Accounting, Organizationsand Society. Vol. 5, No. 1, pp. 147-160. Pergamon Press Ltd, 1980. Printed in Great Britain.

TOWARDS A POLITICAL ECONOMY OF ACCOUNTING: AN EMPIRICAL ILLUSTRATION OF THE

CAMBRIDGE CONTROVERSIES*

ANTHONY M. TINKER

Graduate School of Management, University of California, Los Angeles

Abstract

For over a century economics has been dominated by two theoretical positions: classical political economy and the neo-classical economics of marginalism. From these two paradigms have come the major theories of value: the labor theory and the marginalists theory of value. Until recently marginalism has held the center of the stage, however since the Cambridge Controversies and Piero Sraffa’s critique of marginalism there has been a revival of interest in classical political economy. One outcome is clear from the Cambridge debates: in so far as accounting relies on marginalism for its theoretical foundations then those foundations are fallacious. This paper reviews some of the controversies and illustrates how accounting ideas are affected by the critique of marginalism. An alternative approach to accounting (based on ideas from political economy) is then explored using evidence from an empirical study of a multinational enterprise.

What does the figure at the bottom of an income Table 1 summarizes the theoretical differences

statement mean? What interpretations may we put between these two viewpoints: it shows that they

on it? Business firms trade in factor and product differ not merely as to what profit means but also

markets that form part of a society’s economy. As as to how the rate of profit is determined. For

profit is a result of a trading in these markets, may example, marginal productivity theory adopts an

we conclude that profit is indicative not only of approach that is almost akin to that of

the firm’s market viability but also its social engineering: it deals with the manner in which efficiency in utilizing society’s resources? Alterna- physical resource inputs are transformed into tively the rate of profit may reflect the social outputs and the role played by profit as an power of capitalists. In this view, the magnitude of efficiency criterion in this process. Conversely, expenses in the income statement (including political economy attributes the division of profit) is indicative of social, institutional and income (and therefore the rate of profit accruing monopolistic power rather than social efficiency to capital) to the distribution of power in society and productivity. and the social-political and institutional structure

The two views of what an income statement that mirrors that distribution of power. tells us correspond with two theoretical positions The marginalist explanation concentrates on

that have dominated the history of economic what are called the forces of production. In

thought: classical political economy and neo- economic analysis these are brought together in a

classical marginalist economics. When applied to production function analysis. They include the

the income statement these two theories offer technological aspects of the input and output conflicting explanations as to what income quantities and their transformation coefficients. In

signifies and how it is determined. contrast, political economy relies on the social

*Earlier drafts of this paper were presented to the Annual Meeting of the British Sociological Association, Sheffield, England, 1977 and the UCLA Conference on Accounting Organizations and Society, July 1979. The evidence presented in this study was obtained from an empirical study conducted with Ms. Antie Hoogvelt, University of Sheffield. The author is indebted to Shahid Ansari, Jack Hirshleifer, Axe1 Leijonhafvud and Lauren Newton of UCLA for their comments on some of the ideas presented here. The author alone is responsible for any deficiencies contained in this paper.

147

148 ANTHONY M. TINKER

TABLE 1. Conflicting explanations of profit

Neo-classical economics (marginalism)

Classical political economy

Meaning attributed to profit

Theoretical explanation as to how the rate of profit is determined

Indicator of economic efficiency

Marginal productivity theory focusing on the forces of production

The returns to capitalists

A social and political analysis that focuses on the social relations of production

relations of production: an analysis of the division of power between interest groups in a society and the institutional processes through which interests may be advanced.

The differences between these theoretical alternatives are crystalized by the empirical case study that is described later in this paper. The case study concerns the socioeconomic history of a UK based multinational (Delco) that operated in Africa. Delco operated an iron-ore extraction business in Sierra Leone for 46 years. The firm closed down in 1976. The research attempts to link the firm’s accounting history with its social and political history. A periodization analysis of the historical data is used to illustrate the link between socio-political and accounting variables. The 46 year history of Delco is divided into three periods: early colonial; late colonial and post- colonial. An income statement is then prepared for each period that summarizes that distribution of the firm’s income for that period. The differences between the three income statements (i.e. changes in the distribution of income) are then linked with changes in the social and political conditions underlying the figures.

Table 2 contains a sample of expense items from the income statements of Delco. The expenses are shown in monetary terms and as a percentage of sales revenue. Our earlier questions may now be directed to the data in Table 2: are the returns to investors, labor and government institutions indicative of their marginal produc- tivity in production? For example, Cl3 million was earned by investors over the 46 year period. Is this part of an efficient income distribution in the sense that at the margin, sufficient earnings accrued to investors to ensure that capital was solicited and employed to the point where it was just profitable to do so? Similarly, are the wage rates roughly indicative of the value of labor in production? Is there a notion of social justice in this marginalist’s explanation in the sense that each factor input gets its “just” rewards by earning an amount commensurate with the value of what it contributes?

The subdivision of the venture into three main periods (each with its own income statement) suggests an alternative explanation of the distribu- tion of income in Table 2. Associated with the income statement data for a period is a unique

TABLE 2. Sample of items from three income statements of Delco Ltd

Sales proceeds

Expenses: Taxes (U.K. government

taxes) Taxes (Sierra Leone

government Wages (white labour) Wages (black labour)

Profits

Early colonial period

1930-1947 sm. %

55 100

0.8 1.6

1.0 1.7

4.9 8.9 7.6 13.8

5.7 10.3

Late colonial period

1948-1967 em. %

267 100

1.5 0.6

37.9 14.2

19.7 7.4 15.0 5.6

31.3 11.7

Post colonial period

1968-1975 em. %

102 100

0.2 0.2

1.1 1.0

6.8 6.6 10.3 10.1

5.9 5.7

Total

1930-1975 &m %

424 100

2.5 0.6

40.0 9.0

31.4 7.4 32.9 7.8

42.9 10.1

configuration of social and political conditions. We thought. Indeed it might be argued that will see how these two are related: the income marginalism has advanced beyond the theoretical data is a product of the socioeconomic reality and domain to penetrate the subconscious of even the differences between items in the three income most ardent “practitioner”. Thus Keynes aptly statements may be traced to the changes in that referred to “practical men who believe themselves reality. In this fashion we may use political to be exempt from any intellectual influences are economy to explain and predict accounting usually the slave of some defunct economist” numbers. (Keynes, 1936, p. 383).

The next section shows how heavily contem- porary accounting theory and practice depend on

We can explore the contributions by marginal-

marginalist thought. This is followed by a review ism to accounting in the following manner. Imagine a highly simplified economy that is faced

of the Cambridge Controversies: a discussion that with two alternative ways of organizing its shows that the marginalist underpinnings of economic system. These two methods of accounting are deficient on logical grounds. The organizing are termed techniques of production paper then turns to explain the mode of analysis and are defined as follows: 1 of classical political economy and illustrates how it may be applied to the accounting data of the Year 0 1 2 3

Delco Company. Technique A --w 0 $5 Technique B -Y $1 0 $6

MARGINALISM AND ACCOUNTING The problem we are addressing is: “Which is the most socially desirable technique?” Technique A

Very few scholars would deny that marginalist requires an investment of w man-years in year 0 in

economics has had a tremendous impact on order to earn a return of $5 in year 2. Technique B

shaping accounting theory. This is not to say that requires an outlay of y man-years in order to earn

contemporary accounting practice is simply returns of $1 (year 1) and $6 (year 3).

“applied marginalism”, but if “theory” has played The present value of each technique (the

any role in determining practice then marginalist monetary value of w and JJ) depends on the

theory has probably contributed more than any discount rate applied to their future returns. By

other to the practice of accounting. This particular substituting different discount rates into a present

economic theory has provided guidelines for value formulae we obtain a range of present values income definition, asset valuation and more recent for each technique. The results are presented work in financial standard setting (Hicks, 1946; graphically in Fig. 1. Edwards & Bell, 1961; Parker & Harcourt, 1969; Notice that it is not possible to assert that one Demski, 1973; American Accounting Association, 1977; Dyckman, 1977). The pervasiveness of *7

marginalism in accounting though is illustrated by -A t

views such as: “accounting describes an area of economics concerned with the measurement of economic phenomenon” (Dyckman, 1977, p. 266).

The attraction that marginalism holds for accounting theorists may be understood if we reflect on the conceptual structure of marginalism. The power and strength of marginalism stems from its potential in linking “rational” decision making at various levels: the individual level; the level of the firm and that of an entire economy. While its ability to achieve this conceptual integration has been frequently challenged, marginalism has few rivals today as an organizing frame for accounting

100 200 250

Discount rote % (rote of profit 1

Fig. 1.

AN EMPIRICAL ILLUSTRATION OF THE CAMBRIDGE CONTROVERSIES 149

’ The author is grateful to Jack Hirshleifer for supplying the following numerical example.

150 ANTHONY M. TINKER

technique is most socially desirable regardless of the rate of interest: technique A is dominant over the 100-200 per cent range while technique B is superior up to 100 per cent and again over 200 per cent. Thus we can only speak of a preferable technique for a society with reference to a given rate of interest.

The individual business firm may be incor- porated into this analysis as follows: Fig. 1 may now be viewed as the investment possibilities confronting the “typical” firm. Alternatively the reader may visualize some firms considering technique A; others considering technique B and a third group considering both techniques. If the interest rate for the economy is (say) 250 per cent then, from a societal viewpoint, an efficient allocation of resources will occur if investors are attracted to firms that will select technique B (with the highest present value). Correspondingly, from a firm’s viewpoint, technique B provides the most competitive market position.

The example illustrates two levels of accounting analysis. The first is a societal level and this shows how different techniques of production may be ranked according to their social desirability (where “desirability” is defined in terms of the income accruing to laborors and capitalists). In this context financial accounting may assist in allocating resources by informing investors about the relative desirability of the two techniques. The second level of analysis is microeconomic and shows the investment opportunities confronting the “typical” firm in the economy. In order to remain competitive the “typical” firm should choose the technique with the highest present value. Management accounting systems may assist management in this choice by correctly valuing investment alternatives. Most important, however, is the integrative view of the firm and the economy that marginalism offers accounting.

Whatever the market rate of interest, the best alternative for society is also the best alternative for the firm. This unifying aspect is one of the most appealing reasons for devising accounting policy according to marginalist principles.

Marginalist economists such as Fisher (1930) Hicks (1946) and Hirshleifer have developed concepts of economic value and economic income that are related to the worth of future consumption possibilities. Subject to certain qualifications, cash flow information may be used to assess the present value of these future possibilities (Hicks, 1946, pp. 172-176; Solomons, 1961; Parker & Harcourt, 1969, p. 8; Revsine, 1970; Scapens, 1978, p. 448)’ ,3 ,4 These marginalist ideas already form part of accounting policy: present value calculations are used in valuing leases and assessing such expenses as economic depreciation and certain employee pension items. In these areas there is no difference between the marginalist concept of value (illus- trated with reference to techniques A and B) and current accounting policy. However, perhaps the most comprehensive application of marginalist thought is to be found in the realms of replacement cost accounting.

Replacement cost advocates have frequently used the marginalists concept of value as an “ideal” or benchmark to judge their own proposals for accounting measurement (Carsberg &

Edey, 1969, pp. 73-112; Bromwich, 1977, pp. 592-594). For example, Edwards and Bell provide a detailed illustration which shows that, over time, a firm’s economic income will converge with its replacement cost income and the present value of its assets will converge with their replacement cost (Edwards & Bell, 1961, pp. 48-51)’ Notice that for Edwards and Bell, this convergence with marginalist values are important grounds for favouring replacement costs

*The neo-Fisherian approach is the dominant economics in most accounting teaching texts (see for instance Hendriksen, 1970, pp. 131-132; May, Mueller & Williams, 1975, p. 69).

‘In conditions of uncertainty we may replace present value with a firm’s stock market value in order to allow for risk as well as financial returns (Lerner & Carleton, 1966).

4Neither Hicks or Hirshleifer rely extensively on general equilibrium theory but a few economists do. Space precludes an exegesis on general equilibrium theory but it shares some of the criticisms leveled at the neo-classical theory discussed here and has earned several of its own due largely to its highly restrictive assumptions (Graaff, 1957, p. 142; Buckley, 1976, p. 40)‘ Critical appraisals of general equilibrium theory together with suggested alternative theoretical models are provided by Hunt, 1968, Kregel, 1975, Baumol, 1961, 1964, 1965 and Kornai, 1971. The stature of Kornai in the econometric community only serves to underline the severity of his critique (see for instance Hahn, 1973).

5This convergence arises because present value expectations are gradually converted firstly into cash and then into market (replacement) values (Edwards & Bell, 1961, pp. 48-51).

AN EMPIRICAL ILLUSTRATION OF THE CAMBRIDGE CONTROVERSIES 151

for financial reporting purposes. They appeal to marginalist principles even more directly in relation to management accounting. In this area, rational management is expected to use present values in evaluating alternative uses of their asset base (Edwards & Bell, 1961, pp. 37-38; Parker & Harcourt, 1969, pp. l-30).

We have seen how accounting theorists have developed methods that, directly and indirectly, attempt to measure the marginalist’s concept of value and income. The Cambridge Controversies are concerned with the validity of the marginalist’s concept of value and income. They challenge the conclusion we made earlier (in relation to Fig. 1) that, for a given market rate of interest, we can conclude that one technique is socially preferable. If we are unable to make this conclusion then marginalism begins to lose some of its advantages as a coherent, integrated schema for accounting policy.

THE CAMBRIDGE CONTROVERSIES

Figure 1 will help further our understanding of marginalism’s difficulties. The problem in Fig. 1 was to identify the most socially desirable technique. We needed to assume a discount rate in order to solve the problem and we used 250 per cent. How should we decide which rate to use? Two (alternative) answers are offered in the marginalist literature: firstly, the existing market rate of interest and secondly, that the rate is irrelevant (i.e. the final solution is independent of the interest rate and therefore the distribution of income). This paper deals with the first answer: we will critically examine the case for using the market rate of interest. The reader is referred to Kregel (1976) for an answer to the second question. Kregel shows that: firstly, that in all but the most trivial and unrealistic cases, the choice of the discount rate is crucial (and so therefore is the distribution of income). Secondly, using examples of the switching of techniques, it is shown that marginalism is an “underdetermined” theory: it does not offer a unique prediction and explanation as to the behavior of a real economy but rather a multiplicity of conflicting predictions and explana- tions. Thirdly, we see that two of the central building blocks in marginalist arguments (marginal productivity theory and the law of diminishing marginal returns) are fallacious.

What justification is there for using the existing

market rate of interest in relation to Fig. l? This question requires an examination of the Cambridge Controversies. Reviews of these debates already exist that are more comprehensive than space permits here (see for instance, Robinson, 1953-1954; Sraffa, 1960; Harcourt, 1969; Harcourt & Laing, 1971; Hunt & Schwartz, 1972; Dobb, 1973; Kregel, 1972, 1976). However some of the central issues may be explored using a classic marginalist study conducted by Arrow, Chenery, Minhas and Solow in 1961. This was a comparative analysis of the economies of nineteen countries that explored the relationship between economic growth and capital intensity. In relation to Fig. 1 this empirical study addresses the question: which sequences of techniques leads to the highest levels of national output over time? ‘The study raises the question: how should we measure the quantity of capital goods in an economy and the quantity of national output? Labor resources have a physical measure in terms of labor hours, similarly other resources (such as land) have corresponding physical measures (i.e. acres). What are the physical equivalents for measuring the quantity of capital and the quantity of national output?

Stock of capital I qumt~ty I

Fig. 2. Production function for a national economy.

These concerns can be illustrated with reference to a simplified production function for a national economy shown in Fig. 2. Only two factors of production are considered in this example: labor and capital. Ql, Q2 and Q3 are examples oi iso-product curves: each curve represents a frontier of alternative combinations of labor and capital that are capable of producing the same level of

152 ANTHONY M. TINKER

national output. Tl and T2 are members of a family of price, budget or income lines. The slope of these lines is given by the ratio of the market prices of the factor inputs (i.e. the ratio of the wage rate to the interest rate). All the points that make up a single line represent the different possible combinations of factors that are capable of producing the same level of national income. Points on the same line differ in the way that a given level of national income is distributed between labor and capital.

How much labor and capital would be employed to produce the output level Q2 in a perfectly competitive economy? How will the national income be distributed between the two factors? Neoclassical theory tells us that, in the short term when factor quantities are fixed at L and C, the relative prices of labor and capital will adjust to equate supply and demand. At point Vin Fig. 2, the maximum national output (Q2) is attained (and factors quantities L and C are fully employed) provided their market prices adjust to the slope of T2. These equilibrium prices are reflected in the slope of the price line that gives a minimum cost solution at the point of tangency between the price line T2 and the iso-product curve Q2. Suppose that the stock of capital expanded to C’. Its price would cheapen relative to labor causing a change in the slope of the price line to T’. This leads to a higher level of national output at Q3 with a new equilibrium for wage and interest rates (at V’). This is the neoclassical explanation to how a competitive economy simultaneously solves the problem of production and income distribution. As Harcourt and Laing note, “the production function is a method of analysis for killing two birds with one stone, it shows how the level of employment of labor and capital is determined and also how national income is divided between labor and capital” (Harcourt & Laing, 1971). The national income

distribution is given by multiplying the quantities of labor and capital by the equilibrium wage and interest rates.

In the longer term the supplies of labor and capital become variable. The long run equilibrium conditions are governed by the net marginal productivity of each factor: supplies will increase until net marginal revenue is equal to zero for each factor. And this is the marginalist’s reason for using the market rate of interest in Fig. 2. Capital is assumed to have marginal productivity and the existing market interest rate reflects the worth of its productivity in final production.

But can we say that capital has marginal productivity in the same sense as land or labor? Returning to Fig. 2, how is the stock of capital to be measured? A quantity measure that is often used is the present value of the income stream that

; expected to accrue to capital owners

amuelson, 1976, p. 615). But where do we get the discount rate and a net income stream for this calculation? The expected income stream requires an estimate of national income and a division of that income between labor and capital. But this is what the analysis is supposed to produce: i.e. the optimal income distribution in terms of output, employment and growth.6 [This would give the equilibrium prices that equate the marginal rates of substitution of capital and labor (Samuelson, 1976, pp. 547-557).] In other words, the assumptions we require (in order that the analysis can proceed) gives us the solution before we begin.’ Far from giving optimal solutions to the problems of production, income distribution and growth policies, this analysis shows that the problem is indeterminate unless a distribution of income is assumed beforehand.8 Yet no rationale can be offered for choosing one income distribution in preference to another. After all, this is exactly what the analysis was supposed to solve, not assume away! (Harcourt, 1969,

61n a much more elaborate form, the analysis in Fig. 1 has guided empirical studies of national economies (Hahn & Mathews, 1964). Specifically it has been used as a basis for proposing national economic policy concerning capital formation and employment (Solow, 1957, 1968; Arrow ei al, 1961).

‘An important variant on the present value approach is that which relies on the internal rate of return of an expected income stream. Unfortunately this approach typically results in multiple solutions (Samuelson, 1976, pp. 617618). As the literature on switching of techniques and capital reversals shows, the existence of multiple solutions is a further demonstration of the dependence of the value of capital on the distribution of income (Pasinetti, 1969; Dobb, 1970; Kregel, 1976).

‘Assuming a market rate of interest (or a wage rate) is tantamount to assuming a distribution of national income in this marginalist analysis. This is because it is assumed that equilibrium conditions of full employment of labor and capital will always be achieved. Thus only wage and interest rates will affect the distribution of income.

AN EMPIRICAL ILLUSTRATION OF THE CAMBRIDGE CONTROVERSIES 153

p. 370).’ This marginalist explanation is tauto- logical: we begin by asking how the rate of profit is determined and the answer is with reference to the quantity of capital and its marginal revenue product. We then ask how these are determined and the reply is by assuming a division of future income and discounting the returns to capital with the market rate of interest. All that has been said is that the market rate of interest is a function of the market rate of interest (and an assumed income distribution).”

It should be stressed that these deficiencies refer to marginalism as a theory, not necessarily to capitalism as a system of economic organization. Obviously market discount rates do exist in reality; what the Cambridge criticisms highlight is the inability of marginalism (qua theory) to explain how these market prices are formed and (therefore) how capitalism works.

As Kregel observes, “the orthodox (marginalist) theory can be seen to be a special case requiring restrictions that are non-existent in reality and having no obvious logical support or theoretical foundation . . . capital values and capital intensity depend on the ruling rate of profit or wage rate” (Kregel, 1976, p. 75).

Leading marginalists have acknowledged the difficulties raised for neoclassical economics by the Cambridge Controversies. Paul Samuelson has stated:

“The discussion shows that the simple tale told by Jevons, Bohm-Bawerk, Wicksell and other neo-classical writers . . . cannot be universally valid (1966, p. 576) . . . If all this causes headaches for those nostalgic for the old time parables of neo-classical writings, we must remind ourselves that scholars are not born to live an easy existence. We must respect and appraise the facts of life” (1966, p. 583).

Professor Ferguson has concluded that “neo- classical economic theory is a matter of faith . . . I personally have the faith” (Ferguson, 1969).

One of the most interesting consequences of

the Cambridge Controversies has been the reinstatement of classical political economy to the center of economic discussion. This has involved a return to the concerns of Bicardo and an acknowledgement that the scope of marginalism, defined in terms of competitive markets (the sphere of exchange), needs to be supplemented with political and social concepts if we are to understand how a capitalist economy works.

AN ALTERNATIVE FRAMEWORK OF POLITICAL ECONOMY

Political economy differs from neo-classical (marginalist) thought in that it recognizes two (not one) dimensions of capital: firstly as (physical) instruments of production and secondly as man’s relationship to man in social organization (Bhadui, 1969). The first dimension represents the

Ceflnitions of capital

Social relations of production

;%% /j%ijij$;ii;\ economy, state capitalism. slave economy

Fig. 3. The two concepts of capital and their relationship.

9 Many ingenious suggestions have been devised for quantifying the physical stock of capital. However (as Harcourt’s review shows) they all fail to resolve the basic problem (Harcourt, 1969, pp. 369-380).

“As Kregel indicates, the measurement difficulties are more extensive than this example suggests (Kregel, 1972, p. 24). Capital goods also form part of national output and thus the value of the outputs (as well as the inputs) will vary from one income distribution to another even though exactly the same physical input-output quantities may be involved in each case.

It is interesting to note that, in response to these difficulties, Samuelson appears to have excluded “capital” from all examples in his chapter 27 on the theory of production and marginal products (Samuelson, 1976, p. 540, tenth edition). Moreover, if the previous analysis (and Samuelson’s discussion pp. 617619) are valid there is no way of drawing either Fig. 2 (here) or Samuelson’s diagram on p. 603 without presuming an income distribution.

154 ANTHONY M. TINKER

economic forces of production, the second the social relations of production.” Figure 3 shows how these two concepts of capital are interrelated in shaping social and economic life.

In Fig. 3 the social relations are represented by various social institutions (e.g. legal, state, educational, religious, law and order, political, government administration). These institutions ensure that rights and obligations (e.g. property rights) can be pursued and enforced: they provide the ground rules for an economic order. Different kinds of society (feudal, slave, capitalist, etc.) are characterized by different kinds of social relations and therefore different institutional arrangements. For example, in a recent analysis of the Japanese postwar economy an eminent Japanese economist attributes the economic miracle to a unique alignment of social and political interests (Yamaura, 1978, pp. 4-10). This included a tri-partied alliance between the Liberal Democratic Party, government bureaucracy and business leaders; a closely regulated capital market where the Bank of Japan controlled the money supply by lending through thirteen large central banks; weak monopoly laws and a protectionist stance regarding imports. These factors permitted the government to establish a low cost of capital that stimulated investment and growth: the so-called “disequilibrium policy” of Japan. In terms of Fig. 3, this study shows how an understanding of social and political processes (the social relations) is indispensable to interpreting economic perfor- mance (either at the enterprise or national levels).

Here we come to the empirical study! The analysis of Delco not only attempts to show how the financial benefits from a mining venture were distributed, it also tries to explain how this distribution occurred as a result of institutional and social forces. The study shows how the market was governed by successive institutional forces (including the military, the colonial government and a bureaucratic management function). This amounts to a theoretical explanation (in socio- logical terms) of the social forces that determine market prices (and therefore accounting data). The Cambridge Controversies have shown theories of

workable competition and marginal productivity as inadequate for accounting data. Thus we rely on theories of imperfect competition and political economy to explain income distribution and profit.

CONVENTIONAL FINANCIAL APPRAISAL OF THE VENTURE

The study of the Scottish owned iron ore company, Delco, spans its 46 year life beginning in the early colonial period, and tracing its expansion through the late colonial period until its collapse in 1976 under a post colonial state of Sierra Leone.

In order to investigate the Delco Company a computer simulation model was created that included all the main financial flows involving Delco throughout the period.‘* These monetary flows were then adjusted by an inflation index in an attempt to present all monetary amounts in units of the same purchasing power (thus all calculations are expressed in 1976 pounds sterling equivalents). These inflation adjusted amounts were then used to compute ex ante profitability indices and other measures for assessing the value of the venture. Thus for the shareholders of Delco, the project produced a 13 per cent inflation- adjusted, internal rate of return (or 16 per cent before inflation). Figure 4 and Table 3 show how the total 46 year (inflation-adjusted) sales proceeds were distributed between various parties.

Table 3 presents the project (ex post) from a financial viewpoint. For an outlay of &500,000 in 1930 (approximately 3 million in 1976 pounds sterling), the project generated a present value of &18.9 million at a 3 per cent discount rate - after allowing for inflation. In October 1975, Delco (Sierra Leone’s second largest export earning industry) went into voluntary liquidation and with it, the several thousand employment opportunities its operations generated. Table 3 is not concerned with whether some participants made “excess profits” from the venture. This would imply that we could say what “normal profits” were for the

“It is interesting to note that Hirshleifer’s definition of production (as exchange with nature) accords with the first definition. What is surprising is the determination to ignore the second dimension: as is often the case, the underlying social structure of society is treated as nonproblematic (Hirshleifer, 1970, p. 3).

‘*The PROSPER ICL package was used for this part of the research. Data was obtained from published accounts, other documentary material and interviews in Sierra Leone.

AN EMPIRICAL ILLUSTRATION OF THE CAMBRIDGE CONTROVERSIES 155

40% ShIppen and I”s”mnce agents

Block staff leaseholders

Key-The shaded portion denotes the total share going to Sierm Leone Constituents whilst the remaining segment identifies the 82.7% returns to the capitalist agencies

Fig. 4. The division of the proceeds from ore sales (C1.F. prices) 1930-1976.

TABLE 3. The distribution of inflation adjusted ore sales

proceeds (CIF prices) 1930-1975

CIF Ore sales proceeds 424.14 100

Distributed between:

Capitalist agencies 1. Shippers 2. U.K. suppliers 3. Delco owners 4. White directors,

management and employees

5. U.K. government 6. U.K. leaseholders

169.66 40.00 104.11 24.54

42.70 10.07

31.40 7.40 0.51 0.59 0.62 0.15

&m %

351.00 82.75

Sierra Leone constituents 7. S.L. government 8. Black labor: manual staff 9. Tribal authorities

39.87 9.40 26.84 6.33

6.16 1.45

73.14 17.25

Total 424.14 100

situation. What is of interest are the factors that led to the shares taken by participants and the reasons why those shares change over time.13

ALTERNATIVE ANALYSIS OF THE VENTURE: A PERIODIZATION ANALYSIS

It is at this point that a new way of interpreting accounting data may be introduced. Table 3 (together with Fig. 4) is an income statement for the entire 46 year venture. Table 4 provides a breakdown of Table 3 in the form of a series of income statements: a periodization analysis. The period covered by each income statement in Table 4 represents a particular institutional regime (early colonial, late colonial and post-colonial). Each regime had its own unique configuration of social and political institutions.

How should we interpret Table 4? Table 3 shows that 17.25 per cent of the sales proceeds were returns to capital for an initial investment of &SOO,OOO. Was this allocation (and its related returns) efficient in the wider context of the allocation of international economic resources? Our earlier review of neoclassical analysis shows that we cannot evaluate the situation in terms of marginal productivity. After all, the Cambridge debates show that the distribution of income is determined by forces “outside” the neo-classical sphere of market exchange. And this is exactly what Table 4 shows us: it provides an income statement for each institutional regime. We can now begin a new interpretation of the accounting data shown in Table 2.14

From the early colonial to the late colonial period we see the percentage share of proceeds collected by the British constituents gently declined (from 84 to 79 per cent) and this decline is accompanied by increasing allocations (mainly through taxation) to the Colonial state whose share of the proceeds reaches a peak in the beginning of the post colonial period (from 1.7 to 14.9 per cent). These figures together with other records of the period, indicate that with the passage from early to late colonial conditions the British colonial system that made mineral

r3For a more detailed discussion see Hoogvelt & Tinker (1977, 1977~).

14For a more complete account see Hoogvelt & Tinker, 19774

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AN EMPIRICAL ILLUSTRATION OF THE CAMBRIDGE CONTROVERSIES 157

extraction possible in the form of military, ideological and other support was gradually devolved to a growing and an increasingly bureaucratic group in Freetown (Hoogvelt & Tinker, 1977a). The important thing to note is that the basic relations of production character- istic of capitalist enterprises, i.e. the relationships between the factors of production: capital versus land and labor, remain unaltered. For instance, the returns to the tribal authorities (representing the original owners of the land) and to black wage labor remain perfectly stagnant throughout the entire period.” None of the new and swelling government revenues directly or indirectly ever benefitted the native workers, people and local authorities in the iron producing province. However, they did serve to secure the continued co-operation of the state.

In its general outline this situation prevailed throughout the post colonial period except for one important additional variable which progressively frustrated the financial position of the company. This concerns the appearance and the rise of a new participant, namely a contingent of black salaried staff. In response to pressures for indigenization after independence Delco began to recruit black managerial, clerical and technical supervisory staff, most of whom were not “productive” in the usual sense. The agreements of 1967 and 1972 formulated this indigenization programme in

increasingly stringent terms. By the time of its closure Delco employed some 218 supervisory salaried staff of whom 164 were Sierra Leoneans earning an average annual salary of g3041. In 1974 this black salaried contingent received a total income of &422,320, not much below the total wage bill &5 13,215 of black manual labor numbering 23 17 (Table 3). This Sierra Leonization programme was difficult to justify on the more “usual” commercial terms (Hoogvelt & Tinker, 1977a). As the figures in Table 5 suggest, we should interpret the bonanza in black salaried staff as an attempt by the company to retain the approval and support of influential groups in Sierra Leone. By the mid-nineteen-seventies, the expanding indigenous pressure coupled with the prospect of diminishing returns from the mine induced the Company to leave. In doing so, it was simply following a strategy for survival in a market context.

We have seen how the 46 year history of Delco’s operations in Sierra Leone can be classified into a series of institutional regimes, each with its own income statement. Each regime consists of a configuration of socio-political forces that deter- mine the distribution of the revenue shown in the income statement. Each regime is a development from the previous one in the sense that it is an outgrowth from, and response to, the contra- dictions and instabilities of the previous era. The

TABLE 5. Salaries and wages 1960-1975.

1200 -

/>I3 No. employees ,.L.\_d.’

8

./’ .I

4 43 ., ,

“The declining returns to black wage labor are attributable entirely to a proportionate reduction of numbers employed.

158 ANTHONY hL TINKER

final collapse of Delco took place in a new episode in this sequence of institution regimes.

IMPLICATIONS

It is with the interpretation and use made of accounting statements that this paper is mainly concerned. While these statements are supposed to provide information about an enterprise’s “efficiency” they neglect the state of the socio-political foundations underlying the market forces. For, as the fate of Delco demonstrates, market efficiency and social stability are not independent realms: there is a complex interplay between the two that shapes the destiny of enterprises such as Delco.

While accountants are becoming more rigorous in their understanding of the economic realm, a commensurate degree of rigor also is required concerning the political and social realms. Some may find this suggestion rather alien. All too often political and social problems are relegated to common sense status, not deserving systematic scientific investigation. However, as the Cambridge Controversies have shown, political and social conditions predicate any economic analysis, thus the accounting results are only as good as their political and social precepts.

In order to understand the processes of price formation and income distribution within advanced industrial societies one needs to take into account the second dimension of “capital”, i.e. the state of social relations. Thus, trade unionism, institutionalization of welfare demands and other supply conditions - the “sociological datum” to which Maurice Dobb refers - need to be reflected in any model for explaining price formation and income distribution. Institutional and social forces are often treated as market “imperfections” or aberrations. It is the conten- tion here that in the analysis of multinational and monopoly business (conditions of imperfect competition) these “aberrations” must become central to the analysis.

We have seen from the Delco case how coercive and ideological social forces take on different

guises in different periods of history. Moreover, by connecting our economic and accounting data to these underlying social conditions we have started to tell a different story about valuation and income distribution. This is not a tale of wealth generation and the “justice” of marginal produc- tivity measured in net present values and accounting rates of return, but the story of a system that was so unstable that it failed to meet even the minimum viability test: it did not offer weaker parties (i.e. black employees) enough returns to enable them to reproduce an economic role in the longer term. The fact that in the Delco case, ex post accounting (marginalist) measures of financial viability of the venture flatly contra- dicted this weak “litmus test” of viability raises serious questions about the adequacy of accounting and its social role.

One important lesson from the Delco case concerns the belief that we may entrust to the free play of market forces the task of working out socioeconomic problems. The Cambridge Contro- versies demonstrate this belief to be fallacious: markets are not “free” but structured and we have to discern the structure if we are to explain the distribution of income (including the magnitude of profit). With examples from early colonialism it is relatively easy to agree on the importance of the military (rather than marginal productivity) factors in determining the profit-wage ratio. Similarly, we have little difficulty detecting other such socio-political forces in societies “unlike” our own. What needs to be done in political economy is to construct a theory for explaining income distribution and market conditions in our industrial societies.

Maurice Dobb notes that “at the time of writing, that alternative explanations of distribu- tion in our twentieth-century world are sub judice in current economic discussion, and that discussion (or even elaboration) of them has proceeded insufficiently far as yet to make final judgment possible, still less to speak of consensus” (1973, p. 272). In view of the poor condition of marginalism that is so often used as theoretical support for accounting in matters of production, value and social choice, Dobb’s comments seem to be sound advice.

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