Yuri Biondi: The Firm As An Entity: Management, Organisation, Accounting

ARTI GRAFICHE APOLLONIO
Università degli Studi Dipartimento di

di Brescia Economia Aziendale
Yuri BIONDI
THE FIRM AS AN ENTITY:

MANAGEMENT, ORGANISATION, ACCOUNTING
Paper numero 46
Università degli Studi di Brescia

Dipartimento di Economia Aziendale
Contrada Santa Chiara, 50 - 25122 Brescia Agosto 2005
tel. 030.2988.551-552-553-554 - fax 030.295814
e-mail: segeaz@eco.unibs.it
by
Yuri BIONDI
University of St. Etienne (France)
Dipartimento di Economia aziendale (Brescia, Italy)
Presented to the SASE 17th Meeting

“What Counts? Calculation, Representation, Association”
Budapest, July 1st , 2005
ABSTRACT
Why delve into accounting to understand the economic nature of the firm? A
Coase’s recent suggestion calls economic organisation and accounting system at
issue for understanding how the special economics of the firm supersedes price
system in creating and allocating resources. But incomplete contracts economics
has no clear theorising of these functional modes of existence constituting the firm
as a whole (constituents), surely in reason of its methodological contractualism.
Starting from Coase, Shubik and Simon, instead, this paper aims at further
developing this issue, exploring the accounting system, its nature and role in the
special economics of the firm concerned with real dynamics and complexity. By
means of the accounting system dealing with the business incomes to the firm, the
economic and monetary process generated by the whole firm acquires autonomous
but interdependent existence from external markets (both from factors or products
markets). The accounting system constitutes thus the “veil” that allows this special
process to exist.
Not only the real dynamics, but also the separation between ownership, control
and management (as early discussed by Berle and Littleton) asks for the entity
view on the firm provided by dynamic accounting. Even to protect shareholders,
this kind of accountability is required, far away from the irrevocably lost
proprietary sovereignty.
In this accounting-friendly transactional and institutional perspective, the firm-
entity functions and exists as a managed dynamic system characterised by different
structures of production, institutional, organisational, or epistemic (related to the
nature and role of institutions, internal organisation, and knowledge in the firm).
Accounting system becomes a constituent part of these structures and of the whole
firm.
This new perspective opens to an interdisciplinary approach linking Economics,
Accounting, and Law by the shared, synthetic notion of the firm as an entity, which
provides the “clue” for understanding the nature of the firm as a whole.
Key-words: economic theory of the firm, incomplete contracts economics,

contractualism, systematics, accounting and economics, law and economics
of the firm
JEL Classification: D23; L22; M41

SUMMARY
1. Introduction, or about the theory of the firm ............................................. 1

1.1. Equilibrium theory of the firm as a theory of the firm, but a
misleading one ............................................................................................... 1
1.2. The innovative but bounded contribution of incomplete contracts
economics....................................................................................................... 3
1.3. Outlines for a further theory of the firm as an entity ............................. 5
2. The nature of the firm as economic organisation: the entity's

missing connection .................................................................................... 9
3. Accounting system, firm dynamics and “the institutional structure

of production”.......................................................................................... 13
4. The economic nature of the firm as an entity........................................... 22

4.1. A proposal ............................................................................................. 22
4.2. Firm-entity as actual economic coordination ...................................... 23
4.3. Firm-entity as dynamic economic activity (becoming concern) .......... 24
4.4. Firm-entity as economic organisation and institution......................... 30
4.5. Further developments: the firm-entity as financial and economic
core............................................................................................................... 35
5. Conclusions .............................................................................................. 38
References .................................................................................................... 41
Glossary ....................................................................................................... 45
Couples of contrasting notions..................................................................... 46

The Firm as an Entity: Management, Organisation, Accounting
1. Introduction, or about the economic theory of the firm
1.1. Equilibrium theory of the firm as a theory of the firm, but a

misleading one
Equilibrium economics constitutes the usual framework for theories of
the firm. The equilibrium theory of the individual firm provides a universal
frame of reference and analysis for the actual behaviour of every firm. This
framework chooses some elements and directly links them to the actual
results generated by the business activity. Therefore, framing the firm's
economic activity with equilibrium imposes some essentially static
coherence between the framework and the actual behaviour of the firm1.
In this perspective, firm dynamics (and complexity) is relegated to
alleged exercises, and the equilibrium hypothesis is always maintained.
Finally, the box that equilibrium theory designs for the firm does appear
neither black nor empty. The skeletal machinery that equilibrium supports
grapples with the underlying economic and monetary process, at least with
its ultimate elements and results. It aims at explaining selling price, cost,
quantity, and resultant (no) profit for each product separately (firm as a
nexus of prices in equilibrium).
In short, the equilibrium box based on the so-called “production
function” may be a theory of the individual firm. It grounds on marginal
cost pricing, i.e. an analytical machinery able to determine selling price,
cost and quantity of each product separately, together with some “principle
of maximisation” and with perfect competition on all the related markets for
factors or products. This bundle of instruments allows the price system alone
to dominate the firm, at least from the economic viewpoint, when creation
and allocation of resources are concerned.
Major theoretical and critical developments about the firm question
equilibrium theory of the firm as an institution and an economic
This essay is indebted to fruitful discussions with such impressive scholars as R. N. Anthony, R.
Aréna, A. Canziani, E. Chiapello, M. Dietrich, D. Gindis, Ch. Hoarau, G. Hodgson, T. Kirat, A.
Rebérioux, J. Richard, O. Weinstein, S. Zambon. I hope the result, of which I am the sole responsible,
would be valuable enough to cope with that debt.
This paper can be downloaded without charge from the Social Science Research Network
Electronic Paper Collection: http://ssrn.com/abstract=774764
1
According to the “as if” epistemological defence, also known as methodological
irrealism, provided by Friedman (1953). cf. also Machlup (1946, p. 534-535) or (1967, p. 6-
7). Instead of predictions, the utmost purpose for a theory would be to provide framework
and perspectives to understand and represent phenomena as we experience them.
1
Yuri Biondi
organisation. Like in other matters, the Emperor equilibrium has no more

clothes (Kirman 1987). Equilibrium framework is seen as an odd case of a
static system of interactions between some elements constituting the
economic activity. As frame of reference and analysis, equilibrium does not
allow the understanding of the business economic activity as it exists, is
organised and shaped by institutions.
Equilibrium theory tries to embrace the special economic activity of the
firm as an aggregate but spontaneous order established by the direct
interaction between some motives and some constraints of all the actors
involved. Yet experience teaches us also that business economic activity is
subject to other modes of existence, for contingencies and uncertainties are
no less given in its special activity than are regularities and order.
Furthermore, actual resultants of behaviour vary between firms and in real
dynamics, subject to different patterns of management and organisation, and
cannot provide a general basis for theorising2. Thus, the fully predictable
pattern derived from equilibrium theory has to be, to say the least,
incomplete. As functional frame of reference for economic behaviour,
equilibrium theory of the firm consists in a straightforward, over-simplified
connection between what that can be, what that is or will be, and what that
ought to be.
Take the metaphor of a grain and of its potential plant. According to
equilibrium theory, if determining conditions realised, the firm as grain may
become an actual plant, and nothing else. Under social and economic
dynamics, in fact, human entities are not like the atomistic grain. In the case
of the grain, even though discrepancies between facts and theory occur, the
equilibrium theoretic “grainology” seems tell us enough about general
principles and actual experience. But the case of the firm goes against the
grain: the economic analysis framed by equilibrium represents at best an ex
ante mode of functioning based on atomistic elements or individuals alone.
It neglects, indeed, the genuine implications of the actual complexity of the
whole firm confronted with real time and uncertainties.
Time and uncertainty have essentially disappeared

from this apotheosis of the price system. But it is
time and uncertainty which are the concerns of
everyday economic life and the problems of how to
account for the influence of time and uncertainty in
the ongoing economic process are central to the
development of accounting. (Shubik, 1993, p. 228).
2
On the contrary, each firm ought to appear as a special case, marked out by its own
peculiarities (including actual resultants of behaviour), but otherwise exhibiting the general
modes of functioning that jointly constitute each firm.
2
In conclusion, the resilient, enduring activity of the whole firm as

economic organisation and institution relates to its going, stable existence in
real dynamics (going concern), but also to the evolution of competencies
and resources as we experience into its creative or destructive development
(becoming concern). Understanding the interactions between general
purposes (the ends) and the means at disposal, as well as between potential
aims and actual results, begs indeed for a different frame of reference and
analysis.
1.2. The innovative but bounded contribution of incomplete contracts

economics
Looking for a different framework, incomplete contracts economics (both
new institutional economics, and property rights theory) seems novel but
nonetheless constrained in searching for a deeper understanding of the firm,
of its business activity and of its role in economic and monetary process3.
Under the price system, institutions are relegated to an exogenous
framework that plays a very limited and passive role in the economic and
monetary process. Business entities are neutral (just “black boxes”) and
institutions simply do not matter. In a like manner, accounting also (in all of
its manifestations) has been neglected for a long while, relegated to the
margins of analysis, although such leading economists as Walras, Menger,
Pantaleoni, Schumpeter, Hicks paid special attention to its role. For all
intents and purposes, just like all the other institutions, views, principles and
working norms embedded into accounting did not matter.
The “new institutional revolution” fostered by Coase deals, on the
contrary, with the opposite insight: institutions matter and the firm must
have its special economics, alternative and complementary to the price
system.
Nevertheless, incomplete contracts economics does not deal very well
with important legal and accounting features of the inner working of the
firm:
Neither its notion of “property rights” is what the Law and legal
principles frame and what judges have been applying in the context
of corporations.
Nor its notions of assets, liabilities, costs, and revenues fit the
accounting views, principles and norms as currently applied by firms
and economic organisations.
3
SEE below, the second section.
3
Yuri Biondi
Its view of the “institutional structure of production” and the related

notion of property rights do not fit the law, economics, and accounting of
the firm. Furthermore, the legal structure is thus limited to individualistic
property rights (however defined) and completely neglects other varieties of
legally-enforced norms, dealing with, for example, accounting-based
constraints. Finally, incomplete contracts economics seems share a narrow
contractarian view on the firm, understood only as a nexus of contracts and
of (ill-defined) property rights. However original and fruitful incomplete
contracts economics is, its framework stands merely on individual
bargaining and suffers from the surviving myth of the lonely entrepreneur,
proprietary and equity provider, managing his own business.
This perspective, therefore, under-develops some genuine insights of
Coase himself, its early promoter. Concerned with the allocation of
resources, Coase has especially stressed: (a) the economic distinction
between firm and market, i.e. how the firm supersedes the price system; (b)
the active role of legal institutions in the special economic process hence
generated by the firm; (c) the inner working of organisation and of
accounting system as key tools for this special economics of the firm.
In this planned society, the firm costs do not, in the

main, arise directly out of the operations of the market
but are computed and provided by the accounting system.
While outside the firm prices and therefore costs are
explicit (because of the demands of others for resources)
and are determined by the operations of the market,
within the firm there are explicit costs for exactly the
same reason but they are provided by the accounting
system. This internal system takes the place of the pricing
system of the market. (Coase, 1990, p. 11, italics added).
The danger with such a dualism between the firm and the market is to
misunderstand the effective interaction and the nature of both4, for example
by personifying the firm, or the market. Such an approach understands every
economic interaction as make or buy, own or hire decisions. Its geometrical
metaphor is simply a continuum, a straightforward line between two merely
contrasting terms.
Firm________________________________Market
4
An analogous argument might be developed about the dualism between firm and the
proprietors (shareholders), as well as between dedicated agency and its owners-principals.
4
From the economic viewpoint, the market is not a person and, in

particular, cannot act as a person, nor the firm can. More properly, the
market is a price system, which new theories call to interact with the firm as
alternative but complementary modes of functioning of the economic
activity. The firm as a whole does not act, but constitutes the managed
economic system that creates and maintains the favourable conditions
allowing the business activity to become and fulfil, if possible.
1.3. Outlines for a further theory of the firm as an entity

In our opinion, a new framework of reference and analysis is required to
grasp the inner working of the firm and its active role in economic and
monetary process, while dealing with individuals and other entities.
In the black box, no system of anything exists but prices in equilibrium
(firm as a nexus of prices), framed by some “principle of maximisation” and
by paramount efficient markets (price system). In order to overcome this
bias, understanding the firm as a nexus of contracts, even though
incomplete, is not enough. In fact, the firm is not a legal fiction which serve
as a nexus for a set of contracts among individuals or proprietors, devoted to
the quick pursuit of immediate shareholders’ wealth: neither legal nor
accounting logic and principles currently share this view on the firm and on
its role in economy and society.
Therefore, emphasis is here on the need for a new perspective, which
understands the firm as a managed and organised system of relationships,
not only contractual or bargaining. The firm provides the special field (the
entity) in which individuals and structures mutually interact. In the special
economic environment that is the firm-entity, both order and disorder,
efficiency and waste, honesty and guile, development or distress have much
to do with structures of such relations, more than what existing theories
have already recognized.
In analysing the firm, thus, its business activity is especially related to
three different structures, epistemic, organisational, and institutional, in
order to better understand some features of its internal organisation
(especially legal and accounting features), and relate them (a) to the nature
and role of basic learning, diffusion, and information processes (epistemic
role), (b) to the closeness of products, technologies, resources and internal
organisation (organisational role), and (c) to the framing role of working
rules and norms (institutional role) dealing also with financial matters and
regulation.
A new interdisciplinary approach is hence required, linking economics,
accounting and law by means of a unique synthetic notion: the firm as an
entity, still common to the three fields and understood here as a whole
5
Yuri Biondi
(according to old institutional economics) and a dynamic system

(according to accounting and continental business economics, in turn
related also to old institutionalism)5. The need of such an integrated
approach is not isolated. Not only resources-based and evolutionary
theories are delving into management studies (and issues) to enhance the
economic theory of the firm, but other scholars have called for such an
approach, for example:
• Baker-Gibbons-Murphy argue for the management of relational,

enduring, and informal interactions to understand the special
economic environment called the firm.
• Rajan-Zingales and Blair-Stout argue for the economic integrity of
the firm as such against the “dark side of ownership” (they say).
• Yet another approach relates also to the Carnegie School, since
incomplete contracts economics has neglected, at least in part, the
actual renewing force of such ideas as bounded rationality and of
the critique of equilibrium firm Simon developed (quoting
Commons and old institutionalism as one key think-provoking
precedent to his own theorising).
Looking for this new transactional and institutional perspective, the

dualism6 between the ‘price system’ and the ‘firm as economic
organisation’, however sophisticated, can never suffice to understand their
mutual interaction and the nature of the firm. In spite of the alleged dualism,
we suggest to see the firm as five-terms system. Five functional modes of
5
As recent literature will be quoted below, references may be made here both to old
institutional economics (as summarised for example by Gruchy (1947) analysing T.
Veblen, J.R. Commons, W.C. Mitchell, J.M. Clark, R.G. Tugwell, G.C. Means, but
neglecting A.A. Berle), and to continental European theories of business economics and
accounting, especially to the work of G. Zappa on the firm-entity as actual economic co-
ordination and dynamic system.
An early development of systematics, with geometrical references, is provided by Josiah
Royce in his late logical Essays, and further enhanced by the English philosopher J.G.
Bennett. About the dynamic interaction between a whole and its parts and constituents,
Copeland (1927) quotes also A.N. Whitehead, Lloyd Morgan, and H. Bergson.
Furthermore, F. Perroux provides a valuable economic analysis of the firm-entity as
organisation and institution, especially dealing with its special income. In the domain of
accounting and economics, both Stauss (1944 and 1945), an institutional economist, and
A.C. Littleton, a leading accounting theorist, seek to link the accounting and the economics
of the whole firm as an entity. SEE also Raby (1959).
6
i.e. two-terms system, or dialectics.
6
existence7 are selected as constituents to analyse the firm’s becoming

economic activity under real dynamics and complexity. The three inner
constituents are: (a) management, (b) organisation, and (c) its special
process. The two outer constituents are: (d) the emerging incomes and
results emerging from this process, and (e) all the undertakers (stakeholders)
looking for them, related, more generally speaking, to the institutional
environment and to the human community (the entity's world). This five-
terms system would be better suited to understand the economic nature of
the firm as an entity.
Concerned with this ambitious purpose, this essay outlines an alternative
frame of reference and analysis, starting from the accounting system as
viable alternative to marginal cost pricing in understanding the economic
and monetary process as it actually emerges and evolves into the firm-entity
as a whole.
Just under real complexity (and moreover if together with real dynamics),
the “black box” – i.e the straightforward logical chain linking such atomistic
elements as selling price, quantity and cost for each product separately - is
disregarded as ultimate frame of analysis for the entity’s economic process8.
7
A further distinction might be developed between mode of existence and of
functioning, the first being the actors (or interactions) related to the latter. For example:
- management is the mode of functioning coordinating the firm-entity, and relating
to the interaction between fiduciary delegates for decision-making and directing
responsibilities;
- organisation is the mode of functioning implying the actual inner work of the
becoming activity, and relating to the interaction between management direction
(fiat, norms, actual structures, …) and the actors or individuals involved in the
firm;
- actual incomes as mode of existence emerge into the economic and monetary
process as mode of functioning of the firm-entity as a whole. This special process,
as mode of existence, relates to the accounting system as mode of functioning
(regulating, organising, knowing) of the becoming entity's activity;
- stakeholders, as mode of existence, are the actors or individuals engaged in the
entity as involved parts and ultimate claimants, and relate to the institutional
structure of production as mode of functioning.
For sake of simplicity, we will neglect this further distinction, and refer to each
constituent as mode both of functioning and of existence. In fact, each constituent, as active
element integrating the special process of becoming, could become a whole, and asks for
further detailed analysis.
8
Ijiri (1967, p. 58-64) and (1975, p. 183-186) provides a deepen analysis of the
different imputation logics underlying accounting and economics. He explains how just
simple production processes melt the straightforward logical chain of cost, quantity, and
selling price for each product separately required by the black box firm. In such cases, the
black box asks for some further conditions (epistemic or organisational) external to the
accounting system and provided by the price system. The dynamic accounting approach,
instead, based on historical or invested costs, does not requires the separability, stability
7
Yuri Biondi
Dissecting a whole into separate elements yield not the constituting terms
of the whole analysed, but just a number of new parts. When an element
becomes part of a whole, it ceases to be a separate unit, as the whole is not
merely assembled out with disparate units, but appears as a constituted
enduring pattern existing and functioning as such.
The interaction of the parts, then, would never suffice to explain enduring
existence and functioning of the firm-entity as a whole. Under real
dynamics and complexity, the firm-entity further appears as a special
business activity, analysable in terms of modes of functioning (constituents)
that jointly constitute its actual process of becoming as a whole9. Each mode
is analysable within the entity as an autonomous active component, and ‘in
its interaction with’ (‘playing an active role in’) the economic and monetary
process with which this special activity is concerned. This process is
therefore “constituted” or “structured” in the sense that it arises so much
from the working structures of the parts’ relationships as from the individual
attributes (or behaviour) of the parts actually involved.
In this perspective, the economic nature of the firm is grounded on the
fundamental relationship between the actual economic co-ordination
provided by (a) the firm as a whole, and (b) the inner organisation of (c) its
going economic process. This co-ordination is especially seen as potential
generator of (d) business incomes and results for (e) all the undertakers
(stakeholders).
The following text is organised in three sections. The first section

criticises incomplete contracts economics, which neglects both the logical
and functional implications of the firm as an entity (I section), and the
fundamental role of accounting system in constituting this whole (as
developed in the second section).
The two last sections, starting from the genuine insights of Coase, but
enhancing and developing them in accordance to recent developments of
Baker-Gibbons-Murphy (BGM) and Rajan-Zingales (RZ), explain by a
graduate approach the economic nature of the firm-entity as a whole that
and uniqueness of that logical chain (cf. also Biondi 2003, p. 19-21). Its approach is more
aggregating than individualistic, its figures are more actual amounts recognised than market
or discounted values, it prefers traceable and reliable discretionary methods (accruals) to
optimising or market-to-models methods.
Kirman (1997) enhances the economic viewpoint by dealing with the evolving network
of agents involved. His conclusions are thus very different from usual approaches grounded
on separate or representative actors. His analysis treats in particular the monetary profit,
actual and cumulated, generated by each transaction separately.
9
The notion of constituent is inspired by Whitehead, cf. Whitehead (1932), p. 131. cf.
also Royce (1914) and his order-system of relations as modes of action.
8
management, organisation, accounting system, business incomes and

results, and institutional environment jointly constitute.
2. The nature of the firm as economic organisation: the entity's missing

connection
Both the question of the nature of the firm, and the related distinction
between the firm and the market, are fundamental issues for the new
theories of the firm. Three major approaches exist: agency (AT) and
property rights (PRT) theories on the one hand, and transaction costs theory
(TCT) on the other. The first two neglect any difference of nature between
the firm and the market. Firm is seen as a legal fiction the reality of which is
the simultaneous nexus of contracts between the individuals engaged in
business. These theories stress indeed the ex ante incentive structure framed
by strategic equilibrium bargaining with incomplete contracts. Provided
specific investment existed, it would relate only to the asset(s) owned by
each proprietor separately.
On the contrary, TCT provides a more sophisticated approach, dressing
this methodological contractualism in a transactional and institutional
fashion. Because of market failures, asset specificities have to be protected
otherwise, by an institutional structure: the hierarchy. The original notion of
values specific to the transactions, indeed, could refer to the inter-individual
nature of this structure, searching for the ultimate constituents that jointly
allow the firm as a whole to exist beyond the contracting parts.
In fact, this kind of logical and functional development is neglected.
According to Williamson (1988), all the three approaches share the same
perspective (incomplete contracts economics), founded on (1) opportunism
and moral hazard implied by individuals' motives and behaviour, shaped by
(2) the bargaining nature of their contractual interactions, and seeking for
economic efficiency by means of (3) endogenous, ex ante institutional rules
(PRT) or ex post governance structure (TCT), such as the “Board of
Directors”.
Even though the notion of entity exists in accounting theory and
regulation, this framework completely lacks the firm-entity as a whole,
because of its compromise with equilibrium theory, and of the primary
connection between the firm and its proprietors, i.e. the providers of equity
finances. But the entity phantom actually appears in each approach:
• AT usually personifies the firm-entity into a specific actor, both the
proprietary-manager or the manager-agent, and asks him to pay all the
agency costs which found its analytical machinery;
9
Yuri Biondi
• The notion of property rights provided by PRT does not fit the law
(Kirat-Bazzoli 1998, Hodgson 2002), economics (Hölmstrom 1999,
Demsetz 1995), and accounting (Scott 1979) for assets or claims into the
firm. For example, this notion neglects the collective nature of property
within the firm, which allows the entity to own and possess the assets10.
• So TCT neglects all the economic and dynamic implications of the off-
contracting features related to its notion of hierarchy as economic
organisation. How can the firm and the market remain symmetric in this
approach? By reason of asset specificities, the market can never
replicate the firm. Thus, undertakers of this kind of investment have to
be protected otherwise. In such a way, the firm-entity as specific
institutional environment relates to undertakers’ economic
interdependencies (transactions), and better justifies the existence of
values specific to these latters11.
Here all the new theories of the firm are maintaining several ties to the
quite archaic personage of the lonely entrepreneur, proprietary and equity
provider, managing his own business12. This capitalistic hero takes and bears
the risks and endorses the management (supervision, co-ordination,
decision-making, control) of its own economic activity. In this context, the
firm is relegated to a legal and economic device for entrepreneurial action.
Decision-making and control relate essentially to the ownership of the firm,
and the functional modes of existence as a whole disappear.
This surviving idea conceals fundamental facts concerning the firm, and
prevents effective development of all the novelties provided by a
transactional and institutional perspective. In particular:
• Law and accounting tell us about the functional distinction between
firm-entity and owners: the entity as a whole own and possess the assets,
is able to assume its own obligations and has priority rights in collecting
economic and monetary streams and results. Law and regulation firstly
protect actors other than owners. Ownership consists in certain
subordinated rights to ultimate liquidation of prior investments and of
10
The Incorporation Act also establishes this ability by law, cf. especially Blair (2003).
An interesting legal-economic view is further provided by Dibadj (2005). The chief
reference here is still the master work of A.A. Berle jr.
11
From an old-institutional viewpoint, TCT provides an approach founded on
transactions without going concerns. Further distinctions might be made between the classic
Williamson (1975) and the later developments joining incomplete contracts economics.
12
cf. Stauss (1944), but also the valuable critique of Berle against classical economics.
In accounting, this personage influences the old-fashioned proprietary view on the firm, cf.
Gynther (1967) and Sprouse (1957).
10
subordinate interim rights to share in enterprise earnings at the

discretion of shareholders-elected “Board of directors”, which allow for
retained earnings too13.
• Accounting regulation does not allow dividends until the earnings
actually emerge, and prevents from repaying equity to owners. At the
same time, making an immediate expenditure under an accounting
convention which treats it as an investment (capitalised as an accounting
asset) may completely transform a tax bill (relevant for shareholders’
value and dividends’ distribution). Until liquidation, the firm-entity must
not repay equity shares to their value, in terms of neither market nor
book values. Not only ownership and control, but ownership, control
and management are separate, and only management can organise
business becoming activity and dispose of assets and streams.
Finally, the risk-bearing and taking of business activity relates to the
dynamic connection between firm-entity, organisation and management.
The whole firm as an entity specialises into risk-bearing14, and all the actors
are involved into this collective assumption of risk. The decision-making
process provided by management, especially about risk-taking, engages the
inner working of a complex organisation in real dynamics, and concerns
both the entity and all the undertakers (stakeholders), subject to their
different involvement in it.
In fact, managing the firm's risks implies not only the taking and bearing
of exogenous risks, but the active management of them15. Risks, and the
related technological, organisational or strategic alternatives, become
endogenous16, and dynamically interact with the actual economic co-
ordination of the firm-entity as a whole. When uncertain alternatives occur
in real dynamics, the primary problem becomes one of deciding what do,
and when and how to go about doing it - the problem becomes one of
management, such as to forecast consumer wants and their duration.
Management aims not only to bear the risks taken, but also to deal with
them and to thus realise the related incomes. In this active interaction with
the emerging economic process of the firm, alternatives might be only
vaguely defined, and actually never realised. Alternatives constitute simply
opportunities for gains or losses. The management of the actual
organisation in the dynamic process of becoming transforms them into
13
A further obligation for owners, that is the role of guarantors for equity provided
against losses beyond a legal limit, is currently avoided by business practices.
14
Both as passive assets' aggregation and as active impact of its existence as a managed
dynamic system.
15
cf. also Littleton (1928) and Stauss (1944).
16
On growth real options as endogenous, cf. Zingales (2000).
11
Yuri Biondi
emerging results. These three components, indeed, are selected to be the

inner constituents of the firm-entity as a whole.
Concerning the special economic and monetary process of the firm, the
frame of reference and analysis provided by incomplete contracts economics
is constrained by the entrepreneurial role assigned to the owners
(stockholders). In particular:
• Concerning the purpose of business activity, this role maintains some

“principle of maximisation17” of the (residual or specific) income to the
owners, since the firm is nothing else than an owners’ device. The
distinction between expected and actual results is thus melted, and the
role of such matters as bounded rationality and uncertainties is hugely
reduced.
• Concerning the firm as economic organisation, this role implies the
design of a rigid inner structure, critically based on such hypotheses of
contract’s incompleteness, opportunism, complete external un-
verifiability (ex ante and ex post), that are the sole justifications for the
design itself.
• In this framing, the (specific or residual) income to the firm is essentially
linked to ownership and to the related investments by proprietors,
enhancing their property value. But, in the field of the firm, incomes
relate also, and surely prior, to the firm’s revenues (i.e., to the
interaction between the business entity and ultimate consumers), as well
as to other kinds of entity-investments' financing, especially longer-term
credits. Furthermore, that now-prevailing economic view makes difficult
to understand why taxes on other streams than dividends and capital
gains exist. Finally, as income to ownership justifies the firm’s
economic process, what about losses? What about dividends’
constraints? What about the double taxation of dividends and of net
income to the firm?
• The ownership connection and the related rigid inner structure weaken
the understanding of the interaction between the firm and the “markets”
(both product and factor markets), since the business incomes and
results, which are generated by the firm's dynamic connection between
costs and revenues, are forced to emerge within bounding external
options that strictly determine them. The special economic activity of the
firm, therefore, seems to disappear, as well as its active role in creating
and allocating resources in real dynamics and complexity.
17
Or ‘economizing’, in Williamson's term.
12
However original and valuable incomplete contracts economics might be,

the dualism between the firm and the market is problematic.
The active role of institutions in the special economic process of the firm
relates only to the notion of property rights, which does not fit the law, the
economics, and the accounting of the firm. This notion properly points to
the institutional connection between the firm and the management of its
special economic process, but provides only a misleading frame of reference
and analysis. So does the notion of opportunism, pointing the organisational
connection between the firm and the actual organisation of its economic
process under real dynamics and complexity.
The economic nature of the firm as institution and organisation has yet to
be understood.
3. Accounting system, firm dynamics and “the institutional structure of

production”18
The framework provided by incomplete contracts economics appears as a

genuine but bounded innovation for the economic theory of the firm. It
critically stands on strong (and dismal) hypotheses about individuals'
motives and behaviour, like opportunism and hold-up, which are the sole
ultimate justification for the related analysis. A circular reasoning seems to
be established, indeed, between these hypotheses and the critical
consequences they imply.
Recent advances question this frame of reference and analysis seeking
for a new understanding of the economic nature of the firm as institution
and organisation. Contracts incompleteness means here that off-contracting
features play a role in coordination, and the scope of contractual analysis
tends, therefore, to shrink (Favereau 1997). In particular, Baker, Gibbons
and Murphy (BGM) stress the relational, enduring, and informal features of
the special business activity called the firm. Rajan and Zingales (RZ) also
are concerned with protecting the integrity of the firm from the “dark side of
ownership”, they say. According to RZ, the whole firm performs an
autonomous economic co-ordination between all the actors involved.
Following these advances, management of a going, enduring activity
seems emerge as the primary way to overcome the alleged dualism between
the firm and the market19.
In his classics, integrated by some recent articles, Coase insists on the
firm as an economic co-ordination, but disregards opportunism and hold-up
as proper foundations of the economic theory of the firm (Coase 1988).
18
This is the title of the Coase’s Nobel Conference in 1992, cf. Coase (1992).
19
cf. especially BGM (2002), pp. 73-74. cf. also Crémer (1986).
13
Yuri Biondi
According to Coase, management direction co-ordinates by fiat not only

employees, but all the resources involved, including the equity finances. He
finally suggests to understand the special economic nature of the firm by
means of: (a) the economic distinction between firm and market, since the
firm supersedes the price system; (b) the active role of legal institutions in
this special economics of the firm; (c) the inner working of organisation and
especially of the accounting system as distinctive firm’s features in
superseding the price system (Coase 1990).
In summary, recent developments renew the transactional and
institutional perspective, but they are still constrained by modelling the firm
with reference to an odd nexus of prices, contracts or property rights. This
contractarian view also limits the actual revolutionary force of such ideas as
bounded rationality and of the critique of equilibrium firm Simon (1997)
develops starting from the firm as an economic system. And Simon quotes
Commons and old institutionalism as one key think-provoking precedent to
his own theorising, stressing the need for a new theory grounded on active
firms instead of paramount efficient markets.
Instead of the “contractarian view”, therefore, the firm may be
understood as an entity, as a special field providing an enduring pattern of
interactions between all the parts involved in the actual process of becoming
for its business activity. This field has no deterministic boundaries, since a
field relates to a system which is comprehensive enough to include all the
interacting forces that have a bearing upon the entity being investigated.
The firm as an economic entity, then, exists and functions as a whole, as
a dynamic system of interacting parts, co-ordinated by human intelligence
and effort (management), committed to, and involved in, an economic
undertaking (managed economic system). By parts we mean all resources,
whether material or personal, financial or economic, tangible or intangible,
provided by all the actors or individuals that undertake the business
(undertakers or stakeholders). The special, economic activity of the firm-
entity is usually carried on through the medium of transactions, which are
relational exchanges of goods and/or services for a consideration, and of
combinations of the parts in going processes and working structures. By an
economic undertaking, we mean the implication of parts, co-ordinated by
management, towards the performance of a special, becoming activity that
is organised in terms of fulfilling a collective purpose.
In this context, the firm-entity exists as a whole in real dynamics, because
of modes of functioning that jointly constitute its special process of
becoming. These modes are called “constituents” and allow the whole to be
different from the mere additive resultant of the parts. Any of the individual
parts can be, and in time will be, changed or replaced, and yet the firm as a
whole will go on without interruption and without abrupt change in
14
functional characteristics. Reciprocally, people undertake the firm’s

business activity as providers of resources. They know and play specific
roles without losing their own autonomy (and liberty). As such, the
constituted whole functions apart enough from the parts who compose it
(actually, in a greater order), but it does not perform and fulfil apart from
them20.
The firm is hence one entity functioning through some constituents and
performing through the medium of various interacting parts having
heterogeneous responsibilities to and involvement in it. The firm-entity
combines the parts in such a manner as to give the parts purpose and
meaning, and thereby it influences the parts and makes them components of
a constituted whole. Firm-entity as a whole involves and commits actors or
individuals both as providers of resources and as undertakers of becoming
economic activity seeking for intended results21. The whole, then, influences
their behaviour - prompts, frames and enhances it at the same time - but
does not determine it.
From the transactional and institutional viewpoint, as an undertaking of
any size or complexity, the entity is not merely a device for the stockholders
alone. Its institutional structure of production is more than a bargaining
nexus of (ill-defined) property rights. On the contrary, no one “owns” a
business entity. Instead of owners, there are various providers of resources,
there are various actors or individuals who are involved in different types of
transactions with and combinations into the entity22. The firm-entity is then
active and productive – but is so because it is managed and organised, not
because it is “owned”. Its value depends, not on wealth of resources
passively hold, but on their managed system dealing with the flow of
relationships involved, that is, on dynamics and process. Stop the dynamics,
and its value as an entity disappears.
20
Its changing ‘frontiers’, then, are established by the inner relationship concerning its
actual economic co-ordination, constituted by management, organisation and its special
process, as contrasted to the outer constituents that are the undertakers (stakeholders), and
its incomes and results. SEE Section III below for further developments.
21
In this context, the ultimate consumers are undertakers as well, seeking final products
for a consideration (usually such money transfer called price that closes the transaction)
related to quality and duration.
22
This smooth distinction between transactions and combinations grounds on the
difference between entity and markets. In such a context, financing and working are
combined into the entity, and the interactions between the entity and the providers of these
resources are quite different in nature from market exchanges. Schumpeter (1912) used the
word “combination” (Kombination) to describe the new productive process introduced by
the innovative entrepreneur. K. Polanyi early suggested to overcome “our obsolete market
mentality” by such idea of “fictitious commodities” that he applied to money (related to
capital and credit), land, and labour.
15
Yuri Biondi
As suggested by the early accounting and economics of the firm23,

accounting can further develop the frame of analysis grounded on the firm
as an entity. The accounting system may be understood as one constituent,
one mode of functioning for the firm-entity as a whole24. With other
constituents, it constitutes such a “veil” that allows the firm to supersede the
price system and to be different from a nexus of contracts or prices.
BGM and RZ advance the further development of a transactional and
institutional perspective. Even so, they still frame the economic analysis of
individual firm with equilibrium, as incomplete contracts economics does.
But equilibrium designs at best an ex ante mode of functioning based on
atomistic elements or individuals (the first-order connection in the Table I
below). Equilibrium therefore neglects all the implications of real dynamics
and complexity for the whole firm (third-order)25. Finally, framing the
individual firm with equilibrium weakens such an understanding of its
economic nature as institution and organisation (second-order) that both
BGM and RZ would enhance.
23
cf. especially Zappa and Littleton, cf. also Raby (1959), Stauss (1944).
24
At this level of generalisation, accounting system stands for (i) operations’ costs and
managerial accounting (especially related to the organisational structure); (ii) financial
accounting and tax accounting (especially related to the institutional structure); (iii)
disclosed accounting information (related to managerial and financial accounting and
integrated into the epistemic structure).
25
In fact, Pareto (1906) aims at coping with the economic system, but has dealt
essentially with a system in equilibrium, having emergent but spontaneous order.
Nevertheless, his general equilibrium framework allows the intended purpose of firms (i.e.
their profit) to be not actually realised, and also firms to be different, since general
competitive conditions (actual and potential) prompt all the rest. Furthermore, Pareto
ultimately disregards prices, as for he relegates them to accessory tools, to conceive a full
and sole system of preferences and constraints, where individual values (preferences) are
not reducible to prices. His general equilibrium framework might therefore be understood
as a partial and incomplete framing for the third-order. Even so, the equilibrium framework
for the single firm, at the first-order, is disregarded here.
16
TABLE I Key element/s of the system Modality

as providers of resources and
first-order Actors or individuals involved in, and
undertakers seeking for intended
connection committed to…
results (incomes and products)
as a whole, constituted by
second-
…firm-entity's becoming activity, inner functional modes of
order
concerned with… existence (management,
connection
organisation, accounting)
…its actual results as emerged into
as an economic dynamic
its special process of becoming in real
third-order system, actively shaped by its
dynamics and complexity, conditioned
connection structures, institutional,
by other entities, modes of existence,
organisational, epistemic
behaviour of actors, and resources.
In this context, accounting may provide an alternative frame of analysis

to grasp the special economics of the firm-entity as a whole, and to
overcome indeed the alleged dualism between the firm and the market.
Accounting, in fact, stands on general principles26 that we can summarize in
the following:
(a) The entity principle: the business firm is an entity and a going
concern, autonomous from whichever stakeholders (including
shareholders);
(b) The matching principle: a special method to link economic and
monetary entity’s streams to the reference period;
(c) The historical or invested cost principle: a special method to
recognize and estimate actual business activities as assets and
liabilities, costs and revenues.
These principles were and still are in question, but they are, at the
present, the principles generally accepted to represent the firm by
accounting. They constitute the accounting view we are looking for27.
26
Cf. Boussard (1979, 1997) for a careful representation and Anthony (1983) for further
developments. Cf. also Biondi (2003), p. 33-50.
27
Accounting notions, therefore, stand here for the usual notions and rules framed by
the GAAP (General Accepted Accounting Principles) and by the historical cost approach.
In this context, especially accruals generate such a original view and frame of analysis that
accounting provides for the economic process of the whole firm as an entity.
Littleton (1953, p. 24) adds on a forth principle of enterprise service: “Business
enterprises are accepted and used because they perform effective economic function in
supplying goods (for living) and employment (for earning)”.
Even though recent developments enhance the role of discounting-based values for
some special cases, the genuine originality of accounting view still remains. In fact, under
17
Yuri Biondi
Quarrels about them also relate to the special view of the firm these
principles imply. As recognised by leading accounting theorists (Zappa,
Schmalenbach, Littleton, Ijiri, Anthony), the accounting view deals with the
firm as an entity and with its events, resources, and transactions in real
dynamics and complexity. According to Shubik (1993), time and
uncertainties have essentially disappeared from the apotheosis of price
system driven by equilibrium framework, but they remain the concerns of
everyday business activity. The problems of how to account for their
influence in the ongoing economic process are central to the development of
accounting, and lead to the original accounting view of the special
economics of the firm seen as an entity.
The entity's real dynamics implies uncertainties, bounded knowledge,
potential and actual mistakes and mis-organisation. Dynamics inscribe
business activity into such a special economic process of becoming, and
accounting has to cope with this entity’s process. As for the accounting view
represents the economic and monetary process of the whole firm in a very
different way the equilibrium framework does:
TABLE II ASSETS LIABILITIES

equilibrium frame future monetary entries
claims on future monetary exits
of analysis discounted
accounting frame actual monetary exit advances on future monetary entries
of analysis (expenditure) capitalised (concerned with real dynamics)
However instantaneous or stationary, an equilibrium framework seeks for

synchronicity of costs and revenues, which are conceived as simultaneous
cash flows imputed to each product separately. Every transaction is thus
closed by a monetary flow that is a market price28. A limiting identity is
assumed between contractual transaction, market exchange and market
price, allowing the independence of periods. No economic system of
anything exists but prices.
On the contrary, the accounting system is grounded on events, resources,
transactions and combinations as they actually happen and are engaged or
committed by one firm. Such a system deals with the whole firm as an
entity, melts real and monetary matters, and makes periods interdependent.
Starting from actual monetary transactions between the entity and its
real dynamics and the separation between ownership, management and control, accounting
system frames and modifies the economic and monetary process of the firm whichever
accounting approach is retained.
28
“Money talks” in Williamson's terms, cf. Williamson (1991).
18
world29, the accounting system fills in the inner and inter-temporal

allocations of prices-related and income-related accounting values.
Hence the accounting system provides a representation of the special
economics of the firm starting from the dynamic connection between two
autonomous and interdependent patterns of economic flows. They relate
either to the costs' side or to the revenues' side of the becoming business
activity of investing, producing and selling.
This accounting representation focalises on the resources' application for
which the entity is accounted for (accountability). The dynamic connection
between costs and revenues constitute a traceable and reliable aggregation
allowing the estimation of the actual performance generated by the whole
firm as an entity during the reference period.
In this perspective, the accounting notions for costs, assets and selling
prices represents the economic and monetary process of the firm in an
original way:
• Accounting costs match either with the actual products sold, or with the
reference period (costs of being in business) for income representation30.
• In most cases, accounting values for capitalised costs (i.e. assets) do not
discount future entries (i.e. results) from related business activity,
obviously since the actual determination of these emerging results (if
any) is the primary purpose for which that entity is accounted for.
• Selling prices do not constitute merely informative signals to actors
engaged in equilibrium adjustments, but payment inflows necessary to
recover costs incurred, repay debts for investment and working capital
and meet other obligations and claims in real time31.
In this context, most accounting assets relate to specific financial exits
(expenditures) that accounting rules capitalise. These assets hold up the
whole firm as an entity in an potentially irreversible way, since expenditures
might never be recovered by future selling revenues32. At the same time,
contrary to the myth of lonely entrepreneur, shareholders' equity does not
29
As method of recognition and measurement, accounting is not grounded on cash
receipts and disbursements (cash-basis accounting). In short, either cash transfers or
occurrences of credits/debts suffice to record transactions into accounts. In such a way, as
well as by accruals and overheads allocation, accounting method makes periods inter-
dependents, SEE also note 8.
30
Cf. Anthony (1983), chap. 5, especially p. 124 ss.
31
Furthermore, selling prices relate to the interaction between the firm-entity and the
final consumers, including discriminatory and multiple-prices policies.
32
Thus, income to the firm-entity does not essentially relate to stockholders
subordinated claims, but primarily to the selling revenues from consumers. It relates to
satisfying actual results for all undertakers involved in the business activity.
19
Yuri Biondi
appear here as a claim on assets' values, but as an advancing of revenues for

costs invested. Shareholders’ equity is such a source of funds that is waiting
for eventual dividends. But accounting earnings, as ultimate outcome of the
working of accounting system, provide a legal upper constraint on those
dividends, and participate indeed in the active role of legal institutions in
business income allocation33.
In summary, at least the following three points distinguish the accounting
system from the price system34:
(a) Accounting system is accruals- and not cash-basis, it grounds on

financial transfers and not only on cash; a “veil” is therefore
provided among every monetary price and the inner economic
process;
(b) The accounting special mode of regulating, organising, and
representing the firm’s activity (related to overheads, accruals and
other accounting values) further implies the active role of the firm
as an economic entity in real dynamics and complexity;
(c) As consequence, accounting system provides relevant figures
both for dividends and other legally-enforced constraints, and for
paying taxes on such an entity’s income.
Not only the real dynamics and complexity, but also the separation
between ownership, management and control (Berle, Littleton) asks for the
entity view on the firm. This view recognizes the old-fashioned proprietary
view to be irrevocably lost, especially in such networking of corporations
(and of other legal arrangements) that currently constitute the legal bundling
for the business entities. Even to protect shareholders, we need for a new
kind of control, different from the irrevocably lost ownership sovereignty35.
Under the real dynamics and this separation, the accounting
representation of the firm does not fit together rents, properties, and claims
on them based on (well defined) property rights, but deal with actual
revenues, invested costs and funds incurred for these economics streams.
Accounting system cannot and will not establish expected results for
33
The accounting role in business taxation is another fundamental matter.
34
Even tough the fair value approach includes special values based on discounting and
market-to-models, these values cannot and may not make the accounting system to become
a price system, SEE also note 27.
35
In this context, the entity question for accounting regulation is not so much in single
assets’ valuation, as in recognising the actual firm’s economic system (and involved risks
and implications) over and above the very thin corporate frontiers. The so-called off-
balance sheet items are not off the flow of relationships constituting the firm as an entity.
20
whichever undertaker, but the actual entity’s performance represented in a

reliable and traceable way.
TABLE III INCOMES ASSETS LIABILITIES

rents or quasi-rents claims and rights on
proprietary view properties
properties
business income to the firm revenues advanced
entity view (based on actual revenues costs invested (concerned with real
and costs) dynamics)
In summary, by means of its dynamic entity view, the accounting system

defines business income to the firm-entity (Zappa) and plays an active role
on its allocation, allowing the special economics of the firm as an entity to
supersede the price system.
According to BGM, business income stemming from the entity's co-
ordination essentially relates to the entity's ability to go on and perform36. As
long as actual co-ordination goes on, it involves a relational and informal
component beyond the contract for every provider of resources committed
to. This involving commitment implies, for example, bearing some business
risks involved in the business activity, i.e. the risks taken by management
and implemented by actual organisation in real dynamics. This commitment
modifies income allocation, attaching a relational, specific income to every
provider, subject to different arrangements. Furthermore, the institutional
structure shaping the business activity asks for prior recovery of invested
costs for the entity as a whole, costs which ought to include a fair equity
interest for providers of equity finances (holders of equity shares), based on
actual funds provided in the past.
In this context, this is the enduring existence and financial viability of the
firm-entity to be fundamental for economic effective production, much
more than the so-called “owners” of the firm (especially shareholders) and
their “property”.
Here the accounting system constitutes one of the modes of functioning
(i.e., one of the constituents) of the firm-entity as a whole. It jointly relates
to the basic learning, diffusion, and information processes (the epistemic
structure of production), to the closeness of products, technologies,
resources and internal organisation (organisational structure), and to the role
36
At the same time, the notion of organisational capital as suggested by Rajan and
Zingales may be reformulated within the flow basis of dynamic accounting, subject to the
distinction between intended results (the old-fashioned financial goodwill based on
discounting), and actual, emerging incomes as represented by the accounting system. SEE
§4.5 below.
21
Yuri Biondi
of working rules and norms, related or not to financial matters and

regulation (institutional structure).
Accounting system, then, with limitations, helps to know, organise and
regulate the special process of becoming as it emerges into the firm as a
whole. This understanding of the accounting role calls for further analysis of
such structures that characterize the economic nature of the firm as an
entity.
4. The economic nature of the firm as an entity
4.1. A proposal
How can the nature of the firm as economic organisation and institution
be understood?
The alleged dualism between the firm and the market actually is a
limiting representation of the dynamic (second-order) connection between
management, organisation, and accounting system.
From the transactional and institutional perspective, the firm appears as
an actual, evolving economic activity, analysable in terms of modes of
functioning (here called constituents) which jointly constitute its process of
becoming. Each mode is analysable into the entity as an autonomous active
component, and ‘in its interaction with’ (‘playing an active role in’) the
economic and monetary process with which the special activity is
concerned. The three inner modes are management, organisation, and the
accounting system (related, in turn, to the actual economic and monetary
process emerging into the firm-entity).
Even though they are autonomous into the pattern provided by the
activity, these modes have to jointly interact with the entity as a whole to
make sense, and without the whole they exhaust their potential and actually
disappear. Thus, management is the authority dealing with co-ordinating,
framing and organising the inner work of organisation. Management could
neither accomplish its function without organisation, nor effectively act
without the mode of knowledge (and representation) provided by accounting
system. The latter, with limitations, helps to know, organise and regulate
the special process of becoming as it emerges into the whole firm.
In this context, we suggest three progressive approximations37 to grasp
the firm-entity as economic organisation and institution. The firm as an
37
Early promoted by V. Pareto, the method of progressive approximations consists in
the construction of concepts starting from general outlines with subsequent gradual filling
in of details and implications. It would be here a deepening of meanings as opposed to
accumulation of data or fictitious hypotheses.
22
entity will be gradually considered (1) as an actual economic co-ordination,

(2) as a becoming economic activity (becoming concern), and (3) as an
economic organisation and institution. A fourth approximation approaching
the firm-entity as a financial and economic core will be finally sketched.
4.2. Firm-entity as actual economic coordination

The first approximation stresses the real dynamics of the economic
activity called the firm. The firm as an entity constitutes the general frame
into which management interacts with organisation to seek for potential
aims, and deals with the actual, evolving economic process to keep the
entity on track.
[Figure I]: Firm-entity as actual economic co-ordination
Management
Organisation Actual economic and

monetary Process
The three inner constituents for the firm-entity are here management,
organisation, and the actual economic and monetary process emerging into
the whole firm (process that accounting system, with limitations,
represents). Each of constituents is quite distinct in nature from the others.
They do not replace one another. In particular, transitory profits emerging in
the going process do not suffice alone and are not a substitute for clever
management and effective organisation, since the whole business process
ought to be regenerated and developed in real dynamics.
Management, organisation, and process, then, are both autonomous from
one another and also mutually necessary. They are closely interdependent.
Management, as capacity to induce and maintain actions, interactions and
activities, complements with the possible modes of existence of the
organisation, creating structures and looking for order and co-ordination.
This interaction between management and organisation exists and evolves in
23
Yuri Biondi
the actual process of becoming. This process may be, with limitations,
represented and shaped by the accounting system38.
In this first approximation, the firm as an entity exists as the actual
economic co-ordination oriented by management by means of a complex
organisation, that the accounting system, with limitations, represents.
Management blends with organisation to actualise the special process of
becoming of the business activity. In such way, the whole process of
becoming for the firm as one entity is not confined to some disparate series
of events, resources and transactions. The firm co-ordination is not simply a
legal fiction standing for the nexus of contracts between separate individuals
or proprietors. There is no activity such as undertaking a business unless
management, organisation and going process are present. They constitute
the inner cohesion for the firm-entity as a whole, the managed economic
system that allows the business activity to cope with hazard and
uncertainties in real dynamics and complexity.
But how does this actual economic co-ordination, emerging into the
entity from the interaction between management and organisation, go on
and become as purposive, endurable economic activity?
4.3. Firm-entity as dynamic economic activity (becoming concern)

The actual economic co-ordination that characterises the inner nature of
the firm is neither blind nor spontaneous, but allows conscious and creative
actions into the special process of becoming with which the business
activity is concerned. The entity's economic activity is indeed purposive in
real dynamics. It is a becoming concern, since orienting this activity
concerns every resources provider, including employees, managers and final
consumers, as long as their resources are committed to the firm-entity and
engaged in the inner working of its organisation. In one sentence, as long as
the entity's economic co-ordination goes on, the entity's economic activity
becomes.
In this context, the further approximation deals with the usual dichotomy
between motives (“the ends”) and means, i.e. between instrumental and
motivational terms of the system we name firm-entity. This static dichotomy
is here refined by two interacting couples of constituents: general purposes
and management direction on one hand, inner working of organisation and
going process (generating actual results) on the other.
38
Searching for business income finalises the interaction between management and
organisation. The purpose of business income for the firm-entity is partially
institutionalised by accounting rules defining earnings, and differs from optimal profit
framed by individual firm equilibrium. SEE below for further details.
24
The firm-entity as becoming special activity dynamically deals with two

contrasting strains, between general purposes suited by undertakers and the
actual management co-ordination on one side, and between the inner
working of organised activity (facilities, technologies, instruments,
operations) and the going process generating actual results in real dynamics
on another side.
[Figure IIa]: Firm-entity as becoming economic activity
General Purposes (Undertakers)
Inner working of Organisation Management direction
Going economic and monetary Process
Compared to the previous approximation, the new constituent are all the
undertakers. They establish the general purposes that frame the firm-entity
as a becoming concern. This purposive framing modifies each other
constituent of the actual economic co-ordination.
25
Yuri Biondi
[Figure IIb]: Actual economic coordination shaped by undertakers' purposes
Purposes
Organisation Going Process
Management
Undertaking such a purposive economic activity implies taking and

bearing the risk and the hazard of its temporal realisation as it emerges in
the actual, going process concerned with real dynamics and complexity.
Thus, the general purposes wished by undertakers (stakeholders) do not
determine the actual results emerging from the going economic process.
They just constitute the guiding pattern that can shape the activity’s
becoming. This pattern is the central theme that can involve all the
components of the activity into a co-ordinated, purposive whole.
In taking actual decisions and dealing with working structures and norms,
management authority is delegated by undertakers to implement their
guidelines and seek for intended results. Management does not only make it
for its own sake, but also to serve the greater purpose39. For that,
management co-ordinates and focuses the becoming of activity by its
interaction with the organisation, creating organisational structures,
processes and projects that are concerned with special institutional and
epistemic conditions.
In this making, the organisation must not be divided against itself, but
devoted to the purposes for which the activity has been undertaken and the
39
Ultimately, only individuals can create the firm-entity for prompting, framing, and
enhancing their business activity. Even so, although power interactions might and actually
exist within the entity, the notion of power cannot understand the instituted, fiduciary
responsibility for managing the whole firm as an entity: inside the entity field, every
holding-up opportunity becomes an abuse of the entity and a menace to its enduring.
Corporate distress factually points the moral that the entity’s hazard may be great.
26
co-ordination concerned. At the same time, the management direction must

accept the “vagueness”, the “incompleteness” of the inner working of
organisation implementing the concerted actions, with all the actual
adjustments it calls for, because it could by no means perform the business
activity and fulfil the intended results without this mode of functioning40.
Furthermore, all the actors involved in and engaged to the business
activity are concerned with the representation and evaluation of activity’s
actual results emerging in the special process of becoming for the firm-
entity in real dynamics and complexity. The accounting system provides,
with limitations, a valuable tool for representing and evaluating such results
on a reliable and traceable basis, able to settle divergent interests41.
According to this approximation, the general purposes wished by

undertakers (and shaped by society) interact with and try to inform the
entity's life. They are especially concerned with the intended results from its
going economic and monetary process (dynamics between ideal purpose and
its material ground). Thus, management authority is delegated by
undertakers to attain these purposes by focusing, structuring and co-
ordinating (by fiat, norms, technologies, and so on) the actual organisation
of the firm-entity as an evolving, economic activity (dynamics between
management direction and inner organisational work).
Contrary to incomplete contracts economics, most interdependencies and
complementarities do not relate here to the contractual interactions between
two (or more) actors, but to the involvement of each undertaker into the
special economic process of becoming that emerges into the firm-entity as a
whole. This involvement may relate either to the revenues' side or to the
costs' side of the becoming concern, according to specific organisational,
institutional and epistemic conditions.
The new purposive constituent, then, does not make the entity an
association of independent resources’ proprietors, only shaped by the
working of interacting expectations in the joint concern42. Instead, the entity
is such a whole where the working constituents make the whole becoming
activity different from the simple additive resultant of the interacting parts.
40
This second approximation deals with two contrasting couples. As well general
purposes are modified by management co-ordination, as managerial actions are changed in
the making of the inner working of organisation. An attempt is usually made to grasp these
translations in some mechanical ways, as provided by perfect technologies or arrangements.
In such a way something of essential is irrevocably lost.
41
According to Zingales-Novaes (2003), this role is performed by bureaucracy. On this
role as performed by accounting, cf. also Ijiri (1975). This role is an active one, concerned
with real dynamics and complexity, not only an ex-post measurement.
42
Stauss (1944; 1945) also discussed this point in Common’s institutional economics.
27
Yuri Biondi
All the constituents jointly constitute this whole, i.e. they allow it to
function and exist as such. Here the whole system of relations between
constituents stand for such “working rules”, or “habits”, or “structures” -
prompting, framing and enhancing every organised activity - that every
institutional economics is looking for.
This system of interacting constituents does not offer any deterministic
framework as equilibrium theories do. Management co-ordination is
essentially distinct from the general purposes suited for the entity, as well as
the becoming activity of the entity as organisation is distinct from the going
economic and monetary process that the entity actually realises. Each
constituent does not replace one another, but every one is at the same time
autonomous from one another and mutually interdependent.
Business income to the firm, for example, may constitute one of purposes
for the firm-entity. It emerges into the special process of the becoming
activity as fulfilling consequence (partially unintentional and/or unintended)
of managing the inner working of organisation. Neither the sole undertakers
nor the managerial decisions could ever determine these actual, emerging
results, nor undertakers could ever completely determine actual
management direction.
The firm-entity as becoming economic activity structures the functional
interaction between general purposes (related to the ‘institutional structure
of production’) and the inner working of the firm. In this context, the special
activity carried on by the firm as a whole appears as a collective agency
which ought to fulfil past, actual and future expectations of all the
undertakers (stakeholders), including the providers of equity finances.
Continuity and evolution of such an agency ultimately relates to the
undertakers' consent to initiate and persist in their various interactions with
the entity itself. This conditional, dynamic agreement (by will or habit)
relates to the general purposive framework suited for the firm-entity (the
institutional structure of production), ultimately concerned with the
satisfying fulfilment of human needs. This framework shapes the agency’s
actual economic co-ordination that is engaged on searching for the intended
business incomes and results into its going economic and monetary process.
28
[Figure IIc]:
Actual economic coordination facing with purposes and actual results
Purposes
Organisation Going Process
Management
actual results
In seeking the realisation of intended purposes, undertakers delegate

authority to management direction. Management constitutes the actual
decision-making mode of functioning for the actual economic co-ordination
framed by the undertakers' purposes. This direction exists by interaction
between delegates (and coalitions of them) having fiduciary responsibilities.
As Berle early recognized, this managing constituent actually co-
ordinates the firm as a whole, controls the resources at its disposal and
organises the becoming activity in real dynamics and complexity. Not only
property and control are separate, but also property and management,
asking for a new kind of control, different from the irrevocably lost
ownership sovereignty. In such a context,
it should be possible to visualize law and accounting as

combining forces in setting standards which could aid
management in giving well-balanced consideration to the
interests of all parties concerned, as is fitting wherever
fiduciary responsibilities obtain. (Littleton, 1938, p. 84,
italics added).
In summary, the firm-entity as actual economic co-ordination is further

shaped by undertakers' purposive framework, which transforms it into a
becoming economic activity seeking for satisfying realisations in real
dynamics and complexity.
29
Yuri Biondi
From the economic viewpoint, indeed, the notion of firm-entity, its being
as a whole, refers at the same time to the inner relationship between
management, organisation and the going process (defining the entity as
actual economic co-ordination), and to the outer relationship between the
functional entity with its undertakers especially concerned with the creation
and allocation of emerging business incomes and results. Thus, the inner
relationship may define the economic nature of the firm-entity, the outer one
its becoming economic activity involving its world.
To properly define the nature of the firm as economic organisation and
institution, however, we must further clarify the interactions between the
entity and such two constituents that are the undertakers and the emerging
business incomes and results. These further constituents seem to be related,
in some important but still obscure way, with the ‘frontiers’ of the firm-
entity, i.e. with both the inner and the outer fundamental relationship.
In fact, the second approximation fails to integrate the firm-entity into a
‘potentially harmonious’ whole, whilst coupling with the contrasts between
expectations and emerging results, concerted actions and constraints,
effective management authority and actual inner work of organisation.
In this perspective, such an approach should attempt to bring business
law, management, and accounting closer together. But the role of the
accounting system is too vaguely established, even though it appears to be
related with the interactions between undertakers' wishes and effective co-
ordination by management on one side (institutional structure of
production), between management direction and the inner working of
organisation on another (organisational structure of production). In such a
context, the accounting system ought to deal with the going process of the
firm-entity, in order to provide reliable knowledge of resources, transactions
and combinations, events and emerging results, relevant to evaluate and
trace its becoming economic activity under real dynamics and complexity
(epistemic structure of production)43.
4.4. Firm-entity as economic organisation and institution

As the previous approximations explain, the inner relationship between
management, organisation, and going process, defines the firm-entity as
actual economic co-ordination, whilst the articulation between instruments
(means) and motives (purposes) defines its economic activity as becoming
concern.
A further synthesis is required to link into an integrated whole both (A)
the inner interaction of the entity as actual economic co-ordination
43
The three structures are melted and misunderstood either by equilibrium theories or
by incomplete contracts economics.
30
generating actual results, and (B) that outer term constituting the entity's
world that are the undertakers (related to the institutional environment and
to the human community), together with the intended results they are
waiting for.
Starting from the purposive context of the firm-entity as a dynamic
economic activity (becoming concern), indeed, the third approximation
synthesises the firm-entity as an economic organisation and institution by
framing it into two fundamental interactions:
(A) The inner relationship of the entity as actual economic co-

ordination, where the management direction co-ordinates and
focuses the inner working of organisation into the going economic
and monetary process. This dynamic managed system defines the
entity’s economic nature, and generates the becoming economic
activity of the whole firm.
(B) This activity is outlined by the outer further relationship, which

considers the business entity from an external viewpoint. Here
emphasis is on the dynamic connection between the functional
entity seeking for realising its activity, (intended and actual)
incomes and results, and the undertakers looking for them.
Management co-ordinates this activity with the fiduciary authority
conferred by all the undertakers and according to institutional
arrangements.
Even though undertakers have purposive expectations on entity's results,

whether promised or residual (outer relationship - B), actual fulfilment of
them depends on the undertakers' involvement in the inner working of
organisation co-ordinated by management in reason of its fiduciary
authority (inner relationship - A).
31
Yuri Biondi
[Figure III]:Firm-entity as economic organisation and institution
Entity's incomes
Going process of and results
becoming
Inner relationship
Entity Firm Outer relationship
Other interactions
Managed
System Undertakers
(Stakeholders)
From the transactional and institutional perspective, notions such as

economic organisation (organisational structure of production), or
institutions (institutional structure of production), or knowledge (epistemic
structure of production), relate to the fundamental interactions between
constituents (functional modes of existence) as we can experience and
understand them in real dynamics and complexity.
In particular, property rights constitute just an incomplete, and at worst
biased acknowledgement for the active role of norming institutions not only
for the whole entity, but also for its management and its going process of
becoming (institutional interaction). As well, opportunism only constitutes
an incomplete and surely dismal acknowledgement for the active role of the
inner working of organisation in the whole entity, its special process and its
emerging results (organisational interaction). Finally, bounded rationality is
a valuable but underdeveloped idea to grasp the field and the ways in which
actors engage in actual business decisions and activities under real dynamics
and complexity (epistemic interaction).
Quarreling with Coase, Arrow (1986) questions that property rights
alone suffice for social welfare under bounded rationality. In spite of them,
he calls for the price system as a frame of competitive interactions. Under
incomplete and imperfect markets, nevertheless, only firms as active entities
32
provide sustainable conditions for effective business activity of investing,

producing and selling. In fact, the “contractarian firm” does not appear to
emerge so much in the making of reality44, as in the day-dreaming field of
the price system. Under real dynamics and complexity, instead, the leading
personages on the socio-economic scene are the entities firms45. Neither
property rights nor markets (i.e., price system and competitive conditions)
alone do ever assure economic effective production. As the Simon's
creature floating down to Earth from Mars does, then, our approach
understands firms as connected by a changing network of communications
and transactions that we know as markets. “But the firms would be much
more salient than the markets, sometimes growing, sometimes shrinking,
sometimes dividing or even swallowing one another. Surely they would
appear to be the active elements in the scene” (Simon, 1997, p. 35)46.
In the light of this predominance of firms (and organisations), markets
may be considered as threading environments that link firms-entities to each
other and to undertakers. Markets could (or not) determine this outer
interaction, but never the emerging process of becoming for the entity's
activity. The firm-entity is not a price system (i.e. the reacting resultant of
competitive conditions), but a managed system. It is the actual economic
co-ordination that characterises the whole firm as an entity, defining its
special economic nature. This view of the whole economic system relegates
the notion of market to explicitly designed arrangements, like the “stock
market” and so on. Most of the so-called “market exchanges” are instead
outer transactions and interactions between the entity and its world.
According to this new transactional and institutional perspective, not
only (properly defined) property rights constitute the institutions shaping the
economic activity of the firm-entity, but so do all the norms, rules and
conventions designed for and actually applied in business activities,
including the accounting-based standard representation for income taxes and
dividends' constraint. All these working norms play an active role as
institutional structure of production, framing and shaping the special
economics of the firm.
Legal institutions are especially concerned with the outer interactions
between management and undertakers, and between undertakers and the
entity as a whole. They frame the business activity shaping and modifying
the inner relationship between the entity and the management of its going
process. In this context, as Coase suggested, management direction co-
44
In spite of the methodological realism Coase (1988, pp. 52-54) advocates.
45
We are neglecting the mystery of other “black-boxes” such as the State, families, non-
business entities, and of the monetary and financial system.
46
cf. also Simon (1991), p. 27.
33
Yuri Biondi
ordinates by fiat not only employees (labour interaction), but all the
resources involved, including the equity finances.
But, however shaped and modified, management would never play the
capitalistic hero beloved by incomplete contracts economics. The firm-
entity may never be a bundle of property rights however defined. Under real
dynamics and complexity, the inner working of organisation and the actual
going process of the whole firm constitute the performing but limiting
factors for the managerial active role.
In this dynamic context, the accounting system functions as:
• a mode of knowing (and representing) the going process and its actual,
emerging results (epistemic role);
• a mode of regulating the entity's activity and shaping its special process
of becoming for the undertakers and the law, especially concerned with
the structured allocation of intended results (institutional role);
• a mode of organising the becoming economic activity in accordance
with the going economic and monetary process of the whole firm-entity
(organisational role).
The accounting system, therefore, constitutes one of the modes of

functioning (constituents) of the becoming activity of the firm-entity, either
as cognitive tool, as organisational instrument for management, and as
working norm (and rule) related to the institutional structure of production47.
The accounting system deals with the effect on each entity of events,
transactions and combinations which take place in the entity’s special
process of becoming. Under real dynamics and complexity, however, the
accounting system may never determine such process that it has to
represent, organise and regulate. Instead, accounting system and going
process are to be distinguished. For example, the accounting system - as one
of entity’s mode of functioning - involves the use of money as a symbol,
whilst transactions between one entity and its world involve the use of
money as a medium of exchanges48.
47
Following Anthony (1983, p. 208, note 6), the usual barrier between financial and
management accounting is left out and further developed as inner and outer accountability.
48
cf. Zappa (1937), but also Raby (1959); Littleton (1961), Symbols of Reality, pp. 226-
227. In the price system, making money and credit to be neutral, “each individual at the
start of the trade has available implicitly a credit line equal to his net worth “at market” -
i.e. at the worth of his initial assets at the final market price” (Shubik 1993, p. 230, italics
added). The dynamic accounting view of money and financial devices is very different, and
allows the presence of money (as credit money) to play an active role into the economic
and monetary process.
34
Since the accounting system may never determine the related economic
and monetary process49, its epistemic role does not fit any “principle of
value maximisation”. Instead, according to Anthony (1983), the accounting
framework begs for concepts and norms making the history and evolution of
the firm-entity understandable in synthesis under bounded rationality.
Accounting is concerned here with the capacity of the firm-entity to go on,
become and satisfyingly fulfil in a situated, changing context50.
This capacity relates to the recovery of invested costs in real dynamics, as
well as to the satisfying creation and allocation of business incomes for all
the undertakers, including satisfying equity interest for shareholders as
providers of equity finances51. As a reasonably aggregated, reliable mode of
knowledge, accounting system is suitable indeed for settling conflicting
interests, helping the proper formation of prices on the stock market in time,
and evaluating the entity's and managerial performances.
According to this scope, the accounting system views the firm-entity as
an accounting agency characterised by the possession of assets and by the
prior control of economic and monetary streams, being accountable for
aggregated determination of all emerging revenues, costs and allocations of
incomes.
In such a way, the accounting framework defines business incomes to the
entity (earnings, in their actual nature) as the main entity’s outcomes. These
outcomes emerge in the entity’s special process of becoming in real
dynamics. The accounting framework, therefore, is concerned with the
duration of assets and other values related to unknown length of investing,
producing and selling cycles.
In summary, the accounting system constitutes a mode of knowing,
organising and regulating the entity’s special economic and monetary
process that emerges and evolves into the business entity as a whole.
4.5. Further developments: the firm-entity as a financial and economic

core
This third approximation defines the economic notion of the firm as an
entity (second order connection). Yet it does not further link expectations
and realisations, neither deal directly with the field and the ways (third-
49
Even though the accounting system may somewhat shape and modify this process.
50
Anthony directly refers to Simon's approach. cf. also Anthony (1960 and 1983).
51
This interest may constitute one accounting way to bridge the intended and the actual
results in real dynamics. A sort of equity interest is also calculated by Economic Value
Added (EVA) approach to residual income, even though it usually starts from capitals
invested (capitalised as accounting assets). Our approach, instead, suggests to take actual
funds committed (recognised as accounting liabilities or equities) as basis, as Schumpeter
(1912, pp. 175-200) early justified.
35
Yuri Biondi
order connection) in which entity’s business activity becomes or its going

process actualises.
If the previous approximations deepen the nature of the firm as an entity
and link the entity’s business activity to its world, a further one should
explore its evolution, dealing with its history and with the real dynamics of
transactions, combinations and events, potential or occurred. This latter
approximation should include, at least, the accounting system and the
intended and emerging results as further terms.
The following figure tries to sketch this further development:
[Figure IV]: The entity's constituents in real dynamics and complexity
Emerging actual results

Intended results
Accounting system
organisational relationship
institutional relationship
Management
(intents) epistemic relationship
Organisation
Undertakers
Actual economic
(purposes; process (real dynamics)
resources)
The emergence of income in a business activity is analogous neither to

the simple speculative adventuring of a placement, nor to the renting of a
nexus of properties. Income emerges as the result of an intended work, and
as the consequence, partially unexpected and/or unintended, of resources
engaged in and then of prior costs invested to generate it. As Littleton
(1937, p. 58a) wrote52, “income is the earning flowing from the work done;
it is the consequence of a prior outlay made with intent of generate income.
(…) The key to this doctrine is the word intent”.
52
cf. also Littleton (1953), chapter 2, and Biondi (2004).
36
Management is here the key constituent of this working co-ordinating

intent. Management is accountable for making the costs invested productive
and effective for both undertakers and society (accountability). His intent
may be incomplete, vague, and tentative, since it tries to link the past and
the future with the present. Intended and actual results may and will surely
differ53, but the firm-entity has to be managed in some manner to effectively
produce in real dynamics and complexity. In this process, all the undertakers
are both framing purposes (related to intended results), and providing
resources (related to the internal organisation and involved in its actual
process).
DYNAMIC BALANCE SHEET: AN HEURISTIC VIEW
ASSETS SOURCES OF FUNDS
(cash,
1. prices-related
commercial 3. prices-related liabilities (commercial debts)
values
claims to money)
(expenditures
capitalised, (funds supplied,
2. Costs invested 4. Revenues advanced
overheads, liabilities incurred)
investments)
(net funds supplied
5. Shareholders' equity plus unpaid equity
interest)*
(cumulative difference
between costs and
6. Net income
6. Net income cumulated (if negative) revenues, including
cumulated (if positive)
net income of the
period)
Here accounting system stands for the epistemic, organisational,

institutional mode helping management and disclosure to in synthesis track
the past, represent the present, and also declare intents when the economic
and monetary process of the whole firm is concerned. Thus assets and
liabilities, as resources (means) allowed by undertakers, are in intention and
53
This distinction between intended and actual context is not exactly the same as the
distinction between ex ante and ex post early developed by Hicks, cf. Biondi (2003),
especially p. 21-25. Actual accounting figures, for example, need to consider the future, as
well as intended figured purposes, more or less quantified, somewhat ground on the past
and start from actual conditions, especially epistemic. There are the framework and method
that fundamentally differ.
*
Here we are including equity interest calculation on net funds actually provided by
shareholders as dynamic sources of funds (financial resources).
37
Yuri Biondi
in effect an advancing of costs and an investment for the future. And

revenues are, in part, a way of recovering these costs advanced, a fruition of
a future now became the present, some accomplishments secured.
In this economic and monetary process, sources of funds incurred
(equities and liabilities), as well as invested costs (assets), imply a dynamic
connection in real time, which allows the whole firm to endure and develop
as a financial and economic core.
In this context, the ultimate message of accounting system is not merely
the final, net figure of the income statement. The real story lies in the kinds
and relative amount of costs invested and revenues advanced (resources
engaged in making the working process), and in the kinds and relative
amounts of revenues actually generated. This flow basis (and method) is the
accounting way of saying that the firm’s economic and monetary process
transforms the capitals engaged, rather than simply accruing to the total
stock of capital. No such a thing as permanent capital exists according to
this accounting view, but instead cost invested and revenues advanced
confronted with actual costs and recovering revenues (the first couple being
especially represented by the balance sheet, the latter one by the income
statement) 54.
The notion of firm-entity, then, gives such a “clue” to have an
understanding of enterprise business activities in real dynamics and
complexity. Accounting system has to give a “clue” to the way these
activities are made understandable in synthesis. Framing the entity with
accounting, thus, means to link accounting, which structures “the means”,
with such enterprise’s activities that make “the ends” intended.
5. Conclusions
Following the genuine insight of Coase (1990), the Simon's Martian may
delve into accounting in order to understand the special economics of the
firm. Even though incomplete contracts economics is lacking in the Martian
view, surely because of the alleged dualism between the firm and the
market, a new transactional and institutional perspective can deal with it.
This essay outlines this further development starting from Coase, Shubik
and Simon, but also from the recent advances provided by Baker-Gibbons-
Murphy and also by Rajan-Zingales.
54
The usual metaphor of business capitals (assets, investments) accumulation applied to
all firm-specialised and firm-specific resources and processes, as well as all the stuff of
“intanglibles”, are thus misleading. It especially prevents to grasp resources’ commitment
and actual resulting losses at the same time.
38
The new perspective recognizes the firm as an entity, i.e. as a special

field providing an enduring pattern of interactions between all the parts
involved into the actual process of becoming for the whole firm. The firm as
economic entity, then, exists and functions as a whole, as a dynamic system
of interacting parts, co-ordinated by human intelligence and effort
(management), committed to, and involved in, an economic undertaking.
The interaction of the parts, nevertheless, does not suffice to explain
enduring existence and functioning of the firm-entity. Under real dynamics
and complexity, the firm-entity further appears as a special business activity,
analysable in terms of modes of functioning (constituents) that jointly
constitute its actual process of becoming as a whole. Each mode is
analysable within the entity as an autonomous, active component, and ‘in its
interaction with’ (‘playing an active role in’) the economic and monetary
process with which this special activity is concerned. In this transactional
and institutional framework, the alleged dualism between the firm and the
market disappears, and the firm-entity as a whole can exist and function
quite apart from the parts that compose it, even though does not perform and
fulfil apart from them.
In this context, the accounting system is seen as one of the modes of
functioning of the firm-entity as a whole. It relates to the epistemic,
organisational and institutional structures of production, i.e. it constitutes a
mode of knowing, organising and regulating the actual, going process of the
firm-entity, coping with real dynamics and complexity.
In particular, it provides a reliable representation of actual transactions
and combinations, events and emerging results. So it may trace and estimate
the becoming economic activity, and thus play an active role in the entity’s
economic and monetary process. The accounting system, indeed, will allow
the special economics of the firm to supersede the price system into its
special process of creating and allocating resources.
Whilst incomplete contracts economics allows firms to emerge in the
theoretical framework provided by the price system, the transactional and
institutional perspective seeks in the making of Reality to allow economic
entities to exist. So, even though firm-entity does not act as individuals do,
it becomes an integral part of society as a whole, having its own
autonomous, enduring existence, and function as an economic organisation
and institution. As such it is responsible towards the totality of human
experience and of natural world. Its powerful impact on individual liberty
and life ultimately asks for a “conscious island” of concerted, managing
authority, looking forward to serve not only undertakers, but the whole
human community.
39
Yuri Biondi
40
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44
Glossary
Selected functional modes of existence of the system, which

jointly constitute the dynamic process of becoming of the whole.
They allow the whole to be different from the mere additive
resultant of the parts. As such the constituted whole exists and
Constituents
functions apart enough from the parts who compose it (actually, on
a greater order), but it does not perform and fulfil apart from them.
Constituents relate to the fundamental relationships composing
the whole system and to the structures of these relations.
The actual, conditioned, becoming relationship as it goes on and
evolves in real time and complexity (implying uncertainties,
Dynamics
bounded knowledge, potential and actual mistakes and mis-
(and Complexity)
organisation). Dynamics is hazardous. Real dynamics and
complexity stands for dynamics of the reality in its making.
The firm as an enduring pattern, or whole, experienced and
understood as a system with special dynamics and complexity. The
Firm-entity firm is hence an entity functioning through some constituents and
performing through the medium of various parts having
heterogeneous responsibilities in and interactions with it.
Logical and functional nexus between two (or more) parts (or
Interaction
constituents) of the system as a whole.
Mode of existence,
see Constituents, Firm-entity
Mode of functioning
Playing a role in see Interaction
The simplest elements of a whole, for example the resources
(provided by actors or individuals) committed to the firm-entity.
Their identity could not be fundamental for the whole as it exists,
Parts
even though it could become fundamental into its actual process of
becoming. The whole influences the behaviour of the parts, but
does not determine it.
Logical and dynamical interaction between three constituents of
Relationship
the system as a whole.
A frame of autonomous and yet mutually necessary terms,
System jointly defining a whole. Terms could be both parts and
constituents.
Whole see Firm-entity, system
45
Yuri Biondi
Couples of contrasting notions
INCOMPLETE CONTRACTS ECONOMICS TRANSACTIONAL AND INSTITUTIONAL PERSPECTIVE
Equilibrium System
Dualism between Firm and Market Five-terms System
Firm as a nexus of prices, contracts or

Firm as an entity
property rights
Structures, epistemic, organisational,

Opportunism and hold-up
institutional
Property rights Working rules and norms
Opportunism Inner working of organisation
Game theoretic bargaining Accounting system
Separation between Property and Control Property, Management, and Control
Power bounded by outside options Authority based on fiduciary responsibilities
Ownership Sovereignty Management co-ordination
Some principle of maximisation or

Satisfying based on bounded rationality
economising
Net revenues as rents or quasi-rents Business incomes to the firm
Accounting proprietary view Accounting entity view
46
DIPARTIMENTO DI ECONOMIA AZIENDALE
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2000.
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competitività aziendale, febbraio 2000.
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conoscenza, dicembre 2000.
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Italia. Dalle origini agli anni settanta, dicembre 2000.
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preventivo nell’esperienza del tribunale di Brescia, dicembre 2000.
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dall’irrealismo neoclassico alla differenziazione dei prodotti, marzo 2001.
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Italian Equity Mutual Funds, agosto 2001.
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capitale economico e strumento di gestione aziendale, dicembre 2001.
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aziende cooperative agricole, dicembre 2001.
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febbraio 2002.
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metodi di misurazione, marzo 2002.
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commerciali, aprile 2002.
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22. Giuseppe MARZO, La relazione tra rischio e rendimento: proposte teoriche e ricerche
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∗ Serie depositata a norma di legge
47
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2003.
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XXI secolo?, luglio 2004.
34. Yuri BIONDI, Equilibrio e dinamica economica nell’impresa di Maffeo Pantaleoni,
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38. Elisabetta CORVI, Michelle BONERA, Il ruolo di internet nelle relazioni con gli
stakeholder: il settore dell’energia elettrica, dicembre 2004.
39. Yuri BIONDI, Zappa, Veblen, Commons: azienda e istituzioni nel formarsi
dell’Economia Aziendale, dicembre 2004.
40. Federico MANFRIN, La revisione del bilancio di esercizio e l’uso erroneo degli
strumenti statistici, dicembre 2004.
41. Monica VENEZIANI, Effects of the IFRS on Financial Communication in Italy:
Impact on the Consolidated Financial Statement, febbraio 2005.
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familiari, marzo 2005.
44. Anna CODINI, I codici etici nelle cooperative sociali, luglio 2005.
45. Francesca GENNARI, Corporate Governance e controllo della Brand Equity
nell’attuale scenario competitivo, luglio 2005.
48
ARTI GRAFICHE APOLLONIO
Università degli Studi Dipartimento di
di Brescia Economia Aziendale
Yuri BIONDI

Paper numero 46
Università degli Studi di Brescia

Dipartimento di Economia Aziendale
Contrada Santa Chiara, 50 - 25122 Brescia Agosto 2005
tel. 030.2988.551-552-553-554 - fax 030.295814
e-mail: segeaz@eco.unibs.it

Yuri Biondi: The Firm As An Entity: Management, Organisation, Accounting

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ARTI GRAFICHE APOLLONIO

Università degli Studi Dipartimento di

THE FIRM AS AN ENTITY:

Università degli Studi di Brescia

Presented to the SASE 17th Meeting

Key-words: economic theory of the firm, incomplete contracts economics,

JEL Classification: D23; L22; M41

1. Introduction, or about the theory of the firm ............................................. 1

2. The nature of the firm as economic organisation: the entity's

3. Accounting system, firm dynamics and “the institutional structure

4. The economic nature of the firm as an entity........................................... 22

Couples of contrasting notions..................................................................... 46

1. Introduction, or about the economic theory of the firm

1.1. Equilibrium theory of the firm as a theory of the firm, but a

organisation. Like in other matters, the Emperor equilibrium has no more

Time and uncertainty have essentially disappeared

In conclusion, the resilient, enduring activity of the whole firm as

1.2. The innovative but bounded contribution of incomplete contracts

Its view of the “institutional structure of production” and the related

In this planned society, the firm costs do not, in the

From the economic viewpoint, the market is not a person and, in

1.3. Outlines for a further theory of the firm as an entity

(according to old institutional economics) and a dynamic system

• Baker-Gibbons-Murphy argue for the management of relational,

Looking for this new transactional and institutional perspective, the

existence7 are selected as constituents to analyse the firm’s becoming

The following text is organised in three sections. The first section

management, organisation, accounting system, business incomes and

2. The nature of the firm as economic organisation: the entity's missing

subordinate interim rights to share in enterprise earnings at the

emerging results. These three components, indeed, are selected to be the

• Concerning the purpose of business activity, this role maintains some

However original and valuable incomplete contracts economics might be,

3. Accounting system, firm dynamics and “the institutional structure of

The framework provided by incomplete contracts economics appears as a

According to Coase, management direction co-ordinates by fiat not only

functional characteristics. Reciprocally, people undertake the firm’s

As suggested by the early accounting and economics of the firm23,

TABLE I Key element/s of the system Modality

In this context, accounting may provide an alternative frame of analysis

TABLE II ASSETS LIABILITIES

However instantaneous or stationary, an equilibrium framework seeks for

world29, the accounting system fills in the inner and inter-temporal

appear here as a claim on assets' values, but as an advancing of revenues for

(a) Accounting system is accruals- and not cash-basis, it grounds on

whichever undertaker, but the actual entity’s performance represented in a

TABLE III INCOMES ASSETS LIABILITIES

In summary, by means of its dynamic entity view, the accounting system

of working rules and norms, related or not to financial matters and

4. The economic nature of the firm as an entity

entity will be gradually considered (1) as an actual economic co-ordination,

4.2. Firm-entity as actual economic coordination

[Figure I]: Firm-entity as actual economic co-ordination

Organisation Actual economic and

4.3. Firm-entity as dynamic economic activity (becoming concern)

The firm-entity as becoming special activity dynamically deals with two

[Figure IIa]: Firm-entity as becoming economic activity

General Purposes (Undertakers)

Inner working of Organisation Management direction

Going economic and monetary Process

[Figure IIb]: Actual economic coordination shaped by undertakers' purposes

Organisation Going Process