Shahid L. Ansari
UNIVERSITY OF CALIFORNIA, LOS ANGELES
Diana T. Flamholtz
LOYOLA MARYMOUNT UNIVERSITY

MANAGEMENT SCIENCE AND THE DEVELOPMENT OF HUMAN RESOURCE ACCOUNTING

Abstract: A common misconception about human resource accounting (HRA) is that it focuses narrowly upon financial accounting, that its purpose is to reflect the asset value of people on financial statements. The major purpose of HRA is to provide concepts and measurements to facilitate the effective and efficient management of human resources. It, therefore, represents a management accounting development.

Management science has played an important role in facilitating the development of human resource accounting as a managerial tool. The theories underlying HRA are derived from and consistent with the concepts and philosophy of management science developed after WW II. The rationality and multidisciplinary problem solving approaches which characterize management science were applied to HRA and together with other economic and social factors of the 1960’s produced human resource accounting.

Accounting history has, for the most part, dealt largely with the earlier development of the discipline. It has thus focused on bookkeeping and accounting as it evolved from its beginnings in Europe. Less has been done to interpret, and to put into proper historical perspective, more contemporary developments in – accounting. While it is recognized that earlier accounting developments grew out of societal needs and reflect the state of general development of contemporary societies, many recent developments are not recognized as representing the outcome of similar forces. This is important because those who use and shape accounting must anticipate the impact of societal changes upon accounting—particularly in the period of rapid change we find ourselves in today.

The twentieth century has been marked by the recognition of management accounting as a major branch in accounting. This evolution was greatly influenced by the developments in “manage-
*Our thanks to the following people who provided us information useful in writing this paper: R. Lee Brummet, C. West Churchman, Eric Flamholtz, Paul Kircher, R. O. Mason, Wm. Pyle, Burt Swanson.

The purpose of this paper is to trace the influence of management science thinking on the development of “human resource accounting” (HRA). The contribution of management science thought to HRA’s development was at two levels. First, at a philosophical level, the basic tenets of HRA are consistent with and grow out of the fundamental notions of management science. Second, at a methodological level, the development of HRA is based on basic methods of management scientists.

Management science did not bring HRA into being, but it was one of the most important factors in its rapid growth and development. The basic premise of HRA—that people are valuable organizational resources whose measurement is needed to judge how well they are utilized—has been long recognized, but it was the application of management science thought that has elevated HRA to its current status as a viable and useful management tool.

The emphasis upon management science thinking is in no way intended to lessen the importance of other factors which were re-sponsible for the development of HRA. For example, the need for the acceptance of HRA in the last decade may have a great deal to do with the general shift in the U.S. economy toward more people oriented enterprises which, having more sophisticated production technologies, need better qualified people. Research and examination of these aspects we leave to a compilation of a comprehensive history of HRA. The relationship between management science and HRA is an example of another important contemporary development—the transplantation of ideas across disciplines.

This paper is divided into three parts. The first part describes the main features of management science thinking including not only a discussion of current thought, but also a description of its evolution over the years. The second part describes the field of HRA and how management science thinking, as described in the previous section, helped shape its key characteristics. The final segment of this paper will be devoted to a discussion of what this history portends for the future.
I—What is Management Science Thinking?

The ideas and attitudes associated with the term management science (MS) are not easy to describe since the bounds of the subject have been, and still are, the subject of much debate. In recent years, the literature of management science has been concerned with abstruse theorems and complex mathematical treatises on operational problems such as inventory control, production scheduling, etc. However, there is a broader conception of MS thinking which regards MS as an attempt to practice “science-based” management. It therefore encompasses all efforts designed to substitute the “art” of managing with a “science” of managing.

A. MS Thinking up to World War II

Historically, science and scientists in management were first used in the area of military operations. One of the earliest such uses is attributed to the Greeks who employed Archimedes to solve a naval problem. His reported success against the Roman fleet encouraged greater use of scientific talents for military enterprises right down to modern times. Today all armed forces throughout the world employ regular scientific talent pools for solving operational problems.

It was the industrial revolution which first focused attention on the need for science-based management in industry, as well. Ac-cording to Smiddy and Lionel, there was a lot of talk about a “science of management” during the nineteenth century. Nothing much came out of it, however, since “those who created the industrial revolution were interested in changing the world they had brought into being.”1 There was, therefore, little movement in the direction of MS application to industry.

The first industrial application and the modern beginning of sci-ence-based management is generally attributed to Frederick Taylor.2 By training, Taylor was an engineer who believed in measurement and controlled experiments—thus his famous time and motion studies. Philosophically, he was closer to the tradition of scientific induction characterized by its adherence to a holistic view of the world. He therefore used experimentation and measurement to search for underlying principles governing the operation of industrial processes. The resulting principles of scientific management made an important contribution by introducing experimentation and statistical analysis as useful managerial aids.

The influence of the holistic view was reflected in Taylor’s at-tempt to include both men and machines in his studies. He believed that scientific management would help reduce exploitation of employees by employers through a better redistribution of wealth. He also believed that the utilization of an employee’s full potential for greater output would lead to a happier work group. This philosophy was clearly dominant in the work of Frank and Lilian Gilbreth who, because they were engineer and psychologist respectively, focused their time and motion studies on man-machine systems.

After World War I, the scientific management movement was at its zenith. It was being taught, conducted, and preached by the many followers of Taylor who had formed a Taylor society.3 Their enthusiasm, however, was confined to time and motion studies and other kinds of work measurements. A weakness of this excessive attention to work measurements was the lack of attention to the human factor. Employees were treated as extensions of machines rather than as individuals in their own rights. The result was a split between those who regarded management as a technical problem and those who felt that it was primarily a motivational problem.

Figure 1 labels the two sides of this argument as the “technical” and “humanistic” approaches to management. The technical side was primarily engaged in improving work methods and its arena was the production job shop. This trend was dominant up to World War II. The humanistic opposition to Taylor’s followers grew out of the now famous “Hawthorne experiments.” The plant sociologists who conducted these experiments founded the so-called “human relations school,” which regarded human motivation as the dominant managerial problem.

The human-relations perspective was in many respects the antithesis of the doctrine preached by Taylor’s followers. As opposed to technical determinants, the human relationists believed that social factors played a greater role in affecting worker performance. While Taylor had emphasized economic rewards, they emphasized social rewards. In fact, if we may be permitted an extreme statement, Taylor’s manager was an engineer; the human relations manager was a psychiatrist.

It is interesting to note that despite vast differences in philosophy, both these approaches shared a common methodological heritage—the inductivist-empiricist tradition in science. The so-called “Hawthorne effect” reinforced the belief of many who main-tained that the early principles of scientific induction had to be modified to recognize that the process of measurement alters the phenomena being measured. As in Taylor’s work, controlled experi-mentation and measurement were central to human-relations research.
With the advent of World War II, military management became dominant. Scientists were recruited on both sides of the Atlantic to aid in the war effort. The earliest and best known such group was the operational research group under Professor Blackett in the United Kingdom.5 This group, dubbed “Blackett’s circus” was im-mensely successful in solving several operational problems for the Army, Navy, and the Air Force. Its success spawned the formation

Ansari & Flamholtz: Management Science & Human Resource Accounting
FIGURE I Evolution of Management Science Thought

Philosophical Origins

1. Inductivist-Empiricist Approach to Science
2. A holistic system of thought Science-Based Management Applied to Military Affairs Greeks — Industrial Revolution

Industrial Scientific Management Taylor, Gilbreth, etc.

Military Applications World Wars I & II

Operations Research Post W.W. I I to 1960

Human Social Side Human Relations Movement – Post W.W. II
Technical Side Production
Management Work
Measurements etc.

Socio-Technical & Contingency Theory Man-Machine Systems

Problem & Technique Centered Approaches e.g. Queueing Programming, etc.
SystemsOriented Approaches e.g. Churchman Ackoff , Beer Boulding, etc
Problem Solving in structured Environments

of other groups and its extension into other areas, most notably intelligence. Here, too, there were spectacular successes such as the breaking of the Japanese and German codes.
The operational research methods developed during the war made two key contributions to the development of MS thinking as we know it today.

First, they brought back into sharper focus the holistic tradition which had been fragmented by the development of the technical
and humanistic approaches to management. This resulted from the use of interdiscliplinary research teams to focus on all pertinent aspects of a problem. As Trefethen stated:
. . . it broadened the point of view from which problems were approached. Whereas the time-and-motion study treated both the machines and operators as mechanical components of the total complex and attempted to make measurements as though both were equally predictable, the psychologists on an operations research team faced with a similar problem, would add such variables as motivation and morale to the factors for consideration.

Second, because the OR teams were dominated by mathematicians and physicists, they demonstrated that “mathematical solutions could be attained for extremely complex problems.”7 The idea of model building, especially in mathematical forms, became an accepted MS methodology. After World War II this concept was applied to industrial problems.

B. MS Thinking After World War II

Immediately after the war, when attention shifted back to industrial problems, operations research was regarded by many as the essence of management science thinking. OR during this period was defined and accepted as a system of thought. For instance, Solandt defined operations research as “a point of view or method of approach to the study of the operation or functioning of a complex organization.”8 In a similar vein, Kendall called OR “a branch of philosophy, as an attitude of mind towards the relation between man and environment; and as a body of methods for the solution of problems which arise in that relationship.”

The strongest statement about the philosophy and methodology of OR during this period is by Beer. According to him, “operational research is not a science, for it is not about anything; it is science.”10 Beer went on to stale that the method of science was induction. OR represented a newer form of this methodology resulting from a revision of the principles of nineteenth century induction. These principles, which were based on a stationary world, had been replaced by counterparts more appropriate to an analysis of a dynamic and rapidly changing world. Thus, to him “operational research is that subset of scientific methods which is appropriate to the analysis of activity.”

At this stage, management science thinking, as represented by OR, had the following characteristics:

(1) A holistic approach that focused on all aspects of a problem;
(2) The bringing together or synthesis of interdisciplinary specialists and special knowledge in problem solving.

While these characteristics were widely shared, they were by no means universal. Very early in the post war application of OR, dif-ferences began to emerge between what McCloskey termed the “purists” and the “functionalists.”12 The purists were initially centered in U.K. and subscribed to the belief, held by Professor Blackett, that OR was an activity suited for physical scientists and mathematicians. If an occasional social scientist was needed on a project, he was used as a consultant and was not an integral part of the activity. On the other side of the Atlantic, the Operations Research Society of America (ORSA) was their primary organization.

The functionalists were more interdisciplinary and regarded math-ematics merely as the language of OR. These individuals were affil-iated with several major universities in the United States. One group, comprised of academics at UCLA and managers from Hughes Aircraft, held organizational meetings which led to the formation of The Institute of Management Sciences (TIMS). This group believed that OR was more problem centered than technique centered. Swan states their position as follows: “. . . the problem must be the central focus and that it must be attacked by such tools and techniques as are appropriate no matter what the training of the possessors of these tools and techniques.”

The founders of The Institute of Management Sciences and its journal Management Science (whose first editor was Professor C. West Churchman of Case), were more inclined toward this broader functional view of management science. They were interested in bringing scientist and manager together, instead of being an exclusive professional society of the type exemplified by ORSA. A quick sampling of the earlier issues of the journal shows many interdisciplinary, practice-oriented contributions from marketing, accounting, finance, etc. In addition, there were appeals to broaden the scope of OR to nonoperational problems. For instance, some thought OR methodology might be usefully applied to problems such as economic development, city planning, etc.

By the late 1950’s management science in the U.S. came to be dominated by the purists. The content of the journal Management Science reflected a greater proportion of more mathematically stated solutions to operational problems such as queueing, sched-uling, etc. It is difficult to speculate on the reasons for this trend. Our guess is that it was in part a reflection of the difficulty of applying OR to “messy” nonoperational problems, and in part due to the greater successes achieved in solving problems more amenable to mathematical solutions.

The 1960’s saw some move away from operational problems into other areas. These attempts, however, were still highly mathematical and dealt largely with problems in relatively structured environments. Consequently, they were also less practice-oriented. There were signs of dissatisfaction with the major emphasis on mathematics. For example, in a recent TlMS meeting, Professor Starr, the present editor of the journal, presented a history of OR-MS publications, On a scale from “really readable” to “really mathematical” he assessed the journal’s emphasis to be closer to the “mathematical” scale while most of the readers desired emphasis to be closer to the “readable” scale.14 He felt that future issues would be less mathematical and more readable. It is not clear whether this will be accompanied by a shift to the original functional position of dealing with broader and less structured problems.
During the same period the work of those in the humanistic tradition in science based management—the earlier defectors from this greater operations orientation—continued along the same lines as before. Despite its earlier emphasis on inter-disciplinary problem solving, the OR-MS people did not attract many human relationists to their camp. Their adoption of inter-disciplinary approaches came later in the 1960’s. It resulted from a recognition that the prescriptions of this movement, although well intentioned, did not provide a panacea for managerial problem solving. Human relations began to branch into psychology of individuals, work conditions, and other situational factors not previously considered by the plant sociologists.

There were still researchers in this area, however, who believed there was a one best management style for all situations. As late as 1965, Rensis Likert and his colleagues were searching for management styles which would provide “the answer.” Likert’s contri-

Ansari & Flamholtz: Management Science & Human Resource Accounting

butions are especially important to our thesis and we will have more to say about it later. The enlargement of factors to be considered in dealing with employee motivation caused people to take a more conditional or “contingent” view of the problem. Instead of searching for a one best way, the emphasis was now upon the set of factors whose combination would yield best results.

By the late 1960’s an interesting situation had developed. Those in the humanistic mold had begun to appreciate the importance of technical or operational factors in their efforts. They were once again receptive to the original ideas of Taylor, Gilbreth and others for focusing on man-machine systems. On the other side, the functionalists in OR, who were less than totally enthusiastic about the purist trend, were looking for more complex and ill-structured problems to demonstrate the power of MS thinking—both at a conceptual and practicel level. The time seemed right for some sort of a merger between these groups. What was needed was a catalyst.

Such a catalyst appeared in the form of systems theory. Two versions of this theory have been particularly instrumental in shaping scientific thought. The first, called the “general systems theory” (GST), was chiefly developed by Von Bertalanffy. It took an organic view of systems and was a move away from the more static laws of physics which had been dominant until then. The other, “cybernetics,” was developed by Norbert Wiener and took a more mechanical communication and control orientation.16 Despite their differences, both forced researchers to look anew at the problem of connected wholes and to take into account more complex dynamic relationships.

During the 1950’s and 1960’s GST and cybernetics had slowly grown in importance. Many ready converts from the rank of all three groups—the humanists, the OR purists and the OR functionalists were found. This was hardly surprising since all these groups were based originally in the holist tradition. Systems theory provided a neat conceptual framework for many of their existing beliefs and, in addition, offered a promise for synthesis that had eluded them in the past. This was most prominently noted by Boulding who saw GST as a “skeleton” for the unification of all science.

While it is too early to see if Boulding’s hope will come to fruition, the systems approach has succeeded in moving toward a syn-thesis between the technical and humanistic sides of management. This has come about in the form of socio-technical systems theory whose central thesis is the discovery of mutually supportive technical and social systems in the work place.18 It thus views the interaction between technology and social systems as the central fact of managementsystems.

In the last decade the functionalists have made the precepts of systems theory central to management science. Professor Churchman is one of the leading figures in this latest move. As Churchman states, the management scientist today thinks of his approach as the “systems approach.” He describes this as an interest in “characterizing the nature of the system in such a way that the decision making could take place in a logical and coherent fashion and that none of the fallacies of narrow-minded thinking would occur.”

What has the systems approach contributed to management science thinking? We have already indicated the synthesis of technical and social systems approaches to management made possible by systems thinking. The other major contribution of the systems approach is that it has made the management scientist aware of the central role of information systems and resource measurement for their work. This is perhaps best stated by Churchman:

For a management scientist, the systems approach entails the construction of “management informations systems” that will record the relevant information for decision-making purposes and specifically will tell the richest story about the use of resources, . . . not only to existing resources but also to the manner in which resources can be increased . . . by means of research and development in the case of hardware types of equipment, or by training and education of personnel.

This does not mean that early OR-MS efforts were oblivious to the need for measurement and information, not currently available, in order to implement some of the models developed for operational problems. In fact, the field of “managerial accounting” come into existence partially as a response to this challenge. It was fairly successful in providing information useful for estimating paramen-ters of OR models such as inventory, replacement, queueing, etc.21 The information systems, however, were highly structured just as the problems being solved were highly structured. What was missing, therefore, was information which was suited to the “messy” and unstructured policy problems which management scientists had begun to attack in the late 1960’s.

Another difference in information currently available and information needed by management scientists was noted by Churchman. He pointed out that the orientation of the systems approach was on missions (problems) rather than organizational units. According to him, “The managerial accountant wants to generate ‘scores’ of de-partmental performance, or ‘cost centers’ which can be examined for their utilization of resources.”22 While this may have been too harsh an indictment of the managerial accountant, his criticism that he (the accountant) is department-oriented rather than mission-oriented is legitimate.

The adoption of the systems approach by the management scientist, therefore, has shifted attention from measurement for structured problems and measurement of tangible resources to more difficult measurement problems. In fact, it may not be wrong to characterize present day management science thinking as seeking to design better information systems and to attempt to measure variables previously considered unmeasurable. This fact is particularly relevant in the case of HRA as we shall see in the next section.
To summarize, this section has traced the evolution of management science thinking from its early beginning in military operations to modern times. The key characteristics of present day MS thinking not necessarily reflected in any one publication, may be summarized as:

(1) An adherence to a holistic system of thought which is currently expressed in the precepts of general systems theory;
(2) Implementing the holistic approach through interdisciplinary problem-solving;
(3) A belief in induction as the method of science;
(4) Observation, experimentation and measurement as the cornerstone of induction;
(5) Measurement of resources—past, present and future as one of the key elements of information systems; and
(6) Information systems as central determinants of managerial success in decision-making in complex unstructured environments.
//—Management Science and the Development of Human Resource Accounting

A. Early Work in Human Resource Accounting

The distinctive features of MS thinking must now be related to the development of human resource accounting. The emergence of human resource accounting (HRA) at the broadest level was a reflection of basic changes in the economy following World War II. Growth in service oriented industries led to changes in the composition of the labor force with increased emphasis on white collar and technical employees. Greater investment in human resources followed, and by the 1950’s a group of economists based in New York and Chicago had begun to examine the question from several perspectives.

In New York, particularly at the National Bureau of Economic Research, economists dealt with the investment in human capital in terms of education, health services, changes in productivity, and income differentials.23 At the University of Chicago, Milton Friedman, Theodore Schultz, and others were involved with similar questions. Schultz, in particular, became known for his work on investments in education and for his Presidential Address given to the Seventy-Third Annual Meeting of the American Economic Association in 1960. In that speech, which had great visibility, Schultz argued that:

Although it is obvious that people acquire useful skills and knowledge, it is not obvious that these skills and knowledge are a form of capital, that this capital is in substantial part a product of deliberate investment, that it has grown in Western societies at a much faster rate than conventional (nonhuman) capital, and that its growth may well be the most distinctive feature of the economic system.

The viewpoint of Schultz and other human capital economists did not have great impact on business practice or business thought. They were not concerned with questions of measurement and dealt with problems from the individual or macro-economic perspective, while most writers in business areas approached questions from the point of view of the individual firm. In the area of personnel, however, George Odiorne applied the human capital approach to the individual firm: “These investments in human capital which Theodore Schultz defines . . . are often the direct concern of the personnel function in an organization.”

Odiorne had many years of business experience in the personnel area before becoming Professor of Industrial Relations and Director of the Bureau of Industrial Relations at the University of Michigan in 1959. He was concerned with justifying the personnel function within the traditional profit-oriented context. Odiorne argued that personnel did contribute to profits but that its contribution through investment in people, was long-term rather than immediate. Man-agement, generally concerned with short-run profitability, therefore tended to view the personnel function as an expendable area, the first to be cut in a down turn.26 Odiorne thus saw a need to account for the investment in human resources in order to justify the contribution of the personnel function. He was, however, uninterested in developing measurements to facilitate that accounting process. For Odiorne MS thought exhibited a narrow emphasis on measurement and mathematical expression, and he explicitly rejected its usefulness in both personnel and general management. He argued that “To understand management in the area which relates to personnel and manpower, we must come to terms with man . . . with his gut-reaction, his sentiments . . . and the loves and hatreds which make his work a thing of joy or of despair.”27 Thus although Odiorne clearly outlined a framework within which human resource accounting could emerge, he had neither the tools nor the inclination to develop the measurements necessary to perform the functions he had outlined.

In the early 1960’s the problem was approached from a different perspective, that of accounting. Roger Hermanson, a doctoral student in accounting at Michigan State University, wrote his dissertation in the area. In 1964 he published a monograph Accounting for Human Assets, whose stated purpose was “to investigate We implications and possible advantages of assigning asset status to human resources in accounting statements.28 Hermanson’s basic perspective thus was that of financial accounting. His methods far the valuation of human assets attempted to improve the measurement capability of financial accounting by bringing it closer to economic concepts of income (in the Hicksian mold). Although Hermansort cited economists in support of his views, he did not go to the human capital school of thought previously described. His economic authorities were writers such as Hicks, Fisher and Canning whose theories related in a more immediate sense to the nature of financial accounting. Hermanson also relied on classic accounting authorities such as Paton and Littleton, and the more recent thought of Leonard Spacek, Felix Kollaritsch, and the Sprouse and Moonitz study of accounting principles. Although he noted the possible uses of human resource data in financial analysis for internal purposes and the evaluation of management performance, his basic focus was on the accounting system.

Both Hermanson and Odiorne viewed the problem of human resources from the perspective of their individual disciplines, personnel and accounting. Hermanson basically focused on the mea-surement process relative to financial accounting, while Odiorne dismissed measurement and sought a general change in management policy and attitudes toward the human resource function within the firm. Thus, it was not until the problem of human resources was placed within an interdisciplinary context that it fully developed. The interdisciplinary team approach characteristic of MS thought was critical for the development of the area and the impetus for that approach came in the mid 1960’s from Rensis Likert, Director of the Institute for Social Research at the University of Michigan.

Likert’s work viewed the problem from the perspective of the human-relations school described earlier. Philosophically, Likert and his group were in the humanistic tradition. They regarded the area of human motivation as the most important managerial problem and were looking for the one best form of management. Meth-odologically, however, Likert’s work exhibits the inductivist-em-piricist approach common to all areas of MS thought. He received his doctorate in psychology and thus was familiar with the research methodology and statistical analyses of the social sciences. He brought these techniques to bear on questions of organizational management. Based upon his own work and that of others at the Institute for Social Research (IRS) Likert developed a general theory of management in which the element of human resources was critical.

Likert outlined his theory in broad terms for the first time in New Patterns of Management, published in 1961. He argued for the greater effectiveness of the participative-group form of organization, one in which decision-making took place at all levels of the firm, with the satisfaction of a variety of employee goals in a friendly supportive atmosphere. Likert claimed to have found the best man-agement system, and relied extensively on new measurement tech-niques and experiments to prove that claim. This approach, as we have seen, is characteristic of MS thought. Likert himself acknowledged that continuity of thought:

Several decades ago Taylor (1911) pointed to the fact that human variability in performance could be used to discover better ways of doing work. The social sciences and their capacity to measure human and organizational variables are making possible the extension of this fundamental idea from the organization of the work itself to the problem of building the most productive and satisfying form of human organization for conducting any enterprise.

Through observation, experimentation, and statistical analysis Likert sought to substitute fact for intuition in a very complex problem. Thus he noted that it was now possible to measure such as-pects of organizational functioning as decision-making processes, motivational forces, and communication effectiveness. Some of the tools necessary for these measures were the sample-interview survey, controlled field experiments, and “refined methods of statisti-cal and mathematical analysis.”31 Likert argued that through such measurements “Rigorous, quantitative research can now be used in place of the cruder methods available previously.”

From 1947 on, The Institute for Social Research at Michigan engaged in a large research program which essentially involved the application of these new research methods to problems of organizational effectiveness. In a series of related studies they sought to discover “the organizational structure and the principles and methods of leadership and management which result in the best performance.”33 Likert concluded, as noted previously, that the group participative form of management was most effective.

New Patterns of Management thus was simultaneously an argument for a particular management style and a demonstration of the broad MS approach applied to the management of organizations. The way in which the research was carried out was also in the MS mold, for although Likert was Director of ISR the program of research was a team effort. We may note too that the team existed before becoming associated with ISR ; the staff of the Division of Program Surveys of the Department of Agriculture, headed by Rensis Likert from 1939-1945, became the Survey Research Center of the University of Michigan.34 Researchers such as Angus Campbell, Dorwin Cartwright, Daniel Katz, Robert L. Kahn, Stanley Seashore, and Floyd Mann were heavily involved in the project, both at the Survey Research Center and the Research Center for Group Dynamics.

The team headed by Rensis Likert argued for a new management system, and central to that argument was the measurement of the human resources of an organization. Likert contended that the reason managers and others did not realize that the group-participative form of organization was superior was due to “the inadequacy of the measurement processes used by most companies.”35 They regularly got measurements dealing with end results, such as production, sales, profits, investments in various assets, etc., but gave much less attention to what Likert called “intervening variables,” those that “reflect the current condition of the internal state of the organization: its loyalty, skills, motivation, and capacity for effective interaction, communication, and decision-making.”36 End-result measurements were taken too on a relatively short-term basis, so the nature of the measurement system and the timing of the measurements combined to lead managers to look for short-run profitability. In those circumstances an authoritarian leadership style could look effective.37 Short-run results and increases in productivity, however, were achieved at a cost to the human assets of the organization. Likert described an experiment in which in-creased short-run productivity later led to the deterioration of the human organization “as a functioning social system devoted to achieving the institution’s objectives.”38 Likert recognized that until the intervennig variables were measured and analyzed on a systematic basis managers would not pay much attention to them. In order to prevent the liquidation of human assets it was necessary to obtain “adequate periodic measurements of the intervening variables to reveal the current character and quality of the human organization.”

Although Likert thus realized the importance of measurement, it was not really the major focus of New Patterns of Management However, in The Human Organization, published in 1967, he emphasized the need to measure the human resources of organizations and tried to integrate that need into an accounting framework. With this shift in emphasis Likert reflected the emerging importance of information systems for managerial effectiveness in decision-making—a central tenet of MS thought in the 1960’s (see Churchman’s quote, page 20). Likert contended that the measurement of human resources should take place within the context of the largest information system in the organization, the accounting system. Thus, he devoted a full chapter to what he now called “Human Asset Accounting,” cited accounting authorities such as Paton, and argued that measurement of human assets was necessary because important decisions were being made based on “something like 25% to 50% accounting,” due to “the magnitude of the income-producing assets not yet included in financial reports.”40 Just as the earlier concept of group-participative management was codified into systems one through four, the need to measure the intervening variables was now clarified and expanded into proposals for human asset accounting.

Likert saw the capability to create human asset accounting arising from the new measurement processes of the social sciences:

The social sciences, along with mathematics, have created methodologies for measuring and analyzing variables valuable both for helping an enterprise decide on which management system to use and for appraising the present state of its human organization. These methodological developments make it possible now to measure the causal and intervening variables with accuracies approaching or exceeding the accuracy of measurement of the end-result variables.

The creation of human asset accounting thus required an inter-disciplinary team, made up of accountants and social scientist trained in the new measurement techniques. Likert argued that Hermanson’s work in accounting had not generated other research due to the lack of interaction among the various disciplines. The type of effort he visualized was a long-range project which would eventually develop sophisticated measurement and accounting pro-cedures that would put in financial reports “reasonably accurate estimates of the current value of the human assets of an enter-price.”

Likert visualized several steps in getting at dollar estimates of the current value of human assets, which he argued was more important but more difficult to measure than the cost of the original investment. After measurement of the key causal and intervening vari-ables over several year’s time, statistical analysis could lead to the computation of the mathematical relationships between those variables and end-result variables, such as costs and earnings. Likert saw these formulae eventually being used in a routine manner to generate estimates that operate in the same way as standard costs.

For Likert and his group the development of human asset accounting played a central role intended to prove the greater effectiveness of the System Four theory of management. Through measurement the intuitive art of management could become “science-based management” which would validate System Four. Instead of “the shifting sands of practitioner judgment” management could now be based on “verifiable information derived from rigorous, quantitative research.”

The validation of the System Four theory of management which provided the impetus for the development of human resource accounting did not, however, become the dominant theme of the group that started working on the area at ISR. That group was drawn from disciplines within the Graduate School of Business Administration at the University of Michigan. Thus William C. Pyle was a doctoral student in the Department of Industrial Relations in the Graduate School of Business. Around 1966 he did a paper on the problem for a course in Industrial Relations, and a later course in change management, given at ISR, brought that work to the attention of Rensis Likert. It was Likert who brought Pyle together with the management of the R. G. Barry Corp., which then became the site of the first human resource accounting project.

Around the same time R. Lee Brummet, Professor of Accounting in the Graduate School of Business, was contacted by Rensis Likert, who needed an accounting perspective for The Human Organization, published in 1967. Brummet provided accounting advice for that work, and in 1967 joined the R. G. Barry project.46 The third member of the team, Eric Flamholtz, was also a doctoral student in the Graduate School of Business, working in accounting, personnel, and organizational behavior. Through a talk given by Stanley Seashore he first heard about an ISR project trying to measure the goodwill attributable to human resources. It was in the spring of 1967, however, through a management accounting seminar with R. Lee Brummet, that Flamholtz was asked to get involved on that project.

Thus there was by 1967 an inter-disciplinary team working on the problem of measuring human resources. The project was con-ducted under the auspices of the Center for Research on the Utilization of Scientific Knowledge at ISR rather than in any one department of the university, and Likert’s views strongly influenced the early work on human resource accounting. This influence was reinforced by the commitment of top management at R. G. Barry, site of the project, to participative management. The specific need to measure human resources was seen, too, within the framework Likert developed in The Human Organization. Robert L. Woodruff, Jr., Vice President-Personnel, for example, argued that measurements were needed for a manager to keep track of all the assets entrusted to his care, thereby avoiding short-run profitability at the expense of assets that were not measured. He specifically cited Likert’s chapter on “Human Asset Accounting” as having “sparked management’s interest in developing a method of accounting for the total assets of business.”

The project at R. G. Barry provided manager-scientist interaction and also served as a field experiment in the management science mold, with measurement techniques applied to a new area, human resources. The information about human resources generated through measurement would then flow through the accounting information system to be used in managerial decision making. At Barry the measurement techniques were essentially those of accounting, used to determine the cost of the firm’s investment in human resources:

First, an attempt has been made to identify human re-source acquisition costs and separate them from other costs of the firm. Rules and procedures have been formulated to distinguish between the asset and expense components of human resource costs. Human resource investments are then classified into functional groupings called ‘functional asset accounts’ such as recruiting and acquisition, training, and familiarization, which are, in turn, allocated to personalized accounts for individual employees. Rules and procedures have also been developed for measuring human asset expirations which are recorded as amortization or as losses.

On January 1, 1968, this system was put into operation for invest-ments in managers, and later extended to other groups of employees.

Although, as we have seen, the earliest work at Barry strongly reflected Likert’s ideas, by 1969 that emphasis had shifted toward placing human resource accounting more squarely within the in-formation system relating to the functional areas of the business firm. As stated earlier, one of the basic characteristics of current MS thought is the measurement of resources within a management information system. By 1969 Brummet, Flamholtz, and Pyle emphasized managerial effectiveness as a function of “the ability to acquire, develop, allocate, maintain, and utilize resources.”50 Human resource accounting was, therefore, designed to provide information to facilitate the process of human resource management. Likert’s intervening variables became only one section of a model depicting the information system for the acquisition, maintenance, and utilization of human resources.51
The R. G. Barry Project, under the direction of William C. Pyle, was the first experiment in measuring the cost of an organization’s investment in human resources. The first experimentation with the measurement of human resource value was done by Eric Flamholtz in his doctoral dissertation “The Theory and Measurement of an Individual’s Value to an Organization.”

Flamholtz attempted to develop measurements for what had pre-viously been unmeasurable. He developed a model for the eco-nomic valuation of individuals, based upon the general economic theory of value, but concluded that it was not possible to opera-tionalize this model. He therefore developed a replacement cost model as a surrogate for individual value, and argued that this was a “testable hypothesis.” Using an insurance company as an experimental site, Flamholtz obtained empirical measures of replacement cost and assessed their validity as representations of an individual’s value to an organization. In developing and testing the replacement cost-model he drew upon a variety of disciplines ranging from operations research and accounting through psychology, personnel and psychometrics. Flamholtz’s work thus had an inter-disciplinary flavor, and although its primary focus was the measurement of value, he noted, too, the importance of the concept of human resource value for a systems approach to human resource management. Information about the value of an organization’s human resources could provide a unifying concept for the process of human resource management:

If the purpose of human resource management is seen as the optimization of human resource value, then selection, development, training, and performance appraisal are not merely a set of service functions to be performed if the organization can afford them; rather, they are a set of available strategies that can be employed to increase the value of the organization’s human assets, and, in turn, the value of the organization as a whole.

Thus the development of Human Resource Accounting at Michigan in the 1960’s owed a great deal to MS thought broadly defined. Although management science did not cause HRA to emerge, its growth and implementation at a particular time and place was in many important ways due to the influence of MS thought. As we have seen, those researchers working in individual disciplines were not as successful as a concerted interdisciplinary effort in the MS mold. In addition, the methodology for implementation of Human Resource Accounting reflected essential MS ideas. An inductivist experimental approach generated measurements of previously unmeasured resources. These measurements were then to be used within information systems designed to aid managerial decision-making in complex situations.

Although MS thought did not cause the development of HRA, there does exist a close relationship between these two areas. Man-agerial accounting grew out of the movement toward science based management. HRA, viewed as a new development in management accounting, is therefore a logical extension of MS thought applied to accounting. To early MS thinkers, accounting and OR – then surrogate for MS were highly similar disciplines, and to them, changes in one were expected to lead to changes in the other. For instance, as early as 1955, Wansborough-Jones noted this similarity by stating that, like accounting, “operational research has come to stay as another means of using measurement to help management.”54 Stafford Beer went even further and urged the two disciplines to exploit their kinship to mutual advantage:

. . . the definitions of operational research and accounting indicate a remarkable identity of purpose. Each is concerned with the quantitative presentation of data, and each expects to influence managerial decisions and policy-making. Hence it would seem advantageous to each to exploit its relationship with the other.

HRA, therefore, can be viewed as part of accounting’s response to the progress, changes, and challenges posed by MS thought.

There is also a larger lesson in these developments which goes beyond linkages in related disciplines being mutually beneficial. One of the most important contributions of MS thought is its use of the multi-disciplinary approach in focusing on a problem. The power of this multi-disciplinary or, as Professor Churchman likes to call it, anti-disciplinary approach, is its ability to free its user from being wedded to any one world view. The problem is central and it is not subservient to the methodologies available in any particular discipline. Therefore, it can be attacked by drawing upon the specialized knowledge in unrelated disciplines.

This is particularly important in dealing with managerial problems because no single methodology is likely to be universally applicable. Unfortunately, in recent years there has been a tendency to move away from this multidisciplinary perspective. Consequently, problems have sometimes become secondary to methodologies and, more important, multiple perspectives have been ignored in favor of a single “reality” view. In accounting, recent research on security prices is very heavily based on a single reality-single methodology perspective.

The multi-disciplinary approach was particularly useful in the de-velopment of HRA . Most recent work, however, has focused on the measurements side of HRA from an economic perspective. This em-phasis on accounting and measurement may have been valuable in gaining acceptance for HRA . There has been, however, little progress along the socio-psychological dimensions originally envisaged by Likert. Human Resource Accounting should be expanded in these directions as is proposed in a recent paper by Eric Flam-holtz concerning the psycho-technical nature of HRA measurements.

Human Resource Accounting, finally, represents a major development in the adjustment of accounting to what has been called “post-industrial society.” Just as modern cost accounting emerged after the Industrial Revolution of the nineteenth century, we have seen in the second half of the twentieth century the beginning of basic changes in the very nature and scope of accounting. Human Resource Accounting, as we have seen, reflects both major economic changes and the influence of management science techniques and approaches. Similarly, social accounting has attempted to deal with an increasingly complex society by using a variety of measurement techniques to focus on the contribution to society of the accounting entity. The role of management science in the development of HRA therefore illustrates the diverse forces acting upon accounting and the need for an historical understanding of those forces to be better able to deal with the process of change.

FOOTNOTES

1smiddy and Lionel, p. 1.
2Readers interested in more information on Taylor’s work should see Frederick W. Taylor, The Principles and Methods of Scientific Management, (New York: Harper & Row, 1911).
3For an excellent discussion of the development and spread of scientific man-agement see Smiddy and Lionel (1954).
4 A description of the early work by the human-relations movement is given in George C. Homans, The Human Group, (New York: Harper & Row, 1950).
5For a history of the early development of OR in the Army see Joseph F. Mc-Loskey and Florence N. Trefethen (eds.), Operations Research For Management, Baltimore: The John Hopkins Press, 1954).
6Trefethen, p. 29.
7Trefethen, p. 30.
8Solandt, p. 3.
9Kendall, p. 267.
10Beer, (1959) p. 10.
11Beer, (1959) p. 12.
12Swan, p. 2.
13Swan, p. 4.

Ansari & Flamholtz: Management Science & Human Resource Accounting 33
14This recent debate was sparked by a letter by Robert Machol in the TIMS-ORSA Newsletter (see OR/MS Today, TIMS, Nov. 1975) which generated a highly favorable response from other readers. As early as 1965, however, David Hertz had objected to the tendency to substitute form for content. He wrote: “I suggest that management has seduced science to its side by leading it away from truly scientific approaches to the kind of wish-fulfillment attacks on trivial problems we are all apt to deplore when we see them in cold print. And the kind of writing and exposition we do that management complains it cannot understand is simply the protective coloration of respectable clothing that any sensible seduced professional would want to wear when appearing before his own family.” See David B. Hertz, “The Unity of Science and Management,” Management Science, Vol. 11, (1965), p. B-95.
15A more complete development of this philosophy is contained in Fremont E. Kast and James E. Rosenzweig, Contingency Views of Organization and Management, Chicago: SRA, Inc., 1973.
16Readers interested in learning more about these concepts should see L. Von Bertalanffy, “The Theory of Open Systems in Physics and Biology,” as reprinted in F. E. Emery ed., Systems Thinking. (Baltimore, Md.: Penguin Books, 1969); and Norbert Wiener, Cybernetics: Control and Communication in the Animal and the Machine, (Cambridge, Mass.: MIT Press, 1948).
17Boulding, pp. 197-208.
18For a more complete discussion of the theoretical and practical aspects of socio-technical systems see F. E. Emery and E. L. Trist, “Socio-Technical Systems” as reprinted in C. W. Churchman and M. Verhulst, eds., Management Sciences, (N.Y.: Permagon Press, 1960).
19Churchman, p. X.
20Churchman, p. 39.
21For example, see William J. Vatter, “Contributions of Accounting To Measure-ment in Management,” Management Science, Vol. 5, (1958), p. 27.
22Churchman, p. 42.
23See for example, Mincer, pp. 281-302. Becker, (1964). Mushin, Miller, Becker, (1960), p. 50.
24Schlutz, p. 1.
25Odiorne, p. 158.
26Odiorne, p. 162, p. 226.
27Odiorne, p. 381.
28Hermanson, p. 6.
29Hermanson, pp. 41-42.
3°Likert, (1961), p. 3.
31Likert, (1961), p. 5.
32Likert, (1961), p. 5.
33Likert, (1961), p. 5.
34Likert, (1961), p. 216. See also American Men and Women of Science, Social and Behavioral Sciences, Vol. 2. 12th ed. (New York: Jacques Cattell Press/R. R. Bowker Co., 1973), p. 1488.
35Likert, (1961), p. 61.
36Likert, (1961), p. 61.
37Likert, (1961), p. 69.
38Likert, (1961), p. 71.
39Likert, (1961), p. 73.

34 The Accounting Historians Journal, Fall, 1978
40Likert, (1967), 102.
41Likert, (1967), pp. 129-130.
42Likert, (1967), p. 146.
43Likert, (1967), pp. 148-152.
44Likert, (1967), p. 1.
45Telephone interview with William C. Pyle, June 1, 1977.
46Telephone interview with R. Lee Brummet, June I, 1977
47lnterview with Eric Flamholtz, June 2, 1977.
48Woodruff, p. 2.
49Brummet, Pyle, and Flamholtz, (1968), p. 24.
50Brummet, Flamholtz, and Pyle, (1969), p. 12.
51Brummet, Flamholtz, and Pyle, p. 14.
52Flamholtz, (1969).
53Flamholtz, (1969), p. 124.
54Wansborough-Jones, (1954), p. 3.
55Beer, (1954), p. 12,
BIBLIOGRAPHY
Ackoff, Russell L. “The Development of OR As A Science,” Operations Research, Vol. 4, (1965), pp. 265-295.
Becker, Gary S. Human Capital, National Bureau of Economic Research, Columbia University Press, New York, 1964.
Becker, Gary S. “Underinvestment in College Education?”, Proceedings, American Economic Review, May 1960, p. 50.
Beer, S. “Cybernetics and Operational Research,” Operational Research Quarterly, Vol. 10, (1959), pp. 1-21.
Beer, S. “Operational Research and Accounting,” Operational Research Quarterly, Vol. 5, (1954), pp. 1-12.
Beer, S. Decision and Control. New York: John Wiley & Sons, 1966.
Boulding, Kenneth. “General Systems Theory: The Skeleton of Science,” Man-agement Science, Vol. 2, (1956), pp. 197-208.
Brummet, R. L., Eric G. Flamholtz and William C. Pyle. “Human Resource Measurement—A Challenge for Accountants,” The Accounting Review, Vol. 43, No. 2, April, 1968, pp. 217-224.
Brummet, R. Lee, Eric G. Flamholtz and William C. Pyle. “Human Resource Ac-counting: A Tool to Increase Managerial Effectiveness,” Management Accounting, August, 1969.
Caplan, Edward H. and Stephen Landekich. Human Resource Accounting: Past, Present and Future, National Association of Accountants, New York, N.Y., 1974.
Churchman, C. W. The Systems Approach, New York: Dell Publishing Co., 1968.
Flamholtz, Eric G. “Measurement, Psycho-Technical Systems, and Human Resource Management,” UCLA, Accounting Information Systems Working Paper #77-5, presented at a session titled “Measurements in Human Resource Management” sponsored by The Institute of Management Science College on Measurements In Management, San Francisco, California, May 10-11, 1977.
Flamholtz, Eric G. “The Theory and Measurement of An Individual’s Value to An Organization,” unpublished doctoral dissertation, University of Michigan, 1969.
Goodeve, C. F. “Operational Research As A Science,” Operations Research, Vol, 1, (1953), pp. 166-180.
Hekinian, James S. and Curtis H. Jones. “Put People on Your Balance Sheet,” Harvard Business Review, Jan.-Feb. 1967, pp. 105-113.

Ansari & Flamholtz: Management Science & Human Resource Accounting 35
Hermanson, Roger H. Accounting for Human Assets, Occasional Paper No. 14. Bureau of Business and Economic Research, Graduate School of Business Ad-ministration, Michigan State University, East Lansing, Mich. 1964.
Kendall, M. G. “The Teaching of Operational Research,” Operational Research Quarterly, Vol. 9, (1958), pp. 265-278.
Likert, Rensis. New Patterns of Management, McGraw-Hill Book Co., Inc., New York, 1961.
Likert, Rensis. The Human Organization: Its Management and Value, McGraw-Hill Book Company, New York, 1967.
McCloskey, Joseph F. and Florence N. Trefethen (eds.). Operations Research For Management, Baltimore: The John Hopkins Press, 1954.
Miller, H. P. “Annual and Lifetime Income in Relation to Education: 1934-1959,” American Economic Review, December 1960, p. 50.
Mincer, Jacob. “Investment in Human Capital and Personal Income Distribution,” The Journal of Political Economy, Vol. LXVI, August, 1958, November 4, pp. 281-302.
Mushkin, Selma J. “Health As An Investment,” Journal of Political Economy, Supplement, October, 1962.
Odiorne, George S. Personnel Policy: Issues and Practices, Charles E. Merrill Books, Inc., Columbus, Ohio, 1963.
Schultz, Theodore W. “Investment in Human Capital,” reproduced by the University of Michigan from The American Economic Review, Vol. LI, No. 1, March, 1961.
Smiddy, Harold F. and Norman Lionel. “Evolution of A ‘Science of Managing’ in America,” Management Science, Vol. 1, (1954), pp. 1-31.
Solandt, O. “Observation, Experiment and Measurement,” Operations Research. Vol. 3, (1955), pp. 1-14.
Swan, A. W. “The Name and Nature of OR,” Operational Research Quarterly, Vol. 8, (1957), pp. 1-5.
Woodruff, Robert L. “What Price People?”, reprinted from The Personnel Administrator, Jan.-Feb. 1969.
Wansborough-Jones, O. H. “Measurement and Management,” Operational Research Quarterly, Vol. 6, (1955), pp. 1-8.