Tom Mouck, CPA, Ph.D THE UNIVERSITY OF NEW MEXICO

IRVING FISHER AND THE MECHANISTIC CHARACTER OF TWENTIETH CENTURY ACCOUNTING THOUGHT

Abstract: This paper provides an overview of the influence of Newtonian mechanics on the development of neoclassical economic theory and highlights Fisher’s role in the popularization of the resulting mechanical conception of economics. The paper also portrays Fisher’s The Nature of Capital and Income — a work which has been aptly characterized as the “first economic theory of accounting” — as the first move toward the colonization of accounting by economics. The result of Fisher’s influence has been a paradigmatic linkage between the Newtonian world view of science, neoclassical economics, and mainstream academic accounting thought. The picture that emerges from this linkage is then used as a backdrop against which the emerging challenges to economicsbased accounting thought are highlighted.

Prior to the twentieth century, accounting writings were primarily “howtodoit” treatises detailing the techniques of recordkeeping and financial statement preparation [Gaffikin, 1987, pp. 189]. There was little, if any, treatment of accounting theory; and academic accounting research as we know it today was virtually nonexistent [Bricker and Previts, 1990, p. 4]. This situation began to change shortly after the turn of the century. Political debates were raging regarding labor issues and the social, economic and political implications of huge corporations and trusts. The significance of accounting practices was gaining visibility as a result of their roles in these issues [Merino, 1993, pp. 1645]. The phenomena of absentee ownership and professional management were being recognized as potentially problematic with respect to accountability issues. And capital markets were beginning to take on an increasingly important and visible role with respect to the financial wellbeing of individuals, businesses and the overall economy. It was into this environment that accounting began to be incorporated in academic curricula at the college and university level, states began to license accountants, and professional accounting organizations were being formed [Bricker and Previts, 1990, pp. 45]. It was a political and economic environment that proved to be increasingly receptive to efforts to locate accounting within a larger theoretical perspective.

Looking retrospectively from the other end of the twentieth century, it is increasingly clear that neoclassical economics became the dominant theoretical perspective for evaluating accounting practices and for generating new views of accounting and accountability [Hopwood, 1992, pp. 12830]. Thus, accounting techniques have been widely promoted on the basis that they are politically neutral tools for generating objective factual evidence that is useful in the pursuit of efficiency, both within the firm (for managerial decisionmaking) and outside the firm (for investor and creditor decisionmaking). And corporate accountability issues have been framed primarily within the narrow confines of market economic theory [Benston, 1982, pp. 8994]. The mainstream tendency to view accounting practices through the lenses of engineering and machine efficiency is, of course, not incidental; it is largely attributable to the fact that twentieth century accounting thought has been dominated by an economic theory which was inspired by Newtonian mechanics [Mouck, 1994b, pp. 27].

In this paper, my aim is to elaborate upon a relatively neglected chapter1 in the story of how accounting came to be located within the framework of neoclassical economic theory. I must note at the outset that this chapter is essentially a U.S. story; albeit one that is relevant to the much broader international history of twentieth century accounting thought. Specifically, I am concerned with the unique role played by Irving

‘Fisher’s role in accounting thought has not been totally ignored. It has been recognized in a handful of articles, such as Chambers [1971] and Lee [1975; 1979]. But it has been omitted or mentioned only in passing by most works on accounting history. For instance, the American Accounting Association’s Statement on Accounting Theory and Theory Acceptance includes a discussion of “classical approaches to theory development” [1977, pp. 510] but includes no mention of Fisher. Mattesich [1984] states that “[t]he endeavour to cast the foundations of accounting into postulates forming the logical bases for other statements, goes back to Paton’s Accounting Theory [1922/73]” [p. 28]. Gaffikin’s [1987, pp. 189] study of “The Methodology of Early Accounting Theorists” discusses Sprague’s The Philosophy of Accounts [1907] but omits any mention of Fisher. Previts and Merino [1979, pp. 169 & 2223] include only a brief mention of Fisher’s influence. Other authors, such as Flegm [1984, p. 184], relegate Fisher to a footnote.

Fisher in this story. Tt is my contention that the mechanistic character of twentiethcentury accounting thought is, to a large extent, the legacy of Irving Fisher whose 1906 publication, The Nature of Capital and Income, has been dubbed “the first economic theory of accounting” [Schumpeter, 1954, p. 872].

Fisher’s role in this story should prove interesting in and of itself, but it also offers a unique potential to add depth to our understanding of the impact of broader social and intellectual movements on the character of twentieth century accounting thought. Fisher’s academic training at Yale placed him at the crossroads of the dominant currents of turno[thecentury intellectual thought. At Yale, for instance, he was strongly influenced by Willard Gibbs, one of his professors who was also a major contributor to the emerging theory of thermodynamics [Samuelson, 1967, p. 19]. Fisher’s training in science is clearly reflected in his writings on economics; thus offering a valuable view of ihe extent to which mechanistic thinking underlies economics and its intellectual offspring, twentieth century accounting thought. He was also influenced by William Graham Sumner, a Yale economist who was famous (at that time) for his unabashed espousal of a social Darwinist approach to economic policy.2 Fisher later rejected the extreme views of Sumner, but it was Sumner who suggested that he write a dissertation on mathematical economics. The result of this suggestion has been described by Fisher as follows: “… I became fascinated with Cournot, with Walras, and with Jevons …. This is how I happened to choose the subject of my thesis, which was founded . . . chiefly on Walras and Edgeworth” [quoted in Fisher, 19563, p. 45].

It is interesting to note Lhat another famous American economist, Thorstein Veblen, also attended Yale University and came under the influence of Sumner. This fact will prove quite significant for the history of twentieth century economics and accounting thought. Veblen rejected Sumner’s laissez faire economics, but developed his own theory of social evolution which, in turn, became a cornerstone for his institutionalist economic theory. As Spiegel [1971] notes, institutional economics “was a characteristically American movement with unique features of its own, lent to it by its connection with the American philosophy of pragmatism. Veblen was a student of Charles Peirce’s and a colleague of John Dewey’s …” [p. 628]. And as Merino [1993, pp. 1735] makes clear, institutional economics informed a view of accounting and accountability that briefly, during the first three decades of this century, challenged the neoclassical economics view of accounting and accountability. The best known articulation of an institutionalist view of accounting was by DR Scott in The Cultural Significance of Accounts [1931]. Institutional accounting can, in an important sense, be seen as “the path not taken”.

A brief exploration of “the path not taken” is relevant to the present paper is several respects. First, it serves as a reminder that the paradigmatic linkage of physics, neoclassical economics and accounting, as promoted by Fisher, did not go unchallenged. It suggests that the work of DR Scott can be seen as an alternative paradigmatic linkage of evolutionary science, institutional economics and accounting. Second, the nature of this alternative is relevant to the present story because it emphasized the cultural, social and political implications of accounting practices. Because of this, it can serve as a backdrop against which the sociopolitical implications of the Fisherian paradigm can be seen more clearly. Whereas Scott’s institutionalist paradigm served to highlight the broader implications of accounting practices, the Fisherian paradigm served to hide such implications behind a vocabulary of “valuefree” machine efficiency. Third, the story of “the path not taken” suggests a strong parallel between the institutionalist paradigm and the “new accounting research” which serves, according to Morgan and Wilmott (1993), “to make visible some of the conditions and consequences of accounting practices, and the ways in which accounting(s) contribute(s) to the processes of social and organizational (re)production” (p. 5). Finally, for each of the major components of the institutionalist paradigm a historical thread can be drawn linking it to an emerging theoretical perspective which is currently challenging the various components of the Fisherian paradigm. Thus, highlighting the contrast between the Fisherian paradigm and the institutionalist paradigm may facilitate the development of new set of paradigmatic linkages among the contemporary challenges to the Newtonian worldview, neoclassical economics and mechanistic accounting thought.

Thus, my aim is not merely to fill the historical gap regarding Fisher’s contributions to accounting thought, although that hopefully will be a sideeffect of this paper. My primary objective is to portray Fisher’s intellectual contributions (consisting of a unique blend of accounting, economics, finance and physics) as a backdrop against which emerging challenges to the mainstream economicsbased accounting research paradigm can be rendered more visible; a backdrop against which the economicsbased accounting research paradigm can be rendered more problematic and more susceptible to change. In pursuit of this objective, the paper is laid out in four sections. The first provides some biographical background on Fisher and describes his mechanistic worldview. The second describes how the main currents of twentieth century accounting thought can be viewed as the “legacy” of Irving Fisher. The third provides a brief overview of “the path not taken”. And the fourth section provides an overview of the emerging challenges to mechanistic accounting thought, one of which is a new evolutionary view of economics.

IRVING FISHER AND HIS MECHANISTIC WORLDVIEW

Fisher’s fascination with mechanical gadgets was manifested by a lifelong habit of dabbling in inventions. Among other things, he invented a sundial, a folding chair, a bizarre bed to maximize the circulation of air, and a cardex filing system. The cardex system was the most important to his financial life. It became the basis for a small firm which “merged with its chief rival to form the nucleus of what was known as Remington Rand and has since been enlarged into Sperry Rand” [Fisher, 1956, p. 161]. But the most relevant “gadget” for the present paper was the mechanical contraption (a “price level mechanism” — see Illustration I) which he invented to illustrate the mechanical workings of market economic forces by means of pipes, levers, cisterns, and so forth.

Fisher’s price level mechanism vividly demonstrates the seriousness with which he viewed mechanistic market forces, but his concern with mechanistic efficiency was also applied to his personal life. In fact, it could be argued that he attempted to emulate the rational, calculating homo economicus of his economic theories. For instance, in the biography written by his son (Irving Norton Fisher) it is revealed that “[h]e added his professorial goatee, after calculating precisely how much time he would conserve in an average lifetime by not shaving” [1956,

p. 17]. And with respect to Frederick Taylor, the efficiency expert, Fisher is quoted as follows: “I’ve been reading the life of Frederick Taylor and I felt throughout as though I were reading my own biography. I don’t mean the events are alike but the character, ideals and methods of thought and work seem so much like mine …” [p. 215].
Even his religious views, which were apparently formulated after his recovery from tuberculosis, reflect an attitude of mechanistic fatalism. His letters reveal a view of the Universe as a deterministic, clockwork type of machine:

When and how was the great machine we call the Universe set going and why was it prearranged in the particular way it was, so that out of it must have come all that did come out and will come out down to the minutest details ….

Whatever its meaning, of one thing I am convinced: That it is for us to approve and not disapprove. It is perfect because it is impossible of variation by a hair’s breadth. The wheels of time never jump the track. What we call mistakes are deviations from our provisional programs. The Program of Fate is never altered, [quoted in Fisher, 1956, p. 86].
And he describes “Prayer” as “the same thing as communion” with the Universe as it is. “For me it [“Prayer”] could never be a calculated request, for I feel that God’s books for the future are already made up” [quoted in Fisher, 1956, p. 83]. The key to religious experience, accordingly, is “[t]o feel union with the infinite and submission and even joy in whatever fate is made for us …” [quoted in Fisher, 1956, p. 83].

On the other hand, Irving Fisher was a tireless crusader in his efforts to change the course of events. His crusading was primarily focused on issues of health, world peace, and stable money. For instance, in a 1925 letter, he notes that, “my dreams now are of (1) getting America into the League of Nations, (2) expanding the Life Extension Institute, (3) developing the Eugenics Society and (4) Stabilizing the Dollar …” [quoted in Fisher, 1956, p. 222]. But how would he reconcile his crusading effort with his attitude toward Fate? Fisher addressed this question in a different context as follows: “Napoleon was asked why, if he believed in fatalism, he didn’t sit still and let empire come to him. He replied that he was fated to fight for it” [quoted in Fisher, 1956, p. 86].

With respect to his crusading efforts, it will be noted that his economic crusading was focused on the issue of stable money. This issue, it seems, was the only area in which he thought that mechanistic economic forces could not be relied upon for efficient results. Other crusaders who worked for more fundamental economic change were considered to be ignorant of the true laws which governed economic and social affairs. There is evidence that Fisher had developed such characteristically strong views as early as 1887 when he was a Junior at Yale, as evidenced by his contribution to a publicspeaking contest. His topic was “Liberal Education and Social Needs” and excerpts have been quoted by Fisher [1956, p. 29] as follows:
. . . there is a class who have just reached the stage of theorizing. They are a strange excrescence of modern civilization, known under the various names of Socialists, Communists and Anarchists. . . . These wouldbe reformers with their dangerous mixture of knowledge and ignorance and those of the labor leaders that without reason and without profit block the wheels of industry must have their eyes opened to the great laws they are violating.

In sum, every aspect of Irving Fisher’s life and character indicates an affinity for the mechanistic character of neoclassical economic theory with its emphasis on economic laws, “efficiency” and quantifiable calculation. It is not surprising, therefore, that in response to Professor Sumner’s nudge toward the literature of “mathematical economics” for a doctoral thesis, the young Fisher quickly became fascinated with the work of Walras and Jevons [Fisher, 1956, p. 45]. Their mathematically precise economic theories that tended to subsume all human social behavior under universal economic laws — laws in tune with the physical laws of the universe — must have resonated powerfully with his love of mathematics, his admiration for science, and his desire for rational certitude. The linkage that was constructed between physics and economics is reviewed briefly below before turning to Fisher’s version of mechanistic economics.

Physical Mechanics and the Emergence of Neoclassical Economics

Eighteenth century intellectuals were captivated by the rigor and beauty of Newton’s explanatory model of the physical world. With the concept of the law of gravity, Newton had brought the movement of the planets, the oceanic tidal movements, and the interaction of physical objects on earth all under the umbrella of a single explanatory model; a model that could be specified with mathematical precision and logical clarity; a model that demonstrated the symmetry and timelessness of universal cycles and essential dynamic processes. The Newtonian model of the physical universe was thus profoundly inspirational with respect to the search for an intellectual scheme that could explain the workings of the newly emerging hodgepodge of social, political, and economic practices. The Newtonian model of the physical world fueled the expectation that a comparable explanatory model of the social world could be found; an expectation that has been summarized succinctly by Berlin [1956, p. 27] as follows:

Men were objects in nature no less than trees and stones; their interaction could be studied as that of atoms or plants. Once the laws governing human behavior were discovered and incorporated in a science of rational sociology, analogous to physics or zoology, men’s real wishes could be investigated and brought to light, and satisfied by the most efficient means compatible with the nature of the physical and mental facts.

The building blocks for a Newtonian view of the social world were provided by the philosophy of John Locke in the form of ontological individualism. And Locke’s theory of property rights gave rise to the labor theory of value which, in turn, became a cornerstone of Adam Smith’s classical theory of economics; a theory that explained how the natural working of market mechanisms in which each person is moved by his or her selfinterest will result in a harmonious and stable system that provides the optimal wellbeing not only for individuals but for society as a whole. It is hardly surprising, therefore, that Lowe [1965] should find “a striking affinity between the central problem of a theory of the market and the Newtonian theory of Mechanics. Both try to derive the state and motion of aggregates from the state and motion of their components” [p. 31]. As Rothschild [1992] points out, “Where Newton explained that gravity was the central force holding the universe together, Smith argued that individual selfinterest held human society together” [p. 32].

The publication of The Wealth of Nations in 1776 is generally viewed as the originating intellectual achievement of classical economics. For almost a century, classical economic theory was subjected to various theoretical refinements by Ricardo, Mill, and others. Then in the 1870s and 1880s, a major transformation began. Mirowski [1988] has argued convincingly that the “identifiable discontinuity in economic thought in the 1870s and 1880s which was the genesis of neoclassical theory . . . can be explained by parallel developments in physics in the midnineteenth century” [p. 13]. Mirowski points out that all the major figures4 in the “marginalist revolution” liberally employed metaphors from physics. The most notable (Jevons, Walras, and Pareto) had been trained in science or engineering — Jevons was a student of chemistry and mathematics and both Walras and Pareto were trained as engineers [Mirowski, 1988, pp. 2021]. Furthermore, in their writings they all made explicit references to the influence of nineteenth century physics.

But the evidence does not end with the use of physics types of metaphors. Mirowski demonstrates clearly how “the neoclassical theoiy of the maximization of utility was derived directly from the immediately preceding innovations in physics in the 1840s through 1860s” [1988, p. 31]. Jevons, for instance, in The Theory of Political Economy [originally published in 1871] derived the criteria for utility maximization (the ratio of relative prices must be equal to the corresponding ratio of marginal utilities) directly from the model of the mechanical lever — a derivation in which utility is related, by implication, to potential energy. Ten years later, Edgeworth expanded Jevon’s ideas on utility and developed the indifference curve form of analysis. “In his Mathematical Psychics he [Edgeworth] expanded Jevons’s utility function by relating the utility of a good not only to the quantity of the good that an individual possessed or consumed but also to the quantities of all other goods possessed or consumed by the individual …” [Spiegel, 1971, pp. 525526]. Edgeworth explicitly spelled out the relationship between energy and utility that was only implicit in Jevons’ work:

The application of mathematics to the world of the soul is countenanced by the hypothesis . . . that Pleasure is the concomitant of Energy. Energy may be regarded as the central idea of Mathematical Physics: maximum energy the object of the principal investigations in that

4Mengers is excluded by Mirowski as a founder of neoclassical economics on the grounds that he was of the “Austrian school of economics”. Sec Mirowski [1988, pp. 2225] for a detailed argument to the effect that “the Austrians were not neoclassicals”.

science . .. ‘Mecanique Sociale’ may one day take her place along with ‘Mecanique Celeste/ throned each upon the doublesided height of one maximum principle, the supreme pinnacle of moral as of physical science. As the movements of each particle, constrained or loose, in a material cosmos are continually subordinated to one maximum subtotal of accumulated energy, so the movements of each soul whether selfishly isolated or linked sympathetically, may continually be realizing the maximum of pleasure. [Quoted in Mirowski, 1988, p. 15]

Mirowski and Cook [1990, pp. 1912] have further argued that the mathematics of energy was also used as the basis for the core theoretical analysis presented by Walras in his Elements of Pure Economics [originally published in two parts in 1874 and 1877]. Walras’ “theoretical imagination” had been “fired”, they suggest, by an explanation of the new physics which he had received in 1872 from Antoinne Paul Piccard, a French professor of mechanics [Mirowski and Cook, 1990, p. 192]. And indeed, in a subsequent paper entitled “Economics and Mechanics” [published in 1909] Walras set out, in the words of Mirowski and Cook, “to explore . . . the metaphor of utility as potential energy . . . [and] to convince the world of its legitimacy” [Mirowski and Cook, 1990, p. 202]. In the paper Walras presents his system of equations which result in the criteria for economic equilibrium at maximum satisfaction, and for comparison he also presents the system of equations that describe the mechanical equilibrium conditions for a lever type of machine in a steelyard. “The analogy”, he says, “is obvious” [Walras, 1990, p. 209]. Furthermore, he points out that “the forces or raretes are vectors on the one hand, and energies and utilities are scalar quantities on the other” [Walras, 1990, pp. 209210]. He then proceeds to demonstrate that “[t]he same analogy exists between economics and celestial mechanics” [p. 210], and he concludes the paper with the assertion that “economics is a mathematical science on a par with mechanics and astronomy” [Walras, 1990, p. 213].

Fisher’s Mechanistic Economics

Schumpeter [1954,p. 829] has pointed out that, “In the United States, Walras acquired two firstrank followers, Fisher and Moore, but was practically ignored by the rest of the profession”. Of these two, it was Fisher who attempted — indeed, with a good deal of success — to reach a mass audience with his work, while Moore’s work scarcely attracted followers even within the economics profession.5 Schumpeter [1951, p. 223] even went so far as to predict that Fisher’s name “will stand in history principally as the name of this country’s greatest scientific economist”.

Fisher’s work is especially interesting from an accounting perspective because of his attempt to provide an economic perspective for the measurement of income. Indeed, as noted earlier, his work on The Nature of Capital and Income [originally published in 1906] has been cited by Schumpeter as “the first economic theory of accounting …” [1954, p. 872], and it provided the principal theoretical notion for income in Canning’s The Economics of Accountancy: A Critical Analysis of Accounting Theory [1929]. Canning noted that he “considers Fisher’s theory of income to be, by far, the best that has appeared in the literature” [1929, p. 145].

Fisher’s dissertation, entitled Mathematical Investigations in the Theory of Value and Prices [1925], is also particularly interesting with respect to the relationship between nineteenth century physics and neoclassical economics because it literally provides visual mechanistic models of the workings of “the ideal economic market” [Fisher, 1925, p. 44]. The physical components of Fisher’s mechanistic models include stoppers, pistons, levers, pipes, and cisterns. In fact, the republication of his dissertation in 1925 includes a photograph of the actual physical mechanism which was constructed for classroom demonstrations. For a given commodity, each individual has a different sized “utility cistern”, “cubic inches of water represents the number of units of the commodity . . . consumed by the individual” [Fisher, 1925, p. 26], and so forth. Fisher also includes a short dictionary of terms from mechanics and their corresponding economic terms. “Force”, for instance, corresponds to “Marginal utility or disutility”, “Work” corresponds to “Disutility”, and “Energy” corresponds to “Utility” [1925, p. 85]. In short, a more vivid illustration of a mechanistic view of economics is hardly imaginable. In the next section I examine how this mechanistic view of economics has influenced twentiethcentury U.S. accounting thought.

THE LEGACY OF IRVING FISHER AND THE “FIRST ECONOMIC THEORY OF ACCOUNTING”

Fisher’s influence on twentieth century accounting thought can be viewed from three different perspectives, and I examine each of these in this section. First, and most specific, he did provide the first economic theory of accounting, thus grounding the notion that a “scientifically correct” measurement of income is possible, at least theoretically. The notion of income measurement in accordance with “scientific” economic theory had an impact beyond his own specific theory of income measurement. Thus, the second perspective on Fisher’s influence on accounting is examined in conjunction with the socalled normative apriorist movement for “scientific” accounting practice which peaked in the 1960s and early 1970s. And third, though the strands of specific influence may be harder to identify, the emergence of capital market research in accounting, which has been promoted as “scientific” accounting research, can be seen as an extension of financial economics that resonates soundly with Fisher’s views on economic reality, scientific research and public policy.

The First Economic Theory of Accounting

Gaffikin [1987] notes that Sprague’s The Philosophy of Accounts [originally published in 1907 and reprinted in 1922] has been widely regarded as a seminal work in accounting theory in that it was “among the earliest attempts to establish a rigorous theoretical framework for the discipline” [p. 19]. Gaffikin goes on to point out, however, that the contribution was more on the order of indicating the need for a theoretical foundation than for actually providing one. “In the end, The Philosophy of Accounts tends to be not a developed theory but a manual of practice the author observed or perceived to be the most appropriate” [Gaffikin, 1987, p. 19]. Indeed, Sprague’s [1922] work even contains chapters dealing with “The Trial Balance” [chapter XIV], “Posting from Tickets” [chapter XVII], and “The Detection of Errors” [Chapter XX]. The fact that it was widely recognized as a seminal work on accounting “theory” makes it an excellent reference point for gauging the significance of the new theoretical direction pioneered by Fisher in The Nature of Capital and Income [originally published in 1906 and reprinted in 1930]. Fisher pioneered a radical new direction for accounting theory in two important respects: first with respect to the nature of the relationship between accounting theory and economic theory and second with respect to the theoretical significance of the concept of income.

Sprague [1922] scarcely refers to economic theory, and when he does [on pages 38 and 47] it is with reference to Fisher’s [1906] theory of capital. Based on his references to economic theory, it is likely that he viewed economic theory as an important aspect of background knowledge with respect to the environment in which accounting functions. It is quite clear, however, that he did not view economic theory as the framework within which accounting theory must be located. Fisher [1930a], on the other hand, very meticulously locates accounting theory within the broader context of economic theory. Specifically, he points out that The Nature of Capital and Income is intended to form “a sort of philosophy of economic accounting, and, it is hoped, may supply a link long missing between the ideas and usages underlying practical business transactions and the theories of abstract economics” [Fisher, 1930a, p. vii]. He accordingly begins the book with a three chapter introduction of “fundamental concepts”. Chapter I elaborates an economic definition of “wealth”, Chapter II traces the theoretical linkage between wealth and property rights, and Chapter III is a brief discourse on the definition and importance of the concept of “utility”. Fisher’s definitions of wealth, property and utility are subsequently used as the foundational concepts for his theory of capital and income.

Although Fisher [1930a] devotes three chapters to his theory of capital before turning his detailed attention to income, the latter is the more fundamental concept. This emphasis is in sharp contrast with Sprague’s view of the balance sheet versus the income statement: “The balance sheet may be considered as the groundwork of all accountancy …” [Sprague, 1922, p. 30]. The balance sheet accounts, according to Sprague [1922], “might also be called the ‘exterior’ accounts, as they alone affect persons outside of the business …” [p. 68]. The income statement, on the other hand, is presumed to be for internal use only. Sprague refers to the income statement accounts as “economic accounts”, and contrary to the balance sheet accounts, they are considered to be “‘interior’ ones, kept for the instruction of those inside” [1922, p. 68]. Sprague goes on to discuss the pros and cons of various approaches to recording, measuring and presenting income items, but he clearly does not share Fisher’s concern about the importance of a precise concept of income.

Fisher considers the concept of income to be fundamental to a coherent view of economic activity. In fact, in a subsequent work — The Rate of Interest [1930b] — he notes that,
A friendly critic, Professor John B. Canning, suggests that The Nature of Capital and Income should have been called “The Nature of Income and Capital” and that the subject matter should have been presented in reverse order, inasmuch as income is the basis of the concept of capital value and is, in fact, the most fundamental concept in economic science” [p. 3, n. 1].

Income, according to Fisher, ultimately consists of psychic satisfactions derived from the consumption of goods and services; and, as Lee [1979] points out, “Fisher regarded business entities as devices by which human beings could obtain enjoyment from consumption” [p. 326]. “Psychic income”, however, is subjective and unmeasurable. Objective measures of income must therefore be made at a previous stage. Thus, the flow of real physical objects of wealth into the possession of the individual may be viewed as “real income” even though the ultimate realization of income occurs with the enjoyment of the services provided by such objects (food, clothes, houses, etc.). In most cases, however, the events that constitute real income may be preceded by “money income”; that is, the inflow of money enables the individual to purchase the physical objects whose service in consumption will eventually yield psychic income.

But what is the source of income? The answer, according to Fisher, is capital. He defines capital in the most general sense as follows: “A stock of wealth existing at an instant of time is called capital [1930a, p. 52]. Income is the service provided by wealth. Thus, “[a] flow of services through a period of time is called income” [Fisher, 1930a, p. 52].
Fisher’s careful distinction between stock and flow concepts is reminiscent of his hydrostatic price level machine [Illustration I]. In his view, the failure to make this distinction has been a major source of confusion among economists [1930a, p. 59]. He also suggests that economists could have benefited from observing “business bookkeeping” practices.
A little attention to business bookkeeping would have saved economists from such errors; for the keeping of records in business involves a practical if unconscious recognition of the time principle here propounded. The ‘capital account’ of a railway, for instance, gives the condition of the railway at a particular instant of time, and the ‘income account’ gives its operation through a period of time. [Fisher, 1930a, pp. 5960]

Fisher [1930a] also takes economists to task for their attempts “to mark off capital as that wealth which is ‘productive'” [p. 58]. He maintains that his definition of wealth as “material objects owned by human beings” [1930a, p. 2] implies the desirability oi: potential services inherent in such objects. He further claims that, “[a]ll wealth bears income, for income consists simply of the services of wealth” [1930a, p. 58], Thus with respect to the balance sheet (which he refers to as a “capital account”), Fisher considers all of the assets to be positive elements of capital. He further views the liabilities as negative elements of capital, so that the owner’s “capital balance” is really the “net capital” [1930a, p. 68].

But what about the concept of income? If income is the flow of service that emerges from the use of capital, then in what sense is income the more fundamental concept? In the very broadest economic sense, Fisher considers income to be the most fundamental concept because (as psychic income) it refers to the “desirable events” which give “meaning to all economic phenomena” [1930a, p. 41]. In the more objective sense of business and finance, income is fundamental because it is the expectation of future income that gives capital its value. The linkage which allows the value of capital to be derived from expected future income is the rate of interest. The linkage is a very mechanical one; indeed, it is tautological since Fisher derives the rate of interest from the following ratio [1930a, p. 186]:

Value of services per unit of time ,

: = value return Value of capital

As he notes, “If the income is perpetual and flows at a uniform rate, the valuereturn is called the rate of interest realized on capital” [1930a, p. 191]. It is clear that the value of capital in this formula is the present value of future income defined as “value of services”. “The rate of interest acts as a link between incomevalue and capital value, and by means of this link it is possible to derive from any given incomevalue its capitalvalue, i.e., to ‘capitalize’ income” [Fisher, 1930a, p. 202].

Fisher goes on to explore various facets of the relationship between capital and income, many having to do with the issue of capital maintenance. In fact, this issue is the basis for his distinction between realized income and earned income. Assume for instance that during a given time period a proprietor withdraws and spends an amount that is different than her earnings. In Fisher’s view, this difference can only happen in conjunction with a change in capital. And since he views consumption (i.e., the psychic income resulting from the enjoyment of services) as the truer measure of income, the amount withdrawn and spent (consumed) is referred to as realized income. Thus, according to Fisher, these relationships can be expressed as follows: “… the general principle connecting realized and earned income is that they differ by the appreciation or depreciation of capital. It is thus possible to describe earned income as realized income less depreciation of capital, or else as realized income plus appreciation of capital” [Fisher, 1930a, p. 238].6 Fisher further explored capital maintenance implications relating to sinking funds, depreciation funds, and repair and maintenance funds [1930a, pp. 239247].

Fisher’s theory of income served as the inspiration for Canning’s influential work The Economics of Accountancy [1929] in which the latter attempted to explain Fisher’s economic model and its significance for accounting theory. A less direct influence of Fisher’s economic theory of accounting can be seen in the controversy over the use of current values in accounting statements. As Flegm [1984] points out, “the advocates for a change from the historical cost base, both past and present, have concentrated on the data needed to make an investment decision in a given situation based on an economists’ view of ‘income'” [p. 184]. At this point Flegm points out in a footnote that “The noted American economist Irving Fisher was the first to attempt to rationalize accounting and economics” [1984, p. 184]. Indeed, it is my contention that Fisher’s contribution to accounting theory can be seen as the first serious move toward a colonization of accounting by neoclassical economics. It is also my contention that the movement toward a “scientific”

This view of income is the most controversial aspect of Fisher’s theory. Since he viewed income as ultimately equal to consumption, the proprietor’s savings (i.e. the appreciation of capital) was not truly income. This view runs counter to the more generally accepted notion that earned income is the truer measure of income, and one chooses Lo either consume or save one’s income. In any case, it is interesting to note that Fisher’s unique definition of income was central to his subsequent opposition to a capital gains tax.

approach to accounting practice, which reached a peak in the 1960s and early 1970s, can be viewed largely as part of the legacy of Irving Fisher and his economic theory of accounting.

The Normative Apriorists and “Scientific” Accounting Practice

During the first half of the twentieth century when accounting theorists were concerned with the articulation of a coherent set of financial accounting principles, Fisher’s economic theory of accounting, especially as it was formulated by Canning [1929], was one of the competing theoretical views, but it was clearly not the dominant perspective [Previts and Merino, 1979, chs. 5 & 6]. In fact, it could be argued that Fisher’s influence on accounting thought during this time was primarily due to his role in the development and dissemination of neoclassical economic theory which, in turn, was viewed by accounting theorists as the dominant explanatory scheme with respect to the economic environment within which accounting operated.

By the late 1950s, however, the emergence of a heightened concern with the role of science in U.S. education began to filter down to business schools and academic accounting programs. This concern — which has been attributed largely to the Soviet Union’s successful launching of sputnik and the corresponding fears that the U.S. might lose the “space race” and even the “cold war” — was reflected in the Ford Foundation study that criticized U.S. business schools for their lack of grounding in scientific theories and techniques. The Ford Foundation study, among other studies, contributed to the pressure for a widespread reassessment of accounting theory. This atmosphere paved the way for the emergence of an unprecedented concern with the development of “scientific” approaches to accounting theory. And since neoclassical economic theory was widely held in high esteem for its “scientific” status, the time was ripe for new articulations of the relationship between economic theory and accounting theory.

The resulting movement in accounting theory, a movement whose proponents have been labeled as normative apriorists7 , can be seen as a direct descendant of the spirit of Fisher’s eco
7Their theories have been characterized as normative because they attempted to prescribe “scientifically” correct views of accounting practice. They were labeled apriorists because of their penchant for developing elaborate theoretical structures on the basis of postulates assumed apriori to have scientific legitimacy.

nomic theory of accounting. The normative apriorists did not literally adopt Fisher’s theory per se, but they resurrected his view that accounting theory must be grounded in economic theory. For the normative apriorists, economic theory was still important in terms of its theoretical explanation of the environment within which accounting operated, but it was also important in a much more direct sense, as a foundation for accounting theory.

Chambers, Mattessich and Sterling were arguably the most influential of the normative apriorists.8 They each developed booklength systematic treatises on accounting theory that articulated elaborate linkages with economic theory and emphasized their employment of scientific methodology: Mattessich’s Accounting and Analytical Methods: Measurement and Projection of Income and Wealth in the Micro and MacroEconomy [1964]; Chambers’ Accounting, Evaluation and Economic Behavior [1966]; and Sterling’s Theory of the Measurement of Enterprise Income [1970]. And they all three wrote specifically of the influence of Irving Fisher. Mattessich [1964] has references to Fisher’s work scattered throughout. Sterling [1970] likewise contains numerous references to Fisher plus an entire chapter entitled “The Fisher Tradition” [pp. 211245]. Chambers [1966] contains no direct reference to Fisher, but he does make several references to Canning [1929]. Chambers elsewhere has written directly of “Fisher’s Legacy” [Chambers, 1971, pp. 137149], and he has indicated [in Chambers, 1979] that “Canning’s work was one of the earliest analytical studies of accounting that came to my notice when, 15 years after its publication, I became seriously interested in whaL stood as the theory of the subject” [pp. 7645].

As noted earlier, the normative apriorists were critical of the specific details of Fisher’s economic theory of accounting. It is clear, however, that Fisher’s work established an intellectual perspective within which the normative apriorists’ various theories can be seen as part of the legacy of Irving Fisher and the “first economic theory of accounting”. As Sterling remarks with

8Gaffikin [1988] notes that “four people stand out as having made the most significant contributions to … [the] increasing methodological sophistication: Chambers, Mattessich, Devine and Sterling” [pp. 1617]. I leave Devine out of the current list of the most influential theorists of this movement, because he never developed an overarching theoretical structure for accounting theory. As Gaffikin notes, “Devine’s contribution is as a commentator …” [1988, p. 17].

respect to Fisher’s theory of income, “If we were to accept Fisher’s thesis, this study would end at this point; therefore it is clear that we must disagree in order to continue” [1970, p. 10]. And Chambers, in a review of “Canning’s The Economics of Accountancy — After 50 Years”, suggests that if Canning had clearly delineated the distinct functions of “past information, present facts, and future prospects in the decisionmaking process” the linkage between accounting and economics might have been more clearly understood and Canning’s work might have served as a point of departure for a rigorous theoretical restructuring of accounting theory [Chambers, 1979, p. 774]. In any event, if Fisher’s The Nature of Capital and Income [1906] can be seen as the first serious move by an economist to colonize accounting, it is apparent that the normative apriorists breathed new life into that movement. This implication is vividly supported by the following quote from Mattessich [1964]:

Accounting is concerned with the theoretical and practical problems of measuring various aspects of the income or flow of wealth phenomenon and hence may be considered a service discipline which cannot be studied in isolation but which must be viewed in the setting of a threefold relationship: (1) in dependence with its master discipline ‘economics,’ (2) in relation with the other tributaries of economics and business administration, and (3) in connection with the needs of economic practice, [p. 12]

Finally, it must be noted that the normative apriorists also followed in the legacy of Fisher with respect to his penchant for mechanistic assumptions and explanations. Chambers [1966], for instance, asserts that

The laws of human behavior in a society in which a significant part of interpersonal intercourse is mediated by money and in which such behavior is informed by monetary calculation are no less adequate and compelling bases for deriving means of coping with human problems than are the laws of motion” [p. 371].

Mattessich [1964] goes to great lengths to integrate his analytical accounting models with engineering types of operations research models, with computer systems models and with econometric models for simulating economic events. He strongly implies that such models belong to a family of models of which Irving Fisher’s hydrostatic price level model can be seen as a revered ancestor [Mattessich, 1964, p. 321]. And Sterling in a later work, Toward a Science of Accounting [1979], makes even more explicit connections with Fisher’s mechanical model.

Wealth is a stock; income is a flow. Stocks are a function of flows, and flows are a function of changes in stocks. We cannot measure one without also at least implicitly measuring the other. . . . This is true of mass flowing in and out of a system or of water flowing in and out of a bathtub, as well as income flowing in and out of a firm. . . . Therefore, if the stocks are correctly measured, the net flows are also correctly measured. If the flows are correctly measured, the stocks are also correctly measured.

I present this general relationship of stocks to flows in an attempt to lay to rest an ancient, pervasive myth in accounting. That myth is that one can have an accurate measure of flows while having an inaccurate measure of stocks. Specifically, that one can have an accurate income statement (flows) which yields an inaccurate balance sheet (stocks). [Sterling, 1979, p. 194]

Sterling follows this passage with an arithmetic example of gallons of water in a bathtub and calculations of net flows, etc. All of this is in support of his view of “the income statement as an explanation of the changes on the balance sheet” [1979, p. 196] and his emphasis on the importance of a common unit of measure in terms of observable market prices.
In spite of their shared concern with the development of a “scientific” theory of accounting and their shared emphasis on the integration of accounting theory with economic theory, the normative apriorists were never able to agree on the details of such a theory, or indeed even the general outline of such a theory. Mattessich, Chambers and Sterling often engaged (via published articles) in very contentious disagreements, often displaying open contempt for each other’s work.9 In fact, Mouck [1993, pp. 3941] has argued that their inability to formulate a coherent research paradigm contributed to the “revolution” in financial reporting theory that Beaver [1989, p. 18] characterized as the replacement of an “economic income” approach by an “informational perspective”. The “informational perspective”, however, was not a movement away from an economicsbased paradigm, nor was it a rejection of the ideal of “scientific” accounting theory. It was an academic movement away from the concerns of “scientific” accounting practice in favor of a paradigm that focused on “scientific” accounting research [Mouck, 1993, p. 44]. And even though the informational approach to financial reporting theory abandoned Fisher’s concern with a theory of income, it can still be seen as a major extension of the legacy of Irving Fisher.

Financial Economics and “Scientific” Accounting Research

As Whitley [1986, pp. 1757] has pointed out, the development of modern portfolio theory (MPT), the efficient markets hypothesis (EMH) and the capital asset pricing model (CAPM) in the 1950s and early 1960s paved the way for the transformation of business finance into financial economics. Essentially this transformation can be seen as an extension of the neoclassical economics paradigm; an extension from a focus on the markets for real goods and services to a broader focus that now includes the workings of financial markets. This broader focus, in conjunction with the recently developed ideas in information economics, allowed Ball and Brown [1968], Beaver [1968], Foster [1973], Gonedes [1972] and other academic accountants to extend the reach of financial economics to include the “market” for accounting information. Tn short, the informational perspective meant that financial accounting research became capital markets research; it became a subparadigm of neoclassical economics.

Fisher, of course, had contributed much of the early theoretical work upon which financial economics was developed. As Hakansson [1984] points out, “One link among accounting, economics, and finance that is familiar to all of us is the present value formula under certainty. This formula has served as a minor cornerstone of all three fields for decades … ” [p. 60]. And it was Fisher [1930a] who provided the pioneer work in this area for all three fields. Furthermore, Fisher [1930a, Chapter XVI] extended his analysis beyond conditions of certainty, to include a discussion of chance and “the risk element”. In the same book, Fisher applied his present value analysis to the determination of the value of annuities, bonds, and “any income stream whatever” [1930a, pp. 202226]. He also discussed the possibilities of hedging against risk [1930a, pp. 299300]. His subsequent book, The Theory of Interest [1930b] expands his analysis of these issues; issues that are fundamental to financial economics.

There is, however, a more important sense in which the capital markeLs research paradigm may be seen as a continuation of the legacy of Irving Fisher; and that has to do with his emphasis on “rational” choices regarding time preferences and lifetime consumption. Fisher considered the rate of interest to be “the link which binds man to the future and by which he makes all his farreaching decisions” [quoted in Fisher, 1956, p. 131]. He elaborates as follows:

The rates of preference among different individuals are equalized by borrowing and lending or, what amounts to the same thing, by buying and selling. An individual whose rate of preference for present enjoyment is unduly high will contrive to modify his income stream by increasing it in the present at the expense of the future. The effect will be upon society as a whole that those individuals who have an abnormally low estimate of the future and its needs will gradually part with the more durable instruments, and these will tend to gravitate into the hands of those who have the opposite trait, [quoted in Fisher, 1956, pp. 1334]

In like fashion, the “informational view” of financial reporting theory can be seen as an expansion of Fisher’s theory of financial markets to include accounting information. This expansion has been succinctly described by Lev and Ohlson [1982] as follows:

The link provided by capital market theories connects the accounting information system to its function in capital markets. Information has a dual role in these markets. First, it aids in establishing a set of equilibrium security prices that affects the allocation of ‘real’ resources and the productive decisions implemented by firms. Second, it enables individuals to exchange claims to present and future consumption across different states, thereby attaining both preferred patterns of lifetime consumption and the sharing of societal risks. This explicit conceptualization of the role of information in capital markets appears to provide the elusive operational framework for the systematic analysis of alternative accounting information systems. The out come of the economic system, as a function of the information system, can now be analyzed, [p. 252]

In sum, the development of the informational perspective on financial reporting — a perspective which has been characterized as “modern financial reporting theory” [Brown, 1987, p. v] — can be seen as a product of “economic imperialism”.” From this perspective it is clear that, if Fisher’s economic theory of accounting was the first serious move toward colonization of accounting by economics, “modern financial reporting theory” (i.e., the capital markets research paradigm) can be seen as the ultimate move in that direction. In a nutshell, the colonization of accounting by economics is the real legacy of Irving Fisher’s “economic theory of accounting”.
The result of this colonization has been succinctly captured by Hines (1989a, p. 62) as follows:

Mainstream accounting research views accounting as communicating economic reality and as being an economic good. Markets are implicitly assumed to be naturally occurring, and the demandsupplyprice mechanism is seen as impersonal and valuefree. The costs and prices which financial accounting communicates are seen to emerge as products of this impersonal mechanism.

As Hines further points out, this has significant political implications.

When prices and costs are taken as natural, and the result of impersonal forces, this protects from scrutiny the sociopolitical processes by which they arc created and sustained. It also blocks from view the existence of the power relationships which create and sustain prices, and hence incomes, wealth and resource allocations. On the contrary, the status quo is legitimated by social practices such as research which takes it as given and valuefree. [Hines, 1989a, p. 63]

“”Economic imperialism” refers to the attempt by economists to expand the aulhoritative domain of economic theory and method to other disciplines in an effort to dominate the field of discourse in those disciplines. Economist Gary Becker was awarded a Nobel prize for his leadership in this movement. The imperialistic tendency of economics is discussed in detail by Radnitzky and Bernholz [1987]. See Mouck [1995, pp. 537539] for a discussion of economic imperialism and “modern financial reporting theory”.

Furthermore, since neoclassical economic theory was inspired by, and following Fisher has attempted to mimick, Newtonian physical mechanics, the proponents of “scientific” economicsbased accounting research have tended to claim the prestige and status that is often associated with the Newtonian worldview of physics.

It must be noted, however, that the mechanistic view is not proceeding unchallenged. As we approach the end of the twentieth century, new and formidable challenges to the mechanistic view (in physics, economics and accounting) are emerging. Before turning to those challenges, however, a quick look at “the path not taken” (in terms of the interrelationship between accounting, economics and science) during the first third of this century may provide additional focus for surveying the emerging challenges to the mechanistic view.

THE PATH NOT TAKEN

The Fisherian legacy can be portrayed as a unique linkage between Newtonian mechanical physics, neoclassical economics and “scientific” accounting thought. It is interesting to note, however, that a competing linkage among science, economics and accounting emerged during Fisher’s most academically productive years (the 1890s — 1930s). The competing paradigm during these years linked Darwinian evolutionary science, institutional economics, and a sociocultural view of accounting. DR. Scott’s The Cultural Significance of Accounts [1931] is the prominent accounting treatise to emerge from this linkage, but Veblen’s economic thought is clearly the key link in the chain. Veblen is generally recognized as the founder of institutional economics, and it is Veblen’s view of economics that most explicitly undergirds Scott’s view of accounting.

As noted earlier, both Veblen and Fisher received their Ph.D.s from Yale, and both came under the influence of the social Darwinist William Graham Sumner. The result of Sumner’s influence, however, was radically different for Fisher than it was for Veblen. For Fisher, Sumner’s influence was manifested primarily in Fisher’s lifelong admiration for the methods of science and his attempts to solidify the “scientific” foundation of neoclassical economics. For Fisher, however, the “scientific” foundation for economics was not provided by the evolutionary views usually associated with Sumner; it was as we have seen, the mechanical worldview of Newtonian physics.

For Veblen, on the other hand, Sumner’s espousal of evolutionary thought directly influenced his thinking about society in general and economics in particular. As Hodgson [1993] points out, “Veblen became immersed in evolutionary theory, and clear, enduring traces of both Darwin and Spencer can be found in his thought” [p. 124], Veblen’s evolutionary social theory, however, was radically different from that of Spencer and Sumner.12 Whereas they took the individual to be the fundamental unit of social and cultural evolution, Veblen saw institutions as the fundamental unit, with individual habits of thought and action being influenced primarily by institutional factors. And whereas Sumner’s social Darwinism was primarily a defense of laissezfaire capitalism, Veblen’s evolutionary view of economics was fundamentally opposed to the existing economic order.

Unfortunately, Veblen’s work is notorious for its lack of consistent and straightforward usage of terminology. Thus, there has been considerable disagreement among Veblen scholars with respect to precisely what he meant by the term “institutions”. But the view that is most often associated with the “school of institutional economics” has been summarized by Oser [1963] as follows:

An institution is not merely an organization or establishment for the promotion of a particular objective, like a school, a prison, a union, or a federal reserve bank. It is also an organized pattern of group behavior, well established and accepted as a fundamental part of a culture. It includes customs, social habits, laws, modes of thinking, and ways of living. . . . Economic life, said the institutionalists, is regulated by economic institutions, not by economic laws. Group social behavior and thought patterns that influence them are more germane to economic analysis than the individualism of the prevailing marginal type of theory, [p. 247]

Since institutions are always changing and adjusting to new environmental situations, the institutionalists rejected the neoclassical economist’s static equilibrium analysis as well as the notion that market forces would automatically promote a harmony of interests. The institutionalists were accordingly able to muster a substantial following during the first third of this century as economic reality increasingly diverged from the picture painted by the neoclassical theorists. The increasing concentration of economic wealth and power at the turn of the century, the increasing visibility of waste and conspicuous consumption that Veblen highlighted in The Theory of the Leisure Class [first published in 1899], and the massive and persistent unemployment of the Great Depression — all of these were increasingly taken as manifestations of the bankruptcy of the neoclassical economist’s worldview. Indeed, as Oser [1963, p. 245] suggests, the rise and influence of institutional economics was curbed only when Keynes [in 1936] “created a more elegant theoretical system” that explained some of the most glaring problematic macro tendencies of capitalism without blatantly undermining the micro analysis of neoclassical theory.

In the meantime, however, “[t]he movement for social control and reform was gathering momentum” [Oser, 1963, p. 246]. And as Merino [1993, pp. 16978] has pointed out, accounting practices and accounting theory played a significant role in the reform movement. The alternative views of accounting theory that were drawn upon during the economic reform efforts of the early 1900s were primarily associated with institutional economics and, as noted earlier, the related institutionalist view of accounting theory has been explicated at length by DR Scott.

In the second chapter of The Cultural Significance of Accounts [1931], Scott gives a preliminary overview of economic institutions and institutional change. In conjunction with this overview, he points out that, “the presentation most nearly embodies what appears to the writer to be the general position of the late Prof. T. B. Veblen” [1931, p. 28, n. 4], In subsequent chapters he provides a sweeping overview of the historical evolution of economic institutions prior to settling down to his main theme — i.e., the changing role of accounts and accounting with respect to the changing economic institutions. A thorough review of Scott’s [1931] work is beyond the scope of the present paper, but a brief summary of the most salient points should be sufficient to mark the extensive contrast of his view of accounting theory with the economicsbased accounting theory that has been developed as part of the Fisherian legacy.

Scott [1931] points out that in the early stages of capitalism the competitive unit was the individually controlled enterprise and that in that environment the market and the law were the primary institutional forces relied upon for adjusting conflicts of interest between individuals. The role of accounting was quite limited.

In the field of merchandising in which accounting first developed, the scope and function of accounts were limited, in the beginning, to recording decisions rendered by the market. A system of books constituted a record of transactions affecting one particular competitive interest. The theory of accounts involved nothing beyond setting up an efficient bookkeeping record. Accounting was, thus, entirely subordinate to the market and to law. [Scott, 1931, p. 197]

With the emergence of machine technology and the attendant rise of large scale enterprises characterized by absentee ownership, however, the role of accounting had changed dramatically. Scott points out that accounting in such organizations plays a major role with respect to internal management and control; a role that interweaves extensive statistical data with the traditional double entry accounting system.

A multiplicity of forms, the distribution of records over many departments, the summarization of data in statements which do not take the form of balance sheets and income statements and the keeping of records which do not run in money terms, are all parts of a system calculated to afford a maximum of information useful for the purposes of administrative control [Scott, 1931, p. 212].

The larger integrated role of accounting within the organization, Scott suggests, has done much to enhance the professional status of accountants. In his words, “Accountants came to be regarded as something more than mere grownup bookkeepers” [1931, p. 210].

A more significant development, however, was the changing role of accounting with respect to outside institutions such as the law, markets and government. The expanded role of accounting, Scott maintains, was largely due to the emergence of a plethora of interests that are affected by the measurement of profit and the reporting of financial condition.
The typical accounting record has come to be a record not of one but of many interests. The relationships to be recorded and differentiated are many and various. Creditors, and customers, profitsharing managers and employees, present and future stockholders, common and preferred stockholders, majority and minority stockholders, partners, bond holders and under writers represent some of the interests involved in modern enterprise. [Scott, 1931, pp. 202203]

A major result of the new organizational and institutional realities was that accounting practices and accounting theory began to be embedded in legal arrangements, market transactions, and government regulatory practices. In Scott’s words, “The principles of accounting, principles of law, accounting technique and the machinery of the market are all mixed up together in the process by which conflicting interests are adjusted” [1931, p. 202].

Covaleski and Dirsmith [1991, pp. 47] have contrasted Scott’s view of accounting and accounting theory with the neoclassical economics view (i.e., accounting theory as developed within the Fisherian legacy). They couch their comparison in terms of “first and second order concerns of accounting research”. The first order concern, they suggest, views “accounting information . . . [as] a technical device for coping with an objective world, rationally fostering efficiency, order and stability” [Covaleski and Dirsmith, 1991, p. 4].

It is my contention that this concern is wholly within the Fisherian legacy which sees accounting as a set of purely technical apolitical tools for the pursuit of economic efficiency. As they point out, however, this perspective ignores, or assumes away, the second order concerns raised by Scott [1931]; it “ignores the critical topic to be investigated — the role of accounting between internal organizational structures, ideologies, and processes and the society within which they exist” [Covaleski and Dirsmith (1991, p. 5]. Such second order concerns, they suggest, are quite relevant to a looming crisis in accounting research. Scott’s [1931] work provides “a meaningful basis for addressing the significant issues embedded within the contemporary research crisis” [Covaleski and Dirsmith, 1991, p. 1].

In the next section, I provide an overview of some of the more salient challenges which are confronting the mechanistic Fisherian style of accounting thought. My overview of these challenges will, to some extent, support the contention of Covaleski and Dirsmith by pointing out important parallels between the emerging “new” challenges and the challenges posed by Scott’s “institutional” view of accounting.

EMERGING CHALLENGES TO MECHANISTIC ACCOUNTING THOUGHT

Just as the Fisherian Legacy and the “path not taken” were construed in terms of paradigmatic linkages among science, economics and accounting, the most salient contemporary challenges to the mechanistic accounting paradigm can be construed in parallel terms. Chaos theory and complexity theory are challenging the reductionistic perspectives associated with the Newtonian scientific worldview; the “new accounting research” literature is challenging the narrow asocial, ahistorical and apolitical perspectives of mainstream accounting research; and the neoclassical economics paradigm is being challenged by a new evolutionary economics movement. This section contains a very brief overview of each of these emerging challenges.

The “New Accounting Research”

Morgan and Willmott [1993] use the term “new accounting research” (NAR) in a very broad sense “to identify accounting research that is selfconsciously attentive to the social character of accounting theory and practice” [p. 3]. NAR rejects the positivistic methodological views of mainstream accounting research and tends to favor social constructivist methodological perspectives associated with Gadamer’s hermeneutics, Habermas’ critical theory, Foucault’s genealogies and archeologies, and Derrida’s deconstructions. In words that are reminiscent of DR Scott, Morgan and Willmott [1993] note that “NAR contrives to render visible, and amplifies, accounting’s wider social and historical constitution and significance as a technology of social and organizational control” [p. 4]. By rendering the sociopolitical implications of accounting more visible NAR tends to problematize the accounting practices and accountability relationships by which the status quo is reproduced. NAR can thus be seen as an attempt to counteract the previously cited conservative political role that is wittingly or unwittingly being perpetuated by mechanistic accounting research.

The wideranging scope of NAR projects can be illustrated with the following very limited list of examples. Tinker and Neimark [1987] have examined “The Role of Annual Reports in Gender and Class Contradictions at General Motors”. Hines [1988; 1989b] has examined the role of financial accounting in the construction and maintenance of the social world. Arrington and Francis [1989] have used Derrida’s techniques of “deconstruction” to disclose the fundamental contradictions in agency theory. Boland [1989] has used Gadamer’s hermeneutics as the basis for treating accounting as a text to be interpreted. Broadbent et. al. [1991] have used Habermasian critical theory to examine financial and administrative changes in Britain’s National Health Service. Miller and O’Leary [1987] have used a Foucauldian analysis to examine the role of cost accounting in “the construction of the governable person”. Preston and Chua [1993] have examined the role of hospital cost classifications in the rationing of health care to the elderly. And on and on.

NAR obviously poses a wide range of challenges to mainstream economicbased accounting research. The number of international journals which routinely publish such research has expanded to include the following: Accounting, Organizations and Society, Accounting, Auditing and Accountability Journal, Critical Perspectives on Accounting, Advances in Public Interest Accounting, and Accounting, Management and Information Technologies. Furthermore, international conferences which focus primarily on NAR — such as Interdisciplinary Perspectives on Accounting (held every three years in Manchester, England), Critical Perspectives on Accounting (held every three years in New York), and beginning in 1995, Asian Pacific Interdisciplinary Research in Accounting (scheduled to be held every three years) — consistently draw large numbers of participants. In sum, the challenge represented by NAR shows no signs of dissipating or of being coopted by the mainstream.

With respect to the concerns of the present paper, the emergence of NAR can be seen as the rebirth of the sociocultural accounting research movement that culminated with DR Scott over sixty years ago. There is, however, a very significant difference between Scott’s sociocultural research and today’s new accounting research. Whereas the former was linked with an identifiable scientific perspective (Darwinian evolutionary theory) and an identifiable school of economic thought (institutional economics), the latter (NAR) is more closely aligned with certain areas of philosophy and social theory and has eshewed any significant affiliation with science or economics. In ray view, however, the emerging theories of chaos and complexity as well as an emerging new evolutionary economics can be seen not only as challenges to the scientific and economics perspectives associated with the Fisherian legacy, but also as potential linkages that could be developed with NAR. Exploration of the latter notion — that some sort of intellectual linkage could be developed between complexity theory, the new evolutionary economics and NAR — is obviously beyond the scope of this paper, but I shall attempt in the following subsections to provide at least a cursory indication of this possibility.

Chaos and Complexity Theory

The Newtonian scientific worldview upon which neoclassical economics is built presumes that: natural phenomena behave in accordance with fixed and immutable laws; effects are proportional to causes; and causality implies the potential for predictability. The Newtonian worldview is reductionist in its presupposition that knowledge of the behavior of the component parts is sufficient for explaining the behavior of the whole. That is, the behavior of the whole can be reduced to the behavior of the component parts.

Chaos theory has demonstrated quite precisely with mathematical models that causality does not necessarily imply predictability and that nonlinear dynamics can generate effects that are spectacularly out of proportion to causes [Prigogine and Stengers, 1984, pp. 16770; Gleick, 1987, pp. 1737; Peitgen et. al., 1992, pp. 4259]. Chaos researchers have also demonstrated convincingly that the processes working in the mathematical models are also evidenced in many natural and social phenomena including turbulent dynamics of fluids and gases, weather patterns, geological developments, and social and political turmoil. The rapidly growing interest in the study of such phenomena has culminated in the emergence of a new interdisciplinaryfield of scientific endeavor that is variously termed “complexity theory” or “complex nonlinear dynamic systems theory” or “complex adaptive systems theory”.

The Santa Fe Institute (SFI) has gained an international reputation as the leading center for the study of complexity theory [Lewin, 1992, pp. 910 and Waldrop, 1992, p. 12], and the studies reported by the SFI are further challenging the Newtonian worldview of science. SFI researchers, for instance, have demonstrated that perpetual novelty is associated with the behavior of complex adaptive systems, and that such perpetual novelty is frequently due to “phase transitions” that occur in systems operating far from equilibrium. Phase transitions are associated with the emergence of new phenomena that behave in qualitatively different ways than before the phase transition. The most farreaching implication of such findings is that the behavior of the whole cannot necessarily be reduced to, and explained by, the behavior of the parts; i.e., reductionism is invalid with respect to complex, nonlinear dynamic systems. Indeed, Cohen and Stewart [1994, pp. 24785] have cited such studies to suggest that “natural laws” may not be fixed and immutable; that natural laws may evolve. This is an enormously controversial suggestion, but at the very least, the studies of complexity have demonstrated the importance of history, not just with respect to social systems, but also with respect to the study of natural systems. In the jargon of complexity theory, outcomes are “pathdependent”.

The developments associated with chaos and complexity theory have interesting implications for the themes of the present paper. Not only do they challenge the Newtonian scientific worldview which supports neoclassical economic theory and the related developments in accounting thought, they also draw more heavily upon evolutionary metaphors than upon the metaphors associated with physical mechanics. In this sense, chaos and complexity theory provide an interesting parallel with the evolutionary perspectives of institutional economics and the “path not taken” in accounting thought in the first third of this century. This parallel may be made more apparent by the following cursory overview of the new evolutionary economics movement.

A New Evolutionary Economics Movement

In 1987 the SFI held a workshop in Santa Fe on “The Evolutionary Paths of the Global Economy”. The proceedings, published in Anderson et. al. [1988] demonstrate many of the implications of complexity theory for the study of economics. One paper in particular, Holland [1988], succinctly captures the evolutionary perspective on economics:
The global economy is an example, par excellence, of an adaptive nonlinear network (ANN hereafter). Other ANNs are the central nervous system, ecologies, immune systems, the developmental stages of multicelled organisms, and the processes of evolutionary genetics. ANNs allow for intensive nonlinear interactions among large numbers of changing agents. These interactions are characterized by limited rationality, adaptation (learning), and increasing returns. (Typical examples in the global economy are: entrainment of speculators in the stock market, anticipation of shortages and gluts, learning effects in hightechnology, and niche creation wherein a successful innovation creates a web of supportive and augmentative economic activities.) [p. 118]

Economic agents in such an economy are continually engaged in futureoriented decisions on the basis of “rulesofthumb” that have evolved on the basis of past experience and are continually being revised as new experience is accumulated. Their decisions are also influenced by expectations of what other agents are likely to do; i.e., much of the decisionmaking is strategically oriented. The arena in which these agents operate “is typified by many niches that can be exploited by particular adaptations …” [Holland, 1988, p. 118]. This notion of environmental niches is especially relevant with respect to technological developments since, as Holland notes, “[njiches are continually created by new technologies and the very act of filling a niche provides new niches (cf. parasitism, symbiosis, competitive exclusion, etc., in ecologies)” [1988, p. 118]. Thus, new technologies are inherently linked with the ongoing production of novelty and choice.

Such an evolutionary perspective has radical implications with respect to neoclassical economic thought. For instance, the phenomena of increasing returns has the potential of driving an economy far from equilibrium, and it plays havoc with the equilibrium analysis of supply and demand. Additionally, the agents who operate in such an economy are adaptive learning agents as opposed to rational maximizing agents. The upshot of such implications is that welfare economics criteria frequently cited by capital markets researchers — criteria such as “Pareto optimality” and “Pareto improvement” — are clearly not applicable within an evolutionary perspective.

The economic theory implications of an evolutionary perspective are explored more fully in Hodgson [1993], England [1994] and Mirowski [1994]. Hodgson [1993] in particular does a thorough job of assessing the challenges and prospects facing the new evolutionary economics movement. He also provides an historical overview which emphasizes the linkages of the contemporary evolutionary economics with the evolutionary thought imbedded in the writings of earlier economists, including Marx, Marshall, Schumpeter and Hayek. Most significantly, however, with respect to the present paper, his overview makes it clear that some of the strongest and most significant linkages are with the institutionalist economics associated with Veblen. As Hodgson [1993, chapters 1 & 16] makes clear, the linkages with institutionalist economics facilitates more extensive linkages with both poststructuralist social and political theory and with complexity theory. It is my contention that these broader linkages hold the potential for the development of a new alliance between accounting, economics and science; an alliance that would link complexity theory, the new evolutionary economics and the new accounting research. Since the relationship between economics and complexity theory has already been discussed, a brief discussion of the potential linkage between NAR and complexity theory should be sufficient to complete my suggestion regarding the possibility of a new alliance among science, economics and accounting.

Chaos Theory, Poststructuralism and NAR

Structuralism did much to promote the view that the human world is a socially constructed world; a world that is constructed, held together, and perpetuated by sociolinguistic processes. The movement known as poststructuralism did not repudiate this basic notion; it primarily took issue with the structuralist view of language as a system of fixed meanings or as a system of meanings based on fundamental sets of binary oppositions. The difference can be simplistically characterized as a closed (structuralist) versus open (poststructuralist) system of linguistic meanings. The NAR of the last decade has seen an explosion of literature exploring accounting practices from various social constructivist perspectives, including the poststructuralist/postmodernist views of Foucault [Hoskin and Macve, 1986; Loft, 1986; Hopwood, 1987; Miller and O’Leary, 1987; Preston, 1989; and Stewart, 1992], Derrida [Arrington and Francis, 1989], Rorty [Arrington, 1990; Mouck, 1994a], and Laclau and Mouffe [Mouck, 1995].

Chaos theory and complexity theory have much in common with poststructuralism. In fact, chaos theory has even been referred to as poststructuralist science [Hayles, 1990, pp. 28892]. It is my contention, accordingly, that chaos and complexity theory have the potential to make significant contributions to the poststructuralist accounting research program. For a brief exploration of this suggestion, it will be useful to begin with an analogy between structuralism on the one hand and both the Newtonian world view of science and neoclassical economics on the other hand. Just as structuralists seek to isolate the elementary components of linguistic structures and identify the rules governing their constructive possibilities, scientists working within the Newtonian world view hope to locate the basic systematic building blocks of the physical world together with the laws of nature that limit the various possible structural arrangements. Neoclassical economics likewise can be seen as structuralist in the sense that (having presupposed atomistic individuals as the elementary building blocks) it attempts to locate the invariant laws governing the socioeconomic universe. For the neoclassical economist, as for the economistic accounting researcher, once the basic structural possibilities are identified, then predictions can be made regarding various alternative policy stances.

Poststructuralist social theory shifts the focus away from a search for invariant structuralist elements and laws, and highlights the processes which drive change; processes involving metaphoric views of language and the role of rhetoric in social interaction. Poststructuralist social theory, accordingly, can be seen as a powerful tool for attacking the reductionistic and deterministic perspectives associated with neoclassical economics and economistic accounting theory. In a similar manner, chaos theory has shifted the focus away from a search for elementary building blocks and the invariant laws of nature and redirected the focus of inquiry toward the processes which continually bring forth new phenomena and new patterns of behavior. From this perspective, it is increasingly clear that there are many potential interconnecting threads among the concerns of poststructuralist accounting research, chaos and complexity theory, and the new evolutionary economics. These potential interconnections hold the promise of a powerful challenge to the Fisherianstyle economistic accounting research that has dominated the mainstream academic accounting journals for most of this century.

CONCLUSIONS

It is understandable that Fisher has not been prominently mentioned in historical accounts of the development of accounting theory. It is understandable because, at the time of his contributions (roughly the first three decades of this century), accounting theory development was largely driven by issues facing practitioners, while Fisher’s contributions to accounting theorywere driven by his concern to fit accounting issues into the abstract theoretical framework of neoclassical economics. Accounting theorists of that time tended to view Fisher’s work as economic theory, not accounting theory. Thus, accounting historians have understandably omitted, or minimized, Fisher’s influence on the development of accounting thought.

In hindsight, however, it is clear as we approach the end of the century that accounting theory and academic accounting research have been increasingly colonized by neoclassical economics, with the result that works such as Fisher’s Capital and Income would now be easily recognizable as accounting theory. It is in this sense that I claim that economicsbased accounting thought, whether of the normative apriorist sort or the subsequently developed emphasis on capital markets research, can be appropriately characterized as the legacy of Trving Fisher and the “first economic theory of accounting”. Not only is this descriptively appropriate, it is also useful, as I have sought to demonstrate, for the purpose of highlighting the intellectual constraints that have accompanied the colonization of accounting by economics. As Fisher’s work makes abundantly clear, the primary metaphors and analytical techniques of neoclassical economics were directly inspired by Newtonian mechanics and the nineteenth century physics of energy, the economists of that school have been able to claim that their analyses are technical and apolitical.

The historical analysis of this paper — an analysis which highlights the paradigmatic linkage between the Newtonian worldview of science, neoclassical economics and mainstream academic accounting research — provides a backdrop against which to illuminate both the breadth and the depth of current challenges to mainstream accounting research. Not only is the mechanistic character of mainstream economicsbased accounting research being challenged on all fronts by the “new” social constructivist view of accounting techniques and practices; the underlying neoclassical economics paradigm itself is being challenged by a new evolutionary perspective on economics. Furthermore, the emerging evolutionary economics research is significantly affiliated with the new sciences of chaos and complexity which are posing profound challenges to the Newtonian world view of science. In Kuhnian terms, the economicsbased accounting research paradigm is increasingly susceptible to challenge and, as this paper has indicated, potential linkages with complexity theory and evolutionary economics could magnify the growing challenge posed by the “new accounting research”.

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