SPEAKER_00: Amazing, fascinating stories of inventions, ideas and innovations. Yes, this is the podcast about the things that have helped to shape our lives. Podcasts from the BBC World Service are supported by advertising.
SPEAKER_03: Selling your car to Carvana is as easy as...
SPEAKER_02: As easy as pie?
SPEAKER_03: Sure. All you have to do is enter your license plate or bin.
SPEAKER_02: As easy as a stroll in the park.
SPEAKER_03: Okay. Just answer a few questions and you'll get a real offer in seconds.
SPEAKER_02: As easy as singing.
SPEAKER_03: Why not? Schedule a pick up or drop off and Carvana will pay you that amount right on the spot.
SPEAKER_02: As easy as playing guitar. Actually, I find that kind of difficult.
SPEAKER_03: But selling your car to Carvana is as easy as... Can be.
SPEAKER_04: Visit Carvana.com or download the app to get an instant offer today. 50 Things That Made the Modern Economy with Tim Harford.
SPEAKER_01: In 1495 or thereabouts, Leonardo da Vinci himself, the genius is genius, noted down a list of things to do in one of his famous notebooks. Da Vinci's to-do lists, written in mirror writing and interspersed with sketches, are magnificent.
SPEAKER_02: Find the master of hydraulics and get him to tell you how to repair a loch, canal and mill, in the Lombard Manor. Ask the Florentine merchant Benedetto Portinari by what means they go on ice in Flanders. And the deceptively brief...
SPEAKER_01: Draw Milan.
SPEAKER_01: This list included the entry...
SPEAKER_02: Learn multiplication from the root, from Maestro Luca.
SPEAKER_01: Leonardo was a big fan of Maestro Luca, better known today as Luca Pacioli. Pacioli was, appropriately enough, a Renaissance man. Educated for a life in commerce, he was also a conjurer, a master of chess, a lover of puzzles, a Franciscan friar and a professor of mathematics. But today Luca Pacioli is celebrated as the most famous accountant who ever lived. Pacioli is often called the father of double-entry bookkeeping, but he didn't invent it. The double-entry system, known in the day as Bookkeeping alla Venetianum in the Venetian style, was being used two centuries earlier, around 1300. The Venetians had abandoned, as impractical, the Roman system of writing numbers and were instead embracing Arabic numerals. They may also have taken the idea of double-entry bookkeeping from the Islamic world, or even from India, where there are tantalising hints that double-entry bookkeeping techniques date back thousands of years. Or it may have been a local Venetian invention, repurposing the new Arabic mathematics for commercial purposes. Before the Venetian style caught on, accounts were rather basic. An early medieval merchant was little more than a travelling salesman. He had no need to keep accounts. He could simply check whether his purse was full or empty. But as the commercial enterprises of the Italian city-states grew larger, more complex and more dependent on financial instruments such as loans and currency trades, the need for a more careful reckoning became painfully clear. We have a remarkable record of the business affairs of Francesco Di Marco Dattini, a merchant from Prato, near Florence. Dattini kept accounts for nearly half a century, 1366 to 1410. They start as little more than a financial diary, but as Dattini's business grows more complex he needs something more sophisticated. He berated one befuddled associate, and declared to another,
SPEAKER_01: But Dattini himself didn't get lost in a tangle of his own financial affairs, because in the 1380s he began using the state-of-the-art system of bookkeeping a la Venetiana. So what, a century later, did the much-lauded Luca Pacioli add to the discipline of bookkeeping? Well, quite simply, in 1494 he wrote the book. And what a book it was.
SPEAKER_01: It was an enormous survey of everything that was known about mathematics. Amidst this colossal textbook, Pacioli included 27 pages that are regarded by many as the most influential work in the history of capitalism. It was the first description of double-entry bookkeeping to be set out clearly, in detail, and with plenty of examples. In essence it has two key elements. First Pacioli describes a method for taking an inventory, and then keeping on top of day-to-day transactions using two books, a rough memorandum and a tidier, more organised journal. Second, he uses a third book, the ledger, as the foundation of the system, the double-entries themselves. Every transaction was recorded twice in the ledger. For example, if you sell cloth for a ducat, you must account for both the cloth and the ducat. The double-entry system helps to catch errors, because every entry should be balanced by a counterpart. And this balance, this symmetry, seems almost divine, appealing enough for a Renaissance mathematician. It was during the industrial revolution that double-entry bookkeeping became seen not just as an exercise for mathematical perfectionists, but as a tool to guide practical business decisions. One of the first to see this was Josiah Wedgwood, the pottery entrepreneur. At first, Wedgwood, flush with success and fat margins, didn't bother with detailed accounts. But in 1772, Europe faced a severe recession, and demand for Wedgwood's ornate crockery collapsed. His warehouses began to fill with unsold stock, his workers stood idle. How should he respond? Faced with this crisis, Wedgwood turned to double-entry bookkeeping to understand where exactly in his business the profits were emerging, and how to expand them. He realised how much each piece of work was costing him, a deceptively simple-sounding question, and calculated that he should actually expand production and cut prices to win new customers. Others followed, and the discipline of management accounting was born, an ever-growing system of metrics and benchmarks and targets that has led us inexorably to the modern world. But in that modern world, accounting does have one more role. It's about ensuring that shareholders in a business receive a fair share of corporate profits, when only the accountants can say what those profits really are. And here, the track record is not encouraging. A string of 21st century scandals – Enron, Worldcom, Parmalat, and of course the financial crisis of 2008 – have shown us that audited accounts do not completely protect investors. A business may, through fraud or mismanagement, be on the verge of collapse, yet we cannot guarantee that the accounts will warn us of this. Accounting fraud isn't a new game. The first companies to require major capital investment were the British railways of the 1830s and 1840s, which needed vast upfront investment before they could earn anything from customers. Investors poured in, and when railway magnates couldn't pay the dividends that the investors expected, they simply faked their accounts. By 1850, the entire railway bubble had collapsed in ignominy. Perhaps the railway investors should have read up on their Geoffrey Chaucer, writing around the same time as Francesco De Tini, the merchant of Prato. In Chaucer's Shipman's Tale, a rich merchant is too tied up with his accounts to notice that his wife is being wooed by a clergyman. Nor do those accounts rescue him from an audacious con. The clergyman borrows the merchant's money, gives it to the merchant's wife, thus buying his way into her bed with her own husband's cash, and then tells the merchant he's repaid the debt and to ask his wife where the money is. Accountancy is a powerful financial technology, but it doesn't protect us from outright fraud and it may well lure us into complacency. As the neglected wife tells her rich husband, his nose buried in his accounts. The devil take all such reckonings!
SPEAKER_04: The definitive history of bookkeeping is Jane Gleeson White's double entry. For a full list of our sources, please see bbcworldservice.com slash 50things.
SPEAKER_01: Thanks for listening and thank you to everyone who sent in a suggestion for a 50-first thing. The deadline has now passed so we aren't accepting any more ideas, but in the next episode I'll be announcing my six favourites and explaining how you will be able to vote for the 50-first thing that made the modern economy.
