No Accounting for Accounting: A Review of Michael Perelman’s “Railroading Economics”

Michael Perelman, Railroading Economics: The Creation of the Free Market Mythology (New York: Monthly Review Press, 2006).

* * *

By Lambert Strether of Corrente.

Continuing our series of book reviews in time for the holiday gift-giving season, here’s a quick look at Michael Perelman’s Railroading Economics, a title, and a subject, that intrigued me for two reasons. Trivially, as readers know, I’m by way of being a rail fan; more importantly, when I was a mere sprat, I read Matthew Josephson’s Robber Barons. Josephson’s tales of Jim Fisk watering the stock of the Erie Railroad — “Gone where the woodbine twineth” was Fisk’s answer to where the money went — and his running buddy Jay Gould — “I can hire one half of the working class to kill the other half” (attributed) — trying to corner the gold market would inoculate anyone from belief in the ideology of “perfect competition.” They certainly did me. Perelman begins (p.1):

The title of this book, Railroading Economics, has multiple meanings. The verb “railroading” refers to the ideological straitjacket of modern economics, which teaches that the market is the solution to all social and economic problems. The adjective “railroading” refers to the experience of economists during the late nineteenth century when the largest industry in the country, railroading, was experiencing terrible upheavals. Many of the leading eocnomists at the time came to grips with the destructive nature of market forces. Competition, which according to conventional economics, is supposed to guide business to make decisions that will benefit everybody, was driving business into bankruptcy and common people into poverty.

That lesson was never allowed to take hold among economists. In fact, the same economists continue to teach their students that markets work in perfect harmony, while they advised policy makers to take quick action to put the brakes on competition. In effect, the railroad economists railroaded economics into perpetuating a free market mythology.

This is a long and complicated story, and Perelman tells it well. Since Perelman is a radical economist from a non-Ivy League School, reviews of his book are few and far between. Here’s one from an orthodox economist (latest book: The Wal-Mart Revolution) that to my untutored eye seems to summarize Perelman’s thesis fairly:

[Michael Perelman’s new book] is a highly readable, lucidly written, and provocative account of the evolving American economy. Moreover, readers of this site would be pleased that this is a rare economist who draws very heavily on insights from economic history and even the history of economic thought in reaching conclusions about the contemporary American economy. Also, the book has lots of solid footnotes showing a serious appreciation of much of the relevant scholarly literature of the past century or more….

According to Perelman, classical economics emerged out of an agrarian society where the presumption of pure competition was fairly reasonable. Over time, however, massive capital-intensive businesses evolved, notably the railroads, with very high fixed costs. The neoclassical notion that profit-maximizing firms would produce where marginal costs equaled marginal revenue and price (in pure competition) simply did not fit the reality of these new natural monopolies. Competition was destabilizing, led to overinvestment, and paved the way for unscrupulous financiers like Jay Gould. In Perelman’s view, “the increasing relative importance of fixed costs means that … competition … would lead to utter chaos” (p. 46). A group of “railroad economists” or corporatists understood all this, but they were largely ignored by conventional economists who developed a “quasi-religious” and “ideological” (p. 99) fervor towards their theoretical models, a fervor that persists today.

Perelman thinks that in pursuing competition, prices were forced so low that many railroads were forced into bankruptcy, much as is happening in airlines today. This opens the door for the “financial capitalists” who make money reducing competition (via mergers) and reorganizing bankrupt companies, getting rich in the process and hurting workers of the involved companies. The Enron/WorldCom problems of the early twenty-first century are not that different from those created by J.P. Morgan organized mergers of a century earlier, best symbolized by the formation of U.S. Steel.

In Perelman’s eyes, the instability arising from the lack of realization of the importance of fixed costs, the machinations of financial interests, and so forth, have caused internal contradictions in capitalism. He opines that “an economy built increasingly on finance is a disaster waiting to happen” (p. 198), concluding “I look forward to the day when we no longer rely on competition for monetary rewards … when cooperation and social planning replace the haphazard world of the market place” (p. 200).

Needless to say, the orthodox reviewer vehemently disagrees; readers can follow up at the link. At this point, however, magpie-like, I want to pass on from assessing Perelman’s thesis to display a bright, shiny object I collected from the text. As the post title suggests, it’s about accounting! (Note the focus on fixed, long-lived capital; railroads have rather a lot of it.) From pp. 58-59:

What about accounting as an anchor for business rationality? Certainly, the widespread adoption of seemingly solid accounting practices contributed to the illusion of a sound basis for business action. Even as astute an observer as Max Weber associated accounting practices with rationality.

This attitude toward accounting is not surprising. Indeed, the erratic movements of markets disappear in the accountant’s ledgers, which exude a misleading image of straightforward calculations of profit and loss.

First, accounts are necessarily backward-looking. Accountants must necessarily base their calculations on historical costs, even though they can make allowances for changes that have occurred since the original purchase. … Since account books are based on historical information, they will be better guides if the business is a relatively short-lived affair. After all, tomorrow is more likely to resumble today than sometime in the far-off future will.

Second, the methods that accountants use to make these adjustments are necessarily based on inexact conventions rather than precise measurements. Finally, as the dot com bubble proved [the book was published in 2006] accountants can easily mislead even supposedly sophisticated investors. Accounting firms even accommodated failing corporations by providing fraudulent information [of which more below] rather than risk losing lucrative contracts.

So much for accounting. But wait! There’s more!

The treatment of capital in conventional economic theory had its origins in the long-obsolete accounting principles of early merchants. … The economic environment of the early merchants’ shops conditioned later accounting practices, especially their treatment of fixed capital. Even as late as the time of Adam Smith more than two centuries ago, fixed capital requirements were relatively modest. … Since accountants have never been able to discover a satisfactory method of handling long-lived capital goods, accounting provides a frail foundation for business rationality in a developed economy where long-lived fixed capital assumes great importance.

Ronald Coase… once noted that an accountant would say that the cost of a machine is the depreciation of the machine. The economist would say that “the cost of using the machine is the highest receipts that could be obtained by the employment of the machine in some alternative use.” If no alternative exists, the cost of the machine is zero

Ideally, Coase is correct. Unfortunately, no economist can hope to calculate the highest receipts that could be obtained. To do so would require knowledge of the future of all industries that could possibly use the machine. As a result, economists generally either accept the accountant’s calculations in violation of their own principles or they assume away the problem of long-lived capital goods.

Economists rarely consider this defect in economics because they avoid any serious consideration of time in their models. Instead, in dealing with investment decisions, the models typically pretend that investors are able to accurately foresee the future.

All that is solid melts into air. (Orthodox) economics assumes a soothsayer. And accounting provides no basis for business rationality (at least if one is more than a shopkeeper). How does one even begin to process that information? (Here let me welcome corrections and clarifications from readers familiar with current accounting practice and theory.)

* * *

So what’s accounting for, then? Perhaps the news flow will provide a clue. From Reuters (but leaving out most of the detail on a sadly usual flexian infestation):

Accounting industry and SEC hobble America’s audit watchdog

The Public Company Accounting Oversight Board was set up [by Dodd-Frank] to oversee the auditing profession after a rash of frauds. The industry got the upper hand, as the story of the board’s embattled chief shows.

James Schnurr, just two months into his job as chief accountant at the U.S. Securities and Exchange Commission, stood before a packed ballroom in Washington last December and upbraided a little-known regulator.

The Public Company Accounting Oversight Board, or PCAOB, oversees the big firms that sign off on the books of America’s listed companies. And the board was “moving too slowly,” Schnurr said, to address auditing failures that in recent years had shaken public confidence in those firms.

These were fighting words in the decorous auditing profession, and they hit their target. PCAOB Chairman James Doty was among those attending the annual accounting-industry gala where Schnurr spoke. And Schnurr was Doty’s new supervisor.

“This is going to get ugly,” Doty said to a colleague afterward.

In his new SEC job, Schnurr now had direct authority over the PCAOB – a regulator that just a few years earlier had derailed his C-suite ambitions at Deloitte & Touche. As deputy managing partner at the world’s largest accounting firm, Schnurr had commanded an army of auditors – until a string of damning PCAOB critiques of Deloitte’s audits led to his demotion.

Related content

Then, in August 2014, SEC Chair Mary Jo White named Schnurr to his SEC post. It was a remarkable instance of Washington’s “revolving door” for professionals moving between government and industry [sic] jobs. …

Schnurr’s speech was part of a yearlong campaign to oust Doty and thwart his efforts to implement rules that would increase auditors’ accountability to investors and their independence from the companies they audit. …

Deloitte, Ernst & Young, PricewaterhouseCoopers and KPMG audit companies that account for 98 percent of the value of U.S. stock markets. During the crisis, nine major financial institutions collapsed or were rescued by the government within months of receiving clean bills of health from one of the Big Four. While Schnurr was deputy managing partner at Deloitte, the firm signed off on the books of Bear Stearns, Washington Mutual and Fannie Mae. Each went bust soon after, costing investors over $115 billion in losses.

Doty’s efforts have floundered, in large part because Schnurr’s office has used its oversight powers to block, weaken and delay them, according to a dozen current and former SEC and PCAOB officials. Schnurr’s staff has also campaigned to have Doty removed from office, these people said.

Doty’s term ended on Oct. 24. He continues to serve as PCAOB chairman day-to-day, waiting for the SEC to decide whether or not to reappoint him.

The standoff is a test of who holds sway with regulators in Washington – investors large and small who seek better disclosure of what really goes on inside companies, or the financial-services establishment that’s supposed to serve those investors.

Why, one might almost conclude that the accounting “industry” exists to enable accounting control fraud, rather than to prevent it — especially given the limitations that Perelman points out. Although, to be fair, perhaps fraud is what “business rationality” is all about these days.

* * *

So, from Perelman, we learn that accounting has severe limitations that make it unsuitable as a basis for business rationality. Moreover, it’s not suitable (in its current form, at least) for making decisions — any decision — about long-lived, fixed capital allocation — and isn’t capitalism supposed to be all about that? And finally, if we ask what accounting is good for, we find that it’s certainly useful for enabling fraud. It’s very difficult to know how deep the rot goes.

Readers, are these thoughts too grim?

Print Friendly
Tweet about this on TwitterDigg thisShare on Reddit0Share on StumbleUpon0Share on Facebook0Share on LinkedIn0Share on Google+5Buffer this pageEmail this to someone
This entry was posted in Economic fundamentals, Free markets and their discontents, Guest Post, Market inefficiencies on by .

About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.

46 comments

  1. MartyH

    To the closing question, “Nope.”

    The use of “accounting” to support political and avaricious aims should be self evident to any watching the behaviors of our leading companies and nations. There is an accounting excuse invented for every shenanigan.

  2. Thure

    Maybe it’s not a question of how deep the rot goes, but more of a realization that the whole economic capitalistic/market edifice is the wrong approach to living sustainably on this planet.

    When you say rot, it implies that there is a theoretical and practical foundation that is worth saving.

    What would that be? Or do we need to re-think the whole thing based on ethical principles we agree on, like fairness.

    1. Carla

      Has anybody here read Mary Mellor’s new book, “Debt or Democracy”? Subtitle: Public Money for Sustainability and Social Justice.

        1. Peter Schitt

          Ooh, a visitor from ZeroHedge, you say? So, how are all those kooks, frauds and fantasists doing over there? Gold still going to $20k? Hyperinflation just around the corner? Those Iraqi Dinars really worked out, eh? Money isn’t wealth, sparky. See ya.

  3. flora

    Great post.
    Since reading Yves PE/pension reports I’ve been thinking about the late 1800’s and early 1900’s and the railroad trusts. Kept thinking there was some kind of parallel, but couldn’t quite put my finger on it. From those days we got phrase “he got railroaded”, but we also got railroad infrastructure – and govt and Wall St. corruption, but that’s another story.
    From PE we get no infrastructure. Can only wonder what the future equivalent phrase of “get railroaded” will be that applies to today’s PE financial, uh, “engineering”.

  4. Steve H.

    Any model of the future is an unsolvable extrapolation. The good ones (like Newtonian physics) select for stability of data within certain confines of scale (non-relativistic, non-quantum).

    The physical rules of the universe don’t change much. Social rules, legal, financial, change in space and time. They also alter subsequent conditions.

    The problem is that the extrapolations are given such importance due to the incentives. Models work best under stable conditions. Incentives work best when conditions are destabilized, fast boom and bust. As long as the party has inside information, which may be extremely short-term, they can game the system.

    In the same way that derivatives have ‘value’ orders of magnitude greater than the underlying assets, the fact that future values are accounted for makes them over-valued in terms of uncertainty.

    There is a Bayesian method which yields hyperbolic discount rates. That banks use exponential rates, a machine-mind standard, means they get profits by exploiting the gap between simplistic models and complex reality, and implement it legally. It breaks down when they change the rules, as the Hudson post today shows.

    1. Synoia

      The good ones (like Newtonian physics)

      Nah. Only good under extremely limited circumstances.

      The world is chaotic. Get used to it, and seize opportunities when they occur. Expect the opportunities not to last for very long.

  5. Jim Haygood

    ‘During the crisis, nine major financial institutions collapsed or were rescued by the government within months of receiving clean bills of health from one of the Big Four.’

    These collapses can be attributed to a variety of causes: inadequate capitalization; maturity mismatch (excessive reliance on commercial paper financing); excessive debt; etc.

    A ‘clean bill of health’ from the auditor simply means that these imprudent practices are being accurately reported, not that the auditor endorses them.

  6. craazyman

    too grim. accounting can work to keep track of things pretty well and capital markets can work pretty well — even for railroads and airlines.

    It all just needs clear rules and standards that are kept with integrity.

    If somebody doesn’t work out and get buff and instead sits on the couch all day eating donuts dribbling crumbs on their belly, its not because the fancy exercise machines don’t work.

    1. paulmeli

      Exactly. The problem with accounting is the lying liars doing it, not the accounting itself. With accounting, reality asserts itself no matter how numbers are massaged.

      Smart observers (anyone not lying to themselves) can make a lot of inferences about the future through systems (circuit) analysis within an accounting framework.

      MMT for example with the Sectoral Balances at the top of the hierarchy. MMT told us before the Euro system was implemented that it would fail, and why.

      1. Lambert Strether Post author

        “The problem with accounting is the lying liars doing it,”

        I’m always a bit leery of that kind of logic. “If only we had good people running it, the system would be good.” “If only the Czar knew.”

        That said, yes, I had the MMT sectoral balances approach in my head when I wrote this; maybe accounting just doesn’t work (ok, for what…) in profit making institutions, to support “business rationality”?

    2. Lambert Strether Post author

      “capital markets can work pretty well”

      That’s exactly my concern. How would be know? In fact, I’m not sure they do. Did they in the pre-crash housing crisis, when construction was driven by fraud? We’re ramping up the invest in self-driving cars, apparently. Will they have little parachutes and motion detectors to deploy them when they drive over a collapsing bridge?

      1. susan the other

        This is not too grim at all. This is the stuff we need to have aired and explained on an ongoing basis. If Capital itself fails its social mandate then things will never be in a safe balance. Perelman is saying stg. close to what Stiglitz said – that “capitalism” is too successful bec. competition (its own sacred mantra) actually kills it. Capitalism becomes monopoly and/or devastation. It doesn’t surprise me that capital improvements are accounted for in a way that accelerates instability. The thing about capitalism is that it is like a shark in more ways than one. It has to keep moving or it suffocates. So naturally the accounting that describes it has to be an artful dodger too. So the question is, How can capital adapt to a stable environment?

        1. susan the other

          In these last neoliberal 40-years we have indulged in an experiment that substitutes classic natural advantage for all our various enterprises with shiney new credit which has achieved a financialized world of cutthroat competition divorced from actual economics. Maybe. So to account for that transmogrification, accounting just looks at the numbers and not the cliff. Accounting was never designed to see the nothingness. When the Saudis dropped the price of oil and were accused of a trade war they simply responded that they were not prosecuting a trade war, they were instead prosecuting a credit war.

  7. alex morfesis

    And on the 13th week they cook the books…first thing to read on a “financial” filing or report is the footnotes…but how many firms described their derivatives position and exposure prior to 2008 ?

    Putting the book on my purchase list…
    Thanx…

  8. Left in Wisconsin

    I’m with craazy. One needs to separate the big accounting firms, who seem to be entirely in cahoots with the rest of the corporate fraudsters, from the profession.

    Accounting is not economics. It isn’t supposed to guide economic policy. It isn’t really even supposed to guide corporate (forward-looking) policy. It IS backward-looking. The purpose is to measure past profits, and thus provide a basis for taxes on profits, (which is why value = cost), and current financial condition.

    I dealt with lots of small-time accountants back in the day and they were almost all very straight shooters. One got much better information from the accountants than one got from top management, who were invariably trying to spin one tale or another.

    As a side point, the “orthodox economist” who did the review of Perelman’s book is the oddball Richard Vedder. He has done a lot of work on costs in higher education, some of which is interesting. But he is also the go to (paid) economist for ALEC’s network of state-level stink tanks. He authored the report the rightwingers used here in Wisco this spring to “justify” our new right-to-work law.

    1. detroitdan

      Thanks. I was wondering about the “orthodox economist” review. Good to have some context for that

      I agree with your observation on accounting also.

      I just order Perelman’s book.

    2. Lambert Strether Post author

      Thanks for the info on Vedder; he sounds like a piece of work.

      And thanks also for the distinction between accounting the profession and Big Accounting.

      However, on the backward-looking: What Perelman is arguing, I think, is that accounting, exactly because it is backward-looking, is not an adequate basis for business rationality, especially for long term capital investments.

      1. John Zelnicker

        Exactly, Lambert.

        Although accounting provides useful information to consider in making rational business decisions and deciding on long term investments, it is not at all adequate.

        Left in Wisconsin also makes a good point about the calculation of profit for taxation purposes. For several of my small business clients that is the only purpose for accounting. They know about how much they make and their main concern is whether or not it’s enough to support them and their family. They really don’t care about the details.

  9. Chauncey Gardiner

    Thank you for your review of Perelman’s book and your related observations on the intersection of accounting, economics and control fraud, Lambert. Much food for thought and action.

    Regarding financial accounting treatment and published audited financial statements, I think “the bright, shiny object” substantially transcends specific accounting treatment of fixed assets (including the footnote disclosures), and other items and matters that are disclosed in the financial statements. It is noteworthy that we had the Great Financial Collapse of 2008 only six years after the passage of Sarbanes-Oxley.

    My own view is that meaningful change will not occur until substantive changes are required in who writes and approves the public accounting, auditing and financial reporting standards; who selects and pays the “Independent Accountants” for audits; whether the accounting firms’ provision of other services beyond audits is restricted; and the various revolving doors that are opened for them (which are not limited to those between government and the so called “private sector”) are restricted in order to reduce potential economic conflicts of interest and foster their independence from management and the boards of directors of the entities the accountants are auditing.

    Further, internal control requirements and protection of whistleblowers that were addressed in the Sarbanes-Oxley Act must be enforced.

    Doty’s case will be a tell if the winds are finally shifting.

  10. Jim

    The history of railroad economics is, indeed, complex.

    It must be kept in mind that the framework of traditional American political culture largely determined the historical evolution of its industrial organization. Before 1860 the individual states and localities supplied much of the construction aid to the emerging railroad industry based on the premise of denying control over industry to powerful private actors and to central political authorities.

    But this strategy, although maximizing more local community control, resulted in extensive corruption. Consequently a new policy paradigm began to emerge.

    This policy transformed the central state into a supposedly neutral market referee with local authority supposedly embedded in market forces rather than in the more traditional town meeting.

    Unfortunately, the ideal that economic life should be organized by subnational governments seeking to promote regional economic development with business interests gave way to the idea that an economy should operate as a “free market” under a single centralized state that established ground rules for competition.

    Is there any chance for a vision of a new political order that resurrects the ideal of locating sovereignty in the local community, without the corruption, rather than in the state or the individual?

    1. Norb

      A new vision indeed. All the obfuscation and propaganda we are subjected to day in and day out is the attempt to maintain an outdated and fraudulent vision of the world in which we live. The main problem to overcome in establishing a new political order is one of responsibility. The notion that one has to take responsibility for your life and relation to the world. This responsibility begins with the rejection of greed, and acceptance that cooperation is a better model for life on this planet than competition. It will require everyone to reestablish a connection to the cycles of life on this planet and learn how to coexist with them in harmony. To my mind it is a positive vision. A hopeful one.

      This vision can only start with the individual and it spreads out from there- to family, friends, and social relations. This vision is grounded in the human spirit- as it must be to survive. There is a spirit of generosity and self sacrifice in the human spirit that has been cynically hijacked by the purveyors of capitalism. The capitalist vision is one of short term self interest. A vision of constant destruction without proper attention to the need for a harmonious recycling mechanism is by definition a long term failure in a finite ecosystem. We see this failure spreading every day.

      The capitalist vision of how we should live our lives and provide for our daily needs is a failure. The proof of this statement is found in the fact that the elite who maintain the current system and enforce its rules no longer actually live in the same community as the rest of us.

      The new political and social order will be identified by leaders who live in and support the communities in which they live. A community that succeeds in establishing a recycling system in harmony with nature and true human needs is the only path into the future.

  11. SeanL

    About 30 years or so ago in Australia there was a requirement that accountants sign off financial reports as being ‘fair & true’ – this requirement has since been removed. The removal of ‘fair & true’ implies that these two qualities are no longer required for financial reporting – and we now wonder why we have these problems.

  12. gordon

    I wasn’t much more than “a mere sprat” when I read Kaplan’s “Measures for Manufacturing Excellence” (Harvard, 1990). That book demonstrates how poor many firms’ accounting practices are and how badly they are integrated with the management decision process. It woke me up to the whole idea of “management accounting”. That attitude was reinforced when I read Hawken, Lovins & Lovins’ “Natural Capitalism” (Little, Brown 1999) and learned how woefully inadequate most firms’ accounting practices are for tracking the success of sustainable methods. So there is accounting and accounting, as Craazyman (upthread) suspects. But I think the rules and standards need not only to be clear, they need to be much more relevant to actual firms’ needs and much more forward-thinking than they are.

  13. Strategist

    What a wonderfully, marvellously interesting post. A ninth birthday present from you to us, your readers.
    Information I would never have got anywhere else, a window into a world about which I know little, but can see is vitally important. Like so many of the others I have read over the years.

    For which, just to say for now, thanks for what you do, and I promise I’ll chip in to that tip jar as soon as I can.

  14. TheCatSaid

    As gordon & other commenters point out, crucial pieces are missing from current accounting methodologies. Any system that only evaluates financial aspects of activities is missing much or most of the reality that constitutes an organization or business’ activities and state of health.

    Like gordon, I too was impressed and influenced by “Natural Capitalism”. Other ways of looking at things / assessing them / frameworks for decision-making and evaluation: Allan Savory’s Holistic Management; M-CAM’s Integral Accounting; Perelandra’s Soil-less Garden (soil-less = any activity or project not growing in soil–a business, project, artwork, etc.)

    The financial side is relevant in many activities but it is too limited to use it as the only evaluation of success or balance. “Accounting” starts with a world of unquestioned assumptions–and serves to reinforce those assumptions and avoid questioning them–such as the assumption that money matters most.

  15. Portia

    This just made me want to cry. I did “accounting work” for 20-odd years. I did it to pay my bills. It is pretty much a cut and dried process, until it’s not. Then I would demur, and have to find another job to pay my bills. I have to say, it is not accounting or bookkeeping I abhor, it is the assholes who are never satisfied with the results. The numbers are what they are, assholes, deal with it;.

    1. Lambert Strether Post author

      Thanks, Portia. I didn’t really want to paint all accountants with the same broad brush, but honestly I was so flummoxed by the foundational problems I questioned to whole edifice.

      And good for you, for leaving.

  16. Ishmael

    First I will not defend the Big 4 accounting firms nor the SEC but this article is just rubbish (Lambert I know you will delete this comment) and a lot of untruths.

    First let’s look at this comment — Finally, as the dot com bubble proved [the book was published in 2006] accountants can easily mislead even supposedly sophisticated investors. Accounting firms even accommodated failing corporations by providing fraudulent information [of which more below] rather than risk losing lucrative contracts.

    Let me point out in the Dot-Com period no one was looking at the audited financial statements. If they had they would have found that these companies were losing substantial sums of money. No they were valued based upon clicks or eye balls. The short comings of the accounting profession in this area are far more complicated that are let on here.

    Also, comments like the following are rubbish –The treatment of capital in conventional economic theory had its origins in the long-obsolete accounting principles of early merchants. … The economic environment of the early merchants’ shops conditioned later accounting practices, especially their treatment of fixed capital. Even as late as the time of Adam Smith more than two centuries ago, fixed capital requirements were relatively modest. … Since accountants have never been able to discover a satisfactory method of handling long-lived capital goods, accounting provides a frail foundation for business rationality in a developed economy where long-lived fixed capital assumes great importance.

    Accounting is based upon the cost concept because it has some anchor to reality versus mark to fantasy or pull-it-out of your ass valuations. Besides there is one statement in the financial statements which is not even mentioned and that is the Statement of Cashflow. The only thing that matters is whether the company is generating sufficient cash to pay its bills and debt. If not you have big troubles.

    This book was quite obviously put together by someone who knows nothing about accounting and its usages. If you are trained to look at financial data you see the truth which untrained people miss. Lambert, how many financial statements and footnotes have you ever set down and read!

    1. susan the other

      I don’t think that’s the message. I think the message is economic stability and how to achieve it. Clearly we do not have it yet.

    2. TheCatSaid

      Accounting is a a multi-faceted skill, and in some contexts can approach an art form in the best sense of the word. (This also makes it open to being misused to mislead. But similarly when used well it can bring clarity and new understandings.)

      It’s not necessarily cut and dried at all.

      Think about projections for pre-revenue companies, or companies with substantial intangible assets. There are diverse ways of looking at their value (many can be scams, but look at M-CAM’s approach, too, which is grounded). Ditto for even tangible assets, stock, etc. There are conventions that are the “correct” legal values–but these may or may not reflect accurate value.

      Taxation accounting vs management accounting are different sets of skills–they are like different dimensions.

      And projections, as in for business plans or funding rounds–yet another dimension, equally open to skill, art, clarity and deception–with it not necessarily being easy to tell the difference.

      (And this is not even approaching things like triple bottom line or Integral Accounting, which uses 6 categories.)

      Sure there are contexts in which accounting can be cut and dried–but there is also lots of room where judgment and flexibility in choosing appropriate approaches for unique situations gives a vast range of arguably honest but different accounts.

    3. Lambert Strether Post author

      “I know you will delete this comment.”

      Hmm. Seems like there’s a lot you don’t know. Surprising. As for this part of your comment:

      This book was quite obviously put together by someone who knows nothing about accounting and its usages

      I’m not hearing that from others knowledgeable in accounting on this thread. Moreover, the reviewer wrote:

      [T]he book has lots of solid footnotes showing a serious appreciation of much of the relevant scholarly literature of the past century

      Since the reviewer is from a different school of thought than Perelman, and thus had every incentive to engage in scholarly controversy, it’s telling that the reviewer had no problem either Perelman’s knowledge of accounting, or its history.

      In sum, there is indeed rubbish on this thread. But it doesn’t come from Perelman.

      Pro tip: Don’t throw your drink in your host’s face.

  17. Watt4Bob

    Accounting concerns itself with the basic questions;

    How much money do we have?

    Where did it come from?

    Where did it go?

    The managerial class hires and fires accountants based on how willing they are to fudge the answers to all those questions.

    That’s all you have to know about accounting.

  18. JimYoung

    Seems the deregulation let companies chose their own “Frauditors” instead of traditional auditors.

  19. nothing but the truth

    i would trust an account’s opinion any day over an economist’s.

    an accountant can go to jail for bad advice.

    an economist’s reputation is not even tarnished by bad advice. all the rogues who got us into this mess are still there, still revolving in those doors.

    mostly, “public” economists are pushing someone’s agenda. in their case, the question to ask is “who is paying”?

      1. nothing but the truth

        the “article” is itself not saying much.

        It is attacking accounting and then implicitly saying “economics” (ie economists) are good. this is kind of like attacking historians and then concluding psychologists are good.

        i fail to understand what modern economists are trying to study. they go around passing judgement on everyone except themselves. almost always they are working to justify some political agenda.

        in the past economists would study political economy (ie, cuo bono) and that was the value in their study.

        now, economics has turned into a dark art, invariably supporting the dark state like in cofessions of the economic hitman.

  20. Gary Morrison

    Michael Perelman is a very solid scholar who also happens to be an economics professor. Railroading Economics is a worthy contribution from its prolific author to an already substantial body of work calling into question the usefulness of economics as we know it. The wonder is that in this body of work, lies some of the most compelling evidence available for debunking the whole of the argument for Neoliberal economic policy but almost no one has ever heard of him.

  21. michael yates

    I served as editor for this book. Isn’t its main point that standard neoclassical economics is a mythical representation of real world capitalist economies? It falls to the ground on its own terms in the presence of large sunk costs, as with railroads. What is more, some of the economists who realized this were still proponents of the pure competition model that purports to portray real capitalist economies and serves to this day as a guide to the policies a society should follow if it wants to maximize social welfare (whatever this might be!).

  22. BRUCE E. WOYCH

    “…one might almost conclude that the accounting “industry” exists to enable accounting control fraud, rather than to prevent it —”
    http://www.nakedcapitalism.com/2011/04/bill-black-fiat-justitia-ruat-caelum-let-justice-be-done-though-the-heavens-fall.html
    Bill Black: Fiat Justitia Ruat Caelum (Let Justice be Done, Though the Heavens Fall)
    Posted on April 17, 2011 by Yves Smith
    —————————————————————-
    Review Bill Black’s summary article. Justice? clearly justice is not served at the bottom line entry, and Black’s article pretty much spells out why. But let’s not stop at editorializing history in the graveyard digs of financial archaeology. There are items that should stand out, such as patterns of massive looting schemes themselves.
    —————————————————————-
    If we look at Black’s article we see mortgage fraud which is certainly a relative to real estate fraud categorically.
    Texas Looting was just that and seems to be the model of more elaborate fraud.
    See: http://www.scribd.com/doc/13579076/Looting-Akerlof-Romer
    Akerlof, George A. and Paul M. Romer. 1993. “Looting: The Economic Underworld of Bankruptcy for Profit.” Brookings Papers on Economic Activity. 2: 1-73
    —————————————————————–
    The Savings and Loan, linked from what I understand to Junk Bond mastermind Milken and the Bush family is an elaborate form of looting using the same tactics of false asset values drawing mass capital before collapsing into bankruptcy for profit.
    see: http://en.wikipedia.org/wiki/Savings_and_loan_crisis
    The Savings and Loan Debacle, Financial Crime, and the State
    ment in the savings and loan and insurance industries. Soc. Probl. 38:94-112. Calavita KC, Pontell HN. 1993. Savings and loan fraud as organized crime: …
    http://www.jstor.org/stable/2952542
    http://www.jstor.org/stable/2952542
    ———————————————-
    Organized Crime utilizes “BUST OUT” to bilk every penny from a takeover business, apparently the U.S. Government footed the first real systemic “Bail Out: under George H.W. Bush’s 1989 Bailout of the S& L Scandal & fiasco.
    ——————————————
    If we look at the Treasury Bailout in 2008 the same elements come together with Bush Jr. initiating a Bailout over derivatives (Junk Bonds) magnifying the volatility and inflated speculations over mortgages (Texas Looting) and the parallels are there despite the fact that the magnitude is fabulously greater (audacity of arrogance).
    Yet no one has scaled the relationship between the S&L swindle and the looting of the Treasury in 2008. That is not “Accountings” fault…so who is to blame for the censored history apparently right before everyone’s’ eyes?

    —————————————————————-

Comments are closed.