The accounting‐economics interface: where the market fails

The conclusion of this paper is that market prices fail to reflect the information required to provide meaningful accounting measurements that are used in real‐life decision making. This failure is due to the employment of an “ideal” economic world’s assumptions that do not, and cannot, fit the real world of business. The argument in the paper begins with a discussion of the ideal market as envisioned by the Chicago School and outlined in Tisdell (1995). From this ideal market characterization, it is argued that even Adam Smith recognized the existence of external effects resulting from certain social undertakings. In addition to externalities, two other market failures are discussed: the use of efficiency measures while ignoring effectiveness measures; and the emphasis on the short‐term time horizon at the expense of the longer term.