Zen and the Art of Double Entry Bookkeeping: On Accounting and Accountability
By Andrew Benedict-NelsonApril 29, 2014
The Reckoning by Jacob Soll
ACROSS THE IDEOLOGICAL SPECTRUM, histories of capitalism used to be monolithic tales. For Karl Marx, capitalism was a necessary phase on the way to revolution. For Max Weber, the Protestant work ethic was refined into one component of a rationalist “iron cage.” Meanwhile, scholars more friendly to the world of finance tended to assume it was just a part of the inevitable modern mix of technology, liberalism, globalization, and the like.
Since the end of the Cold War, the story has become more fragmented. Historians of capitalism have followed the trend toward more focused cultural history, producing rich descriptions of the merchants or middlemen of various eras that also make less ambitious claims about the political economic whole.
But who can blame them, when the dynamics of capitalism in our own time seem so topsy-turvy? Category confusion abounds between public and private, market and state, as the preservation of economic growth has become one of contemporary government’s primary functions. And when the future of today’s markets could turn on American collateralized mortgages or Greek government debt or uninhabited Chinese skyscrapers, a well-ordered global picture of capitalism seems like an unrealistic level of resolution.
Nevertheless, one longs for a way of reading history that makes some sense of the fickle financial forces that still seem to bind the world. Happily, this is what Jacob Soll has achieved in his brilliant, deceptively brief book, The Reckoning: Financial Accountability and the Rise and Fall of Nations.
Soll pulls off the miracle of making his history not a monolith but a mosaic. He examines financial affairs in a dozen eras with a cultural historian’s flair for fidelity, but then assembles these fragments into a whole that leaves the reader satisfied with everything except the status quo. That’s because what emerges from The Reckoning is an enormous missing concept in our debates over market and state, as well as a mandate to rearrange our thinking in response.
That concept is accountability, which one could define as the capacity for citizens to read the financial code of the public and private programs that govern their lives. As Soll’s story makes clear, it’s a capacity that requires both a financially literate public as well as institutions that can tolerate an audit. This mutual relationship fits the setting where Soll’s account of accounting begins: the republican city-states of Renaissance Italy.
No one knows who invented double-entry accounting, but it was a necessary technology to process the real-time profits and losses of complex, multi-partner firms that sprung up in that time and place. But from the start, accounting wasn’t just a tool for private enterprise. The City of Genoa incorporated it into both the administration of the city and its legal code. Cosimo de' Medici used it to secure a central place in the European economy not just for his bank but for Florence itself. The first manual on double-entry accounting by the Dominican friar and mathematician Luca Pacioli was a guide not just to making books, but to building the kind of moral merchant class proper to a republic.
Soll is an early modern historian by training, and one of the most pleasing aspects of The Reckoning is the way in which he comprehends accounting not as the technical specialty it is today, but as a virtue whose influence waxed and waned as a part of the premodern firmament. Every chapter draws upon art and literature to consider the ways in which bookkeeping was conceived as part of the culture of the time. This cultural contest explains in part why Medici-style capitalism did not conquer the world. Accountancy always had to compete against Christian asceticism and suspicion of usury (though the Vatican depended on the Medicis to clear its checks). Soll explains how the shifting values of the Renaissance empowered the art of accounting in one generation then discarded it in the next. Neo-Platonic educational ideals de-emphasized merchants’ artisanal knowledge. Pacioli’s accounting guide was vastly out-sold by Baldassare Castiglione’s The Courtier, which encouraged young men to adopt an attitude of sprezzatura, “the aristocratic illusion of effortless achievement.” Keeping an eye on the books became déclassé.
As fate would have it, Italy’s republican spirit would soon be extinguished by the power of the Spanish and the French. Soll shows the ways in which accounting was haphazardly applied as a tool of governance in the Spanish Hapsburg realms, but could never truly handle that global empire’s disparate demands. Instead, the “fragile tradition” was taken up by the Dutch. In this period, the Netherlands itself was a kind of violent entrepreneurial project, experimenting with various forms of governance as it sought to extricate itself from Spain’s grasp (though as Soll observes, Dutch merchants exploited the commercial potential of Spain’s empire more effectively than Madrid ever did).
Here Soll’s early modern sensibilities help as well. The Dutch East India Company was simultaneously the world’s first modern corporation and a tool of the nascent Dutch state. Soll has no trouble analyzing it both ways. As a business enterprise, the VOC (to use the Dutch acronym) reinforced the need for reliable double-entry accounting — when investments took the form of ships making voyages around the world, one couldn’t simply count the guilders in the vault to know an enterprise’s worth. But as Soll observes, the VOC also functioned as the military arm of the Netherlands and a source of wealth for the Low Countries’ people. This led to debates over how transparent the VOC’s finances ought to be and to what extent shareholders and citizens had a right to understand them. In Soll’s hands, these disputes are credited not just to the history of the state or the corporation, but a new, unified story of financial accountability that cuts across all these institutions.
Soll sketches a similar story for 18th-century England, another nation where a people educated in accounting debated a dubious public project; the South Sea Company was both “a miracle of modern finance” and prompted “the first bailout,” he says. But the pièce de résistance is his chapter on the years that led up to the French Revolution. Though accounting was held in much lower esteem in France than in England or the Netherlands, Soll says it was in the late 18th century that the French gifted to Western civilization “a lasting language of accounting and accountability.”
Previous historians have told the story of how the fiscal revelations of royal finance minister Jacques Necker helped set the stage for revolution. But in the context laid out by Soll, Necker’s policy takes on much greater significance. Necker’s Compte rendu was the first comprehensive description of a major nation’s financial workings. The finance minister released the document in response to critics like those who had attempted to assess the VOC or the South Sea Company. But in “calling their bluff,” Necker demystified the finances of the Crown and shifted the basis of the state’s legitimacy. “This was literally revolutionary,” Soll writes, “for Necker was implying that it was not the king’s personal will that constituted political power, but rather the management of state accounts, for which he himself took credit.” L’état, c’est math.
Soll skillfully reads the Compte rendu as an artifact of 18th-century statecraft. For example, he slyly observes that Necker’s military omissions kicked off “a venerable tradition of underreporting, or keeping military spending off the books, out of national interest.” But the real prize is the story of how Necker’s portrayal of the ancien régime not as a divinely mandated order but as “a set of shocking numbers” reverberated in the culture of France and beyond.
The Compte rendu were a surprise bestseller, news item, and topic of public discussion. When court politics turned against Necker, his enemies and his successor published their own competing accounts of state finances. After the Revolution, the new constitution required the regular publication of accounts by the new state. Necker also found his admirers among the American Federalists, who incorporated similar ideas into the U.S. Constitution and the young republic’s fiscal policy. Accountability had become a key component of the modern state, and we now take for granted the idea that any citizen ought to find out how much is being spent on the various activities of government (even if our ability to understand those numbers is often lacking).
Of course, no story ends so neatly. In a book that paints patient portraits of earlier eras, Soll’s treatment of the 19th and 20th centuries is somewhat brisk. But any inhabitant of the modern world knows the score: financial entities that are too complex and far-reaching to be meaningfully audited, an intermingling of state and market financial policy that leaves citizens feeling bewildered, and a recurring cohort of tricksters who use the tools of accounting to stay a step ahead of the law.
Curiously, Soll says that while we live in a world where there are more things to count than ever, the virtue of accountability has gone into an odd sort of occlusion. The art of accounting — but more importantly, the public responsibility for it — has now been assigned to a technocratic sub-caste in a small number of firms. In the 20th century, these firms carefully carved out a culture of incorruptibility. Arthur Andersen boldly claimed there was “not enough money in the city of Chicago” to make him sign off on a set of bad books — a claim that was infamously vacated generations later as Andersen was brought down in the Enron scandal.
Those scandals are just the first of a series of sins Soll chalks up to the absence of accountability in today’s world. From the unreliability of credit rankings to the labyrinth of Chinese state finances, he sees “a world financial system that is opaque not at all by accident, but rather by multiple designs.” The challenging conclusion:
By separating finance into its own sphere, we have lowered our financial and political aspirations. Once, we asked those who thought about and practiced finance to consider the numbers of accounting as an integral part of society and culture, even elevating the mundane numbers of account books to the analysis of religion and great literature. It is this cultural ambition that we will need to recapture if we are to face down our future reckonings.
I came away from The Reckoning persuaded that those of us in the habit of calling for greater accountability in our public and private institutions must also ask more of ourselves. There are plenty of us who love to natter on about secrecy in the Pentagon or Goldman Sachs but who could never make sense of the numbers even if they conveniently appeared one day in our Dropboxes.
That might be solved through a round of Coursera or two, but the restoration of the virtue of accountability to our society is the real dilemma. I think Soll is right to go to the category of culture. I appreciate his idea that we long for a 21st-century Charles Dickens, a figure who could “bring alive the complicated world of financial accounting with a brilliantly multilayered social and moral analysis.” But The Reckoning also shows the diverse set of resources that different cultures have enlisted to establish accountability and tame the capitalist beast. Dutch water management, British religious dissent, American postal regulations — all these elements come into play in each of the accountability cultures Soll describes.
So who knows what we could use today? Exploring the possibilities would take its own book. My hope would be that there is a role for technology; today’s digital tools allow for coordinated action independent of corporations, the state, or the Big Four accounting firms. Whether it takes the form of a Wikipedia or a Wikileaks, one could imagine a kind of accountability that is distributed throughout the citizenry once again. In the meantime, I’d recommend a reading of The Reckoning to raise demand for the kind of accountability our culture must eventually supply.
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