Wednesday, September 26, 2012

A fight over money

Over the last twelve months or so, the blogosphere saw another round of a long-standing fight over money. Not over getting more money (though that is an element too), but its nature and history.

A story about debt
The aforementioned tussle has been provoked by the publication of David Graeber's intriguing, but seriously flawed, book Debt: The First 5,000 YearsGraeber takes strong issue with much of economics in general and with the barter-then-commodity theory of money in particular. This is a theory of the nature and origins of money which dates back to Adam Smith and was famously stated by Austrian economist Carl Menger in his short 1892 essay On the Origin of Money which took further comments made in his 1871 Principles of Economics. Austrian school economist Bob Murphy has provided a useful summary of Menger's theory, as extended by Ludwig von Mises.

Graeber has done what authors do and engaged in various interviews to promote his book, one of which was posted here. Bob Murphy leapt to the defence of the Smith-Menger-Mises tradition, critiquing what Graeber had to say in the interview without, alas, having actually read the book. Graeber responded in turn, to which Murphy then responded. Graeber has since posted a nice summary of his thesis as a wrap-up to this interaction. (One of the sub-themes of which includes the issue of how blogosphere promotes quickie, congenial attacks by the ideologically hostile, including negative Amazon reviews.) Bob Murphy did get around to reading and reviewing Graeber's book.

Economist and Adam Smith scholar Gavin Kennedy has posted a much lengthier, and more nuanced, set of critiques of Graeber's book than Murphy's original posts. There is even the requisite Marxist critique of Graeber for lacking an underlying economic theory and being a romantic.

Meanwhile, economist Jeff Hummel has also posted a critique of Graeber's book. He does a good job of defending economics and economists from Graeber's wider attack, but does much less well in his critique of Graeber's central thesis. Hummel writes that Graeber:
makes several different historical claims, not all of them compatible:
(1) Credit transactions preceded and dominated spot transactions in early human societies.
(2) Media of account emerged before media of exchange.
(3) Barter was unknown (or at least extremely rare) WITHIN early human societies.
Notice that point (1) is incompatible with either (2) or (3). Early credit transactions must have involved barter (contradicting number 3) or media of exchange (contradicting 2). There is no other logical possibility. Yet because Graeber's peculiar concept of barter excludes a farmer trading a pig for delivery of an ax in two weeks (to use Murphy's example), his claim that barter was non-existent tends to become true by definition. Murphy was not the only one to catch this semantic sleight of hand; it is even exposed by an Amazon commenter on the book.
Graeber's terminological tautology appears to stem from his confusing (a) the limited ability of credit to mitigate the problem of the double coincidence of wants with (b) the substantial ability of multilateral exchange to do so. Multilateral networks are in reality what he is partly describing when he invokes "systems of broad, non-enumerated credits" (more on the "non-enumerated" part below). Consider the standard three-person THEORETICAL trading problem, where A wants only what B is selling, B wants only what C is selling, and C wants only what A is selling. The lack of a double of coincidence of wants can be solved by using one of the goods as a medium of exchange in two bilateral trades OR by conducting a single multilateral trade. Obviously for small groups, where people know and trust each other, the latter is often more likely and convenient. Whether such a multilateral exchange takes place at one moment in time (a spot transaction) or is extended through time (a debt transaction) is of secondary relevance, although the possibility of debt transactions certainly increases the potential scope of multilateral exchange.
This is a damming critique of a thesis which, alas, is not Graeber's. If exchanges of goods and services are intermediated, to what extent are such exchanges then barter? Graeber's central point is that early human societies did not involve spot transactions within them. Instead, people operated within dense webs of connections and that transfers of goods and services occurred within, and as expressions of, those connections. Graeber is taking further patterns described in Marcel Mauss’s classic 1923-4 text The Gift: The Form and Reason for Trade in Archaic Societies. Now, Graeber describes the underlying principle as "communism", which is both provocative and misleading. It certainly wasn't the case, for example, that there was no sense of private property. But seeing connectedness as the central feature leads one to view exchanges very differently than a view which takes methodological individualism to imply the "natural" economy is a series of spot trades.

Social connections
What Graeber is describing is transfers of goods and services that manifested felt obligations; obligations that were informal, personal and involved life-time "games". Including a sense of indebtedness that could be discharged in various ways. So credit exchanges need not involve specific media of exchange; any appropriate good and services would do. Units of account could thus easily predate media of exchange; they were ways of keeping track of obligations in the goods and services economy. (Indeed, various modern economic models treat money precisely like that, as ways of keeping track of prices, debts etc in the "real" or goods and services economy.) Moreover, having such units of account immediately provide some of the transaction cost advantages of money without having actual physical money in any useful sense.
Assumption of debt by guarantor
It is clearly true that foraging societies involved implicit exchanges between hunting males and gathering females; an early use of comparative advantage that improved allocation of resources for the purposes of getting food, distributing risks and raising children. Graeber's point is that this did not involve a series of spot trades ("this chicken for those yams") but roles which connected and obligated--we provide the meat, you provide the fruit, grain and vegetables. Now, there is an exchange going on here, but it is not "barter" in the sense of spot trades. It is only when you have interactions outside these dense webs of connections that spot-trade barter makes sense.

Think of a family-and-friends barbecue.  People do not engage in spot trades. They contribute various things and, over time, people have a sense of who contributes what and whether they are "pulling their weight" in the web of connections which come together in said barbecues. Well, in a foraging society, every meal is a group barbecue embedded in connections. Describing what goes on as "barter" is true in one sense (good and services are being exchanged without money) but very misleading in another.
Medieval tax tallies

Graeber's point is that credit, debt and units of account grow out of connections, not out of spot trades.  Which is highly plausible and accords with much archaeological and anthropological evidence. Even taking things forward several millennia; to describe manorial economies as "reversion to barter" simply because use of coins dropped dramatically shows a gross misunderstanding of how manorial economies work.

So far, so good. That, however, the inadequacy of the spot-trade barter story, or implications from it, somehow invalidates mainstream economics does not follow even though Graeber wants to imply that somehow it does.  And Graeber does not help his case by being very cavalier about historical facts. He is, for example, perfectly correct that historically state debt was mainly about war, since warfare and military expenditure overwhelmingly dominated state expenses. Attempts to tie postwar US debt to military expenditure is, however, nonsense on stilts. Debt is borrowing to spend and is driven by whatever the borrower spends money on and in no modern developed state, not even in the US, is military expenditure (whose share of GDP and government expenditure has been trending downwards across the postwar era) remotely the dominant form of government expenditure.

Graeber's factual unreliability is particularly unfortunate, as he has some fascinating ideas about various historical phenomena and trends -- I was particularly struck by his discussion of what makes an age medieval. But when Graeber makes silly statements such as:
Again, non-state bureaucracies are a phenomenon that no economic model would even have anticipated existing. It’s off the map of economic theory.
he is promoting nonsense -- modern economics finds such things so not-outside its purview, it has awarded Nobel Prizes for work in precisely that.

Unfortunately, there seems to be at least as great a tendency for anthropologists to make dubious statements about mainstream economics as there is for economists to be cavalier about anthropological evidence. Though some economists can join the former game quite happily. For example, in a survey lecture-cum-article on different approaches to money in historical context, economist Michael Hudson tells us that
Douglass North (1984) sees money as having been developed by enterprising merchants seeking a stable measure of value as well as a convenient means of payment. ...
One of the stated reasons for awarding the Nobel Economics Prize to North was his idea that money was developed not by public institutions, but by individuals to grease the wheels of commerce.
Yet there is no mention of money in North's Nobel citation, nor in his Nobel lecture, nor in the article Hudson cites while North's magnum opus has no citation for 'money' in its index.

But there is a wider polemical tussle underlying much of this.

M- or C-theory?
For the debate over Graeber's book is part of a long-standing debate that goes back to at least Georg Friedrich Knapp's The State Theory of Money (pdf) originally published in 1905. (Knapp seemed to have thought that analysis meant multiplication of definitions; his book produces a continual stream of them to the point that following the analysis becomes quite difficult.) Within the Anglosphere, the credit or chartallist theory of money was famously stated by Alfred Mitchell-Innes in two articles published in 1913 and 1914. This stream of thought led to modern monetary theory (MMT). In the chartallist approach, money is seen fundamentally as a creation of the state. This is what economist Charles Goodhart called in a 1998 paper (pdf) the C-theory, one of the two concepts of money.

The alternative is what Goodhart calls M-theory, which sees money as developing out of the needs of exchange. This is very much the dominant mainstream economics approach.  Optimum Currency Area (OCA) theory, for example, uses it. And while Goodhart is correct in that OCA theory is bad at explaining current boundaries of usage of particular currencies, the Eurozone crisis has proved to be eminently explicable in its terms. OCA may not be a good theory of currency realms (the ambit of particular currencies) but it is an excellent barometer by which to judge whether existing currency realms should amalgamate (or not).

As for the wider ideological game that is also being played out, if money is a natural product of exchange, then any state role in money is much more likely to be at best unnecessary and, at worst, pernicious. If, however, money is a natural product of state action, if the state has a necessary role in money, then such action is much more likely to be beneficent.

Thus, Hudson's lecture-cum-article displays a strikingly benign view of "the public sector". While taxes and soldiers get mentioned, the piece shows no serious sense of the expropriation and violence which is at the heart of the history of rulership and the state; in his comments on contemporary policy, there is little sense of issues about the inefficiency of fiscal stimulus, or its impotence if monetary authority does not give it space; little sense of government monetary dysfunction or issues about expenditure rises. Ibn Khaldun's C14th writings have a far better, mostly due to being far more balanced, sense of rulership.

Graeber is not quite playing the same game (his target is debt and state action supporting the same). Nevertheless, while Graeber's portrayal of slaves-money-debt Axial Age empires is extremely hostile (he extends the Axial Age to 600AD), his treatment of ancient Mesopotamian temple and palace complexes is remarkably benign, as is his depiction of medieval manorialism and village economies. He treats the collapse of the Western Roman Empire as overwhelmingly positive, with little sense of the demographic collapse or the loss of comfort which attended it.

On a much less ideological note, part of the problem is that money provokes two different sorts of questions. One is concern for its swap value -- inflation, deflation, use in money offers, the way demand is expressed in a monetised economy. The sorts of questions mainstream economics is mainly interested in.
The other sort of question is how come money has transaction utility at all, why do currency realms exist, what determines the boundaries of currency realms? Boundaries not only in the sense of which money is used in which exchanges, but also whether or how money is used. Consider that family-and-friends barbecue; it is embedded in networks of much more formalised and impersonal exchanges. Such formalised and impersonal exchanges are typically how you treat strangers and other people with low levels of personal connection with you.  Which is why we get offended if people start treating highly informal and personal interactions in ways which imply that they were as if with strangers.

So, there is a certain amount of talking past one another expressed in Goodhart's "two concepts of money", in M-theory and C-theory. Anthropologist Keith Hart expressed the hope that analysis might cope with both sides of the coin -- its manifestation as state power and its use in exchange. But, as he has since pointed out, there is some resistance to such.

Graeber approvingly cites Hart's original "Heads or Tails" essay in his book, and then manifests precisely the sort of one-sided aversion Hart was appealing to folk to get beyond.  There have been attempts to provide some sort of synthesis (such as this recent paper) (via). But the focus on different questions, and the wish to get answers which support wider concerns, means that this recurring fight over money shows no signs of abating.

(Cross-posted at Skepticlawyer and at Critical Thinking Applied.)

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