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For some reason, the theory of Accounting is one of the singularly most boring and dry topics anywhere in our education system - why on Earth it is presented as the rigid, formulaic rote learning of ratios and categorisations is beyond us. The practice of Accounting is somewhat better, indeed the whole process of inserting items onto the right and onto the left and the whole thing balancing is a lot of fun for certain types of personality. For those whose minds are suited, the practice of Accounting makes bearable the fairly dreadful theoretical end of things.
The invention of accounting without doubt precedes the invention of writing - currently the academic consensus is that accounting began around 11,000 years ago whereas writing only began around 6000 years ago (see Creative Steps Leading To Present). Book keeping, in the sense of keeping account, also without doubt long precedes writing down history - we know far more about the purchases and sales of the Sumerian royalty than their history. The contemporary form of accounting, the double-entry dual-sided ledger (Wikipedia:Double-entry_accounting_system), is fairly ancient with it being extensively used by the Romans, the Islamic Caliphate and the Normans, whose particular formulation is still in almost unchanged usage today. Ibn Taymiyyah (Wikipedia:Ibn_Taymiyyah) codified the Arab practice in his twelfth century book Hisba and Luca Pacoli (Wikipedia:Luca_Pacoli) did the same for the Renaissance practice in his fifteenth century book Summa - however what is remarkable is just how few differences there are. Accounting practice today would be entirely understandable by a factor (the old name for an accountant) living two thousand years ago and its current formulation would be entirely understandable to a Norman factor who advised William the Conqueror on how much his invasion of England would cost.
Think about that for a second ...
We are using today in the twenty-first century an almost identical accounting system as that used in the Norman invasion of England in 1066. In particular, our cost valuation system [1] is practically identical to that used by the Normans, and yet this fact is not only unchallenged in the teaching of Accounting, it is not even recognised by those who practice Accounting.
The Norman cost valuation system was specifically adopted at that time as a wartime cost valuation system - it was intended to only be used during wars only because it was recognised as being fundamentally unsustainable in the long term (indeed its usage caused quite a fight between the King and the rudimentary accounting profession at the time). Unfortunately, Europe being what it is, constant warmongering caused the establishment of this wartime accounting system as the de facto accounting system and people forgot why it was originally adopted.
The Norman "Wartime" Cost Valuation System
This wartime cost valuation system is very simple: an item is valued as the cost of obtaining a resource at whatever it takes to obtain it today. If you need five thousand trees by tomorrow and it takes one worker four hours to cut down and transport a tree, then you need 2,500 workers at whatever the current rate of pay is. One therefore gets the old adage that "time is money" because one must now exchange hastiness with cost i.e. more haste usually means more cost. More importantly, everything becomes convertible into money values which opens the door to cost-benefit analyses. This enabled the 12th century Norman knight Gerald of Wales (Wikipedia:Gerald_of_Wales) to survey the Welsh lands and to generate a report for King Henry II which laid out an accounting ledger detailing an estimation of the cost of "clearing" the Welsh lands of their occupants (i.e. genocide) versus that of building a ring of castles to impose order - and as the latter was very significantly cheaper, that was the option chosen.
This cost valuation system is entirely appropriate for times of imminent threat. If your country is about to be invaded and you must do whatever is required as quickly as possible to defend yourself, then you must extract as many required resources as quickly as possible for the cheapest possible cost today.
However, if you persist with a mentality of being on a constant war footing - and indeed, that is exactly what Western civilisation has done since the 11th century without pause - then one's civilisation will extract ALL resources as quickly as possible for the cheapest cost today until you don't have any resources left. The consequence of that is what you witness all around you today where we are converting so much Natural Capital into short-term human profits today that we are on the brink of ecosystem collapse, and therefore the complete collapse of human civilisation.
Much as we tried to illustrate in Money Is Make Believe, what we have today is a Ponzi scheme (Wikipedia:Ponzi_scheme) where the value of most of our economy and human civilisation is utterly unsustainable and is merely a price bubble destined to collapse sooner rather than later - indeed, we describe how this will play out in the preamble to The Neo-Capitalist Manifesto. Just imagine to yourself the current Credit Crunch amplified a million fold - and that will hit us before 2020 as price rises in energy make much of our resource extraction too costly to sustain the Ponzi scheme.
What other form of cost valuation do you propose?
What we need is a long-term sustainable cost valuation system which returns our accounting ledger to more accurately representing true reality. For that, we need to make the first major change to our accounting system in a thousand years - however, don't worry, it's only a little change which incorporates more modern mathematics.
Our fundamental premise is the operation of three sets of parallel books, each using three separate currencies which run three separate sets of cost valuation systems. We add a calculated confidence interval to these accounts which represent a statistical likelihood of accuracy, and we then let the free market handle via a floating exchange rate the interoperation of the cost valuation systems. Accounts then become refined over time (their confidence interval shrinks) as more information becomes available, with a line being drawn under them after five years.
We explain this system in much greater detail in Divorcing The Money Supply.
| [1] | To be clear, by "cost valuation system" we mean a much wider scope than that the very limited asset valuation methods usually taught in Accounting theory e.g. historical cost, fair value, discounted cash flows etc. What we mean is by how a money number value itself is assigned to represent a cost. |
