Agency theory as ideology: A comparative analysis based on critical legal theory and radical...

Accounting Organizations andSociety, Vol. 15. No. 5, pp. 437-454. 1990. 0361-36132I90 S3.00+.00 Printed in Great Britain Pergamon Press plc

AGENCY THEORY AS IDEOLOGY: A COMPARATIVE ANALYSIS BASED ON CRITICAL LEGAL THEORY AND RADICAL ACCOUNTING*

HERBERT G. HUNT III

School of Business Administration, Uniuersity of Vermont

and

RAYMOND L. HOGLER College of Business, Colorado State University

Ahlact

This paper explores the similarities in legal and accounting theory with reference to their foundations in

neoclassical economics. Neoclassical legal theorists argue that governmental interference in employment

should be minimized and that individual contractual arrangements are a superior means of resolving organizational contlict. Similarly, agency-based accounting researchers argue that the demand for

accounting reports derives from, and should be based on, the equilibrium set of “free” market-determined

contracts. Both critical legal theorists and radical accountants contend that the “market” concept and its

theoretical derivatives are ideological constructs which obscure the biases ofpower inherent in economic

organizations. When applied to organizational structure, critical theory and radical accounting mutually enrich the insights of the respective disciplines.

In an article discussing recent developments in

American law, a commentator noted that “[tlhere is war in the lofty world of legal thought” (Reidinger, 1986, p. 64). The academic controversy, he continued, arises out of the dis- agreement between theorists who view law in terms of economic analysis and the group of scholars associated with the movement known as critical legal studies. Adherents of the law and economics movement contend that a legal system should ideally promote the free and efficient

operation of markets in which individuals, unim- peded by governmental regulation, make rational, economically utilitarian choices. In con-

trast, critical legal theorists assert that the Ameri- can legal system is historically biased in favor of

the economic interests of capitalism and that it

reinforces inequitable allocations of wealth and power (Kennedy, 1987). The “civil war” alluded to in American universities is particularly ac- rimonious in nature and has resulted in highly publicized conflicts among faculty at the Har-

vard Law school (Wall Street Journal, 1989). The divisive quality of the debate indicates that the differences may be categorical and irrecon-

cilable (Gordon, 1988a; Nelson, 1988). With respect to the discipline of accounting, a

similar tendency is apparent in the new intellectual movement which is generally referred to as “radical accounting” (Chua, 1986; Tinker et af., 1987). Radical accounting, like critical legal theory, challenges certain theoretical assump-

l An earlier version of this paper was presented at the Second Interdisciplinary Perspectives in Accounting Conference held

at The University of Manchester, July 1988. The authors gratefully acknowledge the thoughtful comments of the conference participants, especially Wai Fung Chua, Michael Clarke (the discussant), Cheryl Lehman, Peter Miller, Tony Tier and an

anonymous reviewer. Special thanks go to Anthony Hopwood and three anonymous reviewers of this journal.

437

438 HERBERT G. HUNT III and RAYMOND L HOGLER

tions prevalent in mainstream accounting research. The radical accounting approach asserts that accounting practices are permeated with the interests of a dominant economic group, that accounting is to a significant degree ideological

in content, and that its ideology enhances the

power of identifiable groups within an enterprise. Importantly, radical accounting also attri- butes the theoretical tenets of mainstream ac-

counting to neoclassical origins. There is a substantial common ground be-

tween critical legal scholars and radical accounting theorists which affords insights into the respective disciplines. A comparative analysis of

the two movements helps to reveal the ideological structure of capitalist organizations, particularly insofar as the relationship between employers and employees is concerned.

Through the legitimating device of an objective, neutral “market” which ostensibly functions to

allocate wealth and organizational power in an

impartial manner, imbalances of power, hierar- chy, and disparity of wealth are explained and justified, and the stability of the existing order is

reproduced. This paper first considers the neoclassical foundations manifest in contemporary legal and accounting thought and then examines the ideological strategies inherent in the neoclassical model, with specific focus on the use of

agency theory in accounting research. The appeal of the agency model is next explained from a critical legal approach, illustrating the useful-

ness of a comparative, interdisciplinary ap preach to a particular area of research.

LAW, LABOR, AND THE MARKET

me symbiotic relationship between legal doctrine and economic thought in the United States can be traced to the mid-nineteenth century. In an important and controversial study of

the evolution ofAmerican law, Professor Morton Horwitz (1976) argued that during the early 18OOs, the common law underwent a transformation f?om “precommercial and antidevelop- mental” values to a system favoring entrep-

reneurial and commercial activities.’ Once that transformation had been completed in the

183Os, common law became increasingly “for- malistic” in nature, and the system of common law rules presented an “appearance of beingself- contained, apolitical, and inexorable, and which,

by making “legal reasoning seem like mathematics,” conveyed “an air . . . of . . inevitability”

about legal decision” (pp. 253-254). The fiction of a market, Horwitz continues, became a conve- nient device for establishing the neutrality and objectivity of law. He states (p. 256):

Since only the market could supply “neutral” principles of distribution t?ee from all “political” (that is, dangerously equalitarian) influences, if became the task of the law fo create legal doctrines that simply mirrored the market. Most of the basic dichoromies in legal thought of the nineteenth century-between law and politics, law and morality, objective and subjective standards, dis- tributional and allocational goals -arose fo establish the objective nature of the market and to neutralize and hence defuse the political and redistributional potential of law.

Thus, the common law in the United States asserted itself as an autonomous, neutral system

which was free from the control of any identifi-

able group. According to Horwitz, “The desire to separate law and politics has always been a central aspiration of the American legal system” (p. 256), and to accomplish that end, law has persis- tently claimed to be a rational, predictive system which is “scientific” in character. Although the legal system does not contain a distinctive methodology other than discursive analysis, its attempted identification with science historically served “to separate politics from law, subjectivity from objectivity, and laymen’s reason-

’ Horwitz’s central thesis has been the subject of debate. Simpson ( 1979). for example, disputes the argument that American contract law followed the clear line of development posited by Horwitz. Horwita’s work remains one of the important early contributions to the critical legal studies literature, and his arguments regarding the connection between the growth of capitalism and the evolution of legal doctrine have been substantiated by more particularized studies (e.g. Tomlins, 1988; Hogler, 1987).

AGENCY THEORY AS IDEOLOGY 439

ing from professional reasoning” (p. 257). Con-

sequently, law was regarded as an apolitical and objective institution which presumably pro-

tected the rights of all citizens without bias or prejudice.2 An excellent example of the manner in which market theory has been used as a basis of common law reasoning is the legal principle

of employment at will.

First announced in 1877 by a legal scholar

named Horace Gray Wood, the employment at will doctrine states that an employee may be ter- minated from employment at any time for a good

reason, a bad reason, or no reason. An employer, consequently, has complete discretion regarding the matter of discharge, and an employee has

no grounds on which to challenge a discharge. Despite the fact that Wood misinterpreted much American legal precedent (Feinman, 1976) his rule became the prevailing judicial principle; and in a leading case in 1884 (Payne, 1884) the Tennessee Supreme Court offered a neoclassical

justihcation for the rule.

The employer in Payne forbade his employees to trade with a particular merchant and

threatened to discharge any employee who did so. The merchant, Payne, sued the employer al- leging that the employer could not legally fire employees on that ground. The court upheld the employer’s right to terminate employees without any stated cause. It did so on the theory that a contrary rule would hinder the development of capitalism. “[M]en must be left,” the court said, “without interference to buy and sell where

they please, and to discharge or retain

employees at will for good cause or for no cause, or even for bad cause without thereby being guilty or an unlawful act per se.” Even though

large corporations might use their power to in-

jure individuals and society, the court con-

tinued, the law could not restrict their rights to

exercise economic domination. The majority concluded with a general statement of the rule (p. 5 19): “The great and rich and powerful are guaranteed the same liberty and privilege as the poor and weak. All may buy and sell when they choose; they may refuse to employ or dismiss whom they choose, without being thereby guilty of a legal wrong, though it may seriously injure and even ruin others.” Accordingly, the

right to engage in a marketplace transaction for the sale and purchase of labor was to remain free

from government interference. The dissenting judges in the Payne case of-

fered a different view of employment. They argued that an employer should be required to

show good cause for any discharge. Such a re- quirement would not interfere with legitimate business practices, they said, but would confine the power of capital to its legitimate sphere. The principle espoused by the majority, according to the dissent, could be used to control the

employee’s social and political life (p. 544):

Capital may thus not only find its own legitimate employment, but may control the employment of others to an extent that in time may sap the foundations of our free institutions. Perfect freedom in all legitimate uses is due to capital, and should be zealously enforced, but public policy and all the best interests ofsociety demand it shall be restrained within legitimate boundaries, andanychan- nel by which it may escape or overleap these boundaries, should be carefully but judiciously guarded.

Such concerns regarding the potentially oppres-

sive power of capital over the personal lives of workers, however, ceased to figure in judicial thought during the latter nineteenth and early twentieth centuries.

‘ The mainstream or “idealized” view of law can be summarized in the following related propositions:

( 1) the law on a particular issue is pre-existing, clear, predictable, and avaitabte to anyone with reasonable legal skill; (2) the facts relevant to disposition of a case are ascertained by objective hearing and evidentiary rules that reasonably ensure that the truth will emerge; (3) the result in a particular case is determined by a rather routine application of the law to the facts; and (4) except for the occasional bad judge, any reasonably competent and fair judge will reach the “correct” decision (Kairys, 1982, pp. l-2).

Critical legal theory challenges both the traditional “liberal” position in law as well as the more recent law and economics school of legal theory. For example, Kelrnan’s ( 1987) book-length treatment of critical legal theory encompasses the major doctrinal trends in contemporary legal thought.


In the case of Adair v. United States in 1908, which is the apotheosis of employment at will,

the U.S. Supreme Court struck down federal legislation affording railway employees a right to unionize. According to the Court, Congress

lacked the constitutional authority to restrict an

employer’s discretion in hiring and firing workers. The employment at will rule was thereby constitutionalized, and the reasoning in the case was firmly grounded on the neoclassical foundation of freedom and equality of market transac-

tions. In one illustrative passage, the Court articulates the point with particular vigor and clar- ity(p. 175):

It was the legal right of the defendant Adair - however

unwise such a course might have been - to discharge Coppage because of his being a member ofa labor organi-

zation, as it was the legal right of Coppage. ifhe saw fit to

do so-however unwise such a course on his part might

have been-to quit the service in which he was engaged,

because the defendant employed some persons who were not members of a labor organization. In all such par-

ticulars the employer and the employee have equality of

right, and any legislation that disturbs that equality is an

arbitrary interference with the liberty of contract which

no government can legally justify in a Free land.

Because the Court broadly interpreted the Fifth. Amendment to safeguard the rights of liberty and property, specifically the right to purchase and sell labor, Congress could not interfere with

the contractual relationship between employer and employee. Although the constitutional prin-

ciple set forth in Adair was repudiated by the

Supreme Court in 1937 (/ones G Laughlin, 1937), and the common law has developed important exceptions to the employment at will

rule within the past decade (Holloway & Leech,

1985), the law and economics movement continues to play an important role in the development of legal theory in this area. One of the most

influential contemporary proponents of economic analysis, Richard Epstein (1984), has of-

fered a straightforward neoclassical defense of

the employment at will doctrine.3 Epstein argues that judicial modification of

the at will principle is a misguided effort to protect the interests of workers and is based on an inadequate understanding of economic principles. He contends that “freedom of contract

tends both to advance individual autonomy and to promote the efficient operation of labor markets” (p. 95 1 ), and for those reasons, the Payne

decision should remain the viable rule of common law. Any legal doctrine, Epstein suggests, can be tested by the three standards of “intrinsic fairness, effects upon utility or wealth, and dis- tributional consequences” (p. 953). On those grounds, he insists, at will employment is the

preferable principle. First, he argues that employment at will is fair

because freedom of contract has importance as an aspect of individual liberty, similar to “freedom of speech, or freedom in the selection of marriage partners, or in the adoption of religious

3 A more complex approach to law and economics analyses the transaction costs of contractual arrangements Hnd assumes

that individuals have “bounded rationality” and limited conceptual competence. Such an approach has specific application to the employment at will doctrine (e.g Fenn & Whelan, 1985) and to the study of economic organizations generally (e.g.

Williamson, 1988). From the perspective of critical legal theory, however, the appeal of law and economics lies in its

reduction of human behavior to individual material incentives. Consequently, representatives of the “Chicago” school, such

as Epstein, are in a Fundamental way representative of the broader movement. As Mark Kelman (1987) explains (p. 118):

[I]t is not solely my claim that the Chicago school is the truly significant one because it brought its simple message to an

academic and social world in search ofsimplicity while both the old economically influenced Realists.. . or the prominent

neoinstitutionalists (like Oliver Williamson, Charles Goetz, and Robert Scott). who Focused on transaction-cost reduction

in organizational and legal form, gave too Few simplistic answers. It is my claim that even the more sophisticated thinkers

(like Calabresi) in Fact mlcst adopt, more or less consciously, the social theory of the Chicago school adherents, even if they genuinely bristle at any summary statement of the theory, because if really is the social theory of economics, of a

coherent liberal individualism that sees society as fundamentally successFu1 when it responds to the will of individuals,

and mediates the confiicts between individuals simply by making everyone pay his way.

The argument of this essay is that neoclassicism in legal theory and in accounting theory articulates a particular social order

within organizations which persuades individuals that their desires and preferences are accommodated by the structures of the organization.


beliefs or aftiliations.” There should not be special protection for workers entering employ-

ment contracts, for “people who are competent

enough to marry, vote and pray are not unable to protect themselves in their day-to-day business transactions” (pp. 953-954). Workers, that is, desire no special solicitude in arranging employment contracts.

Regarding the utility of the at will rule, Epstein emphasizes that markets are based on mutuality of benefit; and as a consequence, “the employee

can use the contract as a means to control the firm, just as the firm uses it to control the worker” (p. 957). The employer can impose significant costs on employees, such as discharge or

wage reduction, in its effort to maintain discipline and productivity. Conversely, the employee can impose costs on the employer by quitting “whenever the net value of the employment contract turns negative” (p. 966). The mutuality of at will employment also enables workers to in- flict costs on employers through “reputational losses” (p. 967) and to protect themselves by “risk diversification,” or moving from job to job

(pp. 968-969). Other utilitarian advantages of the at will rule include a reduction in administra-

tive costs-that is, the cost of litigating an unjus- tified charge - and an equalization of bargaining power because the employer “must always pay an implicit price when he exercises his right to fire” (p. 973).

East, Epstein contends that abrogation of the at will rule would not effect positive distribu-

tional outcomes; proposed reforms “CaMOt

hope to transfer wealth systematically from rich to poor on the model of comprehensive systems of taxation or welfare benefits” (p. 977). Governmental regulation of employment contracts will only serve to reduce the level of

wealth throughout the economy; consequently, “the losses are apt to be spread far and wide, which makes it doubtful that there are any gains to the worst off in society that justify somewhat greater losses to those who are better off’ (pp. 977-978). Allocations of wealth, in Epstein’s view, cannot be achieved efficiently through interference with a party’s power to contract.

Epstein’s ana.lysis demonstrates the powerful

ideological appeal of neoclassical theory. it urges the formulation of common law doctrine

which advances “wealth maximization” as the

highest social good (Posner, 1982), and it advo- cates such desirable values as freedom, liberty, and equality, which are to be attained through the unregulated functioning of capitalistic markets. But for critical theorists, freedom of contract and the market concept are simply ideological justifications for existing inequities. Histori- cally, contract law has served primarily to legitimate a particular form of economic organiza-

tion; in the words of one study (Gabel & Fein- man, 1982, p. 176): “The legitimating image of classical contract law in the nineteenth century

was the ideal of free competition as the consequence of wholly voluntary interactions among many private persons, all of who were in their nature free and equal to one another.” That image, the authors conclude, has been per-

petuated in contemporary legal theory. The roots of neoclassicism in legal thought

can thus be discerned in the mid-nineteenth

century, and neoclassicist perspectives survive in the theories of modern adherents of law and economic analysis. In the field of accounting, a similar evolution has occurred. Mainstream ac-

counting theorists have sought to conceptualize accounting as an objective and scientific en-

deavor free from the subjective value judgments of its practitioners. The next section considers accounting as it is presented in one of the more

influential theoretical models in the field.

ACCOUNTING, AGENCY THEORY, AND

MARKETS

In their analysis of positive theories of ac-

counting, Tinker et al. (1982) examine the role of “marginalism” in accounting theory. As with the discipline of law, the ideology of free market transactions became central in accounting at an early date due to the effort to separate “fact” from “value” and “positive” from “normative” theories. Historically, the concept of value in accounting is derived either from a labor-based or


a utility-based origin. The latter, according to the authors, determines the relative value of all goods and services in an economy “by their relative contribution to the utility of consumers. In

the labor-based theory, in contrast, the exclusive source of value is productive labor” (pp. 175- 176).

Tracing “value theory” to its present incarna- tion in marginalism, Tinker et al. (1982) conclude that there are two predominant aspects of that theory which recur in accounting thought.

They point out (p. 188):

The first [aspect] is the emphasis on individualism

(whether the individual owner or the corporation as a

legal “person”) which has served to preempt questions

about the class aailiations of”individuals” and the part ac-

countants play in class conflicts The second emphasis in accounting has been an attempt to preserve objectivity

and independence by shunning “subjective” questions of

value and confining accounting data to “objective” mar-

ket prices (historical and current).

That latter emphasis, in which the accountant is

presented as a “disinterested, innocuous histo- rian,” originates in the profession’s aspiration “to deny the responsibility that accountants bear for

shaping subjective expectations which, in turn,

affect decisions about resource allocation and the distribution of income between and within

social classes” (p. 188). That point has an obvious parallel in Horwitz’s description of the legal profession’s effort to separate law and politics.

More fundamentally, the desire for objectivity has both epistemological and methodological implications. Mainstream accounting research

“is dominated by a belief in physical realism -

the claim that there is aworld ofobjective reality that exists independently of human beings and

that has a determinate nature or essence that is knowable” (Chua, 1986, p. 606). From that assumption, it follows that individuals may be de- scribed in an objective manner independent of social context. The appropriate model of knowledge for mainstream theorists is therefore the “hypothetic0-deductive” or “scientific” model, with its emphasis on universal causal connec- tions (Chua, 1986, p. 608). The predominance of “agency theory” as an explanation of account-

ing and organizational phenomena is a recent, highly influential interation of the mainstream assumption. Nowhere are the similarities between the disciplines of law and accounting more evident than in the market theory which underlies much contemporary legal thought and

the agency-based concepts so pervasive in contemporary mainstream accounting research.

These similarities are especially significant in both the roles that contracting and markets pla) in agency-based accounting research, and also

with respect to the neoclassical economic as-

sumptions underlying this area of investigation and theory development. Therefore. we focus on the concept of agency in the following pages in order to emphasize the similar structural principles used in law and accounting in performing

their respective roles in a capitalist society. We begin by I-irst briefly describing agency theory, and then examine its influence on mainstream

accounting research. This is followed by a discussion of the contemporary critique of neoclassicism in accounting thought.

Agency theory and contractiq A complete examination of agency theory is

beyond the scope of this paper, but a brief over- view will provide a foundation for the discussion to follow. First, however, a semantic qualifica- tion is in order. While we use the term “agency

theory” in a rather broad sense in this paper to refer to the economics and accounting literature that models the conditions, assumptions and implications of contracts (implicit and explicit) among the parties to various organizational reia-

tionships, agency theorists distinguish between

agency Eiterature and property rights literature (Watts & Zimmerman, 1986b). While the

agency literature generally uses mathematical game theoretic models to address a limited set of agency problems (e.g. Wilson, 1968; Berhold, 1971; Spence & Zeckhauser, 1971; Ross, 1973, 1974; Mirrlees, 1974, 1976; Stiglitz, 1974, 1975; Holmstrom, 1979; Antle 1982, 1984), the property rights literature uses simpler models to address a broader range of agency problems (e.g. Coase, 1937, 1960; Alchian 8; Demsetz, 1972; Jensen & Meckling, 1976; Fama, 1980; Fama &


Jensen, 1983a, b) (Watts & Zimmerman, 1986b, p. 8). More important, perhaps, is that the property rights literature includes competition and

markets in the analysis and thus has been used extensively in empirical accounting research

(Watts & Zimmerman, 1986b). One of the most influential papers in the

agency area is Jensen Pr Meckling’s (1976) development of a theory of firm ownership struc-

ture based on theories of agency, property rights and finance. Jensen & Meckling define an agency relationship as “a contract under which one or more persons (the principal(s) ) engage another person (the agent) to perform some service on their behalf which involves delegating some de-

cision making authority to the agent” (p. 308). Agency relationships will involve nontrivial

agency costs ifit is assumed (as it usually is) that both the agent and the principal are utility maximizers and the agent will therefore “not always act in the best interests of the principal” (p.

308). Indeed,

[I]t is generally impossible for the principal or the agent

at zero cost to ensure that the agent will make optimal de-

cisions from the principal’s viewpoint. In most agency re-

lationships the principal and the agent will incur positive

monitoring and bonding costs (non-pecuniary as well as pecuniary), and in addition there will be some di-

vergence between the agent’s decisions and those deci-

sions which would maximize the welfare of the principal.

The dollar equivalent of the reduction in welfare experi-

enced by the principal due to this divergence is also a cost of the agency relationship, and we refer to this latter

cost as the “residual loss” (Jensen & l\leckling, 1976, p.

308).

When applied to an organizational setting, such as a corporation, agency theory dismisses the notion that an organization is a meaningful entity. Rather,

[M]ost organizations are simply legal fictions which serve

as a nexus for a set of contracting relationships among individuals The private corporation or firm is simply

one form of legal fiction which serves as a nexus for con-

tracting relationships.. Viewed in this way, it makes lit-

tle or no sense to try to distinguish those things that are

“inside” the firm . from those things that are “outside” of it. There is in a very real sense only a multitude of com-

plex relationships (i.e. contracts) between the legal fit-

tion (the firm) and the owners of labor, material and cap-

ital inputs and the consumers of output (Jensen & Meck-

ling, 1976, pp. 3 1 O-3 11).

Viewed in this manner, the firm becomes little

more than an equilibrium of competing contractual relationships entered into by individuals, some of whom may represent other organizations. Jensen & Meckling maintain that questions such as “Does the firm have a social responsibility?” are seriously misleading when the firm is characterized as a nexus of contracts (p. 3 11).

Indeed, as we discuss later, this is one of the major limitations apparent in agency-based accounting research; that is, its inability to address

issues that do not revolve around identifiable, market-based contracting relationships, or to analyse imbalances of power inherent in the so-

cial context of an organization. Before considering the influence that agency

theory has had on accounting research, it may be helpful to highlight two neoclassical economic assumptions inherent in agency theory that have gone largely unquestioned by accountants.“

First, agency theorists assume rational, utility- maximizing behavior on the part of all individu-

als (Jensen & Meckling, 1976, p. 307; Fama, 1980, p. 289). For example, “The agent is ex- pected to act in his own self-interest rather than that of the principal” (Watts & Zimmerman,

1986b, p. 5). Second, central to agency theory, especially the property rights literature, is the notion that competitive markets, characterized by rational expectations, create an environment for the fair and efficient functioning of the

capitalist system. For example, a widely cited

paper by Fama ( 1980) explains how the managerial labor market and capital markets discipline corporate managers. Fama even views the board

4 There are, in fact. several such assumptions evident, either explicitly or implicitly. in agency theory. and they have been

delineated by other researchers (e.g. Tinker et a& 1982; Cooper & Sherer, 1984; Chua. 1986; Hines, 1986) whose work we

examine later in the paper. We focus on the economic rationality and competitive markets assumptions at this point fo help

draw parallels with the previous discussion of law and economics.

444 HERBERT G. HLT III and R.ilWOND L HOGLER

of directors as “. . . a market-induced institution, the ultimate internal monitor of the set of con-

tracts called a firm, whose most important role is to scrutinize the highest decision makers within the firm” (p. 292). While many other examples

of these two assumptions can be easily found, the point is that they are central to a theoretical structure that, as demonstrated below, has pro- foundly influenced mainstream accounting research.

Influence of agency tbeoly on accounting research

The agency and property rights literature has been a rich source of testable implications for researchers from several disciplines, especially ac-

counting. The realization that some of the most visible agency relationships in the corporate en-

vironment (e.g. the manager/shareholder relationship and the manager/debtholder relationship) utilize contracts based on accounting

numbers has led many researchers to use agency theory in attempts to explain, among other things, the demand for accounting reports, varia-

tions in accounting method choice, lobbying ef-

forts before regulatory bodies, and stock market reactions to mandated accounting changes.

Nowhere is the influence of agency theory on

mainstream accounting research more evident than in the “positive” research agenda of the Uni-

versity of Rochester. Michael Jensen, Ross Watts and Jerold Zimmerman, the principal proponents of positive research, have written exten-

sively on the subject (e.g. Watts & Zimmerman,

1978, 1979, 1986a; Zimmerman, 1979, 1980, 1982; Jensen, 1983), and have generated several

critical responses (e.g. Tinker eta& 1982; Chris- tenson, 1983; Cooper 6r Sherer, 1984; Chua, 1986; Hines, 1986; Arrington & Francis, 1989). By any standard, positive research has had a pro- found influence on mainstream accounting thought. Not only has the Rochester-basedJour- nal of Accounting and Economics established itself among the top accounting research jour- nals, but a recently published book entitled, Positive Accounting Theory (Watts & Zimmer- man, 1986a), is likely to become required read- ing in most accounting graduate programs.

Furthermore, the fact that two of the articles co- authored by Watts & Zimmerman (1978,1979) won the AICPA award for notable contribution to accounting literature, and the fact that an arti-

cle by Zimmerman (1979) won the competitive manuscript award from the American Account- ing Association, attest to positive theory’s accep-

tance by both the accounting profession and the academic community.

Based on agency theory, positive theorists view financial reporting as part of the firm’s contracting process (Watts & Zimmerman, 1986b,

p. 1). In fact, “The primary purpose of account-

ing from an agency theory perspective is to facilitate contracting thereby reducing agency

costs” (Watts & Zimmerman, 1986b, p. 16). Thus, positive theorists do not view diversity in financial reporting practices as problematic, but

as a necessity in order for “contracting parties to tailor their accounting procedures to their own unique circumstances” (Watts & Zimmerman,

1986b, p. 3 1). According to Watts & Zimmer- man, standard setters should not view cross-sec- tional variations in accounting procedures as an indication of managements’ attempts to manipu-

late accounting numbers in order to mislead in- vestors (and presumably others). hloreover, “Standard-setters should consider the effects of

proposed accounting standards on existing contracts . (in order to avoid) . . unanticipated wealth transfers between parties to the firm”

(Watts & Zimmerman, 1986b, p. 32). Watts Pr Zimmerman ( 1986b) go so f.ar as to suggest that since the FASB consumes resources in issuing discussion memoranda and exposure drafts as part of the standard setting process, it could reduce the cost of standard setting by using

agency-based accounting research to make “accurate predictions of the economic consequences of proposed standards before they are exposed” (p. 32). Apparently, Watts & Zimmer- man would have the FASB short-circuit its normal due process procedure in which all interested parties, at least theoretically, have an opportunity for input, and instead rely on esti- mates of the economic consequences on the equilibrium set of market-derived contracts in existence at a particular point in time.

AGENCYTHEORY AS IDEOLOGY 445

Contemporary critique of agency-based accoztn ting research

While the agency literature has produced use-

ful insights for accounting researchers, its wide- spread acceptance by mainstream researchers has received critical attention in several recent studies associated with the radical accountants. Emerging from these critical studies is the recog nition that accountants have been unduly influ-

enced by neoclassical economics, that taken-for- granted assumptions are problematic to a full understanding of the sociopolitical environment of accounting, and that both of these problems contribute significantly to ideology in contem-

porary accounting thought. Three pertinent examples of this literature are discussed below.

In a signihcant contribution, previously men- tioned above, Tinker et al. ( 1982) trace the development of marginalist value theory in accounting and find that several marginalist (ideological) assumptions remain unquestioned

in agency-based positive accounting research. These are:

That the primary (and perhaps sole) rationale for and ob-

jective of contemporary financial reporting is to serve the capital market; that competitive market forces can be

relied upon to protect all interest groups (and that all in-

terest groups are represented in the process); that mem-

bers of each interest group are equally capable of proces-

sing information and discerning management’s (homogeneous) utility function; that only government

possesses coercive power; that all behavior is motivated

by economic rationality; and that public interest argu-

ments are always a sham to mask self interest (p. 190).

Tinker etal. maintain that marginalist theory and its “fairyland of perfect competition” ignores institutional imperfections, and has led to “a neoconservative ideological bias that encour-

ages us to take the ‘free’ market and its implicit institutional apparatus as ‘given”’ (p. 191). The authors suggest that a reconstituted concept of

’ Cooper & Sherer ( 1984) offer the following comment:

value in accounting would allow researchers to

investigate a range of social issues that are cur-

rently overlooked by mainstream research. As a second example, in their proposal for an

alternative framework for accounting research,

Cooper & Sherer (1984) critically evaluate the use of the agency-based contracting approach to provide explanations for the development of accounting standards and the auditing function. They see two problems with the contracting approach. “Firstly it tends to evalate markets to the

status of an immutable and ideal benchmark. . . (and) relies on the belief . that market efft- ciency is a necessary condition for social welfare

improvements” (pp. 2 12-2 13). Cooper & Sherer perceive an additional problem to be the ignorance of social welfare issues resulting from

a focus on only one subset of participants in society - active market agents. This limited focus

results in a partial equilibrium approach to valu- ing accounting reports and thus fails “to model the total interaction between these reports and

all individuals and classes in society” (Cooper & Sherer, 1984, p. 2 13). The authors are also critical of the rationality assumptions of agency theory subsuming the issue ofwhy managers act,

or have the attitudes they do.5 These assumptions have resulted in “very little modelling of

the process by which managers respond to ac-

counting changes” (Cooper & Sherer, 1984, p. 216).

In Chua’s ( 1986) examination of “Radical De-

velopments in Accounting Thought”, the author provides further insights regarding the concerns of Tinker et al. and Cooper & Sherer. Chua suggests that the utility maximization assumptions are necessary in mainstream research “because accounting information has long been

ascribed a technical rationale for its existence and prosperity . .” (p. 609). She also contends

that in mainstream accounting,

[ tjhe agency theory literature seems to view rationality inconsistently. It assumes that individual managers and the stock

market have incentives not to interpret accounting numbers at their face value but that “bureaucracies” such as the

government or trade unions do not. In other words, agency theory seems to suggest that individual managers and the stock market can see behind the arbitrary conventions of accounting measurement but other potential users are fooled

by them (Footnote 9. pp. 2 162 17).


Organizational conflict is not seen as reflective of deeper

social conflict between classes of people with unequal

access to social and economic resources. Constructs

such as sustained domination. exploitation, and struc-

tural contradictions do not appear in mainstream accounting literature. And conQicting interest groups are

classified as possessing different legal rights within a

given system of property tights They are not

categorized using antagonistic dimensions such as class

or ownership of wealth (p, 609).

Chua points to the “free” market assumption

that is central in mainstream thought as implying that people and markets will achieve social order, that organizations will “evolve adminis-

trative and accounting systems that minimize transaction costs in changing economic conditions . . (and that) the desirable amount of financial disclosure may be determined by the

‘free’ play of market forces with a minimum of state intervention” (pp. 609-610).

The foregoing examples of social critique

reveal a discontent among radical accounting researchers with the theoretical assumptions that

have molded mainstream accounting thought.” Just as the “market” is seen by critical legal theorists as a means of legitimating the legal

rules of the employment relationship, critical ac-

counting researchers view the competitive market assumption of agency theory as legitimating accounting systems and ways of thinking about

them. Indeed, agency theoq can be viewed as another iteration of contractualism, as is Epstein’s ( 1984) version of employment at will.

In the next section, we discuss specific elements of neoclassical thought in relation to their ideol-

ogy.

NEOCLASSICISM AND IDEOLOGY

Neoclassical theory plays an important role in a number of disciplines, including law and accounting. One possible justification for the pre- valence of neoclassicism is that, in some fashion,

it depicts the actual working of our social and economic system and that it therefore is useful

because it is a valid, accurate model for explain- ing and predicting important areas of behavior.

Proponents of law and economics, for example, argue that the evolution of American common law reflects an intrinsic concern for the “effl- ciency” of markets and that future growth of the

law should adopt efficiency as an explicit goal (Posner, 1982).

In his detailed analysis of economic theories,

Stephen Marglin ( 1984) concluded that neoclassicism is not superior to competing economic

models either in its ability to predict trends or in its empirical verifiability. He states, for example, that “the connection of large-scale forecasting models to the distinctively neoclassical features

of economic theory is quite tenuous” (p. 480). And with regard to empirical assessments of the validity of neoclassicism, Marglin comments that “[tIesting [of models] in economics is akin to choosing among alternative specifications of epicycles in an earth-centered model of the solar system” (pp. 480-f&1). Marglin finds that neoclassical market theory is neither a comprehensive nor accurate description of economic rela-

tionships. To the contrary, he continues that the hegemony of neoclassical thought in American

culture can best be understood in terms of ideological power rather than its conceptual coherence (p. 48 1):

The appeal of neoclassical theory lies not in its superior

explanatory or predictive capacity, but in the aid and comfort, nay, the sanctification, it gives to the pursuit of

self-interest as a principle for organizing interpersonal re-

lationships. In the neoclassical view of a well-ordered

society, economic outcomes are the consequences of the

interactions of large numbers of households each pursu- ing its own conception of the Good while Allowing others

to pursue their notions in equal liberty.

Despite the obvious limitations of the neoclassical theory such as the problems of externalities, incomplete information, and incomplete mar-

’ These three studies are meant to be representative, not exhaustive. Our purpose here is to simply illustrate the potential

for radical critique of agency-based accounting research. The interested reader is referred to Hines ( 1986) and Arrington &

Francis ( 1989) for other good examples.

AGENCY’THEORY AS IDEOLOGY 447

kets, the model nevertheless fulfils a vital function in our social order. Marglin says (p. 68 1):

Even though few neoclassical economists outside of

Chicago would deny the importance of these issues [in-

equities of economic and political power and the social

implications of competitiveness], neoclassical theory

necessarily leads one to separate even the most economic of them, the distribution questions, from questions

of the organization of production. Thus neoclassical

theory has the effect of removing capitalism as an issue

and replacing it by an issue that reduces to “my blood or

thy blood,” an issue in which the moral claims of the dis. putants are decidely difficult to disentangle.

Neoclassicism, consequently, disavows any explicit political implications and asserts that the “market” will itselfresolve matters ofwealth

distribution. But, in fact, neoclassicism is best viewed as a construction of social theory because it presumes that all values are indi-

vidual, subjective, and reducible to an economic form which can be mediated through economic

preferences (Kelman, 1987, pp. 117-l 18).

The core of neoclassical ideology is its model of consensual exchange occurring under conditions of equality. The form of interaction which most thoroughly assimilates that ideology is the contract, and as already suggested, contract is the essential element of both law and economic

analysis and agency theory. Inherent in the legal ideologies of contract are such powerful concepts as “liberty”, “property”, and “equality”,

which informed nineteenth century views of contract and which survive today in the work of

contemporary scholars such as Epstein. Histori-

cally, contractarion ideology has separated contract law from other legal doctrine and has de- picted “all social relations as deriving from the free and voluntary association of individuals

without coercion by the state, and the allocation

of responsibility for the coercion worked by operation of the market to personal merit or luck’ (Gabel & Feinrnan, 1982, p. 176; Horwitz, 1980). Agency theory, with its reliance on a contract model, incorporates and recapitulates the legal ideology.

The market mechanism, which theoretically

serves to regulate the economic relations of capitalism, embodies vital ideological features. In the market environment, all transactions are

reduced to a commodity form, through which values are ostensibly equalized. Likewise, as Isaac Balbus (1977) suggested in an influential essay, the legal process subsumes individual characteristics within a structure of abstract equality, and formal equality legitimates the rule

of law in the same manner that wages legitimate the purchase of labor power. Thus, the law becomes a “universal political equivalent”, and as Balbus further comments (1977, p. 576): “The formality, generality, and ‘autonomy’ of the law. . . preclude the qualitatively different interests and social origins of individuals from entering into the calculus ofpolitical exchange, just as the

formality, generality, and ‘autonomy’ of money preclude the qualitatively different use-values of commodities, and the unique labor that pro-

duces them, from being recognized in the calculus of economic exchange.” The rule of law, like the market, objectifies and resolves the conflict between particular individuals engaged in

the pursuit of purely personal ends through a system of abstract “rights”.’

Critical legal theory depends in significant part upon a critique of ideology. One of its central theoretical principles is that legal ideology constitutes a cognitive system which produces

’ One of the most intluentiaf works of critical legal scholarship is Duncan Kennedy’s (1979) analysis of Blackstone’s

Commen#uties Kennedy argues that Blackstone, and law in general, attempts to mediate the “fundamental contradiction”

between the subjective self and its conflict with the external social world. According to Kennedy, the contradiction is “the

very essence” of every legal problem because “there simply are no legal issues that do not involve directly the problem of

the legitimate content ofcollective coercion, since there is by definition no legal problem until someone has at least imagined that he might invoke the force of the state” (p. 213). A system of legal rights can mediate the contradiction in a number of

ways, particularly by invoking a consensual arrangement which “amounts to a claim that one of the parties has already

voluntarily relinquished the right she now asserts.’ (pp. 356-357). In the employment relationship, consequently. courts

could hold that a worker injured on the job had no “right” to compensation because he had contracted for a wage differential

in accepting dangerous employment and had therefore ‘assumed the risk” of the injury (Horwitz, 1976).


and reinforces social behaviors favoring dominant groups within our society. As Robert Gordon

(1988b) has succinctly stated the matter, “legal discourses” are fluid, indeterminate, and inter- nally contradictory mechanisms of power which “routinely help to create and maintain the ordi-

nary inequities of everyday social life: the coer- cions, dominations and dependencies of daily relations in the marketplace, the workplace, and the family; the ordering of access to privilege, authority, wealth, and power by hierarchies of class, race, gender, and ‘merit”’ (p. 16). Critical

theorists, however, do not equate rules of law with the simplistic notion of “ruling class” in-

strumentalism; that view is a basic misapprehen- sion arising out of a superficial understanding of the critical position.8 The objective of the critical approach is to delineate the ideological elements within institutions which are constitutive of our knowledge and beliefs regarding the institution. To illustrate that point, we next analyse the social relations of individuals in economic organizations from the comparative perspectives of agency theorists and critical

legal theory.

ORGANIZATIONAL THEORY, OBJECTIVITY, AND LEGITIMATION

Recent studies of ideology in organizations

have emphasized the material interests which underlie managerial authority within the enter-

prise and the value of social theory in analysing organizational behavior (Weiss, 1985; Weiss &

Miller, 1987; Mitchell. 1989). Weiss & Miller (1987) to illustrate, contend that the major tradition in the sociological study of knowledge

derives from Marx and is best exemplified in American scholarship by Bendix’s (1956) U’ork? czndAtrtbority in Indmstg: which offered a comprehensive historical appraisal of managerial control through ideology under capitalist conditions of production. Within that context, organi-

zational ideology is appropriately defined as “ideas which are espoused by or for those who

seek authority in economic enterprises, and which seek to explain and justify that authority” (Bendix, 1956, p. 2). More exactly, managerial ideologies maintain a system of domination and

social control within the organization. Such systems are particularly effective to the extent that they elicit the voluntary assent of those subjected to authority, or, in other words, are per- ceived as “legitimate”. In addition, as Thompson ( 1984) notes, ideology also involves the proces-

ses of dissimulation - the concealment of a relation of domination - and reification, which presents “a transitory, historical state ofaffairs as ifit were permanent, natural, outside of time” (p.

131). Agency theory, among its other manifesta-

tions, makes specific and important arguments with respect to organizational structure. In an in-

IIuential paper, Jensen (1983) contended that the agency model provided a “positive” as op-

” As Gordon (1988a) notes, “The reasoning process seems to be something like this: CL5 people identify themselves as on the Left; Left means Marxism; Marxism means a vulgar-instrumentalist view of law” (p. 146). Accurately, the Marxist treatment of law and ideology has never subscribed to the instrumentalist caricature. In his treatment of that point, Hugh Collins ( 1982) offers a detailed argument showing how LMarxism departs from “a simple conspiratorial interpretation of laws, in which the ruling class develops a view of its goals and then formulates laws accordingly” (p. 4 1). Rather, perceptions of interest emerge from “similar processes of socialization and experiences of productive activities. A consensus of values is established by the transmission of ideologies and their vindication through practical work” (p. 40). While critical theory does retlect the influence ofMarxist thought, it does not subscribe to the perverted instrumentahsm which issometimes attributed to it (Gordon, 1988a, p. 146). Rather. law is regarded as relatively autonomous, historically contingent, and localized in application. “This relative autonomy means that [legal rules] can’t be explained completely by reference to external political sock&economic factors. To some extent they are independent variables in social experience and therefore they require study elaborating their peculiar intern;;; structures with the aim of finding out how those structures feed back upon social life” (Gordon, 1984, p. 101). Critical theory also manifests “traces” of European philosophy, including the critical theory of Habermas. Not all of the intluences on critical legal theory can be reconciled or integrated into a coherent philosophical system; such an effort would be pointless in any event, for the power of critical legal theory lies in its application to specitic bodies of doctrine (Boyle, 1985).

AGENT THEORY AS IDEOLOGY 449

posed to a “normative” approach to organization theory. The positive approach. according to Jen- sen, examined organizations as they objectively existed, without reliance on preconceived nor-

mative standards. Although Jensen’s distinction between a positive and a normative research agenda is demonstrably untenable (e.g. Ar- rington & Francis, 1989, pp. lO-12), it formed

the neoclassical basis of Jensen’s organizational theory.

Jensen commenced his analysis by defining an organization as “a legal entity that serves as a nexus for a complex set of contracts (written and unwritten) among disparate individuals” (p.

326). He continued (p. 326):

The multilateral contracts bemeen agents that charac-

terize market relations are supplanted within an organi-

zation by a system in which the relationships among the

cooperating agents are largely effected through unilnt-

eral contracts w2th the legal entity that serves as the contracting nexus. These contracts specify the rules of the

game within the organization, including the three critical

dimensions outlined above: the performance evaluation

system, the reward system, and the assignment of deci-

sion rights. This view of organizations focuses attention on rhe nature of the contractual relations among the

agents who come together in an organization - includ-

ing suppliers of labor, capital. raw materials, riskbearing

senices. and customers.

From Jensen’s initial premise, two operative principles followed. The first was that the utility- maximizing individuals who make up the organization will always seek to minimize the agency costs of contracting. Jensen’s second principle was that in a competitive environment, the fittest organizations will survive (p. 33 1). Embed- ded in the agency model, then, are the neoclassi-

cal assumptions that individuals will seek to maximize individual gain and that the “contracting nexus” is self-regulating, autonomous and economically efficient. But from the perspective of critical theory, corporate hierarchies are permeated with ideologies which inculcate beliefs,

attitudes, and values in those individuals subject to the system of bureaucratic sanctioning. That point can be illustrated using a well-known example of critical legal scholarship.

In his influential critique of administrative law, Gerald Frug (1984) applied critical legal

theory to organizational structure. Frug’s thesis is that concentrations of power in American soc-

iety, such as large corporations and administra-

tive agencies, pose an obvious threat to demo- cratic, participatory processes; and, to allay the fears of shareholders and citizens who may suffer abuses of that power, the legal system has created ideologies or “stories” describing con- straints on bureaucracies (see also Mitchell,

1989). Frug explains (p. 1278):

Corporate and administrative law have embodied a series

of dilTerent attempts to convince us that these charac-

teristics do not permit those who wield bureaucratic

power to violate the freedom of those subjected to it. I argue in this Article that all of these defenses of bureaucratic power are no more than variations on a single story

about the acceptability of bureaucratic organization and

that this stop. far from building a convincing case for

bureaucracy. is a mechanism of deception. The

mechanism of deception is all the more powerful because people regularly deceive themselves as well as

their audience when they generate versions of this story;

we all engage in this kind of deceptive practice when we

comfort ourselves about bureaucratic power.

Frug’s basic argument is of particular rele-

vance to a critique ofJensen’s theory of the firm. According to Frug, the ideological justification for bureaucracy is grounded on the dichotomy between “subjective” and “objective”. Objectiv-

ity is of analytical importance because “[olbjec- tivity is thought to protect people within the

bureaucracy from domination and to ensure that

the interests of constituents are not threatened by the consolidated power exercised by the bureaucracy itself” (p. 1286). The emphasis on shared, common, and therefore presumably objective values is opposed to subjective and per-

sonal desires, which cannot be permitted to in- trude into control of the organization. But at the same time, the bureaucracy must attempt to ac- commodate personal expression and self-fulfil-

ment, or it would otherwise appear to be coercive and oppressive. The legitimating ideology, that is, must articulate some means by which the individual can be said to influence and direct the organization. Frug thus contends (p. 1287), “All the stories of bureaucratic legitimation, in short, share a common structure: they attempt to define, distinguish, and render mutually compati-

450 HERBERT G. HLWI’ III and RAYMOND L HOGLER

ble the subjective and objective aspects of life.”

As a consequence, the “critical focus” of inquiry becomes the dividing line between the realms of

subjectivity and objectivity. “It is this line that al-

lows bureaucratic theorists simultaneously to separate and combine the values of subjectivity

and objectivity - to present bureaucracy as

both an enhancement and a protection of liberty - and that therefore permits them to present bureaucracy as legitimate.” Frug’s approach can

be adapted to an analysis of Jensen’s model. The agency theory of organizations offers a

plausible ideological reconciliation of the sub-

jective/objective dichotomy. Jensen mediates intra-organizational conflict by casting all relations within the enterprise in the form of com-

modity transactions. Because the organization is nothing more than a ?-texus of contracts,” all subjective and personal needs, desires, and aspi-

rations are reduced to a level of formal contractual equality. In Balbus’s terms, the “qualitatively different interests and social origins of individu-

als” are given a form which “extinguishes” any uniquely personal, subjective characteristics. All

contracting parties are deemed to have equal access to the organizational marketplace and the ability to express subjective preferences

through contractual arrangements; the organization thereby protects “liberty” and “freedom” in precisely the same fashion as did the U.S. Sup-

reme Court in the Ad&r decision. Thus, the

“story” of bureaucracy told by the agency theorists is one which safeguards the values of subjectivity on an ideological level.

Contractualism also satisfies the need for objectivity as an aspect of bureaucratic legitimacy. Ultimate control over the organization, and the most important constraint on its power, lies in the operation of the “market”. Through the “nexus of contracts”, the organization performs in an efficient, maximizing manner. The effort of individual agents to minimi.ze transaction costs and the correlative principle of “survival of the fittest” as an organizational imperative ensure that the goal of the organization - profitability - is not impeded by such tangential matters as social responsibility or corporate ethics. Ac- cordingly, the bureaucracy displays features of

autonomy and impartiality. Jensen’s model of organizations also presents

a unified cognitive system which is integrated

into the universe of neoclassical economics. It is impossible to prove the truth of falsity of Jen-

sen’s theory, for, as he admits, his basic principles are “tautologies” which must be accepted as self-evident propositions (pp. 228-230); even though Jensen ascribes a “scientific” status to his

use of those tautologies, there is no sense in which they can be negated (Arrington & Francis,

1989, pp. 1314). As Thompson (1984) indicates, one attribute of a successful ideology is that it is presented through strategies of dissimulation and its central claims therefore are not

easily assessed. Further, by linking organizational theory with the doctrine of the “survival

of the fittest”, Jensen has endowed his ideology

with a respectable historical pedigree. Social Darwinism was an important managerial ideol-

ogy (e.g. Bendix, 1956) precisely because the argument was based on “an appeal stating that this principle governed patterns of dominance and subordination not only in the workplace, nor even in the larger society, but among all nonhu- man species as well” (Weiss, 1985, p. 43).

IMoreover, the rhetoric used to describe organization theory helps to reify the bureaucracy as a “thing” which can be understood in concrete images. To illustrate this point, Frug also

uses social Darwinism as an example of corporate ideology. He comments, quoting John D. Rockefeller (p. 1294): ‘The concrete terms acquire the power - as does a metaphor (‘[t]he growth of a large corporation is merely a survival of the fittest’) - to capture the imagination so

completely that they seem to become the abstraction itself.” The rhetorical device effec- tively persuades the individual that the “false experience” is the actual experience of life and consciousness itself. Frug argues that the oppo- site of reification is individual freedom and ful- fillment, the striving for which would necessarily lead to resistance against bureaucratic domination. For that reason, precisely the project of theorists of bureaucracy is to substitute a reified experience - “freedom of contract” - for per- sonalized relationships within the bureaucratic

AGENCY THEORY AS IDEOLOG’I 451

structure. Frug concludes that “[olnly by con-

tinually overcoming the structures that falsify her/his human potential could the individual en-

gage in the self-transforming, self-creating pro-

cess of freedom” (p. 1259). Within the framework of bureaucratic ideol-

ogy sketched above, accounting may acquire a crucial role. Accountants are represented by agency theorists as neutral and objective experts

who utilize a technical, quantitative methodology to facilitate the efficient operation of the organization. Their decisions, in this “story”, are

free from subjectivity and personal bias. The accounting function thus avoids issues of policy and social consequence, and “Questions about the goals of a decision-maker, firm, or society are seen as outside the province of the accountant” (Chua, 1986, p. 610). Positive accounting knowledge, for example, is presumed to be valid

because it is the product of expertise and science, even though [t]he idea that accounting

researchers can simply construct general theories of accounting practices which will en- able practitioners to predict the outcomes of their decisions in an uncertain world by following methodological rules based on neoclassical equilibrium economics is, to say the least, ten- dentious and open to considerable scepticism” (Whitley, 1988).

One consequence of an empiricist accounting methodology, as Whitley ( 1988) and Arrington

& Francis (1989) have demonstrated, is to alter the nature of the academic discourse concern-

ing accounting theory. Within the network of

knowledge production and dissemination, certain forms of knowledge become more “privileged” than others. Arrington & Francis’s analysis of agency theory and the positive research agenda leads them to conclude that accounting knowledge has “become dangerously centered upon this technology of naive empiricism.” They continue (p. 23): “Further, the dominance of this view cannot be explained in terms of the intellectual competence of the arguments which it uses to privilege itself, and the deconstntctive exegesis of those arguments bears this out. Instead, this view survives because of the political economy of the account-

ing research.” Consequently, the presumed scientific nature of accounting can be related directly to its ideological power.

By providing a model amenable to statistical analysis, agency theory locates itself within the intellectual prestige of “scientific” thought. Posi-

tive theorists advance a system of knowledge which appears to have the rigor and validity of mathematics; in fact, such methods often serve

in important ways to restrict the arena of discourse and the scope of analysis. For example, the discipline of economics itself, one scholar argues, is an exercise in rhetoric which attempts to disguise itself as a science with the aid of mathematical and statistical models (McClos-

key, 1985). The natural science paradigm has exerted

considerable influence over social sciences re-

search. Initially, the purpose of empiricism in the human sciences is to remove the subjectivity and relativity of human values from the realm of

discourse. Richard Bernstein, in his well-known work The Restructuring of Social and Political Theory (1978), linked the presuppositions underlying empiricism and its consequences.

Bernstein argued (p. 106):

There has been an overwhelming tendency in main-

stream social science toward reification, toward mistak-

ing historically conditioned social and political patterns

for an unchangeable brute reality which is simply “out

there” to be confronted. In the eagerness to build a new

natural science of human beings, there has been a ten.

dency to generalize from the regularities of a regnant

moral paradigm, and to claim we are discovering univer-

sal laws that govern human beings. The most serious de-

fect in this endeavor is not simply unwarranted generali-

zations, but the hidden ideological bases.. Scientism in

social and political studies has become a powerful albeit

disguised ideology.

The foundation of the ideology, Bernstein noted, is its asserted ability to distinguish “fact” from

“value” and to attain knowledge untainted by subjectivism. Empiricism, accordingly, becomes one further manifestation of the apolitical, im- personal nature of the organization.

Together, the strands of agency theory present a densely articulated system interwoven with neoclassical assumptions and empirical


methodology. Agency theory explains that system in a manner which sustains hierarchies of organizational power. The primary explanatory mechanism is a reified “market” which brokers all social relations within the organization. The

appealing picture of a universally operative, universally accessible, and uniformly impartial means of resolving conflict circumscribes the possibility of change and leads us to “treat the world as ifit determines our ideas, ascribing false concreteness to the categories we have in fact invented” (Kelman, 1987, p. 270).

CONCLUSION

This paper has examined the groundwork of neoclassical economics evident in current legal

and accounting theories. There are important structural similarities in the legitimating ideologies which are now predominant in both

disciplines. Most significantly, they can be ap- proached through the ideology of contractualism and its role in sustaining organizational power over individuals. Critical legal scholars

and radical accountants have controverted the accepted views of corporate bureaucracy. Frug’s insights deepen and extend the radical accountants’ critique of agency theory; conversely, the work of radical accountants helps to delineate the role of the accounting process in legitimating bureaucracies. The benefit of the inter-dis- ciplinary approach is that the shared values and

perspectives strengthen the challenge to neo-

classical ideology.

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