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In this research paper we are going to fulfill the following tasks: describe three theories of regulation, examine the positive accounting theory and its role in the development of the accounting practices, discuss the perspective of accounting history and analyze an article on accounting. Let us start with the theories of regulation.
Question 1.
In all the economic systems, without exception, the state regulates the economy. In the modern market economy, such regulation is carried out on a smaller scale than, for example, in the administrative-command system, but the economic role of the state is still great.
The state regulation of economy is a system of typical legislative, executive and supervisory mechanisms carried out by the relevant competent government agencies and public organizations in order to stabilize and adapt the existing socio-economic system to changing conditions. As we know, the attitude towards the state intervention in the economy was different at different stages of the economy. Let us quote a few key theories of such interference: classical theory, Keynesian theory and neoclassical theory.
At first we are going to talk about the classical theory. McConnell & Brue (2007) state that the founder of the classical theory was Adam Smith with the work “The study on the Nature and Causes of the Wealth of Nations”, in which he argued that the free play of the market forces create a harmonious unit.
In accordance with the classical approach the state has to ensure the safety of a human life and property, to resolve disputes, in short, to do what the individual is or is not able to do himself, or does it inefficiently. In his description of the system of market economy, Adam Smith argued that it is the desire of entrepreneurs for the promotion of their private interests is a major driving force of the economic development, increasing the ultimate prosperity of both himself and society as a whole. The main thing was that, for all the business entities the basic economic freedoms should be guaranteed, namely the freedom of choice of the field of activity, the freedom of competition and the free trade.
Now let us examine the Keynesian theory of regulation. In the book written by McConnell & Brue (2007), we found the next information that in the 30th year of the last century, after the deepest recession of the economy of the United States of America, John Maynard Keynes put forward his theory, in which he denied the views of the classics on the role of the state. Keynes’s theory can be called the “crisis” one because, in fact, he viewed the economy in a state of depression. According to his theory, the state should actively intervene in the economy due to the lack of free market mechanisms, which would truly ensure the economic recovery from the crisis. Keynes believed that the state should influence the market in order to increase the demand as the cause of the capitalist crises was the overproduction of goods.
He offered several tools. It was a flexible monetary policy, a stable fiscal policy, etc. The flexible monetary policy could step over one of the greatest barriers the rigidities in wages. This might be accomplished, considered Keynes, by changing the amount of money which were in circulation. With the increase of the amount of money the real wages would decrease, which would stimulate the investment demand and the employment growth. With fiscal policy, Keynes recommended the state to increase the tax rates and the expense of these funds would finance the unprofitable enterprises. This would not only reduce the unemployment in the country but would also relieve the social tensions.
The main features of the Keynesian model of regulation are: the share of national income is high and is redistributed through the state budget; a vast area of the public enterprise was created on the basis of education of public and mixed enterprises; the budget and fiscal, and credit and financial regulators were used to stabilize the economic situation, the smoothing of cyclical fluctuations, the maintaining high growth and high employment.
This model allowed to weaken the cyclical fluctuations in the economy for more than two postwar decades. However, later its weakness revealed. Since about the early seventies of the twentieth century the imbalance between the capacities of the government regulation and the objective economic conditions became to manifest. The Keynesian model could be sustained only under the conditions of high growth. High rates of growth of the national income created the possibility of the redistribution of the accumulation of capital without compromising.
The third theory we are going to discuss is the neoclassical theory. The theoretical basis of the neoclassical model has become the concept of the classic economic thought. The transformation of the model of the state regulation was in the refusal of the impact on the reproduction of the demand, but instead of it the use of the indirect measures for the impact on the proposal. Many proponents of the economy of proposal felt the need to recreate the classic mechanism of accumulation and to restore the freedom of the private enterprise. The economic growth is seen as a function of the capital accumulation, which takes place from two sources: their own funds, i.e. the capitalization of profits and through the loans. Therefore, in accordance with this theory, the state should provide conditions for the process of capital accumulation and rising the productivity of production.
The main difficulties in this way are the high taxes and inflation. The high taxes limit the growth of investment, and inflation increases the cost of the credit and thus it difficult the using of the borrowed funds for accumulation. That is why the neoclassics suggested the implementation of the anti-inflationary measures on the basis of recommendations of the monetarists and providing the tax incentives to the entrepreneurs. Reducing the tax rates reduces also the state budget income, and increases its deficit, which complicates the fight against the inflation. Consequently, the next step to be is to reduce the government spending, refuse to use the budget to maintain the demand and the implementation of the large-scale social programs. The policy and privatization of the state property may be included here.
The next set of measures to be taken is the implementation of the policy of deregulation. This means the liquidation of the rules on price and wage, the liberalization (mitigation) of the antitrust legislation, the deregulation of the labor market, etc.
From all the said above we can conclude that in the neoclassical model the government can only indirectly influence the economy. But the chief role in the realization of the economic development of the country is given to the market forces.