1. Accounting, Auditing & Accountability Journal
Emerald Article: Value, profit and risk: accounting and the resource-based
view of the firm
Steven Toms
Article information:
To cite this document: Steven Toms, (2010),"Value, profit and risk: accounting and the resource-based view of the firm",
Accounting, Auditing & Accountability Journal, Vol. 23 Iss: 5 pp. 647 - 670
Permanent link to this document:
http://dx.doi.org/10.1108/09513571011054927
Downloaded on: 07-12-2012
References: This document contains references to 102 other documents
Citations: This document has been cited by 3 other documents
To copy this document: permissions@emeraldinsight.com
This document has been downloaded 2401 times since 2010. *
Access to this document was granted through an Emerald subscription provided by UNIVERSITY OF THE ARTS LONDON
For Authors:
If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service.
Information about how to choose which publication to write for and submission guidelines are available for all. Please visit
www.emeraldinsight.com/authors for more information.
About Emerald www.emeraldinsight.com
With over forty years' experience, Emerald Group Publishing is a leading independent publisher of global research with impact in
business, society, public policy and education. In total, Emerald publishes over 275 journals and more than 130 book series, as
well as an extensive range of online products and services. Emerald is both COUNTER 3 and TRANSFER compliant. The organization is
a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive
preservation.
*Related content and download information correct at time of download.

2. The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0951-3574.htm
Value, profit
Value, profit and risk: and risk
accounting and the
resource-based view of the firm
647
Steven Toms
The York Management School, University of York, Heslington, UK
Abstract
Purpose – This paper aims to argue that the principal components of the Resource-Based View
(RBV) as a theory of sustained competitive advantage are not a sufficient basis for a complete and
consistent theory of firm behaviour. Two missing elements are value theory and accountability
mechanisms.
Design/methodology/approach – The paper proposes a link between value theory and
accountability using a Resource Value-Resource Risk perspective as an alternative to the Capital
Asset Pricing Model. The link operates first from the labour process, where value is created but is
imperfectly observable by intra-firm mechanisms of organizational control and outside governance
arrangements without incurring monitoring costs. Second, it operates through contractual
arrangements which impose fixed cost structures on activities with variable revenues.
Findings – The paper thereby explains how value originates in risky and difficult to monitor
productive processes and is transmitted as rents to organizational and capital market constituents. It
then reviews recent contributions to the RBV, arguing that the proposed new approach overcomes
gaps inherent in the alternatives, and thus offers a more complete and integrated view of firm
behaviour.
Originality/value – The RBV can become a coherent theory of firm behaviour, if it adopts and can
integrate the labour theory of value, associated measures of risk arising from the labour process and
mechanisms of accountability.
Keywords Resources, Risk management, Labour, Competitive advantage
Paper type Research paper
1. Introduction
To what extent is strategy framed in accounting terms and what role do accounting
numbers and techniques play in setting strategy? In both cases the answer is probably
not enough, in view of the potential contribution on offer from accounting generally,
and from critical accounting in particular. In recent years, the resource-based view
(RBV) of the firm, has achieved widespread dissemination in academic literature and
management practice (Acedo et al., 2006). It explains competitive advantage, or
delivery of sustained above-normal returns (Peteraf, 1993) or economic profit (Barney,
2001), in terms of firms’ bundles of resources (Amit and Schoemaker, 1993; Rumelt,
1984), which are valuable, rare, inimitable and non-substitutable (VRIN) (Barney, 2001,
emphasis added). A theory linking asset value and abnormal returns is therefore
Accounting, Auditing &
Accountability Journal
The author would like to thank participants at the European Critical Accounting Studies Vol. 23 No. 5, 2010
Conference, University of York, 2006 and the Institute of Chartered Accountants in Scotland, pp. 647-670
q Emerald Group Publishing Limited
whose financial support helped develop the ideas in this paper. He would also like to thank Chris 0951-3574
Carter and two anonymous reviewers for their very helpful comments. DOI 10.1108/09513571011054927

3. AAAJ required. Because the RBV literature has placed these issues at the centre of its agenda,
23,5 its neglect of the accounting literature all the more surprising.
If the strategy literature has neglected accounting, it is also fair to say that
accounting has neglected strategy. Where concerned with valuation, accountants often
employ theoretical stances at variance with the Neo-classical mainstream strategy
literature (Bryer, 1994, 1999; Macve, 1999; Mouck, 1994; Tinker, 1980, 2004; Toms,
648 2006a, 2009; Toms and Bowman, 2010)[1]. A common approach of critical accounting is
to begin with the restrictive assumptions of marginalist Neo-classical economics and
argue that they possess logical inconsistencies, for example the tautological approach
to asset valuation implied by the Cambridge controversies (Tinker, 1980), privilege
interest groups (Tinker et al. 1982), or are not useful because the total social product is
either not recognised (Mayston, 1992) or ignored (Milne, 1991), and neglect the social
“essence” beneath the surface of market relationships (Tinker, 1984, p. 61, 1980, p. 158).
As a consequence, much of the critical accounting literature has abandoned economic
discourse, including the Classical and Marxian Schools. With limited exceptions,
deductive model building has become unfashionable, even though, as will be
demonstrated below, it has the potential to overcome some weaknesses of the
Neo-classical School and its accounting applications. As a consequence, there are
unresolved questions in accounting and strategy. First, what is the nature of value, and
a theoretically consistent measure of sustained competitive advantage (SCA)? Second,
can an operationalisable theory of risk be developed for the purposes of managerial
decision making?
In addressing these questions the paper will advance an agenda for strategy, and
accounting. It will address them by developing an integrated theory of value, profit,
and risk. In section two the relevant literature is reviewed under three headings. First,
the salient features of the RBV are analysed. Second classical theories of value are
considered. Finally, the accounting literature is discussed, insofar as it reflects the
former two aspects. Section three develops a new conceptual framework, linking profit,
value and risk as a basis for a theory of SCA. It will be shown how the labour theory of
value (LTV) can be extended to include risk and be used to modify the neo-classical
capital asset pricing model (CAPM). It will do so by linking both to the underlying
labour process. It will demonstrate how profit and asset value can be consistently
linked by cost structures. It will show how value creation of value can be differentiated
from the rent. In the fourth section, the implications are discussed, first for accounting
theory, with particular reference to the Cambridge controversies, and second by
comparison with similar approaches in the strategy literature. A final section draws
conclusions.
2. Strategy, value theory and accounting
Strategy and the RBV as a theory of value
The RBV is an important idea in strategy, because it offers the potential to explain
SCA, or the process of delivering long run abnormal returns to shareholders. Such
returns can be delivered through accessing resources, including for example by
monopoly control, as in the theory of competitive heterogeneity, or the creation of
difficult to replicate resources as in the RBV. It follows that the RBV needs a theory of
value to be a convincing theory of SCA. As Priem (2001) therefore suggests, the RBV is
incomplete because its explanation of value must be imported from outside literatures.

4. Further, as Priem and Butler (2001) propose, the RBV is tautological if the firm’s Value, profit
possession of unique capabilities cannot be ascertained independently of their and risk
description (Carter et al., 2008). Accounting might break the tautology by providing
mechanisms for understanding resource creation, their valuation and reporting. It
therefore follows that the measurement of resource value and abnormal returns are
necessary components of the development of the RBV as a theory[2].
Of course, this conclusion has not been fully accepted in the strategy literature, 649
which reflects more general disagreement about the RBV’s basic premises (Hoopes
et al., 2003). Indeed, participants in the debate have yet to reach a consensus on the
circumstances of where, why and when a resource is valuable (Miller and Shamsie,
1996, p. 539). Where recent strategy literature does acknowledge the requirement for a
theory of value, it has adopted two quite narrow and largely mutually exclusive
perspectives. One strand examines processes within the organization (Denrell et al.,
2003), which might be conceptualized in terms of production, transaction and
governance costs (Madhok, 2002). Another considers value, price and cost as market
interactions (Hoopes et al., 2003), and the market based division of value through
bargaining games (Lippman and Rumelt, 2003a, 2003b; MacDonald and Ryall, 2004;
see also Brandenburger and Stuart, 1996).
In contrast with economic theory, which explains performance differentials in terms
of product and market structure, the RBV focuses on the internal characteristics of the
firm (Lockett and Thompson, 2001). However, the valuation of RBV assets also implies
relationships with a specific market environment (Amit and Schoemaker, 1993).
Similarly Barney (1991, p. 105) suggests that a resource is valuable to the extent that “it
exploits opportunities and/or neutralizes threats in a firm’s environment”. A connected
argument is that resources are valuable if they enable a firm to satisfy needs at lower
costs than competitors (Peteraf, 1993). Barney (1991, p. 106) also suggests that
resources are valuable “when they enable a firm to conceive of or implement strategies
that improve its efficiency and effectiveness”. A resource has been defined as valuable
if it enables customer needs to be better satisfied (Bogner and Thomas, 1994; Verdin
and Williamson, 1994).
How the superior returns that arise from these activities are captured by specific
stakeholder groups through accountability processes has not been resolved in the
strategy literature. Coff (1999) addresses the question with the notion of “nexus rents”,
so that proceeds of superior performance are appropriated by competing stakeholder
groups. Although explaining their distribution, rents, and one assumes value, are
determined by market processes and do not arise from the productive process,
although Coff’s contribution importantly highlights the role of monitoring
relationships. Where the stakeholder approach is used, definitions of value are still
predicated on notions of utility. For example Collis and Montgomery (1997, pp. 30-1)
argue that a resource is valuable when demanded by customers, when it cannot be
replicated by competition, and when the profits it generates are captured by the firm
(emphasis added). The implied reification does not sit comfortably with a stakeholder
approach. However, the principal weakness here is that value depends upon defining
customer needs (including, tautologically, access to low priced goods) in utilitarian
terms. There is also the more fundamental question of whether utility in any case
constitutes the basis for a theory of value. It has been dismissed as a tautology by some
prominent economists (Robinson, 1963), and more importantly refuted as a theory of

5. AAAJ capital value and the rate of profit (Harcourt, 1969). Neo-classical economics has
23,5 ignored rather than responded to these fundamental criticisms (Tinker, 1980), and any
attempt to develop a resource based theory of the firm on neo-classical foundations
necessarily faces the same problem, not least because capital values and profit rates are
central to the RBV approach. To summarize these problems, the RBV requires a value
theory independent of utility, or must specify a stakeholder group whose utility is to
650 take precedence.
Strategic management researchers meanwhile are also interested in developing new
risk measures that are theoretically consistent and useful for managerial decision
making, achieving a suitable trade-off between concept complexity and computational
simplicity (Ruefli et al., 1999, pp. 182-4). So far, this literature has relied on the CAPM,
but has merely added to the critique in the finance literature. Bowman (1979) and
Armour and Teece (1978) examined the implied CAPM relationship, finding a
paradoxical negative slope between risk and return. Feigenbaum and Thomas (1986)
and Singh (1986) find differing risk return relationships at different levels of
organizational performance and capacity utilisation. These studies typically reflect
Neo-classical approaches to modelling risky behaviour, so that they are potentially
undermined by the weaknesses of the CAPM highlighted by financial researchers
(Clare et al., 1998, Fama and French, 1992, Wang, 2000), and although address expected
return, do not offer a theory of value.
Summarizing much of the above, Priem (2001) argues that existing theories deal
only with the value capture element but do not explain how value is created. For
Makadok and Coff (2002) RBV works with value capture, but does not need a theory of
value creation, especially not a theory based on consumer utility. Bowman and
Ambrosini (2000) suggest conventional explanations of resource value (Makadok,
2001; Makadok and Coff, 2002; Barney, 1986; Peteraf, 1993; Collis and Montgomery,
1995) are insufficient and set out a framework incorporating value creation and value
capture. These critics have built on Classical economists’ notion of use value, so that
new use value derives from individuals’ actions within the organization (Bowman and
Ambrosini, 2000; Bowman and Swart, 2007; Lado and Wilson, 1994; Pfeffer, 1995;
Wright et al., 1994). These approaches potentially form the most useful starting point
for the more formal integration of the LTV and theories of SCA.
Classical value theory
In the classical LTV, human action within the productive process is the source of value.
Because commodities are systematically sold at higher prices on leaving the productive
process in comparison to the prices at which they enter it, there must be some
commodity within the process that adds value systematically. Without this condition
aggregate profits are zero and the economy is a zero sum game. Further, labour time is
priced in the market, but labour time is transferred to the product with a degree of
intensity that is a function of physical effort and mental processes, which are not
directly observable. Socially necessary labour time is that required to produce any use
value under normal conditions of production with the average degree of skill and
intensity prevalent in that society (Marx, 1984, p. 641).
As far the RBV is concerned, it is not a theory of value, but a theory of rent. These
rents are Ricardian (Peteraf, 1993, Teece et al., 1997, p. 513), since Schumpeterian rents
(Foss and Knudsen, 2002), as synergies, or economies of scope are imitable, except in

6. the short run (Barney and Peteraf, 2003)[3]. However, none of the RBV literature has Value, profit
seriously concerned itself with the nineteenth century literature on rent and associated and risk
value theory. Marx modified Ricardo by varying the assumption of a fixed resource
supply, and allowing rents to arise as a function of different deployments of capital. He
also explained the proportion of profit manifested as rent as a function of the
regulating price, as determined socially necessary labour. Rent therefore is regulated
by the most efficient (or least efficient) combination of resources and their production 651
cost, depending on prevailing conditions of competition and the order in which
resources are brought into use. In other words, Marx’s theory of rent developed
Ricardo’s theory in directions of potential use to RBV theorists and accountants
concerned with asset valuation and rents. Whether useful or not, Marx’s theory of rent
is unlikely to be popular with RBV theorists or mainstream accountants.
The same might be said for the LTV, although it is just as easily attributable to
Ricardo or Smith, or to classical economy in general. As Grant (1996, p. 112) puts it, “a
physiocratic approach”[4], locating value in a single production factor, is essential for a
knowledge-based theory of value. Bowman and Toms (2010) introduce the notions of
value and surplus value along with the distinctions between use value and exchange
value that have already contributed to the RBV conversation (Bowman and Ambrosini,
2000). Following the above definition of socially necessary labour, firms will vary in
efficiency and therefore through bankruptcy and innovation, socially necessary labour
is reduced to the most efficient firm (Mohun, 1996, p. 504). For these reasons Marx is
more specifically useful for the RBV as the notion of socially necessary labour
facilitates the determination of rent elements in abnormal profits. Even so, Marx is only
a point of departure for the further development of RBV discussed in section 3.
Accounting and the RBV
There has been limited research on the RBV in the accounting literature. Studies have
typically concentrated on testing managerial accounting applications. For example
Howorth and Westhead (2003) find that working capital management techniques differ
according to the scale and sophistication of the resource base in small firms. In another
study, managerial selection of performance measures mediates the relationship
between strategic RBV assets and financial performance in non-manufacturing firms
(Widener, 2006). Other research has examined the relationship between the
management control system (MCS), the creation of capabilities in an RBV sense and
performance (Henri, 2006). In general research of this kind has been limited, possibly
because as Barney et al. (2001) suggest, the MCS is not a VRIN asset due to its easy
transferability[5]. In general, where undertaken by mainstream accounting
researchers, RBV research has focused on accounting practice rather than
accounting theory.
In contrast, critical accounting research has been more directly concerned with these
fundamentals. Toms (2002), Hasseldine et al. (2005) develop an integrated framework
for RBV intangible asset investment and stock market signalling. Bryer (1999) argues
that labour values are the basis of objective asset valuations. Tinker(1999, p. 655) on
the other hand suggests that Marx’s economic categories such as profit, wages and
rents should be seen as socially relative phenomena. For Abeysekera(2008) accounting
measurement is a response to commodification, or the economic logic of maximising
the market value of a firm while dealing with the contradiction of use of labour for

7. AAAJ production by the firm. Another strand of critical literature has begun to address the
23,5 relationship between accounting profit, valuation and the competitive process by
integrating the propositions of the RBV. Toms (2006b) integrates a knowledge based
view of the firm with theories of entrepreneurship, and extends the CAPM to integrate
social conceptions of risk (Toms, 2006a). He extends these arguments to show the
possible objective valuation measures that might be computed if social and financial
652 risk are appropriately integrated (Toms, 2008, 2009). Bowman and Toms (2010) show
how the RBV can be integrated with Marx’s model of the circuits of capital
incorporating different classes of labour. These ideas are now extended further to
produce a conceptual framework based on a common theory of accounting and
competitive advantage.
3. Conceptual framework
Theoretical dimensions
A theory of accounting and strategy is presented below, linking value theory and
accountability, using what for shorthand will be referred to as the Resource
Value-Resource Risk (RVRR) perspective. Value, in terms of labour effort transferred to
the product, is best observable in the labour process by those most closely involved
and the value capture process accordingly becomes progressively less observable (with
increased monitoring cost) by those concerned with superintendence of valorization, or
realization of use value into monetary value, and surplus appropriation. RVRR is thus
concerned with accountability mechanisms, consisting of accounting controls and
governance arrangements.
There are several additional and important dimensions. First, is the firm’s cost
structure, which refers to the degree of cost variability arising from the employment
contract. If employee remuneration is not precisely linked to revenue, the expected (risk
adjusted) rate of profit includes a rent element. Either revenue will fall and staff costs
are paid anyway, in which case there is a “rent” accruing to the workforce (because
they have produced less but are paid the same), or revenue will rise and staff costs
remain fixed, in which case profit rises above normal as labour’s share in net output
falls.
Second, if the actions of people within organisations are the source of use values, it
is necessary to define such values according to some Minimum Efficient Labour
Requirement (MELR), otherwise any additional labour time, no matter how inefficient
and regardless of consumer requirement could still be said to create value[6]. MELR
specifically refers to the labour costs of the firm with the simplest processes and most
easily replicable assets consistent with remaining in the market. It therefore regulates
the market price and differential rents are set for other firms with less easily replicable
assets according to the benchmark, as is analogous to the illustrations used by Marx
(1984, chapters 39 [e.g. table 1], 40). The benchmark MELR firm establishes the
underlying expected normal rate of return to shareholders and the discount rate
applied in asset valuation. These relationships are developed further below to show
that such returns are systematically related to cost structures embedded in the labour
process.
Third, there is the possibility of “rent” transfer between stakeholder groups. Rent is
defined as above, but extended to include circumstances where knowledge is unevenly
distributed within firms and between firms and their investors, so that rents accrue to

8. firm insiders or financial market insiders based on access to superior information. By Value, profit
extension, where knowledge is unevenly distributed within firms and between firms and risk
and their investors, rents accrue to firm insiders or financial market insiders based on
access to superior information. Because firm insiders are employees and managers,
their realized wage is the MELR rate for the job plus or minus rent elements arising
from access to information asymmetries in the production process and contract related
cost structures. Conversely, realized returns accruing to shareholders in a financial 653
market reflect both the underlying rate of profit plus or minus realizable managerial
and labour rents[7]. Unlike Ricardian rents in the standard RBV, these rents arise from
labour processes within organisations and markets that are set in process by capital,
and are accordingly consistent with Marx’s second category of differential rent, in
which realized rent depends on differential employments of capital.
The fourth component is tacit knowledge. Employees hold their positions because
the perceived value of their tacit and other knowledge exceeds their market cost[8].
To develop a theory of SCA from a RVRR perspective, it is necessary to establish a
basic relationship between individual knowledge, the means whereby it is embedded
in the labour process, and subsequent monitoring and valorization. Physical effort
and readily quantifiable skills are resources most easily replicable. Such explicit skills
are those more easily generated through generic training and education processes
external to the firm. As labour processes become more deeply ingrained as tacit
skills, they become more difficult to replicate. As the firm invests in assets such as
specialized production facilities, trade secrets and engineering experience (Teece et al.
1997) over time (Dierickx and Cool, 1989), tacit knowledge is embedded in technically
complex routines[9]. According to the knowledge-based view SCA arises from such
routines (Spender, 1989, Nonaka, 1991), but recognition that individuals create the
knowledge, which firms can then apply (Grant, 1996) leads in the RVRR to tension
between rent appropriation by individuals and team-based profit appropriation as
SCA. RVRR places appropriate emphasis on the mental processes, so that senior
managers as well as junior staff spend time creating value, specifically where their
administrative activities are a necessary condition for productive activity to occur[10].
Productive activity is activity that adds value including service provision, not just
factory production. The supervision problem intensifies to the extent that
subordinates hold tacit knowledge. Tacit knowledge reflects value in use rather
than market exchange value and employees hold their positions precisely because the
perceived value of their tacit and other knowledge exceeds their market cost. In RBV
terms, the firm that employs such individuals has a basis for SCA because a
competing firm cannot replicate the asset base through straightforward market
exchange processes.
Therefore a fifth component is that, as the labour process is not directly observable,
the employer of labour and the capital market investor are exposed to financial risk
arising from information asymmetry. Such problems lead to the sixth and final
component, which is the process of organizational control and the mix between
behaviour and output controls (Ouchi and Maguire, 1975) or action and results controls
(Bryer, 2006). The balance shifts from the former to the latter, to the extent that process
observation by supervisors is problematic, where accounting controls receive more
emphasis in the latter case. Each of these components is integrated in the following
framework.

9. AAAJ An integrated model
23,5 Figure 1 uses the Ambrosini and Bowman (2001, p. 816) continuum to include tacit
knowledge as a starting point, but extends their analysis to include the additional
dimension of task complexity in the labour process, and cost behaviour, monitoring
costs, control mechanisms and appropriation in the valorization process. In other words,
to consider the relationship between knowledge location and value appropriation as part
654 of a full description of the productive process, set out in Figure 1 as a horizontal
continuum of dimensions of value creation through to ultimate value capture.
The valorization process comprises four elements: cost behaviour, control,
monitoring, and appropriation. Insofar as specific assets associated with SCA are
not valued in an external market, and are therefore illiquid and non-realizable, they
generate fixed costs rather than variable costs. Similarly hiring knowledge intensive
labour generates fixed cost. Therefore as tacit knowledge and the potential degree of
SCA rises under RBV assumptions, so does the fixity of cost. As suggested in Figure 1,
there is also a continuous relationship between the degree of tacitness and complexity
in the labour process and the ability of external stakeholders to monitor the separable
labour processes that make up the firm and their joint interactions. This follows from
the definition of tacit knowledge, because the process is less readily explainable and
understood by an outsider and, consistent with the RBV, tacit knowledge is implicated
in SCA. External stakeholders’ two methods of monitoring, behavioural (or action)
control and output control, are also implicated in the tacitness and complexity of the
labour process, and the extent of fixed production costs and monitoring costs in the
valorization process. Tasks that are simple to perform and replicate are more easily
Figure 1.
The production process,
knowledge location and
the distribution of surplus

10. controlled through the division of labour and repetition, and more easily flexed in Value, profit
response to changes in demand, so there is greater emphasis on action control. Where and risk
the process is complex, difficult to observe and dependent on embedded fixed costs,
rather than costly monitoring a process that is difficult to understand and
unresponsive to changes in demand, output control might be relied upon, so that the
producer has to account for actions in financial terms. In the latter case, there is an
additional element in the labour process, involving transformation of heterogeneous 655
physical and mental inputs into homogeneous monetary outputs. Following Ouchi and
Maguire (1975), behaviour and output controls may not be direct substitutes, but may
be observable in independent contexts depending on understanding of means-ends
relationships and complex interdependencies respectively. Finally, as far as
appropriation is concerned, the more tacit labour processes create assets that are
unique and valuable, through processes that generate difficult to monitor fixed costs,
the more likely resulting abnormal profit will be appropriated by insiders. Inside
appropriation is at the expense of external capital providers or of other participants in
joint ventures and consortia.
Several corollaries arise from these relationships. First is the conflict between the
managerial objective of achieving SCA and the objective of maximizing shareholder
value. Managers pursue rents rather than optimal growth (Rugman and Verbeke, 2004)
and these rents arise from their role in the labour process, as supervisors and
participants. If firms are identified as achieving competitive advantage by reference to
accounting ratios showing superior performance from a shareholder perspective (e.g.
Peters and Waterman, 1982), such performance is likely based on explicit and easily
replicable skills and that associated competitive advantage is short-term or illusory.
A second and related point is that monitoring costs in Figure 1 also lie on a
continuum suggesting that as the degree of tacitness rises, the probability of surplus
appropriation by those closest to the labour process also rises. In other words the
monitoring problem is not simply confined to the providers of external capital but is
also faced directly by the line managers at each hierarchical level above the labour
process. Line managers have the incentive to externalize tacit knowledge embedded in
labour processes for which they are responsible, for example through the division of
labour, or spend organizational resources themselves on monitoring, so that rents
accrue at their level of the hierarchy[11]. Insofar as line management itself is part of the
labour process, for example where managerial action alters the product or service
delivered, further individually appropriable tacit knowledge arises and monitoring
costs are imposed from above on progressively senior levels of management.
Ultimately the imposition comes from the capital market to the top of the hierarchy,
creating a similar but separate set of monitoring issues discussed below.
A third corollary is that under RVRR assumptions the RBV is made consistent with
labour process theory (LPT)[12]. Many labour process theorists (e.g. Knights, 1990,
Wilmott, 1990) stress the role of power rather than profit and, where applied to the RBV,
the role of power in appropriation (Scarborough, 1998). As Nicholls (1999) has pointed
out, the valorization stage of the productive process, concerned with transformation of
labour use values into realized profit, has been neglected in the labour process literature.
Figure 1 suggests an integrated approach, since labour rent originates in the productive
process, and a valorization stage is included. In terms of labour time, capital comprises
accumulated prior use values plus the labour time, at whatever intensity, transferred

11. AAAJ into output through the labour process. Capital can be conceptualized in labour hours
23,5 without reference to valorization, but the valorization process is nonetheless the crucial
link underpinning the relationship between tacit knowledge and monitoring costs.
Valorization, under RVRR assumptions, depends on the effectiveness or otherwise of
supervisory arrangements to moderate the effects of information asymmetry.
Asymmetry arises because employees sell but usually retain some control over the
656 employment of their labour effort, which supervision arrangements are intended to
counteract in order to achieve fuller valorization. Therefore the labour process leads to
inventiveness on the one hand through the imagination of individual employees and
alienation through the process of specialization on the other. In the RVRR extension, to
the extent that inventiveness and knowledge can be individually appropriated by
employees, the labour process itself becomes a risky set of activities for administering
managers and outside financial stakeholders.
Arising from these risks, a fourth corollary is their price impact capital markets. If
SCA is measured in terms of shareholder returns, then realization through circulation in
capital markets is part of the valorization process. At the top end of the continuum where
all knowledge is tacit, it is impossible for the investor to understand the processes
whereby use values are transformed into exchange values through realization and
thereby generated into profits. Even so, where there is some degree of capital
dependence (Prechel, 2000), for example in high growth sector firms, insiders will have
an incentive to reserve some profit and signal its availability to outside investors instead
of appropriating it for themselves. Insofar as the labour process within one firm is
unrelated to labour processes governing the average firm’s realization of profits, which
include many explicit processes, its variation in profit will appear random. Because the
capital market by definition can only value explicit processes, that firm’s apparently
random changes in profit corresponds to the firm-specific risk from an investor’s point of
view[13]. In the limiting case where all knowledge is tacit, all share prices become
random. Under such conditions, following Grossman and Stiglitz (1980), share prices
would convey no information to investors. In the opposite case where all knowledge is
explicit, information is symmetrical and markets become thin, as there are no abnormal
returns (rents) and no incentive to trade (Grossman and Stiglitz, 1980). Also under these
conditions with RBV assumptions all firms possess the same easily imitable resources
for the same activities and there is no SCA.
These intra-firm and firm-financial market interactions provide the possibility of
theory of profit determination consistent with notions of SCA and the RVRR.
Abstracting from the continua in Figure 1, a model showing the relationship between the
labour cost characteristics of tacit knowledge, task complexity, valorization process
characteristics, and expected profits required by external investors can be developed.
Figure 2 shows the rate of return required by a risk-averse external investor as a function
of the fixed cost labour ratio (FCLR). The FCLR is the proportion of fixed cost to total cost
for firm i divided by the proportion of fixed cost to total cost for all firms.
Some abstraction will assist interpretation of Figure 2. Suppose a firm with a single
employee, w, and a single shareholder, s, and that the actions of w can be made totally
observable or explicit to s through contractual/legal arrangements so w has no
bargaining power. Suppose also that s pays w only for the output actually produced (as
opposed to for the time w spends at work). Under these assumptions[14], s is able to
appropriate profits from the labour process under risk free conditions. If fairly efficient

12. Value, profit
and risk
657
Figure 2.
capital markets are also assumed, and other markets are perfect, the expected rate of
profit should resemble the rate of return from risk free investment (point A in Figure 2),
for example base interest rates[15]. It can also be seen that if these assumptions are
gradually relaxed, so that w is able, through the acquisition of bargaining power, to fix
wages in the face of varying demand conditions, then the rate of profit required to
compensate the investor will rise. Because rate of profit variability increases
proportionately to the degree of fixity in wage cost, even where diversified, investors
require, and should obtain where capital markets remain reasonably efficient, a
proportionate increase in compensation (for the average risk firm, to point B in
Figure 2). There is a systematic increase insofar as under conditions of aggregate
growth expected change in aggregate demand is positive in which case because wages
are fixed, the rate of realized profit rises.
An important reason for the positive linear association between fixity of labour cost
and shareholder risk is implicit contract theory, in which employees are risk averse
(Rosen, 1985). In this model, the capital market absorbs the insurance element of implicit
labour contracts through a risk premium. Figure 2 is theoretically consistent with the
Sharpe (1964) and Lintner (1965) CAPM, in that stock return is proportionate to
systematic risk. The difference is that the risk source is related to value creation, labour
process and value appropriation, rather than mere share price and stock market index
co-variation.

13. AAAJ Suppose next that w has tacit knowledge and can conceal value-creating or
23,5 value-destroying activities in the labour process, so that the effort bargain shifts in
favour of w and the return to s corresponds to point C in Figure 2. Again, s faces
increased risk, but the increase is specific to the labour process and s avoids this risk
by incurring monitoring costs or shifting to output control, for example setting a target
normal rate of profit based on observable rates elsewhere. These rates reflect, and are
658 reduced by, aggregate monitoring cost. Alternatively, s avoids risk through portfolio
diversification, but in doing so reduces capacity further for monitoring performance of
any one firm. Purchasers of other shares also run the risk of negative rents through
premium prices charged by market makers, benefiting from inside or asymmetric
information advantages (point D in Figure 2). In general, points C and D constitute
examples of rents arising from non RBV sources, such as monopoly power, information
asymmetry and other elements of competitive heterogeneity.
The interactions between tacit knowledge and monitoring costs are suggestive of
some interesting contradictions within the corporate economy. Alienation, through
excessive specialization and associated removal of intellectual content, is traditionally
viewed as a source of exploitation by unscrupulous profit maximizers. That said, in
industries where such exploitation might occur, such as cotton textiles in the British
industrial revolution or in modern China, although aggregate profit rates may be high,
there is no basis for SCA at the level of any individual firm[16]. In contrast, where the
labour process has significant intellectual content, thereby creating entry barriers for
competitors, the accrued profit to individual profit maximizers may be still small and the
rents accrued by intermediate producers and market-makers large, due to increased
monitoring problems[17]. In short, because rent is the difference between realized price
and underlying value, if labour is the source of value, information asymmetry is the source
of rent. Interaction between the two tends to equalize the aggregate rate of profit[18].
Figure 3(a) shows a formal decomposition of total observed profits into profit and
rent elements. Following Figure 2, there is a risk free profit element, to which is added a
labour rent based systematic premium equating to the FLCR. Further rents arise from
knowledge-based asymmetries within the production process and as a residual
category, from other non-labour based resources. Consistent with the economic theory
advanced so far, total observed profit consists of normal profit plus rents. Normal
profit, following Figure 2, corresponds to average levels of fixed labour cost,
corresponding to point A in Figure 3(a). A firm operating here would be the regulator
of market price and the benchmark for differential rents arising at points B and C. To
the extent that the individual firm has an above average FLCR, it earns systematically
higher rent, which forms the first component of RVRR-based abnormal return. The
second component arises from knowledge-based production process asymmetries. SCA
associated with the RVRR, consistent with the RBV, is the distance B – A. Further
rents, accrued through heterogeneous access to other physical and informational assets
(C – B), are not part of an RBV story of SCA, but are consistent with competitive
heterogeneity and Ricardian rents. Where such rents are present, they will complement
other categories of rent, thereby increasing total observed profit, or will increase profit
in the absence of other categories. For the purposes of simplicity expected and realized
profit are part of the same total observed surplus in Figure 3(a).
In practice, expected and realized profits are in contradiction. Figure 3(b) shows how
these interactions, including the consumption of rent by internal stakeholders, explain

14. Value, profit
and risk
659
Figure 3.
The determinants of
sustained competitive
advantage and observable
profits

15. AAAJ the observed level of profit and when and how observed abnormal profits are
23,5 associated with SCA. Figure 3(b) shows the general case, in which profits and SCA are
explained jointly by tacit knowledge VRIN assets in the resource base and the process
of surplus appropriation. The framework shows the labour and valorization processes
to be in direct and dynamic contradiction. In the top row of the table, consistent with
the RBV, firms achieve SCA through their tacit knowledge resources. However,
660 observable profits differ, so that where accountability mechanisms are effective, profits
from SCA are above normal and accrue to external stakeholders (quadrant 1). Where
accountability mechanisms are ineffective, rents accrue to insiders (quadrant 2).
Reported profits are normal, since insiders will report and distribute the level of profit
required for minimally satisfying investors and preventing them from exiting their
investment. Remaining surplus will be consumed as rents by insiders. On the bottom
row, there are no VRIN assets and therefore no basis for SCA. Because there are no
VRIN assets, rent appropriation by insiders is also impossible. Profits are therefore
normal in both quadrants 3 and 4. In quadrant 4, losses (i.e. less than normal profits)
are possible if managers are not well monitored and appropriate rents, but only in the
very short-run. Because there are no VRIN knowledge assets, the normal rate of profit
is well known and therefore deviations below are easy to police. Insofar as SCA and
abnormal profits only occur consistently in quadrant 1, accountability mechanisms
contribute to observable competitive advantage. Even here the trade-offs referred to in
Figure 1 still apply, so that increased investment in VRIN assets also increases
monitoring costs. Therefore abnormal profits and SCA are only concurrent where
accountability mechanisms are cost-effective. In short, heterogeneous value creation
processes and cost-effective accountability mechanisms are jointly necessary and
sufficient conditions for SCA.
There are relatively few devices available to outside investors to ensure that their
firm operates in quadrant 1. An example might be to recruit outside directors with
sufficient independence from the main board but who simultaneously possess the
sector-specific expertise required to monitor knowledge based assets. However, in the
general case, availability of such directors suggests inter-firm knowledge sharing
which is in itself inconsistent with firm-level SCA. A possible solution is ideology, and
notions such as “shareholder value maximization”. Arguably, such notions might be
more easily shared between outside investors and the firm’s top management. Top
management might therefore employ ideology to mitigate apparently selfish utilization
of tacit knowledge-based wealth consumption by organizational insiders, consistent
with Penrose’s view that firms and their managers are essentially profit-orientated, and
that managerial opportunism and the agency problem constitute only a special case
(Lockett and Thompson, 2004). However, there is little rational basis for managerial
pursuit of abnormal profit, since it derives from a contradictory appeal to the selfish
interests of another group, i.e. the shareholders, and because normal rather than
abnormal profits are a sufficient basis for the firm’s survival. If ideology by itself is
insufficient, the use of trust in limited measure down the hierarchy in combination with
ideology based sanctions (Armstrong, 1991) may be necessary to achieve quadrant 1
outcomes.
The trade-offs in Figures 1 to 3 explain participants’ behaviour in a dynamic system
operating within social and technically determined limits. There is an incentive to
invest in knowledge assets insofar as the marginal product is positive net of

16. monitoring costs. Because tacitness can rise to the point of total opacity there is an Value, profit
upward limit on the investment level. Similarly there is a downward limit to alienation, and risk
since if all processes are explicit, although monitoring costs are zero, individual firms
cannot achieve SCA under RBV assumptions[19]. The realized rate of profit for the
firm, as an asset bundle, depends on the interaction of these contradictions, but is
unrelated to the competence or otherwise of the firm’s management, who, where
rational, will appropriate surpluses privately. The rate of surplus accruing to 661
individual employees and managers depends on the possession of knowledge and
monitoring cost.
4. Discussion
Implications for accounting theory: the Cambridge controversies revisited
One of the most important potential implications of the model is for the problem of the
valuation of heterogeneous assets, or capital goods (Wicksell, 1934). Conventionally,
asset value is the present value of the future cash flows the asset is likely to generate,
presupposing a discount rate and therefore a rate of profit[20]. However in the RBV as
in neo-classical economics, the rate of profit follows from the possession of valuable
(scarce) assets. Wicksell effects and the associated Neo-Ricardian problems of capital
reversing and re-switching are important challenges to the RBV, since they imply
simultaneous equilibria where firms comprise different combinations of labour and
capital at different rates of profit. If either labour or capital is a VRIN asset, the
implication is that they are only likely to hold such status within a certain range of
profit rates. These issues were raised in the “Cambridge controversies”, but never
satisfactorily resolved (Cohen and Harcourt, 2003).
An alternative approach is to value capital assets according to cost of production.
Wicksell effects also bedevil this approach, because there is a periodic need to revalue
the capital stock to reflect price and technology changes. However, from the RVRR
perspective, these problems are more tractable, and capitalization rates can be derived
from the internal contractual structure of the firm. As Figure 2 shows, the risk adjusted
required rate of return is a linear function of embedded fixed labour cost. Figure 2 is
also generalizable from labour to other classes of cost, using the same fixity of cost
approach[21]. Moreover, corporate boards can impose these expected returns on
business units using output controls. Although problems of asymmetric information,
possession of tacit knowledge and monitoring costs impact on individual valuations,
the associated risks are diversifiable by investors and have no systematic impact on
expected returns or required capitalization rates. In general therefore, rational
valuations for heterogeneous assets, for example RBV style intangibles, can be arrived
at by examining the underlying social relationships and associated cost structure
within the firm.
Implications for strategic management
Such a focus also addresses the need for theoretically consistent risk measures
identified in the earlier review of the strategy literature. Also, the RRVR approach to
some extent parallels Madhok’s (2002) response to Williamson’s (1991) call for an
integrated approach, albeit without the restrictions imposed by the reification of the
firm and absence of shareholder-based governance mechanisms that tend to occur in
such transaction cost RBV analyses. In reality, because outside shareholders can only

17. AAAJ apply output controls to top management, they must rely on accounting
23,5 representations of results, leaving top management, crucially, in control of the
process of transformation of heterogeneous capital resource into homogeneous cash
flow equivalent representations. Therefore top management also have the ability to
promote internal reinvestment of profits from innovation into perquisites at the
expense of dividend payments to shareholders. Also the way in which the firm’s
662 managerial hierarchy exercises surveillance is potentially important, through access
control or incentivization, respectively examples of action and output controls.
There are other similarities between RVRR and Denrell et al. (2003), who assume
that all stage transformations through intermediate to finished products require only
labour cost and that labour is undifferentiated. They also assume that all prices are in
present value terms. It follows that the discount rate, or more precisely, the
risk-adjusted rate of profit, is presupposed. If it is necessary to assume wage rates,
prices and profit rates a priori, in a model with two factors of production, labour and
capital, it is difficult to see how this model rigorously adds to the theory of value.
The Lippman and Rumelt (hereafter L&R) bargaining and payments perspectives
also have similarities to the RVRR approach. Unlike RVRR, however, the L&R
approach lacks an underlying theory of value creation. The bargaining approach
assumes a surplus (Lippman and Rumelt, 2003b, p. 1071, emphasis added).
Alternatively for the payments perspective, (Lippman and Rumelt, 2003a) economic
profit is set at zero, presumably for all firms in aggregate, implying differences in price
and cost sum to zero, or revenues 8 payments. At the aggregate level, these are merely
wealth transfers. In contrast, RVRR offers an explanation as to why on aggregate the
value of purchased outputs is systematically higher than purchased inputs.
According to Lippman and Rumelt (2003b), value distribution depends on the
structure of a bargaining game. A condition is that the game should have a core[22]
otherwise the participants lack the incentive to work together for a co-operatively
beneficial outcome. Where an innovative employee possesses tacit knowledge, it is
unlikely that person will enter the game unless the firm’s incentive structure is such
that the employee will appropriate a significant share of revenues. Where ex ante
contracts of employment specify the ownership and rewards from innovation as
proprietary to the firm, these incentives will not exist. Assets that achieve this, such as
proprietary technology and large fixed asset bases, restrict access from the employees’
point of view and prevent them setting up a competing firm. At the same time, they
ensure inequality in bilateral bargaining gains, encouraging indirect rent
appropriation. The appropriation process in this case, outlined in the RVRR, arises
from non co-operation by the innovative employee and imperfect surveillance of effort
by the employer, so that rent arising from innovation and greater efficiency is
appropriated by firm insiders through equivalent shirking. An alternative contractual
arrangement, which gives the employee incentive to share information, places a core in
the game, but with the risk that the employee appropriates some monetary benefit.
A further problematic aspect of Lippman and Rumelt’s (2003a, p. 924) analysis is
their concluding objective function, that the firm should maximize its wealth and that
competition will induce it to maximize payments for scarce resources (PSR). PSR is a
residual category, once payments of commodity inputs (PCI) and payments for
commodity resources (PCR) have been accounted for. Because the other two categories
are defined as commodities, they are also defined to be in perfectly elastic supply. If

18. Revenue ¼ PCI þ PCR þ PSR and the firm is a price taker in two out of the three Value, profit
categories, then changes in PSR can only be explained with reference to themselves, and risk
which removes any analytic properties from the identity. If on the other hand, perfect
competition is as defined by Makowski and Ostroy (1995) and Lippman and Rumelt
(2003b, p. 1071), as a condition in which individuals fully appropriate the value they
create, then market imperfection implies transfer of surplus through rent (per classical
theory) rather than value. It also follows that if individuals do not fully appropriate the 663
value they create in a market relation other than in perfect competition, this will also be
the case in an employment relation. RVRR, which includes labour rents, does better
than Classical theory and the sections of the RBV literature that ignore the creation of
value through human action.
The value price cost (VPC) framework approach differentiates between value,
defined as the price the customer is willing to pay; price, which is a function of supply
and demand; and cost, which is the cost of production. The framework assumes V . P
. C, which is likely to be true when individual cases of competitive advantage are
considered, and competitive advantage might arise in individual cases of V . P and P
. C (Hoopes et al., 2003). However, in the aggregate V ¼ P ¼ C, otherwise it is not
clear why customers would systematically value all products and services above their
cost of production. The equality of VPC in the aggregate is also consistent with the
payments perspective (Lippman and Rumelt, 2003a), but inconsistent with an
underlying theory of value creation. If V is systematically higher than C in the
aggregate in price terms, then firms must be acquiring a resource for a price below its
cost. The only resource all firms share common access to is human resource. As we
have seen, it is this resource in particular that not only creates value through
intellectual and physical effort, but such effort is also problematic to measure and
observe, unlike the costs of other inputs.
In similar fashion to the VPC approach, MacDonald and Ryall (2004) attempt to
show that value arises from the presence of a willing buyer. In the case presented
(MacDonald and Ryall, 2004, p. 1321), the cost of production is normalized to zero and
the buyer’s utility is set at 1. To presuppose utility at a level greater than the cost of
production, is however, non-generalizable, since without equivalent payments to
production factors utility cannot constitute effective demand. If the case is merely
specific then the bargaining game is a question of rent sharing between firm and buyer,
rather than value creation. Consistent with M&R, the appropriation of value depends
on the number of firms and buyers. As in many interpretations that analyse at the level
of the firm, there is reification and no consideration of rent splits within the
organization. As with L&R, the M&R analysis could be extended to include the
employment relation, so that bargaining is represented as an interaction between
employee and employer as a buyer of labour.
5. Conclusion
A common theory of value for accounting and strategy is appealing for a number of
reasons. First, the strategy literature, and especially the RBV, places emphasis on the
role of human capital in the creation of competitive advantage, which at the same time
poses problems for accountants in terms of total business and intangible asset
valuation. Second, both disciplines have an interest in understanding the meaning of
normal profit and its adjustment for risk where it impacts on performance or

19. AAAJ investment decisions. Third, both disciplines are interested in how, once made, profits
are appropriated. A situation where a firm is more efficient than competitors, but
23,5 whose surplus is appropriated by insiders rather than distributed to shareholders
would not necessarily meet the strategists’ understanding of SCA. Accountants
similarly are concerned with controls which prevent misappropriation of resources
that ultimately are shareholders’ property. Thus, a theory of value also needs to be one
664 of accountability.
Accordingly, the theory developed above has attempted to integrate these elements
to the mutual benefit of accounting and strategy. The contribution of the paper is a
theory of SCA, asset valuation and accountability using a consistent theory of value.
The argument above has accepted the main assumptions of the RBV. It has also argued
for the inclusion of labour process theory, asymmetric information, extension of
Ricardian rent using Marx’s two categories of differential rent, and the analysis of risk,
in the proposed RVRR. The combination of these elements shows that a resource-based
theory must unite the process and content elements of strategy, through simultaneous
interaction of labour management, the determinants of SCA and relations with capital
markets. It has shown that by utilising the RVRR as a substitute for the CAPM, so that
the employment of human resource creates value, but the value creation process is
itself risky from the perspective of the monitoring employer and outside investor, a
consistent theory of value can be applied to explain SCA. The theory also explains that
the roots of competitive advantage lie in the labour process, but with the corollary that
maximizing the associated investment in tacit knowledge and associated difficult to
replicate assets is potentially inconsistent with maximizing the value of shareholder’s
investments. Without the links, advocated above, to LTV, labour process theory and
mechanisms of accountability, the RBV remains merely a view and not a theory,
because it lacks a consistent basis for asset valuation and cannot explain systematic
variations in profit.
Notes
1. In similar vein, the RBV had been neglected in the industrial economics literature (Lockett
and Thompson, 2001).
2. Without measurement, the RBV might still operate, but only as a heuristic, or a means of
understanding an organization as a knowledge system, such that the link with “value” is
tangential, and not as a theory of SCA.
3. Ricardian differential rent is “the difference between the produce obtained by the
employment of two equal quantities of labour and capital” (Marx, 1984, p. 649).
4. Such allusions to Classical theories of economics are rare in the strategic management
literature notwithstanding the obvious parallels with the LTV and Ricardian rents. LTV, as
the cornerstone of Classical economics (Mouck, 1994) has been discussed extensively in the
accounting literature (for example Bryer, 1994, 2007; Toms, 2006a).
5. Henri(2006, p.539) suggests that the performance measurement system (PMS) does create
RBV capabilities.
6. This definition goes beyond the debate in the accounting literature about how Marx’s
socially necessary labour time might be in an accounting context (Bryer, 1999; Macve, 1999).
7. Labour rents accrue to employees (and managers) where the wage rate exceeds the MELR.
Where employees possess knowledge that is not easily replicable, particularly when
routinized within the organization, possession of such knowledge provides workers with

20. opportunities to raise real wages, if they can avoid accountability and appropriate the Value, profit
efficiency benefits (c/f efficiency wage theories, Katz, 1987).
and risk
8. This is an oversimplification for the purposes of model development. It extends reasoning
that stakeholders earn quasi-rents when a factor has a higher marginal product than is
required to hold it in place (Klein et al., 1978).
9. Investment in strategic human resource assets (Mueller, 1996; Wright et al., 1994) is a
sufficient but not a necessary condition for realized super-normal profits, since the 665
employment of such assets simultaneously leads to the creation of internal rent
appropriation possibilities.
10. As seniority increases managers may find more of their time allocated to non-productive
monitoring activities.
11. Although there is an incentive, it is doubtful whether full externalisation is possible. Using
Dewey’s notion of productive enquiry, Cook and Seely Brown (1999, p. 391) argue that
possessed knowledge, whether individual or group, is a set of tools to guide action. Within
organisations, genres, such as mission statements, are used (or misused) to communicate
tacit knowledge in groups. Following this logic accounting controls must monitor how
individuals and groups use knowledge.
12. RBV and LPT are from divergent backgrounds within the strategic management literature,
reflecting context and process based approaches respectively.
13. Under the normal semi-strong market efficiency assumptions employed by capital market
researchers and for which there is the most empirical evidence (Fama, 1991), explicit
processes are public domain information and their value potential can accordingly be priced
by the market. Tacit elements cannot be known and cannot be priced by reference to generic
economy wide factors systematically affecting all firms and therefore appear as residual or
unexplained risk in the empirical form of the CAPM.
14. It is assumed that labour is the only cost and that there is a single period capital turnover (ie
all the assets purchased at the beginning of the period are used up by the end of the period).
These assumptions are for brevity, but the model is generalizable when they are relaxed.
15. Because labour cost co-varies perfectly with revenue, the residual, profit, is a fixed ratio of
revenue.
16. Assuming unlimited product imitation, as a form of Bertrand competition, MacDonald and
Ryall (2004) reach a similar conclusion.
17. For example where abnormal returns from insider stock purchases rise as the firm’s R&D
intensity increases (Coff and Lee, 2003).
18. The lack of a consistent theory of profit equalization has been a long-running problem for
classical economics. In RVRR, differential risky profit rates arise in the productive process
and are equalized through the capital market.
19. Or more precisely, removing the reification, individual capitalists or investors cannot make
abnormal returns.
20. Tinker (2004, p. 458) points out that Sraffa’s critique built on the final works of Ricardo to
expose this circular reasoning behind Neo-classical value theory.
21. See Modigliani and Miller’s (1958) example utilizing interest costs.
22. The core is defined as the set of pay-offs that ensure the sub-set of pay-offs to any sub-set of
players is greater than the maximum value available to that group working on its own
(Lippman and Rumelt, 2003b, p. 1072).

21. AAAJ References
23,5 Abeysekera, I. (2008), “Intellectual capital practices of firms and the commodification of labour”,
Accounting, Auditing & Accountability Journal, Vol. 21 No. 1, pp. 36-48.
Acedo, F.J., Barroso, C. and Galan, J.M. (2006), “The resource-based theory: dissemination and
main trends”, Strategic Management Journal, Vol. 27 No. 7, pp. 621-36.
Ambrosini, V. and Bowman, C. (2001), “Tacit knowledge: some suggestions for
666 operationalization”, Journal of Management Studies, Vol. 38 No. 6, pp. 811-29.
Amit, R. and Shoemaker, P.J.H. (1993), “Strategic assets and organizational rents”, Strategic
Management Journal, Vol. 14 No. 1, pp. 33-46.
Armour, H.O. and Teece, D.J. (1978), “Organization structure and economic performance: a test of
the multidivisional hypothesis”, Bell Journal of Economics, Vol. 9 No. 1, pp. 106-22.
Armstrong, P. (1991), “Contradiction and social dynamics in the capitalist agency relationship”,
Accounting, Organizations and Society, Vol. 16 No. 1, pp. 1-25.
Barney, J.B. (1986), “Strategic factor markets: expectations, luck and business strategy”,
Management Science, Vol. 32 No. 10, pp. 1231-41.
Barney, J.B. (1991), “Firm resources and sustained competitive advantage”, Journal of
Management, Vol. 17, pp. 99-120.
Barney, J.B. (2001), Gaining and Sustaining Competitive Advantage, 2nd ed., Addison-Wesley,
Boston, MA.
Barney, J.B. and Peteraf, M. (2003), “Unravelling the resource-based tangle”, Managerial and
Decision Economics, Vol. 24 No. 4, pp. 309-23.
Barney, J.B., Wright, M. and Ketchen, D.J. (2001), “The resource-based view of the firm: ten years
after 1991”, Journal of Management, Vol. 27 No. 6, pp. 625-41.
Bogner, W.C. and Thomas, H.H. (1994), “Core competence and competitive advantage: a model
and illustrative evidence from the pharmaceutical industry”, in Hamel, G. and Heene, A.
(Eds), Competence-based Competition, John Wiley & Sons, Chichester, pp. 111-44.
Bowman, C. and Ambrosini, V. (2000), “Value creation versus value capture: towards a coherent
definition of value in strategy”, British Journal of Management, Vol. 11 No. 1, pp. 1-15.
Bowman, R.G. (1979), “The theoretical relationship between systematic risk and financial
(accounting) variables”, Journal of Finance, Vol. 34 No. 3, pp. 617-30.
Bowman, C. and Swart, J. (2007), “Whose human capital? The challenge of value capture when
capital is embedded”, Journal of Management Studies, Vol. 44 No. 4, pp. 488-505.
Bowman, C. and Toms, S. (2010), “Accounting for competitive advantage: the resource-based
view of the firm and the labour theory of value”, Critical Perspectives in Accounting, Vol. 21
No. 3, pp. 183-94.
Brandenburger, Z. and Stuart, G. (1996), “Value-based business strategy”, Journal of Economics
and Management Strategy, Vol. 5 No. 1, pp. 5-24.
Bryer, R.A. (1994), “Why Marx’s labour theory is superior to the marginalist theory of value:
the case from modern financial reporting”, Critical Perspectives on Accounting., Vol. 5 No. 4,
pp. 313-40.
Bryer, R.A. (1999), “A Marxist critique of the FASB’s conceptual framework”, Critical
Perspectives on Accounting, Vol. 10 No. 5, pp. 551-89.
Bryer, R.A. (2006), “Accounting and control of the labour process”, Critical Perspectives on
Accounting, Vol. 17 No. 5, pp. 551-98.
Bryer, R. (2007), “Marx’s accounting solutions to the ‘transformation problem’”, unpublished
working paper, Warwick Business School, Coventry.
Carter, C., Clegg, S. and Kornberger, M. (2008), “Strategy as practice?”, Strategic Organization,
Vol. 6 No. 1, pp. 83-99.

22. Clare, A.D., Priestley, R. and Thomas, S.H. (1998), “Reports of beta’s death are premature: Value, profit
evidence from the UK”, Journal of Banking & Finance, Vol. 22 No. 9, pp. 1207-29.
Coff, R.W. (1999), “When competitive advantage doesn’t lead to performance: the resource-based
and risk
view and stakeholder bargaining power”, Organization Science, Vol. 10 No. 2, pp. 119-33.
Coff, R. and Lee, P. (2003), “Insider trading as a vehicle to appropriate rent from R&D”, Strategic
Management Journal, Vol. 24 No. 2, pp. 183-90.
Cohen, A.J. and Harcourt, G.C. (2003), “Whatever happened to the Cambridge capital theory 667
controversies?”, Journal of Economic Perspectives, Vol. 17 No. 1, pp. 199-214.
Collis, D.J. and Montgomery, C.A. (1995), “Competing on resources: strategy in the 1990s”,
Harvard Business Review., Vol. 73 No. 4, pp. 118-29.
Collis, D.J. and Montgomery, C.A. (1997), Corporate Strategy: Resources and the Scope of the
Firm, McGraw-Hill, Chicago, IL.
Cook, S.D.N. and Seely Brown, J. (1999), “Bridging epistemologies: the generative dance, between
organizational knowledge and organizational knowing”, Organization Science, Vol. 10
No. 4, pp. 381-400.
Denrell, J., Fang, C. and Winter, S.G. (2003), “The economics of strategic opportunity”, Strategic
Management Journal, Vol. 24 No. 10, pp. 977-90.
Dierickx, I. and Cool, K. (1989), “Asset stock accumulation and sustainability of competitive
advantage”, Management Science, Vol. 35 No. 12, pp. 1504-11.
Fama, E. (1991), “Efficient markets II”, Journal of Finance, Vol. 46 No. 5, pp. 1575-617.
Fama, E.F. and French, K.R. (1992), “The cross-section of expected stock returns”, Journal of
Finance, Vol. 47 No. 2, pp. 427-65.
Feigenbaum, A. and Thomas, H. (1986), “Dynamic and risk measurement perspectives on
Bowman’s risk-return paradox for strategic management: an empirical study”, Strategic
Management Journal, Vol. 7 No. 5, pp. 395-407.
Foss, N.J. and Knudsen, T. (2002), “The resource-based tangle: towards a sustainable explanation
of competitive advantage”, Managerial and Decision Economics, Vol. 24 No. 4, pp. 291-307.
Grant, R.M. (1996), “Toward a knowledge-based theory of the firm”, Strategic Management
Journal, Vol. 17, special issue, pp. 109-22.
Grossman, S. and Stiglitz, J. (1980), “On the impossibility of informationally efficient markets”,
American Economic Review, Vol. 70 No. 3, pp. 393-408.
Harcourt, G.C. (1969), “Some Cambridge controversies in the theory of capital”, Journal of
Economic Literature, Vol. 7 No. 2, pp. 369-405.
Hasseldine, J., Salama, A. and Toms, S. (2005), “Quantity versus quality: the impact of
environmental disclosures on the reputations of UK plcs”, British Accounting Review,
Vol. 37 No. 2, pp. 231-48.
Henri, J.F. (2006), “Management control systems and strategy: a resource-based perspective”,
Accounting, Organizations and Society, Vol. 31 No. 6, pp. 529-58.
Hoopes, D.G., Madsen, T.L. and Walker, G. (2003), “Why is there a resource-based view? Toward
a theory of competitive heterogeneity”, Strategic Management Journal, Vol. 24 No. 10,
pp. 889-902.
Howorth, C. and Westhead, P. (2003), “The focus of working capital management in UK small
firms”, Management Accounting Research, Vol. 14 No. 2, pp. 94-111.
Katz, L. (1987), “Efficiency wage theories: a partial evaluation”, in Fischer, S. (Ed.), NBER
Macroeconomics Annual, MIT Press, Cambridge, MA, pp. 235-75.
Klein, B., Crawford, R.G. and Alchian, A.A. (1978), “Vertical integration, appropriable rents, and
the competitive contracting process”, Journal of Law and Economics, Vol. 21 No. 2,
pp. 297-326.

23. AAAJ Knights, D. (1990), “Subjectivity, power and the labour process”, in Knights, D. and Wilmott, H.
(Eds), Labour Process Theory, Macmillan, London.
23,5 Lado, A.A. and Wilson, M.C. (1994), “Human resource systems and sustained competitive
advantage”, Academy of Management Review, Vol. 19 No. 4, pp. 699-727.
Lintner, J. (1965), “The valuation of risk assets and the selection of risky investments in stock
portfolios and capital budgets”, Review of Economics and Statistics, Vol. 47 No. 1, pp. 13-37.
668 Lippman, S.A. and Rumelt, R.P. (2003a), “A bargaining perspective on resource advantage”,
Strategic Management Journal, Vol. 24 No. 11, pp. 1069-86.
Lippman, S.A. and Rumelt, R.P. (2003b), “The payments perspective: micro-foundations of
resource analysis”, Strategic Management Journal, Vol. 24 No. 10, pp. 903-27.
Lockett, A. and Thompson, R.S. (2001), “The resource-based view and economics”, Journal of
Management, Vol. 27 No. 6, pp. 723-54.
Lockett, A. and Thompson, R.S. (2004), “Edith Penrose’s contributions to the resource-based
view: an alternative perspective”, Journal of Management Studies, Vol. 41 No. 1,
pp. 193-204.
MacDonald, G. and Ryall, M.D. (2004), “How do value creation and competition determine
whether a firm appropriates value?”, Management Science, Vol. 50 No. 10, pp. 1319-33.
Macve, R. (1999), “Capital and financial accounting: a commentary on Bryer’s ‘A Marxist critique
of the FASB’s conceptual framework’”, Critical Perpectives on Accounting, Vol. 11 No. 5,
pp. 591-613.
Madhok, A. (2002), “Reassessing the fundamentals and beyond: Ronald Coase, the transaction
cost and resource-based theories of the firm and the institutional structure of production”,
Strategic Management Journal, Vol. 23 No. 6, pp. 535-50.
Makadok, R. (2001), “Toward a synthesis of the resource-based and dynamic capability views of
rent creation”, Strategic Management Journal, Vol. 22 No. 5, pp. 387-401.
Makadok, R. and Coff, R. (2002), “The theory of value and the value of theory: breaking new
ground versus reinventing the wheel”, Academy of Management Review, Vol. 27 No. 1,
pp. 10-13.
Makowski, L. and Ostroy, J.M. (1995), “Appropriation and efficiency: a revision of the first
theorem of welfare economics”, American Economic Review, Vol. 85 No. 4, pp. 808-27.
Marx, K. (1984), Capital: A Critique of Political Economy, III, Lawrence & Wishart, London.
Mayston, D. (1992), “Capital accounting, user needs and the foundations of a conceptual
framework for public sector financial reporting”, Financial Accountability & Management,
Vol. 84 No. 4, pp. 227-48.
Miller, D. and Shamsie, J. (1996), “The resource-based view of the firm in two environments:
the Hollywood film studios from 1936 to 1965”, Academy of Management Journal, Vol. 39
No. 3, pp. 519-43.
Milne, M. (1991), “Accounting, environmental resource values and non-market valuation
techniques for environmental resources: a review”, Accounting, Auditing & Accountability
Journal, Vol. 4 No. 3, pp. 81-109.
Modigliani, F. and Miller, M. (1958), “The cost of capital, corporation finance and the theory of
investment”, American Economic Review, Vol. 48 No. 3, pp. 261-97.
Mohun, S. (1996), “Socially necessary labour”, in Bottomore, T. (Ed.), A Dictionary of Marxist
Thought, Oxford University Press, Oxford, pp. 503-4.
Mouck, T. (1994), “Corporate accountability and Rorty’s Utopian liberalism”, Accounting,
Auditing & Accountability Journal, Vol. 7 No. 1, pp. 6-30.
Mueller, F. (1996), “Human resources as strategic assets: an evolutionary resource-based theory”,
Journal of Management Studies., Vol. 33 No. 6, pp. 757-86.

24. Nicholls, T. (1999), “Industrial sociology and the labour process”, in Beynon, H. and Glavinis, P. Value, profit
(Eds), Patterns of Social Inequality: Essays for Richard Brown, Longman, London.
Nonaka, I. (1991), “The knowledge-creating company”, Harvard Business Review., Vol. 69,
and risk
pp. 96-104.
Ouchi, W.G. and Maguire, M.A. (1975), “Organizational control: two functions”, Administrative
Science Quarterly, Vol. 20 No. 4, pp. 559-69.
Peteraf, M.A. (1993), “The corner-stone of competitive advantage: a resource-based view”, 669
Strategic Management Journal, Vol. 14 No. 3, pp. 179-91.
Peters, T.J. and Waterman, R.H. (1982), In Search of Excellence: Lessons from America’s Best-run
Companies, Harper & Row, New York, NY.
Pfeffer, J. (1995), “Producing sustainable competitive advantage through the effective
management of people”, Academy of Management Executive, Vol. 9 No. 1, pp. 55-69.
Prechel, H. (2000), Big Business and the State: Historical Transitions and Corporate
Transformations, 1880s-1990s, SUNY Press, New York, NY.
Priem, R.L. (2001), “The business-level RBV: Great Wall or Berlin wall?”, Academy of
Management Review, Vol. 26 No. 4, pp. 499-501.
Priem, R.L. and Butler, J.E. (2001), “Is the resource-based ‘view’ a useful perspective for strategic
management research?”, Academy of Management Review, Vol. 26 No. 1, pp. 22-40.
Robinson, J. (1963), Economic Philosophy, Penguin, London.
Rosen, S. (1985), “Implicit contracts: a survey”, Journal of Economic Literature, Vol. 23,
pp. 1144-75.
Ruefli, T., Collins, J.M. and LaCugna, J.R. (1999), “Risk measurement in strategic management
research: Auld lang syne?”, Strategic Management Journal, Vol. 20 No. 2, pp. 167-94.
Rugman, A.M. and Verbeke, A. (2004), “A final word on Edith Penrose”, Journal of Management
Studies., Vol. 41 No. 1, pp. 205-17.
Rumelt, R. (1984), “Toward a strategic theory of the firm”, in Lamb, R. (Ed.), Competitive
Strategic Management, Prentice-Hall, Englewood Cliffs, NJ, pp. 556-70.
Scarborough, H. (1998), “Path(ological) dependency? Core competencies from an organizational
perspective”, British Journal of Management, Vol. 9 No. 3, pp. 219-32.
Sharpe, W.F. (1964), “Capital asset prices: a theory of market equilibrium under conditions of
risk”, Journal of Finance, Vol. 19 No. 3, pp. 425-42.
Singh, J.V. (1986), “Performance, slack, and risk taking in organizational decision making”,
Academy of Management, Vol. 29 No. 3, pp. 562-85.
Spender, J-C. (1989), Industry Recipes: The Nature and Sources of Managerial Judgement,
Blackwell, Oxford.
Teece, D., Pisano, G. and Sheun, A. (1997), “Dynamic capabilities and strategic management”,
Strategic Management Journal, Vol. 18 No. 7, pp. 509-33.
Tinker, A. (1980), “Towards a political economy of accounting: an empirical illustration of the
Cambridge controversies”, Accounting, Organizations and Society, Vol. 5 No. 1, pp. 147-60.
Tinker, A. (1984), “Theories of the state and the state of accounting: economic reductionism and
political voluntarism in accounting regulation theory”, Journal of Accounting and Public
Policy, Vol. 3 No. 1, pp. 55-74.
Tinker, T. (1999), “Mickey Marxism rides again!”, Critical Perspectives on Accounting, Vol. 10
No. 5, pp. 643-70.
Tinker, T. (2004), “The enlightenment and its discontents: antinomies of Christianity, Islam and
the calculative sciences”, Accounting, Auditing & Accountability Journal, Vol. 17 No. 3,
pp. 442-75.

25. AAAJ Tinker, A., Merino, B. and Neimark, M. (1982), “The normative origins of positive theories:
ideology and accounting thought”, Accounting, Organizations and Society, Vol. 7 No. 2,
23,5 pp. 176-200.
Toms, S. (2002), “Firm resources, quality signals and the determinants of corporate
environmental reputation: some UK evidence”, British Accounting Review, Vol. 34 No. 2,
pp. 257-82.
Toms, S. (2006a), “Asset pricing models, the labour theory of value and their implications for
670 accounting”, Critical Perspectives on Accounting, Vol. 17 No. 7, pp. 947-65.
Toms, S. (2006b), “Accounting for entrepreneurship: a knowledge-based view of the firm”,
Critical Perspectives in Accounting, Vol. 17 Nos 2/3, pp. 336-57.
Toms, S. (2008), “‘Immeasurability’: a critique of Hardt and Negri, ephemera”, Theory & Politics
in Organization, Vol. 8 No. 4, pp. 433-46.
Toms, S. (2009), “The labour theory of value, risk and the rate of profit”, Critical Perspectives in
Accounting, in press.
Toms, S. and Bowman, C. (2010), “Accounting for competitive advantage: the resource-based
view of the firm and the labour theory of value”, Critical Perspectives in Accounting
(forthcoming).
Verdin, P.J. and Williamson, P.J. (1994), “Core competences, competitive advantage and market
analysis: forging the links”, in Hamel, G. and Heene, A. (Eds), Competence-based
Competition, John Wiley & Sons, Chichester, pp. 77-110.
Wang, X. (2000), “Size effect, book-to-market effect, and survival”, Journal of Multinational
Financial Management, Vol. 10 Nos 3/4, pp. 257-73.
Wicksell, K. (1934), Lectures on Political Economy, Vol. 1, Routledge, London.
Widener, S. (2006), “Associations between strategic resource importance and performance
measure use: the impact on firm performance”, Management Accounting Research, Vol. 17
No. 4, pp. 433-57.
Williamson, O. (1991), “Strategizing, economizing, and economic organization”, Strategic
Management Journal, Vol. 12, special issue, pp. 75-94.
Wilmott, H. (1990), “Subjectivity and the dialectics of praxis: opening up the core of the labour
process analysis”, in Knights, D. and Wilmott, H. (Eds), Labour Process Theory,
Macmillan, London.
Wright, P.M., McMahan, G.C. and McWilliams, A. (1994), “Human resources and sustained
competitive advantage: a resource-based perspective”, International Journal of Human
Resource Management, Vol. 5 No. 2, pp. 301-26.
About the author
Steven Toms is Professor of Accounting and Finance at the University of York, UK. He is the
inaugural Head of the York Management School and, with John Wilson, is Co-editor of Business
History. Steven Toms can be contacted at: st27@york.ac.uk
To purchase reprints of this article please e-mail: reprints@emeraldinsight.com
Or visit our web site for further details: www.emeraldinsight.com/reprints