Economics: Money, Markets, Debt, and the Barter Myth

It is important for us to realize that the basis for most economic discourse is just ideological thinking converted by repetition into “common knowledge,” or “common sense.”  The assumption of humans as “rational” actors in economic matters is only the most egregious error economists make.  It turns out they don’t know much about topics such as money, debt, and markets as well.  David Graeber uses his background as an anthropologist to elucidate humanity’s economic origins in order to address critical misconceptions in his wide-ranging book Debt: The First 5,000 Years. 

Economists generally adhere to a reading of history that assumes economic activity developed by stages from one dominated by barter, to one created by the existence of coinage/money, to one utilizing advanced credit systems.  Graeber claims that this view is incorrect.

“In fact, our standard account of monetary history is precisely backwards.  We did not begin with barter, discover money, and then eventually develop credit systems.  It happened precisely the other way around.  What we now call virtual money came first.  Coins came much later, and their use spread unevenly, never completely replacing credit systems.  Barter, in turn, appears to be largely a kind of accidental byproduct of the usage of coinage and paper money: historically, it has mainly been what people who are used to cash transactions do when for one reason or another they have no access to currency.”

The fact that credit systems came first implies something positive about human nature.  The historical nonexistence of barter economies implies the same thing.  The existence of credit requires the existence of debt.  Graeber requires a particular definition of debt: it is something that can be quantified.  Otherwise, it merely an obligation.  But obligations are apparently the path primitive societies chose to follow.  They recognized that trying to make equivalent the exchange of inherently nonequivalent goods and services was a dangerous path to follow.  Instead, if a neighbor needed a good or service it would normally be gifted under the assumption that the recipient would eventually gift a good or service of near equivalent value.  Peer pressure would help ensure fairness in this process.  Why was the alternative approach of bartering feared?  Humans understood their nature well enough to know that bartering would inevitably lead to each person in the exchange attempting to get the better of the deal, a distinctly antisocial approach that couldn’t work in tightly knit societies.  Graeber provides perspective on these issues.

“They seem inherent to the very nature of barter—which would explain the fact that in the century or two before [Adam] Smith’s time, the English words ‘truck and barter,’ like their equivalents in French, Spanish, German, Dutch, and Portuguese, literally meant ‘to trick, bamboozle, or rip off.’  Swapping one thing directly for another while trying to get the best deal one can out of the transaction is, ordinarily, how one deals with people one doesn’t care about and doesn’t expect to see again.  What reason is there not to try to take advantage of such a person?  If, on the other hand, one cares enough about someone—a neighbor, a friend—to wish to deal with her fairly and honestly, one will inevitably also care about her enough to take her individual needs, desires, and situation into account.  Even if you do swap one thing for another, you are likely to frame the matter as a gift.”

Yet people continued to insist that barter was the natural means of exchange for primitive human societies.

“For centuries now, explorers have been trying to find this fabled land of barter—none with success…missionaries, adventurers, and colonial administrators were fanning out across the world, many bringing copies of [Adam] Smith’s book with them, expecting to find the land of barter.  None ever did.  They discovered an almost endless variety of economic systems.  But to this day, no one has been able to locate a part of the world where the ordinary mode of economic transaction between neighbors takes the form of ‘I’ll give you twenty chickens for that cow’.”

“The definitive anthropological work on barter, by Caroline Humphrey of Cambridge, could not be more definitive in its conclusions: ‘No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing.”

But barter would take place, but only with strangers unlikely to be encountered again.  And, as expected, it could be dangerous leading to violence if a deal was deemed sufficiently unsatisfactory.  This type of transaction would become the standard when groups grew to become large entities interacting with other large entities.  One should note that coinage, money, and markets as we know them awaited the formation of strong governments that could create these things.  In the meantime, various credit arrangements allowed commerce to grow and allowed for more complex interactions.

Graeber provides compelling arguments and data to illuminate the necessary role for government action in economic development.  Economists cling to their assumptions of the barter to money to credit transitions because it fits their ideology not the facts of history.

“The answer seems to be that the myth of barter cannot go away because it is central to the entire discourse of economics.”

“Recall here what [Adam] Smith was trying to do when he wrote The Wealth of Nations.  Above all, the book was an attempt to establish the newfound discipline of economics as a science.  This meant not only did economics have its own particular domain of study—what we now call ‘the economy,’ though the idea that there even was something called an ‘economy’ was very new in Smith’s day—but that this economy acted according to laws of much the same sort as Sir Isaac Newton had so recently identified as governing the physical world.  Newton had represented God as a cosmic watchmaker who had created the physical machinery of the universe in such a way that it would operate for the ultimate benefit of humans, and then let it run on its own.  Smith was trying to make a similar, Newtonian argument.  God—or Divine Providence, as he put it—had arranged matters in such a way that our pursuit of self-interest would, nonetheless, given an unfettered market, be guided ‘as if by an invisible hand’ to promote the general welfare.  Smith’s famous invisible hand was, as he says in his Theory of Moral Sentiments, the agent of Divine Providence.  It was literally the hand of God.”

These theological ruminations are forgotten now, but economists continue to treat Smith’s hypothesis as revealed dogma.  Smith also had another goal in his theorizing: to resist the notion that government played any significant role in God’s creation of economics.

“Adam Smith…was determined to overturn the conventional wisdom that money was a creation of government.  In this, Smith was the intellectual heir of the Liberal tradition of philosophers like John Locke, who had argued that government begins in the need to protect private property and operated best when it tried to limit itself to that function.  Smith expanded on the argument, insisting that property, money, and markets not only existed before political institutions, but were the very foundations of human society.”

“In other words, Smith simply imagined away the role of consumer credit in his own day, just as he had his account of the origins of money.  This allowed him to ignore the role of both benevolence and malevolence in economic affairs, both the ethos of mutual aid that forms the necessary foundation of anything that would look like a free market (that is one which is not simply created and maintained by the state), and the violence and sheer vindictiveness that had actually gone into creating the competitive, self-interested markets that he was using as his model.”

Smith can be forgiven for his ignorance of history and human nature, but his current acolytes cannot.

As commercial interactions became more complex and arrangements between debtor and creditor became more formal, the demand for collateral grew, ushering in forms of debt peonage and ultimately slavery.  Daughters became an asset that could be useful in this kind of system.  Besides the sexual opportunities, they made the best servants.  These credit arrangements dominated commerce until governments grew large enough to contend with each other, waging war, pillaging resources, and collecting slaves.  Credit systems dominated in times of relative peace, while warfare, and the mercenary armies it required, demanded some form of currency to operate.

“If we look at Eurasian history over the course of the last five thousand years, what we see is a broad alternation between periods dominated by credit money and periods in which gold and silver come to dominate…”

“Why?  The single most important factor would appear to be war.  Bullion predominates, above all, in periods of generalized violence.  There’s a very simple reason for that.  Gold and silver coins are distinguished from credit arrangements by one spectacular feature: they can be stolen.  A debt is, by definition, a record, as well as a relation of trust.  Someone accepting gold or silver in exchange for merchandise, on the other hand, need trust nothing more than the accuracy of the scales, the quality of the metal, and the likelihood that someone else will be willing to accept it.”

Graeber provides an instructive example of how governments would necessarily have to move from a credit system to a coinage system and sponsor market development.  Consider a king who wishes to support a mercenary army of some size.  These soldiers must be paid, and they must be able to gain provisions from the local area.  They are inconsistent with a local credit system.  The king can create a coinage system and market by providing the soldiers with coins and, at the same time, demanding that local merchants pay taxes to the king in the form of those coins.  The merchants then must provide produce to the soldiers in exchange for coins to pay their taxes—and a market is born.  Also is born the need for a police force and laws that would impose severe penalties on anyone who did not play by the rules.  Markets need governments to create, regulate and police them.

“The economist’s barter scenario might be absurd when applied to transactions between neighbors in the same small rural community, but when dealing with a transaction between the resident of such a community and a passing mercenary, it suddenly begins to make a great deal of sense.”

The tale of capitalism and our economics is not God’s machinery at work, rather it is the work of states that grew powerful and aggressive.

“The story of the origins of capitalism, then, is not the story of the gradual destruction of traditional communities by the impersonal power of the market.  It is, rather, the story of how an economy of credit was converted into an economy of interest; of the gradual transformation of moral networks by the intrusion of the impersonal—and often vindictive—power of the state.  English villagers in Elizabethan or Stuart times did not like to appeal to the justice system, even when the law was in its favor—partly on the principle that neighbors should work things out with one another, but mainly because the law was so extraordinarily harsh.  Under Elizabeth, for example, the punishment for vagrancy (unemployment) was, for the first offense, to have one’s ears nailed to a pillory; for repeat offenders, death.”

“The same was true of debt law, especially since debts could often, if the creditor was sufficiently vindictive, be treated as a crime.”

The arc of economic history has taken us from a place where exchanges were made as a moral issue where both creditor and debtor had responsibilities and risks, to one where only money considerations matter and the full force of the state supports creditors, leaving debtor’s to bear all risk.

“What, precisely, does it mean to say that our sense of morality and justice is reduced to the language of a business deal?  What does it mean when we reduce moral obligations to debts?”

“From this perspective, the crucial factor,,,is money’s capacity to turn morality into a matter of impersonal arithmetic—and by doing so, to justify things that would otherwise seem outrageous or obscene.”

Progress, the evolution of civilization, always provides positive and negative contributions to our lives.  We should be aimed at providing “the good life” for as many people as possible.  Our problem is that we can no longer consider what “the good life” might be because we are caught up in this milieu where money and markets are the markers for value.  Graeber addresses this issue with an example of anthropological humor—a tale of a supposed interaction between a missionary and a Samoan lying in the beach.

“Missionary: Look at you!  You’re just wasting your life away, lying around like that.

Samoan: Why?  What do you think I should be doing?

Missionary: Well, there are plenty of coconuts around here.  Why not dry some copra and sell it?

Samoan: And why would I want to do that?

Missionary: You could make a lot of money.  And with the money you make, you could get a drying machine, and dry copra faster, and make even more money.

Samoan: Okay.  And why would I want to do that?

Missionary: Well, you’d be rich.  You could buy land, plant more trees, expand operations.  At that point, you wouldn’t even have to do the physical labor anymore, you could just hire a bunch of other people to do it for you.

Samoan: Okay.  And why would I want to do that?

Missionary: Well, eventually, with all that copra, land, machines, employees, with all that money—you could retire a very rich man.  And you wouldn’t have to do anything.  You could just lie on the beach all day.”