In the current crisis, we see the seeds of a new economy emerging:
However, one thing many of them have in common is that the standard accounting and business administration systems will either not work for them or will hinder their full development.
We propose here that the accounting model that we use for Group Accounting - REA (Resources, Events and Agents) - will work for all of these approaches. REA can also help to make all of the groups using all of these different approaches compatible, that is, able to join with each other in community, regional and global .
Another thing all of these approaches have in common is cooperative relationships among the participants, at least to some extent. (By "cooperative" here, we mean the common sense of the word, not necessarily the legal cooperative business form.)
All of these seeds (and others we did not name) are small, and they need to operate within the existing system with all that entails. But a new economic system will not be built from scratch, it will adopt approaches that have been tried and found to work.
REA is a simplified method of accounting that was initially developed by Professor William McCarthy of Michigan State University in 1982, and since has been adopted and extended by a growing global community. As you can see from the community page, REA has been incorporated in ecommerce standards by the United Nations and ISO, the official international standards organization. People from Group Accounting contributed significantly to both of those standards.
REA's benefits for a new economic system include:
Resources include products, services and money.
Agents include any person or organization who is responsible for some resources.
Events include exchanges of resources between agents, consumption of resources, and production of new resources.
REA records economic events exactly as they happened, with no interpretation (unlike double-entry accounting, which requires an interpretation of what happened from the viewpoint of one of the agents involved in the event).
For example, Farmer A traded 100 units of wheat to miller B on March 9, 2008 at 2pm UT for 100 units of bio diesel fuel, which Miller B got from digester D.
From the basic economic event records, REA software can automatically generate all of the standard financial reports, lots of other useful reports, and can even generate those double-entries automatically if somebody really really wants them.
Also, because the basic event records in REA are naturally related, we can trace the flows of resources through a community (for example, the bio diesel feedstock from one farmer to the digester, and then the biodiesel fuel through the miller to another farmer).
An economic system is a system (duh)
Some of the new approaches want to revert back to a "simpler time" when "main street" and independent small businesses supposedly provided the necessities of life.
Not only was this never really true, those "independent" small businesses were all very dependent on larger systems of trade and distribution.
And in a new system, people - and communities - will be interdependent as well. So even if the end of cheap oil forces more production to become local (which we think will happen), those local communities will still need systems of coordination among the producers and consumers of the necessities of life. And they will probably continue to exchange goods with other communities.
So either all these exchanges will revert back to the current economic system, which means all the current problems will continue on some scale, or they will evolve something new and better.
Because REA can relate all resource flows in a community or region, it is uniquely suited to a .
We did something like this for timber, where we tied together all of the resources flows among a group of timber growers, loggers, sawyers, wood processors and home builders. The result would have been transparent economic relationships among the whole group. Unfortunately, the group fell apart due to trust issues (see next topic), proving once again that cooperation is not easy. But we want to do similar systems for whole communities, including all of the major economic flows for food, housing, energy and other necessities of life.
We're starting to develop this idea of whole-local-community or region economic systems here.
Communities of Trust and Transparency
One of the problems with the current economic system is that nobody can trust anybody else. By definition.
And resource flows are anything but transparent. For example, the refuses to say where the bailout money went, and the bank recipients refuse to disclose their counterparties.
In contrast, most of the new approaches develop communities that do learn to trust each other.
Here are two communities of trust that now use double-entry accounting, and what they could do better if they used REA:
You can read more about REA's suitability for managing larger economic system forms like supply chains, business clusters and ecosystems here.
Are we saying everybody should just use our Group ?
Well, that would be nice, but that is not realistic.
For one thing, we are still working on our software. We want to develop it by working with real-life groups, not from our "good ideas". That takes time.
For another thing, we see several other projects working on software for new economic approaches. We would like to find ways to collaborate with them.
What we are saying in this article is that REA is a good basis for new economic approaches, and also for collaboration between these different software projects. And the "standard" double-entry are not.
We'd be happy to teach other software development groups about REA, and help them develop REA-based software. If you are interested, send us an email.