Accounting and the economic Analysis of the Firm as an Entity

The box that neo-classical theory designs for the firm appears neither black nor empty. The skeletal machinery built on marginal cost pricing ought to grasp the economic and monetary process inside the firm, at least in its fundamental elements and results. Together with some principle of maximisation and with perfect competition on efficient markets for all factors or products, this machinery aims at explaining selling price, cost, quantity, and the resultant (no) profit for each product separately. This bundle of instruments allows the price system alone to dominate the firm, at least from an economic viewpoint, when creation and allocation of resources are concerned. Following Coase, Shubik and Simon, instead, the inner working of organisation and of the accounting system is called into question for understanding how the special economy of the firm supersedes the price system. This chapter aims at developing this issue, exploring the accounting system, its nature and role in the special economy of the firm concerned with real dynamics and complexity. In this context, the accounting system copes with the economic and monetary process generated by the whole firm and tries to jointly represent business capital and income related to the firm seen as an entity. By the working of an accounting system, then, the special process of the firm acquires autonomous but interdependent existence from external markets (both from factor or product markets). The accounting system constitutes the veil that allows this special process to exist. A further glance at the entity view provided by dynamic accounting enhances also the economic understanding of the separation between ownership, control and management (as early discussed by Berle and Littleton), not only between ownership and control alone. Even to protect shareholders, this kind of control and accountability is required, far away from the irrevocably lost proprietary sovereignty. From this perspective, the firm as an entity functions and exists as a managed dynamic system characterised by different structures of production, institutional, organisational, or epistemic (related to the nature and role of institutions, internal organisation, and knowledge in the firm). The accounting system becomes a constituent of these structures and of the whole firm. The new transactional and institutional perspective opens to an interdisciplinary approach linking economics, accounting, and law by the shared, synthetic notion of the firm as an entity, which provides the clue for understanding the nature of the firm as a whole and a dynamic system. The following discussion is organised in three sections. The first section discusses some recent suggestions of Coase and Shubik calling for an exploration of the relationship between accounting and the economic nature of the firm. The second section explains how and why accounting provides a special view of the firm that economics should integrate. This view is especially concerned with the economic and monetary process generated by the whole firm. The third section shall finally argue how this accounting view offers further implications for a new theory of the firm based on the synthetic, interdisciplinary notion of the firm as an entity.