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
Sraffas 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

statement
mean? What interpretations
may we put
on it? Business firms trade in factor and product
markets that form part of a societys economy.
As
profit is a result of a trading in these markets, may
we conclude
that profit is indicative
not only of
the firms market
viability
but also its social

Table 1 summarizes
the theoretical
differences
between these two viewpoints:
it shows that they
differ not merely as to what profit means but also
as to how the rate of profit is determined.
For
example,
marginal productivity
theory adopts an
approach
that
is almost
akin
to
that
of
engineering:
it deals with the manner in which

efficiency in utilizing societys resources? Alternatively the rate of profit may reflect the social
power of capitalists. In this view, the magnitude of
expenses
in the income statement
(including
profit) is indicative of social, institutional
and
monopolistic
power rather than social efficiency
and productivity.
The two views of what an income statement
tells us correspond with two theoretical positions
that have dominated
the history of economic
thought:
classical political economy
and neoclassical marginalist economics. When applied to
the income statement
these two theories offer
conflicting
explanations
as to what income

physical resource inputs are transformed

into
outputs and the role played by profit as an
efficiency criterion in this process. Conversely,
political
economy
attributes
the division of
income (and therefore the rate of profit accruing
to capital) to the distribution of power in society
and the social-political
and institutional
structure
that mirrors that distribution of power.
The marginalist explanation
concentrates
on
what are called the forces of production.
In
economic analysis these are brought together in a
production
function analysis. They include the
technological
aspects of the input and output
quantities and their transformation
coefficients. In

signifies

contrast,

and how it is determined.

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
paper.

on some of the ideas presented

here. The author

147

alone

is responsible

for any deficiencies

contained

in this

148
TABLE

ANTHONY

M. TINKER

1. Conflicting

explanations

of profit

Neo-classical economics
(marginalism)

economy

Meaning attributed
to profit

Indicator of
economic efficiency

The returns
capitalists

Theoretical
explanation
as to how the rate of
profit is determined

Marginal productivity
theory focusing on
the forces of
production

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 firms 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 postcolonial. An income statement is then prepared for
each period that summarizes that distribution of
the firms 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

Sales proceeds
Expenses:
Taxes (U.K. government
taxes)
Taxes (Sierra Leone
government
Wages (white labour)
Wages (black labour)
Profits

Classical political

to

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 productivity 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 marginalists 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 distribution of income in Table 2. Associated with the
income statement data for a period is a unique

2. Sample of items from three income

statements

of Delco Ltd

Early colonial
period

Late colonial
period

Post colonial
period

Total

1930-1947
sm.
%

1948-1967
em.
%

1968-1975
em.
%

1930-1975
&m
%

267

102

424

55

100

100

100

100

0.8

1.6

1.5

0.6

0.2

0.2

2.5

0.6

1.0

1.7

37.9

14.2

1.1

1.0

40.0

9.0

4.9
7.6

8.9
13.8

19.7
15.0

7.4
5.6

6.8
10.3

6.6
10.1

31.4
32.9

7.4
7.8

5.7

10.3

31.3

11.7

5.9

5.7

42.9

10.1

AN EMPIRICAL

ILLUSTRATION

OF THE CAMBRIDGE

configuration of social and political conditions. We

will see how these two are related: the income
data is a product of the socioeconomic
reality and
differences between items in the three income
statements may be traced to the changes in that
reality. In this fashion we may use political
economy
to explain
and predict
accounting
numbers.
The next section shows how heavily contemporary accounting theory and practice depend on
marginalist thought. This is followed by a review
of the Cambridge Controversies: a discussion that
shows that the marginalist
underpinnings
of
accounting are deficient on logical grounds. The
paper then turns to explain the mode of analysis
of classical political economy and illustrates how it
may be applied to the accounting data of the
Delco Company.

MARGINALISM

AND ACCOUNTING

Very few scholars would deny that marginalist

economics
has had a tremendous
impact on
shaping accounting theory. This is not to say that
contemporary
accounting
practice
is simply
applied marginalism, but if theory has played
any role in determining practice then marginalist
theory has probably contributed
more than any
other to the practice of accounting. This particular
economic
theory has provided guidelines
for
income definition, asset valuation and more recent
work in financial standard setting (Hicks, 1946;
Edwards & Bell, 1961; Parker & Harcourt, 1969;
Demski, 1973; American Accounting Association,
1977; Dyckman,
1977). The pervasiveness of
marginalism in accounting though is illustrated by
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
The author

is grateful

to Jack Hirshleifer

for supplying

CONTROVERSIES

149

Indeed
it might
be argued that
thought.
marginalism has advanced beyond the theoretical
domain to penetrate the subconscious of even the
most ardent practitioner.
Thus Keynes aptly
referred to practical men who believe themselves
to be exempt from any intellectual influences are
usually the slave of some defunct economist
(Keynes, 1936, p. 383).
We can explore the contributions
by marginalism to accounting
in the following manner.
Imagine a highly simplified economy that is faced
with two alternative
ways of organizing
its
economic
system.
These
two methods
of
organizing are termed techniques of production
and are defined as follows: 1
Year
Technique
Technique

A
B

--w

0
$1

$5
0

$6

-Y

The problem we are addressing is: Which is the

most socially desirable technique?
Technique A
requires an investment of w man-years in year 0 in
order to earn a return of $5 in year 2. Technique B
requires an outlay of y man-years in order to earn
returns of $1 (year 1) and $6 (year 3).
The present value of each technique
(the
monetary
value of w and JJ) depends on the
discount rate applied to their future returns. By
substituting different discount rates into a present
value formulae we obtain a range of present values
for each technique.
The results are presented
graphically in Fig. 1.
Notice that it is not possible to assert that one
*7
-A

the following

100
Discount

Fig. 1.
numerical

example.

250

200
rote

(rote

of profit

150

ANTHONY

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 incorporated 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 firms 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
is defined in terms of the income
desirability
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.
*The neo-Fisherian
approach
Hendriksen,
1970, pp. 131-132;

M. TINKER

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
to the worth
of future
that
are related
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 (illustrated 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
(Carsberg
&
measurement
accounting
for
1969, pp. 73-112;
Bromwich,
1977,
Edey,
pp. 592-594).
For example, Edwards and Bell
provide a detailed illustration which shows that,
over time, a firms 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

is the dominant
economics
in most
May, Mueller & Williams, 1975, p. 69).

In conditions
of uncertainty
we may replace present
well as financial returns (Lerner & Carleton, 1966).

accounting

value with a firms stock market

teaching

texts

(see

for

instance

value in order to allow for risk as

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
market (replacement)
values (Edwards & Bell, 1961, pp. 48-51).

converted

firstly

into

cash and then into

AN EMPIRICAL

ILLUSTRATION

OF THE CAMBRIDGE

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 marginalists concept of
value and income. The Cambridge Controversies
are concerned with the validity of the marginalists
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
marginalisms 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 explanations. 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

151

CONTROVERSIES

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

Fig. 2. Production

of capital

function

I qumt~ty
I
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 distribution is given by multiplying the quantities
family of price, budget or income lines. The slope of labor and capital by the equilibrium wage and
of these lines is given by the ratio of the market interest rates.
prices of the factor inputs (i.e. the ratio of the
In the longer term the supplies of labor and
wage rate to the interest rate). All the points that capital become variable. The long run equilibrium
make up a single line represent the different
conditions
are governed by the net marginal
possible combinations
of factors that are capable productivity
of each factor: supplies will increase
of producing the same level of national income.
until net marginal revenue is equal to zero for each
Points on the same line differ in the way that a factor. And this is the marginalists reason for
given level of national
income is distributed
using the market rate of interest in Fig. 2. Capital
between labor and capital.
is assumed to have marginal productivity and the
How much labor and capital would be existing market interest rate reflects the worth of
employed to produce the output level Q2 in a its productivity in final production.
perfectly competitive
economy?
How will the
But can we say that capital has marginal
national income be distributed between the two productivity
in the same sense as land or labor?
factors? Neoclassical theory tells us that, in the Returning to Fig. 2, how is the stock of capital to
short term when factor quantities are fixed at L be measured? A quantity measure that is often
and C, the relative prices of labor and capital will used is the present value of the income stream that
adjust to equate supply and demand. At point Vin
expected
to accrue
to capital
owners
Fig. 2, the maximum national output (Q2) is ; amuelson, 1976, p. 615). But where do we get
attained (and factors quantities L and C are fully the discount rate and a net income stream for this
employed) provided their market prices adjust to calculation? The expected income stream requires
the slope of T2. These equilibrium
prices are an estimate of national income and a division of
reflected in the slope of the price line that gives a that income between labor and capital. But this is
what the analysis is supposed to produce: i.e. the
minimum cost solution at the point of tangency
optimal income distribution
in terms of output,
between the price line T2 and the iso-product
employment
and growth.6 [This would give the
curve Q2. Suppose that the stock of capital
expanded to C. Its price would cheapen relative to equilibrium prices that equate the marginal rates
of substitution
of capital and labor (Samuelson,
labor causing a change in the slope of the price line
to T. This leads to a higher level of national
1976,
pp. 547-557).]
In other words, the
output at Q3 with a new equilibrium for wage and assumptions we require (in order that the analysis
interest rates (at V). This is the neoclassical
can proceed) gives us the solution before we
explanation
to how a competitive
economy
begin. Far from giving optimal solutions to the
simultaneously
solves the problem of production
problems of production, income distribution and
and income distribution.
As Harcourt and Laing growth policies, this analysis shows that the
note, the production
function is a method of problem is indeterminate
unless a distribution of
analysis for killing two birds with one stone, it income is assumed beforehand.8 Yet no rationale
shows how the level of employment of labor and can be offered
for choosing
one income
capital is determined
and also how national
distribution
in preference to another. After all,
income is divided between labor and capital
this is exactly what the analysis was supposed to
(Harcourt & Laing, 1971). The national income
assume
solve, not
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
marginalist
will always

a market rate of interest (or a wage rate) is tantamount

to assuming a distribution
of national income in this
analysis. This is because it is assumed that equilibrium
conditions
of full employment
of labor and capital
be achieved. Thus only wage and interest rates will affect the distribution
of income.

AN EMPIRICAL

ILLUSTRATION

OF THE CAMBRIDGE

p. 370). This marginalist explanation

is tautological: 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:

153

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
OF POLITICAL

FRAMEWORK
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 mans
relationship to man in social organization (Bhadui,
1969).
The first dimension
represents
the

Ceflnitions
of capital

Social

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 neoclassical economic theory is a matter of faith . . . I
personally have the faith (Ferguson, 1969).
One of the most interesting consequences of

CONTROVERSIES

;%%

relations

of

production

/j%ijij$;ii;\
economy,

Fig. 3. The two concepts

9 Many ingenious
suggestions
have been devised for quantifying
review shows) they all fail to resolve the basic problem (Harcourt,

state

capitalism.

of capital

the physical stock of capital.

1969, pp. 369-380).

slave

economy

and their relationship.

However

(as Harcourts

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 Samuelsons
discussion
pp. 617619)
are valid there is no way of
drawing either Fig. 2 (here) or Samuelsons
diagram on p. 603 without presuming an income distribution.

154

ANTHONY

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 performance (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 sociological terms) of the social forces that determine
market prices (and therefore accounting data). The
Cambridge Controversies have shown theories of

M. TINKER

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 inflationadjusted, 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 Leones 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 Hirshleifers
definition
of production
(as exchange
definition.
What is surprising is the determination
to ignore the second dimension:
social structure of society is treated as nonproblematic
(Hirshleifer,
1970, p. 3).
*The PROSPER ICL package was used for this part of the research.
documentary
material and interviews in Sierra Leone.

with nature) accords with the first

as is often the case, the underlying

Data was obtained

from published

accounts,

other

AN EMPIRICAL

ILLUSTRATION

OF THE CAMBRIDGE

CONTROVERSIES

155

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

40% ShIppen and

Ismnce agents

ALTERNATIVE ANALYSIS OF THE

VENTURE: A PERIODIZATION
ANALYSIS

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

prices) 1930-1976.

of the proceeds

from ore sales (C1.F.

TABLE 3. The distribution

of
inflation adjusted ore sales
proceeds (CIF prices)
1930-1975
&m
CIF Ore sales proceeds
Distributed

424.14

100

169.66
104.11
42.70

40.00
24.54
10.07

31.40
0.51
0.62

7.40
0.59
0.15

351.00

82.75

39.87
26.84
6.16

9.40
6.33
1.45

73.14

17.25

424.14

100

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

Sierra Leone constituents

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

Total

r3For a more detailed

discussion

14For a more complete

account

see Hoogvelt
see Hoogvelt

& Tinker

(1977,

& Tinker,

19774

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

1977~).

African participants
S.L. government
Black labor: manual
Salaried staff
Tribal authorities

European participants
Shippers
U.K. suppliers
Owners and investors
White directors,
management and
employees
U.K. government
U.K. leaseholders

CIF nroceeds

6.33
1.45
0.06
17.25

73.14

82.72

351.00

9.40

0.15

0.62

26.84
6.16
0.27

7.40
0.59

31.40
2.5 1

39.87

40
24.54
10.07

100

169.66
104.11
42.70

424.14

Em

1930-1976

8.66

7.61
0.09

0.96

46.42

0.07

4.91
0.88

22.03
12.86
5.67

55.08

Em
%

15.72

1.74
13.82
0.16

84.28

0.12

8.91
1.60

40
23.35
10.30

100

1930-1947

Early colonial period

17.31

12.21
5.06
0.04

77.19

0.20

3.88
0.02

37.80
27.50
7.79

94.50

Em
%

18.31

12.92
5.35
0.04

81.69

0.21

4.11
0.02

40
29.11
8.24

100

1948-1956

Late colonial period

35.65

25.67
8.14
1.77
0.07

136.16

0.27

15.79
1.44

68.71
26.58
23.37

171.81

km

20.75

14.94
4.74
1.03
0.04

79.25

0.15

9.19
0.84

40
15.47
13.60

100

11.46

1.08
6.01
4.30
0.07

91.35

0.11

6.82
0.17

41.12
37.26
5.87

102.81

Em

11.25

1.05
5.95
4.18
0.07

88.75

0.11

6.62
0.16

40
36.15
5.71

100

1968-1975

Post-colonial periods
1957-1967

TABLE 4. Periodization table: distribution of CIF sales proceeds by periods

2
;

%
2

AN EMPIRICAL

ILLUSTRATION

OF THE CAMBRIDGE

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 characteristic 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
TABLE

157

CONTROVERSIES

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 &513,215 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
Delcos 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 determine 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 contradictions and instabilities of the previous era. The

5. Salaries and wages 1960-1975.

1200 -

/>I3
No. employees
8
4

The

declining

returns

43

to black wage labor are attributable

entirely

.,

.I

,.L.\_d.
./

to a proportionate

reduction

of numbers

employed.

158

ANTHONY

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
enterprises
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 contention 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

hL TINKER

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 productivity
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 contradicted 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 Controversies 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
and market
conditions
in our
distribution
industrial societies.
Maurice Dobb notes that at the time of
writing, that alternative explanations of distribution 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, Dobbs comments seem to
be sound advice.

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