Accounting at the Heart of the Performativity of
Economics
By Eve Chiapello
HEC School of Management Paris, chiapello@hec.fr
Recent research has demonstrated the performative power
of economics, in the sense that economic theory tends to
mould the world to itself and its descriptions. The role of
accounting in the performativity of economics is highlighted
below.
The idea of the performativity of
economics
The concept of performativity comes from linguistics, most
significantly the work of J.L. Austin, and was introduced
into economic sociology by Callon (1998) and MacKenzie
(2004). D. MacKenzie (2004: 305) proposes two meanings
for this notion. The first, generic performativity,
points to
the fact that the categories of social life “are not selfstanding,
natural or to be
taken as given, but are the result of
endless performances by human beings and (an actor-theorist
such as Callon would add) by non-human entities and artefacts
as well. (…)
In this meaning, performativity is
at the
most general level entirely obvious. (…) Except in areas such
as sex and gender where social categories might be read as
natural, generic performativity is a weak claim (could matters
be otherwise?)
but still empirically important.” The second
meaning of performativity, Austinian performativity, is less
universal but stronger. In this sense, “a performative
utterance
is one that makes itself true, that brings into being that
of which it speaks, as when a monarch designates someone an
outlaw, an appropriate
authority designates a couple husband
and wife.”
MacKenzie then uses this definition to study the
performativity of models in financial economics (p. 306).
“To ask whether a model in financial economics is performative
in the Austinian sense is to ask, among other things,
whether the effect of the practical use of the model is to change
patterns of prices towards greater compliances with the
model.”
More recently, Mackenzie, Muniesa and Siu (2007)
have dedicated a whole book to the question of the performativity
of economics.
Exploring this research agenda, I rely in this contribution on
the Austinian meaning and argue that accounting helps to
make economics performative, being one of the instruments
through which economics can make the world conform
more closely to its descriptions.
Two phenomena are important to understand this role of
accounting. The first is the longstanding relationship between
accounting and economics: the former has supplied
many concepts for the latter, such that the latter’s performative
power partly depends on its capacity to latch on to
native
representations in the world, constructed by businessmen
and tradesmen. Partly fluent in accounting language,
economics has adopted
accounting practices to
bring its revised economic concepts into being. A second
dynamic lies also in the relationship between accounting
and economics, notably whenever economics parts company
with or opposes accounting concepts. In a reversal of
influence, economic concepts are introduced into accounting
frameworks via a new discipline originating from the
early 20th century, accounting theory, which has translated
economic concepts, originally foreign to accounting,
into accounting concepts. Both phenomena are studied
below.
Accounting as an inspirer of economics
The fact that accounting practices were a major source of
inspiration for the earliest economists (especially classical
economists) hardly needs further demonstration (Klamer
and McCloskey 1992; Thompson 1998). Accountants and
economists share the same vocabulary: costs, expenses,
investments, capital, assets, revenues, balance sheet,
budget, expenditure, profit, etc.
The concept of capital that is central to economics is also
central to, and in fact comes from, accounting. Italy supplied
the first occurrence of the word capital in an economic
sense in a Florentine accounting ledger dating from
1211. The term then appears to have spread within commerce
and banking from Italy throughout Europe (Braudel
1981). In order of historical appearance, the economic
meanings1 of the word capital have been:
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The amount of money loaned as opposed to the interest
on the loan.
The money invested in a trading concern or funds contributed
by a merchant to his new concern. This second
meaning is the closest to the accounting meaning.2
By extension, for late 18th century economists, capital
meant all wealth invested in the economy for production.
Here, the term became dissociated from the idea of an
amount of money, covering all sorts of wealth and capital
goods. This extension caused a frequent confusion between
the meaning of capital in the sense of money invested,
and in the sense of the things in which
money is
invested, since economists did not always explain their
positions despite the significant consequences (Hicks
1974). This confusion never arose for accountants trained
in double-entry bookkeeping, for the accounting model
makes a clear distinction between the two meanings,
which are also represented by the two sides of the balance
sheet.3
Further, regarding the influence of the accounting framework
on the birth of economic thought, I have shown
elsewhere (Chiapello 2007) that Karl Marx took a close
interest in accounting, helped by his friend Friedrich Engels
who was aware of the cutting-edge practices of Manchester
manufacturers. Marx sought to define the specific
characteristics of capitalism and needed to recreate an
interrelated system and its dynamics. For this systemic
understanding, the representation of circulation and accumulation
in accounting terms played a central role. For a
mid-19th century observer such as Marx, the language of
accounting was similar to that of political economy, a field
in which he read every work published. Capital, profits,
and wages were concepts common to accounting and the
political economy of his time. Marx would choose the
closest economic concepts possible to accounting.
The importance of accounting in the genesis of economic
concepts is thus clearly visible in the works of the classical
economists. They borrowed accounting terms and concepts
very consciously. Yet, once introduced into economic
thought, these concepts began to lead an autonomous
life, progressively diverging from their roots.
In contrast with classical economics, neo-classical economics
departs from traditional accounting representations of
the economy. Irving Fisher’s complete redefinition of the
concepts of capital and income enabled, at least intermittently,
a divorce between accounting and economics (see
e.g. Fisher 1906). Post-Fisher, capital is no longer backward-
looking and seen as the money invested in capital
goods or as the capital goods themselves, as conceptualized
in accounting. It is now forward-looking and conceptualized
as all future services expected of the capital goods.
Discounted cash-flow calculation4 was then invented to
operationalize the new economic concept of capital, and
accounting, hitherto dedicated mainly to registration of
past events, became a practice removed from neoclassical
economic thinking.
But accounting frameworks played an important role at
another moment in the history of economic thought: the
construction of national accounts to provide statistical
resources for Keynesian policies. As Vanoli (2002) and
Studenski (1958) have explained, pre-1930s economic
statistics used incomplete information or only attempted to
estimate national income. It took time before the metaphor
of business accounting was consciously used in constructing
the model of national accounts (Suzuki 2003)5
and in systematic organization of statistical information in
a coherent framework. This international effort was completed
in the 1960s. Yet, since the 1980s, Keynesian macroeconomics
has been in crisis, and accounting began to
lose its attraction for many economists.
The moments of proximity, when economics refers consciously
to business accounting to construct its own representation
of the economic world, may explain the recurring
temptation for economics to return some theoretical input
into accounting, seeking to bring accounting into line or
rationalize it in conformity with its own representations.
Thus while accounting practices are not born out of economics
– having on the contrary supplied some of its
weapons – they may be influenced by economic theory.
When accountants sought to rationalize practices and
define their guiding principles, they turned to economics
for the theoretical discourse that accounting should serve
by operationalizing its concepts.
Accounting inspired by economics
Hopwood (1992) clearly identifies this movement. He
stresses the grip of economic categories on accounting
practice, and the demand placed on accounting to operationalize
economic practices and reform in order to produce
calculations that conform more closely to economics.
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One of the most striking examples of the influence of economics
on accounting concepts is the recent authorization
in International
Accounting Standards (IAS)
of discounting
future cash flows (DCF) as a valuation method for certain
assets, in the pursuit of fair value accounting.
This accounting
policy assumes that the definitions of Capital and Income
provided in the work of Irving Fisher are accepted by
all. A few decades after economics, accounting is apparently
undergoing its own revolution.
The story of this conquest by economic concepts is quite
long. It begins with the birth of accounting theory in the
1920s, followed very closely by the creation of the first
accounting standards in the US under the auspices of the
new Securities
and Exchange Commission (SEC).
Accounting
theorists, such as Littleton and Paton, wanted to give
accounting theoretical foundations and influence accounting
standard production as part of the mission of their
newly created profession. Accounting theorists sought
those foundations in economics, and organized many
debates on Fisher’s concepts and their possible translation
to accounting. The tradition of dialogue between accounting
theory and economic concepts then lasted up the
1970s (special mention must be made of R.J. Chambers,
who can be seen as one of the fathers of fair value accounting).
The positivist
revolution in accounting
academia, inaugurated
by Watts and Zimmermann’s (1979) attack on the
old school, changed everything. The positivists saw no
point in thinking about what accounting should be, as
accounting theorists did. Instead, in their opinion, a careful
study of companies’ actual accounting practices was
needed. This new, highly aggressive generation of academics
successfully discredited their predecessors and, to a
large extent, put an end to accounting theory research. But
the accounting standard-setting system was still developing
and eager to take the old theories on board and reestablish
its legitimacy after a series of scandals through
the application of economic accounting theory. The newly
created (1973) US
Financial Accounting Standards Board
launched its accounting framework project (Gore 1992;
Zeff 1999) in the first manifestation of this trend, followed
closely by other countries. The old accounting theorists’
dream of influencing standard-setting became reality,
strangely at a time when they were no longer welcome in
academia. The unexpected destiny of accounting theory’s
efforts to bring accounting closer to neoclassical economics
was also boosted by the rising influence of the financial
markets themselves and their penetration by Fisher’s economic
concepts.
The close historical relationships between accounting and
economics, largely hidden because contemporary economists
often know little about accounting, explain why
accounting remains a good practical vector for pure economic
concepts, such as the Fisherian concept of capital.
This can be seen as a good example of accounting’s ability
to make economics perform the economic world.
Eve Chiapello is Professor at the HEC School of Management
in Paris. Her research interests include accounting
and the history of economic ideas, the sociology of accounting,
and the historical transformation of management
and capitalism. Inter alia, her articles have been published
in
the journals Accounting, Organizations and Society,
Critical Perspectives on Accounting, Berliner Journal
für Soziologie,
and Sociologie du Travail. With Luc Boltanski
she
co-authored The New Spirit of Capitalism (Verso,
2006).
Endotes
1The economic meanings
of the word capital should be distinguished
from older uses, when as an adjective it was applied to
crimes and punishments, or carried the most obvious meaning of
most
important (e.g. the capital city of a country).
2We talk here of the
accounting concept of share capital, which
represents the historical value of the contributions to the firm
shareholders have made in the beginning and during the life of
the firm by making external resources available to the firm. Shareholders’
equity consists of two components, share capital plus
retained
earnings (or reserves). Reserves represent the accumulation
of capital, the part of the value created through the firm’s
operations that shareholders have chosen not to take out of the
firm.
3Assets, to be found on one side of the balance
sheet, represent
the value of the things
in which money is invested.
The money
invested is represented on the other side of the balance sheet
consisting of shareholder’s
equity plus liabilities, as the money
invested comes from shareholders or other money bringers.
4The discounted
cash flow (or DCF) approach
describes a method
of valuing a project (company or asset) based on 1) a forecast of
all future cash inflows and outflows generated by the project at
different periods of time, and 2) a transformation of these flows
by the use of a discount rate supposed to give their value as if
they occurred at a single point in time so that they can be compared
in an appropriate way. The discount rate used is supposed
to represent the cost of capital, and may incorporate judgments
Accounting at the Heart of the Performativity of Economics
economic sociology_the european electronic newsletter Volume 10, Number 1 (November 2008)