A History of the Early Japanese Theorists’ Development of the ‘‘Capital Circulation’? Approach Akiyoshi Tanaka Tokyo Keizai University, Japan In order to understand the characteristics of the theories and practices of accounting in Japan, it is necessary to appreciate the archetype of the Japanese critical theory of accounting. This is because the methodologies adopted by the majority of the pioneers of the Japanese theory of accounting in the 1930s and early 1940s were critical, and because, through their earnestness, abilities and high positions in academic accounting societies, these pioneers had a considerable influence on accounting in Japan thereafter. Some of them played significant roles in the establishment of the Japanese standards for corporate accounting after the Second World War. ‘The critical accounting theories discussed in this article were published in the period from 1930 to 1945. For more than half of this time, the freedom to conduct critical research was very restricted. Consequently, the development of critical accounting theory was limited. A major characteristic of the critical theories was that they attempted to interpret accounting, dialectically. Instead of conceptualising accounting on the basis of objectives which are external to accounting, the critical approaches conceptualised it as a kind of organ which contains contradictions, through which it has emerged and changed. This way of thinking can be called essentially “‘critical’” not simply because it criticises the existing mode of accounting, but because it also attributes the determinants of accounting to the contradictions (negations) which are inherent in accounting itself. In this respect, this methodology is also capable of determining how the contradictions are settled. This article examines the approaches of the pioneers from 1930 to 1945 to clarify the characteristics of the methodology of the archetype of critical accounting theory. The first section discusses the background of those early Japanese scholars who were most prominent in the development of the capital Circulation approach. The second section examines the main issues which occupied the early theorists in their refinement of this approach. The third section provides some examples of applications of the early theorists’ work and the final section presents conclusions. Special thanks are extended to Vanessa Brooks who kindly assisted with the editing of this article.The Emergence of Critical Accounting Theory the Meiji Restoration of 1868 as a tuning point, Japan developed rapidly into a modern capitalist country. In this process, various types of modern institutions and technologies were introduced from Western countries. One of these was the double-entry book-keeping system, introduced in 1873, which became a main subject of modern commercial education. For the following 50 years, Japanese accounting theories were no more than introduced or imitated versions of Western ones|1]. In 1917, leading accounting scholars founded the Japan Accounting Association and established the Association's monthly journal Kaikei (Accounting), which served as a base from which Japanese accounting theory could develop. It was in the 1930s, however, that Japanese accounting theory began to show distinctive characteristics, the major one being the efforts to turn accounting into a discipline within social sciences. The main reasons for this shift are explained below. ‘The capitalist economy of Japan developed in the 50 years after the Meij Restoration. Although much wealth developed within the society, the fortune of small farmers and of urban labourers declined. A succession of crises — the After-war Crisis in 1920, the Financial Crisis in 1927, and the Showa Cris influenced by the Great Depression in 1929 — also caused marked unemployment. Many scholars of the time believed that a social science should investigate social problems of this kind and develop policies to solve them. In this context, economics was the nucleus of the field of social sciences. By contrast, accounting and management disciplines were generally regarded ‘as mere capitalist techniques that served the accumulation of wealth through which poverty was increased. Hence, accounting students were often ashamed of majoring in such a discipline. The majority of these scholars wanted book- keeping and accounting to become widely recognised as a branch of learning, even though not all of them pursued a social science view of accounting. ‘The birth of socialist government in Russia as a result of the Russian Revolution in 1917 influenced the young Japanese scholars. The works of Lenin (1870-1924), Bukharin (1888-1938), Deborin (1881-1963) and Mitin (1901-) were translated into Japanese and published in rapid succession. A full Japanese translation of Marx's Capital (3 volumes) was published in 1920-24, and the collection of the ‘works of Marx and Engels (29 volumes) was published in Japanese in 1928-35. Hajime Kawakami (1879-1946), Professor of Economics at Kyoto University, played an important role in the spread of these socialist ideas. Kawakami. who was also known in Japan as a poet, at first sympathised with humanistic social revisionism. In his best-selling book, Binbo Monogatari (The Tale of Poverty, 1917), he claimed that people should change their minds and the rich should abolish luxury to solve the poverty problem. Tamizo Kushida (1885-1934), one of Kawakami's disciples, criticised Kawakami's theory from a Marxist viewpoint. He insisted that a drastic change in economic environment was required for such a change in people's minds (Kushida, 1917). Kawakami then concentrated on studying Marxism. The works of Kawakami(2], which were widely read by students interested in social problems, had a great influence on the spread of Marxism in Japan|3}. The “Capital Circulation” Approach 25AAAJ 26 The other philosophy that affected the methodology of accounting at that time was the neo-Kantian way of thinking adopted by the Badische school. One of those who introduced this philosophy to Japan was Kiichiro Soda (1881-1927), a graduate of the Tokyo University of Commerce, the predecessor of Hitotsubashi University. Soda studied German thought in Germany for nine years under the guidance of Heinrich Rickert (1863-1936). In addition to managing his family's bank, Soda taught at the Tokyo University of Commerce and took a position against Japanese militarism and bureaucratism. He also took an interest, in social undertakings and was head of the Institute for Research into the Social Problems of Kanagawa Prefecture. ‘The neo-Kantian methodology was often linked to Marxism in Japan, although the methodologies of Marxism and neo-Kantianism differ, as is explained later. One of the reasons for this connection is that German and Austrian Marxism, or so-called “Austro-Marxism", which was introduced into Japan after the First World War, had adopted the neo-Kantian philosophy to some extent. Hilferding (18771941), Sombart (1863-1941) and Lederer (1882-1939) are examples of the scholars of this school whose works were introduced to Japanese scholars, Lederer taught economics at the University of Tokyo as ar. invited lecturer from 1923 to 1926. Sombart mentioned the relationship of accounting to modern capitalism, referring to Gomberg's writings on accounting. In this respect too, Sombart's thought influenced accounting scholars in Japan. Under these circumstances, it is not surprising that a number of good scholars of accounting in Japan were influenced by Marxism to some extent. Some of these scholars constructed an original theory of accounting under the strong, influence of the then Marxist way of thinking. The most significant of these scholars were Fukuichi Hatanaka (1906-31), Torae Nakanishi (1896-1975), Wasaburo Kimura (1902-73), Kiyoshi Kurosawa (1902-90), lwao Iwata (1905-55), Torazo Ninagawa (18971981), Katsuji Yamashita (1906-69) and Katsuzo Baba 907-). A circumstance common to the majority of these schclars is that, although. they initially belonged to schools which stressed business education, they subsequently entered higher educational institutions because of both their outstanding study results and their continuous desire to study. They had strong, interests in economics and philosophy. They were also good at foreign languages and read a lot of English and German accounting litera-ure. ‘This new academic movement, however, was oppressed before and during the Second World War, and hence some of them gave up writing and were compelled to leave their university positions. After the wer, the movement was revived, with its first problem being to turn accounting into a branch of the social sciences. For this purpose, scholars first tried to define the “object of accounting research”, that is, what should be the focus of investigation for accounting researchers. They then turned their attention to the “methodology of accounting research” Issues in Critical Accounting Theory ‘The following section of this article examines the main issues which concernedthe early critical theorists in Japan. These issues, which are discussed in turn, were: () the classification of accounting research as a methodological or substantial science; (2) the relationship between existence and recognition; (3) the methodology of critical accounting, and ) capital circulation as the object of accounting recognition, Accounting Research as a Methodological or Substantial Science Many accounting scholars of this period felt that accounting research had not satisfied the minimum requirements for a discipline of learning. Ota (1889-1970), a pioneer of the mainstream accounting theory in Japan, reflected that: 1t was generally thought in those days that accounting theory was simply an explanation of the technical procedures of accountng, and lacked theoretical considerations... Por example, in accounting valuation, the reason Why the principle of cost or market price whichover is the lower had traditionally been accepted as a standard was explained merely on the round of an old saying “Anticipate no profit and provide forall possible losses". .. . However, this is no more than a religion to pursue a supreme order without theories. Its far froma sence. There would be no problem if one prefers to deal with accounting as a simple technique. For this objective only an investigation in the means of recording and presentation is required for an accounting scholar. However, one could no claim the existence ofa theory of accounting as a science unless he/she would attempt to clarify the essence of what is recorded and presented (Ota, 1968, p. 16) Using the categorical distinction between essence and appearance, Ota thought that science should clarify the essence of things. Accounting scholars of this period commonly sympathised with the premise that “all science would be ‘superfluous if the form of appearance of things directly coincided with their essence”” (Marx, 1981, p. 956). It was widely thought that there was an trgent need for scholars to confirm the identity of accounting as a learning discipline, and that for this purpose the position and characteristics of accounting should be clarified within the whole system of sciences. Concerning this issue, neo-Kantianists accepted the distinction between “‘substantial’* sciences and ‘‘methodological”’ sciences. This distinction was proposed by German psychologist Wilhelm Wundt (1883-1920). This conceptual distinction provoked much discussion in Japan on the question of to which category accounting research should be allocated. There were two conflicting views, The first regarded accounting theory as a substantial science which should analyse economic process as an objective existence. The second view regarded accounting theory as a methodological science which should investigate the methods or forms of recognition through which value and its change within the economic process were calculated and recorded, i.e. recognised. This latter view regarded accounting theory as a science of recognition which was related to specific objects, i.e. a so-called specific epistemology. Before the Second World War, while a few scholars such as Takase (18921966) The ‘*Capital Circulation” Approach 2728 regarded accounting theory as a substantial science, the majority regarded it as a methodological science. This was mainly due to the influence of neo-Kantian philosophers such as Rickert who stressed the importance of the methodological sciences. The Relationship between Existence and Recognition ‘There were two distinct views on this relationship. One was based on the Kantian and neo-Kantian theory that the form of recognition (category) was constructed @ priori by the subjects to perceive the existence, and hence had no relation to the content of objective existence as the object of recognition. This view was underpinned by a world view that subjects recognise objective existences by putting them in order by means of subjective categories, because an objective ence is an unknowable “‘thing itself” in the chaotic condition. Sombart, for instance, regarded double-entry book-keeping as a form constructed by the subject to identify a particular thing, ie. capital, out of the chaotic world and said that (1922, p. 118): “Prior to double-entry book-keeping, there was no category of capital in the world, and without double-entry book-keeping no capital could have appeared”. The other view on the relationship between existence and recognition is based on the ideas of Hegel and Marx. This view perceives recognition as a reflection or reproduction of an objective existence as the object of recognition. This idea is supported by a dialectic ontology which considers that an objective existence moves by itself just like an organ according to internal necessities, and therefore has its own motivations or contradictions, structure, system and history; and that the recognition of the objective existence develops in line with the development of the object. This process of reflection is a positive process of human thinking in which the subject of recognition gets into the object, being mediated by practice and moving from phenomena to essence or from essence to phenomena. The reflection i, therefore, not simply a passive process. In the context of accounting recognition, it can be said from the above viewpoint that not only the content of book-keeping and financial statements (such as the balance sheet and the profit and loss statement), but also the motivation and modes of accounting (such as the form of recording and the structure of calculation), reflect the objective object of recognition, i. the accounting object, which moves by itself. This way of thinking more or less formed the foundation of the then methodologies of critical accounting theory. Pioneering scholars thought that, to analyse the content and the form of accounting recognition, it was of first priority to clarify the structure and the movement of the objective object of accounting which determined the accounting recognition. However, it seems that at this stage they had not yet understood that the claifcation ofthe structure of accounting recognition could conversely contribute to the analysis of the structure of the accounting object, i.e. capital circulation, The First Proposal of a Methodology of Critical Accounting Theory Fukuichi Hatanaka was the first scholar to present a methodology of criticalaccounting theory in a definite fashion. In his graduation thesis at the Tokyo University of Commerce, Hatanaka raised a systematic criticism of the book- keeping theories of leading European authors. Hatanaka was provided with a position of research assistant at his university after his graduation in March 1931, but suddenly died of ilness in December of the same year when he was 25 years old. An examination of the essential ideas of Hatanaka concerning the methodology of accounting theory follows. Hatanaka (1932) viewed accounting theory as a methodological science which investigates the methods or forms of accounting recognition, or more concretely, “the methods by which the process of capital circulation is discovered””. He called this system “‘accounts theory"’ or “book-keeping theory". Concerning the relationship between objective existence and its recognition, he takes the position of reflection theory. He writes (1932, p. 4): Generally, a theory is not obtained by a ash of inspiration or a voice from above, A theory {is nothing but a reflection of the actual and objective world in one’s brain, which reflection is attained by one's intellectual processing of the world tht is external to, and independent of, one’s consciousness, The object of accounting recognition is the circulation of capital and accounting recognition is therefore a reflection of the capital circulation in one’s idea. However, what is reflected is not only the content of recognition. Hatanaka insists, that the form or method of recognition is also constructed as a reflection of the object. He states (1932, pp. 64-5): Capital circulation is an organic unity of various processes which constitute the circulation Ineach process, capital cats off the previous form, and takes anew form, ... By recogrising individual processes of metamorphosis of capital by use of accounts, one can represent the total process of capital circulation as an organic unity into the series of accounts as the unity ‘of accounts. Thats, the substantial significance of the series of accounts can be understood fonly when the series of accounts is regarded as a reflection of the circulation of ca>ital In order to obtain an accounting method by which the object of accounting is recognised, it is therefore necessary to have an exact knowledge of the object itself. Hatanaka viewed the formation process of a recognition as consisting of the processes of analysis and synthesis by thinking. At first, “starting from the concrete process of capital circulation, we analyse it into its constituent elements by abstraction to distinguish the most general and essential elements from other elements" (Hatanaka, 1932, p. 45). The general element of the process of capital circulation is, according to Hatanaka, the process of the expansion of value or the process of yielding profits. However, this is no more than a general definition, At the second stage, the concrete object is reproduced ideally by synthesis, in which process the elements which were distinguished from the most general and essential ones are added one by one to this general definition ‘The practice of the recognition activity in accounting validates an accounts theory. ‘The criterion for the validity of book-keeping theory should not be the internal logical structure of a theory but concrete relations, i.e. the cepital circulation process as a basis of the theory. A book-keeping theory can claim The “Capital Circulation” Approach 29