Monthly Archives: March 2014

Accounting for Deception in the Industrial Revolution

Creative accounting in the British Industrial Revolution: Cotton manufacturers and the ‘Ten Hours’ Movement

By Steve Toms and Alice Shepherd (both at the University of Leeds Business School)


The paper examines an early case of creative accounting, and how, during British industrialization, accounting was enlisted by the manufacturers’ interest to resist demands, led by the ‘Ten hours’ movement, for limiting the working day. In contrast to much of the prior literature, which argues that entrepreneurs made poor use of accounting techniques in the British industrial revolution, the paper shows that there was considerable sophistication in their application to specific purposes, including political lobbying and accounting for the accumulation of capital. To illustrate lobbying behaviour, the paper examines entrepreneurs’ use of accounting to resist the threat of regulation of working time in textile mills. It explains why accounting information became so important in the debate over factory legislation. In doing so, it shows that a significant element was the accounting evidence of one manufacturer in particular, Robert Hyde Greg, which had a strong impact on the outcome of the parliamentary process. The paper uses archival evidence to illustrate how accounting was used in Greg’s enterprise and the reality of its economic performance. The archival evidence of actual performance is then contrasted with the figures presented by Greg to the Factories Inquiry Commission, convened by the House of Commons in 1833-1834 to hear witnesses from the manufacturing interest. These sets of figures are compared and contrasted and discrepancies noted. Conclusions show that the discrepancies were substantial, motivated by Greg’s incentives to present a particular view of low profits, high fixed costs, and the threat of cheaper overseas competition. The figures appeared to lend some credibility to the apparent plight of manufacturers and to Nassau Senior’s flawed argument about all profit being earned in the ‘last hour’ of the working day. The consequence was a setback for the Ten Hours movement, leading to a further intensification of political struggles over working conditions in the 1840s.


Review by Masayoshi Noguchi

The paper by Toms and Shepherd was distributed by NEP-HIS on 2013-11-22. It makes a welcomed contribution to researching the role of accounting information within the British Industrial Revolution, as great debate still continues over the extent to which accounting technology was used for management decision making during that period.

The aim of Toms and Shepherd is to examine “the use of accounting by entrepreneurs to resist the threat of regulation of working time in textile mills in the early 1830s” (p. 2). This by analyzing the extent of “anti-regulation lobbying on working hours and child labour was influenced by accounting manipulation” (p. 2).

Archival evidence was sourced in the business records of the partnerships of Samuel H. Greg and Sons. As is well known, one distinctive feature of accounting system of partnerships until present day is profit-sharing amongst principals. Toms and Shepherd also examines in detail the level of “sophistication in recording capital appropriations and accumulations” (p. 4) among partners. This as the partnerships’ accounting system recognised implied interest charges of capital and used them to arrive at the balance carried forward. However, this criteria sharply contrasted with the absence of any other criteria for accounting for fixed assets (including depreciation). Fixed assets were treated as part of “[Greg’s] private estate and not assigned to the partnership” (p. 14). The practice at Greg and Sons thus provides a further case to support Pollard’s critical assessment of the limited use of accounting information for decision purposes (p.14).

Business records recording the actual performance of the business are then contrasted with evidence submitted by Robert Hyde Greg to the Factories Inquiry Commission of 1833. Toms and Shepherd then argue that the latter accounting evidence was distorted by the manufacturer’s interest to oppose the introduction of regulation stipulating the working day in textile factories. In particular, Greg manipulated accounting evidence submitted to the Factories Inquiry Commission by exaggerating “the importance of wages as an expense” (p. 22). This by assuming that most of the production costs in general, and wages in particular, were fixed costs and thus “reducing the working day would increase the burden of fixed charges” (p. 21) on profit.

Robert Hyde Greg (1795-1875)

Using the information recorded in Greg’s accounts of the partnership, Toms and Shepherd offer some factual and contra-factual exercises, including the calculation of “implied” rate of return on capital (pp.32-33). They then compare these results with the evidence provided by Greg to the Commission thus providing clear evidence of the manufacturer’s accounting manipulation. However, as the authors themselves admit, the concept of “return on capital is not referred to specifically in Greg’s evidence (only ratios of profit to output)” (p. 31), even though “the committee (sic) could easily draw conclusions from his tabulated appendices” (p. 31). Personally I would like to know more about the effect of writing-off the asset values exercised in 1832 (pp. 27, 30) on Greg’s submission of the accounting evidence to the commission in 1933.

With the skilled manipulation, the evidence submitted by Greg was successful to achieve a political effect with the final report of the Commission incorporated the entrepreneurs’ argument against the regulation on working hours. The authors conclude that accounting information could be used “not so much as an aid to [rational] management decisions, but as a [opportunistic] means of influencing others” (p. 36).

Slavery and the Modern World

The transatlantic slave trade and the evolution of political authority in West Africa

by: Warren C. Whatley (


I trace the impact of the trans-Atlantic slave trade on the evolution of political authority in West Africa. I present econometric evidence showing that the trans-Atlantic slave trade increased absolutism in pre-colonial West Africa by approximately 17% to 35%, while reducing democracy and liberalism. I argue that this slavery-induced absolutism also influenced the structure of African political institutions in the colonial era and beyond. I present aggregate evidence showing that British colonies that exported more slaves in the era of the slave trade were ruled more-indirectly by colonial administrations. I argue that indirect colonial rule relied on sub-national absolutisms to control populations and extract surplus, and in the process transformed absolutist political customs into rule of law. The post-colonial federal authority, like the colonial authority before it, lacked the administrative apparatus and political clout to integrate these local authorities, even when they wanted to. From this perspective, state-failure in West Africa may be rooted in a political and economic history that is unique to Africa in many respects, a history that dates at least as far back as the era of the transatlantic slave trade.

URL: EconPapers: Africa

Review by Stephanie Decker

Last Sunday 12 Years a Slave (2013) won best picture at the Oscars ceremony. A timely reminder that slavery remains a subject of contemporary relevance. But researchers have also been concerned with the long-term impact of slavery on the modern world, with some, like Bill Cooke (2003), arguing that ante-bellum plantation slavery was one of the earliest instances of modern management. If you are wondering why people draw this parallel, have a look at this infographic: 

Spot the difference: slave owners and modern managers. Source:

The careful management of slavery and the slave trade meant that slavery produced a large number of records, and in particular, statistically relevant material. But these figures are often sketchy and frequently problematic to assess Africa’s economic development. This remains a problem even for twentieth century quantitative sources as Morten Jerven has shown in his recent book Poor Numbers (2013).

Notwithstanding the inherent difficulties of using statistics for African history, Warren Whatley’s working paper (distributed in a special issue of Nep-His on 2013-11-07) contributes to a growing literature in economic history which seeks to show the effects of an historical event (loosely defined) on the institutional development of a region. The main assumption underlying this research is “path dependence”, and that these “initial conditions” determine subsequent institutional weaknesses which in turn affect economic development. Inspired by the influential work of Acemoglu, Johnson & Robinson (AJR) on the colonial origins of institutions (2001) and the reversal of fortunes (2002), a new line of research was developed by Nathan Nunn (2008, 2009) on the impact of the slave trade on the long-term determinants of economic development. Warren Whatley’s paper takes a slightly different approach to the literature, but this paper develops a similar argument.

Overall, when Africa’s poor long-run economic performance is attributed to its institutional weaknesses, there are, broadly speaking , three major explanations. AJR (2001) famously argued that the imposition of colonialism, which was a form of conquest and thus an illegitimate form of rule, created extractive institutions in non-settler colonies. However, Gareth Austin (2008) has also pointed out that it is not that easy to label all non-settler colony institutional frameworks as purely extractive, e.g. in West African peasant agriculture. An alternative explanation is of course that it was not so much colonial institutions that were extractive, but the trans-Atlantic slave trade. It is hard to argue with the essentially extractive nature of enslavement, but the question is whether it had a long-term effect.

Statistics on African development are often flawed even for twentieth century historical data

The third explanation is labour scarcity (Hopkins, 1973; Austin, 2008), which Whatley seems to find compelling, but links to the slave trade as an economic shock in a way that is hard to follow. Confusingly, he suggests that the slave trade would provide evidence for the labour scarcity hypothesis, but evades the question of whether the slave trade created labour scarcity (which he appears to be saying on p. 4) or whether it exacerbated it to the point of being a major economic shock (more likely in my view). As he also evades the question of why a territory chooses to export a crucial resource that is already scarce, Because if labour was already scarce but was exported nevertheless, one could argue that political institutions were already dysfunctional before the trans-Atlantic slave trade. Not only does the working paper claim to show that slave exports are a better explanation of cross-sectional variation than environmentally induced labour scarcity (p. 4), but that is also shows that the slave trade caused the spread  of absolutism (i.e. authoritarian political systems, p. 6). It is questionable whether cross-sectional data can be used as evidence of a process that took place over a period of time (more than a century, in this case).  This snap-shot of one point in time also does not appear suitable to prove causality, only correlations (p. 12). It is equally plausible that predatory states facilitated the slave trade, an argument that is easily supported by the geographic distribution of specific slave ports.

But causality becomes a really thorny issue with claims such as: “British colonies that exported more slaves were ruled more indirectly by colonial administrations (p. 6).” While in itself a nonsensical statement (slave trade and indirect rule in formal British colonies did not co-exist in time), it is based on the argument that slavery-induced institutions persisted throughout the colonial era and beyond. Nowhere in the paper is this demonstrated convincingly, and the evidence and analysis in figure 2 that supposedly support this claim are deeply anachronistic.

Figure 2 tries to show that the impact of the slave trade continued its influence throughout the colonial period, by linking slave exports to indirect rule (with post-colonial states as the unit of analysis – why not use colonial states?). The slave trade peaked in the eighteenth century, while indirect rule was only developed in the late nineteenth century and continued into the first half of the twentieth century. Post-colonial states (the unit of analysis) were created in the latter part of the twentieth century, and were often criticised for their total lack of connection to pre-colonial polities. These phenomena were not co-existing, and unless one assumes that an institutional framework that had its inception during the slave trade carried through colonialism into independent states, it really makes no sense connecting two sets of data separated by a century via a unit of analysis that did not even exist until much later still.  The argument of the paper is to prove that the slave trade had a long run historical legacy because of institutional inertia and path dependence, but figure 2 does not prove this, and instead just assumes this to be true without considering alternative explanations.

Labour scarcity due to environmental constraints is a far more straightforward explanation, and pretty much spans the entire time period under consideration. It is quite simply the most parsimonious argument, as it does not require any postulated mechanism that carries the institutional shock of the slave trade through colonialism into the post-colonial period. That seems to take the cause-effect relation seriously, whereas this “causal history” simply presents logical tautologies by equating institutions with historical legacies (p. 6), thus making the mechanism (institutions) the same as the effect (long-run historical legacies). And suddenly causation in history seems no longer that complicated.

In summary, I have two major issues with this research: firstly how “causal” history understands institutions (making it both the explanation and what is to be explained), and secondly how the evolution of institutions (diachronic) is supposedly tested by cross-sectional data (synchronic). Causal history in fact dispenses with history and substitutes it with path dependence. But this kind of institutional history has very little to say about why and how institutions change. This is an area in which history could make a real contribution, but not if institutions are reduced to static phenomena. Claims such as that “the political structure of many post-colonial nation-states in Africa is rooted in a political history that […] stretched […] back [to] the era of the transatlantic slave trade” are obviously appealing but remain difficult to prove.


Acemoglu, D., Johnson, S. & Robinson, J.A. (2001). “The Colonial Origins of Comparative Development: An Empirical Investigation.” The American Economic Review 91(5): 1369-1401.

Acemoglu, D., Johnson, S. & Robinson, J.A. (2002). “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution.” The Quarterly Journal of Economics 117(4): 1231-1294.

Austin, G. (2008). “The ‘reversal of fortune’ thesis and the compression of history: Perspectives from African and comparative economic history.” Journal of International Development 20: 996–1027.

Cooke, B. (2003). “The Denial of Slavery in Management Studies.” Journal of Management Studies 40(8): 1895-1918.

Hopkins, A.G. (1973). An Economic History of West Africa, London: Longman.

Jerven, M. (2013). Poor Numbers: How We Are Misled by African Development Statistics and What to Do about It, Cornell Studies in Political Economy, Ithaca, N.Y.: Cornell University Press.

Nunn, N. (2008). “The Long-Term Effects of the African Slave Trades.” The Quarterly Journal of Economics 123(1): 139-176.

Nunn, N., Wantchekon L. (forthcoming). “The Slave Trade and the Origins of Mistrust in Africa.” The American Economic Review.


Brit Steve McQueen becomes first black director to win Best Picture for “12 Years a Slave”. Source: The Independent (2014-3-3