Cost accounting, controlling labour and the rise of conglomerates

Accountzng, Orgamzat~onsandSocwty, Vol 16, No 5/6, pp 405-438, 1991 Printed m Great Brttam

0361-3682/91 $3 00+ O0 Pergamon Press plc

COST ACCOUNTING, CONTROl,LING LABOUR AND THE RISE OF CONGLOMERATES

TREVOR HOPPER

Department o f Accounting and Financg University o f Manchester and PETER ARMSTRONG

School o f Management and Economic Studie~ Unitmrsity o f Sheffield

Abstract

Through a detailed crtttque ofJohnson & ~ ' s RelevanceLost, (Johnson, H. T. & Kaptan,R. S.,Relevance Los~ TheRiseandFall of ManagenkontAccountDtg (Boston, MA Harvard BusinessSchool Press, 1987)), based up¢~ labour htstorgs of control witlun North Americanfirms, this article identifiesmajor deficienctes m conve~uonal histcmcal studms of cost and management accounting and offers possibihues for thetr resoluuon. ARer n o e ~ the lunitatiom of ~ cost theory for the theorisation of ¢xgmummmsand then- history, the paper argues that acommting controls were not a consequence of econonuc or tedmclt~cal ~ lint rather were rooted m strugglesas firmsattempted to control laixaa, p r o c ~ m vinous epochs of capttalisucdeveaopmem Cost accounting developments are r~l~wdto the ~ of internal subcgmtracung and craft control of ~ m early factories, the advent of '~cmntific" Manasement and hcmmsenmedlabour and, post-1930, with an accord Ixtween prnnary sectors ~ ~ ~ O3tlmeati¢~, whtch led m an increased emphasis on ~ l y pnctr~ smoothing production and h ~ employnmnt patterns, and a shtR of eommmic l~mSUreSto secondary lalmur argl producer mark~ The paper cotwdudesby m]gun~tlmt, in the cxmtext of today's g l ~ of capital,controls assooated wt~ ~ labour and capttal accord are being abandoned as corporauom expemnem with new ~ ~ ~ of control ~ are reflected m current fashtom m accounting research.

T r a d i t i o n a l m a n a g e m e n t a c c o u n t i n g h i s t o r y has b e e n fixated o n a s e a r c h for origins, o n the q u e s t i o n s o f w h o d i d w h a t first, a n d w h e n . Preoccupied with invention, rather than with diffusion a n d application, w r i t i n g s i n this g e n r e h a v e b e e n r i c h i n n a r r a t i v e t e r m s b u t t h e y have n e g l e c t e d to e x p l o r e t h e i m p o r t a n t linkages b e t w e e n phases of accounting development and their socio-economic context. Given the b e l i e f that this p e r c e i v e d d e f i c i e n c y n e e d s to b e addressed, then the recent marriage b e t w e e n a c c o u n t i n g a n t i q u a r i a n i s m a n d the d o c t r i n e s o f liberal e c o n o m i c s c o n s t i t u t e s a defintte t h e o r e t i c a l advance. P r e m i s e d o n t h e n o t i o n that c h a n g e s i n t h e f o r m s o f b u s i n e s s organlsat i o n a n d c o n t r o l s y s t e m s are d r i v e n b y s e a r c h e s for efficiency i n c o m p e t i t i v e e n v i r o n m e n t s ,

a c c o u n t i n g d e v e l o p m e n t is s e e n as a n integral part o f thts e v o l u t i o n a r y process. J o h n s o n & Kaplan's Relevance Lost ( 1 9 8 7 ) is t h e m o s t t h o r o u g h - g o i n g e x e m p l a r to date o f this n e w tradition. G i v e n t h e i m p a c t o f this w o r k i n academic, c o n s u l t a n t a n d p r a c t i t i o n e r circles, t h e r e are g o o d r e a s o n s for s u b j e c t i n g its htstorical a n d t h e o r e t i c a l a d e q u a c y to t h e closest s c r u t i n y , n o t least b e c a u s e t h e s e issues may bear tmportantly on the prescriptive message w h t c h J o h n s o n a n d Kaplan d r a w from t h e i r v e r s t o n o f a c c o u n t i n g history. In c o n f o r m i t y w i t h their e v o l u t i o n a r y m o d e l , J o h n s o n a n d Kaplan p o r t r a y t h e initial phases o f cost a c c o u n t i n g d e v e l o p m e n t as a steady accretion of knowledge and technique achieved by practising engineers and managers in their

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searches for efficmncy As a result of this process, they argue, virtually all of the contemporary techniques of management accounting w e r e in operational use by about 1920 Having reached this point, Johnson and Kaplan then depart from their basic evolutionary model to argue that many of the achievements of this "Golden Age" have subsequently been stifled by the influences of financial reporting and academic teaching Thts theoretmal twist enables the authors to launch a powerful attack, from the historical ground of the 1920s, on the inefficiencies resulting from the contemporary teaching and practice of management accountancy Accountmg information systems of questtonable relevance are said to be used m a mechanical fashion b y a generatton of American executives brought up to manage "by the numbers" This, in turn, is held responsible for a decline in the international competitiveness of American businesses, especially in relatton to the Japanese. This message evidently strikes a c h o r d with many practising managers, perhaps because the inroads made by Japanese manufacturers are indisputable, perhaps because there is some truth in the thesis of accounting stagnation, but also, perhaps, because of the implicit daemonisation of academics and financtal accountants Despite the respect in which Johnson and Kaplan's w o r k must be held, the argument of this paper is that their theory is flawed, their history partial and some of their prescription neglectful of the socto-economic condinons on w h i c h the achievements of the 1920s depended. In contrast to the social harmony and Serf-equilibrating behaviour o f individuals, firms and markets assumed in the transaction cost framework employed by Johnson and Kaplan, many of the historical events used to

argue the thesis of R e l e v a n c e L o s t a r e better understood through a "labour process" approach to e c o n o m i c and industrial history, as exemplified by writers such as Clawson (1980), Gordon e t aL (1982), Littler (1982), Montgomery ( 1 9 8 7 ) and Nelson ( 1 9 7 4 ) Recognising the need for a broader, more critical, institutional analysis of capttahstic development, ~ the core presupposition of this perspective is that social and economtc conflicts arising from the modes of control which characterise particular phases o f capttalisttc development stimulate the creation of new forms of control intended to ehmmate or accommodate resistance and to solve the associated problems of profitability These new forms of control, in turn, decay, partly because their competitive advantage disappears as a consequence of their generalisatton and partly because they give rise to new contradictions and forms of resistance. Thus a labour process approach, in contrast to one utilising transaction cost theory, stresses crisis rather than continuity; contradmtion rather than internal consistency; social and political conflict rather than harmony; the m o n o p o l y p o w e r of corporations rather than serf-equilibrating competitive markets, patterns of class formatton in specific economtes rather than an atomised view of the individual; and human agency m its cultural and mstatutlonal setting rather than economtstic reductlomsm A re-exammation, along these "labour process" lines, of Johnson and Kaplan's chosen exemplars of effficiency-driven development mdtcates that mid 19th century cost accounting systems were employed to intensify labour in response to increased competition as well as to stimulate searches for efficiency. It reveals accountmg's tmplication in the tightening of

tThts article does not cla,m to be umque m thts respect Other pertinent attempts include Armstrong (1985, 1987), Hopwood(1987), Hoskm& MacVe(1986), Loft(1986), Merino & Netmark(1982), Miller & O'Leary(1987) and Tinker & Neimark (1987) Many of these employ a theorettcal perspecttve dertved from the work of Foucault Such work has mlluenced our own, but thts arttcle ts motivated m part by the destre to locate accountingwtthin a more explicit theory of interests

COST ACCOUNTING,LABOURAND CONGLOMERATES managerial control through the destruction of subcontracting and craft controls later in the century, and it shows that a major feature of the General Motors system o f the 1920s was the insulation o f shareholders' dividends from e c o n o m i c fluctuation by throwing the costs of this o n t o the workforce. Because s o m e of these usages of accounting information d e p e n d e d u p o n a lack o f resistance from organised labour, it is b y no m e a n s accidental that Johnson and Kaplan's a p o g e e o f m a n a g e m e n t accounting d e v e l o p m e n t was also an age of anti-union w o l e n c e and espionage. The c o n t e m p o r a r y implicatton is that certain o f the "relevances" of 1920s' a c c o u n t m g control systems can only be r e s u r r e c t e d in c o n t e x t s w h e r e the resistance of labour is weakened. A labour process approach is also useful in reassessmg J o h n s o n and Kaplan's thests of accounting stagnation, according to which the influence o f financial accountants and academics was sufficient to arrest the d e v e l o p m e n t of m a n a g e m e n t a c c o u n t a n c y for o v e r sixty years within the m o s t dynamic e c o n o m y in the capitalist world. Here, the historical record suggests that the post-1930s' decline of interest in accounting for process efficiencies was actually the p r o d u c t of the N e w Deal era, in w h i c h trade unions w e r e far m o r e able to resist lay-offs and the speed-up, and o f increasing industrial concentration which enabled e m p l o y e r s to displace the costs o f welfarist e m p l o y m e n t strategies o n t o semi-monopolised p r o d u c t markets. In this n e w socio-economic context, the relevance o f budgetary controls m a y have changed, rather than declined Cost accounting c a m e to b e used as the instrument o f m o n o p o l y pricing policies designed to p r o t e c t a partial accord b e t w e e n capital and certain sectors o f the labour force. H o w far this a c c o r d will persist into the 199Os is an o p e n question, but to the extent that tt does so, there m a y b e resistance to Johnson and Kaplan's call for a reassertion of accounting for process efliciencies

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TRANSACTION COSTS AND THE DEVELOPMENT OF MANAGEMENT ACCOUNTING: A CRITIQUE OF THE THEORETICAL FRAMEWORK OF "RELEVANCE LOST" Relevance Lost ts not considered h e r e from the standpoint of managerial prescription; the reader can find this elsewhere ( e g. Noreen, 1987) Rather, the c o n c e r n is with the partial nature of the interpretations of history which underlie tts thesis Since this p r o b l e m stems, m part, from certain inadequacies in the transaction cost framework e m p l o y e d b y Johnson and Kaplan, it is necessary to review these before p r o c e e d i n g to matters of histortcal substance. Most of the p r o b l e m s stem from the assumption in transactton cost theory that changes in orgamsational forms and control systems are universally driven by searches for efficiency, whereas it is an elementary feature of capitalist e c o n o m i c life that there are also gains to be made from the extension and intensification of labour and from the monopolisation o f p r o d u c t markets. In fact it ts only fair to point out that the fine detail of Johnson and Kaplan's history often does acknowledge issues of labour intensification and m o n o p o l y - - see, for example, the DuPont case study (Johnson, 1975). The critique which follows, therefore, is not a wholesale challenge to their factual account but, rather, to their broadbrush interpretation The contract image o f organisation Basically, transaction cost theory (Williamson, 1970, 1975) asserts that the concentration of diverse e c o n o m i c activities within large corporations is viable only w h e n managerial c o o r d i n a t i o n of these achieves significant economies, as c o m p a r e d to the aggregate result w h e n the same operations are separately managed and co-ordinated through market transactions. The costs of securing coordinatton are called "transaction costs". The potential for gains from r e d u c e d transaction

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costs m seen as c r e a t m g opportunities for both increased profits and r e d u c e d p r o d u c t costs. Simultaneously, therefore, they explain the expansion of capitalist enterprises into functionally related activities, and the success of those companies w h i c h do so. Moreover, they are held to explain innovattons in systems of organisation and accounting which achieve further i m p r o v e m e n t s in managerial co-ordination Transaction costs, evidently, bear a great weight of explanation in the theory. Yet as P e r r o w ( 1 9 8 1 a ) has p o i n t e d out, it ts far from clear w h a t they are. Whilst it is clear enough that there are gains to be achieved from combining single-activity enterprises, with the object o f eliminating their separate profits, it is clear that Williamson and his followers see the r e d u c t i o n of transaction costs in m u c h broader terms, This is achieved b y visualising all relationships of organisational co-ordination as contracts. T h r o u g h this device, the act of settling the f o r m o f o n e of these "contracts" can b e seen as a transaction. O n this basis it ts claimed that there is potential for reduced transaction costs in devising i m p r o v e d systems of organisation and co-ordination. Setting aside the neglect of p o w e r relauonships implicit in the contract tmage of organisation, it is still not clear that even this extended definition o f a "transaction" can c o v e r all i m p r o v e m e n t s in co-ordination, let alone all increases in efficiency. For example, h o w can clatms that c o r p o r a t e managers may achieve i m p r o v e d investment decisions, as c o m p a r e d to capital markets, b e described as a reduction in transaction costs~ Williamson & Ouchi's answer to these points ( 1 9 8 1 ) c o n c e d e d that transaction costs have n e v e r b e e n formally defined but claimed that a definition could b e adequately approached through a series of illustrattons. This weak reply reinforces the impression that the p r o b l e m ts fundamental. Possibly for this reason, Johnson and Kaplan make no a t t e m p t to resolve the issue, and so transaction cost theory m their hands stmphfies to the " c o m m o n s e n s e " hypothesis that d e v e l o p m e n t s in forms of

organisation and accounting are driven by searches for efficiency Whilst still contentious, this at least has the virtue of intelligibility.

The assumption o f competitive markets Transaction cost theory is based o n the idea that, m o r d e r to be successful, managertal coordination must compete with market coordination. Tacitly this assumes competitive p r o d u c t markets. O f all the areas of e c o n o m i c debate m which this assumptton mtght b e made, that on the formation of giant mtegrated corporations must be just about the least appropriate Using case material, P e r r o w ( 1 9 8 1 a ) has made the obvious point that acquisitions and mergers may b e carried out with m o n o p o l y profits in view, rather than gains from efficiency. In fact Nelson ( 1 9 5 9 ) has shown that the majority of mergers m the great wave of 1 8 9 5 - 1 9 0 4 w e r e horizontal, rather than vertical, and that m o s t resulted in corporations which dominated thetr p r o d u c t markets Williamson & Ouchi ( 1 9 8 1 ) reject thts argument on the dubious and irrelevant grounds that any costs to the public arising from "modest" increases in market power, are m o r e than offset b y the gains in efficiency possible in large monopolistic corporations. Significantly, Chandler's c o m m e n t on the issue ( 1 9 8 1 ) avotded a defence of transaction cost theory as such. Nevertheless, he sought to maintain the n a r r o w e r thesis that managerial co-ordination was vital to the competitive success of m e r g e d corporations on the grounds that only those horizontally-merged companies which w e n t on to achieve the additional e c o n o m i e s of vertical integration w e r e ultimately successful. Logically speaking, even this argument is unconvincing, since one might construct a reverse chain of causality; namely that managerial hierarchies and controls are a c o n s e q u e n c e of firms moving closer to monopoly and that m o n o p o l y profits are essential to the success of managerial control in vertically integrated enterprises Whatever the eventual o u t c o m e of these debates, tt is clear that they have m o v e d on from blanket assumptions of competitive

COST ACCOUNTING,LABOURAND CONGLOMERATES markets (Perrow, 1981b). It seems established that theories of the real-world d e v e l o p m e n t of large organisations, and of the role of accounting therein, n e e d to take account of monopoly. In this vein, this p a p e r will argue that the p u r p o s e of budgets in "core" corporations gradually changed after the 1930s, to b e c o m e an instrument of m o n o p o l y prtcing policies w h i c h created the basis for an a c c o m m o d a t i o n b e t w e e n e m p l o y e r s and certain sectors of the labour force.

Microeconomics as social theory The contract image of organlsational relationships and the assumption of competitive markets are special cases of a m o r e general intellectual m y o p i a in transaction cost theory. As Robins (1987, p. 75) has argued. Although transaction~cost theory offers powerful tools for understanding the tmphcattons of specific soctal mstttuttons for economic acuwty, it is incapable of explaining historical tramformauons m those m s u m . Uons The transacuon-cost approach ulttmately is an extenston and apphcauon of micro-econormc theory, and tts capactty to describe reahty is bounded by the hmtts of the theory m that is, by the very mstituttonal constraints that [it] would attempt to explain. The transaction cost approach thus stands accused o f trying to make history backwards by rationalising past events through the institutional lenses o f the present, particularly in its assumption that all organisational relationships can be visualised as market transactions. By means o f this device, all is explained by the conventions o f m i c r o e c o n o m i c s to the exclusion of social and political factors. But, to quote Robins o n c e again, "the history o f nineteenthcentury d e v e l o p m e n t s is less a story of hierarchy displacing markets than a tale of social and political centralisation creating the conditions for large-scale p r o d u c t i o n of goods (Knowles, 1967)" (Robins, 1987, pp. 76-77). The p r o b l e m with an inordinate reliance upon transaction cost theory is that important aspects o f history are excluded along with divergent e c o n o m i c perspectives. The danger is that history b e c o m e s written as an extension of

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c o n t e m p o r a r y dominant ideologies, sanitised of discomforting explanations of capitalistic deve l o p m e n t and the role of large corporations, educational institutions and the state. By neglecting an examination of alternatives foregone, such history blinds rather than enlightens by portraying the status quo as inewtable.

Contro~ efficiency and effort Transaction cost theory confuses gains from increased effort with those from mcreased efficiency In consequence, it confuses managerial controls aimed at increasing effort levels with those directed towards increasing process efficiencies This t e n d e n c y is at its m o s t visible in Williamson's (1975, 1980) treatment of the e m p l o y m e n t contract. In law, this is incomplete in the sense that the e m p l o y e r formally receives, not a set amount and type of work, but the right to direct labour ("labour p o w e r " in Marxist terminology). Williamson attempts to explain this form of contract, and the consequent apparatus of control o v e r the labour process, as a minimisation of transaction costs, from which b o t h parties benefit. In this manner a tacit assumption is imported into the theory, that managertal control is directed solely towards t m p r o v e m e n t s in efficiency rather than increases in effort levels. According to Williamson, variations in the precise task to be p e r f o r m e d and difficulties of monitoring the possibility o f opportunist behaviour on the part o f workers make the negotiation of contracts covering all possible contingencies e x t r e m e l y costly. Thus a form o f contract in which employers have the right, within limits, to allocate tasks and specify effort levels is seen as a less costly alternative, from which b o t h parties can benefit. In particular, the individual worker's lost opportunities for mtsappropriation and shirking are clmmed to be m o r e than c o m p e n s a t e d by the gains from preventing others from doing so. Thus authority relationships within the firm are depicted as the o u t c o m e of a notional process of rational e c o n o m i c exchange b e t w e e n workers and the firm, in which output efficiency is maximised.

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T h i s fanciful a n d i n d i v i d u a l i s t i c g e n e s i s n o t a b l y g l o s s e s o v e r t h e issue o f w h y t h e c l a i m e d e c o n o m i e s in t r a n s a c t i o n c o s t s s h o u l d b e a c h i e v e d b y a s s i g n i n g t h e r i g h t t o fill in t h e g a p s in t h e e m p l o y m e n t c o n t r a c t t o capital o w n e r s h i p , in t h e p e r s o n o f t h e e m p l o y e r , r a t h e r than, say, t o e l e c t e d r e p r e s e n t a t i v e s o f t h e w o r k f o r c e . M o r e , it b u r i e s all o f t h e gains t o capital from the right to direct labour within a n e u t r a l - s o u n d i n g r e d u c t i o n o f t r a n s a c t i o n costs. M a r g i n s o n ( 1 9 8 6 , p. 5 ) has c o m m e n t e d : The concept of efftctency utthsed by Wtlharuson and Aoki ts not well specifietL An increase m eflictency can be defined as an mcresse m output for given inputs However there ts no certainty that m the case of labour mput the last condition will hold A strengthening of hterarchy can result in an increase of labour input, through the extracuon of labour effort, as well as an mcrease m output. The eflictency tmphcauons of strengthening hterarchy are indeterminate - - both inputs and outputs could have increased Hence the argument (Williamson, 1980) that the existence of an anthonty relatton can be taken as evtdence of enhanced efficiency m achtevmg common goals can be confronted with a plausible alternative hypothesis luerarchy reflects the abthty of those who own and control the firm to ensure that their goals dominate the goals of those employed m the firm Supporting evtdence for flits alternaUve hypothesis can be drawn from the work of Marglm (1974), Pollard (1965) and Thompson (1967) who tllustrate how the msttmtton of hierarchy through the factory system had tts origins m a search by employers for more effecttve means of coercing workers to work. Factory orgamsauon was associated with worlang more days of the week, longer hours m the day, and more mtenstvely T h e s e c o m m e n t s i n d i c a t e t h a t an a d e q u a t e history of capitalist forms of organisauon w i n c l u d i n g t h e r o l e t h e r e i n o f a c c o u n t i n g information -- needs to take cognisance of their part in t h e e x t e n s i o n a n d i n t e n s i f i c a t i o n o f l a b o u r , as w e l l as o f t h e i r a b i l i t y t o p r o m o t e t e c h n i c a l p r o c e s s eflficiencies.

Accounting information and the rational decision-making model of management T h e t r a n s a c t i o n c o s t v i e w o f m a n a g e m e n t as a s e a r c h for p r o c e s s efliciencies has c o n s e quences for Johnson and Kaplan's conception o f t h e m a n a g e r i a l r o l e o f a c c o u n t i n g inform-

ation. T h e r e i n it is s e e n as d a t a t o b e f e d i n t o a rational decision-making process Thus the quality of managerial decisions on production p r o c e s s e s a n d r e s o u r c e a l l o c a t i o n is s e e n as d e p e n d i n g fairly s t r a i g h t f o r w a r d l y o n t h e u m e liness, a c c u r a c y a n d r e l e v a n c e o f c o s t inform. ation. W i t h i n this s c h e m a , c o s t d a t a a r e s e e n in realist t e r m s . J o h n s o n a n d K a p l a n w r i t e freq u e n t l y o f t h e " a c c u r a c y " o f c o s t s or, o n t h e n e g a u v e side, o f t h e i r " d i s t o r t i o n " . W h i l s t s t r e s s i n g t h a t c o s t d a t a n e e d to b e a p p r o p r i a t e t o t h e d e c i s i o n s t o b e taken, t h e y n e v e r t h e l e s s b e l i e v e that, w i t h i n t h e p a r a m e t e r s o f relev a n c e , t h e q u a l i t y o f c o s t d a t a is i m p o r t a n t l y d e t e r m i n e d b y its a c c u r a c y . If, o n t h e o t h e r h a n d , m a n a g e m e n t is t a k e n to be about the control of labour and of junior m a n a g e r s , t h e issue l o o k s different. F r o m this p e r s p e c t i v e , a c c o u n t i n g i n f o r m a t i o n is t o b e j u d g e d b y t h e r e s u l t s w h i c h it achieves, r a t h e r t h a n its n o t i o n a l a c c u r a c y . T o t a k e a familiar e x a m p l e , t h e classical l i t e r a t u r e o n t h e b e . h a v i o u r a l a s p e c t s o f b u d g e t s (e.g. Caplan, 1971 ) d i s c u s s e s t h e effects o f s e t t i n g t a r g e t s at v a r i o u s levels o f difficulty, n o t w h e t h e r t h e s e levels a r e " c o r r e c t " in s o m e essential sense. O n this view, t h e a c c u r a c y o f b u d g e t s a n d i n t e r n a l attribut i o n s o f c o s t m i g h t b e r e g a r d e d as i r r e l e v a n t , s o l o n g as t h e y s e r v e t o focus m a n a g e r i a l effort m the directions desired by those who control the o r g a n i s a t i o n J o h n s o n a n d Kaplan d e p r e c a t e t h e a l l o c a u o n o f o v e r h e a d c o s t s o n t h e basis o f direct labour expended, on the grounds that this p r a c u c e o v e r s t a t e s t h e c o s t s o f labourintensive processes, thus leading to unsound s t r a t e g i c d e c i s t o n s . But this a s s u m e s that strategic decisions on the product mix are permae n t l y o n t h e agenda, w h e r e a s t h e r e m a y b e p h a s e s o f c a p i t a l i s t d e v e l o p m e n t w h e r e this is not the case Given the monopoly power of c e r t a i n A m e r i c a n c o r p o r a t i o n s in t h e d a y s b e f o r e t h e p a m c o v e r J a p a n e s e c o m p e t i t i o n , for example, product costings seem to have had m o r e significance for p r i c i n g p o l i c y t h a n for m a n u f a c t u r i n g strategy. M o r e o v e r , e v e n w h e r e competiuon places cost reduction on the agenda, t h e r e is s o m e t h m g t o b e said for t h e i n a c c u r a c y o f t r a d i t i o n a l furl-costing systems,

COST ACCOUNTING, LABOUR AND CONGLOMERATES

since these serve to direct managerial efforts to cut unit labour costs towards labour-intensive processes, which, as will appear in this paper, are precisely w h e r e resistance from labour is likely to b e at its weakest.

Explaining accounting stagnation Much of the rhetorical force of Johnson and Kaplan's version of m a n a g e m e n t accounting history derives f r o m the fact that it contains a contradiction. If the search for gain from r e d u c e d transaction costs was sufficient to drive the evolution o f organisational forms and accounting systems u p to the mid-1920s, w h y did this process cease thereafter? Necessarily answers have to b e i m p o r t e d from outside the transaction costs framework. Johnson and Kaplan find t h e m in the imposition of financial reporting conventions on management accounting t e c h n i q u e b y professional accountants and a takeover o f research by academics interested only in abstract simplified problems. Thus Kaplan's diatribe against the shortcomings of c u r r e n t m a n a g e m e n t accounting is reconcried with Johnson's optimistic v i e w o f the a u t o n o m o u s evolution of c o r p o r a t e forms and accounting technique. Into the bargain, plausible culprits are produced, since not even their best friends could p r e t e n d that accountants are not p r e o c c u p i e d with financial reporting or that academics are not academic. Whilst this m a y constitute a solution to the logical p r o b l e m s created b y framing accounting history within transaction cost theory, there remains an air o f unreality about it To reduce such accounting p r o b l e m s to accountants, be they academics or practitioners, seems to be a case of blaming the m o n k e y rather than the organ-grinder. W e are asked to believe that the c o m p a r a t i v e l y m i n o r vested interests of accountants and academics have b e e n able to i m p o s e their intellectual habits u p o n managem e n t practice in America's giant corporations for o v e r sixty years, to the considerable detrim e n t o f their profitability. In fact, the independ e n t influence o f accounting professionalism on c o r p o r a t e practice m a y well have b e e n minireal, b o t h in the v i e w o f c o n t e m p o r a r y obser-

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vet's (Berle & Means, 1933, p. 2 0 2 ) and m o d e r n accounting historians (Merino & Neimark, 1982). Speaking during the 1930s, Landis o f the SEC had this to say: The tmpact of almost dady uits with accountants, s o m e of them called leaders m thetr professton, oRen leaves httle d o u b t that thetr loyalittes to m a n a g e m e n t are stronger than thetr sense of responstbfltty to the investor (Carey, 1979, p 2 6 2 )

As against the questionable thesis o f financial a c c o u n t m g dominance, it is important to consider the possibility that the cost accounting systems which stand accused of f a i l i r l g American enterprise have actually persisted because they have s o m e offseRing managerial advantage which lies b e y o n d the grasp of transaction cost theory. By considering the evolution o f accounting systems as an aspect of overall changes in the pattern of control of the labour process, the present p a p e r attempts precisely this.

Social transformation and management accounting technology: towards a labour process approach Johnson and Kaplan are not unaware of the relevance of the capital-labour relationship to the operation of accounting information systems Noting that early cost accounts w e r e c o n c e r n e d with labour control, they remark that "arguments about the causes, costs, and possible benefits to workers o f surrendering control o v e r their labour in return for a fixed income have a b o u n d e d since Ricardo and Marx" (Johnson & Kaplan, 1987, p. 22). But the concerns of political e c o n o m y are cast aside w h e n they self.consciously limit their remit to "the implications for accounting of the complications that factory managers faced o n c e workers w e r e e m p l o y e d at a wage" (ibid. p. 22) The implication appears to be that the p r o b l e m s of securing compliance from the workforce are sufficiently addressed through the institution of the wage relationship, leaving managers flee to search for process efficiencies. The notion that the p r o b l e m of extracting w o r k from the workforce cannot be solved on a

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once-for-all basis, and that it actually lies at the root of many of the "comphcations" for accounting, is thus excluded from consideration. It is this questionable intellectual procedure which underlies Johnson and Kaplan's theorisation of changes in management control and capitalistic development through transactton cost theory In this vein, it is stated as fact that "the goal of the scientific management engineers, such as Frederick Taylor, was to improve the efficiency and utilisation of labour and materials" (Johnson & Kaplan, 1987, p. 10). This ts demonstrably partial, since Taylor himself stated that his system was a means of eliminating "systematic soldiering" (group output restriction) on the part of the workforce (Taylor, 1903). More generally, the notion that searches for efficiency under the pressure of competitive markets were the primary drtve behind the development of capitalistic organtsations and scientific management is tughly contenttous and has been strongly disputed by historians and radical political economtsts, e.g M o n t g o m e r y ( 1979, 1987), Braverman (1974), Clawson (1980), Nelson (1974). I n t e r alia, all of these writers reject technologmal determintsm and e c o n o m i c imperatives as a satisfactory basis for explaming changes in the modes of management control. In contrast to the assumed self-equtlibrating behaviour of firms and markets and the social harmony trnplictt m transaction cost research, they describe h o w social conflicts w e r e e m b e d d e d m histormal changes and h o w instttutions such as the state and trades unions helped to shape controls at the point of production. Transaction cost theory tends to deflect attention from such tssues rather than shed light on them It also tends to portray technological change

(in this case, of management accounting systems) as the p r o d u c t of a continuous evolutionary selection of more efficient forms, rather than as discontinuous, and crisisMriven (Schumpeter, 1942). In this vein, Johnson and Kaplan portray accounting developments up to the mid-1920s as a steady accretion of knowledge and practice spurred on by firms and individuals operating within competitive and self-equilibrating markets. Such assumptions are called into question by the accumulating evidence ( s o m e of which will be reviewed in this paper) that new technologies and orgamsational forms are partly responses to problems of capital accumulation and labour control. Clearly, a comprehenstve historical analysis of management accounting along these lines is beyond the remit of a single paper. What follows, therefore, ts an attempt to sketch out the form of such a history, focusing upon h o w management accounting has developed in relation to the control of labour within increasingly concentrated p r o d u c e r markets m North America. 2

A LABOUR PROCESS APPROACH TO THE DEVELOPMENT OF SYSTEMS OF ORGANISATION AND ACCOUNTING Johnson and Kaplan analyse a perceived crisis in management accounting by examining its historical origins In a notable advance on the '~who did what first?" school of accounting history (see Flamholz's 1983 c o m m e n t s on Johnson's earher work), they relate the early development of cost accounting to the evolutton of orgamsational forms w h i c h took place in American industry between 1850 and 1930. This development is analysed wtthin the frame-

2 Tilts paper ts dtrected at the issues rinsed m the opemng paragraph, namely how management accounting developments have been related to the control of labour The paper dehberately concentrates upon manual labour m manufacturing orgamsattons It does not exanune how costing was assoctated wtth the growth of management and tts control as a labour process, or the role of accountingknowledgeand business schoolsm reproducmg and legttamatingmanagement The paper also concentrates almost exelustvely on North Amertcanbusiness history It does not seek to deny that, Inter alia, due to different cultures, state acttons and patterns of class forrnatton, accounting developments elsewhere (e g. Germany,Japan and the U IC) have been stgndicanflydifferent Some dtscusston of these points can be found m Hopper (1990)

COST ACCOUNTING, LABOUR AND CONGLOMERATES

w o r k o f transaction cost theory (Williamson, 1970, 1975) and is depicted as occurring in a n u m b e r of stages, each of which is illustrated from Johnson's studies of early organisations and accounting systems.

The initial proletarianisation o f the labour force The first stage o f management accounting d e v e l o p m e n t described by Johnson and Kaplan, came with the end of putting out and other forms o f subcontracting in single-product firms. In their account, the driving force behind this d e v e l o p m e n t was a belief on the part of entrepreneurs that gains in profitability could be obtained by increasing the efficiency of the conversion process and from improvements in labour productivity. In pursuit of these aims, systems o f accounting for prime costs w e r e developed. These enabled owners and entrepreneurs to monitor and compare the performance of workers and their supervisors, to encourage workers to achieve "company goals" and to root out "slack behaviour". In these single activity organisations there was no d e v e l o p m e n t o f measures of efficiency with which capital was employed, since there w e r e no decisions to be made on alternative uses of capital. In any case, the rapid expansion of American markets from 1820 to 1870 ensured that a control o f operating costs was sufficmnt to achieve satisfactory long-run returns on capttal. The key case-study used by Johnson and Kaplan to substantiate this part o f their thesis is that o f the accounting system of Lyman Mills (Johnson & Kaplan, 1987, p. 24 ft.). This was one of a n u m b e r of textile factories sited in the N e w England towns o f Waltham, Lowell and Holyoak, which w e r e o w n e d by a close-knit group o f financiers called the "Boston Associates". These employers shared technological information, used c o m m o n selling agents and managed their factories along very similar lines. Wage rates and working rules, for example, w e r e identical throughout the group (Dublin, 1979). As will shortly appear, a n u m b e r o f the Boston Associates' factories have

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been studied by labour historians, and these studies provide an illuminating commentary on Johnson and Kaplan's analysis. Essentially, the Lyman Mills accounting records consisted of records of operatives' wages and other prime costs of production which w e r e inspected weekly by the treasurer at company headquarters in Boston. Johnson and Kaplan's interpretation is that this information was used by the management to monitor and compare the performance o f individuals and of groups of workers with the object of increasing efficiency In contrast to Johnson and Kaplan's approach, writings in the labour process tradition emphasise that much of the gain in profitabfltty from the early factory organisation of production came, not from increases in the technical efficiency of the conversion process, but from the ability of owners/entrepreneurs to mtensify labour through close disciplinary control and to extend the working day (Clawson, 1980) Operatives in the Boston Associates' factories, for example, worked 12 hours per day, six days per week (Dublin, 1979, p 59), throughout the labour intensification process to be described presently. Similarly, Marglin (1974), has noted that many early English factories employed precisely the same production technology as the handicraft system which they displaced, indicating that their initial competitive advantage stemmed not from economies of scale, technological innovation or some conjectural reduction o f transaction costs, but from an increased enhanced ability of owner-managers to discipline and drive labour in the factory setting (see also Gordon et aL 1982, p. 58). In this phase of capitalist development, which Gordon et aL ( 1 9 8 2 ) call initial proletariamsation, labour processes remained for the most part untransformed. In the Marxist terminology of labour process writers, labour had b e c o m e formally subordinated to capital in the sense that workers w e r e n o w employees, but there was, as yet, little real subordlination in the sense that production processes w e r e designed and controlled by employers and their

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agents. The major exception, in the American context, was the New England textile industry ( o f which Lyman Mills was, of course, a part). From the outset, this employed the mechanised p r o d u c t i o n methods pioneered in Great Britain (Lazonick, 1981; G o r d o n et aL, 1982, p. 69; Burawoy, 1985). Since the workforces of the day w e r e accust o m e d to the rhythms of agricultural production, the ability of early factory regtmes to increase labour productivity d e p e n d e d on a harsh discipline of time and task (Thompson, 1967). Partly for this reason, factory work was unpopular and the supply of labour frequently d e p e n d e d upon a lack of alternative sources of livelihood. Some early American textile mills, for example, recruited whole famdies from the depressed agriculture o f New England on the so-called "Rhode Island system" (Ware, 1931; p. 199). The Boston Associates, on the other hand, o w e d much of their success to the provision of company dormitories for single '`yankee farm girls" willing to w o r k for a short period in order to supplement the family income before returning to marriage and the land (Ware, 1931; Dublin, 1979, p. 16, Gordon et aL, 1982, pp. 6 8 - 6 9 ) . Besides serving to attract labour, this system also exhibited some of the features of "total institutions" (Goffman, 1968), creating the conditions for a disciplinary regime which extended deep into what w o u l d nowadays be considered to be the workers' private lives (Gersuny, 1976). Whilst Johnson and Kaplan are too c o m p e t e n t as historians to be unaware of these features of the organisation of Lyman Mills, or to ignore the potential of the accounting records for increasing effort levels, their interpretation is distorted by their commttment to transaction cost theory. They write: "The early cost accounts of Lyman Mills also offered incentives and controls to mitigate slack behaviour that might otherwise disstpate the productivity gains inherent in mechanised, multiprocess systems" (Johnson & Kaplan, 1987, p. 31) Thus an intensification of labour is represented as an implicitly costless reduction of "slack behaviour" and the productivity gains

therefrom are credited to mechamsation and integration. The facts certainly bear a different interpretation. The accounts in question date from the mid-19th century, a period w h e n the Boston Associates w e r e faced with failing prices and rising inventories of unsold cloth as a result of intensified c o m p e t i u o n from England. In 1834, acting in concert, they imposed a wage cut of about 1896 in all their factories, so precipitating an abortive strike. In 1836, there was a similarly unsuccessful strike against an increase tn the price of board and lodgings. By the time further wage cuts w e r e imposed m 1837 and 1840, the "Yankee farm gtrls", having alternatave means of survival, were beginning to leave the mills and, from 1840 onwards, their place was increasmgly taken by Irish tmmigrants w h o had little choice but to accept the worsening conditions. The factories themselves w e r e managed by on-site agents w h o reported weekly to a chief executive and treasurer based in Boston. Whilst the pressure to increase production or reduce costs came initially from the treasurer, agents had substantial autonomy as to h o w this was done, Though there w e r e some technical process improvements, their main responses w e r e the stretch-out (an increase in the number of machines supervised by each operative), the speed-up (an increase in the operating speed of the machines) and a premium bonus system w h e r e b y the overseer whose workers p r o d u c e d at least unit cost received a cash payment which could amount to as much as $100, compared to an annual salary of $600. Indeed this latter incentive was blamed for a p r o n o u n c e d deterioratton in the relationships b e t w e e n overseers and the "girls". As a result of these measures, the workload of the spinners and weavers more than doubled between 1840 and 1854 whilst wages remained substantially the same. Indeed it was the exphcit policy of the Boston Manufacturing Company in Waltham (and probably of other factories in the group) to adjust piece-rates so that earmngs remained steady whilst speed-up and stretch-outs w e r e imposed - - quite apart from actual reductions in real wages. The

COST ACCOUNTING, LABOUR AND CONGLOMERATES

records used to achieve these results w e r e those o f the paymaster, to w h o m w e r e reported monthly figures for output, days w o r k e d and earnings o f each operative (Ware, 1931, pp 230-272; Dublin, 1979, pp. 100-109). It is not clear from Johnson and Kaplan's account w h e t h e r their interpretation of the uses made o f accounting information in Lyman Mills is based o n records similar to these, or on others. W h a t / s clear, however, is that s o m e of the accounting information in the Boston Associates' factories o f the mid-19th century was clearly implicated in the intensified exploiration of labour with which the employers responded to increased competition. O n c e it is established that accounting information is used to redistribute the rewards from p r o d u c t i v e labour, rather than to increase the efficiency with which it is employed, it needs to be seen in the c o n t e x t o f other labour process controls, since such a redistribution may well be resisted. For example, records which indicate w h e r e piece-rates "should" be cut are of little use unless the possibility o f acting on the information has already b e e n established. As has already b e e n pointed out, the Boston Associates' factories w e r e run as a unit, with identical wage structures, conditions and lists of disciplinary rules. In order to solve the p r o b l e m of labour stability, the "girls" w e r e required to sign yearly contracts, with defaulters blacklisted throughout the group. Departments within the factories w e r e controlled by ( m a l e ) overseers w h o had absolute p o w e r to hire, fire and discipline the workers. Gersuny's ( 1 9 7 6 ) study o f the records of dismissals from one factory in the group shows a pattern of individual victimisation, sometimes for "combination" (trade union activity), coupled with a managerial c o n c e r n to establish their own dominance and what they considered to be p r o p e r standards of deference in the workforce, in the light o f the prevailing gender stereotypes o f the time. In the c o m p a n y dormitories "moral police" controlled out-of-work behaviour, which, again, included a prohibition on "combination". By these means, the Boston Associates and their agents maintained the control o f the

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labour force upon which depended their ability to act on the labour cost information generated by their accounting records. Internal contract a n d the role o f a c c o u n t i n g in its d e m i s e

The recruitment and control of sldlled labour posed special problems for the early industriafists, especially in America w h e r e it was scarce (Habakkuk, 1967) To some extent, the supply, as with semi-skilled labour, depended on a lack o f alternatives. Some industries w e r e able to depend on a supply of ex-handicraft workers driven out of business by the emergent capitalist enterprises ( G o r d o n et aL, 1982, p. 57). In the particular case of the New England textile industry, w h e r e the production process was an import or reinvention of English technology (Lazonick, 1981 ), low wages in England created a supply of skilled immigrant workers, despite laws forbidding their exodus (Ware, 1931, p 203). For the employers, external recruitment from these sources had the important consequence that craft knowledge was initially possessed by the workers rather than themselves, with skills passed on by senior workers to their junior counterparts through systems of apprenticeship. With this situation, the problems of delegated control began. Whilst salaried managers and foremen existed, they w e r e not the norm. With Adam Smith (and like contemporary agency theorists), most 19th century owner--managers believed that the security of fixed salaries could only lead to "idleness, negligence and profusion" (Smith, 1970; see also Clawson, 1980, p. 68). Instead, they preferred to rely on the profit motive, in a variety of forms of internal subcontracting, some of which cast skilled craftsmen or heads of households in the role of mternal contractors (Littler, 1982). Besides providing a clear motivation for contractors to extract the most out o f the labour they employed, the subcontracting relationship had several other advantages for employers: it largely eliminated the need for them to be conversant with the production process (important so long as craft workers still

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possessed the "secret knowledge of production"), it spread risk, and it avoided large administrative overheads, partly by acting "as a substitute for accounting" (Littler, 1982, p. 6 7 ) T h o u g h internal contract began to disappear in the latter half of the 19th century, tt cannot b e assumed that thts was a c o n s e q u e n c e of the e c o n o m i c inefficiencies of an archaic system or a technological conservatism rooted in a monopolisation of p r o d u c t i o n knowledge by the workforce. Clawson ( 1 9 8 0 ) points out that m a n y of the 19th century factories run on the internal contract system (such as the Winchester Repeating Arms C o m p a n y ) w e r e large, c o m p l e x and technologically progressive, with m a n y examples of technologtcal innovation instigated b y the subcontractors. In fact the eventual displacement of internal contractors from Winchester Arms resulted in increased costs for a n u m b e r o f years, probably because the college-trained executives w h o replaced t h e m lacked their practical production know-how. Clawson suggests that the real reason for the displacement of the internal contractors lay in their ostentatious displays of wealth m times of prosperity. Their tendency to turn up for w o r k in horse-drawn carriages, for example, was greatly resented b y e m p l o y e r s b o t h as visible h a e m o r r h a g e of profit and as contrary to their ideas on social rank. Thus the employers' gut response to e c o n o m m d o w n t u r n was a systematic a t t e m p t to squeeze their contractors' profits Clawson's account of events in a n u m b e r of American companies in the last quarter of the 19th century indicates that the d e v e l o p m e n t of labour cost records was integral to this process. Until the 1870s, contractors in the metalw o r k i n g industries w e r e paid according to the contract price and the n u m b e r of units dehvered. Compantes kept no record of the hours w o r k e d b y the contractors' employees, or of h o w m u c h and on what basis they w e r e pard There was therefore no c h e c k on contractors' profits, either overall or on particular tasks. Amongst others, the Singer c o m p a n y decided to change all this b y paying employees

directly. According to a c o n t e m p o r a r y source, what "looked like a very innocent and unimportant c h a n g e . . , was really the thin edge of the w e d g e which was ultimately to deprive the contractor of his profits" (Clawson, 1980, p. 117). Of necessity, the direct p a y m e n t of wages called for the creation of records, and these also enabled the c o m p a n y to obtain information on the wage cost of each item of p r o d u c t i o n and so discover which contract prices w e r e high in relation to the contractors' costs. This information was subsequently used to renegotiate contract prices and so reduce the contractors' income. Eventually, contractors b e c a m e reluctant to bid on certam jobs wtth the result that, over time, fewer and fewer of the c o m p a n y ' s workers w e r e e m p l o y e d through them. Johnson and Kaplan have comparatively httle to say on internal contract. However, they do locate "the scientific quest for knowledge about efficiency" ( p 4 8 ) in the c o n t e x t of metalworking firms w h i c h w e r e originally run on this system. Whilst noting that internal contracting meant that the beneficiaries of effictency i m p r o v e m e n t s tended to be contractors and their workers rather than ownership, Johnson and Kaplan nevertheless see the motive for improved record-keeping as a "desire for closer control o v e r increasingly c o m p l e x and specialtsed manufacturing tasks" rather than a redistrtbution of the benefits from innovation. According to J o h n s o n and Kaplan, moreover, the t m p r o v e m e n t in record-keeping was accomplished by encouraging workers to record their o w n acttvities in return for a share in the gains from t m p r o v e d efficiency. By contrast, Litterer's study ( 1 9 6 3 ) indicates that workers w e r e not trusted in this respect and that specialist time-keepers w e r e e m p l o y e d for the purpose. The discrepancy in these accounts is marked. For Johnson and Kaplan, accounting developments appear as part of a drive for efficiency. To Clawson, the immediate stimulus was a desire to approprtate the profits of internal contractors, at the expense, initially at least, of increased costs. To Johnson and Kaplan, the d e v e l o p m e n t of w o r k records had relatively

LObVl ACCOUNTING,LABOURAND CONGLOMERATES benign c o n s e q u e n c e s for the Workforce. To Litterer, o n the o t h e r hand, the result was the imposition of an additional system of activity surveillance, in w h i c h it is not too fanciful to see the origin o f the future expansion of supervision. The suggestion is that the creation of internal cost records marks the beginning of a transfer of financial knowledge from the w o r k e r to the factory owner, which not only p e r m i t t e d rewards from innovation to flow in the same direction, but also provided the potential for making visible w h e r e returns might best b e c r e a m e d off and labour b e intensified and disciplined The question of the reasons for the decline of internal contract is important for Johnson and Kaplan's history. As they point out, it was the establishment of costing systems specifically in the metal-working industries, w h e r e internal c o n t r a c t had previously b e e n dominant, which laid the foundation for the later d e v e l o p m e n t of standard costing systems b y the American industrial engineers. If, as is suggested by Clawson's work, the establishment of these early costing systems had nothing to do with the efficiency of the conversion process (and, in the event, actually reduced it), but was a means of redtstributing profits, the general applicability of J o h n s o n and Kaplan's historical model is t h r o w n into question. If relatively p e r m a n e n t changes in systems of organisation and accounting can b e s h o w n to o c c u r which have nothing to d o with gains in efficiency ( o r reductions in transaction costs), it follows that the latter cannot b e a sufficient explanation of the former.

Scientific Management and the homogenisation of labour The s e c o n d major phase of m a n a g e m e n t accounting d e v e l o p m e n t o c c u r r e d roughly bet w e e n 1870 and 1920, as firms sought to maintain profitability through a sertes of econ o m i c recessions. The period was also characterised b y intensified c o m p e t i t i o n m conseq u e n c e of the geographical expansion of markets, following the creation of a national rail n e t w o r k offering c h e a p freight rates Ftrms r e s p o n d e d in t w o basic ways. Attempts

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tO intensify the labour process took the form of further assaults u p o n internal subcontracting and craft labour controls. At the same time, companies sought to p r o t e c t themselves from competition and the p r o s p e c t of bankruptcy through a sertes of mergers, culminating in the great m e r g e r m o v e m e n t of 1898-1902. In the space of twenty years, the structure of American industry was dramatically transformed. The small, owner-managed and essentially self-financing firms of the late 19th century w e r e swept u p into giant conglomerates, controlled by external financiers through pyramid holding companies and the concentration of voting rights into small proportions of the total e q m t y (Berle & Means, 1933). In a c o m m a n d i n g synthesis of labour histories of the period, M o n t g o m e r y ( 1987, pp. 4 5 4 6 ) describes b o t h of the above developments in the American iron, steel and metal-working industries b e t w e e n 1870 and 1930: By the turn of the century, the steelmasters' quest for greater and more secure profits had led them not only to integrate 'q~ackward"for every operation from the non or coal mine to the rolling mill but also to attack the menace of workers' control in any part of those operattons and ulttmately to search for ways in whtch to cut the taproot of nineteenth century workers' power by dmpossessmg the craftsmen of thetr accumulated skdl and knowledge. W h e r e Johnson and Kaplan follow the transaction costs o r t h o d o x y in arguing that the appearance of vertically integrated companies resulted from entrepreneurial perceptions of possible efficiency gains, M o n t g o m e r y ( 1987, p. 179) points out that it is difficult to point to cost savings for the large metal.fabricating firms, since these enjoyed few e c o n o m i e s of scale, if any. Similarly, whilst Wells ( 1 9 7 8 ) concurs with Johnson and Kaplan that developments in cost accounting w e r e closely associated with the efficiency m o v e m e n t centred on the American Society of Mechanical Engineers, he explicitly denies their p r e s u m e d imperative of effictency as a cause, noting that, "Contrary to the c o m m o n view that competition provided the stimulus to the introduction of costing

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systems, a notable feature of the American mechanical engineers was a lack of competition" (Wells, 1978, p 51). In parallel with the theme of this paper Wells goes on to note that by the 1920s "With the advent of efficiency experts, the emphasis [of costing systems] shifted to control" (Wells, 1978, p. 53) The increases in the size and complexity of industrial organisations following the merger movement, and employers' efforts to develop systematic means of labour control, created a need for complex managerial hierarchies to administer the paper bureaucracy which increasingly replicated and controlled the productive processes (Braverman, 1974). However, these systems did not appear overnight. Initially the labour process was managed through the agency of foremen, and efforts at intensification were relatively unsystematic. Later, however, this aspect of the foreman's role was increasingly taken over by the industrial engineers, who began to undermine craft controls through process redesign and the creation of effort standards under the slogan of "Scientific Management" These formalised production methods and effort (cost) standards were to play a crucial role in the developing bureaucratisation of industrial organisation (Littler, 1982).

The role o f accounting information in supplementing the control o f the labour process by foremen The destruction of internal contract left "the employer facing the solidity of his own Ignorance about shot>floor performance" (Littler, 1982, p. 84). This vacuum of managerial knowledge was initially filled by salaried foremen, employed at a fraction of the costs of the former subcontractors, though initially wielding much the same powers (Clawson, 1980, p 127). Fundamental to the labour process approach to organisational history, however, is the notion that "solutions" to the organisational problems of capital accumulation inevitably generate further problems which derive ultimately from contradictions in the

social relations of production. The expansion of the "foreman's empire" (Gordon et aL, 1982, p. 135) created two such problems: that of how the foremen were to control the work of skilled craftsmen, and that of how employers and their senior managers were to monitor and control the activities of the foremen themselves. In both cases, the "solution" involved developments in cost and management accounting. The problem of controlling the "foreman's empire" grew quickly Partly because of the detailed controls of the labour process demanded by the new methods of management (to be discussed presently), the number of foremen in manufacturing industry increased by more than 300% between 1900 and 1920, whilst total employment increased by only 96%. At the beginning of the period, moreover, foremen exercised virtually unlimited authority within the shop, controlling the administration of payment systems as well as possessing the unfettered right to hire, fire and promote workers (Gordon et aL, 1982, pp. 135-137). These wide and arbitrary powers were resented by workers and were a significant source of disputes. Part of the employers' response was a gradual transfer of many of the foreman's functions to centralised staff departments as the continued increase in the size of companies made these economically feasible. Personnel offices took over payment systems and the hiring and firing of labour, whilst rate-fixers and quality control inspectors appeared on the shop floor (Jacoby, 1985) The other aspect of the response depended upon accounting records. As has already been pointed out, earnings and production records at Lyman Mills were already being used by the 1850s to allocate bonus payments to those supervisors whose workers produced at the lowest unit costs. The 1915 prime cost reporting system a t the E.I. DuPont de Nemours Powder Company was similarly used to stimulate competition between mill superintendants to produce a t the lowest direct cost (Johnson, 1975, Johnson & Kaplan, 1987, p. 72). These instances indicate that the current concerns of agency theory are very venerable indeed: cost

COSTACCOUNTING,LABOURAND CONGLOMERATES data seem to have been used from the outset to create a framework of monitoring informatton with the object o f containing the wide powers then delegated to foremen and superintendents by aligning their interests with those o f their employers. Standard cost systons and the control o f craft labour Whilst historical costing systems, backed up by the disciplinary powers o f foremen, might suffice to speed up semi-skilled labour processes, the obstacles to the intensification of labour posed by the craft control of skilled work w e r e of a different order. Ultimately, of course, they acted as the catalyst for fundamental changes in the nature o f capitahst control o f the labour process. In the first experiments, from the 1880s onwards, p i e c e w o r k began to supplant the time rates previously Favoured by internal contractors (Clawson, 1980, p. 168; Littler, 1982, p. 82), o n the supposition that a general economic incentive to increase output could bypass the p r o b l e m o f detailed labour process controls. In practice, however, managements invariably u n d e r m i n e d their o w n logic of incentives by cutting rates w h e n e v e r workers' earnings rose to a level which they considered unacceptable This tactic caused many industrial disputes until workers learnt to defend themselves against rate cutting by restricting output (a practice recognised as "systematic soldiering" by Taylor, but attributed to a "logic of sentiments" r o o t e d in anthropological mysteries m the supposedly m o r e sophisticated Hawthorne studies o f the 1920s (Rose, 1979)). For these reasons, the simple replacement of time-rates by piece-rates p r o v e d self-defeating. From the 1890s until the First World War, time-saved bonus systems enjoyed a vogue with employers in the British engineering industry, since these systems incorporated a kind of automatic and concealed rate-cutting. A bastc wage was guaranteed for a level o f productton corresponding to pre-set time allowances, bey o n d which bonuses w e r e payable in proportion to the "time saved" over these allowances

419

The element of rate-cutting stemmed from the Fact that production over a basic level was paid at a progressively lower rate. Eventually this system also stimulated opposition and output restriction on the part of the workforce (Littler, 1982, p 84) All of these systems failed as means of combatting output restriction for one simple reason: that the piece-rates and time allowances themselves already contained an element of output restriction because they could only be set on the basis of observation, judgement or past experience. In two respects, however, the experiments with piece-rates laid the foundations for the future development o f Scmntific Management: they clarified the need for management to understand and take control of the labour process in order to speed it up, rather than relying on generalised economic pressure, and they stimulated the creation of an infrastructure of systematic record-keeping on the activities o f the workforce (Clawson, 1980,

p. 187). The outlines of the "revolution in management" built on these foundations by F. W. Taylor and other American industrial engineers are too familiar to need detailed rehearsal here. Because "Both the cost and intractability of skilled labor posed special challenges to the owners of metal working firms", it was these which provided the crucial "laboratory" for the original development o f Scientific Management by the American Society of Mechanical Engineers (Montgomery, 1987, p. 179), which both Johnson & Kaplan ( 1 9 8 7 ) and Wells ( 1 9 7 8 ) recognise as central to cost accounting developments. The means of removing the obstacle to control presented by craft skills d e p e n d e d upon a "homogenlsation o f labour" ( G o r d o n et aL, 1982) in which craft labour processes w e r e redesigned, fragmented and simplified so that skill levels w e r e reduced and the mental aspects of production incorporated mto management (Braverman, 1974). Technological developments w e r e involved in this process as well as the mere redesign of labour processes. G o r d o n et aL (1982, p. 115) give examples of

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TREVOR HOPPER and PETER ARMS'FRONG

technological changes in the metal-working industries which w e r e aimed at breaking the p o w e r of highly-paid and troublesome craft workers rather than "quantitative reductions m unit factor costs in the short run" (see also Bruland, 1982, for British examples) Like Taylor himself, Johnson and Kaplan represent Scientific Management as a search for efficiencies. Whilst labour process writers are willing to c o n c e d e the positive contribution of trained mechantcal engineers in this respect (e.g Clawson, 1980, p. 237), it is important to recall that Taylor also saw his system as an assault upon "systematic soldiering", that is, the restriction of o u t p u t by skilled craftsmen based on the m o n o p o l y of production know-how which they had hitherto possessed. Once "All possible brain w o r k [was] removed from the shop and centred in the planning or laying-out department" (Taylor, 1903), it became possible to take control of the pace of work m a manner which had b e e n inconceivable under the reg~ne of craft control. Moreover, the clatm that effort standards could be "scientifically" determined, h o w e v e r nonsensical to the philosophically inclined, provided a potent ideological warrant for the speed-up (Clawson, 1980, p 236). From the perspecttve of labour process theory, the key feature of Scientific Management was not the increases in technical efficiency, but the creation of deskiUed and fragmented labour dependent upon the production engineering and control n o w inc o r p o r a t e d into management. Both to Marx and to Braverman (1974), thts real subordmation of labour to capital was one of the defining features of the fully developed capitalist mode of p r o d u c t i o n As is by n o w well known, the first standard cost systems w e r e closely associated with the scientific Management m o v e m e n t (Wells, 1977, 1978; Epstein, 1978). However, the labour process control and intensification aspects of Scientific Management are not squarely recognised in most accounting histories and, in consequence, these are not always clear on the respects in which standard cost systems represented an "advance" on detailed historical

costing systems of the Lyman Mill type (e.g. Garner, 1976). The labour process perspective considerably illuminates such questions: whilst historical cost systems permitted detailed and, in prmciple, timely monitoring of performance, and could well have been developed into fullblown systems of variance reportmg on the basis of standards derived from experience, true standard costs are based on the engineering redesign and analysis of the labour process, and so are invulnerable to the influence o f the workforce. It is this critical difference, a difference in the source of standards rather than m accounting procedures, which has made them such an effective instrument of management control and the intensification of labour Management accounting homogenised labour a n d a n t i - u n i o n i s m in the 1920s During the merger wave at the end of the 19th century, vertically integrated organisations began to appear, which incorporated purchasing, transport and distribution within the same organisation as manufacturing. This development was driven by the realisation of entrepreneurs that profits could be increased by securing reliable supplies of raw materials and stable markets for mass production processes, by economies of scale, and by acquisition of the profits of formerly independent suppliers of materials and the commissions of former selling agents. In their early form, these organisations developed functional structures which enabled the experttse of specialist managers to be brought to bear on each aspect of company operations. At this stage the accounting measures of operational efficiency first developed in single activity organisations sufficed Top management, meanwhile, w e r e faced with two new tasks which had not existed in single-activity organisations: that of ensuring that the activities of specialist managers w e r e aligned with the objective of company profitabihty and that of devising the optimum pattern of investment of company resources These problems ~ notably as encountered in the General Motors inventory crisis of 1920 stimulated new developments in organisational

COST ACCOUNTING, LABOUR AND CONGLOMERATES

forms and management accounting technique. In the pioneering multidtvisional organisations, the problems of performance monitoring and investment allocation w e r e tackled by the use o f budgets to control and balance the internal flow o f resources and by use of such measures as return-on-investment (ILO.I.) and stock turnover ratio to compare the productivity of capital invested in different activities, as well as to measure the performance of their managers (Chandler & Daems, 1979). In a kind of bureaucratised revival of internal contract, these forms o f organisation linked managers' career interests to accounting measures of performance, so permitting a "decentralised centralisation" (Pfeffer, 1978), in which managerial initiative could be contained within the imperative o f capital accumulatton. At the same time, the proliferating flows of financial information, along with the managerial records o f performance and standards already generated by industrial engineering, resulted in vast shadow paper organisations which mirrored the productive process, thus rendering it visible and accessible to managerial intervention, but which, at the same time, called for expanded cadres of managerial, technical and clertcal labour which created control problems of their OWn.

Johnson and Kaplan describe these processes through a discussion of the accounting innovations o f Dupont and General Motors from about 1900 to 1925. The nature of these accounting innovations is n o w widely known through the researches of business historians such as Chandler (1966, 1977), Dale ( 1 9 6 0 ) and Johnson himself (1975), and there can be no serious doubt that they w e r e crucial to the success o f the giant, and otherwise unwieldly, conglomerates o f m o n o p o l y capitalism. What is o p e n to dispute is the precise nature of their contribution. Johnson and Kaplan take the conventional line that accounting measures of the performance o f operating units provided a rational basis for the allocation of corporate investment resources, and also served to align the interests o f middle management to those of corporate management and capital ownership

421

(cf. Chandler & Daems, 1979). The emphasis in thLs account is on the control of operational management, firstly by the subjection of their claims on corporate investment resources to an apparently rational comparative appraisal, and secondly by the creation of measures of their performance. Leaving to one side the considerable literature on the consequences of d~visional performance measures for intermanagerial conflict and other org~dsational "dysfunctions", it is noticeable that the workforce simply does not enter into Johnson and Kaplan's conception of the role of the new management accounting techmques. The result is that they are insensitive to the historical specificity of the condv tions under which the new techniques emerged, and which may well have contributed to their success.

According to Gordon e t al. (1982), the years 1890 to 1920, which roughly correspond to the accounting innovations by Dupont and General Motors, also saw the consolidation of a pattern o f employment which contemporary observers called the "drive system". This consisted of three dimensions: the reorganisation of work, facilitated by mechanisation and job restructuring; increased plant size, which increased the impersonality o f work; and the continuing expansion of the foreman's role. The major consequence for the workforce was the replacement of locally specialised skills and experience by mass labour markets in which the individual semi-skilled worker was highly vulnerable to substitution. From the outset, the consequent threat represented by the "reserve army of labour" was reinforced by employer campaigns to "extirpate unionism root and branch from the United States" ( G o r d o n e t aL, 1982; see also Bendix, 1956, on the contemporary "ideology of the open shop"). Tactics included the violent harassment and deportation of trade union activists and the sponsorship of company "unions". The success of these campaigns varied with economic conditions. During the labour shortages of the First World War, craft unions, in particular, had achieved significant gains, partly on the basis of the state's need to obtain the co-

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operation of organised labour. By the mid1920s, however, trade union strength, as indexed b y strike activity and m e m b e r s h i p statistics, was at a low ebb. Under these conditions, there was little trade union resistance to w h a t o n e c o n t e m p o r a r y c o m m e n t a t o r called "fluctuating labour requirements", whilst a n o t h e r o b s e r v e d that "physical output per w o r k e r is e x t r e m e l y flexible and u n d e r favourable conditions can b e quickly and substantially increased" ( G o r d o n et al., 1982, p. 163). This was the general state of the balance of advantage b e t w e e n labour and capital at the time of the introduction of General Motors' pioneering m a n a g e m e n t accounting system. As outlined b y Johnson & Kaplan (1987, p. 102), this centred on the calculation of "standard prices" w h i c h w o u l d ensure a 20% return on capital for each p r o d u c t division at 80% capacity. Fixed capital investment for each diviston was adjusted so that the yearly volume planned o n the basis of sales forecasts could be achieved at an average 80% capacity. Selling prices in the industry w e r e traditionally fixed for a year in advance and w e r e largely dictated b y p r o d u c t markets. If the p r o p o s e d selling prices fell b e l o w the standard prices needed to maintain 20% IZO.I., divisional managers w e r e e x p e c t e d to r e d u c e p r o j e c t e d operating costs. Similarly, if sales forecasts ( b y corporate m a n a g e m e n t rather than the divisional managers themselves in the mature system) mchcated that plant w o u l d run b e l o w 80% capacity, operating costs w o u l d again need to be reduced to compensate. O n c e agreed, annual projections w e r e b r o k e n d o w n into monthly forecasts according to past e x p e r i e n c e of seasonal sales fluctuations These forecasts specifically included budgets for dtrect p r o d u c t i o n costs and earnings. Monitoring of p e r f o r m a n c e against targets was on a m o n t h l y basis ( o r daily, in the case of s o m e items), with an early form of flexible budgeting used to isolate cost variations which w e r e due solely to short-term output fluctuations from "genuine" variations in p r o d u c t i o n costs. If, during the planning year, there w e r e signs that the target return-on-investment would not be

achieved, there was little s c o p e for corrective action either by compensating cuts m fixed capital investment, since this had already b e e n determined, or through price increases, since the industry tradition was to hold prices throughout the model year. In any case, Sloan believed that increasing prices at a time of falling d e m a n d would have the effect of decreasing revenue (Sloan, 1986, p 147). Nor was it possible to achieve targets by arbitrary manipulations of overhead costs, a m o d e r n practice m u c h excoriated by Johnson and Kaplan, since factory overhead was applied at a fixed rate to all units produced. The system therefore encouraged divisional managers to keep close control of inventories and to respond quickly to adverse changes in the competitive e n v i r o n m e n t or seasonal downturns in d e m a n d b y reducing direct costs. Johnson and Kaplan make it clear that the system was used to provide a very positive motivation in this respect: "[the data] enabled top m a n a g e m e n t to swiftly r e m o v e a divisional manager w h o failed to perform as expected. Obviously, such a reporting system put enormolls pressure on the division manager to r e m o v e slack and inefficiency at all levels within his division" (Johnson & Kaplan, 1987, p. 116). Again, however, Johnson and Kaplan see the situation through the distorting flamew o r k of transaction cost theory: the real-life consequences for the workforce w e r e seasonal lay-offs and speed-ups of the production lines, b o t h of w h i c h practices w e r e notorious throughout the American m o t o r industry of the 1920s What Johnson and Kaplan d o not adequately stress is that the American m o t o r industry of the 1920s, besides being subject to the normal instabilities of d e m a n d in a capitalist economy, was highly seasonal, partly due to the employers' reliance on an annual spring model change to stimulate sales. Douglas & Director (1931, pp. 75, 7 7 ) give the following figures for the seasonal variations in e m p l o y m e n t for the industry as a whole: 1923 - - 50% 1924 - - 21%

COST ACCOUNTING, LABOUR AND CONGLOMERATES

19251926192719281930-

19% 11% 11% 10% 24%.

As for longer-term fluctuations in employment, McPherson ( 1 9 4 0 ) gives the following figures for the peaks and troughs during the 193Os: 1929 1932 1937 1938

-~ ~ ~

448,000 244,OOO 517,0OO 306,000.

What distinguished General Motors from other firms w h o s e e m p l o y m e n t practices are aggregated within these figures, was that it had an accounting system which enabled it to b e m o r e responsive to market fluctuations In o r d e r to obtain a rounded picture of the operation o f this management accounting system, therefore, it is important to appreciate the costs which w e r e imposed upon the workforce. In the recession years o f 1 9 3 3 - 1 9 3 4 nearly 40% o f General Motors workers w o r k e d fewer than 29 weeks. Even after switching to an autumn model change in response to Governm e n t pressure to stabilise employment, only 85% o f General Motors workers w o r k e d for a full year (Fine, 1969, p. 60). With hindsight, Alfred P. Sloan himself recognised "... the hardships caused by o u r cyclical production" (Sloan, 1986, p. 404). Besides these aggregate effects, seasonal layoffs exposed workers to the arbitrary p o w e r of foremen, since, throughout the 192Os and 193Os, it was largely they w h o decided w h o would b e laid off and re-hired. This discretionary p o w e r was routinely used to discriminate against trade unionists (Fine, 1963, p. 151). For workers o v e r 50, annual lay-offs also brought the fear o f p e r m a n e n t unemployment since it was widely believed by employers (with some justification) that m e n of this age could not keep up with the demands o f the line speeds (Fine, 1969, pp. 56, 60; Jacoby, 1985, pp. 218, 235; Montgomery, 1979, p. 141).

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Whilst the instability of 1920s' American product markets certainly existed prior to General Motors' accounting system, the latter was clearly instrumental m throwing the costs onto the workforce. Indeed, that was the logical consequence o f a m e t h o d of accounting calculation designed to p r o t e c t the shareholders' 20% return-on-investment in the face o f economic fluctuation. Providing headquarters management with d e a r and prompt signals whenever falls in demand threatened divisional contributions to this target, the system, as Johnson and Kaplan point out (1987, p. 116), was used to put great pressure on divisional managers. Whilst there may have been genuine long-run gains in efficiency as a result, the extent and timescale of the market fluctuations ensured that the predominant managerial response would take the form of lay-offs and the speedup It is arguable that the promptitude and accuracy of these responses at General Motors was the principle achievement of the system, rather than the alchemy of efficiency claimed by Johnson and Kaplan. In view o f this, it is not surprising that there was widespread resentment of budgeting during the 1920s and 1930s, due to its association with the casualisation of labour (Loncar, 1956). The important implication is that the successful operation of the 1920s' General Motors accounting system d e p e n d e d on the inability of organlsed labour to contest speed-ups and seasonal lay-offs. Thus the anti-unionism of General Motors during the 1920s was not a quirk of labour relations policy incidental to the serious business of corporate control: it was integral to it. Only by neutralising union demands for employment security and a voice in the determination of workloads, could General Motors top management secure the freedom to act on the information provided by their accounting system. For this reason, the company fought tooth and nail against the United Auto Workers' campaign for negotiating rights, as this gathered m o m e n t u m during the late 1920s and early 1930s (Bemstein, 1970, p. 515). More details will be given presently.

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TREVOR HOPPER and PETER ARMSTRONG

A n e w c o n t e x t f o r m a n a g e m e n t accounting: the era o f s e g m e n t e d labour m a r k e t s Like internal contract, the "drive system" contained the germs of its o w n decay. Exhausting and stressful conditions of w o r k gave rise to high labour turnover. Despite the general success of the employers' anti-union drives and the n e w transparency of the labour process, there was still hidden resistance to the intensification of labour based on "informal" w o r k groups. The c o n c e r n of employers o v e r this last p h e n o m e n o n was evidenced by the e n o r m o u s publicity attracted b y the Hawthorne experim e n t s (Baritz, 1960). Moreover, the very homogenisation of labour on winch the drive system was based, created c o m m o n conditions of w o r k amongst massive workforces, and thus s o w e d the seeds of the 193Os' upsurge of industrial unionism ( G o r d o n et a l , 1982). Most fundamentally o f all, the growing gap b e t w e e n wages and the productivity o f labour led to a crisis, variously diagnosed as o n e of underc o n s u m p t i o n or over-production, which resulted in the depression and mass u n e m p l o y m e n t of the 1930s (Bernstein, 1970, p. 19). O u t of this crisis there arose a n u m b e r of mutually reinforcing developments which changed the socio-political environment of budgetary control in America's core corporations for several decades to c o m e Labour unrest increased rapidly during the early 1930s, with the issue of trade union bargaining rights ( r e c o g n i t i o n ) a t the head of the agenda, closely followed b y insecurity of employment, wage cuts and speed-ups (Bernstein, 1970, p. 172; G o r d o n et aL, 1982). After b o t t o m i n g out at the height of the slump, trade u m o n m e m b e r s h i p m o r e than doubled b e t w e e n 1933 and 1941 (Fine, 1969; G o r d o n et al., 1982). These d e v e l o p m e n t s w e r e linked with the pattern of state intervention during the period, which appears to have b e e n driven by a conviction that the stability of the capitalist system ttself was in question. W h e r e Roosevelt beheved that recognition strikes w e r e endangering the prosp e c t of e c o n o m i c r e c o v e r y (Bernstein, 1970, p 172), Keyserling, a p r o m i n e n t atde of Senator Robert F. Wagner, thought that only strong

trade unionism could raise purchasing p o w e r and so set the economy in motion (Montgomery, 1979, p 164). Both views w e r e expressed in the National Industrial Recovery Act of 1933 which contained provisions on collective bargaining rights, to be adjudicated b y a National Labor Board under Wagner's chatrmanship. During an intervention in the automobile industry dispute of 1934, this set up the Automobile Labor Board, which imposed limited seniority provisions for lay-offs on the industry and was e m p o w e r e d to hear clatms of antiunion practices The following year, u m o n growth and campaigns for recognition w e r e further stimulated b y the passage of the Wagner Act which granted e m p l o y e r recognition of single unions on a majority vote (Bernstein, 1970, p p 1 7 2 - 1 8 1 ; J a c o b y , 1985, p. 235; Fine, 1963, p. 251). The initial response o f America's giant corporations to this pressure for recognition from the trade union m o v e m e n t and the state varied in detail, but not in intent. W h e r e the Ford Motor C o m p a n y relied upon the thugs of Harry Bennet's "Service Department" to conduct a campaign of organised violence against trade union activists, General Motors o p t e d to spend just short of $1 million on espionage o v e r the two-year period 1 9 3 4 - 1 9 3 6 m though h o w this fitted into the corporate system of budgetary control was not clear (Fine, 1963, p. 153; Fine 1969, p. 37; Bernstein, 1970, p. 739) As has already b e e n indicated, there seems to have b e e n a clear connection, in the mind of General Motors' Alfred P. Sloan, b e t w e e n this anti-union campaign and the maintenance of the freedom of actton d e m a n d e d by the SlomnDuPont system of decentralised financial control (cf. Bernstein, 1970, p. 515): We knew that some political ra(hcalsregarded unions as instruments for the attainment of power But even orthodox "business umomsm" seemed to us a potenttal threat to the prerogattves of management What made the prospect seem especially grtmm those early years was the persistent umon attempt to invade basic management prerogatives. Our rights to determine productton schedules, to set work standards and to chsctplme workers were all suddenly called mto

COST ACCOUNTING,LABOURAND CONGLOMERATES questton Add to tlus the recurrent tendency of the umon to tnject ttself mto prmmg pohcy, and it ts easy to understand why tt seemed to some corporate oflicmlsas though the unton might one day be vtrtuaUym control of our operattons (Sloan, 1986, pp 405--406) Recall that General Motors' divisional budgets w e r e issued in the f o r m o f " t a r g e t prices" and it can b e s e e n that any trade union d e m a n d with a non-zero cost w o u l d be likely to appear to Sloan as an e n c r o a c h m e n t on "pricing policy". State intervention to p r o m o t e union recognition was no m o r e w e l c o m e than the unions' o w n efforts. Both DuPonts and General Motors played a p r o m i n e n t part in the sponsorshtp of the American Liberty League, which organised a declaration b y a g r o u p o f p r o m i n e n t lawyers that the Wagner Act was unconstituttonal, thus furnishing their paymasters with a p r e t e x t for ignoring it (Berustein, 1970, p. 515). On the whole, h o w e v e r , these campaigns w e r e unsuccessful: General Motors was forced to recognise the United Auto Workers in 1937 and Fords followed in 1941. Both companies accepted seniority rights in lay-offs as part of the deal, with the additional provision at Fords that w e e k l y h o u r s w o u l d b e r e d u c e d to 32 before any lay.offs t o o k place. In response to the changed climate o f opinion, though not as a result o f direct union or governmental demands, General Motors, in 1939, introduced a w a g e guarantee plan w h e r e b y workers with five years' seniority w h o w e r e laid off or on short.time could b o r r o w the difference bet w e e n their actual w e e k l y p a y and 24 hours' worth, against their future earnings - - though this s c h e m e was quietly d r o p p e d in 1942, w h e n the industry was working at full capacity (Sloan, 1986, p. 404; Jacoby, 1985, p. 248). As well as encouraging union recognition, the Federal G o v e r n m e n t sought to p r o m o t e the "stabilisation" o f e m p l o y m e n t by sponsoring research o n the topic (e.g. Douglas & Director, 1931 ) and b y direct pressure on employers. In an a t t e m p t to spread e m p l o y m e n t , the Natmnal Industrial R e c o v e r y Act placed an u p p e r limit o n the p e r m i t t e d hours of w o r k in each industry (Fine, 1963, p. 35), whilst the Social Security Act o f 1935 p r o v i d e d for employers

425

w h o guaranteed 1200 hours o f w o r k p e r year to b e e x e m p t from a 3% payroll tax. This was considered b y General Motors in 1938, but rejected on the grounds that such a guarantee could only b e e x t e n d e d to a minority of employees, whereas there w o u l d be union pressure to extend it to all (Sloan, 1986, p. 404). The Federal G o v e r n m e n t also persuaded the automobile industry to s m o o t h d e m a n d by introducing an autumn m o d e l change (Fine, 1969, p. 27, Jacoby, 1985, p. 236). In summary, as the 1930s progressed, Amertca's core corporations found themselves u n d e r increasing pressure to a c c o m m o d a t e to the demands of trade umonism and to provide s o m e security of e m p l o y m e n t for at least a section o f their workforces. To s o m e extent, the e c o n o m i c basis for such an a c c o m m o d a t i o n already existed. Anti-trust legislation notwithstanding, a n u m b e r of large companies had enjoyed dominant positions in their p r o d u c t markets from as far back as the great m e r g e r wave of 1895--1904. The second m e r g e r wave o f 1 9 2 6 - 1 9 3 0 added m o r e (Nelson, 1959, p. 5). During the early 1930s, indeed, a n u m b e r of employers' organisations lobbied for a relaxation of the anti-trust laws on the grounds that reduced c o m p e t i t i o n w o u l d both end overp r o d u c t i o n and enable prices, and therefore wages, to be ratsed, so stimulating demand (Bernstein, 1970, p. 19). Douglas & Director (1931, p. 109 ft.) saw additional connections b e t w e e n m o n o p o l y and e m p l o y m e n t stabilisation, in the possibilities of production plantung and the avoidance of "unnecessary" style changes. In response to demands for stabilisation, and w h e r e there was a c o n t e x t o f limited p r o d u c t market competition, corporate welfare schemes k n o w n as the "American Plan" w e r e introduced in p r o s p e r o u s and oligopolistic mdustries such as autos, rubber, chemicals and electrical machinery. For strongly u m o m s e d workers, or those with s c a r c e skills, this involved job security and o t h e r benefits determined by seniority. On the o t h e r s~de of the coin, these privileges w e r e p r o t e c t e d from e c o n o m i c fluctuations b y the e m p l o y m e n t of

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flexible reserves of black and Mexican labour at the lowest w a g e grades (Montgomery, 1979, p. 160) Whatever the arguments for stabilisation in c o r e areas of employment, there was little e c o n o m i c logic in unnecessarily offering security of e m p l o y m e n t or welfare benefits to unskilled w o r k e r s w h o could readily be replaced from the labour market and w h o lacked the organisation to press their claims for themselves. Moreover, the costs might be prohibitive if the workers c o n c e r n e d w e r e engaged o n labour intensive processes for w h i c h there was a fluctuating demand. Thus the n e w liberal approach to the control o f labour was specific to core workers m core corporations w h i c h possessed the market p o w e r to stabilise d e m a n d for their products Elsewhere, the earlier drive system persisted, and this, in turn, b e c a m e specific to smaller firms, unstable or competitive p r o d u c t markets, and weakly organised labour forces. Labour markets thus b e c a m e segmented into primary and secondary sectors (Doeringer & Piore, 1971). E m p l o y m e n t in the primary sector was characterised b y stability, relatively high wages, career structures and relatively skilled w o r k (for w h i c h training, often of a company-specific nature, w o u l d b e provided), and b y comparatively strong trade unions ( w h e r e these existed). Within limits, labour in this sector was treated as a valuable corporate resource, to b e c o n s e r v e d in the face of (short-run) e c o n o m i c fluctuations. In the secondary sector, w o r k was unskilled ( o r treated as such), wages w e r e low, trade unionism w e a k or non-existent and e m p l o y m e n t was either unstable or explicitly o n a casual basis. Besides this basra segmentation, subsidiary patterns of differentiation emerged. According to G o r d o n et aL (1982), the p r i m a r y sector b e c a m e further segmented into an " i n d e p e n d e n t primary" sector of professionals and managers and a "subordtnate primary" sector of skilled manual workers. As has already b e e n hinted, the segmentation of labour markets, from the beginning, tended to coincide with g e n d e r and ethnic differences. O v e r time, these patterns b e c a m e mstituttonalised, w i t h the result that ethnic minoriues and

w o m e n w e r e assumed to possess characteristics ( s u c h as unreliability and lack of ambition) which peculiarly suited t h e m to secondary sector e m p l o y m e n t (Barron & Norris, 1976). For these, m a n a g e m e n t accounting systems which pressured managers to adjust direct costs in response to market fluctuations continued to b e relevant. For processes on w h i c h primary sector w o r k e r s w e r e employed, this particular relevance was lost, and there are indications that the use m a d e of budgetary controls changed. The precise nature of these changes will be discussed after a brief consideration o f Johnson and Kaplan's views on the loss of relevance o f m a n a g e m e n t accounting systems. Relevance Lost. Johnson and Kaplan's analysis In Johnson and Kaplan's view, the third and latest period of m a n a g e m e n t accounting history has b e e n o n e of stagnation and decadence They deplore the retreat in m o d e r n management accounting systems from the unambiguous focus on p r i m e costs w h i c h characterised the pioneering systems of DuPont and General Motors. By the 1920s, the efforts of managers and engineers to solve real-life p r o b l e m s had, in their view, p i o n e e r e d m o s t of the current techniques of m a n a g e m e n t accounting. Whilst they acknowledge some later innovations, such as discounted cash flow, residual income and m o r e refined m a n a g e m e n t controls, they argue that the teaching and practice of m a n a g e m e n t accounting has generally stagnated or regressed since the mid-1920s, with the result that these are n o w out of t o u c h with the n e w competttive and manufacturing environment. This is attributed largely to the displacement of engineers b y financial accountants as the custodians of m a n a g e m e n t accounting expertise. The c o n s e q u e n c e is that cost accounting has b e c o m e less relevant to managerial decision-making through its subservience to external financial reporting. This is reflected in the current emphasis u p o n inventory valuation and integrated accounts and the widespread adoption of arbitrary overhead allocations withm p r o d u c t costings. Academic accountants are

COST ACCOUNTING, LABOUR AND CONGLOMERATES

implicated in this state of a~irs, notably through their adherence to over-simplified normative e c o n o m i c m o d e l s divorced from practice. The emphasis o n these concerns in accounting education has, it is alleged, p r o d u c e d a b r e e d of managers w h o "manage b y the numbers", on the basis of obsolescent cost systems w h i c h are at odds with the n e w operations management, with its stress u p o n quality, minimal set-up times and broader, longer-run p e r f o r m a n c e criteria. Johnson and Kaplan c o n c l u d e with a plea for the reconsideration o f detailed p r o d u c t costings through tracer studies o f overheads as originally attempted b y engineers It is argued that information t e c h n o l o g y can n o w o v e r c o m e the calculative c o m p l e x i t y that defeated the early efforts o f engineers to d o this. As has b e e n indicated in the previous section, this a r g u m e n t ignores the changed context of m a n a g e m e n t accounting systems in American corporations from the 1930s onwards. Because J o h n s o n and Kaplan do not recognise that systems o f the General Motors type were, in part, administrative devices for matching capacity to d e m a n d b y imposing speed-ups and layoffs o n the workforce, they are unable to appreciate the significance of changes in the balance o f advantage b e t w e e n labour and m a n a g e m e n t w h i c h m a d e these courses of action less possible. More, because they follow the line of the transaction costs literature in failing to acknowledge monopoly profits as a drtving force behind acquisition and merger, they rmss its significance in creating the economic leeway which allowed the possibility of an accommodation with primary sector workforces. Rather than assuming that budgetary controls w e r e driven off course by the requirements of external financial reporting= post-1920s' developments need to be seen in the context of the labour and capital accord in the primary sector

Budgetary controls in primary sector employment., cost accounting f o r a labourcapital accord T h e r e w e r e p r e c e d e n t s for budgets to b e used for planning rather than cost control. As

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early as 1916, the Federal Trade Commission had sponsored the d e v e l o p m e n t o f guides to the i m p r o v e m e n t of cost accounting practice in a n u m b e r of industries, in the belief that this would both lessen the incidence of small business failure and provide a means of controlling price inflation (Miranti, 1986, pp. 451, 452). Some of the early literature on budgeting reveals that the adoption o f budgeting in m a n y American companies followed from their involvement with g o v e r n m e n t in the two World Wars, and from the debates o v e r Municipal and Federal budgeting (Coonley, 1925; Theiss, 1937; Fiske, 1947). For example, Rogers ( 1 9 3 2 ) notes h o w budgeting and costing w e r e p r o m o t e d b y joint industry and g o v e r n m e n t commissions on standardisation and the requirement for i m p r o v e d record-keeping w h e n contracts w e r e negotiated with state bodies. The c o m m o n thread running through these state-sponsored initiatives was the use of budgeting and cost accounting data to plan and control the rate o f return on investment. Having b e e n p u s h e d into budgeting b y the requirements of state bureaucracy, businessm e n soon recognised its potential for planning o n their o w n account, as the c o m m e n t s of Vieh (1925, p. 174) bear out: Until we discover practical means of overcomm8 the evils of booms and depre,sions which are inherent in our present economic structure, years of poor business and even unprofitable years are inevitable

The

budget looks to the future with the hope of averting or, at least, o f r e d u c m 8 t h e effects o f t h e storm w h e n it

breaks.

This use of budgetin 8 to anticipate and d a m p e n the effects o f trade cycles on c o m p a n y profitability is a recurring t h e m e o f its early advocates. In contrast, the 1930s' advocates of " e m p l o y m e n t stabtlisation" advocated the use o f budgetary forecasts to plan a steady rate o f pi'oduction which would build u p inventories so as to a c c o m m o d a t e seasonal variations in d e m a n d (Douglas & Director, 1931, p. 85), a means of preserving the accord with primary sector labour which b e c a m e widespread in the years after the Second World War (Lewis et a t ,

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1984). Progress appears to have b e e n uneven, however. According to Loncar (1956) the potential of budgets for planning was not fully appreciated b y m a n y firms until they encountered matertal shortages during the war. The literature so far lacks a systematic a c c o u n t of the use of accounting reformation in formulating policies designed to preserve the accord w i t h primary sector labour. Indeed, there appears to b e a dearth of historical studies of management accounting post-1930. 3 Clearly, however, a key policy decision in m o n o p o l i s e d markets is that of price The case of U.S. steel illustrates h o w cost accounting data w e r e used to formulate placing policies with the object of insulating profits from the consequences o f the a c c o m m o d a t i o n with primary sector labour, from the m o m e n t this b e c a m e necessary. T h e c o m p a n y recognised the United Steel Workers in 1937, conceding a wage increase in the process. Immediately a policy of building all future wage increases into the price structure was instituted (Bernstem, 1970, p. 417; see also Baran & Sweezy, 1966, p. 77). The aim was to maintain margins m the face of sales fluctuations. Cross-plant average standard costs, assuming p r o d u c t i o n at 80% capacity, w e r e c o m p u t e d on the basts of the anticipated wage settlement for the coming year. Overhead was then assigned to every p r o d u c t on the "traditional" assumption that each cent per h o u r on direct w a g e costs w o u l d add one cent p e r ton to non-wage cosTS. The result was that the anticipated wage settlement was roughly doubled, then multiplied by a "traditional" 20 man-hours to yield the n e w cost of a ton of steel (Kaplan et aL, 1958, pp. 15, 1 6 ) . S i m i l a r policies exist, or existed, in Alcoa and American Can, the Oil Companies and DuPont (Kaplan et aL, 1958, pp. 27, 150, 208, 256). The case of the latter c o m p a n y also illustrates the m a n n e r in which market domtnance enables pricing policy to be used to t h r o w the

COSTS of e c o n o m i c fluctuation onto smaller competitors (Chandler & Salsbury, 1971, p. 155), which, in s o m e respects, might be viewed as an alternative to "smoothing" p r o d u c t i o n b y budgetary forecasTS. As will be s h o w n in m o r e detail presendy, the DuPont strategy was to monopolise only the stable base of a seasonal market, rather than the w h o l e o f it, in accordance with Pierre S. DuPont's 1903 dictum that "the essence of manufacture is a full and steady p r o d u c t " (Chandler & Salsbury, 1971, p 93). This d e p e n d e d o n the c o m p a n y producing at a cost lower than iTS smaller competitors. DuPonts estimated their c o m p e t i t o r s ' costs (p. 157), using this information to set prices low enough to discourage n e w competition and the expansion o f existing competitors, but not low enough to drive the m o r e efficient of these out of business. These w e r e allowed to survive so that they could absorb seasonal and other peaks in d e m a n d (see also Johnson & Kaplan, 1987). Clearly this business strategy creates the conditions u n d e r which a large c o m p a n y might offer a degree of e m p l o y m e n t security to a primary sector workforce w at the expense of insecurity in its secondary-sector competitors. Unfortunately direct confirmation of the place of labour relations in the DuPont strategy is fragmentary, since the major historians of the c o m p a n y (Chandler & Salsbury, 1971; Johnson & Kaplan, 1987; Dutton, 1947) have paid little attention to the workforce. Budgeting is also involved in o t h e r elements of planning w h i c h relate to the a c c o m m o d a t i o n with primary sector labour. In expanding markets, monopolistic firms which r e d u c e production costs through process innovation may use the p r o c e e d s to fund an increased sales effort with the object of capturing the bulk of the enlarged market and to c o m p e n s a t e the workforce for their acceptance of the n e w methods, rather than to c o m p e t e through prtce reductions (Baran & Sweezy, 1966, p. 66;

~he authors were led to speculate whether the "stagnatton" thesis of post-193Os' cost accounting owes more to the stagnation of emptrtcal research relatmg to this pertod and to the questaons asked, rather than any real stagnation of managerial practices assoctated wtth accounting.

COST ACCOUNTING,LABOURAND CONGLOMERATES Aghetta, 1979, p. 305). The idea of preserving relationships by compensating the workforce for revised working arrangements probably reached its apogee in the 1948 General Motors/ United Auto Workers settlement which incorporated an "escalator clause" w h e r e b y wages w e r e related to the cost of living, and an additional " i m p r o v e m e n t clause" intended to reflect the long-term prospects for improved productivity, even though Sloan believed that productivity increases had little to do with the efforts o f the workforce (Sloan, 1986, p. 397). In o r d e r to show the detailed connections b e t w e e n budgetary controls and primary sector e m p l o y m e n t practice, it would be desirable to study both in the context of a single monopolistic corporation from the 1930s onwards. At the moment, unfortunately, published material of this type seems to be lackmg. However, Johnson and Kaplan ( 1 9 8 7 ) offer a detailed study of the accounting system of the E.I. DuPont de Nemours P o w d e r Company as it existed in 1915, and, in view o f the success of this system, it is not unreasonable to suppose that it continued unchanged in essentials for some decades thereafter. As for the company's e m p l o y m e n t practices, these have not been extensively studied, possibly because DuPonts have n e v e r e x p e r i e n c e d large.scale industrial conflict. Nevertheless, the studms of Weber ( 1 9 5 9 ) and Rezler ( 1 9 6 3 ) enable at least the outlines o f the company's labour relations policies to b e discerned. Despite its limitations, this evidence gives some indication of h o w the use o f accounting systems for prtcing pohcy and planning related to welfarism as an aspect o f labour relataons policy in the monopoly sector, from the 1930s onwards.

Pricing policy, planning and welfarism in monopoly capitalism Johnson and Kaplan intend the study of the 1915 management accountang system at E.I. DuPont d e Nemours P o w d e r Company to be an illustration of h o w entrepreneurs developed accounting systems to realise the profit potential o f vertical integration. The records studied date from a time w h e n the manufacturing

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resources of the company consisted of m o r e than forty geographically dispersed mills, manufacturing three broad classes of product Vertical integration consisted of the incorporation of the selling function within the company, rather than relying on agents as was then the custom, and of headquarters control of purchasmg" rather than the devolution of this function to individual mills According to Johnson and Kaplan, the returnon-investment formula devised by DuPont "Is an ideal tool for controlling, with accounting numbers, any vertically integrated company's operations" By providing information on the "mternal efficiency of capital across the three functional departments", the system enabled "the Powder Company's top management to effectively supplant capital markets m dectding h o w to allocate resources within the American explosives industry" (all quotes from Johnson & Kaplan, 1987, p. 84). Fascinating as is Johnson and Kaplan's case material, it scarcely bears this interpretation. The DuPont company was formed during the great American merger wave of the turn o f the century, during which "almost one-half of firm disappearances, and seven-tenths of merger capitalisations w e r e accounted for by mergers that gained a leading position in the market" (Nelson, 1959, pp. 102, 103). By 1907, the company controlled between 64% and 100% o f the entire American market for the various types of explosive. An anti-trust action of 1911 resulted in a division of the corporation mto three parts, but DuPonts still dommated the p o w d e r business and continued to acquire more companies (Laidler, 1931, p. 306) This was quite typical o f the period, the overwhelming majority o f mergers at the tame w e r e hortzontal rather than vertical, with the latter predominating only in the primary metals industries, " ( w h i c h ) suggests that the economies of vertical integration, upon whmh many merger students have placed great stress, played a relatively small role in the merger m o v e m e n t " (Nelson, 1959, pp. 102, 103). The data provided by Johnson and Kaplan sit more comfortably with Nelson's mterpretataon

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than their own. To describe as "vertically integrated", a c o m p a n y of forty or so basically s i m i l a r tlnillg, i n w h i c h vertical integration consists only of the internal administration of sales and the p r o d u c t i o n of one of the two major r a w materials is a very partial view. N o r does J o h n s o n and Kaplan's detailed study o f the accounting system support the notion that it was primarily used to decide the allocation of resources b e t w e e n the three major vertically Integrated activities (purchasing, manufacture and sales). Only the purchasing system seems to have b e e n used in this manner, the information being used to evaluate the likely return from takang a financial interest in raw material supplies. The sales system appears to have b e e n used as a tool for setting prices and motivating the sales force, rather than as a m e a n s o f assessing the resources to invest in the sales effort. The manufacturing system was used to c o m p a r e the performance of the p o w d e r mills, with a view to deciding w h i c h of these to expand and which to close during phases of rationalisation. In other words, the major decisions o f allocation made on the basis of DuPont's accounting system seem to have b e e n b e t w e e n similar, manufacturing establishments. Such a system ts m o r e properly described as an instrument of the rationalisation of horizontally m e r g e d p r o d u c t i o n resources than as a means of allocating investment b e t w e e n vertically integrated activitms. T h e detail of the sales accounting system given b y J o h n s o n ( 1 9 7 5 ) suggests that it was used as an instrument of planning, so as to c o u n t e r trade fluctuations and control competition. Data o n the capital invested in each p r o d u c t line w e r e used to calculate the aggregate desired earnings for that p r o d u c t in a c c o r d a n c e with the c o m p a n y ' s return-oninvestment target. This earnings target was then used to calculate the mark-up per u m t at normal and m a m m u m capacity, which was added to unit p r o d u c t i o n costs to ymld a c o m p a n y - w i d e m i n i m u m price for each product. This p r o c e d u r e might be regarded as an early p r o t o t y p e of the later practace of monopolistic American corporations, of pro-

tecting profits by explicitly building wage costs into their price structures. Decisions on actual prices, subject to this c o m p a n y minimum, w e r e devolved, so as to take advantage of local market conditions. The strategy of branch sales managers was to set the general level nf district prices as high as they could without encouraging the entry of n e w competitors. Individual salesmen w e r e paid on an incentive system which encouraged t h e m to maximise total revenue ( t h r o u g h adjusting prices), rather than sales volume, thus insulating the company's manufacturing operations, to s o m e degree, from market fluctuations. This too could be regarded as an anticipation of the later advocacy of seasonal price changes to smooth d e m a n d b y the " e m p l o y m e n t stahilisation" m o v e m e n t of the 1930s (Douglas & Director, 1931, p. 85), though the aim in DuPont's case was to operate the mills at full capacity rather than to stabilise e m p l o y m e n t as such. The c o m p a n y ' s policy on competition exhibtted the same priorities. Rather than attempting to gain a c o m p l e t e monopoly, DuPonts tolerated smaller, higher cost competitors since these served to insulate the production facilities of the c o m p a n y from market fluctuations. To this end the company's prices w e r e increased to the point w h e r e it was estimated that the m o r e efficient competitors could make an adequate return, though not to the point w h e r e n e w c o m p e t i t i o n was encouraged (Chandler & Salsbury, 1971, p. 155). This policy can b e seen as an early version of a similar pricing policy (ironically) forced o n t o the American aluminium ingot and fabrication m o n o p o l y Alcoa, by a district court judgement of the 1930s. Alcoa w e r e forced to sell ingot to c o m p e t i t o r fabrication companies at prices which would allow these a reasonable profit at the Alcoa prices for fabrications (Kaplan et aL, 1958, p. 30), thus providing the c o m p a n y with a warrant for setting prices on the basis of their smaller competitors' costs rather than their own.

This aspect of the DuPont m o n o p o l y pricing policy, of course, d e p e n d e d o n keeping the company's p r o d u c t i o n costs b e l o w those of its

COST ACCOUNTING,LABOURAND CONGLOMERATES c o m p e t i t o r s (Chandler & Salshury, 1971, p. 155). To this end, as is stressed b y Johnson and Kaplan, the p r i m e costs o f p r o d u c t i o n w e r e r e p o r t e d b o t h to mill superintendants and to c o m p a n y headquarters, so providing the f o r m e r with p o w e r f u l incentives to minimise these costs. The p o i n t h e r e is that the maintenance of p r o d u c t i o n costs b e l o w those of competitors was only o n e aspect of the DuPont c o m p a n y strategy. The o t h e r aspects, namely the allocation of resources b e t w e e n horizontally m e r g e d p r o d u c t i o n facilities and a m o n o p o l y pricing policy w h i c h aimed at securing a steady long-run r e t u r n - o n - m v e s t m e n t whilst insulating manufacturing operations from market fluctuations, w e r e equally important and equally d e p e n d e d u p o n the c o m p a n y ' s internal accounting system. Whereas J o h n s o n and Kaplan argue that the information relevant to the containmerit o f p r o d u c t i o n costs should not contain arbitrary allocations of overhead, it is clear that decisions o n pricing policy must include s o m e allocation o f overhead. To the extent that decisions o f the latter type c a m e to p r e d o m inate m the m o n o p o l y sector o f the American e c o n o m y f r o m the 1930s onwards, the inclusion o f o v e r h e a d allocations in p r o d u c t costings ( o n w h a t basis is a separate question) need not b e s y m p t o m a t i c o f "relevance lost" at all. To w h a t e x t e n t was DuPont's pricing policy the i n s t r u m e n t o f an a c c o m m o d a t i o n with p r i m a r y s e c t o r labour~ As has b e e n indicated, the paucity o f information on labour relations at the c o m p a n y m e a n s that any answer must involve s o m e e l e m e n t of conjecture. It is clear f r o m the w o r k o f Rezler (1963), however, that t h e r e has n e v e r b e e n a policy of a c c o m m o dation with trade unionism as such at the DuPont company. The 1960s' philosophy o f the e m p l o y m e n t relationship remained as individualistic and anti-union as that of the c o m p a n y ' s founders. Until the National Labor Relations Act of 1935, the company, like others in the U.S. chemical industry, cultivated " e m p l o y e e representation plans" as a means of deflecting d e m a n d s for genuine trade unionism (Weber, 1959). Following the N e w Deal, however, these served as the organisational basis for the later

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d e v e l o p m e n t of independent local unions (plant level unions, not affiliated to national organisatlons). By 1940, about 9096 of the DuPont workforce was organised in this fashion, partly as a result o f the c o m p a n y ' s policy of bargaining only on a plant-by-plant basis. By 1960, however, the p r o p o r t i o n of the workforce organised by independent locals had d r o p p e d to u n d e r 60%, with nationally organised trade unions gaining a beachhead of 6% and the rest unorganised. Meanwhile the real influence of trade unionism in the c o m p a n y and thus the a c c o m m o d a t i o n with the demands of primary sector labour w c a m e about through the c o m p a n y ' s policy of outflanking trade unionism b y r e m o v i n g the apparent need for it. On the basis of survey information, the m a n a g e m e n t of each plant ensured that wages w e r e at least as high as those prevailing in the locality. In the process, a careful eye was kept on the advances achieved b y trade unions. In 1956, for example, DuPont's president stated that the average wage at C o m p a n y # a n t s was $2.46 p e r h o u r c o m p a r e d with $2.05 p e r h o u r at comparable unionised plants (Weber, 1959). Welfare benefits formed an important part of the strategy. Apart from the intrinsic welfare utility of stable e m p l o y m e n t , partly m a d e possible by the insulation o f manufacture from market fluctuations through the agency of the sales accounting system, benefits included g r o u p life insurance, accident and health insurance, pensions and a vacation plan. The intention was to p r o v i d e a substantial measure of e c o n o m i c security for xhe workers, at least whilst they remained e m p l o y e e s of the company. By the 1960s, the costs o f these welfare p r o g r a m m e s was claimed by a c o m p a n y spokesman to c o n s u m e 26% of the total wage bill (Rezler, 1963). In o r d e r to ensure that these welfare benefits w o u l d b e effective as a means of combating trade unionism, the c o m p a n y also needed to ensure that trade unions could not claim any of the credit. To this end, trade union influence on welfare benefits was excluded b y deciding these issues at headquarters, whiisr restricting bargaining to plant level. To the DuPont company, the unionisation o f any plant,

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even by an independent local, represented a managerial failure, and was followed by an investigation aimed at "putting things right" The post-1940s' fall in union membership within the c o m p a n y was testimony to the success of these measures Thus, from the time trade unionism became a force to be reckoned with in the U.S. chemical industry m say from the 1930s onwards (Weber, 1959) - - the determination of wages and benefit levels within the DuPont company started from the requirements of labour policy, rather than those of p r o d u c t markets. Whilst unit labour costs were mininused through productivity increases (see Rezler, 1963, p. 189, for the 1950s' record in this respect), wage rates and benefits w e r e set on the basis of what was required to sustain the accommodation with labour on which the anti-union policy depended. Assuming that the sales accounting system remained essentially stmilar to that of 1915, c o m p a n y minimum prices could then be set, within semi-monopolised markets, so as to maintain the planned level of return-on-investment. What this evidence indicates is that, in the DuPont c o m p a n y from the 1930s onwards, there was a m o n o p o l y pricing policy, based u p o n the sales accounting system, which c o v e r e d the costs o f a welfarist employment strategy and w h i c h insulated the manufacturing function from market fluctuations, with a conseq u e n t stabilisation of employment levels. Whilst the stabilisation of employment may have been a by-product of a p o h c y destgned in the first instance to maximise plant utilisatton, and whilst the overt aim of the employment strategy may have been the excluston of trade unionism rather than welfarism for tts own sake, the resultant e m p l o y m e n t policy still adds up to one of r a p p r o c h e m e n t voth primary sector labour.

Overhead allocation a n d the targetmg o f secondary sector labour costs J o h n s o n and Kaplan argue that the practice of allocating redirect costs on the basis of dtrect labour costs is arbitrary and tends to make

labour-intensive processes appear more costly than they should, with consequent distortions m firm's manufacturmg policies. Leaving aside the question of h o w indirect costs should be allocated, it can be argued that present practice fits well with another feature of core corporations m the era of labour segmentation. As noted above, a segmentation of labour markets has taken place w i t h i n some of these, with primary and secondary sector conditions coinciding roughly with capital and labour-intensive processes On the whole, workers on m o d e r n labour-intensive processes tend to be unskilled (or defined as such), are easily substitutable from external labour markets and, in consequence, are weakly unionised. The bargainmg position of workers on capital-intensive processes, on the other hand, is much stronger, either because of their extensive training or because of their responsibility for expensive plant. In consequence the latter are less vulnerable to managerial attempts to intensify their labour and downgrade their employment conditions (Rubery, 1978; Armstrong, 1982). In this situation, there may be a lot of capitalistic sense in incorrect allocations of costs w h i c h t h r o w the pressure to minimise dtrect costs disproportionately on the managers of labour-intensive processes - - for these are where the resistance of labour to further intensification and casualisation is likely to be at its weakest. Information on the true costs of capttal-intensive process, on the other hand, may be relatively useless, since there may be little scope for the reduction of costs by technical means in an up-and-running system and primary sector labour, in any case, is likely to be highly resistant to any attempt at intensification. In other words, ff cost reformation is regarded prtmarily as a means of directing effort, rather than as a representation of reality, it can be argued that the distortions of contemporary cost accounting systems serve to focus that of managers precisely w h e r e it is most likely to ymld results. True to their realist conception of cost information as a basis for rational economtc deciston-making, however, Johnson and

COST ACCOUNTING, LABOURAND CONGLOMERATES

Kaplan argue that overestimates of the true costs o f labour intensive operations m a y lead managers to abandon these unnecessarily in the face o f overseas competition. Whilst this m a y b e true, it is equally possible tlmt the threat of doing so m a y enable these same managers to drive s e c o n d a r y s e c t o r labour costs even l o w e r than they really n e e d to b e in o r d e r to m e e t the competition. W h e r e initiatives of this type are successful, c o r p o r a t e m a n a g e m e n t cannot b e e x p e c t e d to b e greatly c o n c e r n e d if the information o n w h i c h they are based is inaccurate, or if the c o n s e q u e n t increase in overall profit ts incorrectly attributed to capital-intensive operations. As for the effect on p r o d u c t pricing policy, given the relative absence of c o m p e t i t i o n in m a n y American p r o d u c t markets b e t w e e n a b o u t 1930 and 1960, finelyt u n e d p r o d u c t costs for strategic decisionmaking p u r p o s e s m a y have b e e n a secondary consideration in p r i m a r y sector corporations. O f course, this situation has changed with the rapid g r o w t h of Japanese and o t h e r Far-Eastern competition, and m u c h of the present-day relevance o f Relevance Lost derives precisely from that fact.

CONCLUSION AND POSTSCRIPT: SOCIAL TRANSFORMATION AND COST ACCOUNTING TODAY Relevance Lost seeks to inform current a c c o u n t i n g p r o b l e m s through historical analy. sis. Whilst the i m p o r t a n c e o f this is undeniable, it is questionable w h e t h e r transaction cost theory is an adequate theoretical tool for the purpose. The intention o f this p a p e r has b e e n to establish that there is a p r i m a - f a d e case for considering accounting d e v e l o p m e n t s in the light o f labour process histories of capitahst organisation. The potential of this b o d y of w o r k for accounting research has b e e n argued elsew h e r e ( H o p p e r et aL, 1986; H o p p e r et aL, 1987). Following G o r d o n et aL (1982), the p a p e r has sought to establish that there is a relation-

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ship b e t w e e n systems of accounting information and phases in the evolution of capitalist control of the labour process. Systems of control b o t h entail costs and p r o v o k e characteristic forms of resistance which, under competitive conditions, r e n d e r them increasingly ineffective as means of capital accumulation.. These contradictions build into crises o f control, especially in times of e c o n o m i c recession, and this leads to a search for n e w systems of controlling the labour process, either directly or through its immediate management. This p a p e r has sought to establish that s o m e o f the key phases of innovation in cost and managem e n t accounting can be understood as part of this search for n e w methods o f control. Thus d e v e l o p m e n t s in accounting for direct labour costs w e r e implicated b o t h in the employers' liquidation of internal contract and in the curbing and focusing of the p o w e r of the salaried f o r e m e n w h o replaced them. Standard costing systems w e r e p i o n e e r e d as an aspect of the fragmentation and deskilling o f craft labour, which had hitherto resisted employers' attempts at intensification through p i e c e w o r k p a y m e n t systems. O n c e the American industrial engineers had gained control o v e r working methods, it b e c a m e possible for t h e m to make "scientific" decisions on the p a c e of work, and to issue these in the form o f standard costs. As organisations g r e w in size and complexity, the p r o b l e m of securing middle m a n a g e m e n t c o m m i t m e n t to the demands of capital ownership for secure dividends was addressed b y the d e v e l o p m e n t o f the return-on-investment measure. A re.examination o f the General Motors case r e p o r t e d b y Johnson and Kaplan indicates that the effectiveness of this measure depended, at least in part, on the "drive system" of e m p l o y m e n t and anti-union campaigns which secured the freedom of middle managers to t h r o w the costs of e c o n o m i c fluctuation and recession directly o n t o the worlcforce. Subsequently, the drive system ran into, and partially created, the American recession of the 1930s, from w h i c h there e m e r g e d a resurgent labour m o v e m e n t and a government committed to s o m e measure o f legislative support for trade

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TREVOR HOPPER and PETER ARMSTRONG

unionism and e m p l o y m e n t stability. In these circumstances, the relevance of the accounting systems o f the 1920s was indeed lost. Managemerits b e c a m e less able to a c t on accounting information w h i c h told t h e m where, and by h o w much, to cut direct labour costs. Instead, large corporations, aided by the m o n o p o l y positions w h i c h they increasingly enjoyed, b e g a n to e m p l o y budgets for the very different p u r p o s e of preserving an accord with their core labour forces b y means of m o n o p o l y pricing policies. J o h n s o n and Kaplan describe an early p r o t o t y p e of this strategy in their case study of DuPont, though the purpose there was apparently to k e e p manufacturing plant fully o c c u p i e d rather than to provide stable employm e n t as such. W h e n used as an instrument of m o n o p o l y pricing policies, apportioned indtrect costs b e c a m e relevant in cost accounting systems, as o p p o s e d to the p r i m e costs relevant to m a n a g e m e n t decisions on manufacturing methods. In the phase o f capitalist d e v e l o p m e n t described b y G o r d o n et aL ( 1 9 8 2 ) as one of "segmentation", this a c c o m m o d a t i o n with labo u r was restricted to a p r i m a r y sector of core operations within core corporations. Elsewhere, In the competitive sector o f the e c o n o m y and in the small suppliers to core corporations, secondary sector e m p l o y m e n t conditions continued. Indeed, by throwing the effect o f e c o n o m i c fluctuations and d o w n t u r n o n t o s e c o n d a r y sector firms, core corporations w e r e able, in effect, to use the insecurity and l o w wages o f secondary sector e m p l o y m e n t as a m e a n s of subsidising their a c c o m m o d a t i o n with their o w n labour forces. T h e r e are signs that the boundaries of this a c c o r d are n o w being redrawn. Whilst parts of the i n d e p e n d e n t primary sector of managers and professionals remain protected, the bureaucratic and costly apparatus of control m large c o r e conglomerates, w h i c h had e m e r g e d in m o r e benign e c o n o m i c conditions than the past fifteen years or so, is increasingly being questioned w i t h c o n s e q u e n c e s for the control and e m p l o y m e n t p r o s p e c t s of lower levels of management. Similarly, condttions m the subor-

dinate primary sector of skilled manual workers are increasingly u n d e r attaclc Anti-union drives and threats o f plant closure have enabled employers to claw back previous trade union gains on wages and e m p l o y m e n t security. Edwards (1979, p. 157) argues that the accord with subordinate primary sector labour c a m e u n d e r pressure in the early 1970s w h e n the oil crisis precipitated a series of e c o n o m i c and social crises. Under these conditions, "For the firm, bureaucratic control threatens to b e c o m e a pact with the devil thaL while offering temporary respite from trouble, spells long-term disaster. The reason ts simple: bureaucratic control speeds up the process of converting the wage bill from a variable to a fixed cost." For these reasons, the present may well turn out to be a period of exploration from which n e w forms of control of the labour process and its immediate m a n a g e m e n t may emerge. T h e r e are parallels with the British context, in w h i c h debates o n "Japanisation" (IndustrtalRelations Journal, 1988) and "flexibility" (Pollert, 1991), b o t h tacitly predicated u p o n the destruction of current trade union rights, n o w clog the academic and practitioner journals. In this context, current accounting research obsessions with agency theory, downscaling and financial rewards, far from being irrelevant to real-life p r o b l e m s as Johnson and Kaplan believe, make a good deal of sense. Agency theory, m particular, offers a n e w "scientific" rattonale, and s o m e practical guidance, for tying the rewards of managers to their success in rolling back the previous gains made b y labour and treating it as a variable and expendable cost (see Metcalf, 1989, on the effects of such initiatives on macro-measures of British labour productivity). Likewise, the attraction to firms of activity costing may lie in its potential for questioning the continued need for bureaucracies and bureaucrats w h o s e functions originated not in the quest for corporate efficiency but in the search for a labour/capital accord and associated m o d e s of control which are n o w perceived as redundant. In the American context, the mroads of Japanese manufacturers have b e e n such that

COST ACCOUNTING, LABOUR AND CONGLOMERATES

Harvard Business School itself, so long the high temple of strategic management, is now the headquarters of a sect which reasserts the centrality of manufacturing policy (Hayes & Abernathy, 1980; Skinner, 1985) The work of Johnson and Kaplan, with its concern to adapt management accounting to new manufacturing technologies and Japanese systems of organisation, needs to be seen as part of this intellectual ferment. It is likely that Relevance Lost, w i t h its resonant assertion that management accounting systems are to be judged solely by their relevance to managerial decisions on man-f~cturing processes, however historically inadequate (as this paper has hopefully demonstrated), may turn out to be an important moment in the search for a leading role for accounting in new forms of control of the labour process. On the other hand, there are reasons for expecting the influence of financial reporting on management accounting systems to increase rather than decrease. Burawoy (1985) sees the present intensification of internatzonal competition and the potential mobility of capital in multinational conglomerates as creating the conditions for new regimes of corporate control in which financial reports are used to reassert the primacy of capital accumulation at

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the level of operating subsidiaries. Thus plantlevel accommodations with primary sector labour (regimes of "factory hegemony" in Burawoy's terminology) may be preserved through the common interest of plant-level management and labour in preventing the flight of capital At the same time, these may be subjected, through financial accounting reports, to the discipline of internal capital markets. If Burawoy is correct, and this hegemonic despoosm is indeed the map of the future, corporate-level management accounting may continue to pay little attention to the prime costs of production and regard these as an internal matter for establishment-level managements in their competition for investment capital If this perpetuates the games of financial entreprenenrship currently played with overhead allocation by the managers of operating subsidiaries (and much decried by Johnson & Kaplan), the result may be a continuation of the loss of relevance to manufacturing policy of management accountancy. However, because individual companies may be able to evade the consequences by astute policies of acquisition and divestment, the costs may ultimately appear in the U.S. balance of payments figures rather than in the balance sheets of the companies concerned.

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