BlindSpots returns on its mission to analyse ideas that get out of hand. Accountancy-thinking is ideologically over-dominant in our decision making at the levels of both business and government. Like anything that becomes ideologically over-dominant, it becomes above question in people’s minds and begins to behave like a religion.
The Brains of the Operation
Most of us have seen pictures of society pyramids in history class. They show a social hierarchy in a given time or place. The one depicting medieval Europe was probably the most common.
I like this one as it shows how the aristocracy and the church shared the top spot on the pyramid between them.
In what Thomas Piketty calls ternary societies (split in three between peasant commoners, the learned clerical class, and the aristocratic warrior class), the learned clerical class’s function is to tell stories that bring meaning and try to make sense of the world, both for the commoner farmers and merchants, and for the aristocratic knights and lords.
The church functioned as this learned class in medieval Europe, being the wardens of schools and universities for nearly two millennia. India’s Brahmins functioned in a comparable way. Aside from functioning as Hindu priests, any work involving creativity, thinking, or administration of any kind was reserved for people born into this class. Crucially, they didn’t take vows of celibacy as European priests did, meaning they could reproduce out in the open and so, did not have to recruit from the commoner and noble classes, as the European church did.
This learned class stands side by side with the wielders of power at the top of the pyramid, acting as a moral compass and as the learned councillors of the ones making the decisions. Think of druids, of King Arthur’s wizard Merlin, or of the Maesters depicted in Game of Thrones.
A Thought Experiment
Imagine if our society had an extremely influential profession, one that was seen as so obviously correct about everything that to not make our decisions according to what they had learned when they were being educated would make you seem irresponsible or insane. Imagine all of society was deferential to the teachings of this profession.
A society where medical teaching informed all policy and decision making would actually have a fairly strong argument for it. Imagine such a society. All good business decisions were ones that brought about the best medical outcomes. All public policy would be designed to maximise medical health. We would probably be a lot healthier, but would be any happier? I would miss chips, whiskey, and partying.
I’m asking you to imagine not so much a society where doctors themselves are bossing us all around, but a society where the teachings of the medical profession dictated to everyone else and were obediently followed without question in every area of life, well beyond medical settings.
In fact, as the governmental responses to covid has shown, we don’t even let the medical and health expertise dictate policy to us! Of all the professions that exist, the best candidates for that spot at the top of the pyramid seems to me to be the medical and scientific professions, but even at that, it’s still not a great idea.
So why do we let accountancy dictate decision making to so much of society?
The Syllabus, Not the People
It’s my suggestion that the thinking and teaching underpinning accountancy are at the top spot on our society’s pyramid and that this doesn’t always work well for us.
I’d like to emphasise that my point is that accountancy as a discipline has influence beyond the limits of where its influence belongs. In no way do I intend to suggest that it is without value as a profession, or to insult anyone that practices it, but to analyse places where its teachings are applied in areas beyond the borders of where it’s appropriate, which in turn leads to suboptimal decision-making.
My aim is to write about the limitations of over-applying accountancy thinking in business, then to show how this thinking dominates at the governmental level where its dominance is having even more dire consequences for our societies and our world.
Lastly, we’ll cover how these two areas give us clues to how a lot of the problems our world faces seem to stem from our apparent confusion about money at its most basic level.
We seem to have drifted into believing that money is more real than the things that money can buy.
In Commerce – Emperor and Pope
The American Sarbanes-Oxley act of 2002 was a reaction to corporate and financial abuses like those seen at Enron and WorldCom. One of the ways in which it sought to safeguard against scandals of that stature was by demanding that both chief executive and chief financial officers sign off on financial statements.
In practice, this has gradually elevated the importance of CFOs to a level approximately as powerful as the CEO. If the CEO is charged with deciding the strategic direction of a firm, the CFO’s voice and perspective has come to the forefront of how the route there should be navigated. More importantly: due to the finance department’s newfound influence at the tip of the pyramid, the other business functions have come to be compelled to think and act in submission to the teachings of accountancy and finance. Functions that don’t recite the requisite prayers back run the risk of being shunned as irresponsible or profligate heretics.
Side by side, the CEO and CFO have come to rule together as Emperor and Pope. The Emperor, tasked with strategic direction, and the Pope — treated as if they’re the only one that can count and calculate correctly — given almost total and unquestioned trust over how to execute on the plan that gets the firm to its strategic goal.
In Commerce – Cost over Benefit
Drawing on some observations from my own career, the theory I was thought during my education (which was split between an undergraduate in marketing and a postgraduate in finance), and conversations with the accountant friends in my life: I want to lay out some of the flaws in accountancy-thought I believe can put more, not less, pressure on a company’s budgets and profits.
What’s more, it is difficult, though not impossible, to find much discussion of these flaws.
When there is little or no discussion of the flaws in certain teachings or modes of thinking, it tends to amount to tacit acceptance of those faults as being ‘right’.
At the centre of these flaws is accountancy’s tendency to default to the mentality of parsimony (known as scabiness, in Ireland). Of course, there are times to be frugal, but having default approaches of any kind can cause lazy decision making that leans on a preconceived course of action that hasn’t bothered to factor in the specific details of the scenario being dealt with in the given moment.
One place I observed this inclination towards frugality was in college lectures that covered pricing and price elasticity. Pricing is a discipline that both finance and marketing claim as their own but I noticed that finance and accountancy students had a very different attitude to it compared to us marketing students who were mostly career salespeople, account managers, and digital marketers; natives to the realm of generating income for our organisations.
Total income from a given product or service is obviously a very simple equation:
(units sold X price per unit)
The accountancy students tended to instinctively lean towards maximum mark-up on each individual unit but didn’t seem to have quite as good a feel for the idea that in some cases, the units sold figure can be massively affected by price (price elastic). Even after this being explained to them it seemed that there was just something in them that kept slipping back into the thinking that the ‘units sold’ variable was fixed. This is where parsimony can actually shoot itself in the foot. In cases where the price is elastic, you can actually make more total income by charging less and making less profit per unit.
At one energy utility employer; the sales and marketing teams had regular debates with the pricers (who fell under the finance team at this particular firm). What really confused the finance side was our point that when you are able to sell enough of something all at once: “Volume can be its own margin”. Our point, of course, was that some tenders and deals are so big that the volumes sold under them are equal in time and effort to dozens of small or medium deals. It just doesn’t appear to be in accountancy’s DNA to have a feel for this.
Accountants themselves will tell you that it’s not really in their remit to understand the causes or probabilities that lead to business outcomes, but to record and account for them after the fact. This can lead to an inclination in the profession to either visualise commerce flowing backwards, with the final numbers booked at the end coming first, and all of the marketing and sales processes happening afterwards, or for it to fall into the very common post hoc ergo propter hoc fallacy where B is thought to be caused by A just because it came after it. For these reasons, I believe pricing should be firmly in the hands of people who’s heritage and background is in generating revenue as long as it is commonsensical and isn’t producing losses, which hopefully didn’t need to be said.
Another way parsimonious accountancy-thought can manifest is its ability to distort cost/benefit reckoning. My experience has indicated to me that monetary cost dominates accountancy thinking to the neglect of benefit, which is mostly given mere lip service.
At one employer, my team worked with an engineer who was approaching full qualification, working while completing their bachelor of science dissertation. Engineers in their category and specialisation are as abundant as shit from a rocking horse in Europe yet they were being paid about one-quarter of the market rate due to their not having graduated yet. Their management team knew that we ran the risk of losing them once they had their parchment, which would bring us from having four of their kind down to three in Europe when we really needed six. Our organisation’s accountants, in their infinite wisdom, had hardwired rules about maximum increases in pay for existing employees which blocked this engineer’s manager from being able to give them a raise in line with their market rate. We lost them to a competitor for 5x what we were paying them. Astoundingly, if they didn’t already work for us, we would have been able to easily match or exceed the offer from our competitor. This point was made during this period of wrangling over the engineer’s salary but was pushed aside since its logic clashed with the gospel according to accountancy. In terms of cost/benefit, the savings here did not cover the loss of a talented engineer that had been developed at our firm, only to be snapped up by a competitor when they graduated. It would have been cheaper to increase their pay by a factor of six and hold on to them. In fairness to the accountancy discipline, measuring benefit is a much more complex task than measuring monetary cost, which tends to be very clear cut. Perhaps this fact indicates a need for cost/benefit analysis to always function as a strictly bottom-up process as again, accountancy is intended to measure, capture, and record business results after they’ve happened, and not to be an imposition from above on how business is done. Especially since, if you owned geese that laid golden eggs, accountancy’s instinct would be to find savings on their feeding costs.
At another employer, I managed teams of salespeople who generated subscription revenue for the organisation. My role was simple enough when you zoomed out: manage a budget that pays staff and logistics to bring in enough subscription income to cover the budget spent 3-5 times over. We hoped to bring in €3-5 for every €1 we spent. As a fleet of vehicles we used was approaching the end of a lease-hire agreement, we had the option of buying them out for a lump sum worth about 5 month’s worth of lease – let’s say €3k each or, getting a new fleet for another 3-year contract at €600/each per month. As someone whose responsibility it was to own a profit and loss account, I was happy to get maybe four or five years of use from the fleet at a vastly reduced cost as all we would have to do was fuel and maintain them. The accountants, however, were more worried about the abstract and frankly imaginary concept of depreciation that would come from us technically now owning these assets and them losing 10% of their value per year on paper. This theoretical drawback was seen as more important than the real-life cost-effectiveness of being able to win revenue for the organisation with this logistical cost stripped out. Compared with €600 per month, 10% of the value being lost off each car each year would only have amounted to €300 anyway! This means we paid 24x more just to be able to say we didn’t own the vehicles. An academic concept from the accountancy scriptures won the day against real-life cash flow. But accountancy always knows best when it comes to anything to do with money, right?
Like the priests and bishops of old, it has become quite standard for the accountants within the finance function to stand at the apex of influence within our organisations and tell the rest of us what and how to think about business. It is routine that the finance function is more influential than and dictates to marketing and other income-generating teams but it is extremely rare to see the inverse. It is even becoming increasingly common for CFOs to hold dominion over cybersecurity and other IT functions when it would be inconceivable to imagine a finance department answering into a computer science-educated Chief Technology Officer. Please let me know of any such examples if you have them!
Other examples I would be very curious to hear about are organisations that have a system of recourse or appeal if their accountants have decreed or dictated something to another business function that doesn’t make commercial sense.
Is their moral and intellectual authority derived from the suggestion that they are the only ones that can count? Is accountancy hailed as the only discipline within business that is numerically literate and so the only one that can be trusted with figures?
One welcome development that could soon counter the weight of accountancy in firms’ decision making is the emergence of the Chief Revenue Officer and amalgamation of marketing, sales, and account management into a single revenue function. This could have the twin benefits of making the revenue-generating functions become more rigorous, analytical, and quantitative (something that can often be a weak point for them) in addition to making the finance department lean away from their go-to cost-cutting instincts and take a more balanced approach to thinking about revenues and costs together.
Let’s now leave business and commerce behind and see how accountancy thinking is causing some even more bizarre disconnects from reality at the more macro level of governing states.
In Government: The Accountocracy
The nineteenth-century Scottish essayist, Thomas Carlyle called economics ‘the dismal science’ in 1849. He was referring to Thomas Malthus’s dreary but widely accepted theory that human populations would increase exponentially but that food production would stay forever where it was at the time, or at least be unable to grow in proportion.
“If they’d rather die, they had better do it, and decrease the surplus population”
-Ebeneezer Scrooge, A Christmas Carol, 1843
This outlook is very reminiscent of the pricing debate (units X price) mentioned above. The pessimistic suggestion is that one variable is static while the other one moves freely. People assumed that productivity wouldn’t be able to keep pace and feed us all.
I’d suggest that, despite the theory being debunked by technological advancement, dozens of millennia of struggle to feed ourselves is a long way from working its way out of our genes after just a few decades of plenty.
“Abundance is harder for us to handle than scarcity”
–Nassim Nicholas Taleb, Antifragile, 2012
Beyond that, most of us live in a household that has to bring in as much or more money than it gives out. The organisations that most of us work for are the same in that respect. In fact, it is difficult for us to imagine an entity that doesn’t have this basic law of gravity keeping it anchored to the ground.
Because of this, we’ve developed a way of imagining our nation-states as scaled-up shops, businesses, or houses that have to make money and budget to pay the bills the same way any bar, hair salon, or family home would have to. We borrow terms like ‘income’’ and ‘debt’, from the world of household or business finance and shoehorn government finances painfully into these ill-fitting clogs. Why are they ill-fitting?
Modern Monetary Theory has the answer. And it answers it, over and over again, with one simple counter-question: What household or business creates its own money?
For any country that issues it’s own (reasonably valuable) currency, there is a completely separate set of rules and limits to how spending works. Under no circumstances is this to be misconstrued as a lack of rules and limits – just that there are different ones.
Let’s get back to why ‘revenue’ and ‘debt’ are not actually what they are labelled as for nation-states that issue their own fiat currencies (currencies that are not pegged to precious minerals or other currencies).
Revenue: Another term for income. At the government level, the subliminal suggestion is that the government’s ‘earnings’ must come from extracting taxes from wages and other economic activity before it has money to spend on anything. Conservatives, in particular, love to paint taxes and the government spending that it funds as ‘your money’ being taken from you. Margaret Thatcher’s rebuke that “eventually you run out of other people’s money to spend” has set the tone of economic thinking for 40 years now, and this delusion is far from dead today. Let’s trace back an imaginary British Pound, from the moment it was confiscated from some poor hard done-by bar worker in the form of income tax, to where it originally came from in the first place. Where was that pound before it was taxed? It may have been in some punter’s pocket before he walked into the given Wetherspoons and spent it on a half-pint of disgraceful Carling. Before that? It was with whoever gave it to the punter with the poor taste in beer. But how did that pound make its way into circulation in the first place? If Thatcher’s government saw it as ‘other people’s money’, then who gave it to the British government to issue originally? It’s so extremely counter to our generally accepted narrative about money to think that it was created and spent into the economy before it was taxed, but how could it physically have worked any other way unless there is some other entity giving British pounds to the British? For this reason, ‘revenue’ is not income or earnings for a currency issuer at all. It is a way of extracting money back out of the economy again after it had issued it in there in the first place. The government creates and holds cash before it circulates it into the economy, it doesn’t need to ‘earn’ it by taxing, because it can make as much of it as it wants.
Debt: Whenever a currency-issuing country gives figures for its national debt, it is quoting the total value of all its bonds that people or other governments hold. In plain English: a bond is a coupon worth the amount of money deposited in it, that pays off chunks of interest until the original deposit matures at a pre-agreed time, and is paid back. For the bondholder, it functions like a savings account that pays out some interest every year until the bond matures and those savings have to be withdrawn. That’s it.
Government debt is not debt as we imagine it at our smaller household/business scale; it’s people saving money in ‘the bank of the USA/EU/Japan/Switzerland.’ A currency-issuing country changes the money on a bondholder’s ‘normal’ bank account every time they ‘lodge’ an interest payment with them each year and, when the bond expires, tops up the holder’s normal bank account with the value of the original bond amount and changes the value of their bond account to 0. All of this is carried out on a keyboard without ever even bothering to print the cash.
We are not served well by borrowing the terms ‘revenue/income’ and ‘debt’ from private finance and imposing them on a country’s finances because they are literally not what they say on the tin in that setting.
Back to how there are still limits, just different ones. The number one point is that deficits or debts aren’t the limits, inflation is. Governments can create as much cash as they want but if they spend too much, inflation can occur. How much cash is too much? What is the limit on the cash level before it becomes inflationary?
The simplest answer is: when there is too much cash circulating in an economy relative to the amount of buyable stuff, it produces inflation.
When all the fancy, academic sounding terms are said and done, inflation is just another term for shortage of stuff for the amount of money that there is, or, put the other way around, too much cash chasing too few resources. Of course, one pressure valve here is that if the government is spending on things that are actually creating more productive resources (like power stations or business start-up grants), then there is plenty more actual stuff to balance out the amount of cash that’s been issued into the economy.
Conservative economists tell stories that suggest that the amount of buyable stuff is static, though. Here again, we see yet another manifestation of the parsimonious accountancy habit of thinking that one of the moving parts in an equation is fixed. This anxiety, borne of an inability to acknowledge that some spending – particularly investment spending – actually creates more resources, is probably the main reason governments have tended to do too little to lubricate economies after crises and so, delay our emergence from them.
Tragically, it took fifteen years of stubborn deflation (too little cash circulating for the amount of buyable stuff) before Western regimes stopped worrying that we were on the verge of inflation. How much dangerously low blood pressure would a doctor have to see before they felt they could stop thinking everyone had hypertension?
When the economy is overheating with inflation, the government can siphon cash back out again as tax to restore a healthier balance in the cash-to-stuff ratio.
This distinction between money and the stuff money can buy is the most important element in all of this. It is key to rising above the hypnosis we are all under in our accountocracies. Money is something that us little people and organisations have to worry about, but as you scale up to the level of nation-states, real resources and their management is what the focus is really on since they have control over the issuing of money.
One of the things that has most obscured this reality is the fact that we have very selective rules about when we need to ‘find the money’ that the government spends and when we don’t. Sadly, when we discuss education or healthcare we usually talk about ‘where that money is going to come from’. Ireland’s education budget in 2021 will be €8.9bn, or 2.3% of GDP. In 2008, when the Irish state decided to underwrite and guarantee the banking system to protect it from collapse, it committed to a €64bn bailout, or 17% of GDP – or almost eight years worth of our education spend, and with little or no discussion of “where that money would come from”.
Stephanie Kelton has detailed how she saw this selective double-standard at work as an economist at the US senate budget committee. There, she saw how any bill that proposed spending on healthcare, education, or infrastructure always needed an attached taxation or borrowing proposal to ‘cover’ that spending. Defence spending along with corporate or financial sector bailouts, however, did not. The latter were seen as strictly necessary and so it was completely acceptable for the Federal Reserve to simply lodge dollars electronically into bank accounts for these kinds of expenditures. She even followed the passage and approval of a bill to transfer hundreds of billions of dollars into Boeing’s bank account in exchange for a fleet of fighter aircraft. The transaction was carried out on a computer keyboard in the Federal Reserve and the bill had no taxation or borrowing provisions attached. Asking where we’ll get the money for weapons or corporate bailouts is seen as unpatriotic. Asking where we’ll get the money for schools and hospitals is seen as responsible.
What is most interesting about MMT is that the ‘radical’ side of this debate are simply describing how things already work, while the orthodox or conservative side are clinging to a theory that described a practice that ended long ago. Deficits have not mattered to currencies since they abolished the gold standard in the 1970s but the orthodox side seems unwilling to update the theory to match what the practice has been since then. We just seem to be unable to stop imaging our nation-states as shops!
Money is The Map, Resources the Territory
I’ve written before about the blinding effect abstractions can have on us when we drift into thinking the symbols are more real than the things they were created to represent. Money is a representation of value. A scoring system against which we can grade the worth of real life things. Without the resources to buy with it, it is completely worthless. Accountancy-thought, due to the ease with which costs can be counted compared to benefit, or money can be counted compared to the value of real-life stuff, has led us to develop a habit of over-focus on cash to the neglect of the things that cash can buy, which is presumably what we were all in it for in the first place.
This reversal in our understanding of reality, where we now think real-life stuff orbits around money, can be seen everywhere. Economists wondering if the world economy will ever recover from the covid pandession when all the physical makings of a booming economy and resources are sitting there is a baffling situation if you realise stuff is more real than money. Believe it or not, we are actually debating whether or not we should:
- Lubricate the economy by injecting cash into it to get all of our warehouses, factories, and businesses up and running and producing again once the pandession is over or:
- Leave all of those factories, warehouses, and businesses idle for lack of cash when they could be used to produce real life goods, services, employment, and prosperity again once we are able to get back to normal.
You know an idea has us more than we have it when we start sacrificing practical reality for the sake of a notion. Is this real life? Or are we hypnotised by yet another religion, one dressed up as a social science with a thin veneer of mathematics camouflaging it as a science?
If we’re going to continue to give accountancy the run of the place, there are a number of fundamental flaws in its thinking that need to be resolved in a hurry.