Historical Stages of Capitalism: Accounting and Financial Reporting Processes in the UK - Essay Example

?The Historical Stages of Capitalism: Accounting and Financial Reporting Processes In constructing a ‘history of capitalism,’ it is important to that use of the term linguistically dates only to the 18th Century, where Adam Smith is credited with introducing the concept of capital in his classic text, “An Inquiry into the Nature and Causes of the Wealth of Nations” (1976). (Novara et al., 2003) Following this, historians recognize three figures as primary in defining capitalism philosophically: Adam Smith, David Ricardo, and Karl Marx. Adam Smith wrote: "That part which, he expects, is to afford him revenue, is called his capital. The other is that which supplies his immediate consumption." (Smith, 1776, Web) Revenue in this regard relates to surplus economic production as opposed mere subsistence, but also represents a larger, rational pursuit of this surplus in profit. Yet, it is important to note that Adam Smith does not write specifically of “capitalism” as a system, but does define the importance of capital in economic relations critically in his analysis. (Novara et al., 2003) In his text “On Wages” (1817), David Ricardo writes that, "Capital is that part of the wealth of a country which is employed in production, and consists of food, clothing, tools, raw materials, machinery, etc. necessary to give effect to labour." (Ricardo, 1817, Web) Yet, it is Marx who develops capitalism as a system theoretically in his works such as “Das Kapital” (1867) and others which would inaugurate and define nearly all later intellectual treatment of the subject. (Bryer, 2005) I. A Definition of Capitalism In "Wage Labour and Capital" (1849) Marx initiates a fundamental definition of capital: "Capital consists of raw materials, instruments of labour and means of subsistence of all kinds, which are utilized in order to produce new raw materials, new instruments of labour and new means of subsistence... Capital, also, is a social relation of production." (Marx, 1849, Web) In Accounting, the ‘Sombart Thesis’ as advocated by Werner Sombart in "Der Moderne Kapitalismus" (1902), is regarded as being the first historically to identify the critical link between double-entry accounting standards and capitalism. (Winjum, 1971) Money systems, trade, and labor exchanges are found from the early stages of human development historically, but Sombart points to the use of accounting standards as an essential characteristic of capitalism. Through this interpretation, historians can search primary source materials from various societies to determine the degree that accounting records were kept. Where systems of agriculture and early industry involved work relations and paid labor, the development of capitalism historically in the society is evident. Similarly, a community monetary system is essential for the development of marketplace capitalism, as well as the exchange of surpluses in supply and labor. As Basil Yamey writes in "Accounting and the Rise of Capitalism" (1964): "Werner Sombart was largely responsible for the broad thesis that systematic of scientific accounting, identified with the double-entry system, played an important part in releasing, activating or accentuating the 'rationalistic pursuit of profits,' and essential of the capitalist spirit." (Winjum, 1971) III. The Pre-Capitalist Era (4000 BC to 1000AD) In the pre-capitalist era, money systems allowed agriculturalists to trade surplus products in a manner that encouraged the growth of capitalism and forms the basis for economic exchange. Some theorists relate capitalism to a system of political values, as the theory of capitalism developed from within the political context of the 18th Century related to the onset of democracy, liberalism, and modernism historically. This creates the question of whether the political definition of capitalism can be legitimately applied to early commercial, industrial, and agricultural trading activity in England in the pre-historical or feudal period. The development of artisan groups and skilled labor who could trade their products, activity, and knowledge for financial gain, measured in monetary standards, relates an essential characteristic of economic relations that is independent of the political values of the Enlightenment, but historians also recognize these activities to be the root of contemporary political values. In “Craft Guilds and Christianity in Late-Medieval England: A Rational-Choice Analysis,” Gary Richardson writes: “Craft guilds combined spiritual and occupational endeavors because the former facilitated the success of the latter and vice versa. The reciprocal nature of this relationship linked the ability of guilds to attain spiritual and occupational goals. This link between religion and economics at the local level connected religious and economic trends in the wider world.” (Richardson, 2005) In the pre-historical or pre-capitalist period, accounting and financial reporting processes can be seen in feudal income statements which are prepared to record quantities of grain, wine, meade, building supplies, and other materials required for managing a feudal estate or craft guild. As the estates and guilds grew in economic complexity and employed many serfs, specialized accounting arose for the needs of estate management. (Richardson, 2005) An example of this is log books, diaries, and other written records relating to the stocks of the estates and also early retail stores. This type of record keeping was primarily descriptive in the pre-capitalist era, as compared to later advances in economic and statistics that used these figures also for prediction. (Bryer, 2000) The return on capital in this era is managed through surplus agricultural production on the estates, but also includes the trade guild activity of skilled labor. Thus, the specialization of labor increasingly provided a means of producing return on capital when compared to other forms of unskilled labor at the time. (Stier, 2011) The church’s medieval prohibitions on usury discourage financing, though loans may be available in the form of agricultural advances related to sharecropping or from other sources. (Bryer, 2000) Accounting in this era is not typically involved with the production of annual accounts or reports, but more related to an ongoing inventory. Investors typically use royal privilege and bound labor to develop estates, and retail trade leads to increasing urbanization including small villages and cities with their shops and accounting systems related to inventory balances. (Bryer, 2000) This also leads to increasing use of investment in retail trade, including the development of trade routes and expeditions of trade that offer a higher return on investment. II. Early Capitalism (13th century to 1750) The earliest stages of capitalism are characterized by an increase in commercial activity that is developed from efficiency in modes of production that derive from the rational implementation of systems, new technologies, and management. Early capitalism is represented by a wider range of trade, increased diversity in products, and trained or skilled labor that relates to the development of careers. Guilds, represented as collectives of artisans or skilled workers in a particular form of production, are symbolic of the economic structure of early capitalism developing from the feudal era and relate to both modern corporations and unions. Early capitalism sees an increase in the development of infrastructure such as road, canals, bridges, and ports, which all facilitate trading activity between groups. (Arnold & McCartney, 2008) This era in England is also characterized by advances in mining, including the use of fossil fuels such as coal for fuel on a wide scale, and the development of more specialized means of production in metals. (Lord, 1923) The developments in economic production during early capitalism creates a wider array of products in the marketplace, is driven by advances in human technology and inventions, and leads to the widespread development in industry and wage labor. (Turnbull, 1987) Early capitalism includes increase specialization in agricultural production as well as wider routes of trade in agricultural products. These types of economic activity all encourage the accurate keeping of records of financial relations, and this period represents developments in accounting that lead to increasing systematization of the discipline, the rise of accountancy as an occupation, and a diversification of record keeping to account for the wide range of raw materials used in production and the large number of products being sold in shops. The result of the progress of early capitalism leads to the development of science and industry in England, as well as to the rise of modern corporations and joint-stock companies. In “Capital and Steam Power” (1923), John Lord writes: “At the end of the seventeenth century, the capital of these joint-stock companies was increasing rapidly. In 1695 the approximate total invested on the joint stock principle was ?4,250,083, while in 1703 the total is estimated at ?8,447,401. 7 At this time (1695) it is estimated that the industrial wealth of England, without agriculture, was 33 millions, thus the joint-stock capital formed about 12 per cent of the total.” (Lord, 1923) The British East India Company, one of the first joint-stock companies in the world, developed on the Dutch model but can be said to be representative of the development of advanced capitalism in England. The ownership of stock and the corporate nature of publicly traded companies encouraged the growth of accounting to a large degree, and accounting would become an inherent part of the way that businesses are managed efficiency. In early capitalism, accounting and financial reporting processes is related to the rise of joint-stock companies and these can be viewed as the direct ancestors of modern corporations. Income statements are prepared increasingly related to stock prices, and the public trade of shares results in wide price swings, as well as swindles and bubbles. The problem of fraud in the record companies of joint-stock companies leads to the evolution of more standardization in accounting and systematization of training and procedures for accountants. The use of finance increases as church prohibitions on usury decrease, and this leads to the use of accountancy to increasingly rationalize the investments of private individuals, but even more so in the companies themselves. The production of income statements and the release of accounting information to shareholders becomes an accepted practice, and the guilds themselves are transformed into free laborers. Wages lead to an increased use of accountancy to manage investments, as does the increased specialization of retail sales and trade companies. Capital is deployed by the State and private interests in investment patterns and trade, leading to the classical conception of capitalism. III. High Capitalism (1750-1914) High Capitalism is also known as Industrial Capitalism and the widespread development of industry in British society based on scientific progress, invention, population growth, and transportation advances all created a vibrant and expanding economy that developed into the modern institutions that are recognized today. . In “Calculating Profit: A Historical Perspective on the Development of Capitalism,” Steven Toms writes: “Under feudalism, the required institutions of law that presuppose a legal and measurable surplus did not exist. Transitional capitalism and associated accounting measurement is thereby implicitly defined by the removal of intolerance to usury which characterised feudalism.” (Toms, 2008) High capitalism is characterized by the complete removal of feudal restrictions on banks and the rise of financial power as a controlling aspect of economic development. Finance relates to monetary systems differently than supply and demand driven economics, marketplace activity, and traditional modes of production and distribution. Finance through stocks, bonds, and bank loans of both public and private debt characterize high capitalism, and this financial activity is used to develop industry, architecture, public works, railroads, canals, mines, and utilities to ever greater levels. The State uses finance and taxation to play a large role in the economy during this stages, as can be seen further in the production of armies, navies, and the development of a colonial empire. Nevertheless, it is science, industry, factories, and the explosion of production, invention, and economic activity represented in the Industrial Revolution which best characterizes high capitalism. In high capitalism, the accounting and financial reporting processes drive stock markets and play a critical role in financing and investment in both the State and private industry. The income statement becomes increasingly regulated by industry and governmental authority and is an integral part of the pricing of public companies on the stock market. The income statement is prepared by certified accountants who graduate from recognized schools of training in accountancy. In this era, accountancy becomes increasingly career-driven and related to the specialization of labor in the industrial era. The growth of finance and the nation-state creates a much larger scale of investment patterns that are governed on rational principles of accountancy. (Chiapello, 2003) Where double-entry bookkeeping is symbolic of earlier eras, it is practiced on a more general basis in society in this era through the expansion of capitalism in cities and towns and the small businesses and marketplaces that they inspire. The use of accountancy in trading, retail, services, and industry is widespread. Both the State and private groups use accountancy to build investment plans that seek a much larger return of investment through increasingly complex plans involving thousands of laborers specialized in a company. (Chiapello, 2003) IV. Late Capitalism (1914-Present) Late capitalism builds on the Industrial Revolution and innovation in technology to advance mass-production systems that lead to revolutions in human life. The telephone, the automobile, electricity, and other inventions radically transform culture, as does the effects of two World Wars in this era. The transition from the steam engine as a symbol of the industry of high capitalism is replaced with the nuclear technological development and space industry at the highest levels of industry. Late capitalism is dominated by the effects of science in industry, as well as the influence of the State in economic affairs. Marxism begins in the era of high capitalism but becomes politically implemented around the world in late capitalism, in Russia, China, and the Eastern Block, leading to the Cold War. That England fought two world wars in defense of empire during this era can be seen as evidence of the vast expansionary activity of late capitalism as manifest through the combination of industrialization with a political economy. Democratization and the battle of socialism and capitalism for the hearts and minds of citizens politically is the overriding theme of this era, with the effects of Marx and his studies of capital being applied in social justice movements around the world. This period leads to the modern accounting standards of publicly traded companies being further advanced, as well as the use of statistics in accounting for a wider range of economic planning. The management of economies through government proceeds on the basis of both Marx and Adam Smith, with economists such as Keynes advocating the vast influence of State power through currency control and other measures related to government industry and social investment. This gives rise to the modern welfare State, and the collapse of communism in the East leads to further progress in democratization, modernization, and industrialization around the world. (Bryer, 2000) The information economy is born at the close of the 20th Century, possibly signaling the entry of the world into a new stage of capitalist development characterized by globalization and speed. Late capitalism represents the evolution of modern accounting standards and practices in academia, corporate affairs, governance, and modern economics. These become standards of capitalist citizenship, where most citizens keep bank accounts, loans, credit facilities, and complex investment patterns in real estate, equities, bonds, and other securities. Financial planning for retirement and the public planning of State welfare operations and industry may be privatized, as in Thatcherism, in later stages of this era around the world, opening the interpretation to the analysis of sub-stages in the modern era. Some also claim the information technology revolution and globalization are symbolic of the post-modern economy. Late capitalism in England sees accounting standards spread popularly to become an accepted part of education and citizenship. Accounting becomes an integrated part of every business, and integrally related to the calculation of tax incomes for State revenue. With this expansion of services and control represented by the Welfare State and its military-industrial complex, social justice issues relating to finance, world politics, the legacies of colonialism, and progress combine to make for volatile economic markets driven by political and social issues. In late capitalism, the accounting and financial reporting processes come to their highest level of importance and integration within society, with modern economics related increasingly to the planning of the State and corporations. The modern corporate structure is established through law that is enacted to respond to developing understanding of the markets, for example in the post-WW I depression era. Accountancy as a profession is increasingly specialized and related to complex investments by corporations, individuals, and the State. (Chiapello, 2003) Profit is maximized through the increased rationalization of methods and specialization in labor and education. Experiments in State socialism are alternated with periods of privatization of State industry, highlighting the political nature of the economy and the large role the State plays in regulation, taxation, and corporate law. Profit measurement is based on scientific methods of the application of accounting and the allocation of resources proceeds on the statistical verification of accounting. (Winjum, 1971) Neo-liberal economics reflects traditional patterns of imperialism which it replaces following the anti-colonial liberation movements, highlighting the importance of social justice issues relating to the North-South or East-West divides in modern economic development. The income statement and balance sheet becomes the basis for the accounting and financial reporting process in the UK in the modern era, as the stock market is regulated, banking and finance are regulated, and the standards of accounting are regulated, all in an effort to combat elements of fraud and corruption in business. To a large degree, the expansion of publicly traded companies and universal taxation has led to a systematization and standardization of accounting into accepted standards of practice and professionalism that are integral to the health of modern economies. (Winjum, 1971) The use of debt spreads to nearly every consumer through credit cards, personal banking, home mortgages, and other aspects of personal finance that recognize accountancy as a fundamental of education related to modern citizenship. Because of this, investors receive better information in 2010 than they had done in the past. Financial reporting improves over time through addressing problems directly through reform in corporate law or in increasing regulation and standardization through institutions. V. Conclusion In “The history of accounting and the transition to capitalism in England,” R.A. Bryer writes: “In this historical process, the rate of return mentality combines with the mentality of maximizing surplus labour within production, to produce the modern capitalist mentality, that pursues the maximum rate of return on capital employed in production.” (Bryer, 2000) Following the initial definition of capitalism, a historical interpretation in stages can be developed, with the pre-historical roots of capitalism found in the development of trade, money, and systems of exchange between people. Capitalism also relates to the rise of private property, agriculture, crafts, technology, and tools, especially as these relate to individual and group production. The development of the concept of work, employment, and wage labor can also be found in primitive and pre-historical societies. Early capitalism is represented by a wider range of trade, increased diversity in products, and guilds, represented as collectives of artisans or skilled workers with religious affiliation. High Capitalism is seen in the widespread development of industry in British society based on scientific progress and invention. Late capitalism builds on the Industrial Revolution and innovation in technology to advance mass-production systems that lead to revolutions in human life, characterized by the advances in transportation, telecommunications, energy, and information technology. The task of the historian of capitalism is to search for the roots of its development in these socio-economic patterns, and to further distinguish the stages of growth of later versions of capitalism through fundamental characteristics. 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