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After Schmalenbach

The origins and extension of his School,1873: 1955: 1990 with special relevance to Economic Polity, Information & Decisions.


Contents -

Preface; Bio-data & Biographers; Tested through turbulence; National and International; Information and Control; Dynamic Balances; Charts of Accounts; Costs and utilities; a secret planning weapon?; Economics or institutions; Betwixt or between; A committed or a neutral profession; Indicative references; Publications, 1990-96 in Postscript

Key-words: Eugen Schmalenbach; German Business Economics; Polity


Paper read to the 6th Scientific Conference "Applikation von Mathematischer Modelle, Methodenund Rechentechmik in der Leitung der Volkswirtschaft" BRATISLAVA, Slovakia, April, 1990 redrafted - Glasgow, Oct.1996


After Schmalenbach



Our themes must seem incompatible even in the Accountancy section of a congress devoted to the mathematical modelling of economies. And our chronicling will report doctrines from Cologne which consistently over the decades opposed planning in favour of disseminated information and decisions decentralised to the consumer, to the firm or even through quasi-markets within the firm. Schmalenbach’s beliefs robustly held until his death in 1955 will differ from the assumptions of many papers here presented, as from the socio-political doctrines professed in East Europe until very recently. "Socialism" has faced more systematic alternatives; but our interest here will be to show how straight dichotomies did not prove acceptable earlier in the Century. Consequently our care will be to show adaptation, learning indeed, in turbulent times with some themes continuing as possible contributions in the extending period "after Schmalenbach". Our first concern is with biography and biographers.


The Bio-data and the Biographers

Schmalenbach was born in Halver in 1873. He entered Leipsig College of Commerce in 1898. His success there earned a call and subsequently a professorship at Cologne. His teaching, research, journal-editing and publications prospered before and after World War I, when the College of Commerce formed part of the new university. His reputation grew through his pupils, his consultancies and membership of official commissions. From many such activities, he retired in 1933, but his reputation long protected him and his Jewish wife from the Nazis. Eugen died in 1955, and his wife shortly after.

Compared with the Frankfurt sociologists, the Austrian Liberals or even the Social Democratic ideal nurtured at Freiburg from 1933, German Business Economics (Betriebswirtschaftslehre) received little attention in post-War decades. Then in 1977, Hundt’s Theoriegeschichte traced the leading ideas from 1900, while Forrester’s Schmalenbach and After concentrated on that teacher’s life and varied interests, including practical accounting, financial accounting, charts of accounts, cost accounts and finance. Dieter Schneider produced his Geschichte Betriebswirtschaftslehre covering the early and later years of this Century by subject area and with great documentation in 1981 (with later editions). Just a few years later was published the definitive study of Schmalenbach’s life and influence by Kruk, Potthoff and Sieben. In just a few years, death had been replaced by copious source materials which enable a briefer and more selective treatment here of testing times.


Tested through turbulence

Those who recall the revolutions in Eastern Europe in 1989/90, 1968, 1948 and even 1938 may be reminded of the World Wars which were only the greatest of catastrophes in Germany to be set alongside the changes from 1945, in 1933, and post-1918/19. The sharpest of inflation in the early Twenties stands out against the progressive industrial developments through the Second Reich and from before Schmalenbach’s birth. The struggles of nations and classes found family-scale, however, in his rebelliousness against his father!

In the early Twenties Schmalenbach was active in the Cologne Democratic Party, as well as in numerous commissions set up in the Weimar Republic to make recommendations on Price-level accounting or uniform Charts, etc. He also undertook consultancies; but by 1927 he expressed frustration with politics and bureaucracy, preferring to work with his students, and with congenial company which was formalised as the Schmalenbach Society in 1933. Post-War membership was opened beyond former seminar participants to others from both industry and academia. In 1978, the Society was firmly linked with the German Society for Business Economics (DGfB in acronym). In 1990 they received at St.Gallen a distinguished Prize for collective research. Much of that research had been published in a journal started in 1906 and still published on behalf of the Society with the title "Schmalenbach’s" Zeitschrift fuer betriebs-wirtschaftliche Forschung. Continuities and consistencies may thus be traced, narrower than f or the Cologne School as a whole or for Business Economics in the many "Wiso" (Wirtschaftsociologie) Faculties within the German-speaking zone.

Nevertheless the Schmalenbach tradition may be contrasted with other Schools which arose amid the turbulence of those times. The Schmalenbach School emerges as less theoretic and systematic than others and with more practical orientations and key-ideas which appeared applicable whatever the ethos of each age. The distinctions made between theory and practice do not seem robust, but hagiography of such a provocative thinker has been largely avoided. One notes that Business Economics texts and the teaching of Schmalenbach and his followers have not been disseminated over the years largely in Japan. We may illustrate first the horizons which he researched beyond the ambit of the simple business.


National and international

As the Nazis came to power, Schmalenbach published his text on Financing. He wrote much on credit and the finance of the firm. But innovative sections on National Balance-sheets must be of interest to those attending this conference. These Balances, he suggested, could be more accurate than company accounts; and without them, one "tapped around in the dark". In the same year, Grunig was to make more formal proposals; but German statistics were not properly systematised until the 1950s. The co-ordination of industry had to rely on cartelised data, rather than on the management-by-prices which Schmalenbach commended.

Exports were a continuing interest, and also international relations through academic contacts, but these were not facilitated by Schmalenbach’s incompetence in ancient and modern languages! Contacts in the safe-haven of Switzerland were especially close using emigrant relatives and a collaborative research-company. But it was much-bombed Cologne which was preferred in autumn 1943, in the preparations for an international institute for research and translations! Efforts were thus made to overcome dangers and isolation. But home-loving preferences inhibited the reputation of that School abroad, compared with the acceptance of the scholarship of Vienna or Frankfurt. We now sample persistent themes and invite tests of their relevance far from Cologne and long after Schmalenbach.


Information and Control

The first theme studied is that of information and control. The topic if not the techniques have contemporary relevance. Primarily of interest then was the information available within the firm, for market signals were often distorted by cartels and price controls and by incomplete capital markets. Quoted firms with routinely quoted share prices were infrequently compared with the firms which were dominated by the German banks. (For such reasons Market-based research relating share price changes to "new" information has only recently been undertaken in Germany).

Schmalenbach claimed that important information could be gained from a firm’s accounts. The results of one’s firm should show through-flows more usefully than balances. What he termed "Dynamic Balances" were to be promptly and regularly prepared and presented, so that external changes and internal efficiencies could be gauged. When the price-inflation of the early Twenties struck Germany, "Gold-mark Balances" indexed to an earlier and firm money-of-account were advocated so that useful information could still be obtained. Inter-firm comparisons were to be facilitated by another technique.

Uniform "Charts of Accounts" (Kontenrahmen) were then advocated from 1927 to assist decentralised management’s ability to compare its results with others in its sector of the economy. Astounding benefits were hoped for through this decimalised classification of financial and cost accounts: old fashioned routines and the paper-work of authoritarian systems were to go: instead there was to be joy in work, and a new adaptability for accountants!

Information thus normalised was promoted in a liberal period - only to be adopted for the control of industry in Nazi Germany and then throughout the "New Order". The French economy was to be run with the aid of a dozen clerks and such a Chart, a German general claimed during the War. And a decimalised chart or Plan Comptable served in post-War French economic "planification". Democratic planning of this type appeared for many post-War years to offer a successful compromise between the centralised planning of Eastern Europe and decentralised market economies. Charts are of less importance in post-socialist Eastern European countries; but in modified form they continue to receive official recognition.

Schmalenbach went an important step beyond his Chart of Accounts and indeed towards the systems of today when in 1948 he proposed the structure of a Purpose-neutral Data-base (Grundrechnung). Traditional recordings were to be modified by a systematic storing to enable retrieval of information in any desired form. A disaggregated structure was commended, segregating quantities and values but permitting retrieval or summations by any intelligent user. There was thus no one cost as prescribed by the cartels, by the Nazis or by the bureaucrats who purchased supplies for the public sector. Cost data could be extracted rather to meet the needs of the hour and market. One notes that purpose-neutral data-bases were presented first in a 1948 publication on the management of the economy through Prices, with alternatives presented for directed or market economies. Clearly the economics of information may discriminate between polities, even though advancing data-processing offers to serve both for the "Perfect co mputation" claimed for planned economies and in the "Perfect competition" necessary for market choice! (The contrast is owed to P.J.D.Wiles).


Costs and Utilities

Marginal Costing was a tactic advocated early and late by Schmalenbach. His first publication urged that costs should not be apportioned to centres and then aggregated to selling stage and price: rather, prices available on highly segmented markets should have costs progressively deducted for all the resources consumed in their production. The proposal is derived without acknowledgement from Wieser’s "Natural Value" of 1889. It was later elaborated as an alternative to marginal cost cumulation whenever there were constraints or scarce factors. Thus Marginal utility (which approximated net realisable value) had a role in allocating production and rewards in external markets and for internal decisions.

He complained until the end that the Full Costers neither understood nor sympathised; and the outcome of his advocacy over ensuing years is not yet clear. Varied sources of his conviction may be traced - in his experience with small firms where short-term adaptation rather than long-term average pricing was possible, or from his important work with the German railways for which full costings had little meaning. A further source and School may be examined.

Interactions with the School of Menger, Bohm-Bawaerk, Wieser and others deserve investigation today because of the important effects of Austrian economic theory in the renewal of capitalism in recent decades. In direct conflict with the historicist methodologies, Menger preferred an intuitive consciousness of needs and a ranking of means for their satisfaction. Utilities and market appeal had a primacy over producers’ returns; but because of their subjectivity, utilities could neither be added nor reduced readily to statistical form. Von Mises (1949, p.210) was to assert that economic calculation can neither be based on nor related to anything which could be called value. Neither for Schmalenbach nor for these economists was mathematical modelling much favoured, although there was an important Mathemetical School in Vienna until the 1930s.

As von Mises re-established a post-War basis for free markets, capital and other, Schmalenbach wrote more neutrally on the systems of East and West. He criticised the manipulation of preferences under capitalism. Freedom within a pluralist yet media-manipulated democracy was less referred to than the problems of choice of consumables or of advanced consumer-goods. Discrimination was then held to require time and technical know-how, with competences which perhaps only professionals could claim. Product standardisation and simplification were advocated; while current advertising was held to be largely manipulative, uninformative and over-costly. Here again there were enduring motifs: even before the First World War, the whole marketing function had been belittled with the slogan that its costs should never exceed 10% of production costs. Price and interest rate changes were seen as sufficient mechanisms for affecting and directing demand. The economies of continuous production were emphasised so that there c ould be little sympathy with Schumpeter’s acceptance of competition and consequent creative destruction. Schmalenbach’s strong Puritan emotions prompted little sympathy for variety and change. A horror of waste and inefficiency in any form featured very high in the indoctrination of Business Economists, without recognition of the diseconomies of nature and with little atttention to the waste of war. Generalised ethics and claims for rationality may arise from varied assumptions; but they require exemplification.


A Secret Planning Weapon!

Frequently Schmalenbach produced "price" as his secret planning weapon. In 1918, it was to be the moderator for the slumps and booms which had bedevilled the economy of previous decades. Informed management should react quickly to overheating and raise their prices. The profits then earned should be reserved, tax-free, for release to cover overheads when prices had been reduced to the point where they covered marginal costs only. The tactic has been adopted in Sweden and remains open when demand cannot be shifted through anticipation and stock-building. Structural inflexibilities and labour costs at artificial exchange rates would seem to be greater concerns today than the variations round equilibrium of earlier concern.

Price too seemed to be available as control and corrective for investment decisions in planned or free economies. Inter-war investment had seemed to be often ill-timed and ill-directed. Much investment stood simply as a monument to the egos of the politicians who had authorised it! Subsequent historians have noted how the heavy industry lost post-1919 in Alsace-Lorraine was replicated rather than replaced by modern, "sun-rise" industries (James, 1986). Some industries such as the German Machine constructors employed economists like Rustow to collect statistics on current and likely supply and demand but others seemed to be possessed by an "investment devil". After 1933, investment was encouraged by constraints on dividend distribution and was directed whenever possible to rearmament or to self-sufficiency with regard to key raw-materials.

Alternative coordinating instruments were clearly needed for investment and other decisions. Such simplification was indeed necessary when in 1936 a small firm might have to fill 15,000 forms requiring over 10,000 signatures! (op.cit. p.396). Schmalenbach’s Management-by-prices proposals were applicable, he held, in both public and private sectors, and must eventually be applied under the Soviets too. The price which he considered applicable in most investment decisions was an Interest or discount rate which would shift plans between high and low conjunctures. More tentatively it was suggested that labour could price itself into or out of a job. Special concern was expressed about increasing capital intensities.

Schmalenbach reacted to this structural change not by the prescription of some "pocket-tactic" but by political foreboding. By 1926 he had abandoned many of the means of political influence and could only express extreme disquiet in the statistically documented replacement of men by machines. Those who had sunk costs in machines could not ensure their utilisation and must turn to some new and planned order for security. His speech to his colleagues in Vienna in that year found repeated echo in his last publication "In Memoriam of a Free Economy" (Freie Wirtschaft zum Gedaechtnis). The choice of title suggested a Left-swing in his loyalties and was neither timely nor happy for readers committed to defend capitalism and Berlin against socialism. His argument extends some of his earliest themes, and offers critical advice on decisions at international, personal and state level. Some remarks on each are now in place.

New Orders may be appealed to, just as Hobbes appealed to his Leviathan to resolve clashes of interest at his time. The balancing of interests in the Weimar state was delicate and changing. Capital intensities had increased long before 1926; and more practical alleviations than a catalysed state were available such as better forecasting before investment, transnational links to reduce parochial uncertainties or - the equilibrating techniques already advocated! But for the forecasts of the 1920s, some Marxian/Spenglerian determinism of an inescapable future were always tempting. At best such determinism must express in mood and short hand the social forces which were open neither to understanding nor to control. No Business Economist need have shared a mood so widespread!

A chief reason for hope at that time and today must be found in the controllability not of fixed costs but of aggregate demand through money supply. If Austrian economists fear all interventions, German social market theory has justified strict controls to give stability of policy and monetary values through a central bank which is independent of welfare-promising politicians. One may wonder how far Schmalenbach could have anticipated such policies and results, had he accepted an invitation to be Top Banker received in 1923!


Economics or Institutions

The practices researched and commended to Business Economics students related to the Business Man and his decisions within changing polities. Comment and criticism of these polities were free. But formal institutional analyses has been less common in contrast say to the Corporatist studies based in Constance and widely elsewhere. Von Eucken also explicated more clearly a more liberal "Ordo". The institutions appropriate to totalitarian, pluralist or mixed societies must be worth consideration especially if free market liberals conceive that market economies can be introduced by simple revolution!

One contribution of Schmalenbach deserves reference at this point: formally if not fully he compared the constitutions of corporations and of democratic states. The government, opposition and bureaucracy of each are described - without sufficient reference however to the potential of take-over threats and of marginal share-purchase. Such take-overs have been uncommon in German capital markets where management are prompted to efficiency rather by Supervisory Boards. These boards illustrate institutional arrangements which are not inherently acceptable in the nominally pluralist model of financial capitalism where more usually there is a dictatorship of the majority shareholding. More negotiable outcomes may appear as a legacy of Schmalenbach and his School with professional consciences often replacing rigorous agency relations. But effectiveness must be judged within particular polities.


Betwixt or Between

We have referred to Schools and theories which flourished in the same epoch as Schmalenbach‘s - and indeed pervade political-economics today. Socialist ideals were given formal effect through the calculations of Oscar Lange and implemented to achieve "the dictatorship of the proletariat" through the cadres of Communism. On behalf of Austrian economics, von Mises in 1918 contrasted their calculatory pretensions with the infinite preferences of democratic persons. Subsequent apologetics for the Market took decades to achieve confident and academic acceptance. Cadres were not necessary for the dissemination of their beliefs up to 1990. But overlap of theory and theorists may be found between the Austrian School and the Social Market School which was brought forth if not conceived by lawyers out of economists in Freiburg, 1933. A welfare and legal framework was prescribed within which competitive markets should flourish; and the implementation came through schooled politicians such as Chancellor Erha rdt. Further adoption of Social Market principles has followed through the European Union.

Can the Cologne School and the Schmalenbach legacy compare with these Schools? Has it particular affiliations or contributions to make? On grounds already sketched, a stance was taken against planning as applied in the firm where the "Markets" option was clearly spelled out decades before Williamson described also the authoritarian Hierarchic option. The actual effects of planning of economies (Gleischaltung) were also seen, feared and caricatured. Whatever the order, liberalisation and choice were preferred. But in his writings and in his character, Schmalenbach placed his faith in schooled professionals to cope with every institutional arrangement. Among the consequences were even "neutered" data-bases and a system or polity-neutral profession.


A committed or neutral profession?

The function of "commitment" may well be asked of one who prescribed ethical stances from early days. Academic objectivity had been advocated by Sombart and Max Weber in 1911. With other opponents of the "lackies of capitalism", Schmalenbach had argued for a training and for techniques which were applicable under any system. Although he attempted to make his teaching lucid to the laity, reliance was placed on a sometimes naive economising applied by his trained "crusaders".

Simple or advanced theory was presented by some who followed, in search of a "system-neutral" frame-work for Business economics. The efforts of Mellerowicz and others are detailed by Hundt (1977). Elsewhere a convergence of systems, East and West, was heralded by Tinbergen in 1959, while Raymond Aron held that countries set on economic growth must adopt comparable "rational" policies. Such optimism was dealt a fatal blow through the Czech coup of 1968. The rise and fall of this Convergence Theory was documented by Tuchtfeldt (1969/89).

But the earlier and current roles of ethics in the teaching of Business Economics deserve further attention. None could welcome the immense challenges to thought and action which were faced by Schmalenbach. Much integrity in theorising and in relating narrower trainings to wider responsibilities has been subsequently shown. Schmalenbach’s tradition has been successfully replanted in the centres such as Leipsig where he had gained his wife and academic spurs. But such rewards to forty years of patience and persistence should not distract from further endeavours to improve the international affiliations of the Society and to extend the theory and practice compatible with pluralist economies.


Indicative References


Forrester, D.A.R. - Schmalenbach and After - A Study in the evolution of German Business Economics (Strathclyde Convergencies, Glasgow, 1977).

do - Eugen Schmalenbach and German Business Economics (Garland, NY, 1992).

Grunig, F. - (trans. from German) - Le Circuit Economique (Paris, 1933).

Hundt, S. - Zur Theoriegeschichte der Betriebswirtchaftslehre (Koln, 1977).

James, H. - The German Slump (Oxford, 1986).

Jay, M. - The Dialectical Imagination [Frankfurt School], (London, 1973).

Kruk, Potthoff and Sieben G. - Eugen Schmalenbach: Der Mann; sein Werk; Ihre Wirkung (Stuttgart, 1984).

Mises, L. von - Human Action (London, 1949).

Peacock & Willgerodt - The German Social Market Economy, vols I & II, (London, 1989).

Richard, J. et al - Financial and Cost Accounting - Issues in Accountability X (1984).

Schmalenbach, E. - Dynamishe Bilanz (13 editions to 1962).

do - Der Kontenrahmen (6 editions to 1939).

do - Kostenrechnung und Preispolitik (8 editions to 1963).

do - Kapital, Kredit und Zins (4 editions to 1973).

do - Pretiale Lenkung des Betriebes (1948).

do - Die freie Wirtschaft im Gedaecchtnis (3 edtions to 1958).

Schneider, D. - Geschichte betriebswirtschaftliche Theorien (Oldenbourg, 1981 & 1987).

Tuchtfeldt - Convergence Theory reprinted in Peacock & Willgerodt (see above).

Wieser, F. von - (trans) Natural Value (London, 1893).

Williamson, O. - Markets and Hierarchies (Glencoe Free Press, 1975).



Postscript Some PUBLICATIONS - 1990 to 1996.


Graves, F. Dean, G. & Clarke, F. - Schmalenbach’s Dynamic Accounting and Price- level Adjustments with trans of Schmalenbach’s Inflation writings (Abacus, NY, 1990).

Jouanique. P, -"En relisant Schmalenbach ou l’histoire du Plan Comptable" - Revue du Tresor, (Aug.1991).

Martinez Tapia, R. - Economia, Derecho y Contabilidad (Cap. on origins of Charts) a tribute dated 1992

do -Schmalenbach y el Balance Oro - Revista Espanola de Financiacion & Contabilidad, (XXIV, # 83, Apr./June 1995)

do - Sobre la Contribution de las Escuelas Superiores de Commercio en suis inicios al desarrollo de la Contabilidad de Costes en Alemania - 7th Meeting of University Professors of Accounting, (June 1996).

Potthoff, E. & Sieben, G. - "Eugen Schmalenbach, 1873-1955" - Twentieth-Century Accounting Thinkers , ed. Edwards, J.R. (Routledge, 1994).

Schneider, D. - Theorien zur Entwicklung des Rechnungswesen - Schmalenbachs Zeitschrift, (Jan, 1992).

Schweitzer, M. - Eugen Schmalenbach as Founder of Cost Accounting in the German- speaking World - Studies in Accounting History, ed. A.Tsuji & P.Garner (Westport, Connecticut, 1995)


iIt was received favourably in America, Europe and e.g.Poland as showing the influence of changing social, economic and political conditions on the evolution of a scientific discipline but as arousing doubt in some about the underlying political implications. (Ekonoistikaz, 1979, ii, p.573).