(56k words, 1-2h read) Popularizing overview of Luca Pacioli's publication of double-entry bookkeeping, and some historical tracing of its subsequent spread through Europe and use in modern corporate-capitalism. As an active user of ledger for my personal finances, writer of the WP article on the Medici Bank, & reader of Nick Szabo, I thought I might find Double Entry interesting.

The book sets up as a morality play, pointing to the many well-known corporate scandals in the 2000s, before quickly going to Ancient Sumeria & the invention of writing for business purposes ('accounting' might be a bit of an anachronism there), a few tantalizing Roman quotes & the possibility of Indian invention (although as with so many other things, the Indian dreamtime makes certainty difficult to reach), and settling down in the 1300s and sketching out Venice's rise with its associated mercantile class, such as Datini, whose well-preserved business documentation is familiar to anyone interested in Renaissance commercial practices.

This sets the scene for Pacioli: Venice's trade throughout the Mediterranean and Adriatic and Black Sea and especially Constantinople, its navy, which Pacioli witnessed as a young mathematician traveling and tutoring. He learned well, returning to Venice in time for the Gutenberg revolution to make financially feasible an enormous encyclopedia laying out the use of indispensable Arabic numerals and, as it happens, double-entry accounting. Along the way, he hung out with Leonardo da Vinci, compiled a book of cool magic tricks like handling molten lead barehanded (apparently featured on Mythbusters), wrote the first book on chess, got that portrait done, and so on. Pacioli turns out to be far more interesting than I would have guessed for a monk known for popularizing something as dull as double-entry!

We get a short introduction to double-entry; I'm not sure how well one would learn double-entry from that chapter if one didn't already have a little experience. (It's not that complex, but it can be tricky deciding what should be added/subtracted from what accounts.) The brevity of this section is a little odd since it is the major theme of the book: you expect a book on the history of accounting to discuss in detail accounting, like a book on physics or any other intellectual topics.

It's also not a very good overview of Renaissance capitalism either: the great fairs appear in one or two sentences, the tricky methods of interest (exploiting exchange rate variations between currencies and geographic variation) are discussed too briefly to clarify, and we don't get a good idea of how banks and trading companies were organized as a series of yearly partnerships (for example, the Medici bank was structured as several affiliated partnerships which dissolved and reformed every year; and this was how the financial state was calculated, and new partners/employees brought on) though later Gleeson-White contrasts the yearly partnership form to the continuous joint-stock corporation form - apparently forgetting that she never really covered the original form.

This leads into the Industrial Revolution. A few examples of the moralizing of good accounting are provided, but not that much. (There seems to be a lot of fertile material in the Netherlands which got omitted, judging from Soll's article "The vanished grandeur of accounting".) An interesting example of the effect of double-entry is provided by the famed Wedgwood pottery factory, which was staggering under financial problems despite enormous success until Wedgwood got his books in order and figured out where all his money was going. I wish Gleeson-White had provided a dozen examples in that vein: how was double-entry used in real life? The first railway bubble provided the impetus for British wholesale adoption, but I wonder how double-entry related to the Gilded Age in America? Since accounting is subjective in some senses, it would have been interesting to dig into the details of some of the collapses briefly mentioned to see what went into the differing appraisals - for example, I am intrigued by the final line of this quote, but the thread is dropped without any further discussion:

In the 1920s the US construction business Kreuger & Toll became one of the largest conglomerates and multinationals imaginable, like Enron seventy years later. After its founder Ivar Kreuger died in 1932, millions of investors discovered the company's financial statements had been falsified over many years. But because of the company's extraordinary organisational complexity, the investigating accountants Price Waterhouse could not determine the exact extent of the fraud and so the investors lost their money. The Wall Street Crash of 1929 revealed the accounts of another titanic company, Insull Utility Investments, to be 'grossly misleading'. Its CEO Samuel Insull was tried for fraud in 1932 and acquitted on all counts. A considerable part of Insull's defence rested on the persuasiveness of the commonsense rationale behind his accounting practices (he had treated stock dividends as income, which was prohibited at the time, but the prosecution was unable to make a clear case against it)-and, by implication, 'the financial nonsense peddled in the conventional accounting wisdom'. The prosecution was left without a case, unable to deny that the accounting rules of the day were controversial and unable to claim that there was any consensus within the accounting profession on the particular rule in question. The Insull case highlighted the contentious and arbitrary nature of corporate accounting, especially regarding valuation and depreciation, issues which are essentially unresolvable and continue to be hotly debated today. Significantly, some of Insull's accounting practices, which then lay outside conventional accounting practice, are now accepted wisdom.

I'm concerned because as useful as double-entry is, I don't see a good case for identifying it as a major technology worthy of a book or marketing like 'created modern finance' (the Dutch would seem to have a better claim there); to quote the book:

"But detractors argue that a close reading of the historical evidence does not support Sombart's generalisation: in fact the few merchants' books which survive from the 1300s to 1800 indicate the double-entry system was not then widely adopted in practice. As part of his career-long dispute with Sombart, economist Basil Yamey argues that the spirit of capitalism animated numerous prominent Italian mercantile ventures before they adopted Venetian bookkeeping: 'Perhaps it is sufficient to note that the Italian enterprises of the Bardi, Peruzzi, Alberti and Medici cannot be said to have been run less efficiently and "capitalistically" before they had adopted the double-entry system than after they had done so.'"

Indeed. The point is made even more strongly, inadvertently, by the emphasis on modern accounting scandals and Buffett's observation that derivatives make a corporation's true financial state nearly unknowable, combined with the observation that the world keeps on ticking and annual global growth continues: if modern financial reporting is so ambiguous and unreliable, doesn't that imply that clear transparent books were never that important?

The book gets weaker as it returns to the original theme of the corruption of capitalism and its focus on internalizing gains while externalizing costs. While it's true that GDP may not be a perfect measure, can we say that it's really that bad? (Is it really plausible that a Big Mac actually costs $200 when all externalities are priced in?) I recall environmentalist activists making a big deal of Bhutan adopting 'Gross National Happiness', but last I heard, you still want to live in China with its focus on GDP and not impoverished unfree Bhutan (ask the Bhutanese refugees how well things worked out for them). There seems to be little critical consideration of this topic, or of arguments for optimism about the environment from the Kuznets curve (although Kuznets is certainly mentioned often enough) & the cornucopians. One feels that in the attempt to turn a long good article on Pacioli into a short book, some rather weak material got included.