Social Accounting versus Double-Entry Bookkeeping

Double-Entry bookkeeping makes very specific assumptions. All interactions must have these 4 features:

  • Transactional
  • Zero Sum
  • Comparable Value
  • Quantifiable

Double-Entry Bookkeeping is Transactional

In every transaction 4 things happen. Each person both gives and receives an “asset”. Let’s say Alice and Bob are trading food. What are the 4 steps?

1. Alice gives Bob her apples.
2. Bob receives the apples from Alice.
3. Bob gives Alice his bananas.
4. Alice receives the bananas from Bob.

Even in simple interactions, there are a lot of important details. If we delve into the language, it reveals hidden assumptions.

I want to draw your attention to the possessive pronouns: ‘his’ and ‘her’. In English and other languages we can refer to objects using an indefinite article, a definite article, or a possessive pronoun:

  • “an apple”
  • “the apple”
  • “his apple”

In each, the change doesn’t communicate a difference in the object, but the existence of a human relationship with the object.

If we say “an apple”, the apple isn’t important to us, it’s just like any other apple. If we say “the apple”, we signal that the apple is important, and we may refer to it again. Finally, using the possessive pronoun, “his apple”, signals a claim of ownership of the object by some gendered entity, either a human or an anthropomorphized entity.

The fact that we are describing human relationships and not the object itself is most obvious when using the possessive pronoun. Using his or her makes it clear there is a human in the picture. But indefinite and definite articles also communicate a particular human relationship. They create a relationship between YOU and the apple. If I say “Look! There’s the apple.”, it forces you to take an interest in the apple. You’ll ask questions like “What makes this apple interesting? What is this apple’s history or destiny?” You may conclude “This apple must be valuable.”

In this way, the language we use as social humans determines what we think and how we act. It is no mistake that sales and advertising are a focus of capitalist societies. These activities have only indirect value, yet we reward salesmen generously. Without constantly reinforcing our commercial “needs”, spurring us to buy and sell, our market focused anti-social society is at risk of falling apart.

In the interaction between Alice and Bob, we could remove any step and thereby completely change what happened. Perhaps Bob gives Alice his banana and Alice says: “meh, I don’t really care for bananas.” Perhaps Bob forcibly takes the apples from Alice and then gives her the bananas because he feels guilty. Perhaps Bob and Alice throw fruit at each other and start a food war. Our bookkeeping representation are incapable of describing such unexpected occurrences. Bookkeeping practices are clearly normative, but the pernicious and persistent lie is that the norms they enforce are always of a moral nature.

By all accounts, the social reality promoted by double entry bookkeeping is fragile. Bob and Alice must engage in very specific behaviors, otherwise these accounting representations are meaningless. They must care enough to complete the transaction without sabotage or theft, but they don’t care enough to simply share their resources according to the highest priority needs.

Anthropologist David Graeber describes how markets and currency arose. They weren’t started by communities as a tool to manage production and consumption of goods and services. Instead they arose between strangers or communities that had neutral or hostile relationships. You can read about this in “Debt: the first 5,000 years” which is available for free online.

Double Entry Bookkeeping is Zero Sum

In double entry bookkeeping, every interaction is zero sum. All exchanges transfer assets or liabilities between parties, and all production and consumption happens off the books. There is no way to create or destroy anything. It is also poorly suited for sharing resources or creating nuanced resource roles. Objects are generally either “yours” or “mine”.

Obviously, bookkeepers are aware of activities involving resource creation, resource destruction, or unconventional resource roles. But these activities are not represented accurately by traditional bookkeeping models. Accounting conventions misrepresent or obfuscate the true logic of creation, destruction, and sharing. Legal processes for recognizing ownership, granting shares, and enforcing possession are disfunctionally problematic, mired with the cruft of a long legacy of mismanagement by the philosophically inept and morally depraved.

In reality, interactions are not zero sum. Transactional exchanges have positive or negative externalities, which don’t show up in normal accounting entries. But at a more basic level, the assumption that resources are always transferred from one party to another is fundamentally flawed.

In a previous post, I defined resources as things which are applied through choices according objectives. What makes something a resource is utility, its potential for use.

Double entry bookkeeping makes flawed assumptions about the nature of resources. This especially leads to problems in the way we administrate common pool resources.

Elinor Ostrom did important work on managing “common pool” resources. With common pool resources, no one exclusively owns the resource, but all must work together to manage the resource. Double entry bookkeeping doesn’t make sense in this context.

Additionally, many resources are not physical objects that are limited to one location in space for each moment in time. If I hand you an apple, I no longer hold the apple myself. But if I tell you a story, now we both have the story. I remember it better, and you hear it for the first time. Stories have been the glue of society since history. But accounting practices pervert storytelling and thereby promote the corruption of our society.

The most obvious instance of these flawed accounting norms is intellectual property. Intellectual property is broken system for commercializing creativity and a flawed accounting model to measure the costs and value of informational activities. While IP laws have value for ensuring creative endeavors can cover their costs and secure financial reward, the flaws in our IP practices do significant harm.

I don’t have a perfect alternative to contemporary IP laws, it is a challenging and controversial issue. But a good first step would be to change what the abbreviation “IP” stands for. Instead of saying “Intellectual Property”, we should call it “Intellectual Production”. Changing our language can help us make a better accounting model to share the costs and rewards of informational efforts.

One redeeming aspect of our current IP laws is that creators have a great deal of flexibility in how they exercise their IP rights. We have seen positive results from legal licenses used by open source software projects and creative commons efforts. Fixing IP practices may require cultural transformation before we can expect legislative reformation.

Comparable Value

All bookkeeping interactions involve comparable value. At first we might be tempted to say “All bookkeeping transactions involve the exchange of assets of equal value.” But this is false, even according to mainstream narratives.

In market exchanges, goods and services are traded not because they are of equal value, but because both parties get greater value from the exchange. So exchanges aren’t necessarily “equal”, only “mutually beneficial”.

The biggest problem with this broken assumption is not that people often end up getting the short end of the stick, if they lack the skill to navigate the violence of pricing tactics effectively, but rather that we end up comparing things that we have no business comparing in the first place.

Once again, David’s book Debt, presents this issue masterfully. It is a must read.

Our double entry madness makes us unable to distinguish between need and luxury, between violence and generosity.

Quantifiable

Quantification(misapplied) is an abomination.

Comparing things that are clearly in non-relatable dimensions of social life is bad enough, but to then pretend that these things can be represented with specific quantities takes that delusion a step further.

This is where evils like the ford pinto come from.

So don’t be a quant. “You play with magic beyond your understanding!!”

Yes, quants can do amazing magical things, because their rote and ritual creates consistency and reproducibility, up to a point. That is until they break the whole damn system.

I’m no math hater, I love mathematics. I am a math major who has completed most required upper level mathematics courses successfully including analysis. It is in fact my love of math that makes me hate to see it misapplied for social ill.

Social accounting is a better way. We can use numbers as a tool for enlightenment and understanding when appropriate and accurate, instead of as a chain of debt and a whip of enslavement.

I’m not against being precise and careful with our accounting practices, but we need to step back and ask, “Are our assumptions appropriate?” “What are the social implications of these actions” “Does our accounting practice help us achieve our social priorities?”