Economics and accounting

A comparison between philosophicalbackgrounds of the two disciplines inview of complexity theory

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Y. Shiozawa

Osaka City University, Japan
Keywords Accounting theory, Decision making, Economic theory, Management accounting
Abstract Compares the philosophical backgrounds of the disciplines of economics andaccounting in view of complexity theory. The relationship which has existed between the two is
examined as well as the problems of such inter-disciplinary studies. Decision making, target
costing and the need for future collaboration are discussed in light of the theory.

The past relationship between economics and accounting
The French Marxist philosopher Louis Althusser once warned us of the dangerof interdisciplinary research studies. They often opt for putting together
dominant ideologies of different disciplines. I do not claim that this is aninevitable situation for a relationship between economics and accounting, for I
believe there are many points that we can learn from each other. However, therelationship between economics and accounting in the latter half of thetwentieth century seems to justify Althusser's warning.
What is symbolic for the relationship is the past one-sided attention of
accounting to economics. Researchers in accounting were customarily
concerned about what was achieved in economics but economists remained
indifferent to the studies in accounting. As Scapens (1991) put it, the economic
framework played the central role when the accounting researchers tried toconstruct decision making models for the development and reorganization ofmanagement accounting. Accounting researchers were therefore interested inanalytical tools and theories of economics. A reciprocal interest in accounting
was never observed in economics. In the 1950s and 1960s, economists were
proud that their discipline came to the level of an exact science, first among thesocial sciences. Economics was believed to be complete by itself. So, economics
did not learn from accounting, nor from other disciplines. It was believed that
exploring the pure logic of economics was the only right way to pursue
economic studies. On the other hand, academic researchers in accounting held acomplex attitude vis-aÁ-vis economics which propelled them to pursue similar
theoretical success to economics. Scapens (1991) argued that this is related toaccountants' desires to achieve the academic respectability of management
accounting.
Plenary Address at the Second APIRA Conference, Osaka, Japan, July 1998.

Accounting Auditing &Accountability Journal,
Vol. 12 No. 1, 1999, pp. 19-38.
# MCB University Press, 0951-3574

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This one-sided situation is not unique in the relationships between
economics and other social sciences. Despite disciplines' apparent desire for
their independence, there has always been a widespread tendency insociology and political science to import some ideas from economics. In
economics, too, there were always some people who claimed the necessity ofinterdisciplinary collaboration between economics and other social sciences.
But they were only dissidents. Mainstream economists never imagined that
there was some theoretical lacuna or deficiency which should becomplemented by other social sciences. To repeat, economists believed that
economics was complete in itself.
An easy explanation of this ``economic imperialism'' is that economics is thebasic discipline among social sciences so that it is independent of other sciences
while other social sciences depend upon economics. I don't think this is the only
possible explanation, nor a good explanation. In fact, economics has much tolearn from other disciplines but its excessively theoretical and abstract
character has prevented it from incorporating knowledge and discoveries
obtained by other disciplines. As long as economics continues to preserve thisattitude, it is difficult to establish a mutual interaction between economics andaccounting. In order to do so, economics should change. But this is not a simple
question of changing the attitude of economists, for it is the theoreticalstructure of economics itself which prevents economists from becoming more
open to other disciplines.
To be more precise, the economics with which we are concerned ismainstream neoclassical economics. It is this economics which has been
occupying a dominant position in economics since the 1870s. At the core of
the success of neoclassical economics lies rational choice theory. The rational
choice framework made it possible to formulate human purposive action as
an optimization problem. Together with the equilibrium framework,
economics could take the form of a highly mathematical science. At first,
argumentation was a rough imitation of mathematical reasoning. Unknowns
and equations were counted and it was supposed that a solution existed withappropriate properties. Then, after a long effort in vain, there was a kind ofbreakthrough in the 1930s, and in the 1950s the theory was elegantly
completed in the form of Arrow and Debreu's existence theorem. This success
was remarkable for all social sciences. It was even the envy of some scholarsof other social sciences and so they tried to adopt the rational choiceframework themselves. After a long, timid imitation period, rational choicetheory is now spreading its influence over various disciplines. In politicalscience, in sociology, in decision making theory, in organization theory, andeven in psychology, there are now powerful trends whose theoretical core isrational choice theory.
This facilitated each discipline to take the appearance of an exact science.
At least some believed that they were successful in raising the level ofargument of their discipline. In some senses, they were right. Usually themodels have been specified in such a way that there are few ambiguities forthe situation under consideration. Comparison of alternatives has led to thesame conclusion for all analysts. But this exportation of rational choicetheory from economics to other sciences, is in fact unfortunate. It distorts
the understanding of human purposive behaviors and thus misleads
disciplines to what I think is a misguided research programme. This isdoubly unfortunate, for economists are now considering abandoning thepresumption of perfect rationality which lies at the base of all rational
choice theory, and are starting to reconstruct a theory from the very basis of
economic science.
As this is the situation of economics today, before embarking on thequestions of co-operation between economics and accounting, it isnecessary to provide a brief overview of the discussion about the necessityof theoretical reform. Why should we abandon the assumption of perfectrationality? If we introduce an alternative bounded rationality
assumption, what kind of new understanding will emerge for humanpurposive actions?
The necessity of theory reforms in economics
The basis of neoclassical economics is general equilibrium theory. The idea
was first developed by Leon Walras and mathematically perfected by Arrowand Debreu (1954). The paper on the existence of a competitive equilibrium wasreally seminal and I don't make any claim that there are any logical errors intheir results. They are mathematically perfect. Nevertheless, as a model of how
market transactions take place, the general equilibrium theory has a serious
defect, and mathematical perfection cannot thereby save it from the necessityof a radical reconstruction of the theory.
The core of the general equilibrium theory is the existence of an equilibrium.
The latter can be characterized as a point where the excess demand function for
the economy as a whole takes all non-negative values. However in order that an
excess demand function exists, it is necessary for a demand function and a
supply function to be constructed, for the excess demand function is defined as
the difference between these two functions. Now it is important to know thatthese functions have prices as independent variables and depend on no othervariables. This is a very peculiar framework and it is this framework which
necessitates assumptions which are too unrealistic, so that the theory which
depends on it can claim no reality in terms of the working of the market
economy.
Construction of the demand function
The standard theory can be explained as follows. The demand function of theeconomy as a whole is the sum of the demand functions of all consumers. Thus,
the construction of a demand function is reduced to the case of the individual
consumer. Now, a consumer is supposed to maximize his or her utility with thecondition that he or she satisfies the budget constraint. This can be formulated
as follows.

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Utility maximization: the general case,
Maximize the valueu(x1, x2 ,..., xN)
under the conditions thatx1*p1 +x2*p2+...+xN*pN < = B,
andx1 > = 0, x2 > = 0,..., xN > = 0.
This is just a simple mathematical problem. If the utility function u iscontinuous and prices pk are positive, then there is a maximum as a simple
extension of Weierstrass's theorem. However when we try to find out a solution
by a concrete calculation, the problem takes on a different feature, for the
calculation for a large N demands too much time, so that it is practically
impossible to find a solution within a suitable lapse of time. In order to makethe comparison easier, let us take a following problem which is but a special
case of the above utility maximization problem.
Utility maximization: a special case,
For any numbers
x1, x2,...,xN,
maximize the value
x1*u1 +x2*u2 + ... + xN*uN
under the conditions that x1*p1 + x2*p2+...+xN*pN < = B,
andx1 = 0 or 1, x2 = 0 or 1,..., xN = 0 or 1.
The new problem belongs to the category called integral programming. It is notnecessarily easier than the continuous case. In particular, a linear programming
problem of this type is an easy one. You have only to find out the maximum of
the ratios u1/p1, u2/p2, ...,uN/pN and then buy the good k as much as you can, if
the k is the number which gives you the maximum. But, our new integral
problem is much more complicated, for the unit we can buy is restricted to 1 or
0 and fractional quantities are not permitted. Thus, mathematically speaking,the restriction to an integral solution makes the problem substantially different,
whereas, economically speaking, the restriction is just an approach to reality.
The problem reformulated above is in fact a famous problem in the field
called the theory of computing complexity. Mathematicians call the problem
the ``knapsack problem'', for it is equivalent to packing articles in yourknapsack when you want to maximize the total value of the articles you put in,with the condition that total weight does not exceed the predetermined limit.
NP complete problem and the computing time
The knapsack problem is just a simple problem but it is also famous as a caseof the NP complete problem. Conceptually, the problem is not difficult at all. It
is easy to write down a program which solves the problem. The procedure issimply to find a maximum for all permissible combinations. The trouble is thatthe computing time is proportional to 2N. When you try to find a numericalsolution, it takes an enormous time for a problem of large size. There is little
hope that another fast method will be discovered. By what is called afundamental conjecture of the theory of computing complexity, it is believedthat there are no algorithms which give a solution in the time which isestimated by a polynomial function of the size of the problem. In our case, thesize of the problem is the number of commodities N (more exactly, the numberof kinds of commodities).
The computing time which is proportional to 2N is really astonishing. You
can see the effect of the exponential growth in Table I.
As a number of commodities, 80 is not large. If you walk into any
convenience store, you will find as many as 3,000 items. It is thus evident thatno consumers are maximizing their utility, for the calculation exceeds any
consumer's capacity of calculation.
It is rather astonishing that this kind of problem (i.e. an NP complete
problem) is discovered in the most common formulation of economics. We
cannot assume that consumers are maximizing their utilities. We have to look
for a new behavioral principle, which is different from the maximization
principle.
One of the consequences of this observation is that the normal constructionof demand functions has no realities that we can rely on as a basic frameworkof the economic theory. This is not new knowledge at all, for most of the people
know that consumers are not making such a troublesome calculation as
maximization when they want to decide what to buy at any moment.
Economists know that utility maximization is but a theoretical construction
which is necessary only to construct the demand function. They know it isunrealistic but they continue to cling to it, because once they abandon thisassumption, they are obliged to abandon the whole framework of neoclassicaleconomics.

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Construction of the supply function
The construction of the supply function is also divorced from reality. The
concept of the supply function includes that an enterprise has a specified
volume of production and sales on which the profit is maximised. This meansthat in a state near the equilibrium, enterprises are facing a rise in marginal
cost so that if they produce more and sell more, their profit becomes smaller.
This is a really strange assumption, for a majority of enterprises are trying tosell more if it is at all possible. Just in order to increase their sales volume, they
employ a number of personnel and spend a considerable amount of money inadvertising and promoting their products.
Number ofcommodities N

10

20

30

40

50

60

70

80

Computing
time

0.001
sec

1
sec

17
min

12
days

35
years

35.7
thousand
years

36.6
millionyears

37.5
billionyears

Table I.
Number ofcommodities in relation
to computing time

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The very concept of the supply function presupposes that the marginal cost of
production is rising at the point where the enterprises are operating. Marginal
cost and average cost are two different concepts. But, as you see by a simple
calculation, we have identities:
a'(x) = { c(x)/ x } ' = { c'(x) - c(x)/x } / x = { m(x) - a(x) } / x
Here, c(x) is the total cost for the production of volume x. The function a(x)stands for the average cost and m(x) the marginal cost. If the price is equal tom(x) as the standard neoclassical theory presupposes, this is equivalent tosaying thata'(x) = { p - a(x) } / x .
If in this situation enterprises are making profits (i.e. p > a(x)), it means thatenterprises are facing an increasing average cost (i.e. a'(x) > 0). In other words,
it means that enterprises are facing decreasing returns to scale.
As many people know, enterprises are operating in exactly the opposite
situation. In other words, they are operating either at constant returns to scale(for a short term with given capacity) or at increasing returns to scale (for along term, where an investment in plant and equipment is made). Researchersin accounting know this fact very well. This is the very basis of break evenanalysis. Proportionality assumed here is also the basis of cost accounting. So
accounting has been long working with much more realistic assumptions thaneconomics. Many economists know that their assumptions are unrealistic.
They also know that knowledge supposed in cost accounting is contradictory
to what is assumed by economics. But they cannot abandon the assumption of
decreasing returns to scale. Just like the maximizing principle, the assumptionof decreasing returns to scale has no empirical support. But it has been
accepted by the economists for a long time, because it was necessary for theconservation of the theoretical framework of general equilibrium. As long as
they cling to this framework, they cannot throw away the assumption of
decreasing returns, for without this assumption, the supply function of the firm
loses its meaning.
The persistence of neoclassical economics should be an object of
psychoanalysis. It is only explained by the fear of losing habitual tools andaccustomed frameworks.
The economics of complexity approachA new approach to economic theory should now be proposed. This new
approach has several names: institutional economics, evolutionary economics
and economics of complexity. They have a common research program in thesense that they all try to reconstruct a new economic theory which does not relyon the rational choice theory. They have a common ambition of providing analternative to the neoclassical theory of economics. As the difference between
names indicates, the main focus is different for each of them. Institutional

economics focuses on the synchronic structure of various institutions, whereas
evolutionary economics pays special interest to how the new behaviors andinstitutions come to exist and are widely adopted. The economics of complexity
focuses on the consequences of complexity of the world. It wants to make clear
how human actions are organized when our capacity of rational reasoning isinevitably bounded. The relation of complexity and bounded rationality is justthat of opposite sides of the same paper. For the time being, let me use the term``economics of complexity'' for the discussion in relation to the limits ofrationality. This is the most important part of my paper.
The direction of the new approach is now almost apparent. We should reject
two basic assumptions: that of unlimited rationality which underlies the
maximization principle and that of decreasing returns to scale which supports
the economic theory of the firm. Instead, we start from two assumptions so far
neglected or rejected by the neoclassical school: that of limited or bounded
rationality and that of increasing returns to scale. Basic assumptions being so
posed, the framework of general equilibrium should also be abandoned. In
particular, the notions like demand functions and supply functions which canbe defined by a system of prices, should be abandoned as well.
The new economics must be very different from neoclassical economics,
both in its topics and its method of study. As for topics, themes like institutions
and evolution will occupy an important part of our concerns. As for methods ofstudy, computer simulation of multi-agent systems and traditional narrative
analysis will both be important. Narrative is the oldest and most developed
analytical method ever invented by human beings. Some contents of narratives
can only be analyzed by building a simulation model. In this sense, computer
simulation may be a helpful tool for the detailed examination of the contents ofnarratives.
Now the most difficult point of the new economics is how to formulate andcharacterize human purposive actions. It is necessary to change our old habitsof thinking that it is something similar to maximization.
Economic behavior as routines
When we abandon the long cherished idea of maximization, how can weformulate economic behavior? Some neoclassical economists think that if weabandon the maximization principle, we will be deprived of any concrete
formulation of economic behavior. If formulation must be mathematical, they
may be right to claim so, but it is not necessary to assume that our behavior isorganized in such a way that it is easily treatable by mathematics. This is not to
say that any logical treatment is impossible. Even the boundaries ofmathematics move. Indeed, the world is full of phenomena, natural or social,which are not easy to formulate in traditional mathematics. But mathematics is
powerful and full of possibilities. New theories like catastrophe theory, chaostheory, fuzzy theory and fractals theory show that phenomena which were once
thought to be untreatable can be incorporated into the range of mathematics.
There are as yet many phenomena which are not treated suitably by ready

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made mathematics. The fact that some phenomena appear not to be suitable formathematical analysis does not indicate that we should refrain from attacking
those phenomena. Now there are many researchers who are interested in thetheory of complexity in various fields of science. I think I can say that it is acommon understanding of those people that there are no clear cut boundaries
between mathematics and non mathematics and that possibility ofmathematical analysis should not define the boundaries of targets for scientificresearch. Actually, human action is not an easy target for mathematics. Someday we may discover a mathematical theory by which we can formulate andanalyze human behavior. At any rate, the fact that we do not have a readymade mathematical theory does not imply that we should abandon an ambition
to tackle the problem without using mathematical formulae.
What I want to propose as a new formulation of economic behavior is to see
it as routines. This is also the position of Nelson and Winter (1982), whose bookon An Evolutionary Theory of Economic Change marked the starting point of
the resurrection of the old evolutionary tradition in economics.
In my opinion, routines have a common structure. One may call them
programmed behavior, for they can be decomposed into a series of actions, eachof which can be seen as a CD-transformation. CD-transformation is a concept
formulated by a Japanese sociologist Tamito Yoshida (1990). He thinks thathuman intentional actions can be seen as a transformation of a cognitive
meaning (C) to a directive meaning (D) ± hence the terminology CDtransformation. This understanding of human behavior is congruent with themathematical formulation of a computer program which is but a set ofquadruples qSS'q'. Here, q and q' are internal state of the machine, whereas S
and S' are an observed state of the outer world and an action for it, respectively.
It is well known that any computer program can be written as form of a set ofthese quadruples.
Rational choice theory under uncertainty
Neoclassical economics has been criticized in various ways. One of theimportant criticisms has been that it cannot incorporate uncertainty in its
theoretical framework. As an answer to this criticism, neoclassical economists,in collaboration with mathematicians, developed rational choice theory under
uncertainty. The standard form of this theory is called expected utility theory.
Expected utility is the mean probability of utilities of all events, which are inthis case assumed to have a numerical quantity and are weighted. Many
economists think that expected utility theory succeeded in incorporating thecase of future events which cannot be foretold with certainty. The method
consists only of taking expected utility instead of raw utility in the certainty
case, and as such, expected utility theory inherits all the defects of the rational
choice theory of certainty.
This is really the work of a genius but as a solution it is badly conceived. All
the difficulties in the theory were transferred to the subjective world, where thedecision maker is supposed to give probabilities for all events in the future. It isagreed that these probabilities should not be supposed to have any objective
values. It is sufficient that they are the results of purely subjective estimates.
So, such probabilities are called subjective probabilities. But even if they are
purely subjective, is it possible to attribute probabilities to all events
concerned? Probably not.
Even if we admit that any subject has or is able to estimate what are calledsubjective probabilities for all future events concerned, there remains anotherserious difficulty. The burden of calculations are not reduced at all. The
situation is worse now, for in addition to the normal comparison of utility
values, one has to calculate expected means. Then the same criticism which
was made of the utility maximization problem is valid in a stronger way.
Rational choice theory under uncertainty may have succeeded in incorporating
future uncertainty, but it completely ignores the fact that human ability tothink, reason and calculate is limited. To assume that a man or woman can
maximize the expected utility is to attribute much greater rationality to thehuman agent. The rational choice theory under uncertainty takes the form of adifficult theory which is full of mathematics, but is only claptrap.
If we do not question the computability of expected utilities, we have anotherproblem. Is the solution obtained sufficiently reliable as something whichshould be pursued as a target? Most important data, which are used in solving
the problem, are subjective. Even if we obtain a solution, we cannot guaranteethat the solution has any objective superiority to other alternatives. It may bebetter to choose an alternative, purely by inspiration or by casting lots. The
positivist spirit which was apparent in the early neoclassicism is now
completely lost from the rational choice theory under uncertainty.
In this way, expected utility theory has tremendous theoretical defects.
Despite this, as mentioned in the first section of this paper, the influence ofrational choice theory is now strong and widely spread. In this respect, theeconomics of information deserves to be mentioned. This is particularly
important when we talk about the influence of economics on accounting.
Management accounting adopted information economics as an essential part ofits theoretical renovation.
Many economists believe that expected utility theory and other rational
choice theories under uncertainty have succeeded in incorporating theincomplete information case. In a sense, they are right. Rational choice theory
can now treat the situation where the subject has only limited knowledge of thestate of the world. However seen from the complexity point of view, or in otherwords, when the bounded rationality is taken into consideration, it is not asolution at all. They take into consideration the cost of information gatheringand monitoring, but they don't take into consideration the cost of information
processing, or for the case of a human agent, the cost of thinking or reasoning.
Habitual behavior and genuine decisions
The agent assumed to exist by the neoclassical tradition is the calculating man
or woman. He or she calculates every situation and decides what he or she will

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do. The style is invariant, whether he or she faces a certain or uncertain
situation.
The new theory proposes a totally different image. In this new image, thehuman agent behaves according to a routine or a ready made program. To see ahuman agent as someone who is repeating routines is to see them as someone
who is parsimonious in thinking anew. If I use the neoclassical phraseology,
this means that the most scarce resources for the agent are time. He or she isreluctant to use much time in thinking and calculating. He or she is prepared to
pay only a minimal time cost. Rapidity in judgment is most welcomed and longspeculation is something which should be avoided.
This image of parsimonious decision makers is confirmed by various
researchers of business organizations. March (1988) argued that time andattention are scarce resources and hence the allocation of attention is one of themost important choices that managers should make. Mintzberg (1973) made it
clear, after a wide survey and his own observations, that managers are
spending a very short time on most of their activities ± each of them being in
the order of one minute to nine minutes. A shop steward is reported to haveengaged in 1,073 activities in a day. The importance of quick and instantaneous
judgment was also pointed out by Nakaoka (1971), when he examined theexpertise of factory workers.
This is not to say that people are not thinking seriously. They should beparsimonious in thinking, judging, and decision making, because there are somany things which demand judgment and decisions. They cannot spend timein considering only one problem. In consequence they are obliged to allocate
their scarce time in order to obtain a better result. Katona (1951), a rare
psychological economist, explained these observations by indicating thathuman activities can be arranged to occupy a point on a scale whose extreme
points are habitual behavior and genuine decisions.
A comment on decision theories
One may feel that neoclassical economists have paid too much attention to asituation where genuine decision is required. They are not aware of a
distinction between habitual behavior and genuine decisions. The situation
they wanted to explain was always that of genuine decisions. This does notmean, however, that they have succeeded in making an appropriate theory of
genuine decisions.
For example, expected utility maximization is not applicable to decision
making of importance to an enterprise. First of all, we do not know how todefine the utility function for an enterprise. If the enterprise is of the risk averse
type, how is the function bent? Second, even if we can invest a large amount ofmoney and work time of the personnel, it is not certain that we can get a
sufficient clarification of profits and losses of all alternatives so that we candraw a conclusion from the study. However for the neoclassical theory ofrational choice there is no such possibility of undecidedness unless we face achoice of two alternatives of equal expected utility.

As decision making is one of the most important matters for business,various theories of decisions have been proposed. Some are empirical and someothers are normative. Other people have proposed a clinical theory of decision
making. It is important that we accumulate knowledge on decision making. It
may bring precious information to the economic theory of complexity, or thetheory of bounded rationality.
The neoclassical theory of rational choice can be included among normative
theories, but as long as it continues to ignore the bounded nature of ourreasoning, it will not be able to give any useful hints on decision making in areal situation. On the contrary, it may mislead decision makers into costly but
unfruitful studies, for it pays little attention to the cost of decision making.
Reason for the failure
We can now understand why the rational choice theory was doomed to fail.
The economic agent in the neoclassical tradition considers the world only in aprospective way. He or she calculates every future course and makes
comparisons. This situation setting has an important implication. At each time
when a choice is made, the alternative actions are examined only to see what
will be the future results. In this ex-ante setting, the agent is asked to make achoice without any assumption about what he or she did in the past. In thistheoretical setting, no assumption means no information. The agent has neither
information nor memories inherited from the past, even though the agent is
supposed to have an ability to foretell what will happen in the future as a resultof present actions. The economic agent thus supposed, is a peculiar tabula rasa
man or woman who knows the general laws of the world but has no experiencenor memories. In this peculiar setting, the imagined agent is forced to makechoice for the first time in his or her life. This is a very fictitious situation.
This human image is similar to a robot in the early days of artificial
intelligence studies. Designers tried to equip their robot with various kinds oflaws of the environment, but this program did not work well. When a robot was
furnished with various laws of dynamics, it did not move at all, for it took too
much time in calculation. The economic agent in the neoclassical theory is justlike a robot which takes too much time in calculation and can do nothing.
What assures the usefulness of routine behavior?
It is important to know why routine behaviors are useful to us. The argument
about evolution is possible, but it is necessary to acknowledge that under any
evolutionary explanation, some sort of stationarity is supposed. If the world ischanging without any continuity, evolution would not be efficient, for theselection would be arbitrary and ineffective. Of course, this stationarity does
not require that all the variables remain constant. Just like stationary processes
in probability theory, the situation changes when we can assume any
constancy among the changes.

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Routine behaviors generate an economic process as a whole and this total
process conditions the usefulness of each routine. There is a kind of loop of
mutual determination between micro behavior of agents and the macro processof the economy as a whole. This leads to an idea of the micro-macro loop.
Micro-macro loop
Although this is an important topic, I shall be brief for the sake of space. The
concept of a micro-macro loop is proposed by several authors. I borrowed thisexpression from Imai and Kaneko (1988). Much earlier Shimizu (1978) proposed
the concept of feedback loop between micro and macro. A similar concept likethe micro-macro link is used in sociology in order to denote a unifying effort oftwo major sociological study approaches: micro theory and macro theory. They
all differ from person to person. My concept is close to Shimizu's feedback loop
concept. Interactions of each economic agent generate a total economic process
which normally takes the form of a macro order. The important point is thatagents' micro behavior will be affected by the macro order, for it will constituteconditions for the expected results of each action. Shimizu cites the example ofa laser. Excited molecules are arranged to form a coherent emission of light andthis coherent order conditions the behavior of each molecule.
An economic example of the micro-macro loop is given by what is normallycalled the Japanese management system. This consists of three major customs
or institutions established in Japanese enterprises:(1) lifelong employment;(2) promotion by seniority; and(3) cooperation between workers and management.
These institutions provided the very base of the quality control (QC) circles
movement and the latter developed later to the total quality control (TQC)
movement. Productivity increased rapidly and real wages improved
substantially year after year. This in turn provided a base for the higheconomic growth in the 1960s and a base for the stable but steady growth in the
1980s. What is important here is that this condition of high and steady growth
gave each enterprise room to maintain lifelong employment and othercharacteristics which comprised the Japanese management system. In the
1990s, the situation changed. Japan is now suffering an ongoing depression.
Enterprises are being forced to restructure their business. So top managers are
now considering the possibility of changing long established institutions. Thisis a very good example of the micro-macro loop. Behaviors of management andworkers of individual companies and the macro performance are mutuallyconditioning for each other. The present depression is at risk of destroying the
micro-macro loop of post war Japan.
The concept of the micro-macro loop was introduced in order to conciliate
between two contradictory methodologies ± one is methodologicalindividualism and the other is methodological holism. The argument between

these two methodologies is an ontological one. A line of demarcation is drawn,in economics, somewhere between neoclassical economics and Marxian
economics. A similar demarcation line exists in sociology in the form of
dichotomies such as ``individual versus society'' and ``action versus order''. So,
the concept of the micro-macro loop shows a new approach which is neither
individualistic nor holistic. This new approach is closely related toevolutionary economics, for the loop between macro and micro provides thefield in which evolution takes place.
Neoclassical economics provides an extreme case of methodologicalindividualism. Individuals have a firm independent system of values which is
not influenced by experience nor by the opinions of other people. The micromacro loop has two directions of determination. Neoclassical economics takes
only one determination into consideration. From macro to micro determinationis completely ignored.
A summary viewAs a summary of the above discussion, let me point out that between
neoclassical economics and economics of complexity, there is a shift in themode of economic analysis.
Neoclassical economics has paid attention to choice behavior from a very
special point of view. Analysis is made only at the moment of deliberation. This
reflects the fact that the equilibrium has been almost the unique framework of
economics since the arrival of neoclassical economics in the 1870s. The conceptof equilibrium is composed of two ideas. One is what we may call systemic
equilibrium. Demand and supply for each commodity should be equal. The
other is what we may call subjective equilibrium. No economic agent shouldhave an incentive to change his or her decisions. In order to satisfy thisrequirement, human purposive actions are characterized as optimizations, ormore precisely as maximization of profits and utilities. At this optimum point
alone an agent has no incentive to change his or her previous decision. This
made mathematical formulation easier but confined economic thinking to avery special moment of decision making. Human behavior was considered only
from an ex-ante mode.
The economics of complexity emphasizes limits of rationality. As aconsequence of the complexity of the situation, decision making at the pureex-ante position is impossible. Normally, such deliberation takes too much time
for conjecturing and the result thus obtained is unreliable. Decision making is amuch more complex process in which past experience always plays animportant role. It should be examined as a structured mix of ex-ante and ex-post
deliberation. This shift of viewpoint is important when we talk aboutcollaboration between economics and accounting, for in my opinion confiningof economics to the ex-ante feature of decision making has been the main
obstruction which has prevented a useful interaction between the two
disciplines. It was not only an obstruction but also the cause which disfigured

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our understanding of decision making and misled many arguments ofmanagement accounting. In the next section, I will illustrate this claim by citingsome discussions made inside the accounting discipline.
Management accounting as a tool of decision making
I have talked at length about economics. Let me now make some comments on
the possible implications of the new economic thinking to accounting. This is
not to say that accounting should learn again from new economics just like itlearned from neoclassical economics. If this were the case, there would be nochange in the relationship between economics and accounting. It has always
been accounting which has drawn on economics. My suggestion in this section
is not an invitation to that kind of one-directional teaching and learning.
Instead, I want to propose a relationship of mutual learning. This change ispossible, because the new economics of complexity has a much wider scope in
its understanding of economic behaviors. This wider scope understanding has
been evident in accounting for a long time.
The nature of the management cycle
To illustrate my proposal, let me cite at first an example very familiar toaccounting researchers. It is the well known management cycle. Although it is
not a proper topic of academic accounting research, all researchers know it, for
it is closely related to management accounting. The cycle takes the form of``plan, do, see and check''. My question is ± why are the last two parts, ``see andcheck'', necessary?
Accounting started as a system of records and reporting. It had in its nature
an ex-post character. Even if accounting reports are used for management
purposes, they are based on past experience and records. When management
accounting started, it was exposed to a special problem which characterizes thedriving force of the discipline. This was the contradiction between the ex-post
character of accounting and the ex-ante requirement of decision making.
When I insist on the ex-post character of accounting activity, it may soundlike blasphemy to accountants and researchers in accounting. I have no suchintention. Instead, I want to point out that most useful knowledge is based on
past experience. Even in the case of the natural sciences and technologies, theimportance of experimentation shows how our knowledge is based on the pastexperience. Experimentation is a name given for a past experience which iswell controlled. Accounting is not an experiment, but it is based on real
operations. This is the crucial difference between accounting and economics.
Accounting is based on real experience. Neoclassical economics is only
concerned with an imaginary comparison between which alternatives to take.
If we take the management cycle into consideration, it becomes evident thatneoclassical economics is composed only of the ``plan'' stage and does notcontain the ``see and check'' part. One can easily understand why it does notcontain the ``see and check'' part. Let us suppose that general equilibrium
theory is valid. Then theory assures that whatever the agents' plan is, it will

always be realized in the equilibrium. As a consequence, the ``see and check''part of the management cycle is useless, for everything goes as it is planned. It
is not by an accident that neoclassical economics does not contain the ``see andcheck'' part and offers no explanation about it. That part does not and cannot
exist in the neoclassical theory of economics.
The absence of ``see and check'' indicates the presence of a theoretical lacunain neoclassical economics. In my opinion, this is the reason why management
accounting could not make substantial progress under the neoclassicaldominance. I will discuss this point in the next subsection.
Ex-ante and ex-post features of management accounting
If it was conceived as a contradiction or not, the difference between ex-ante
analysis and ex-post analysis was sharply acknowledged from the very start ofmanagement accounting. Emerson, the advocate of efficiency engineering,
contrasted standard costing with retrospective costing, claiming that
retrospective cost had no relevance as a benchmark for efficiency management.
Harrison, a critical successor to Emerson, mentioned the fact that entrepreneurs
were shifting their attitude from a retrospective one to a more prospective one.
He expressed a hope that future accountants would spend more time inforecasting than in recording past facts.
In my opinion, misfortune began from this very early phase of management
accounting. Questions should be constructed in a different way. In order thatmanagement accounting becomes a self-explanatory discipline, it should
answer two questions:(1) How and why ex-post knowledge can be useful for ex-ante decision
making?
(2) Why this mode of reasoning is especially important among otherpossibilities?
These questions are related to the raison d'eÃtre of management accounting. If
these points are not clarified, it is difficult to argue why management
accounting can be a useful tool for management. They are even related to aphilosophical question (of the Kantian style) if management accounting as adiscipline is possible at all. There are many textbooks of management
accounting and I have only read a few of them, but it seems to me that thesequestions are not clearly posed and not yet answered in a satisfactory way. At
least, I can say that these questions are not conceived by academic accounting
researchers to be so important that they should be a standard topic ofintroductory textbooks.
For me, this is a very strange situation and I doubt if there was some
negative influence of economics on accounting. I do not say that this kind ofreflection is either possible or necessary in the initial phase of management
accounting. It is natural that early proponents only pursue possibilities andnever reflect on their own efforts, but for any discipline, the time comes when it
is conceived as an independent discipline. The kinds of questions posed above

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are rather natural ones for academic researchers. The fact that no suchquestions were posed is explained only by the fact that they were preoccupied
with other academic concerns. Researchers wanted to reformulate management
accounting as a science which is helpful for the ex-ante deliberation of decision
making. Interests in operations research (OR) and information economics are
but a few examples of them.
Concentration of analytical efforts upon ex-ante decision making gave birth
to a discrepancy between practice and theory. Indeed a deep gap has been cut
between real decision making practice and imaginary choice problems. WhenOR and other mathematical methods were introduced, their formulation was
criticised as being too complicated and not useable for practical applications. In
fact, it was true that management accounting based on new mathematicalsciences was not practical. But the researchers believed that their analysis had
some normative value. This understanding is pointed in the wrong direction.
OR and other mathematical theory only address situations treatable bymathematical analysis. In contrast to real world complexity, the problems thus
treated were only toy problems. As a consequence, new mathematical theories
were not only impractical but also inadequate as a framework for organizing
our knowledge in a useful way.
Johnson and Kaplan (1988) once declared that management accounting had
lost its relevancy. Until 1925, US manufacturing had developed substantially
all the tools available now. One can say that management accounting had
stopped its development since then. Academic efforts to reorganize
management accounting as a powerful tool of decision making resulted in
failure. We should ask ourselves why.
The key to answering this question is to understand how our knowledge isorganized and when it is assured to be useful. This is the same problem that
economics had to face when the hypothesis of complete rationality was denied.
Ex-ante choice is only a special moment of a complicated decision-making
process.
Decision making consists of at least three phases:(1) elaboration of plans;(2) comparison of feasible alternative plans;(3) selection of one alternative.
But management does not stop here. Execution is one of the most importantparts of management. In the course of the execution, it often happens that theplan comes to face unexpected troubles and changes in direction. Managers are
obliged to modify the adopted plan. Assumptions that we can foretellcompletely the course of the events are totally false. This is not a question ofimperfect information. Even if we have all the information we want, we cannot
solve the enormous equation which describes the whole course of events.
Human beings confined to the limits of bounded rationality do not act asproblem solvers, but behave in patterns just like programmed machines. Of

course, they have ingenuity and show that they can create new patterns. People
are always able to develop a new plan, in the same way they invent a new story.
Indeed, human planning is very similar to story making. When a novelist tells astory, it is invented from the fragments of our experience and arranged just as
things proceed in real life. In all these considerations, past experience
accumulated as knowledge, plays the essential role. So management
accounting should ask about the nature of our knowledge: how is it obtained,
how is it organized, how is it connected to our behavior, how and in what point
is it related to the decision making, and why is it useable in a different situation
than that in which the knowledge was obtained? Management accounting andthe economics of complexity thus face similar problems that require solving.
This is not astonishing, because accounting has been for a long time under thesame influence of neoclassical thinking. Only it is now time to be liberated fromits theoretical straitjacket.
Genka kikaku or target costing
Genka kikaku is another good example of where complexity plays an essentialrole. Genka kikaku, or target costing, is a new tool of management accounting
which was invented in Japan. It is true that it is related to a specific Japaneseapproach to research and development activities, but this does not mean thattarget costing is a peculiarly Japanese method that cannot be exported to othercountries. The introduction and the success of target costing were the result of
the Japanese way of organization and management. Once its usefulness isacknowledged and its operating principles understood, it can be successfullytransplanted to foreign countries of different cultures. In this sense, target
costing has a universal value and can be analyzed as such. However this point
is not my real concern.
The reason why I picked up target costing is that it gives a good example ofillustration of the problems of complexity. As it is well known, genka kikaku
started in Toyota Motor Co. as a part of genka kanri (cost management), whichis in turn a part of total quality control (TQC) movement. Genka kanri includes
cost targeting, cost maintenance (genka iji), and cost improvement (genka
kaizen). The main tool for the target costing was value analysis (VA), but thecore of target costing does not lie in analytical tools such as VA or VE. Target
costing is a coordinated effort of all sections concerned with the development of
new commodities. When a target cost is chosen, the design team starts to
consult with suppliers and manufacturing sections. Value analysis is used in
the design process, but this is not a pursuit of minimal cost combination with agiven cost table.
In the field of research and development (R&D) management, a new concept
called the concurrent model has now been proposed. The concurrent model
replaces the linear model which presumes that research and development
proceeds in a linear sequence, from basic research to applied research todevelopment. Target costing is an effort which is only understandable when we
have a concurrent model in mind. As in the case of the concurrent model of

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R&D management, target costing proceeds not in a linear sequence but
consultation takes place between different sections which are in charge ofdifferent phases.
The philosophy which underlies target costing is also important. In thedesign process, costs of components and costs of operations are examined. In
the course of the design process, a search continues whether the cost of each
operation is deduced or not. Designing affects the manufacturing process, so
the possibility of design modifications is pursued by consultation between thetwo sections concerned. Claims and demands of users are crucial in deciding
which functions you adopt and which you do not. So you should consult withyour salesmen. These characteristics of target costing can be summarized as
gemba jushi (emphasis on the importance of the knowledge and experience ofthe personnel on the spot). This is the philosophy which underlies all activities
like QC circles movement, TQC and kaizen. Genka kikaku is an application ofthis philosophy to the design and development process. Target costing ispossible only in a company where management and designers can expect
voluntary collaboration from workers, engineers and salesmen on the spot,
drawn from manufacturing, shipping and sales. On any setting of target cost,``shop floor'' knowledge must be stressed. If workers feel that their effort toachieve the target was not sufficiently rewarded, target costing will not work
well.
VA is usually understood as desk work. Target costing includes this part.
But the important part lies in the consultation and coordination processes
designed to ensure that the new design embodies ``shopfloor'' knowledge. It is
not a mere choice of alternatives from among well known alternative methods.
It is rather a process of discovery of a new and better method. The idea does notlie on the design table. So, if you are a design engineer, you should go and talkwith people on the ``shop floor'' (including salespersons).
In summary, target costing is a process of deciding commodity designs andtheir manufacturing method. It is not ex-ante decision making, which is
performed as desk work. Effective decision making is to be designed as aprocess of discovering a good solution. Neoclassical economics presents animage of decision making as being a choice among known feasible alternatives,
but this image is a result of complete mystification. It is time to demystify this.
The case of target costing shows how an accounting method can contribute toclarifying misunderstandings which were once created as a result of
neoclassical dominance.
Call for further collaboration
The influence of neoclassical economics on accounting distorted the nature ofdecision making and confined management accounting to the narrowframework of ex-ante deliberation. Accounting should be liberated from thisepistemological obstruction. The new economics of complexity will be helpfulat this point.

This is not one-way collaboration. Once liberated from the yoke ofneoclassical economics, accounting can be a good and helpful partner of
economics. Accounting, which started as a record of past activities and thus
has a different perspective from economics, can help the newly born economics
of complexity in its efforts to clarify behaviors of the enterprise as an economic
agent. More specifically, the two parts can collaborate on questions like ``whatis profit?'' and ``why is it important?''. Economics has an experience like thereintroduction of profit concept for the management of the socialist planned
economy. Accounting can contribute to this collaboration by pointing out, forexample, ambiguities in the notion of profits. The economics of complexity also
claims that profit maximization is not always possible except for the very
simple decision case like deciding upon a volume of one specified item. If it isclarified that profit is an ex-post summary of the past activities and that it
cannot be a target of an ex-ante comparison and choice, economics ofcomplexity will gain a powerful rationale for changing the current constructionof economics.
An historical survey of accounting as an institution can provide a good
example for the economics of institutions. On the other hand, the theory ofcomplexity (not specifically the economics of complexity) can provide
explanations for the necessity of arbitrariness in some accounting concepts andprocedures.
Thus we can say as a conclusion, that between economics and accounting,there is a promising field for interdisciplinary research and collaboration. I will
be happy if this paper can provide impetus for such further collaboration in the
future.
References
Arrow, K.J. and Debreu, G. (1954), ``Existence of an equilibrium for a competitive economy'',Econometrica, Vol. 22, July, pp. 265-90.
Imai, K. and Kaneko, I. (1988), Nettowaku Soshikiron (The Theory of Network Organization),
Iwanami Shoten, Tokyo.
Johnson, H.T. and Kaplan, R.S. (1988), Relevance Lost: The Rise and Fall of Management
Accounting, Harvard Business School Press, Boston, MA.
Katona, G. (1951), Psychological Analysis of Economic Behavior, McGraw-Hill, New York, NY.
March, J.G. (1988), Decisions and Organizations, Basil Blackwell, New York, NY.
Mintzberg, H. (1973), The Nature of Managerial Work, Harper & Row, New York, NY.
Nakaoka, T. (1971), Kojo no tetsugaku, (Philosophy of the Factory), Heibonsha, Tokyo.
Nelson, R.R. and Winter, S.G. (1982), An Evolutionary Theory of Economic Change, The Belknap
Press of Harvard University Press, Cambridge, MA.
Scapens, R.W. (1985:1991), Management Accounting: A Review of Recent Development,
Macmillan Press, London. Japanese translation: Scapens (1992), Kanri kaikei no kaiko totembo, Hakutoshobo, Tokyo.
Shimizu, H. (1978), Semei o torenaosu, (Rethinking Life), Cuko shinsho, Tokyo.
Yoshida, T. (1990), Jikososhikisei no johokagaku, (Information Science of Self-organization),
Shinyosha, Tokyo.

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Further reading
Alexander, J.C., Giesen, B., Muench, R. and Smelser, N.J. (Eds) (1987), The Micro-Macro Link,
University of California Press, Berkeley, CA.
Ito, H. (1992), Kanri kaikei no seiki, (The Century of Management Accounting), Dobunkan,
Tokyo.
Okano, H. (1995), Nihonteki kanri kakei no tenkai (Japanese Management Accounting: A
Historical and Institutional Perspective), Chuokeizaisha, Tokyo.
Shiozawa, Y. (1990:1998), Shijo no Chitsujogaku, (The Science of the Market Order), Chikuma
Shobo, Tokyo.
Shiozawa, Y. (1997), Fukuzatsusa no Kiketsu, (Consequences of Complexity), NTT Shuppan,
Tokyo.
Shiozawa, Y. (1997), Fukuzatsukei Keizaigaku Nyumon, (An Introduction to the Economics ofComplexity), Seisansei Shuppan, Tokyo.