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The Bottom Line

Evan Davis gets to the heart of the big finance stories at The Bottom Line.

Creativity is central to the human condition and gives rise to innovation and entrepreneurship in a range of domains and activities. Human beings are also deeply territorial – constantly creating and deconstructing homelands in a Phoenix-like dance through time. In Anthony Powell’s masterly opus on what it is to be English, A Dance to the Music of Time, the participants tread and re-tread over the same spaces as they attempt to make sense of their existence. In the Star Trek world of ‘boldly going’ it was claimed that space was the final frontier, but in its geographical and temporal senses, space is the first frontier we attempt to account for and create around, however unwittingly. In our dance to the current mood music, creative accounting and how we manage, operate and occupy our work spaces are pertinent. The frontiers of what is efficacious in the two areas appear to be cyclical and not particularly structural. Enron became synonymous with everything that is destructive about accounting, and the de-humanising environment of call centres with the zeitgeist of work organisation.

The Enron sign.
Picture © STANANDLOU, used under Creative Commons licence.

Accounting is a framework for evaluating resource allocation and management in organisations. It is not objective reality, whose methodologies and methods lead to optimal and efficient outcomes. This would only be the case if we lived in a world of efficient markets in which all prices equated to values. This world would correspond to the Arrow-Debreu Theorem, named after the two Nobel prize-winning economists, in which all market exchanges are matched by underlying contingent commodities within a general equilibrium framework. Differences in time and place, and thus transaction costs, are not a consideration within this framework, so the accounting profession is stuck between the Charybdis of efficiently measuring values of organisational assets and the Scylla of differences in the time and place in the transactions of these values through market exchange.

Some siren voices may claim that the profession deserves everything it gets given scandals like Enron and the recent financial crisis, as well as the tax avoidance schemes which reached their zenith in the UK in the 1970s. However, accounting isn’t the agency of these outcomes, it’s the result of unintended consequences and perverse outcomes of the structure of regulation and regulatory changes. The ingenuity of ways in which regulations can be bypassed and turned into market opportunities is manifold and legion, but you cannot regulate away creativity and innovation, unless one starts to distinguish between good and bad parts of this human condition. So, what is the distinction between good and bad creative accounting? The length of a piece of string or when the ‘perps’ get caught? As for tax avoidance schemes, well we could ‘eat the rich’, and then send the accountants and other ‘creatives’ like management consultants and advertising agencies to another galaxy on the pretext of the earth exploding, but then financial products would be created on the transactions in human flesh and ‘marked to market’ at, say, Smithfield, the meat market in London. Getting rid of one form of accounting and its creative variants would then just generate others. The creative frontiers for accounting are set by the statute and international standards. These frontiers are really thresholds, the negotiation of which can lead to deviant behaviour – which is perhaps also one of the properties of the human condition.

The question of organisational deviancy is one that arises from why firms appear to spend so much time, energy and resources in managing property. The fundamental reason is that land is both a fixed and variable form of capital and gives rise to a set of uses and values, and most of our net worth is tied to property. At the philosophical level, John Locke developed the genesis of the idea of property rights as the foundation of the modern liberty. In the hands of the Peruvian economist Hernando de Soto, these rights are the basis of sustainable economic development. So property matters.

There is also the issue of power and prestige concerning property. The management of a mutual society may look down in pride on their provincial locale as they survey it from the heights of their new building. No self-respecting bank in 1980s London was complete without occupying a building with an atrium and an internal galleria. The question of architecture has external and internal dimensions. Externally, the need for signature architecture with a Gehry, Foster or Pei designed building seems central to corporate image. Internally the complex socio-psychological relationships of workers to their spaces cuts across the human resource management, finance and estate management functions. For the latter, maximising personnel in minimum space is rational, but the ebb and flow of movement and work patterns means that open plan or Dilbert-like booths are not optimal solutions. The way in which workers seek to humanise their work spaces suggest that the deep territoriality in all of us isn’t restricted to the home, but the challenge is to manage the challenge that status being often linked to a spatial hierarchy. Many firms claim that employees are their most valuable asset, but if they don’t creatively account for and put their spatial resources where their mouth is, this claim will not stand scrutiny. If you want to stifle workers’ creativity and innovation in solving business problems, then housing them as automatons in a single open space will suffice and no amount of virtual working will change this. There are creative solutions, but these are not cheap as the frontiers between private and public spaces in the workplace are constantly crossed and re-crossed.

At the banal level, accounting for the creative frontiers of managing financial and work space resources is a question of races and riders. The bottom or winning line, however, will only reached when it is recognised that these organisational imperatives are part of complex systems in which creative spaces develop and thrive.

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Ethics Bites on Business Ethics

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About the author

Leslie Budd is Reader in social enterprise at The Open University Business School. He is an economist and has written extensively on the relationship between regional and urban economics, and international financial markets.

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Thinking Allowed

The BBC Radio 4 soap, The Archers, which was set up after the second world war to provide public information to provide advice and guidance to rural communities and farmers, has recently featured a big story on fraud. It’s chance, although I wouldn’t bet on it, because, unlike some of the poker playing Archers’ characters who are involved in the current narrative, I’m not a betting person, but the current storyline coincides with Radio 4’s series on 'White-Collar Crime' on Thinking Allowed.

This is white-collar crime: it involves a £5million fraud case

This is white-collar crime: it involves a £5million fraud case. The main protagonist, businessman and wheeler dealer Matt Crawford, has a chequered past and has come up the hard way, unlike his clearly middle-class partner, Lillian, who is not involved in the case, except through her emotional relationship with him. Lillian is a member of the eponymous, largely affluent, Archer family of local farmers, who also mostly occupy the moral high ground, as well as owning much of it: she is also the widow of a wealthy man. Matt has struggled and, whilst on the right side of the law, was tolerated by the local land consortium, Borsetshire Land, but having transgressed, or at least been caught, he is marginalised. In spite of Lillian’s hopes for leniency, he has been sent to prison; ‘Take them down!’ said the judge and listeners were faced with the speed of sentencing and its finality, however well-off the offender.

Matt and his business partner at TWJ bank, Stephen Chalkman (Chalky), receive custodial sentences, and Lillian is left weeping loudly. Matt not only has the reassurance of her fidelity, but also that of earlier storylines, where characters with much more clearly working-class credentials have been reinstated into the community following release from prison. For example, Susan Carter was imprisoned as a result of protecting her brother, the infamous Clive Horrobin, armed robber and hostage-taker, at an armed raid on the Ambridge village shop. Susan currently manages the shop and post office and plays a key role in the community. However, such stories are haunted by class. Matt was never quite accepted; Susan is just the best of a rough family, a fragile step away from social exclusion.

Soaps often engage with social issues, usually with dramatic hyperbole but The Archers offers some more nuanced, complex coverage. The programme, which has a tradition of dealing with big issues: from racism, the rural economy and economic recession to dementia, family breakdown and sibling rivalry, does not limit itself to rural or agricultural matters. It deals with big issues (Woodward, 2009), such as class, family, kinship, place, diversity and inequality, which intersect in different ways, through the lens of personal experience.

Soap opera can do something to engage with the detail and affect of social phenomena

Soap opera can do something to engage with the detail and affect of social phenomena like white-collar crime in complex ways. As the sociologist C.Wight Mills argued (The Sociological Imagination), this is what sociology does; it demonstrates the powerful interconnections between private troubles and public issues through the sociological imagination. This is an everyday story of the personal and the public and political which has wider resonance and demonstrates, albeit inadvertently, the power of thinking sociologically.

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• The Big Issues, by Kath Woodward, Routledge, 2009
• The Sociological Imagination, by C Wright Mills, Harmondsworth, Penguin (1970), 1st edition 1959
• Get The Archers podcast
• Serious Fraud Office help The Archers with their inquiries
• Join the discussion on white-collar crime

About the author

Kath Woodward is Profesor of Sociology at the Open University, focusing on gendered identities. She has recently completed research into anti-racist organisations in sport.

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The Bottom Line

Evan Davis gets to the heart of the big finance stories at The Bottom Line.

A number of years ago, the sociologist Richard Sennett pondered on why it was, that in a so-called digital or virtual age, global financial and business services still crowded into the world’s leading cities. The answer to his question and that of why firms cluster near each other is rooted in the concept of agglomeration economies, of which there are three types:

• Localisation economies: which refer to the advantages accruing to firms in the same activity which result from their joint location;

• Urbanisation economies: which are concerned with the range of advantages to the individual firm which result from the joint location of firms in different and unrelated activities;

• Activity-complex economies: these refer to economies that emerge from the joint location of unalike activities which have substantial trading links with one another. In the case of manufacturing, such economies typically occur within industrial complexes.

 The City of London is a classic example of activity-complex economies at play. Financial firms and associated business services crowd together in the Square Mile and its environs in order to benefit from external and internal economies of scale and scope. Economies of scale that are internal to the firm include spreading a larger output over existing productive capacity, and differentiation of products or services from existing production platforms. External economies of scale and scope include the ability of firms to draw on specialised pools of local labour; and, to exploit different markets because of transport and technology infrastructure. Agglomeration economies are thus at the heart of the dreaded ‘c’ word – clusters – one of the topics of the latest BBC/Open University broadcast of The Bottom Line. The other topic is the future of television.

It’s reasonable to ask, “What on earth has the clustering of firms in the same locale got to do with the future of television?” Well, for many commentators the future of broadcast media is multi-platform. The advantage of multi-platform production, as in any industry, is the ability to exploit external and internal economies of scale and scope; in other words, the capacity to create activity-complex economies. Whether they’re in Euclidean space, cloud computing or cloud cuckoo land makes no difference; clustering concerns the co-location of business activities. The paradox is that in this supposed age of the ‘death of distance’, the dominance of clustering in real geographical space prevails.

The most frequently cited example of a cluster is Silicon Valley in California, the heartland of web-based companies and venture capitalists from where two of the guests of the current programme were drawn. In the 1980s, it was ‘Third Italy’, the region of Emilia Romagna in which small textile firms co-located and gave rise to the Benneton phenomenon, among others. Clusters are nothing new and the academic literature is informed by reference to the work on ‘industrial districts’ of the economist Alfred Marshall, who examined the characteristics of industries in 19th Century England, in particular their locational advantages. The conflating of clusters with industrial districts does a serious disservice to Marshall and his disciples. The celebrity academics and management consultants who have been significantly advantaged by their promotion of an increasingly elastic concept overlook one key fact. Many firms in the same sector are often blithely unaware of the immediate location of competitors, as countless surveys have demonstrated. This is especially true of small and medium sized enterprises: the basis of Marshall’s original ‘industrial districts’. It is the very elasticity of the concept of clusters and the lack of empirical evidence that weakens its claims as the universal panacea for economic development, as the economic geographers, Ron Martin and Peter Sunley perceptively note, “The cluster literature is a patchy constellation of ideas, some of which are important to contemporary economic development some of which are either banal or misleading.” One important issue that’s overlooked in the discussions of clusters is the bounty of nature. London became a global financial centre because its topography allowed it to be become a port; Hollywood initially attracted film makers because of its natural light. Similarly, the bounty of technology has created the television and Internet ages, but what sustains different forms of clusters is their underwriting by the state.

The question of the future of the televisual age is an important one, but one that can lead to debates that are both banal and misleading. Almost since the day John Logie Baird first demonstrated his new device, the television has been the hearth in the home that families cluster around. Whether that connected cluster we commonly know as the Web will change the locale of our emotional and social hearths and heimats is a future question but one that has contemporary resonance. For many, the Internet will replace television as the dominant medium of choice, but as the Chief Executive of the UK-based Channel 5, the other guest of the programme, pointed out, the two are complements and not substitutes. The most ubiquitous contemporary technology is the mobile phone, which has a visual function that allows the user to access television programmes. The Internet and associated technologies may be the medium of transmission but they are not the message.

In the present day, television has become a product and a process that generates its own cluster of activities because technology and social (and business) practices create external and internal economies of scale and scope: a basic condition for the development of clusters. The multi-platform of broadcast media has joined the pantheon of activity-complex economies and agglomeration around a hearth is no longer restricted to family viewing of the Billy Cotton Band Show or Strictly Come Dancing on a Saturday evening. In 1979, the Tubes sang “I really love my television” on the track ‘TV is King’ and, like geography, reports of its death have been very premature. Clusters have been around much longer than television but the future of these connected and networked phenomena is still assured as their natural and technological bounties lead us through the millennium.

Find out more

The following Open University courses will help you explore these subjects in greater depth:

Managing 1: Organisations and People

Understanding Cities

Understanding Media

Film and Television History

About the author

Leslie Budd is Reader in social enterprise at The Open University Business School. He is an economist and has written extensively on the relationship between regional and urban economics, and international financial markets.

Subscribe to Leslie Budd's posts