Reinventing Bookkeeping and Accounting (In Search of Certainty)

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Director, MIT Media Lab

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Discussion by JP Rangaswami
JP Rangaswami
Hi Joi, here are a few links as grist to your mill. I've been interested in how we view and review economic activity for some decades now, not just as companies but as societies, as entire economies. This is even more important when the economies are open and interconnected.
Discussion by Phil Cagney
Phil Cagney
Great writeup, always worth digging into inventions that seem like laws of nature, but have perhaps outlived their usefulness.Another aspect of conventional accounting that seems broken in this day and age is doing accounts annually or quarterly. This artificial cycle, no doubt made sense when these things were compiled manually and printed. For a modern public company though, this now creates a long lag between a company's own internal knowledge of its situation, and the market's knowledge.In the same way that seeking to reduce value to a single scalar, always aggregating results by the quarter or year also hides a lot of information, beyond the obvious effect of making it stale at the time of release.The periodic cycle creates endless opportunities for companies and accountants to massage things by bringing the dates of transactions forward and back into/out of the current period in question, or to obfuscate accounts by changing from one financial year convention to another, having a different financial year from your competitors, etc, etc.Since company shares are priced in real-time by the market, those prices would be rather more closely tied to reality if the company's accounts were also provided in real-time (say, at least daily). With the current situation, share prices float around based on rumor and innuendo, only to be snapped back to reality when "results" are released periodically.
Discussion by Michael Barbarelli
Michael Barbarelli
Hi Joi. Are you familiar with Ian Grigg's triple entry accounting?
Discussion by Andrew Maffei
Andrew Maffei
Joi, I've been working on an "update" to Double Entry Bookkeeping for the last couple of years and made some progress. I'm headed down to NYC this week to talk with Australian author Jane Gleeson-White (https://janegleesonwhite.com/). She is speaking at the Princeton Club on Friday -- https://cpe.nysscpa.org/product/26573. Her two books, "Double Entry" and "The Six Capitals" are a must read if you are looking closely at Double Entry Bookkeeping. I'll provide you with a more detailed review of your article later in the week. So excited to see this article, a bit of synchronicity at play.
Discussion by Ben Tolkin
Ben Tolkin
When we've reinvented bookkeeping and accounting, we're also going to end up reinventing price-setting and the concept of exchange on the consumer side as well. We're used to thinking of "price" as a property of an object, like size or color, because that's an easy heuristic for our human-sized meat brains, but a big data algorithm could understand perfectly that it's really a property of the buyers and sellers. One worry is that this leads to asymmetric exchanges: individual human consumers can be manipulated by sellers with vastly more computing power.Airbnb and Uber have already gotten flak for algorithmic price setting that can be counterintuitive and predatory. In the long run, one would hope that consumers also organize, sharing data more freely among each other and opening up the analysis of that data, so that they can negotiate with sellers on an equal cognitive footing. On the other hand, a dynamic, algorithmic price-setting model could also be more liable to hacks; I think there are some precursors to this in Amazon and eBay price-setting bots. (http://www.telegraph.co.uk/technology/amazon/9385986/Robo-pricing-risks-Amazon-price-crash.html) Double-entry bookkeeping's simplicity leads to problems, but it also prevents the system from being screwed around with too much.I think the shift towards a dynamic, algorithm-aided concept of value is inevitable; the question is whether this will come as a broad cultural shift, sweeping over buyers and sellers equally, or whether a relatively small number of people in possession of the best data, machines, and algorithms will reap most of the benefits. We should strive to publicly redefine value, and create tools for all of us to process the data that produces value, or we'll find the same organizations that used our data for targeted advertising able to make even more manipulative targeted prices.
Discussion by JOSE BERENGUERES
JOSE BERENGUERES
"Accounting and auditing enabled the creation of vast empires, such as those built...... and the Romans. " --> huh? How could the romans do efficient accounting in roman numbers? that does not make sense. Experts say that roman empire success was based on the "legal culture" check: https://www.quora.com/Why-was-the-Roman-Empire-so-successful
Discussion by Max Schumacher
Max Schumacher and Joichi Ito
Hey Joi, I don't think the statement "Accounting predates money" is true. See https://en.wikipedia.org/wiki/History_of_money and http://www.lrb.co.uk/v38/n08/john-lanchester/when-bitcoin-grows-up
You're right. I should probably say something like "while some forms of money existed before accounting, accounting existed before money in some civilizations..." or something like that. Will update in next version. Thanks.
Discussion by Pedro Nardelli
Pedro Nardelli
Hello Joi,I think you can also refer to Labor Theory of Value, which was the basis of classical political economy writings. There is an interesting book called Classical Econophysics that might also be interesting to this topic.My final suggestion is also based on this way of looking what is value from the writings of Karl Marx, making the difference between Value - Exchange value - Use Value. I suggest David Harvey video lecture as a good start point.Many thanks and I hope this would give another (far-from mainstream) view of this issue.
Discussion by Joe Edelman
Joe Edelman
Joi, I think you'd find my talk "Is Anything Worth Maximizing?" highly relevant. It was made with help from Bret Victor and Patrick Collison. http://nxhx.org/maximizing/
Discussion by David Rankin
David Rankin
Thanks for starting this. My first comment is that the parenthetical in the title should be (In Search of a Better Narrative). Certainty is not the point of accounting. Assurance is. Accounting is not now, nor will ever be, a "derived-from-first-principles" practice. It is language, or more accurately, story-telling. The story is about wealth: how much there is, who has claims upon it, how it is created, and how believable the author is.Double-entry bookkeeping as persisted for so long because it works. It is a masterful language to describe the journey from capital to product to profit and then back to the capital provider.The current language requires a priesthood to create and interpret it- especially in the netherworld of exotic financial instruments. Those who do not understand it are second-class citizens in the church of modern finance.New technologies like distributed ledgers or Bitcoin may be as disruptive as Gutenberg's printing press. What if the sacred texts do not require an intermediary to put them to work?I too find the prospects exciting. Less because the underlying bookkeeping is ill-suited for 90% of what it does, than because we now have technology that allows us to question and discard outdated heuristics. Value no longer needs to be determined by price, or the cost basis of an asset. Private exchanges can emerge where "exotic" goods like ecosystem services can be bartered or created. Excess capacity could be traded.These are exciting times. This is the right time to begin this conversation. I'm delighted that you are putting yourself in the mix! Thank you!