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Accounting and its Relationship to General Equilibrium Theory
Abstract
Accounting both for macro and microeconomic purposes deals with process and dynamics. Much of the best microeconomic theory has dealt only with statics. General equilibrium theory shows the virtues of a price system, but abstracts from price formation and all of the accounting problems which appear in disequilibrium. An approach is suggested here for reconciliation of accounting with general equilibrium. More generally, it is suggested that the importance of accounting to economic theory has been underestimated.
... (p. 145). There are very recent suggestions towards imposing a micro-accounting framework to microeconomic theory (Coase, 1990; Shubik, 1992 Shubik, , 2003). Present aim is to complement the economics of the firm with a set of definitions taken from micro-accounting as it typically happens in macroeconomics with national accounting, international economics with balance of payments, monetary economics with the credit multipliers, in cost-benefit analysis and the like 4 . ...
... Incidentally, financial scandals should also draw attention to the sharp split-off of formal education in economics from modern accounting theory and principles. This progressive gap may furthermore jeopardize a deeper understanding of the world of firms and represent a waste of a much relevant information for new ideas and testing of theories (Coase, 1990; Stonemann and Toivanen, 2001; Shubik, 1993 Shubik, , 2003), and even impede a much needed renewal of didactics in economics (DeBoer, 1998). One should warn since now that accounting principles, practices and figures should not be taken at their face value for there are differences in concepts and definitions and valuation methods and procedures between economists and firm accountants (Demsetz, 1997 (V commentary); Balakrishan, Sivaramakrishnan, and Sunder, 2001, Cummings, 2003). ...
This paper provides an initial rational reconstruction of Coase’s unmistakable way of doing economic analysis in a manner coherent with his objectives (and mine). It is founded on his microanalytics as extended, refined and clarified by Williamson, Alchian, Demsetz, Ménard, Foss, among others. It goes without saying that it does not purport to answer the impossible question of “what did Coase really say?â€. Firms are normally depicted in marginal analysis as almost exclusively concerned with possible costs and revenues: as having a profit-and-loss account but no assets-and-liabilities statement (or balance sheet), i.e. as if they had no structure in terms of resources and related property-rights, and debts. That is possibly one of the main reasons why an increasing number of scholars see much of firm theory as a “bodyless disciplineâ€. There are differences under many respects between standard treatments and Coase’s but they are not desperately conflicting or diverging. Rather, it is possible to show that much of received firm economics can be reinterpreted and salvaged by “regionalizing†it, i.e. by showing that it is a special case plausible under the very restrictive set of assumptions most clearly spelled out long ago by Léon Walras. In most standard treatments they are all uncritically and - what is even worse - implicitly retained even when partial equilibrium analysis is at issue. I maintain that they should be abandoned to take full advantage of the AC approach, thrust and potentialities. Present paper is a starting step in that direction, first i) by giving operational definitions to such concepts as cost and “transactionâ€, and ii) by introducing a vision of the firm as a set of activities or functions very much in line with Coase’s (and Stigler’s); secondly, iii) by following Klamer and McCloskey’s ideas as to the master metaphor of economics, and some of Shubik’s suggest
... Instead, they assume that market participants follow the model of the perfectly rational and informed homo economicus, who is instantly able to make optimal choices that are consistent with market equilibrium. As explained by Emrich and Follert (2019) and Braun (2021), the homo economicus is a methodological device that allows economists to sidestep the discussion around complicated market processes and their institutional preconditions (Shubik 2019). By assuming perfectly rational and fully informed market participants, economists do not have to explain how the market works, that is, how competing profit-oriented firms operating in the market allocate resources and coordinate the production process. ...
According to the widespread, neoclassical market ideology, market prices are not simply helpful, yet imperfect, reference points for consumers and profit-seeking enterprises. Rather, they are interpreted as reflecting the true value of goods. The hypothetical end result of the market process - the market equilibrium - is thereby assumed to be an ever-satisfied condition of the market economy. Based on this unrealistic presupposition, this market ideology maintains that the performance of managers can be evaluated from the prices of the (net) assets they control and, in the case of publicly traded companies, share prices. The share prices supposedly reflect the value that managers create for shareholders and, thus, the economy as a whole. If this were actually the case, the maximization of so-called shareholder value would be a socially beneficial goal for managers. The present paper demonstrates, however, that the ongoing reorientation of corporate governance toward the maximization of values (as revealed by share prices) instead of profits (as determined by the accounting system) destroys the very market processes that coordinate business activity and allocate resources in the market economy.
... The capital asset pricing model's original theoretical foundation by portfolio selection theory (Markowitz 1952(Markowitz , 1959 as well as its alternative foundation by arbitrage pricing theory (Ross 1976) also require access to a perfect and complete capital market (Follert 2023). 11 Since neoclassical assumptions are neither fulfilled nor feasible (Buchanan and Vanberg 1991;Shubik 2019), neoclassical market theory is, from our point of view, not adequate for substantiating transfer pricing. Furthermore, referring to neoclassical market theory is selfcontradictory since transfer pricing guidelines are superfluous on perfect markets where prices are objective and observable. ...
International tax law is characterized by the arm’s length principle. However, the arm’s length principle is highly criticized since it is seen as a major driver of tax avoidance. Although the OECD’s Two-Pillar Solution and EU initiatives seem to indicate that international tax law is in a state of change, the arm’s length principle remains relevant. Therefore, we deal with the question whether it is possible to improve the arm’s length principle. While previous attempts ask, for example, whether it is possible to reduce its complexity, we focus on the aspect that the OECD Transfer Pricing Guidelines do not refer to a theory of the formation of prices in transactions between independent parties. We advocate developing a theoretical substantiation and introduce a new interpretation of the arm’s length principle, based mainly on concepts of a general evolutionary theory and political-cultural market theory. This reference to an adequate market theory leads us to a new interpretation of the arm’s length principle that differs considerably from the current interpretation. Still, we doubt that this new interpretation of the arm’s length principle alone can reduce tax avoidance significantly. However, understood as one instrument in a mix of instruments, we estimate that this interpretation of the arm’s length principle constitutes a more adequate means for fighting tax avoidance of multinational corporate groups than its current interpretation.
... The price and accounting systems work together to steer market price formation over time (Biondi, 2011). Accounting institutions are logically necessitated by the market process (Shubik, 2007). In Iraq, these principles can be used as well. ...
This paper integrates the market process approach from the Iraqi Economics with capital theory as conceived by the Historical School, providing a conduit to delve into the diverse methodologies of financial accounting. In this context, the significance of the revenue-expense approach becomes apparent. This method is instrumental in promoting a balance in the market, commonly known as market equilibrium. The revenue-expense approach's net income determination facilitates uncovering price structure inconsistencies. It discloses essential market information and provides insights into possible pricing disparities. This critical function makes it a key player in maintaining the market's overall balance. The balance-sheet approach, which heavily relies on fair value measurement, assumes that the market is always in equilibrium. However, this assumption is problematic, as balance in the market cannot be achieved purely through fair value accounting. In an interesting twist, for the balance-sheet approach to be practically applied, it requires an efficient working market process that incorporates financial reporting based on the revenue-expense approach. Hence, this paper portrays the balance-sheet approach as relying on the very methodology it often contradicts. The nuanced interplay between both approaches and their individual contributions to market equilibrium forms a complex, pivotal aspect of financial accounting.
... In fact, actors are faced with a large number of possible options and cannot assign objective probabilities to possible states of nature (Witt 2009). Second, neoclassical theory cannot endogenously explain many of the events we are confronted with in reality, such as innovations and learning of individuals, bankruptcy, the use of money, or the existence of institutions such as firms or multinational corporate groups (Shubik 2007). Thus, with respect to tax avoidance, neoclassical theory cannot adequately explain why some multinational corporate groups avoid taxes and others do not (Hanlon and Heitzman 2010). ...
This paper deals with the question whether there are reasons to deem multinational corporate groups ethically or legally responsible for paying their fair share of taxes. Ethical concepts argue that companies should generally be held responsible, but these findings contradict the mainstream market theory that understands companies as legal fictions and therefore not ethically but merely legally responsible. In contrast, we base our argumentation on the political-cultural market theory. We find that this theory provides reasons to ascribe an ethical responsibility for paying their fair share of taxes to multinational corporate groups. We argue, moreover, that this ethical responsibility also speaks for a legal responsibility. The prevailing tax law, particularly the arm's length principle, does generally not see groups as tax subjects. This currently missing legal responsibility gives reasons to rethink tax law. Therefore, we analyze whether the OECD Pillar One proposal may be an alternative to existing law.
... In this note only economist's responsibility is stressed". M. Shubik (1993). ...
... More generally, it is suggested that the importance of accounting to economic theory has been underestimated". M. Shubik (1993) In historical terms, the first step in the development of accounting regulation occurred within the monarchy microcomptable regulation. Under this approach, the accounting is concerned with the coordination of profits distribution among the actuators using the commercial code or the act of the company. ...
Accounting techniques as social norms and kind reflection vector describe the society conventions and
principles. This societal reflects let it more complex and esoteric. Accounting seems a buildings
assortment, historically dated and generating economic effects as a mechanism for tracking and remote
monitoring the economic activity evolution. Accounting science is rooted, it is no longer neutral. In this
sense, it would be more a gradually building steeped in cultural influences, social conflict and political
issues and economic investments choices. Given the economic activities complexity and the interest
deregulation, accounting sciences remain as an analysis tool for major conflicts, differences, and each
party opportunistic concerns. A management tool for vertical relationships, guided by personal preferences
and attitudes which each consider meditation to increase its profit margin and its timeliness. In this
environment, information has become the success secret and a profit source.
Keyswords: Accounting regulation, investment, credit, Financial Stability
Jel classifications: G38, E21, G18.
... Des Weiteren spricht gegen die neoklassisch verstandene Harmoniehypothese, dass die neoklassische Markttheorie für zahlreiche Probleme der realen Welt blind ist, weil diese in vollkommenen Märkten unter Sicherheit oder stochastischer Unsicherheit nicht definiert sind. Hierzu zählen beispielsweise absolute Ressourcenknappheit (Holstein 2003, S. 38-68, 288), Innovationen und das Lernen von Individuen, Illiquidität, der Gebrauch von Geld oder das Vorhandensein von Institutionen wie beispielsweise Unternehmen (Shubik, 2007). Deshalb verknüpfen institutionenökonomische Theorien neoklassische Theorie häufig mit (partiell) asymmetrischer Information oder positiven Trans aktionskosten. ...
Business administration argues that means-end-analysis in the interest of firms does not need to take the interests of other actors into account. Its implicit or explicit reason is that there is a harmony between firm goals and the interests of other actors. This study objects from a critical rationalist perspective that such harmony hypotheses are not empirically confirmed. Because of this, actors are not truly free to pursue their own interests. Instead, this study argues that actors on markets are allowed to pursue their own interests as long as they consider the legitimate interests of other actors at the same time. The study goes on to show how business administration should analyze means-end-statements that try to realize this market value.
... In other words, goals are only adequate if it is possible to design environmental conditions according to the assumptions of the empirical hypotheses (Albert 1985;1999). For that reason, a pareto-efficient market is not an adequate social order value because the assumptions of a perfectly competitive market contradict reality (Shubik, 2007). Secondly, we have to consider that rules can cause secondary effects (Albert, 1999). ...
This paper examines whether a one-book-system that takes the commercial law profit definition as tax base (the so-called authoritative principle) is adequate from an evolutionary point of view. We consider firstly the case that European International Financial Reporting Standards (EU-IFRS) are relevant for all statements with the authoritative principle based on EU-IFRS. Secondly, we examine the fact that EU-IFRS focus on the consolidated annual accounts and that the national accounting principles are relevant for individual statements. Tax law analysis under genuine uncertainty requires a framework and we present such a framework. It entails an interpretation of equality of taxation, a hypothesis on the functioning of markets, an interpretation of realizable and desirable market goals, tax effects hypotheses, and action hypotheses for personal and corporate companies under genuine uncertainty. Contrary to the mainstream of accounting literature, from our evolutionary point of view, the authoritative principle is adequate. The reason is that commercial profit is an adequate instrument to achieving the tax goal equality of taxation in the sense of reducing expectable tax avoidance decisions. This is the case because according to evolutionary action hypotheses as well as tax effects hypotheses, commercial profit can be a subjectively rational decision criterion for personal and corporate companies alike. Equality of taxation is for its part in line with the evolutionarily interpreted social values freedom of choice and equality before the law. Since we focus on the question if the existing commercial profit concept can be an adequate tax base, we do not discuss whether we would have more reasons to take a conservative profit concept as tax base rather than EU-IFRS. Just as little, we analyze whether it is better to take EU-IFRS profit as tax base although national accounting principles are relevant for individual statements.
... As equilibrium approaches do not disentangle the specifics of the trading process, the in- teractional nature of its dynamics and its epistemic preconditions, concerns have been raised that this modelling strategy does not correctly lead our understanding of share markets activity especially concerning the choice of regulatory designs and regimes (Shubik 2007;Kirman 1999;Biondi 2011b). In particular, Sunder (1997) chapter 7, noted that information from outside the market pricing process needs to be gathered and interpreted by market players in order to be integrated in the market prices; quoting the author: the hypothesis of instantaneous adjustment of price to new information leads paradoxically to the conclusion that such an adjustment cannot occur due to the absence of private incentives to gather information'. ...
Biondi et al. (Phys A 391(22):5532–5545, 2012) develop an analytical model to examine the emergent dynamic properties of share market price formation over time, capable to capture important stylized facts. These latter properties prove to be sensitive to regulatory regimes for fundamental information provision, as well as to market confidence conditions among actual and potential investors. We comparatively assess accounting models belonging to two main families: historical cost accounting and mark-to-market (fair value) accounting regimes. Regimes based upon mark-to-market measurement of traded security, while generating higher linear correlation between market prices and fundamental signals, also involve higher market instability and volatility. These regimes also incur more relevant episodes of market exuberance and vagary in some regions of the market confidence space, where lower market liquidity further occurs.
... From a dynamic perspective ( Biondi et al., 2007), accounting for the firm does not fit with a neoclassical financial economics rooted in the price system, but there is a need to delve into the special economics of institutions and organ- izations. Beyond the daydreamed world of the price system, every business activity is confronted with real dynamics and complexity (Shubik, 1993). In this context, accounting cannot be considered as a neutral technique, since it shapes and frames the actual working of the entity itself, as other institutions do. ...
... No investor can then observe fundamental value, but the market aggregating process enables its emergent collective discovery. As equilibrium approaches do not disentangle the specifics of the trading process, the interactional nature of its dynamics and its epistemic preconditions, concerns have been raised that this modelization strategy does not correctly lead our understanding of share markets activity especially in the context choosing regulatory designs and regimes (Shubik 2007; Kir man 1999; Biondi 2011b). In particular, Sunder (1997) chapter 7, noted that information from outside the market pricing process needs to be gathered and interpreted by market players in order to be integrated in the market prices; quoting the author: 'the hypothesis of instantaneous adjustment of price to new information leads paradoxically to the conclusion that such an adjustment cannot occur due to the absence of private incentives to gather information'. ...
Biondi et al. (2012) develop an analytical model to examine the emergent
dynamic properties of share market price formation over time, capable to
capture important stylized facts. These latter properties prove to be sensitive
to regulatory regimes for fundamental information provision, as well as to
market confidence conditions among actual and potential investors. Regimes
based upon mark-to-market (fair value) measurement of traded security, while
generating higher linear correlation between market prices and fundamental
signals, also involve higher market instability and volatility. These regimes
also incur more relevant episodes of market exuberance and vagary in some
regions of the market confidence space, where lower market liquidity further
occurs.
... The …nancial framework is then featured by two distinctive institutional dimensions: the share market, which endogenously generates a collective information driven by the market dynamics (Phelps 1987; Kirman 1999) – that is, the series of clearing prices …xed by the Share Exchange through time; and a not-market dimension, which generates a collective information generated outside the market, driven by institutions that are complementary to the market and that facilitate its making (Frydman 1982; Sunder 2002; Biondi 2008). This institutional approach originates a di¤erent perspective on share market dynamics (Shubik 1993; Sunder 1997). According to Fama (1991 Fama ( : 1575 Fama ( -1576), the main obstacle to inferences about market e¢ ciency (that he relates to col-lective or individual " rationality " ) is the joint-hypothesis problem that makes " market e¢ ciency per se not testable " : " we can only test whether information is properly re ‡ected in prices in the context of a pricing model that de…nes the meaning of 'properly'. ...
This paper develops a model of share price formation driven by accounting and market structures. Heterogeneous investors are assumed to discover and process fundamental information disclosed by the accounting system. The information set available to share market investors is then jointly composed by market-driven and firm-specific (non-market) information. From one side, the accounting system provides collective signals of fundamental information. From another side, the price system provides collective signals of market-driven information. Both structures are significant for the formation of aggregate share market prices over time. We simulate share price formation under alternative accounting designs (namely, historical cost, fair value and target reverting accounting), and derive implications and recommendations for the concept and occurrence of speculative bubbles, the cyclical effects of accounting design on share market evolution, and share market allocative efficiencies.
... (p. 145). There are very recent suggestions towards imposing a micro-accounting framework to microeconomic theory (Coase, 1990; Shubik, 1992, 2003). Present aim is to complement the economics of the firm with a set of definitions taken from microaccounting as it typically happens in macroeconomics with national accounting, international economics with balance of payments, monetary economics with the credit multipliers, in cost-benefit analysis and the like 4 . ...
Standard theory of the firm is largely based on a set of straight-jacketing assumptions that make it ill-suited to understand and explain the institutional structure of production. To make economics of the firm more fruitful and operational many standard "hidden" assumptions ought to be dropped. After disentangling various related concepts of "transaction", the suggestion is to complement transaction cost economics with an explicit recourse to the framework provided by micro-accounting. Accordingly costs are defined as changes in equity. The inventory problem of a retailing firm with a much simplified balance sheet is then used as a benchmark to show how a problem also widely experienced by most manufacturing firms can be tackled by the suggested approach with the firm as the critical unit of analysis.
... Individuals are endowed with bounded rationality (Simon 1982; 1983) which renders impossible the behavior predicted by economics. Many authors have challenged the propositions – which are at the core of economics and finance – derived by the full rationality assumption. ...
Standard finance theory was born from the rib of neoclassical economics. Notwithstanding some assumptions have been modified or relaxed, this neoclassical finance theory (NFT) is still based upon: (1) methodological individualism; (2) the fully rational homo economicus; and (3) the capital markets’ efficiency.Despite its fast development as a comprehensive decision making theory, NFT is increasingly under attack because of the irrealism (or the anti-realism?) of those basic assumptions.The main criticisms are usually addressed to both the fully rational agent and capital market efficiency, whilst methodological individualism is more tolerated. The rationale for this chapter is, on the contrary, that the evidence that the real world is a world of organizations and institutions, which cannot be reduced to the mere aggregation of single agents’ behaviors. More dynamic and holistic features and implications have thus to enter the framework.This chapter focuses on a finance theory built around the concept of a firm as an institution. Therefore it aims at shedding light on the effects that the introduction of the entity-firm concept has on finance theory.In order to achieve its goal, the chapter is structured as follows. The second section synthesizes NFT from a methodological standpoint, also offering some insights on both its foundation and how it differs from so-called traditional finance. The third section outlines the problem of the missing entity-firm at the core of the analysis, and the fourth section presents the criticisms levelled against full-rationality and capital markets’ efficiency assumptions. The fifth section offers an analysis of how the introduction of the entity-firm concept calls for renewing finance theory, and the sixth section addresses the topic of capital structure decisions under the light of the basic premises of the entity-firm-based finance theory. Finally, conclusions are outlined.
... The working of that collective device fixing final payout relates to the role plaid by the accounting system of the business firm in the share market pricing process. Like the collective device, the accounting system provides signals of fundamental information about the financial performance and position of the business firm that has issued the shares traded (Shubik 1993). This information is somehow related to the fundamental value of those securities (Lintner 1956) and is common knowledge among all investors (Sunder 2002). ...
We experimentally explore how common knowledge provided by accounting systems affects investors’ decision and shapes the formation of security prices over time. We design alternative accounting structures and run experiments in artificial security markets framed by these structures. In sessions where investors receive exogenous accounting information about ultimate earnings, prices converge to the fundamental levels derived from those earnings through backward induction. Accounting plays a role for the market. In sessions where investors receive endogenous accounting information about earnings that are linked to the ongoing clearing price of the security, market price levels and paths become indeterminate and lose earnings anchor; investors tend to form their expectations of future prices by forward, not backward, induction. Accounting plays its role from the market, and loses its relevance in financial decision-making. These laboratory results suggest that accounting information and its overarching structure are important to prevent market exuberance, excess volatility and the formation of financial bubbles. They further have relevant effects on market allocative efficiency, and revenue and wealth distribution among investors.
... As recognised by leading accounting theorists (Zappa, Schmalenbach, Littleton, Ijiri, Anthony), the accounting view deals with the firm as an entity and with its events, resources, and transactions in real dynamics and complexity. According to Shubik (1993), time and uncertainties have essentially disappeared from the apotheosis of price system driven by equilibrium framework, but they remain the concerns of everyday business activity. The problems of how to account for their influence in the ongoing economic process are central to the development of accounting, and lead to the original accounting view of the special economics of the firm seen as an entity. ...
Why delve into accounting to understand the economic nature of the firm? A Coase's recent suggestion calls economic organization and accounting system at issue for understanding how the special economics of the firm supersedes price system in creating and allocating resources. But incomplete contracts economics has no clear theorizing of these functional modes of existence constituting the firm as a whole (constituents), surely in reason of its methodological contractualism. Starting from Coase, Shubik and Simon, instead, this paper aims at further developing this issue, exploring the accounting system, its nature and role in the special economics of the firm concerned with real dynamics and complexity. By means of the accounting system dealing with the business incomes to the firm, the economic and monetary process generated by the whole firm acquires autonomous but interdependent existence from external markets (both from factors or products markets). The accounting system constitutes thus the "veil" that allows this special process to exist. Not only the real dynamics, but also the separation between ownership, control and management (as early discussed by Berle and Littleton) asks for the entity view on the firm provided by dynamic accounting. Even to protect shareholders, this kind of accountability is required, far away from the irrevocably lost proprietary sovereignty. In this accounting-friendly transactional and institutional perspective, the firm entity functions and exists as a managed dynamic system characterized by different structures of production, institutional, organizational, or epistemic (related to the nature and role of institutions, internal organization, and knowledge in the firm). Accounting system becomes a constituent part of these structures and of the whole firm. This new perspective opens to an interdisciplinary approach linking Economics, Accounting, and Law by the shared, synthetic notion of the firm as an entity, which provides the "clue" for understanding the nature of the firm as a whole.
... This institutional approach originates a di¤erent perspective on share market dynamics (Shubik 1993;Sunder 1997). According to Fama (1991Fama ( : 1575Fama (-1576), the main obstacle to inferences about market e¢ ciency (that he relates to collective or individual rationality) is the joint-hypothesis problem that makes market e¢ ciency per se not testable: we can only test whether information is properly reected in prices in the context of a pricing model that de nes the meaning of properly.(ibidem). ...
The discovery and processing of firm-specific information is expected to play a role in the making of individual expectations and related financial decisions. The information set available to share market investors is then jointly composed by market and firm-specific (non-market) information. From one side, the accounting system provides collective signals of firm-specific information. From another side, the price system provides collective signals of market information. Both institutional devices are significant for the formation of aggregate share market prices over time. In particular, the accounting system complements the price system by constituting a lighthouse in the amazing dynamics of the share market through hazard, learning and interaction between heterogeneous investors. This framework of analysis applies here to provide a theoretical model of share price formation under such dual informational (and institutional) structure. Implications and recommendations are derived for the concept and occurrence of speculative bubbles, the cyclical effects of accounting information on share market evolution, and the "value relevance" of accounting information and its role in the formation of market share prices over time.
... For these reasons, firm-specific information is typically provided by the accounting system in accordance with the enforced conventions, standards and rules on which the disclosure and reporting processes are based. From this point of view, the accounting system constitutes one of the cognitive prerequisites that enable investors to effectively play the stock exchange over time, leveling the market playing field by providing common knowledge on the business entity's performance and position over time (Shubik 1993; Sunder 2002). ...
In listed companies, the Board of directors has ultimate responsibility for information disclosure. The conventional wisdom is that director independence is an essential factor in improving the quality of that disclosure. In a sense, this approach subordinates expertise to independence. We argue that effective certification may require firm-specific expertise, in particular for intangible-intensive business models. However, this latter form of expertise is negatively related to independence as it is commonly measured and evaluated. Accordingly, there exists an optimal share of independent directors for each company, related to the level of intangible resources.
... Concerning the special environment of the business firm, Shubik (1993) contends that actual accounting systems are neglected by neoclassical theorizing. According to the latter, Shubik (p. ...
The accepted approach to capital budgeting leaves decision makers without appropriate guidance because it ignores the cognitive, organizational, and institutional dimensions of their decision-making process. This approach is based upon the unrealistic assumptions of neoclassical finance, where investors are assumed to be (or behave as if they were) fully rational and informed. This chapter explores the opportunity to analyze capital budgeting decisions within a more realistic context. To reach such an objective, it summarizes alternative perspectives addressing these specific dimensions: the cognitive, the organizational, and the institutional. All together, such dimensions suggest generalizing the current approach based on discounted cash flow analysis to provide decision makers with alternative ways to assess investment opportunities under more realistic approaches driven by behavioral and institutional finance.
... This approach actually implies a peculiar understand- ing of the market coordination between individual investors. This coordination is supposed to be achieved in a solitary moment beyond time and context [17] when all investors contemplate the past, present and future of the business firm and univocally agree on its fundamental value of reference. ...
Financial economic models often assume that investors know (or agree on) the
fundamental value of the shares of the firm, easing the passage from the
individual to the collective dimension of the financial system generated by the
Share Exchange over time. Our model relaxes that heroic assumption of one
unique "true value" and deals with the formation of share market prices through
the dynamic formation of individual and social opinions (or beliefs) based upon
a fundamental signal of economic performance and position of the firm, the
forecast revision by heterogeneous individual investors, and their social mood
or sentiment about the ongoing state of the market pricing process. Market
clearing price formation is then featured by individual and group dynamics that
make its collective dimension irreducible to its individual level. This dynamic
holistic approach can be applied to better understand the market exuberance
generated by the Share Exchange over time.
... The problem with fair value accounting relates to this view about markets and the firm. According to Shubik (1993), time and uncertainties have essentially disappeared from this apotheosis of the price system, but they remain the actual concern of everyday business activity. The problems related to accounting for the influence of time and complexity in the ongoing enterprise process is central to the development of accounting. ...
When international accounting standards were renamed to become international financial reporting standards, this seemed to imply that accounting no longer needed to exist, but rather had to be reconsidered as a part of financial communication and advertising. Does traditional accountability no longer matter? Betrayed investors and globalized stakeholders would dissent. A difference of nature continues to exist between fair values disclosed by managers and certified by auditors, and the actual performance generated by the enterprise entity through time, space, and interaction. In a world shaped by complex organizations facing unfolding changes, hazard and limited knowledge, the quest for fundamental principles of accounting is not academic. Accounting principles constitute a primary way that the creation and allocation of business incomes is governed; that is, fairly managed and regulated in the public interest, having respect to “other people interests.” This article adopts a dualistic posture that opposes the accounting conceptual frameworks based on fair value (market basis) and historical cost and revenue (process basis). The fundamental premises about the underlying economics of the enterprise entity are discussed, including the representation of the business and the concepts of asset and liability. References are made to the case of accounting for intangibles, and to the distinction between equities and liabilities. The cost and revenue accounting perspective is then defended in terms of accountability, but also from the informational viewpoint: historical accounting information plays a special role as a lighthouse in the dynamic and strategic setting of the Share Exchange. In particular, two refinements of the historical cost (and revenue) accounting model are suggested. The first one regards the treatment of earned revenues from continuing operations, and the second, the recognition of shareholders' equity interest computed on the actual funds provided in the past, coupled with the distinction between shareholders' equity and entity equity.
... For these reasons, the production of firm-specific information is typically performed by the accounting system, which provides enforced conventions, standards and rules to frame the disclosure and reporting processes. From this point of view, the accounting system constitutes one of the cognitive prerequisites that enable investors to effectively play the share exchange over time, leveling the market playing field by providing common knowledge on the business entity performance and position through time (Shubik, 1993; Sunder, 2002). This section analyses the special role played by accounting in the disclosure of information (2.1.) ...
In listed companies, the Board of directors is the ultimate responsible of information disclosure. The "conventional wisdom" considers independence of directors as the essential attribute to improve the quality of that disclosure. In a sense, this approach subordinates expertise to independence. However, effective certification may require finn-specific expertise, in particular for intangible-intensive business models. However, this latter form of expertise is negatively related to independence as it is commonly measured and evaluated. We show that there exists an optimal share of independent directors for each company, related to the magnitude of intangible resources.
... From a dynamic perspective (Biondi et al., 2007), accounting for the firm does not fit with a neoclassical financial economics rooted in the price system, but there is a need to delve into the special economics of institutions and organizations . Beyond the daydreamed world of the price system, every business activity is confronted with real dynamics and complexity (Shubik, 1993). In this context, accounting cannot be considered as a neutral technique, since it shapes and frames the actual working of the entity itself, as other institutions do. ...
This paper aims at understanding the recent evolution of Chinese accounting standards while focusing on accounting for business combinations as a case of reference. A comprehensive comparative analysis between the standards of the International Accounting Standards Board and Chinese accounting standards is provided, based upon a dualistic approach towards two opposing perspectives of accounting, static (fair value) and dynamic (matching based). The comparison casts doubt on the ultimate convergence of Chinese and international accounting standards. Main differences remain and are explained by taking into account: (i) the special Chinese context, (ii) the massive industrial development experienced by business enterprises in China and (iii) the dynamic accounting perspective that leading accounting theorists and Chinese regulatory authorities agree with and wish to encourage.
The present paper is a commentary on the article “The relationship between Taxation, Accounting and Legal Forms”, which has already been published in AEL: A Convivium. The article deals with Controlled Foreign Corporation rules (CFC rules) from a profit-seeking perspective. It develops tax schemes and assumes them to be adequate means to avoiding the Austrian or German CFC rules. This commentary argues that from the perspective of a critical rationalist methodology, the topic and the findings of the article need to be viewed with some reservation. A substantial objection applies to the article’s statement that the developed tax schemes are adequate to achieve the end of optimising the effective tax rate. However, there is the even more substantial objection that neither the developed tax schemes nor the end of optimising the effective tax rate without taking the interests of society systematically into account are legitimate. However, the article fails to address the major societal issue of how to reduce tax avoidance.
Although wealth inequality is increasingly considered a massive societal problem, only a few jurisdictions charge wealth taxes on a wide range of assets on annual due days.
Against this backdrop, the present paper asks whether there are reasons to tax wealth from a tax equity perspective. It interprets tax equity as a procedural rule, which means taxing people with equal ability to pay equally and people with unequal ability to pay unequally. Since ability to pay refers to ‘economic capacity’, which is often understood as economic power, which in turn depends on the interpretation of market theories, answering the research question requires reference to market theories.
The paper shows, firstly, that economists who argue that a wealth tax in addition to an income tax leads to double taxation refer to neoclassical market theory and its power interpretation. However, neoclassical market theory is not adequate to justify that wealth should not be taxed.
Secondly, the paper provides an alternative ability to pay interpretation and a different understanding of wealth. It refers to political-cultural market theory that explicitly deals with power and power distribution. From this perspective, there are reasons to ascribe an ability to pay to wealth that is independent of the ability to pay of income. For that reason, taxing individuals’ wealth supports tax equity.
Thirdly, the present paper asks whether wealth taxation is feasible. It finds that, from the perspective of the political-cultural market theory, the main obstacle preventing the introduction of wealth taxation lies in the prevailing neoclassical market culture.
Many economic theories rely on equilibrium. Notwithstanding its widespread framing role, the very notion of equilibrium shows epistemic and methodological limits when confronted with space, time, human behaviour and institutions. A systemic perspective may upgrade equilibrium by considering the featuring roles of economic organisation (entity), money and accounting in the economic process. This article tributes to Martin Shubik’s scholarship and friendship by providing a systemic perspective on his last co-authored book with Eric Smith.
This paper combines the market process approach developed by the Austrian School of Economics with the theory of capital as worked out by the Historical School in order to provide a suitable framework for discussing the two competing approaches to financial accounting. Within this framework, it becomes clear that the revenue-expense approach with its emphasis on actually realized, historical transactions plays an important role in creating a tendency towards market equilibrium. Net income determined according to this approach provides information to the market on where there are gaps in the price structure. The balance-sheet approach, on the other hand, and particularly fair value measurement take market equilibrium for granted. Based on fair value accounting, an equilibrium could never be accomplished in the first place. Ironically, in order to be applicable, the balance-sheet approach presupposes the perfect working of the market process, including financial reporting based on the revenue-expense approach.
This treatise takes a fresh (and somewhat contrarian) look at the long history of accounting lead-ing up to the time of Luca Pacioli, who has long been considered the "father of accounting." It first examines the centuries immediately preceding the time at which Pacioli recorded the Vene-tian technique of double-entry bookkeeping, in order to reveal why the model appeared in Italy during the fifteenth century. It also addresses the manner in which Pacioli's work misdirected accounting historians' efforts as they have sought the origins of accounting. Secondly, this trea-tise looks at stimuli explaining probable origins of accounting in earliest sedentary human cul-tures, in order to separate origins of accounting activity from the origins of bookkeeping. It is po-sited not only that the dawn of the institution of private property was the sole requirement for the existence of accounting activity, but that many of the factors (including writing and formalized mathematical systems) often believed to be necessary prerequisites for accountancy are most like-ly consequences of, not prerequisites to, the accounting process. This treatise concentrates atten-tion on accounting for privately-owned entities rather than governmental accounting issues, part-ly because Pacioli himself concentrated on that aspect of accounting, but most importantly be-cause everything said herein regarding fundamentals of accountancy is equally valid, with appro-priate modifications, for governmental and nonprofit entities.
Recent financial crises and scandals have focused attention on the system of governance and disclosure in a way many may never have imagined and few welcomed. Not only do reforms appear to be necessary to protect shareholders as well as other stakeholders, but also to develop a different understanding of the relationship between the financial markets and the business firm. This paper criticises two daydreams concerning the firm - as a 'black-box' or an 'owner-entrepreneur' - and contrasts them to the idea of the firm as an enterprise entity. The latter implies a comprehensive approach that integrates economics, accounting, and law. The firm is then understood as a managed dynamic system, characterized by different structures of production: institutional, organizational or epistemic (related to the place and role of institutions, internal organization, and knowledge within the firm). Accordingly, the accounting system is an integral part of this framework, one that demonstrates the joint implications of economic, accounting, and legal matters within the firm. In a business affair fraught with unfolding changes coupled with asymmetries of resources, access, control and information, the accounting system copes with the economic and monetary processes generated by the whole enterprise, by representing the enterprise capital (assets and liabilities) and income (revenues and costs). In this way, the accounting system allows this special process to exist and function autonomously from (and interactively with) financial holding of shareholders' claims traded on the Share Exchange.
In a series of recent papers professor Mark Blaug accuses the Formalist Revolution of the 1950s of having greatly damaged economic science by burying the conception of 'competition as a process' in favour of a conception of 'competition as an end-state', incompatible with realistic studies of stability. The paper argues that the criticism is convincing and in fact addressed at the Arrow-Debreu conception of equilibrium, which is a very-short-period conception due to the Walrasian treatment of the capital endowment. Given the unreality of the resulting model, which assumes complete futures markets and can study stability only under the auctioneer, the question arises of why the Arrow-Debreu model and its conception of equilibrium were so successful, given that traditionally the dominant conception of equilibrium had been a long-period one (even in Walras: new evidence is adduced in support of this last thesis). The answer is found in the problems of neoclassical capital theory. The conclusion is that professor Blaug's criticisms point to a necessity to return to the long-period method, but this requires abandoning the marginalist or supply-and-demand approach to value and distribution, because it was precisely the inability of the latter approach satisfactorily to determine long-period positions that motivated the switch to the sterile modern versions of general equilibrium
This book was originally published by Macmillan in 1936. It was voted the top Academic Book that Shaped Modern Britain by Academic Book Week (UK) in 2017, and in 2011 was placed on Time Magazine's top 100 non-fiction books written in English since 1923. Reissued with a fresh Introduction by the Nobel-prize winner Paul Krugman and a new Afterword by Keynes’ biographer Robert Skidelsky, this important work is made available to a new generation.
The General Theory of Employment, Interest and Money transformed economics and changed the face of modern macroeconomics. Keynes’ argument is based on the idea that the level of employment is not determined by the price of labour, but by the spending of money. It gave way to an entirely new approach where employment, inflation and the market economy are concerned.
Highly provocative at its time of publication, this book and Keynes’ theories continue to remain the subject of much support and praise, criticism and debate. Economists at any stage in their career will enjoy revisiting this treatise and observing the relevance of Keynes’ work in today’s contemporary climate.
To the pure theorist, at the present juncture the most interesting and challenging aspect of money is that it can find no place in an Arrow-Debreu economy. This circumstance should also be of considerable significance to macroeconomists, but it rarely is. Much of current macroeconomics is written as if the ‘real’ economy could be looked at as an equilibrium of an Arrow-Debreu economy. It is true that these economists have given the economy a sequential characterisation, but they believe that the postulate of rational expectations renders this inessential: the underlying economy could just as well be that described by Debreu. In this, I believe, they are not only careless (since the matter is never given proof) but also mistaken. It is one of my central concerns in what follows to argue this. Indeed, I shall wish to maintain the view that from our present standpoint Keynes’s theory, and in particular his monetary theory, is best understood as a denial of the realism and relevance of Arrow-Debreu equilibrium. Of course, Keynes did not and could not have put it in this way and in any case, while he had a poet’s insight, he lacked the seriousness and care of a theoretician.
A. Wald has presented a model of production and a model of exchange and proofs of the existence of an equilibrium for each of them. Here proofs of the existence of an equilibrium are given for an integrated model of production, exchange and consumption. In addition the assumptions made on the technologies of producers and the tastes of consumers are significantly weaker than Wald's. Finally a simplification of the structure of the proofs has been made possible through use of the concept of an abstract economy, a generalization of that of a game.
Of the Law of Demand 20. To lay the foundations of the theory of exchangeable values, we shall not accompany most speculative writers back to the cradle of the human race; we shall undertake to explain neither the origin of property nor that of exchange or division of labour. All this doubtless belongs to the history of mankind, but it has no influence on a theory which could only become applicable at a very advanced state of civilization, at a period when (to use the language of mathematicians) the influence of the initial conditions is entirely gone. We shall invoke but a single axiom, or, if you prefer, make but a single hypothesis, i.e. that each one seeks to derive the greatest possible value from his goods or his labour. But to deduce the rational consequences of this principle, we shall endeavour to establish better than has been the case the elements of the data which observation alone can furnish. Unfortunately, this fundamental point is one which theorists, almost with one accord, have presented to us, we will not say falsely, but in a manner which is really meaningless. It has been said almost unanimously that "the price of goods is in the inverse ratio of the quantity offered, and in the direct ratio of the quantity demanded." It has never been considered that the statistics necessary for accurate numerical estimation might be lacking, whether of the quantity offered or of the quantity demanded, and that this might prevent deducing from this principle general consequences capable of useful application. But wherein does the principle itself consist? Does it mean that in case a double quantity of any article is offered for sale, the price will fall one-half? Then it should be more simply expressed, and it should only be said that the price is in the inverse ratio of the quantity offered. But the principle thus made intelligible would be false; for, in general, that 100 units of an article have been sold at 20 francs is no reason that zoo units would sell at 10 francs in the same lapse of time and under the same circumstances. Sometimes less would be marketed; often much more.
The General Theory of Employment, Interest, and Money / John Maynard Keynes Note: The University of Adelaide Library eBooks @ Adelaide.
A general model of noncooperative trading equilibrium is described in which prices depend in a natural way on the buying and selling decisions of the traders, avoiding the classical assumption that individuals must regard prices as fixed. The key to the approach is the use of a single, specified commodity as "cash," which may or may not have intrinsic value. The model, in several variants, is treated as a noncooperative game, in the spirit of Nash and Cournot. The rules of the game, including the price-forming mechanism, are independent of behavioral or equilibrium assumptions, which enter, instead, through the solutions of the game.
The existence of an equilibrium is proven for a two-period model in which there are spot transactions and futures transactions in the first period and spot markets in the second period. Prices at that date are viewed with subjective uncertainty by all traders. This introduces the possibility of speculation. Conditions for the existence of a competitive equilibrium include restriction on the nature of price expectations.
This chapter discusses the price of money in a pure exchange monetary economy with taxation. A transactions demand for money is built into the model. Further, the demand becomes discontinuously inoperative when the nil price of money occurs, as nil-price money is useless in exchange. The discontinuity in demand behavior in this neighborhood is a technical problem. Fixed-point theorems may not be directly applicable over the unrestricted price space. The transactions demand is not sufficient to ensure price positivity. However, fiat money is issued by a government possessing taxing authority. The demand for fiat money to pay taxes creates sufficient demand for fiat money so that there is positive price equilibrium and the nil price is no longer an equilibrium. When the price of money is positive, traders will deplete their money holdings to the point where the nonnegativity constraint is binding. If the constraint is not restrictive enough, however, this will result in an excess supply of money on the market and an excess demand for goods, clearly disequilibrium.
This paper applies two recently developed trading algorithms to a water quality trading (WQT) market located in the Cub River sub-basin of Utah; a market that includes both point and nonpoint sources. The algorithms account for three complications that naturally arise in WQT markets: (1) combinatorial matching of traders, (2) trader heterogeneity, and (3) discreteness in abatement technology. The algorithms enable a full characterization of the market’s performance by distinguishing a specific pattern of trade among market participants, which in turn results in as detailed a reduced- cost trading benchmark as possible for the basin. Contrary to the commonly held belief that relatively high point-source abatement costs necessitate nonpoint-source abatement effort, we find that in a WQT market where each source is required to reduce its pollution loadings it may be cheaper for point sources to sell abatement credits to nonpoint sources.
Summa de arithmetica, geometria, proportioni et proportionalita. Google Scholar
- L Pacioli