Are There No Prisons - Are There No Workhouses

Written by Aetius Romulous

The first of a four-part essay that questions the inevitability of the social costs of unfettered capitalism. By travelling back in time to visit the world as it was before the ancient precursors of Goldman Sachs, it becomes clear that options for the inclusion of social welfare in capitalism existed, but were deliberately externalized by the rapacious tenor of the times. We live needlessly with the result.

Part One: Are There No Prisons - Are There No Workhouses

Part Two: The Unsightly Back of the Invisible Hand

Part Three: The Empty Triumph of False Validation

Part Four: The Brief, Great, Vanished Social Welfare

There are places in our modern world that are ghosts from the distant past, relics of ages and people long gone. Some are corners, small eddies in the tired, meandering course of progress. They are quaint in their resistance to change and adaptation and decorate our contemporary lives. There are also vestiges of the past hidden in plain view, so essential and ubiquitous they form important struts and bearing walls for everything we know. Some of these sit beneath our modern edifice of complexity and technology. Some sit on top.

One however - ancient, simple, and virtually unchanged for nearly a millennia - is still used and depended on faithfully by every man, women, and child in the world, a world that developed almost entirely because of its adoption so many lifetimes ago. An essential, ubiquitous, strut and bearing wall; a ghost from the past that may entirely have outlived its long usefulness. In this new era of uncertainty and repeated long tail events, the time may finally have come to reconsider the dull and soul crushing practice of accounting, and double entry bookkeeping.

Giovanni de Nicolao Arnolfini was the young son of a powerful cloth trading family in Italy. He and his wife were forever memorialized in painting by Jan van Eyck, a Flemish master of the mid fifteenth century. There he is, young, worldly, pasty in the style of the time, in command of his house and the world outside of it. He holds aloft a graceful hand that has never touched labour, and displays it before him like a trophy. His dog and his wife complete the portrait of a man who is indeed the "measure of all things".

Arnolfini, it would seem, had it goin' on.

As the hand of a Tuscan cloth trader in mid 1400, it would possess the skill to keep accounts. It would do so in the script that had become the unofficial numbering system that powered the Italian renaissance - Hindu-Arabic numerals. 1 through 9 and 0. While official documents continued to use the old roman numeric system, the advantages of the new one were simply to enormous to ignore. Created in India sometime in the 6th century, and carried by Islam as it swept the Middle East, this amazing new set of numerals had been known in Italy since the first crusade.

Like Arnolfini, Leonardo Pisani was an Italian merchant who, two centuries earlier, traded with and lived amongst the Arabs of the Mediterranean. It was he - known to history as Fibonacci - who first recorded the use and astonishing versatility of the "Hindu Art of Reckoning" in his famous treatise on mathematics of 1202AD, the "Libre Abaci". The merchants of Italy flocked to the new system and by the time of Arnolfini's portrait in Bruges, Hindu-Arabic was the accounting method of choice in Italy. As a ten based numbering system, each with its own unique numeric representative, it replaced clumsier systems of letters and words that were incapable of calculation. With the simple addition of the zero, created for the first time to represent nothing but a placeholder, mathematics - and commerce - exploded.

Fibonacci There are of course many reasons why the Italian Renaissance flourished, and unmistakably for a while, Italy could claim to be the summit of all civilization. Humanism brought man to the summit of command on the earth in Italy, and commerce brought the capital to fund and patronize the epic feats of human creativity released as a result. The House of Medici and Florence marked the centre, however the provincial Duchies of late feudal Italy refined and spread the spirit. None were as important or as influential as the towering Apennine town of Urbino.

As a cloth merchant, Giovanni Arnolfini would have kept detailed records of his accounts in folios or heavy, decorative leather bound books for the purpose. He, or his employed "book keepers", would record transactions as they occurred, listing out the exchange in descriptive line passages by date, place, with whom, and other important details. Many of these "accounts" survive, and are a far more valuable aid to history than they ever were as financial information. Bookkeepers would troll through the chronology, constantly figuring with quill and parchment if the enterprise was ahead or behind.

Clearly, the advent of Hindu-Arabic numerals greatly improved the speed, accuracy, and timeliness of the information. However, the presentation was linear - it allowed no in depth analysis of the business, kept to no uniform standard, and served as a glorified narrative rather than a tool with which a powerful cloth merchant might ferret opportunities and problems out of his enterprise. Arnolfini's famous portrait was painted in Bruges in the Netherlands, where his family kept an office. Arnolfini's cousin, Giovanni de Arrigo (who for centuries was erroneously identified in the painting) also ran a foreign office. Without accurate reporting business was almost entirely a family affair to ensure uncle Arni kept his pilfering in the family.

Without a universal, comprehensive way to match expenses to revenue, perform balance checks, and easily audit, the medieval European wheels of commerce were stuck at arm's length and trusted acquaintance. It took the odd confluence of people, places, and things that every so often occur in history to solve the problem and set commerce free. It was Islam and its scientific culture that infused the west with the final tool it would need to silently and methodically dominate the planet, and it would be a renaissance man in Urbino who would provide the opportunity for the revolution to occur.

Three years after Jan van Eyck painted Arolfini's portrait, Frederico da Montefelto became the Duke of Urbino. "The Light of Italy", Frederico established one of the most humanist and equitable societies ever built by man in his small, Apennine, Free State of the Italian Papacy. This is funny, because he financed it all as a Condottieri, or contractor - a paid mercenary and gun for hire. The Duke of Urbino was the Blackwater of his day. Frederico never lost a battle or a war, which he accomplished in part by a strict egalitarian concern for his men and their well-being. He extended this humanist approach to his realm, where all were equal before the law, the common wheal the utmost concern of the enlightened prince. When asked what it takes to rule such a place, the Duke confidently answered, "To be Human". Coming as it did at the end of the Dark Ages in Europe, Urbino must have been one strange trip indeed.

Frederico was a literate man and he established one of Europe's great libraries, built in part by one of the greatest architects of the high renaissance, Bramante. His court painter was Giovanni Santi, the painters' young son (who grew up at the court) more famous than his father - little Raphaello, known to all the world today as Raphael. The painter, not the Ninja Turtle. Baldassare Castiglione wrote "Il Courtegiano" based on the court of the Duke of Urbino (which he visited often) and its notion of civilized man, polite intellect, and humanist relationships.

Luca-Pacioli Frederico kept a court mathematician as well, a friend and trusted confidant of Leonardo da Vinci, who worked just down the road from Michelangelo. Luca Pacioli was a true renaissance man in every sense of the word. Apart from being a recognized mathematician, Pacioli was a Franciscan Friar who had wide interests in art, literature, law, architecture, and politics. A true man for all seasons. Pacioli did some of his best work making gambling cheat sheets for the Duke. While Christoffa Corombo of Genoa was setting sail from Spain for the new world, Pacioli was quilling one of the most important works in mathematics, the”Summa de arithmetica, geometria, proportioni et proportionalita", known today simply as "The Summa".

Buried near the end of the treatise was a section on bookkeeping for the Duke to deal with his shifty merchants and traders. It proposed a radical - Islamic - way of recording transactions. Using the new Hindu-Arabic that had become so fashionable, Pacioli displayed how transactions could be recorded using two or more separate entries for each item. Instead of "bought 10 bolts of silk for 100 ducats", the entry would be 1) paid out 100 ducats 2) took in 100 ducats worth of silk. Debit inventory, credit cash, 100 each. Cash goes down and inventory goes up by a balanced amount. As long as the entries were made correctly, the Dukes books would "always balance". If they didn't, something was amiss and heads would roll. Pretty simple.

Pacioli did not invent this system, it had been proposed a generation earlier by another "Infidel" who freely travelled the Muslim world, the Croatian trader Benedetto Cotrugli. However Pacioli's description had three advantages Cortugli's did not; Pacioli's was attached to a monumental work of geometry and algebra published at the apex of the civilized earth, was written in the vernacular, and Pacioli published his work about the time that Guttenberg had invented moveable type. The Summa would be the new media's first viral sensation.

This act of setting numbers in fixed type, adhering to an iron clad rule of balance, and then distributing the information as fast as printers could turn the screws had two effects, one obvious and important, the other not so obvious - and as permanent as a black death from plague. The invention of printing, falling as it did in an age of renewed civility and understanding, spread The Summa to the four corners of the western world. But it also permanently fixed those numbers on paper, where for the first time they could not be fraudulently reworked or rewritten, guaranteeing a merchant protection from the one thing that had bedevilled his trade from the birth of private profit - theft, corruption, and lack of trust.

Commerce went nuclear.

gutenberg_Press Freed from the constraints of the past, the miracle of double entry bookkeeping - set in movable type - spread to every conceivable business and state, and a new profession of account keepers flourished. The new printing technology gave budding "accountants" the ability to refine and pay forward the concept in ever-increasing editions of the new science. "A Profitable Treatyce called the Instrument or Boke to learne to knowe the good order of the kepyng of the famous reconynge called in Latyn, Dare and Habere, and in Englyshe, Debitor and Creditor" of 1543 by Hugh Oldcastle in far away London was just one of many. (Boke (book) titles didn't have to deal with Amazon back then). By the turn of the 17th century, separate balance sheets were added, and annualized fiscal cut offs became the rule.

A comprehensive set of audited books such as we know them today led directly to the creation of great pools of capital and the legal structure of the "Joint Stock Corporation" or "Chartered Company". Established in Holland in 1602 with the creation of the Dutch East India Company, Chartered Companies and the laws that support them could not have been developed without Pacioli's Summa. Once universally adopted by commercial law and the European aristocrats that wrote it, the entire structure of finance that developed as a result became a fundamental feature behind all of politics and economics, and forever more.

After a stunning explosion from Urbino in 1494, and only a single generation to universal use in 1602 with the Dutch East India Company, the refinement, adaptation, and experimentation of the new commercial alchemy came to an abrupt and sudden stop. Born in an era of humanism, free thought, and absolute wonder at creation, the accounting profession became a slave to commercial greed and national ambition - becoming locked down and into its very earliest and most crude format under the Faustian weight of its own success.

From the grey, plague wracked streets of filthy medieval Europe to trillion dollar golden Goldman Sachs, accounting has not changed a stitch. Not a stitch.

And for good reason. The new accounting was infinitely malleable, and could adapt itself to any financial transaction. Finance could be categorized, organized, sliced and diced in any way a nimble bookkeeper could figure. It was custom designed to work with the new numeral set and together the concept was portable and easily understood anywhere in the western world. Welsh fisherman could do equitable business with French ports, or Spanish, Dutch, or Moor. Local moneychangers became the banking houses of Rothschild and Barings'. States could control and implement fiscal policy. The word "fiscal" was born. As long as everything balanced, anything goes.

As it so often does, the predictable happened. The unfettered free market in accounting entries led to bedlam. The saying "liars can figure and figures can lie" entered popular vernacular. The world experienced its first manufactured booms and busts. Commerce, and its wet-nurse accounting began to drive nations and ambition, slavery and subjugation. Capitalism was born, grew, flourished, and swept the world on the shoulders of accounting and double entry bookkeeping.

Six hundred years after Fibonacci introduced Hindu-Arabic numerals to Italy, Four hundred years after Arnolfini had himself immortalized by Jan van Eyck, two hundred years after the advent of the voracious corporation, and throughout endless bouts of rapacious capitalist carnage, it took the Scottish to attempt to tame the wild beast. On July 6, 1854, a group of accountants from Glasgow petitioned for a Royal charter to organize an association of accountants, which would establish standards and supervision for the very first time and, throughout the British Empire. The charter was granted, and the world gained "Chartered Accountants", our familiar CA's.

And this is where the widgets, as they say, hit the fan.

"At this festive season of the year, Mr. Scrooge," said the gentleman, taking up a pen, "it is more than usually desirable that we should make some slight provision for the Poor and Destitute, who suffer greatly at the present time. Many thousands are in want of common necessaries; hundreds of thousands are in want of common comforts, sir."

"Are there no prisons?" asked Scrooge.

"Plenty of prisons," said the gentleman, laying down the pen again.

"And the Union workhouses?" demanded Scrooge. "Are they still in operation?"

"They are. Still," returned the gentleman, "I wish I could say they were not."

"The Treadmill and the Poor Law are in full vigour, then?" said Scrooge.

"Both very busy, sir."

"Oh! I was afraid, from what you said at first, that something had occurred to stop them in their useful course," said Scrooge. "I'm very glad to hear it."

"Under the impression that they scarcely furnish Christian cheer of mind or body to the multitude," returned the gentleman, "a few of us are endeavouring to raise a fund to buy the Poor some meat and drink and means of warmth. We choose this time, because it is a time, of all others, when Want is keenly felt, and Abundance rejoices. What shall I put you down for?"

"Nothing!" Scrooge replied.

"You wish to be anonymous?"

"I wish to be left alone," said Scrooge. "Since you ask me what I wish, gentlemen, that is my answer. I don't make merry myself at Christmas and I can't afford to make idle people merry. I help to support the establishments I have mentioned -- they cost enough; and those who are badly off must go there."

"Many can't go there; and many would rather die."

"If they would rather die," said Scrooge, "they had better do it, and decrease the surplus population. Besides -- excuse me -- I don't know that."

"But you might know it" observed the gentleman.

"It's not my business," Scrooge returned. "It's enough for a man to understand his own business, and not to interfere with other people's. Mine occupies me constantly. Good afternoon, gentlemen!"

Charles Dickens ushered in the era of popular literature, and he wrote passionately about the social catastrophe that had become the industrial revolution. "A Christmas Carol" was published on December 19, 1843, at the same time the good accountants of Glasgow were endeavouring to lock in accountings "abundance" - and lock out the common wheal - by law and Royal charter. Both Dickens and the CA's have survived to this day, as have the social ignorance's of Victorian England, set in place by the accounting that gave capitalism its rigid, soulless demeanour. "Most men are individuals no longer so far as their business, its activities, or its moralities are concerned. They are not units but fractions." said Dickens. "It's not my business" said Scrooge, on behalf of accountants.

The issue was cost. An item of revenue had to be offset by an item of cost. The revenue was straightforward to record, but what was a cost? With the now universal use of double entry bookkeeping it became easy to assess the financial health of a firm - or state. Healthy books drew investment, and investment drove growth. Crafty masters of commerce grew adept at moving entries around, creating new ones, and cooking the books to improve the final numbers at the bottom line. Cost cutting was invented. The new accounting associations brought order to this chaos by setting standards for the what, where, and how of recording and presenting entries. This brought the profession to the question of what, exactly, are the costs associated with the revenue entry on the other side of the ledger. What gets recognized and recorded, where would it be entered, and how would the result be interpreted.

The fine men of Glasgow were nothing if not creatures of their time, as all men are and will forever be. Their fingerprints are not those left on accounting, but rather the firm grasp of burgeoning industry, colonialism, and empire. After all, the parvenu masters of the universe paid the accountants with the interests of the merchant classes being utmost in their mind and ambition. Neither the tenor of those worst of times, nor the obligation of the accountant agent gave a tinkers damn about the costs of human suffering. No attempt imagined to account for the social collateral that was a part of every piece of revenue recorded. And to accountants, lawyers, economists, lawmakers, and business people then as now, if it is not recorded...it does not exist.

But that was then and this is now.

The Yagana pipeline project in Burma was to disgorge an insane amount of natural gas profits. European led multinationals allied with the equally insane and repressive Burmese military government would be the recipients. They had been costing the project for years, but could not make it pay. The problem was not the gigantic Burmese gas reserves the oligarchies had clutched on to, it was the prohibitive cost of getting it out of the ground and through the thicket of primordial swamps, jungles, and hills that is Burma. The junior partners of the military solved the cost issue by forcefully removing every human in the way of the pipeline project, enslaving them, and working them to death; torturing and executing ahead and behind of the great steel clad serpent of the River Kwai.

That year, 1996, Unocal of California - the principle American oil conglomerate in the deal - represented none of that cost on its books. Regrettable no doubt, but unaccountable. It had certainly broken no law, as the government had done what it needed to do for the benefit of the state. Or so they figured. But as importantly, even if it did have a fit of moral amplitude, there was simply no way to account for the terror and the atrocity that had made Unocal's project profitable. The antique culture of accounting accepted no provision for it. Had every executive been tried and properly executed, the corporation would live on profitably with nary a pencil mark against the projects costs. Happens all the time.

Industry is messy, and heavy industry is heavy messy. Pollution. Health problems. Urban issues. Labour issues, safety issues. These are all costs unaccounted for on the books of the offending industries. Perfectly legal offending industries that are manna to local politicians, businesses, criminals, and hospitals. In Richmond California, Unocal's parent Chevron operates one of the company's largest and most profitable refineries, spewing out 350,000 barrels of oil a day at nearly one hundred bucks per barrel in revenue. It also spews out violent gas flares, toxic rivers of effluent, lupus, skin rashes, rheumatic fever, liver problems, kidney problems, tumours, cancer, asthma, and eye problems as well as a host of others. As costs, it carries only plant, equipment, and the few members of the local community to whom it pays crappy wages for dangerous work. Chevron of Richmond keeps the considerable difference.

This of course, is exactly what they did in Dickens time. The only real change being in the magnitude of the effluent. The dictum of the expendable human and the irrelevance of his cost remain alive and well today as the accounting concept of "externalities". This is the progress we have made thus far; that we may now recognize the theft of another's value as such, and we may now refer to it with a cool new name. But of course, still, an externality is just that...external to the interest of the firm. Costs for sure, and costs related to revenue, but not costs we ever want to account for in the books. To do this you would need to balance revenue in the standard system, which would mean a kind of voluntary bankruptcy for almost every firm like Chevron of Richmond California. Not gonna happen.

At least we now attach a value to these things, and we recognize the costs for what they are. But consider how we treat these costs. They are born by the individual humans as they have always been, but in many cases, we simply amortize them by having the state shoulder the financial burden and spread the costs through taxation over every individual progressively. Thus, we are all investors in every enterprise with externalities. Idiot investors who don't share in the profits our investments return. This is the fault of accounting, which does not provide a mechanism for valuing these externalities, and cannot record their contribution to revenue because of a format locked in place generations ago.

chevron The raped and pillaged victims of Burma brought a lawsuit against Unocal on October 3, 1996. The complaint alleged, "Crimes against humanity, forced labour, torture, loss of homes and property, and rape." The Arnolfini Family cloth trading company this isn't. To the great wonder and surprise of all involved, the humans won, and the corporation lost - in a historic and precedent setting way. To the great wonder and surprise of nobody, after a ten-year legal battle, Unocal paid a fine, cleaned up their act, and remorsefully skulked off to Nigeria to repeat the same process. They are known as Chevron today, for anybody wishing to know that when they fill their car with gas. That's Chev-ron.

Frederico da Montefelto, the civilized humanist and Duke of Urbino, would be appalled. Simply appalled.

Part One: Are There No Prisons - Are There No Workhouses

Part Two: The Unsightly Back of the Invisible Hand

Part Three: The Empty Triumph of False Validation

Part Four: The Brief, Great, Vanished Social Welfare

Aetius Romulous

Historian, Economist, Accountant, Writer, and blood sucking CEO.

Born at the wrong end of the Baby Boom Generation - too late to enjoy the ride, too early to have missed it, and stuck in the middle with the mess.

Aetius writes and blogs from his frozen perch atop the earth in Canada, spending the useful capital of a life not finished making sandwiches and fomenting revolution.

It's a living.

http://screambucket.com/

aetiusromulous (at) rogers.com

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