The Subtle Change from Principles to Rules

 

The Subtle Change from Principles to Rules
The Subtle Change from Principles to Rules

Table of Contents

From Eden to Woodstock

Meadow Improvement

What does it all Mean?

INTRODUCTION

In the lazy summer days of 2007, the world appeared to be getting its groove back.  Few, if any, were the signs pointing to the financial catastrophe that was about to unfold.

Yet despite the feeling of relative calm and optimism, it was clear that a deep and permanent change was occurring at the very base of society.  Suspicion was beginning to replace trust and goodwill amongst men.

This brief book is a compilation of three essays that were written during the summer of 2007 and first published in October 2010.  They deal with a revelation that was given to us as we were attending a breakfast presentation on upcoming changes to the US accounting standards.  Instead of fighting off the drowsiness which usually accompanies listening to accounting jargon, we found ourselves grappling with a deeply disturbing truth that increasingly defines life in America to this day.

American society, which had built itself and created an unprecedented dynamism by operating on the basis of tacitly agreed upon principles, was now turning to the blunt instrument of rules as the basis for relationships.

An understanding of this subtle shift in American thinking will greatly aid one in understanding the seemingly inexplicable changes that they see all around them.

Clearly, rules have always been a part of life.  They are nothing new.  What was, and is new, is the power that is now being ascribed to rules. In America, it was often the case that a rule would be written and modified on the basis of an underlying principle.  Rules for the sake of having them did not make much sense.

Now, circa 2012, the power is continuing to shift to the rules themselves.  While the hallmark of principles is that they are flexible enough to adapt to constantly changing circumstances, rules tend to serve as a kind of concrete for society which, as they harden, completely paralyzes anything that finds itself trapped amongst them.

Societies based on rules are nothing new.  In fact, they are sadly becoming the norm throughout the world.  Perhaps the clearest high level distinction between a society that operates on the basis of principles and one that operates on a basis of rules is whether it finds its legal basis in English Common Law, which generally produces outcomes based on equity before the law and a reasonable standard; and Napoleonic Code with its strict adherence to written rules which often has little flexibility regarding the individual circumstance that is being examined

These essays deal with the shift, then, from America’s predisposition to operate on the basis of English Common Law to that of the rigidity of Napoleonic Code, and the inevitable consequences of making this shift.

The eternal question that we present here, “deer” reader, is whether or not one will stay in the meadow once as they see this shift occur.

 

From Eden to Woodstock

We recently attended a brief seminar which was titled “GAAP Update.”  This title, to anyone who is not an accountant, may sound like some sort of fashion show.  While I had hoped to observe some of the latest models of pocket protectors, the only thing that any reasonable person (that is you and I, “deer” reader) could observe to be “in fashion” was a decreasing reliance on professional judgment and increasing scrutiny, oversight, and more rules in the accounting profession. 

In order to properly understand the above observation, we must first attempt to understand what GAAP is.  GAAP, while not addictive, should be taken in small doses.  As such, I will proceed to administer it in as small of doses as possible so that we can avoid the common side effects of confusion, drowsiness, and its other less understood attacks upon the human psyche.

GAAP, for those of you who have been fortunate enough to avoid the acronym thus far, stands for “Generally Accepted Accounting Principles.”  According to Wikipedia, “GAAP is the standard framework of guidelines for financial accounting. It includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements.”  Wikipedia goes on to list the principles by which GAAP is guided by as the principles of sincerity, permanence of methods, non-compensation, prudence, continuity, and periodicity.

The presenter at the seminar, a brilliant local CPA, alluded to what we are now calling the “subtle change from principles to rules” when he mentioned that the words “should” and “must” were now explicitly defined in the new accounting guidelines in such a way that it had all but eliminated professional judgment from his profession.

His statements referred to the new requirements which Statement of Accounting Standards 102, entitled “Defining Professional Requirements in Statements on Auditing Standards,” enjoined upon those condemned to his chosen profession.  Where the word “must” appears, the accountant is to understand that the requirement is unconditional and must be performed.  This is straightforward enough, and even highly trained professionals would have trouble arguing this definition.

It is the stated definition of the word “should,” which has from time immortal been the fallback for the imprudent when explaining why something was not done, which took the man aback.  For the word “should,” from now to eternity, shall indicate a “presumptively mandatory requirement,” which for practical purposes, makes it just another spelling of the word “must.”

On the surface, this sounds like a simple and presumably necessary clarification made in the name of making the writings of accountants more accessible to the general public and the ethics of the general public more accessible to accountants.

The deeper truth, the one that our brilliant local CPA alluded to, is that trust in professional judgment has disintegrated and the need for specific, carefully worded instructions that remove the need for “flawed” professional judgment is taking its place.  This should alarm us all, as the accounting profession is by no means the only field that this subtle change is taking place in.

[Editor’s note:  If you would like to witness for yourself the alarming rate of the expansion of rules written by agencies of the Federal Government, a peek at regulations.gov at any given time will give you a general idea of the proliferation of rules in society.]

Any institution that is organized by human beings, such as a company, a religion, a government, or a football team, follows a pattern.  Observe closely, “deer” reader, and see if you can pull an example from your own experience.  These institutions begin with some sort of principle or set of principles.  The person or persons, whom we will call the founders of the institution, understand the principles upon which they were founded and tacitly operate according to these principles. 

When something is in its genesis, it is fresh and exciting.  Possibilities bound about, like deer in a meadow in early spring.  It is a thing to behold.  People flock to this bounding, this life, to simply breathe it in and to somehow be a part of it.

“Let it always be this way!” they say, “I love this!  How can I join?”

The founders may or may not have decided how one can join.  In the beginning, at the genesis of the institution, it hardly matters.  If people are not allowed to join formally, they will do so by imitation.  Such is the charismatic nature of an attractive institution which is run on sound principles.

At this stage, whether formally invited or not, people flock to the institution in great multitudes.  Everyone wants to bound with the deer, drink from the stream, to lie in the grass. 

Then, something begins to happen.  The people, who were not there at the genesis, do not understand why the deer are bounding.  And when the deer try to explain this to them, the people may not understand or perhaps may disagree with the reasons given for their joyful bounding.  In this miscommunication, the principles get lost or distorted. 

Nevertheless, the people agree that the bounding must continue, and increase, by all means.  They continue to flock to the meadow.  Soon, because of the crowds, the bounding area becomes a mosh pit, the water in the stream becomes undrinkable, and the grass turns to mud.

Yes, the once fair meadow full of bounding deer has quickly turned into a scene from Woodstock.

~~~~~~~~~~

Meadow Improvement

The once vibrant meadow and its subsequent demise can provide us with a metaphor from which to gain an understanding of the difference between principles and rules and what it means for us as persons as we navigate together this subtle yet incredibly important cultural change in our society.

We pick up the scene at our meadow in the aftermath of Woodstock.  It has become obvious to everyone in the meadow, both deer and persons alike, that the meadow is no longer the utopia that they had entered.  The people become desperate to understand what went wrong and more importantly how to keep it from going wrong again in the future. 

How will they go about this?  First, they cordon off a bounding area, so that bounding may continue, albeit in a limited fashion.  Other areas are then cordoned off and efforts are made to revive the grass in these areas.  It is prohibited to enter into these areas until it has been deemed “suitable for bounding.”  Next, they decide to construct a canal system in part of the meadow and allow the stream to “revive” itself within its new found confinements.  Water from the stream and canals is then rationed, which, in turn, limits bounding.  This limitation on bounding, as envisioned, seems to rejuvenate the meadow for a time.

At this stage, something peculiar; a paradox, if you will, begins to take place.  The people in the meadow begin to see that, although bounding now has become a limited an increasingly coveted activity, and their other projects seem to have achieved their aims, the grass is growing and the stream is beginning to clear up.  Heartened by their success, they begin to dedicate themselves more and more to “meadow improvement” and less to bounding. 

There is now scarcely time or space for bounding anyhow, and “meadow improvement” is a much more worthy cause.  Why just look!  We have grass growing where no one can bound and our canal system now provides more rations of water for more people who are not bounding.  What could be better? 

The clear answer, though few people now recall, is the very reason that people began to flock to the meadow in the first place:  The freedom of bounding in a meadow!  Joyful, unadulterated bounding without water rations and cordoned off grassy areas.

Now, however, nobody dares to say these things out loud, because everyone knows that “meadow improvement” has become vital, and that bounding, while entertaining, must be done on an extremely limited and controlled basis, with a careful eye on the grass and the stream, lest the area be disturbed again and they find it in need of further improvement.

Of course the original, “genesis” deer and their principles, are now long gone, searching for another meadow in which to freely bound about.  Some who remain in the meadow are still searching for these principles and long for the days when they will bound freely again.

However, since most of those who remain were either unaware of, or in some stage of disagreement with the original principles, the “why” of the boundless joy that they once beheld; “meadow improvement” continues and the deer and their principles are idolized, but rarely sought.

Why?  A return to those principles would lead to too much bounding, of course.  And, of course, too much bounding leads to ruined meadows.

So what is the point of this tale, “deer” reader?  What can you and I learn from a humble accounting lecture, bounding deer, and “meadow improvement” projects?  In other words, what does it all mean?????

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What does it all mean?

At this point, we are forced to step back from the mud and ponder the events unfolding in the meadow and ask the questions that are raised in the parable, for they are of the utmost importance.

The parable highlights the subtle yet important difference between principles and rules.  In the meadow parable, the activities and projects referred to as meadow improvement represent rules.  Rules are made by those who either do not fully understand or do not desire to adhere to the principles of an activity and are generally imposed with the stated purpose of maintaining or “improving” the status quo. 

Once a human institution, as the meadow was to represent, makes the subtle change from being guided by principles to being governed by rules, these rules fill the meadow with “cordoned off areas” and “canals” until no one can freely move about within them.

A glance at the following definitions will help us to better understand the conceptual difference between principles and rules.  A principle, according to the Encyclopedia, “signifies a point (or points) of probability on a subject (i.e. the principle of creativity), which allows for the formation of rule or norm or law by (human) interpration of the phenomena (events) that can be created.”  By contrast, a rule, according to dictionary.com, is “a principle or regulation governing conduct, action, procedure, arrangement, etc.”  Making a clear distinction between principles and rules is confusing because the terms are often used interchangeably to define two concepts that could not be more different.  This is why the change is subtle.

We must then attempt to compare and contrast these concepts in the following manner:  Principles make things possible.  Principles create.  Rules govern conduct or regulate.  Rules destroy.  With this understanding, we can now postulate that, while principles tend to create rules, rules tend to destroy principles once the propagation of rules dwarfs the principle that created them.  It is as if an invisible prison is constructed by the growing threat of going to a real one.

Does this mean that principles are bad because they create rules?  By no means, in the same way, rules are not bad either, but principles must be held above the rules that they create in order for the principles to maintain their power to create and make things possible.  Once rules are allowed to dominate, they thrust aside principles and a prison begins to quickly construct itself.

This is what our brilliant local CPA was alluding to in the GAAP Update seminar when he mentioned that the word “should” in of some of the pronouncements had been changed to “must.”  For this careful choice of words is perhaps the clearest manifestation of this subtle shift in American society, circa 2012.

The word “should” bestows some glimmer of freedom of choice upon the hearer.  As in “You should wear a jacket, its cold.”  While the word should implies a strong suggestion that would do well to heed, it is understood that one is free to ignore it, albeit at their peril.  Once the word “must” is placed in the same sentence, this freedom is removed and the only thing that remains is the expectation of punishment for non-compliance.  It describes this subtle change from principles to rules that is happening in not only in GAAP but in many other areas of society as well.

This choice of words will only lead to resentment and violence in the meadow, where those guilty of stealing water rations for their parched fellow meadow dwellers and for crossing into a cordoned off area are either incarcerated, banished, or exterminated in an increasingly futile attempt to keep the meadow clean.  While those dwelling in the meadow may gradually adjust to this dire state of affairs, it will be clear to all external observers that the once vibrant meadow has turned into a gruesome cross between a pig sty and a slaughter house.

Such is the fate of a society in which rules are employed to remove all semblance of freedom of its inhabitants.  It is not a question of if, but when.

It is abundantly clear that the principles of liberty and self-determination are the only antidote to the poison of rules once they have overwhelmed the principles that gave rise to them.

And what of the deer who began all of the bounding in the meadow in the first place?  Wouldn’t they have stayed around to ensure the freedom of bounding?  It is perhaps the greatest of ironies that these deer, who so fervently loved bounding and whose activities attracted the very people who would stifle and destroy it, would simply bound to another meadow as the first restrictions on bounding were drafted.

For it is the very nature of true freedom to respect the right to freedom of others.  Even if they choose to destroy the very freedom that has been accorded to them.

~~~~~~~~~~

If you have enjoyed this ebook and wish to contribute to this author’s work, it would be much appreciated.  Please visit https://davidmint.com and click on the “Donate” button on the right hand side of the page.  All donations are accepted by The Wilcox Trading Company via Paypal, are considered sales of the book and, while given and accepted in a charitable spirit, may not be considered charitable donations by the IRS.

Thanks again and we wish you all the best, deer reader!

Fresh ideas on Economics, Monetary Theory, Politics, and Less Pressing but Equally Entertaining Matters for the English and Spanish speaking worlds

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