Finest Product of the Human Brain

Luca Pacioli taught mathematics at all the well-known universities of Quattrocento Italy including that of Perugia, Napoli, Milan, Florence, Rome, and Venice. In 1494 he published his Summa Arithmetica, Tractatus 11 of which is a textbook on book-keeping. The author shows that the assets and liabilities of a firm do balance out at all times, provided that we introduce a new item in the liability column that has been variously called by subsequent authors “net worth”, “goodwill”, and “capital”. This innovation makes it easy to check the ledger for accuracy by finding that, at the close of every business day, assets minus liabilities is equal to zero. If not, there must be a mistake in the calculation.

But what Pacioli discovered was something far more significant than a method of finding errors in the arithmetic. It was the invention of what we today call double-entry book-keeping, and what Göthe called “the finest product of the human brain” (Wilhelm Meister’s Apprenticeship.)

Why was this discovery so important in the history of Western Civilization? Because, for the first time ever, it was now possible to calculate and monitor shareholder equity with precision. This is indispensable in starting and running a joint-stock company. Without it new shareholders could not get aboard, and old ones could not disembark safely. There would be no stock markets. The national economy would be a conglomeration of cottage industries, unable to undertake any large-scale project such as the construction of a transcontinental railroad, or the launching of an intercontinental shipping line.

The invention of the balance sheet did to the art of management what the invention of the compass did to the art of navigation. Seafarers no longer had to rely on clear skies in order to keep the right direction. The compass made it possible to sail under cloudy skies with equal confidence. Likewise, managers no longer have to depend on risk-free opportunities to keep their enterprise profitable. The balance sheet tells them which risks they may take and which ones they must avoid. It is no exaggeration to say that the present industrial might of Western Civilization rests upon the corner-stone of double-entry book-keeping. Oriental (Chinese) and Middle-Eastern (Arab) civilizations would have outstripped ours if they had chanced upon the discovery of the balance sheet first. By the same token, the continuing leadership of the West depends on keeping accounting standards high and isolated from political influences.


Fekete, Antal E., The Revisionist Theory and History of Depressions, (2009)