The Evolution of Double-Entry Bookkeeping

Abstract

We present an evolutionary theory of double-entry bookkeeping (DEB). We hypothesize that DEB produces more timely and accurate information on transaction-specific profits than the single-entry bookkeeping (SEB) it gradually displaced. The new DEBITS=CREDITS constraint unique to DEB alters transaction analysis to emphasize wealth changes, profit measurement, and the identification of contingencies that complicate profit measurement. Repeated use of DEB-based historical transaction analysis engenders a mental model of economic exchange that helps better evaluate future exchange opportunities. Early adopters could internalize DEB-based mental models because widely-accepted Bourgeois virtues encouraged the diligence needed to implement DEB, and the evolved human brain is extraordinarily able to learn from individual experience. DEB functions like eyeglasses that let an entrepreneur distinguish ex ante between transactions that generate small profits versus those that yield small losses, while these categories were fuzzier under SEB. This small improvement can become economically profound when a single organization like Amazon or Walmart consummates billions of transactions every year. This improved insight could explain the hypothesis of Werner Sombart and others that DEB was necessary (but not sufficient) for the emergence of capitalism. More fundamentally, DEB may play an important but unrecognized role as a finger of Adam Smith’s “invisible hand” that guides market activity.