The economy may be described in three ways: human economy, physical economy and monetary economy. The factors that make up the economy are housekeeping, undertaking and financing.
From a human economy point of view, housekeeping provides labor and undertaking distributes income. And financing distributes and redistributes the income while taking unemployment countermeasures and providing a means of distribution. Given these factors, accounting establishes a standard for distribution.
From a physical economy point of view, housekeeping purchases and consumes goods while undertaking produces and sells goods. And financing builds up social capital.
From a monetary economy point of view, housekeeping invests and saves. Undertaking makes equipment investments and borrows money. And financing assures monetary credit and supplies money.
In a free economy, goods are exchanged via markets, and money is used as the medium. This money is distributed in the form of income.
Capitalism is the thinking that holds good in modern accounting systems. It would be impossible, therefore, to understand modern accounting systems without understanding capitalism. For example, what is meant by capital, profit or transaction could not be understood without understanding capitalism. Capital and profit are concepts that are remarkably oriented for accounting. Either capital or profit may be a concept, with profit and loss assumed to occur during the term determined on an accounting basis. And a capitalistic economy has a profit or loss term that is the basis of economic phenomena.
Speaking from an ideological point of view, an economic system based on the cash principle has a nature that is different from an economic system that is based on profit and loss accounting. It is necessary that this point is properly understood.
It may be safely said that economic phenomena taking place in the 20th century mostly emerged during a period of transfer from an economy based on the cash principle to an economy based on profit and loss accounting. Without understanding this point, one could not understand the meaning of a panic or a war.
And the modern economic system is a mixed economy in which both the cash principle and profit and loss accounting coexist. A portion oriented to the cash principle is borne by financing and accounting, and another portion oriented to profit and loss accounting is covered by undertaking.
We are accepting an equation, “income minus expense equals profit,” as if it were a matter of course. Nevertheless, it was only after modern accounting became established that such equation came to hold good. Before then, balance minus expenditure plus income equaled balance. In other words, the balance had been more critical than the profit. And earnings had been left out of the equation, “balance minus principal.” That is, income and expense are remarkably new concepts.
An accounting system is a mechanism driven by currency. Funds may be considered the power or energy of an accounting system. Energy is power at work intangibly.
The power of currency, that is, capital strength, resembles hydraulic power more than electric power. A hydro generator is a machine that operates using hydraulic power generated by the flow of water.
A hydraulically operated machine or mechanism is activated by the power of flowing water. No hydraulic power could be generated if the water were standing still or was unavailable in the mechanism or machine.
When reviewing financial statements, the thing we should note that the numerical values shown in such statements are not figures that indicate a quantity of currency existing in reality. The numerical values shown in financial statements are merely a trace of the currency that has already flowed. The values do not indicate that there is enough cash available to cover the numerical values shown, but instead they represent only the level at which such a numerical value has pointed to the monetary value involved.
One of the related problems is that financing, accounting and housekeeping have neither institutional continuity nor institutional compatibility naturally. So, taxation systems have become eclectic.
Unless there is an institutional incompatibility among financing, accounting and housekeeping, it would block the cause-and-effect relationship that should have shown the effects of a tax, or how and on what portion of the accounting or housekeeping the tax actually works. Furthermore, it would lead to ambiguity regards knowing what effects the taxation system has on the aspects of production and consumption. And it will be difficult, furthermore, to measure the direct effects of a taxation system on the economy.
In addition, information about financing, accounting and housekeeping is not interchangeable for want of compatibility.
What might become problematical in our modern economy is the fact that economic experts are not knowledgeable about accounting while accounting experts do not know the economy.
There is no omnipotent measure. The measure is a tool, which should be selected according to the situation or objective or according to prerequisites. Just as there is no cure-all medicine for every disease, there is no omnipotent measure to be taken.
Competition is not a principle but a tool. And it is a tool based on prerequisites. Competition could not be held without rules, which is an artificial arrangement. A conflict in the rules should be made compatible by eliminating any errors. Nevertheless, the rules have a characteristic that is different from the law, such as a given law of nature or such. It is incorrect to identify rules as self-explanatory laws.
An industry has five phases: inauguration, growth, maturity, stagnation and atrophy. There are phases in every industry. And it is an industrial form that gives birth to such a phase.
In the phase of inauguration, development competition takes place, making it difficult to link this phase with revenue in any way. Once the industry has entered the growth phase, it will be possible to expect that an expanded market may bring about an increase in revenue. Soon, newcomers will increase, causing overcompetition to take place. Consequently, revenue will decrease. In the phase of maturity, undertaking has been weeded out more progressively than usual, with revenue declining down nearly to a marginal level. In the phase of stagnation, the market comes to expect no new demand, and it falls into an oligopolic or monopolic state. And it becomes difficult for newcomers to take part in the market.
Development support is essential at the phase of inauguration. An industry with a broad reach, like the automotive industry, moreover, is required to have an infrastructure and social capital built up with priority. In the growth phase, the demand for funds grows vigorously. In the phase of maturity, it is necessary to suppress competition to protect against possible mutual weakening.
Industrial policy should be implemented according to the situations of each individual industry.
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