‘Double Entry’: crediting the Venetians for creating modern accounting
Jane Gleeson-White’s “Double Entry: How the Merchants of Venice Created Modern Finance” is a fascinating look at the accounting system, developed more than 500 years ago by a Franciscan monk, that still governs business, finance and government budgets today.
Special to The Seattle Times
`Double Entry: How the Merchants of Venice Created Modern Finance’by Jane Gleeson-White
W.W. Norton, 294 pp., $25.95
Modern business is almost literally unthinkable without accounting. Without it, product managers wouldn’t be able to tell if their latest gizmo was recouping its development costs, investors wouldn’t know which businesses were worth putting money into, and executives would be hard-pressed to figure out if it made more sense to buy or lease that Gulfstream jet. As famed management theorist Peter Drucker once wrote, “What gets measured, gets managed.”
But what to measure, and how? Those key questions were answered and codified more than 500 years ago by a Franciscan monk named Luca Pacioli. The wonder of Pacioli’s accomplishment, as recounted by Jane Gleeson-White in her stimulating new book, is that his system is, in all its essentials, the same one bookkeepers and accountants use today.
The roots of accounting go back to ancient Rome, and the earliest surviving accounts in double-entry form date to around 1300. But it was the merchants of Venice who fully worked it out, including the seemingly trivial, yet crucial, innovation of recording debits and credits in two separate columns. The key advantage of the Venetian system, as set down by Pacioli, is that a merchant could see at a glance “all about his business and will know exactly whether his business goes well or not.”
Gleeson-White, who holds degrees in both accounting and economics, does as good a job as probably can be done of succinctly explaining the mysteries of debits and credits to lay readers (hint: Debits aren’t always “bad” any more than credits are always “good”). And she clearly traces how Venetian bookkeeping spread throughout the Western world and, as the Industrial Revolution literally and figuratively gathered steam, morphed into modern corporate accounting.
If this were all Gleeson-White was interested in, her book would be of little interest to anyone except accountants and economic-history buffs. But she also says that double-entry, for all its usefulness in business, has been a more mixed blessing when brought up to the national and international spheres.
Her main target here is gross domestic product, or GDP (and its cousin, gross national product or GNP). GDP and GNP are progeny of the national-accounts systems devised during the Great Depression and Second World War — ways of organizing the whole of a nation’s economic activity in a single ledger, with one summary number by which all nations could be judged.
Developing such a system probably was essential, given the complexity of modern economies; one of the handicaps nations faced in fighting the Depression was that no one had the kind of birds-eye view GDP provides. But Gleeson-White argues that governments overvalue GDP growth as a measure of their countries’ health, precisely because it can be quantified while other societal values (clean air, scenic views, public health) are harder to reduce to numbers.
Gleeson-White describes a number of “green accounting” schemes that try to address the gaps in GDP, but they’re generally too broad or too subjective to be much use (the Millennium Ecosystem Assessment, for instance, pegged the carbon-storage value of forests at anywhere from $360 to $2,200 per hectare). I’d have liked a deeper discussion of the problems green accounting must solve before it can be incorporated into standard accounts.
Still, Gleeson-White’s book is not just fascinating history but a reminder that, as sociologist William Bruce Cameron wrote, “Not everything that can be counted counts, and not everything that counts can be counted.”
Drew DeSilver is a business reporter for The Seattle Times.