a rationale for its own practices

(consciously and otherwise) these borrowings

have been almost exclusively from one of these

approaches: utility-based value theories (the lower

stream of ideas in Fig. 1).

What kinds of accounting are suggested by

labor-based theories of value (the upper stream of

thought in Fig. l)? How might they differ from

the accounting which has grown-up in the shadow

of utility-based value theory? While the evolution

of these two economic paradigms is considered in

detail in the following passages, we can gain a brief

foretaste of their implications for accounting by

contrasting the essential differences of these two

generic approaches to value theory.

The most fundamental difference between

utility-based and labor-based theories of value lies

in the manner in which each approach deals with

the social relations underlying economic cate-

gories. In the case of utility-based value theories,

the relative value or worth of all goods and services

produced in an economy (producer goods, inter-

mediate goods and final goods) is ultimately deter-

mined by their relative contribution to the utility

of consumers.” The distinguishing aspect of this

theory is that value is said to originate in “things”

(called “factors” i.e. land, labor and capital).

Those labor theorists who are also historical

materialists have criticized this analysis because of

its a historical and a social character; it treats

factors of production as the genesis of value

(“eternal categories”) thus failing to recognize

that these factors are only found in one type of

wealth producing society: the very specific social

and historical conditions of capitalism. This is

evident in the dual meaning of the term “capital”:

the first, to do with its capacity to produce other

goods; the second, which is concerned with pro-

perty ownership. This second (Marxian) meaning

of the term capital is specific to capitalism and

signifies a social entitlement to income for a class

that has no personal involvement in production.

This shows that the notion of “factors of pro-

duction” is socially specific to capitalism:

“factors” refer to sources of value (labor) as well

as features of appropriation of value (capital) that

are specific to Capitalist Society. Socially special-

ized labor is the only factor that is common to all

societies, in the view of labor theorists, and there-

fore labor is the common origin and determinant

of value (for capital itself is appropriated and

accumulated labor).

We may develop still further the labor-theory

critique of utility-based value theories to show

that factors of production and associated concepts

such as profit, wages, capital, equilibrium and

18 Including capitalists who express their preferences for consumption over time in a time-preference discount rate.


price are all ultimately reducible to the social

relations of capitalism. Capitalism may be defined

and distinguished from other social formations

(such as slavery and feudalism) in terms of its

unique relations between social members (laborers,

capitalists and landowners) and their relations to

Nature and property (Shaikh, 1981; Dobb, 1963).

Theoretical categories such as capital, rent, profit

and wages are not universal to all wealth producing

societies; they are (socially) specific to capitalism

and therefore to its social relations because, in the

final analysis, it is the social relations of capitalism

that distinguish it from other social systems

(Meek, 1967; Mandel, 1968).

Thus, what utility-based value theorists regard

as “fixed” in the form of factors that produce

wealth, labor theorists take as problematic because

the latter treat “factors” (like capital) as social

relations of capitalism that are both changing and

changeable (Arthur, 1979; Elson, 1979; Amin,

1978). Being “changeable” is the vital element

here: whereas utility approaches reify the existing

social order into “fixed factors”, labor theory

approaches highlight the fact that a social order

may be recreated, enhanced and developed. The

difference is crucial for accountants (as it is for

ail social beings): one approach is an apology for

the existing social structure, the other is on

opportunity to change it.

The canonist theory of‘ value

One of the dominant value principles to emerge

from Antiquity and primitive societies was that

exchange took place in quantities that equalized

the amount of non-slave labor-time embodied in

the products transferred (Anderson, 1974; Dobb,

1963; Mandel, 1968). Certainly there were ex-

amples from irregular exchange, silent exchange,

ceremonial exchange and exchange by plunder

that transgressed this rule, however, even in these

cases, the value principle was still prevalent: a

product was worth the socially necessarylg labor

expended on it, and it could be exchanged for a

quantity of other products that embodied an

equivalent amount of labor time (Mandel, 1968,

pp. 49-67).

This production-based value principle (based on

the exchange of equal amounts of labor time) was

one of the most influential legacies that Antiquity

bestowed on the medieval period. Canonist

theorists” were concerned with the terms of ex-

change between small independent producers, i.e.

the proceeds that each obtained from the sale of

products and what could be obtained with those

proceeds. As Canonist scholars and clerics were

frequently involved in adjudicating trade disputes

as well as other matters of distributive justice,

there was a need to develop a concept of an

ethically just price. Since the proceeds of sale

usually accrued to the direct producer (not a

merchant intermediary or capitalist) the idea that

the rewards should be commensurate with the

outlay and effort expended in production pro-

vided an obvious definition of a just price (Kaulla,

1940, Chapter 1). The exchange of equal amounts

of labor time - the practice evolved in Antiquity

- became the Canonist’s primary rule for deter-

mining the ‘fairness’ of a particular exchange.

Compensation for the labor time expended was

the most important element of medieval just price;

with additional amounts added to cover the costs

of raw materials, transport and sometimes the risk

involved.2’ A reasonable measure of distributive

justice was probably attained by the concept of a

just price in Aquinas’s time because trade took

place in small, static and relatively self-sufficient

ly 1n this context, “socially necessary” labor time means time spent productively in a trade or craft that has evolved as

part of the division of labor of the community in question. Thus, time spent as a finance professor would have been

“unnecessary” in feudal times but “necessary ” in other societies (Mandel, 1968, pp. 63-65). 20 The Canonist concept of value may be traced to 13th century philosophers such as Thomas Aquinas.

‘I The fact that the Canonists placed equal value on an hour spent by different craft specialists was in keeping with

customs dating back to the very beginnings of commodity production, estimated to be about 3000 B.C., when labor

was frequently considered to be equivalent, regardless of its specific character. On the tables found at Sasa, inscribed in

a Semitic language, the wages in a Prince’s household were fixed at 60 qua of barley for the donkey man, shepherd,

cultivator, smith, cobbler, cook, engraver, tailor and carpenter (Mandel, 1963, p, 65).


communities, where the efforts and expenses of

various direct producers were known and could

readily be compared (Meek, 1975, p. 13).

What was distinct about Canonist Value Theory

(compared with utility-based marginalist theories)

was the centrality that was ascribed to a com-

munity’s labor time in imparting “real” value to a

commodity and in translating that real value into

the commodity’s exchange or relative value.

Accompanying this emphasis on the production-

side, as the source of value, was a stubborn refusal

to grant consumer demand and subjective utility

the status of determinants of value and price

(ibid, p. 11).

Mercantalist theory of value

The growth of merchant trade initiated a major

transition in the concept of value. The Church’s

involvement was ambiguous and contradictory in

this transition, reflecting its heavy investment in

the feudal order (through ownership of land, for

instance) and, at the same time, its expanding

beneficial interests in ore-extraction and trade

(Tigar & Levy, 1978).

Gradually scholastic theoreticians began to

articulate a concept of value that was more in

keeping with the growing merchant interests who

came to dominate the new social structure. In

order to respond to the needs of expanding trade

and commerce (particularly the need for the gains

of the merchants and traders to be recognized as

“just”) scholars retreated from the cost-oriented

basis of the Canonist’s just price, and redefined

“just ” in terms of what has been called the con-

ventional price approach.

The conventional price was that which was

customarily received and paid for a commodity.

This approach set aside its production-oriented

traditions by admitting demand-side influences

(utility and the subjective expectations of owners

and consumers) as determinants and constituents

of value. Meek suggests that the conventional price

was reconciled with Aquinas’s just price without

too much difficulty by arguing that, in the absence

of information about the difficulties in producing

a merchant’s products, value was partly depend-

ent on utility to the purchaser and therefore

subjective valuations of the individual consumer

(Meek, 1975, p. 14).

In the development of the idea of a conven-

tional price in the mid-to-late seventeenth century,

several important subsidiary concepts emerged

that were to play an important role in future theo-

rizing. The ideas are well illustrated by Nicholas

Barbon’s pamphlet (A Uiscourse on Trade) written

in about 1690, when Classical Value Theory

was beginning to supercede Mercantilist theory.

Barbon’s pamphlet links the “value” of a com-

modity (its current market price) with the strength

of its demand and its level of supply. Moreover, he

introduces the concept of the intrinsic value of a

commodity (its utility value or subjective value)

and suggests that this is causally linked to the

market value; thereby anticipating marginalism

and its causal ordering by nearly sixty years.

The emphasis (in the mercantilist period) on

utility as a legitimate factor in determining value

and price was understandable in that the mer-

chants’ gains came almost entirely from the con-

sumer through price differentials. Conventional

price value, with its emphasis on utility rather than

labor as the primary source of value, strengthened

the merchant’s bargaining position relative to pri-

mary producers by suggesting that the consumer’s

wishes (not rhe effort expended) should be the

ultimate consideration in determining the amount

to be paid to producers by merchants.

The transition to the classical thcovy of value

The emergence of early forms of capitalism in

the late seventeenth and early eighteenth centuries

stimulated a further transition in Value Theory.

The producer-cost approach to value began to

show clear signs of a revival (especially in Britain)

where we find writers such as Cary describing pro-

duction costs as “true value” or “real value”

(Cary, 1719, pp. 11-12, 98-99). The reversal in

economic thinking mirrored a revolution that

was taking place in economic practice. Many

theoreticians of the times were spokesmen of the

merchant-manufacturer and parvenu industrial

capitalist and these new entrepreneurs were in-

creasingly concerned with costs of production.

Competitive pressures in the product market made

it more difficult for merchants to maintain profit

levels by traditional methods and the merchant

classes began seeking new ways of exercising direct


control over production costs.** These methods

varied from the “putting out” system, to attempts

to increase productivity through technical im-

provements and the division of labor. The latter

form of reorganization was often instigated from

within the direct producer group: “the rise from

the ranks of the producers themselves of a capita-

list element, half-manufacturer, half-merchant,

which began to subordinate and organize those

very ranks from which it had so recently risen”

(Dobb, 1963, Chapter 4).

There was also a shortage of labor during this

period resulting, in large part, from restrictions on

the movement of labor and the existence of parish

based poor laws (Polanyi, 1957). Well before the

end of the 18th century, by which time the short-

age had become acute, the economic literature

recognized the importance of the supply of wage-

labor for economic advancement. From the last

quarter of the 17th century onwards, a variety of

schemes emerged for encouraging immigration and

permitting naturalization; setting the poor to

work; and abolishing the death penalty for all but

the most serious offences (Meek, 1975, p. 19).

Production problems, together with greater com-

petition in the market-place, gradually helped

divert the attention of economists and social

philosophers away from the sphere of exchange to

that of production. These changes were accom-

panied by a growing belief that it was through

specialization of labor rather than through the

accumulation of gold and silver that nations be-

came wealthy. It was no accident that Adam

Smith, the pre-eminent economic thinker of this

period, states in the first sentence of the Wealth of

Nations that “the annual labor of every nation is

the fund which originally supplies it with all the

necessaries and conveniences of life which it

annually consumes”.

Smith’s doctrine - articulated initially in his

Glasgow Lectures (1740) and developed and ex-

panded in his Wealth of Nations (1776) - reflects

a period of ideological transition in which the

central problem was to remove mercantilist

obstacles to industrial expansion, i.e. the regula-

tions, practices and sectionally-protective impedi-

ments to free trade and competition. While Smith

argued that the ultimate source of a nation’s

wealth was its labor, he recognized that unlike

more primitive societies, where exchanges of pro-

ducts were based on equal amounts of labor

power, capitalism featured “unequal exchanges”

in which the capitalist appropriated part of the

social product for reinvestment and capital ac-

cumulation.

At the center of Smith’s analysis of the de-

velopment of capitalism is the emergence of a

social surplus and the appropriation of that surplus

by capitalists for growth and development. These

precepts were essential for Smith’s basic theoretical

mission: to show that the key to abundance lay in

understanding how the surplus was appropriated,

deployed and then redeployed in successive time

periods. For Smith, wealth generation involved

the study of economic dynamics and this required

an invariable yardstick with which to measure the

flow of production through time that would

emanate from a particular sequnce of employ-

ments (distributions) of surpluses.

Smith’s yardstick of social value was his con-

cept of commandable labor value: the quantity of

work-people that could be hired from the proceeds

of sale of a product. Such a concept is meaningful

when viewed in terms of the preoccupations of

theorists at the time. An individual capitalist’s rate

of accumulation could be measured in terms of the

additional number of employees who could be

hired in each period. It was natural, therefore, for

Smith to appeal to such a value notion to describe

a nation’s capital accumulation potential.23

Smith uses the notion of a “real measure” in

the special sense that it not only captures the

magnitude of a commodity’s value but also “em-

bodies”, “inheres”, or “composes” the product.

** From Pollard we can hypothesize that this interest in production costs preceeded early developments in cost ac-

counting. Here we have a clear instance of accounting ideas and practices - as we would recognize them today -

originating from social and economic conditions (Pollard, 1965).

23 Meek also notes that it is only in a society in which labor power has become a commodity (i.e. capitalism) that one

would associate real value with the power to purchase labor itself and not the products of labor (1975, p. 65).


While Smith regarded money as a measure of

value, it was only in the limited sense of providing

an estimate of the “real” value possessed by the

product (Meek, 1975, p. 51). Thus, Smith states in

the Lectures: “We have shown what rendered

money the measure of value, but it is observed

that labour, not money, is the true measure of

value” (Smith, 1838, p. 190).24

The intellectual climate of Smith’s era was a

period of transition from the mercantilist’s con-

cern about exchange to the early capitalist’s

concentration on production and the division of

social labor. It was understandable therefore that

Smith would regard socially specialized labor as

the motive force behind progress and abundance

and the quintessence of a commodity’s value.

Socially necessary labor endows a product with

exchange value because that labor forms part of a

social, collective whole: a form of social under-

standing that permits each member to specialize

in a prescribed way and exchange the products

of this specialization for the means of existence.

In this sense, all exchange is not only an exchange

of labor but ultimately an exchange of social

activities, or as Meek puts it, “The value relation-

ship between commodities which manifests itself

in the act of exchange is in essence a reflection of

the relationship between men as producers”

(Meek, 1975, p. 63). This accords with the view,

developed subsequently by Marx, that “value” is

ultimately a social relation because it is concerned

with the exchange of the life experiences of people

whose labor is bound-up in the products, We are

thus led to the conclusion that accountants and

economists who advise and guide participation in

market transactions are essentially adjudicating in

social relations and in the transfer (and appropria-

tion) of labor time.

Classical political economy and the labor theory

of value

Ricardo’s contribution to the ideological re-

constitution of the concept of value was complex.

He is known for his trenchant attacks on land-

owners and was outspoken in his support of

capitalism. At the same time, he developed a theo-

retical apparatus in his Principles (1817) that came

to be feared by gentry economists as having

socially mischievous and even revolutionary

possibilities. Inherent in the work of Ricardo, is a

concept of value that is diametrically opposed to

the value theory underlying much contemporary

accounting research. We first examine Ricardo’s

concept of value and then show how it was sub-

sequently maligned and discredited thereby pre-

paring the way for the utility-based theory of

marginalism (and its accounting derivatives).

Ricardo was interested in economic dynamics:

the path that an economy followed over time in

terms of aggregate national income, income dis-

tribution between social classes, employment,

savings and investment. Income distribution (and

therefore the distribution of property and wealth)

were at the center of Ricardo’s studies. Indeed,

evolving a distribution theory was the “principle

problem in Political Economy” in his view.

Ricardo saw economic activity as a circular loop

where, once continuing net investment and growth

are introduced, a significant portion of the outputs

are ploughed back as fresh inputs before they have

a chance to emerge as final consumer goods.

Ricardo, and his twentieth century interpreters,

such as Sraffa, sought to determine the trajectory

an economy would follow over time if it began

from a particular distribution of income among

laborers, capitalists and landowning classes. In

this fashion, he sought to provide a “conditional

24 It would be incorrect to say that, by the mideighteenth century, a fully fledged labor theory of value, such as that

articulated by Ricardo and Marx, had developed. Many writers were still heavily influenced by the mercantilist view of

exchange values, but a growing number were beginning to take an interest in the link between the increasing amount of labor specialization in society and the accumulation of social wealth. This would eventually develop into the idea that

labor contributed value to commodities in proportion to the total social effort that it was necessary to expend in their

production (Meek, 1975, p. 445).


forecast” as to the pattern of growth, employ-

ment, etc., that would ensue in a succession of

time periods from an initial distribution of in-

come.

Such a formulation raises one of the most in-

tractible problems in economics: how should we

measure the total output of goods and services

from an economy (including capital goods that

will be used in future production) for each time

period? Such a measure is necessary if the desir-

ability of different (starting) income distributions

is to be ascertained. Unfortunately the same

physical output quantity of goods and services

may be valued differently depending on the dis-

tribution of income. In short, there is a many-to-

one (not a one-to-one) relation between monetary

measures and each physical output level. Therefore

monetary measures do not provide a reliable

numaire, metric or in Ricardo’s terms, “an invari-

able yardstick of Absolute Value”.*’

It was precisely on this point that Ricardo had

criticized Smith. In Ricardo’s estimation Smith

held contradictory views on value: it was incom-

patible to assert on one hand that a commodity

was imbued with value through the amount of

social labor that had been expended on its pro-

duction and on the other hand to contend that a

commodity’s worth was equal to the number of

laborers that could be hired from its proceeds

(i.e. Smith’s concept of commandable labor value).

If the wage rate changed, so would its command-

able labor value in Smith’s analysis, even though

the social labor expended on the commodity

through production remained constant. Rather, to

Ricardo, the ultimate source, regulator, and yard-

stick of “real” value was socially necessary labor.

Monetary value and market values were merely

imperfect expressions of this “real” underlying

value.

Before considering the ideological struggle that

ensued from the declaration of this potentially

revolutionary viewpoint, it is worth noting the

way that Ricardo dealt with contemporaries such

as Malthus, who advocated incipient versions of

the kind of economics that underlies much of the

accounting that we practice and teach today.

Utility was an inadequate source and determinant

of value in Ricardo’s view (except in inducing

short-run price fluctuations) because economic

policy and the well-being of those who depended

on it were far too important to be based on such a

fickle and unassessable quantity (a point that was

dramatically reiterated in Keynes’ references to

the “animal spirits” of investors being the unstable

ingredient in capitalism). Similarly, supply and

demand theory was viewed by Ricardo as in-

adequate because in his view, a theory of value

had to make some determinate statement about

the level at which forces of supply and demand

fixed price in the normal case (Meek, 1975, p.

122). It was not enough to argue supply balanced

demand at the point where net marginal revenue

was zero because that begged the question: what

determines “cost”?26

Ricardo’s focus on income and property

division between classes as a primary determinant

of economic growth set him apart from many of

his successors. He argued that an antagonism of

interest existed between landed property and

industrial capital: “the interests of the landlord

are always opposed to the interests of every other

class in the community” (Sraffa, 1946, Vol. IV,

p. 18). Ricardian analysis suggested that income

distribution and so, therefore, property-ownership,

class-relations and the institutional context were

the proper and legitimate concern of economists

and could not be parcelled off to the economic

historian or the sociologist.

25 Not until 1960 was this problem “solved” when Sraffa devised a Standard Commodity Index for the purpose

(Sraffa, 1960; Kregel, 1976).

” Modern economists and finance researchers who accept the market’s verdict as the sole arbiter of “cost” and “value”

are haunted to this day by these Ricardian criticisms: their inability to think of value in any way other than in terms of

market value means that they are never able to put the market prices into question. Their theory is incapable of re-

cognizing disequilibrium situations (excessively priced or underpriced commodities) with the corollary that there is no

such thing as an under- or over-valued share in the modern theory of finance.


The outrage evoked by Ricardo’s theories and

their subsequent rejection27 have been attributed

to the fact that “the majority of economists were

very much aware of the dangerous use to which a

number of radical writers were putting Ricardian

concepts” (Meek, 1967, pp. 50-60). These writers

and pamphleteers have been described as the

“Ricardian Socialists” and included Thomas

Hodgskin, J. F. Bray, John Gay and William

Thompson. They used Ricardo’s theories to

formulate a revolutionary ideology (Halevy,

1928). Hodgskin for instance was a considerable

influence in the incipient trade unions and work-

ing-class educational establishments such as the

Mechanics Institute. His work did not go un-

noticed by economists who inhabited the cloisters

of Dublin and Oxford. James Mill once wrote of

Hodgskin’s ideas that “if they were to spread they

would be subversive of civilized society” (Robbins,

1952, p. 135). Hodgskin propounded a rather

underdeveloped concept of exploitation “where

profit and rent were alike filched from labor”

(Hodgskin, 1825). Piercy Ravenstone elaborated

an appropriation theory of property-income when

he wrote: “A man cannot excercise his faculties

. make use of his limbs without sharing the

produce of his labor with those who contribute

nothing to the success of his exertions” (Raven-

stone, 1821, pp. 199-200).

Professor Meek was of the opinion that estab-

lishment scholars were primarily concerned with

the dangerous character of Ricardo’s doctrines,

rather than with what they believed to be their

falsity: “Their fundamental approach was

determined by the belief that what was socially

dangerous could not possibly be true” (Meek,

1967, p. 71).= Thus, we find Samuel Read

denouncing Ricardo’s notion that labor is the only

source of wealth as a “mischievous and funda-

mental error” (Read, 1929). Poulett Scrape,

author of Political Economy for Plain t’eople

(I833), refers to the “mistaken hostility to

capital” and “the Right of Profit on Capital” as a

response to Hodgskin’s “robbery of laborers”

(Scrape, 1833, pp. 103, 105). Critics of Ricardo

did not attack his concept of Absolute Value

directly; rather they sought to conflate it with

other notions of value (principally exchange

value). Thus, we find Bailey, one of Ricardo’s

most vociferous critics and a thorough going

relativist, starting with a definition of “exchange-

able value” and then contending that “value . denotes nothing . but merely the relation in

which two objects stand to each other as ex-

changeable commodities . thus, Ricardo’s

search . . . was pointless because there was no way

of defining ‘unvarying value’ ” (Bailey, 1825).

Thus Ricardo’s focus on the distribution of in-

come and property and his concept of Absolute

Value not only facilitated the transition from

feudalism to capitalism, but also became an

ideological weapon that was used against capital-

ism itself.

Ricardo’s preoccupation with measuring the

aggregate social product led him to average out the

effects of alternative income distributions. In con-

trast, the causes of different income distributions

were the centerpiece of Marx’s contribution to

economic analysis where he showed that social

history was the history of the struggle between

social classes over the social product and that

distribution of income was a manifestation of the

exploitation of one class by another. Building on

Ricardo’s ideas, Marx defined exploitation as the

difference between the actual time spent working

by the producer classes and the portion of that

time devoted ultimately to reproducing those

classes. Under capitalism, this difference is the

amount of time the laborer spends working for

capital and is an appropriation of the labor pro-

duct by those who have contributed no productive

activity and lack personal participation in the

process. Marx’s concept of capitalist exploitation

is fundamentally the same as Marc Block’s apt

27 This rejection lingered well into the 20th century until the Royal Society commissioned Piero Sraffa to produce the

edited works of David Ricardo. The project, completed in 1946, resulted in the reinstatement of Ricardian theories to

the center stage of economic debate.

28 It was with reference to these establishment academics that Marx referred to “hired prize-fighters” taking over from

scientists and the emergence of “vulgar economics”.


characterization of feudal exploitation as a system

where feudal lords “lived off the labor of other

men” (Dobb, 1973, p. 145). Marx argued that in

order to understand exploitation and income

distribution in the market sphere of exchange, it

is necessary to consider the institutional datum;

the social relations; the “hidden essence” or

“inner form” lying beneath the “outward dis-

guises” or the “market appearances” of things. 29

In the following section, it will be seen that

ideas espoused in reaction to Marx and Ricardo

provided the basis for a new value theory, margin-

alism, in which demand-side influences (in the

form of utility and subjective preference) replaced

Ricardo’s socially necessary labor as the prime

source and determinant of value.

Marginaksm and the subjective theory of value

The transition from the Ricardian to the

marginalist view of value was completed by the

elaboration of two catenations of ideas. The first

related to the directional flow of the causal influ-

ences and determinants of value. Under margin-

alism value originated not from the fund of labor

that Smith termed “the Wealth of Nations” but

from the utility-based, subjective preferences of

consumers of final goods. This reorientation was

expressed in a shift away from macroscopic

problems of the economy-at-large towards a micro-

scopic emphasis on the behavior of individuals.

These were not the individuals in the Ricardian or

Marxian sense, however, as they were stripped

completely of their social class origins and thus

of their unique standing in relation to property or

natural resources.

The second aspect of the transition was to

attempt to remove a number of social policy issues

from the agenda of economics, mainly by expung-

ing “politics” and “sociology” from political eco-

nomy. This was achieved by confining economics

to the study of the sphere of market exchange;

such critical parameters as the distribution of in-

come (that were molded by forces “outside” the

market) were treated as “given” because (in the

words of one marginalist) “to do otherwise would

be to ask economists to commit value judgments”

(Robertson, 1930).

The foundation for marginalism was laid by

Jevons. 3o In the second edition of his Theory of

Political Economy, Jevons shows how conscious

he was in reshunting the “car of economic

science” which Ricardo had redirected “onto the

wrong line” (Jevons, 1879, Preface, 2nd ed.;

Dobb, 1973, p. 166). At the beginning of his

work, Jevons has a much quoted passage that pro-

vides the basis for the marginalist theory of value:

“Repeated reflection and inquiry have led me to

the somewhat novel opinion, that value depends

entirely on utility . . . in this work I have attempt-

ed to treat economy as a calculus of pleasure and

pain” (Jevons, 1871, p. 2).

Space precludes a comprehensive exegesis on

the various criticisms that have been levelled at

Jevon’s claim that utility is the central moment

in value theory. Rather, we will confine our

criticisms to three areas of specific concern:

criticisms of the relevance of utility, the nature of

utility and its existence as an aggregate function,

Ricardo challenged the relevance of utility by

arguing that it was effective demand not merely

utility, which affected the level of production and

the distribution of resources, thereby underscoring

the need for a theory of income distribution.

Ricardo, like Marx, understood that, in a very real

sense, distribution preceded everything else and

therefore an “economic sociology” was essential

to show how social and property relations affected

income distribution and its translation into effect-

ive demand.

The existence of aggregate utility has been

challenged by several authors (Boulding, 1969;

Kay, 1979; Arthur, 1979). Most of these criticisms

29 Marx’s theory of value is one of the richest (and currently one of the most controversial) contributions to the literature. The omission here of any detailed discussion of this value theory should not be taken as an indication of its

lack of relevance. Rather in our opinion, it offers one of the most promising sources of radical thought. For a summary

of the current controversies surrounding Marx’s value theory, see Elson (1979) and Steedman & Sweezy (1981).

3o Stigler describes Jevons as “the forerunner of neoclassical (marginalist) economics” (1946, pp. 13, 135).


relate to the difficulty of using utility as a cri-

terion of social choice and efficiency, without

which utility has little to offer as a theory of

value. The concept of aggregate social labor value

(as a criterion for a theory of value) could be

justified on the grounds that individual labor be-

comes additive and homogenized as labor evolves

into a specialized cooperative entity. The same

argument cannot be made for utility: the utils of

individual consumers are not socialized into an

integrated whole, they remain disparate, incom-

mensurable and (therefore) non-additive (Kay,

1979; Arthur, 1979).31

The nature of utility, as conceived by Jevons

and his followers, has been questioned because of

its ambiguous form. Dobb notes how both

Marshall and Pigou acknowledged that utility was

ambiguous because “desire” was used to represent

“satisfaction”. Thus Marshall said: “We fall back

on the measurement which economics supplies of

the motive, or moving force to action, and we

make it serve with all its faults, both for the

desires which prompt activity and for the satis-

factions that result from them.” (Marshall, 1920,

pp. 92-93; Dobb, 1937, pp. 27-28).

Jevons further contributed to the development

of marginalism by utilizing the principle of the

equilibrium seeking tendencies found in the study

of Statical Mechanics3’ This turned out to be a

particularly prophetic analogy as it led to a

manner of thinking (i.e. that an economy tended

toward equilibrium) that contributed to the

assumption that all factors and services would be

fully employed at such an equilibrium position;

overlooking the possibility (until Keynes in the

1930s) that multiple equilibria were possible, and

not necessarily at the full employment level.j3

Jevon’s notions of utility-based Value Theory,

diminishing marginal returns and the equilibrating

tendencies of economies, gave rise to the assump-

tion that maximizing behavior by economic agents

(i.e. entrepreneurs, laborers, and consumers) led to the maximization of the social welfare - an invalid

deduction since such a summation is contingent on

the distribution of income (a further example of

how the latter intrudes itself). Both Jevons and

Walras often overlooked this qualification in their

enthusiastic support for the capitalist social order

(Steedman, 1972, pp. 48-49; Walras, 1954, pp.

125, 255). The most flagrant claims for the

“natural justice and order” of capitalism (that

marginalist theory legitimatized) were made by

J. B. Clark: “What a social class gets is, under

natural law, what it contributed to the general

output of industry” (Clark, 1899, pp. 46-47,

323-325).34

What Jevon’s theory lacked was a compre-

hensive scheme for showing how the prices of

goods in various parts of the economy were

determined. Menger and his two disciples, Wieser

and Bohm-Bawerk, provided this framework by

conceiving of an economy in terms of goods

arrayed in various stages of production, whose

values are imputed directly and indirectly from the

31 Boulding has indicated further problems, especially those related to the lack of realism in marginalist utility analysis.

For instance, it is assumed in general equilibrium theory that utility functions of consumers are independent of each

other (thereby excluding the affects of greed and envy that intertwine the utility functions of individuals) (Boulding,

1969). An equally unrealistic assumption in this analysis is that production and consumption decisions arc independent, thus implying that the advertising industry and production decisions that attempt to condition consumption choices

may be safely overlooked (Graaf, 1975).

32 Dynamic considerations are therefore neglected by marginalist methods because it is just assumed that economies

will gravitate to an equilibrium state. Unfortunately the path of movement that an economy follows in this equilibrat-

ing process is undefined, as is the time-frame in which it takes place (Dobb, 1973, pp. 168, 173).

33 Sir John Hicks has cautioned that “economists are so used to the equilibrium assumption that they are inclined to take it for granted,” yet “there are market forms, not necessarily unrealistic or unimportant, where the mere existence of an equilibrium, even in a single market, is doubtful, and perhaps more than doubtful” (1965, pp. 15 et seq.).

34 This crude attempt to bless the existing orderof-things was subsequently disowned by Stigler (who remarked that “Clark was a made-toorder foil for the diatribes of a Veblen”) but the approval bestowed by marginalism was still

allowed to linger in many texts (Stigler, 1946, p. 297).


preferences of consumers for final goods. That is

to say, all resources and intermediate goods were

valued in terms of their marginal productivity to-

wards final consumer goods.

Menger, Weiser and Bohm-Bawerk were

members of the so-called Austrian school, for

whom the criticism of socialist doctrines was

something of a preoccupation (as it was also with

Pareto). Weiser developed Menger’s imputation

theory expressly as an answer to supposedly

socialist claims that property income represented

exploitation of labor; and Bohm-Bawerk’s theory

of interest and capital, elaborated along Jevonian

lines, was intended as an answer to Marx’s theory

surplus-value. The Austrians are frequently de-

scribed as apologists of the existing system, so

much so that Schumpeter dubbed Bohm-Bawerk

“the bourgeois Marx” (Dobb, 1973, p. 193;

Schumpeter, 1954, p. 846).

Weiser and Bohm-Bawerk were not only fully

aware of the work of Marx but also the social

backlash to Lassallean propaganda. Thus, Bohm-

Bawerk in appraising Lassalle’s critique of ab-

stinence as an “explanation” of profit, attributed

the popularity of abstinence theory, not so much

to its superiority as a theory, as that it came in the

nick of time to support interest against the severe

attacks that had been made on it (Bohm-Bawerk,

1880, pp. 277,286).

Marginalist value theory was expressed as a

general equilibrium model of a capitalist economy

by Walras, in which he embodied the same eco-

nomic interpretations and causal implications as

Jevons and Menger. This model contributed a

representation of society at large that enabled

marginalists to claim to be pursuing policy pre-

scriptions that are consonant with the social

interest.3s

The Walrasian system shares the same problem

that confronted Menger, Weiser and all subsequent

marginalists. In order to assess whether the dis-

tribution of income in an economy is at a social

equilibrium, a production function analysis is

employed which requires quantity measures of

factor inputs (e.g. labor hours, acres). (See for

instance, Arrow et al., 1961.) In such an analysis,

heterogenous capital goods and tools of pro-

duction are conventionally measured by present

value methods. However, in assuming the discount

rate needed for the present value calculations, one

is also assuming a distribution of income; but this

is what the analysis is supposed to derive, not

assume at the outset of the calculation.36 Con-

sequently, in its attempt to show that an eco-

nomy’s particular income distribution (wages,

profit and rents) is optimal, marginalism begins

by assuming an income distribution!

In their empirical work, marginalists have

“assumed” a discount rate in one of two ways.

Some researchers have simply used the prime rate

prevailing in the market at a point in time, thereby

assuming (rather than demonstrating) that this rate

is in equilibrium. In other cases, researchers have

used the internal rate of return that is inherent

in the cash flows expected to accrue to a stock of

capital goods. This latter practice has been dis-

credited by showing that, in general, there are

many internal rates of return associated with the

assets of an economy (Pasinetti, 1969, 1970).

It is important to note that these criticisms are

directed at marginalism’s ability, as a theory, to

explain and appraise the existing discount rate or

rate of profit. It may be that the ‘real’ rate is

indeed optimal (in terms of, say, economic

growth; employment; inflation etc.), however the

significance of the indictment lies in the fact that

marginalism, as a theory, totally fails to demon-

strate this social optimality. Moreover, the theo-

retical flaws of marginalism that invalidate it as a

macro-economic theory, also contaminate such

intellectual dependents as accounting. For ex-

ample, consider a management accounting

problem of appraising an investment in a new

factory in an area of high unemployment. Accord-

ing to some versions of rationality, not only the

firm’s best interests but also those of society

3sAn exhortation to apply general equilibrium theory to social choice issues facing accountants may be found in May

& Sunden (1976) and American Accounting Association (1977).

36 For the readers who are interested in exploring these issues see Sraffa, (1960) for an economic analysis and Tinker

(1980) for a discussion of the accounting implications.


would be furthered by rejecting the investment if Our discussion of the evolution of value

its net present value was negative. The authority theories is summarized in Table 1, which compares

for such a rule derives from marginal productivity and contrasts characteristics of the two main

theory. However, as the previous discussion has approaches: labor-based and utility-based value

shown, the basic ingredients of a present value theories. The first row of Table 1 contrasts the

calculation (the discount or profit rate and the treatment of “real” historical time and dynamic

TABLE 1. Differences between the marginalist and classical theories of value

Characteristics Marginalism

Criterion variable(s)

(e.g. level of output;

employment of factors;

equilibrium price

structure)

Explanatoy system of

variables

Causality assumptions

(a) concerning the

origin of value

(b) the direction of

the causal flow

Quantification in models

(a) measures

(b) basic entity

Studies using static equilibrium analysis

where historical (real) time is ignored,

i.e. the future is summarized into the

present through rational expectations

Focuses on the sphere of exchange

and assumes that behavior is regulated

by ‘workable’ competition

Subjective theory of value: value

emanates from the utility of consumers,

i.e. Demand creates value. Production

and consumption decisions are in

dependent (advertising is insignificant

for instance)

(a) Measures are in terms of marginal

quantities and relative prices

(b) Individuals (atomistic consumers

and producers)

Classical theory

Studied using dynamic equilibrium

analysis where paths of movement of

criterion variables (and their inter-

actions) are examined over time

Focuses on productive and social

relations and assumes that developed

western economies are governed by

monopoly and oligopoly

“Absolute” theory of value: value is

created through effective demand

which is a function of the distribution

of income which (in turn) is deter-

mined by social and production rela-

tions, i.e. Production creates value

(a) Measures are in terms of total

quantities

(b) Social aggregates and class

relations

wage rate) are arbitrary or indeterminate quanti- considerations under marginalism and the classical

ties in marginalist theory.37 Thus, although the labor theory. Under marginalism, historical time is

prescriptions of management accounting may ad- non-existent: using comparative statics and

Vance the interests of capital in such circum- rational expectations, the future is instantaneously

stances, they cartainly have no authority to claim and effortlessly transformed into a present-time

to be harmonious with Society’s interests. equilibrium. Classical labor theory (in contrast)

37 This does not mean that these quantities are arbitrary in general. Several theories (particularly exploitation theories)

have been put forward to explain the level of profits relative to wages: Kalecki for instance emphasized the degree of

monopoly; others have stressed the degree of unionization or the monetary policy of the state (Dobb, 1973). The point

is that, unlike marginalism, these exploitation theories do not attempt to relate to the existing distribution of income

between profits and wages with the ‘colorful’ language of “efficiency”; “equilibrium”; “optimality”; “justice”, etc.

186 ANTHONY M. TINKER. BARBARA D. MERINO and MARILYN DALE NEIMARK

deals directly with economic dynamics by tracing

the paths of movement of interacting economic

variables through real historical time; disequi-

librium situations are readily anticipated with such

models (Kregel, 1973). The second row focuses on

the differences between the explanatory systems

of the two approaches. As noted previously,

marginalism explains production and distribution

in terms of “factors” while the classical labor

theory appeals to the specific social relations

underlying the “factors” that uniquely define

capitalism as a social system. The origin and

direction of causal movement of the two

approaches is the subject of the third row in

Table 1; value derives from utility and is im-

puted to “factors” by marginalist theory while

(under classical labor theory) it is socially special-

ized and necessary labor (the physical manifesta-

tion of the state of development of Society’s

precious productive forces) that embodies and

bestows value. Finally, the two approaches differ

in terms of their measurement systems. Margin-

alism computes with “first differences”, relative

prices and the aggregated behavior of social atoms

(consumers, entreprenuers etc.) to obtain

economy-level characteristics. In contrast, classical

theory uses absolute quantities (not their deriva-

tives) and works with variables that tend to be

exclusive to the economy-entity level (e.g. class,

surplus value, socially necessary labor, employ-

ment).

Marginalism: truth, fact or ideology?

An important lesson from the historical review

concerns the link between scientific theories and

social ideology and, when viewed in that light, the

extent to which accounting theoreticians, through

marginalism, may be said to foster the social

relations (and ideology) of capitalism (Katouzian,

1980; Abercrombie, 1980; Lowe & Tinker, 1977;

Cornforth, 1971, 1980). It is the philosophy of

Historical Materialism that suggests this con-

ception of accounting as social ideology. In stark

contrast to orthodox philosophy - which pays

little attention to the social origins of scientific

theories38 - Historical Materialism shows that

theories emerge and decline, not merely in the

context of sociai struggles but as inextricable

parts of them. The recurring lesson from our

history of Value Theory is that social theorizing is

subordinated, not to a quest for absolute truth,

but to materialist conditions that require a con-

tinual molding and remolding of the social con-

sciousness for the purpose of social order and

control. Our focus on Value Theory underlines

the dialectical pressures of social history: the

conflicts, antinomies and contradictions that

spring from social conflicts (Amin, 1978). These

provide the momentum for change, not only in

the social structure but also in the ideological

apparatus through which social order and control

is achieved. In this fashion therefore, economic,

accounting and other theories are not so much

refuted by the facts as rendered obsolete by

historical change. Thus Canonist Value Theory

was overthrown by mercantilism; the conventional

price approach of mercantilism was rendered

obsolete by inchoate forms of capitalisn;

Ricardian Socialism was refuted by the ideological

developments of capitalism and currently, the

revival of classical political economy appears to be

a response to the difficulties of late capitalism

(Mandel, 1975). “Truth” in this view is not an

absolute that is to be discerned by logic and/or

facts, but a “social truth” that only embraces

those theories that are in tune with the prevailing

social ideology. In focusing this materialist view

on accounting we recognize that accounting

theories form part of social ideology and as an

ideology are always changing and changeable.

38 For instance Popper views the origins of theorizing as a problem of psychology (Popper, 1959). Thomas Kuhn

comes closer than Popper in acknowledging that, when a scientific paradigm is in a state of crisis, the crisis is usually

reflective of a larger ideological crisis in the social system of which the scientific community is part. Kuhn fails to

pursue the implications of this point, however, and concludes by attributing the origins of a theoretical crisis to the

buildup of unsolved puzzles (Kuhn, 1970). In this respect, Kuhn and Popper share the same basic view of the multitude

of discarded theories that litter history: that they are no more than the “gropings” of early scientific explorers who, in

the quest for objective truth, exemplified the “very best” of the scientific tradition (Weiner, 19.50; Allen, 1975; Shaw,

1975).


It is important to contrast the view of account-

ing theories that emerges from Historical Material-

ism with the view presented by the so-called

“Positivism” of Watts & Zimmerman (1979). To

the careless reader it may appear that the two

views hardly differ - for Watts & Zimmerman

acknowledge that (1) accounting research changes

“as the underlying factors change” (ibid: p. 274);

(2) accounting theories will be used by special

interest groups to advance the latter’s self-inte-

rest3’ (ibid: pp. 274-27.5); and (3) the accounting

literature is not “the simple accumulation of

knowledge” that results in progressively “better”

accounting practices. “Instead it is a literature in

which the concepts are altered to permit account-

ing practices to adapt to changes in political issues

and institutions” (ibid: p. 289). The differences

between the views become apparent, when one

recognizes the undialectical, individualistic (rather

than class) and economic (rather than sociological)

character of their analysis. In focusing on “com-

petition among individuals for the use of coercive

power of the government to achieve wealth trans-

fers” (ibid: 275), Watts & Zimmerman ignore

relations between people and with property that

unify social classes. In failing to examine the

origins and existence of the institutional frame-

work (e.g. government bureaucracies, universities,

corporations) underlying the supply and demand

data that form the starting point of their analysis,

Watts & Zimmerman fail to provide any insights

into the historical and social processes from which

these institutions spring or the class interests that

originate and perpetuate them. Thus, the under-

lying factors alluded to when they set out the

objectives of their paper are, in fact, never ex-

plained. Without an explicit analysis of the under-

lying class structure of society, their theory is akin

to the sound of one hand clapping in that it fails

to explain countercultures, social change and

ultimately, how revolutionary thought comes into

being.

Finally, the reduction of all accounting theo-

rists to the status of intellectual mercenaries

creates special problems when we come to evaluate

Watts & Zimmerman’s own theorizing. Are we to

regard their work in the same manner as they

suggest that we view that of others? Should we

follow their general exhortation and dismiss their

theory (of excuses) as nothing more than a self-

serving excuse? Apparently not: Watts & Zimmer-

man claim to have miraculously transcended the

scientific law that, they assert, applies to the

theorizing of all other earthly scholars. Their

Excuses Theory is put forward as a correct,

accurate and truthful representation of account-

ing theorizing. Ironically therefore, by their own

arguments, Watts & Zimmerman’s own Excuses

Theory provides a single counter exception to

itself: it amounts to a refutation that (according

to Realist Popperian philosophy) should cause

them to abandon their beliefs or drastically revise

them.

MARGINALISM AND ACCOUNTING

Our review of Value Theory suggests that

economics is not a closed book. The acute diffi-

culties of economic management together with the

lively intellectual tournaments among economists

throughout the subject’s history should have

taught accounting scholars that nothing has been

settled. Yet if a Martian consulted the accounting

literature in order to form an opinion as to the

substance of economics, he/she could be forgiven

for assuming that there was only one economic

theory: Marginalism. As we show below, account-

ing scholars exhibit far greater unanimity than

professional economists as to the “true” economic

theory.

We find two emphases running through the

history of accounting thought that have main-

tained the subject’s commitment to Marginalism.

3g Clearly self-interest is also present in a dialectical process: what distinguishes the latter is that it articulates and subordinates individual self-interest into a class structure that eventually impedes further development of productive forces. The dynamic contradiction or antagonism between the social structure and the development of the productive

forces is the fundamental dialectic in Historical Materialism: it is exhibited in the overthrow of slavery by feudalism and

the eventual deposal of feudalism by capitalism.

188 ANTHONY M. TINKER. BARBARA D. MERINO and MARILYN DALE NEIMARK

The first is the emphasis on individualism (whether

the individual owner or the corporation as a legal

“person”) which has served to preempt questions

about the class affiliations of “individuals” and the

part accountants play in class conflicts (Mac-

pherson, 1971). The second emphasis in account-

ing has been an attempt to preserve objectivity

and independence by shunning “subjective”

questions of value and confining accounting data

to “objective” market prices (historical and

current). As we show subsequently, this image of

the accountant - often as a disinterested, in-

nocuous “historian” - stems from a desire to deny

the responsibility that accountants bear for

shaping subjective expectations which, in turn,

affect decisions about resource allocation and the

distribution of income between and within social

classes. This attachment to historical facts pro-

vides a veneer of pseudo-objectivity that allows

accountants to claim that they merely record -

not partake in - social conflicts.

Irving Fisher (1906, p. 70 ff), underscored the

importance of both an individualistic focus and an

emphasis on historical cost in writing that: “cost,

at the time of purchase, is a market estimate of

future earning power”.40 As such, he continued, it

can be assumed “to reflect expected future returns

to a specific individual”.41 This view of the

sovereignity of the individual owner was adopted

by Sprague (1908), Hatfield (1909) and Canning

(1929), who simply ignored the separation of

ownership and management by focusing on the

individual owner-manager. Neither Fisher’s view

of cost nor his individualistic focus went un-

challenged. However, in the accounting literature,

most criticisms were modest relative to the kinds

of concerns raised in this study. For instance, in

the 1960s and 1970s we find accountants mildly

questioning the relevance of Fisher’s individualistic

focus to a world of large corporations run by

managers who are not the owners (see for instance

Rayman, 1972; Sprouse & Moonitz, 1963;

Edwards, 1962; Lee, 1974, 1975; Taylor, 1975;

Sterling, 1970; Chambers, 1971). Such questioning

of Fisher’s assumptions hardly matched the

criticisms of economists such as Veblen who con-

tended that the concentration of corporate control

created a differential advantage that favored the

vendibility of capital relative to the vendibility of

goods and services (Veblen, 1904, p. 146). Instead

of viewing the rise of corporatism as a shift in

social and political power that was capable of

radically redistributing income between classes,

accountants have followed the legal model which

reincarnated, out of individual shareholders, a

corporate “being” with its own rights and re-

sponsibilities.42

Accounting theorists who explicitly recogniz-

ed the separation of ownership and management

(for example, Paton 82 Stevenson, 1918; Paton,

1922; Sweeney, 1930) contended that the firm

itself had a “right” to maintain command over a

given level of resources. Thus, income did not

accrue to the stockholder/owner unless a given

productive capacity and/or level of purchasing

power had been maintained. Edwards & Bell

4o The attraction of subjective accounting income concepts is reflected today in contemporary GAAP and FASB rules

where present value procedures are used in valuing leases, pensions, goodwill, bonds, fixed assets (where payment is

deferred) and oil and gas reserves.

41 Irving Fisher (1906), a self proclaimed Marginalist, has had considerable influence on the works of early accounting

scholars (e.g. Canning, 1929; Rorem, 1928; Paton, 1922; Paton & Stevenson, 1918). Canning’s acknowledgement to

Fisher was explicit “I need not declare my obligation to Professor Fisher for the influence of his writings upon my thought - that obligation appears throughout this book” (1929, p. iv). The influence of Canning can be seen in Vatter

(1947) and subsequent funds flow theorists. The utility-based foundations of Fisher’s work, as articulated by Hirsh- leifer (1970) and Fama & Miller (1972), are also widely acknowledged in the accounting literature, even the standard

teaching texts. Thus for instance, we find open acknowledgements to this intellectual heritage in Hendrikson (1970);

May et al. (1975); Edwards & Bell (1961); Parker & Harcourt (1969).

42 For a discussion of the evolution of legal thought from the 19th century perceptions of corporations as “artificial

beings” subject to regulation, to the 20th century extention of “individual rights” to corporations, see McClurdy, 1979,

pp. 307 ff. See also Miller, 1969, pp. 13 ff, who characterized natural order legal theory as affirmative action to promote monopolistic advantage.


(1961) provide a further reconciliation between

accounting and its utility-based, marginalist found-

ations: First, they espouse a concept of accounting

wealth and profit that they claim best approxi-

mates subjective present value (op. cit. pp. 48-56);

and second, they propose that the corporate

“personage” should retain sufficient resources to

allow the maintenance of physical capital (op. cit.

pp. 31-109).

The second emphasis in the development of

accounting thought is the positioning of account-

ing as an impartial record of historical exchange

values with the corollary that the accountant bears

no responsibility for affecting expectations, de-

cisions or ultimately the distribution of income

within and between classes. We do not mean to

suggest that accountants have rested easily with

historical objectivity as their dominant objective.

Rather, the protection offered by appearing as

“mere historians”, together with the desire to

measure subjective Fisherian-type income, have

presented accountants with the twin horns of a

dilemma. On the one hand, Fisherian and Hicksian

income are faithful disciples of marginalist value

theory in the way they install capital as a “pro-

ducer” of value and legitimize profit as the reward

for marginal productivity in production. On the

other hand, the affiliations of accounting to these

subjective notions of value have drawn account-

ing into a number of bitter disputes about the

way accounting data influences income distribu-

tion within and between classes. Most disputes

have centered on redistributions of income within

the capitalist class (i.e. between groups of invest-

ors) that accounting data has affected. Equity

Funding, National Student Marketing, Slater-

Walker, Leasco-Pergamon and the recent affair

involving IOS and Arthur Andersen & Co. were

all incidents that exposed the distributional impact

of accounting; discrediting the professional image

of objectivity and impartiality and undercutting

its authority and credibility.43

It is in the light of the above that the long

attachment of accounting scholars to historical

objectivity needs to be interpreted. Kester (1919),

Couchman (1929) and Littleton (1928, 1929)

argued that all accountants did was trace “un-

expired costs”, factual evidence, in and out of the

firm. Littleton (1928, pp. 148 ff) went further in

asserting that cost and value were in fact un-

related.44 Accountants, he wrote, deal only with

the “supply side” of economics, cost that furnish-

ed the limiting factor to price. “Value”, he con-

tended, “was subjective”. Citing Bohm-Bawerk,

who wrote that value was “regulated in the last

resort by marginal utility of finished products”,

Littleton argued that utility and value were mental

concepts based on desiredness and had no place in

accounting. As finally incorporated in Paton &

Littleton’s (1940) cost allocation model the view

of the accountant as recorder, classifier and

matcher of costs (with revenues) provided the

rationale by which decades of accountants, cloak-

ed in pseudo-objectivity, have circumscribed the

profession’s view of its responsibilities and the

agenda for accounting research.

In limiting the scope of accounting research,

the theorists referred to above, ignored alternative

perspectives that were available both in accounting

and in economics. Scott (1933) for example,

attempted to show that accounting theory based

on marginalist premises, was biased and could be

socially dysfunctional. Scott (1925, p. 191) re-

cognized that “subject to conditions fixed by pre-

vailing institutions, the machinery of the market

controls economic activity, determines income

and adjusts conflicts of economic interests be-

tween different classes and individuals of society”.

43 Veblen (1904, pp. 132 ff) regarded the value of large, managerially governed corporations as a psychological con-

cept that was dependent on the expectations and confidence of investors. Those in control, he argued, attempted to

promote the interests of capital by creating illusions (manipulating outpur, disseminating false reports and information

or withholding positive news) that impacted on exchange prices. In this manner he anticipated the power of accounting

to affect the distribution of income.

44 Those wishing to retain the link between historical cost and subjective consumption possibilities did so by arguing

that future income is determined at the time of purchase (measured by the owners implicit discount rate) and, as

Alexander (1950) was to contend at a later date, any future deviations from that income were due to faulty expecta-

tions and, as such, were not income (or loss) but merely revisions of initial cost.


In 1933, he chastized his colleagues for uncritical and not to ask. Specifically, along with the indivi-

acceptance of the market model, noting that it had dualistic focus, it has precluded inquiries into the

a pervasive effect on theorizing, i.e. it did more class underpinnings of economic phenomena; the

than allow the theorist to accept market valuations role of accounting in regulating economic activity

for measurement of goods and services, it justified and the possibility “that accounting data has

limiting the profession’s role by assuming the superceded competition as the chief arbiter of

viability of “regulation by competition”. Scott society’s resources” (Scott, 1933, pp. 225 ff).

decried the propensity of accounting theorists to The reluctance of accountants to address such

place blind reliance on the efficacy of competition questions along with their acceptance of market

and argued that, if accountants did not recognize prices (and hence their implicit commitment to

the non-competitive nature of the corporate particular distributions of income and social re-

economy, accounting would become a useless sources) is reflected in the persistent notion that

“vestigial appendage” of society. accountants are “historians”.

Similarly, Veblen (1909, 1923) and later

Keynes (193 3) noted the dysfunctional nature of

accounting’s pecuniary calculus, criticizing

accountants for focusing solely on monetary

returns. Keynes, for example, wrote that under

the peculiar logic of accountancy, the men of the

nineteenth century built slums rather than model

cities, because slums paid. Veblen (1904) re-

cognized that the growing separation of ownership

and control was transforming the character of

business entities under capitalism. To Veblen,

management’s interest in the vendibility of

capital rather than of goods, resulted in a dis-

harmony between the interests of capital and

those of Society at large. One result of this dis-

harmony was that exchange prices no longer

reflected value, but rather were a reflection of

existing power relationships (or to use alternative

terminology, was a reflection of the appropriation

of income by one class from another).

Although Veblen was to have a direct influence

on the subsequent work of Berle & Means (1934),

Brandeis and Landis (who played a substantial role

in drafting the Securities Act of 1933) (Dorfman,

1973, pp. 62 ff, pp. 138 ff), both Veblen and his

student Scott were virtually ignored by accounting

theorists. The consequence of this myopia for

accounting is reflected in the questions that sub-

sequent accounting theorists have chosen to ask,

More recent contributions to accounting

theory, while they have shifted their focus away

from “theories of accounting” to theories about

accounting theorizing (i.e. the production of

knowledge in accounting) have done so without

fundamentally modifying the Marginalist pre-

conceptions and narrow focus of the discipline. While the market of competing interest groups

has replaced that of competing individuals, and

the utilitarian calculus has been extended to in-

corporate transaction costs, a series of marginalist

(and hence ideological) assumptions remain un-

questioned. These are vividly illustrated by Watts

& Zimmerman’s (1979) interpretation of agency

theory, implicit in which are the following assump-

tions: that the primary (and perhaps sole) ration-

ale for and objective of contemporary financial

reporting is to serve the capital market; that

competitive market forces can be relied upon to

protect all interest groups (and that all interest

groups are represented in the process); that

members of each interest group are equally

capable of processing information and discerning

management’s (homogeneous) utility function;

that only government possesses coercive power;

that all behavior is motivated by economic

rationality; and that public interest arguments are

always a sham to mask self-interest.45

45 For a critical assessment of romantic pluralism in political science, i.e. freedom accrues only to the individual while

all government action is coercive, see McConnell, 1966, pp. 89 ff. There is, also, a substantial body of literature

challenging the assumption that the leadership of any interest group protects the interests of its membership. Starting

with Michel’s “Iron Law of Oligarchy”, delineated in the 1920s (see Michels, 1949, passim), there has been a wealth of sociological literature that suggests that leaders, once attaining power, are more concerned with preserving their own

power than with protecting membership interests.

IMPLICATIONS apparatus as “given”.

Like the “Implications” section of many

This paper was motivated by the claims of some papers, this one contains a speculative element

scholars that if accounting research was conducted that goes beyond the detailed arguments of its

according to the tenets of positivism, it would be contents. These speculations take on two forms:

blessed with a detachment, neutrality and promise The first concerns the way “radical accounting” is

not enjoyed by normative approaches. In the pre- conceptualized as a total area of study. Here our

vious sections we argued that such a viewpoint focus on Value Theory and our view of accounting

misapprehends the nature of scientific knowledge as commensurate reciprocity in exchange, warn us

and the social processes by which it is produced. against construing “radical accounting” too

Specifically, the normative-positive split emanates narrowly; especially by reducing it to (say) ac-

from a Realist position: a viewpoint that, from a counting for trade unions or corporate account-

sociology-of-knowledge perspective, fails to re- ability. Such tendencies run the risk of localizing

cognize the partisan role of scientific theories in radical criticism to ‘new’ areas and overlooking its

social control and social change (Gouldner, 1971; applicability to existing areas such as cost and

Shaw, 1975; Mendelsohn & Whitley, 1977). We management accounting; organizational theory

illustrated the process by which ideas are reified and behavioral accounting; financial accounting;

by using the history of Value Theory. This analysis international accounting etc. (Elson, 1979, pp.

illuminates the normative (i.e. marginalist) origins 171-174). The second part of our speculations

of positive accounting theories. The pretense of involves the function of historical analysis (His-

value-free theorizing is cultivated by taking market torical Materialism) where we argue that historical

phenomena as “natural” and “universal” and, at analysis is an integral part of social criticism and

the same time, by ignoring the institutional back- should not be devalued to an “interesting back-

ground that defines the rules according to which ground”, as if it were a superfluous scholarly

market behavior is played out. Thus marginalist appendage.

theory and its fairyland of perfect competition, Interest in the role of accounting in providing

fails to consider institutional “imperfections” information to employees and trade unions has

such as monopolies, cartels, labor unions, political resulted in a body of research which, although

lobbys and particularly, the division of income valuable and well-intentioned, needs a unifying

and property and the nature of property rights. In and underlying theory of social value to situate

ignoring these sociological facts, marginalism the research in an overall context of social con-

attempts to confine its analysis to “free” markets flict. (See for instance, Maunders & Foley, 1974a,

of exchange. Ricardo showed that markets are not 1974b; Cooper & Essex, 1977; Cooper, 1979;

“free” but are conditioned by property ownership Transport and General Workers Union, 1971;

through income distribution. Other economists Jenkins, 1974.) Incipient forms of such a theory

have demonstrated that “surface” market behavior of value may be found in the recent controversies

cannot be understood in isolation from aspects of between so-called neo-Ricardians and Marxists

its underlying, sociological datum (Veblen, 1904; (see for example, Elson, 1979; Steedman &

Scitovsky, 1976; Dobb, 1973; Sweezy & Baran, Sweezy, 1981). These concepts of value are

1966; Galbraith, 1967). Thus we can see the sensitive to problems of alienation at work and

normative bias that is inherent in marginalism the debasement of work-life to mechanical, un-

and its positive accounting variants: a neoconserv- fulfilling routine (see, for example, Braverman, ative ideological bias that encourages us to take 1974; Ollman, 1976; Marcuse, 1964; Arthur, the “free” market and its implicit institutional 1979; Elson, 1979; Sartre, 1960).46

46 It is not that we expect employers to be overwhelmed by humanitarian and philanthropic feelings when confronted

with a new theory of value. Our proposals are longer-term in nature and extend beyond the workplace to the activities of professions, business schools and other institutional spheres where concepts of value (marginalist and others) are in- culcated. The first step could be to break the strangle-hold that Marginalism has on accounting education and research.



The importance of giving due weight to the

social context of accounting becomes even more

apparent if we recognize that, to date, when ac-

counting has affected the work-lives of employees,

it has done so overwhelmingly on behalf of corpo-

rations and employers. Budgeting, motivating, co-

ordinating and planning are methods for control-

ling the behavior of people within organizations.

The traditional areas of cost and management

accounting (together with more recent approaches

based on industrial psychology and organization

theory) have escaped virtually Scot-free from

critical social appraisal. The organizational and

behavioral literature provides accountants with

some helpful precedents for self-criticism in this

regard; not only are there studies that focus on the

manipulative and exploitative side of these sub-

jects but a number of these works seek to locate

their analyses in a socio-historical perspective (see

for instance: Pollard, 1965; Bogomolova, 1973;

Leavitt, 1964, pp. 55-71; Clegg & Dunkerley,

1980, Gouldner, 1971, pp. 167-242; Fredricks,

1970; Krupp, 1961; Baritz, 1960; Shaw, 1975;

Burrell & Morgan, 1979; Edwards, 1979). His-

torical studies in this area do not merely add a

historical “dimension”, they shed light on the

social conditions that create and sustain a dis-

cipline in its present form.

The role that Value Theory could serve in pro-

viding a framework for “counter” information

systems is also illustrated in the case of corporate

financial reporting. The 1970s was a period of

vigorous criticism of the “Accounting Establish-

ment”, financial reporting and corporate behavior

in general (e.g. see Briloff, 1970, 1972; Account-

ing Standards Steering Committee, 1975; Nadar

et al., 1976; Green et al., 1976; U.S. Congress,

1976a, 1976b; Lowe & Tinker, 1977). The pro-

posals that emerged in this period however,

typically ignored the social roots of corporate

power in that they proffered “voluntaristic”

solutions. Most critical in this regard is their

common assumption that the State is an inde-

pendent and well-meaning body that can act freely

to establish a licensing system (Nadar et al., 1976),

an accounting court (Briloff, 1972) or function as

a countervailing institution (Galbraith, 1967).

In parallel with the quest for global solutions to

corporate accountability in the 197Os, have been

a steady flow of localized, “grass-roots” activity:

Examples include the critical appraisals of Bell

Telephone (Sloan, 1976); British Steel Corpora-

tion (Bryer et al., 1981); American Universities

(New York University Conference Publications

Collective, 1971); Slater Walker (Raw, 1977); New

York City (Newfield & Debrul, 1977); Equity

Funding (Dirks & Gross, 1975); nuclear power

(Komanoff, 1981). As with the proposed global

solutions referred to above, each of these case

studies implicitly attempts to confront one of the

most complex problems facing modern value

theorists: what constitutes commensurate reci-

procity in exchanges between large corporations

and Societyat-large? Such a question is at the

heart of the Lucas Aerospace Workers’ plan (for

instance) where a corporate plan was developed

that was intended to create greater social worth

(value) than the existing militaryqriented pro-

gram. Similarly, investigations that attempt to

show that the services of Bell Telephone or Con

Edison are “overpriced” imply that the investi-

gators had in mind a notion of social value that

enables them to judge that an “unequal exchange”

was taking place between these institutions and

Society.47 These investigative studies, together

with the general proposals for greater corporate

accountability, envisage a similar social role for

accounting - that of an interpreter and articulator

of social value, as an adjudicator in social struggles,

and as an instrument of social change. Here too,

critical social history can be deployed in providing

insights into the formulation of current policy. An

illustration is the study of disclosure regulation

and public policy by Merino & Neimark (1982).

The study finds that, in the three decades preced-

ing the passage of the securities acts in the U.S.,

the concept of disclosure helped to reconcile the

growing contradictions between a belief in indivi-

dualism and market competition and increasing

economic concentration and the separation of

47 Insofar as the prices charged by large public and private corporations became embodied in the prices of other goods

and services, it is the community at large (not just the immediate customers) who may be subject to unequal exchanges.


ownership from control. In developing their view-

point Merino and Neimark challenge two con-

temporary precepts: first, that the only criteria

for assessing the disclosure system is whether it has

improved the pricing mechanism for securities;

second, that the existence of voluntary disclosure

prior to 1933-34 is evidence that existing mecha-

nisms were sufficient to ensure an optimum level

of disclosure (for investors) (e.g. Phillips & Zecker,

1980; Wallace, 1980; Watts & Zimmerman, 1978;

Ferguson, 1978; Benston, 1969, 1973; Friend &

Herman, 1964; Stigler, 1964).

Multinational accounting and international

accounting offer opportunities for radical and

dramatic changes in accounting. Samir Amin

delivered sharp words of rebuke for Western

Marxists who, he argues, perpetuate exploitation

between different races and nations by down-

playing the world-wide character of exploitation

(Amin, 1978, p. 116). Amin’s criticisms are

relevant to multinational and international ac-

counting research because although it is in inter-

national exchanges that the greatest inequality

takes place (i.e. exploitation of one nation

state by another through the relative terms of

trade) accountants have managed to curtail their

vision of research to problems of currency trans-

lation; controlling overseas divisions of multi-

nationals; moving cash balances around the globe

in an optimal manner and harmonizing account-

ing practices in different nation states.48

The area of international accounting provides

an additional illustration of the insights that can

be gained from a critical social history. The

example here is a study, by Hoogvelt & Tinker

(1978), of the African subsidiary of a U.K. based

multinational, located in Sierra Leone. The study

shows how the early colonial, late colonial and

post colonial periods were distinguished by their

prevailing methods of repression and exploitation;

methods that the company relied on and helped

to reproduce (Hoogvelt & Tinker, 1977a, 1977b,

1978; Tinker, 1980). Differences in the methods

of repression and exploitation were manifest in the

income statements for each of the three eras.

Moreover, if Marginalist assumptions about the

correlation between corporate and (international)

social efficiency are rejected, then it becomes im-

possible to ignore exploitative social relations in

assessing a multinational’s performance.

We have tried in this concluding section to

sketch out the implications for accounting re-

search (and practice) of alternative, non-margina-

list concepts of value. We have also illustrated the

important role of critical social history in under-

standing and changing contemporary social pro-

cesses (Held, 1980). By tracing the historical

development of the concept of value, for example,

we have illuminated the social ideology that under-

lies marginalist economics and thus dominates

accounting thought. It is this social ideology that

forms the normative origin of positive accounting

theory. The question that this insight raises for

accountants who are interested in social change is,

what kind of value theory should we create as our

contribution to social development?

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Documents

Origins of Positive Theories