The Importance of a Realistic Theory of Capital for Institutional Reform – The Case of Financial Accounting

Asevere problem arises when an economic theory, which is itself institutionfree, is applied to the reform of institutions. There is the risk that economics compromises the institutions that it and our current economic order are based upon. If economists want to avoid counterproductive reforms of fundamental institutions, they must adopt a more realistic theory of capital that incorporates the institutional framework of capitalism. This point is exemplified by the recent harmful reform of financial accounting regulation – the substitution of historical-cost with fair-value accounting – which was justified within the framework provided by neoclassical economics.