Accounting, Economics, and Capitalism

Ideologues enjoy using the nebulous concept of ‘capitalism’ either as a punching bag or as something to laud, but most prefer to stay away from the method of calculation that underlies it, giving it its own logic as to why it functions. That system is the international accounting system — which is not something that is evenly distributed throughout the economy.

Accounting is a way of rationalizing production using tokens of value combined with scrupulous record-keeping. It has less to do with enormous factories and more to do with the mathematically rationalized operations of those factories. Much of the political agitation surrounding the developments of capitalism owe to an evaluation that the rational method indicated by what the numbers say ought to be is unacceptable. When the accounts say that a given laborer can’t be paid more than what he produces, agitators will try to convince that laborer that he might be able to earn more than the books say that he should if he joins a protest or lobs a bomb at the works.

In the more modern times of too-big-to-fail nationalized and quasi-nationalized corporations, we see an aesthetic and political preference for the preservation of defunct entities — better to be big, impressive, shiny, and defunct than functional and rationally ordered. This is the essence of the Keynsian approach — puff up accounting entities with lots of credit, and then presume that rational productivity will ensue.

What actually happens is that entrepreneurs of all types — state and business — orient towards chasing new credit, because that’s what a rationalized response to the changed accounting environment is. The smartest decision to make is to chase after credit and credit-generated investment dollars, rather than following the restrictive moral and financial strictures of cash accounting along with scrupulous avoidance of excessive debts.

Much of the economic history (like its social history) of the 20th century concerns a pervasive rebellion against traditional strictures and disciplines. If the accounts say that a pursuit is wasteful, then the good (post-)modern man says “damn what the books say: flood it with more money!” In doing so, they can appear heroically irrational, even bold, and any boondoggle (no matter how poorly thought out) can be rationalized as an important speculative exploration, even when it’s actually just depleting the capital of the society and uncovering almost nothing.

The main difference between speculation under a more disciplined monetary system and speculation combined with too-big-to-fail accounting is that in the former, when speculators err, they run out of cash to speculate with, and poor speculators get culled from the market. With too-big-to-fail, bad speculators get rewarded commensurately with their failures, and their errors then cause further coordination failures. This goes beyond just big banks, but also extends to cities like Detroit, Camden, Newark, and Baltimore — essentially defunct municipalities where rational large-scale production can no longer occur.

Anti-capitalists rarely frame their criticisms of the system as a denial of the validity of using accounting to rationalize productive human activity, but that is in effect what most proposed interventions and modifications to the system wind up being: a demand either for irrational production or favored exemptions from the strictures that said rationalized production would otherwise indicate.

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4 Comments

  1. Important post.

    I concluded that our money – the dollar – is Risk Formula based Fiat. Our accounting is known as Fraud, the dollar has not run out it’s string.

    http://www.realclearmarkets.com/articles/2015/06/26/the_road_to_economic_tyranny_is_littered_with_high_iqs_101723.html

    Happy 4th.

  2. Barely Intrepid July 6, 2015 at 10:07 am

    When dealing with scale a savy marketer can employ all kinds of tricks to change financial realities.

    Capitalism is in essence driven by what you can sell, not what should. The too big to fail phenomenon presents moral hazards but these are different from those of public borrowing entities. Remember, the institutions that accepted TARP funds were commercial banks, not investment banks, and they all paid back the funds very quickly.

    Public entities are not intended on profit and are dependent on a tax base for basic function. Credit is derived from the same source. On the open market, defunct municipalities are in the unfortunate situation where their costs of capital is extremely high, and their need is greatest. A private company in that situation could not function, especially considering the astronomical liabilities of cities like Chicago. Given the natural monopoly of Governments, that is not really an option….hence bailouts.

    Government liabilities and the court enforced system of contact between public institutions need major reform. The offloading of costs to public debt is criminal and could not exist in a sane society.

    There is no easy solution, and politicians are in the business of kicking this can full of dogshit downthe road. The most likely outcome will be continued stagnation. The 20th century and the American middle class were economic outliers.

  3. TARP’s not the problem.

    The Fed is.

  4. Insightful. While the West props up a global capitalist system, they are in fact eagerly working to destroy it at the same time! No blindness could explain the lunacy which goes on at the printing presses. This will end in great tragedy.

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