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Last week the popular blog
"naked capitalism" ran an interview with David Graeber, an "economic anthropologist" whose new
book allegedly destroys the standard account of the origin of
money. If correct, Graeber's views would prove
embarrassing to the Austrian School, because it was none other than Carl Menger who developed the first systematic explanation for
how people went from barter to a full-blown monetary economy.
As we'll see, Graeber's
critique of the standard (Mengerian) view is much
weaker than he believes, while his own explanation makes no sense. Furthermore,
we have actual case studies of the development of a new
money, which fit the Mengerian story. All in all, I
see nothing in Graeber's interview to make me
question Menger's orthodox approach.
Menger on the Origin of Money
In an earlier article I systematically laid out
the Mengerian position, as well as the extensions
that Ludwig von Mises provided, in the area of
monetary theory. But to make sense of Graeber's
challenge, here we should briefly review the basics.
According to Menger,
money emerged spontaneously through the self-interested actions of
individuals. No single person sat back and conceived of a universal medium of
exchange, and no government compulsion was necessary to effect the transition
from a condition of barter to a money economy.
Menger pointed out
that even in a state of barter, goods would have different degrees of salableness or salability. (Closely related
terms would be marketability or liquidity.) The more salable a
good, the more easily its owner could exchange it for other goods at an
"economic price." For example, someone selling wheat was in a much
stronger position than someone selling astronomical instruments. The former
commodity was more salable than the latter.
Notice that Menger
is not claiming that the owner of a telescope would be unable to sell it. If
the seller set his asking price (in terms of other goods) low enough, someone
would buy it. The point is that the seller of a telescope (in a state of
barter) would only be able to receive its true "economic price" if
he devoted a long time to searching for buyers. The seller of wheat, in
contrast, would not have to look very hard to find the best deal that he was
likely to get for his wares.
Menger argued that
this fairly obvious fact of different degrees of salability would set events
in motion that would eventually yield the first money. In the beginning,
owners of relatively less salable goods exchanged their products not only for
those goods that they directly wished to consume but also for goods
that they didn't directly value, so long as the goods they received were more
salable than the goods given up. In short, astute traders began to engage in indirect
exchange. For example, the owner of a telescope who desired fish didn't
need to find a fisherman who wanted to look at the stars. Instead, the owner
of the telescope could sell it to any person who wanted to stargaze,
so long as the goods offered for it would be more likely to tempt fishermen
than the telescope.
Over time, Menger
argued, the most salable goods were desired by more and more traders because
of this advantage. But as more people accepted these goods in exchange, the
more salable they became. Eventually, certain goods outstripped all others in
this respect, and became universally accepted in exchange by the
sellers of all other goods. At this point, money had emerged on the
market.
Graeber Doesn't Buy It
We'll quote extensively from the
interview to understand Graeber's problem with the
conventional (Mengerian) approach and what he
offers in its place:
Philip Pilkington: Let's begin.
Most economists claim that money was invented to replace the barter system.
But you've found something quite different, am I correct?
David Graeber: Yes there's a standard story we're all
taught, a "once upon a time" — it's a fairy tale.
It really deserves no other introduction: according to this theory all
transactions were by barter. "Tell you what,
I'll give you twenty chickens for that cow." Or three arrow-heads for
that beaver pelt or what-have-you. This created inconveniences, because maybe
your neighbor doesn't need chickens right now, so you have to invent money.
The story goes back at least to Adam Smith and in its own way it's the
founding myth of economics. Now, I'm an anthropologist and we anthropologists
have long known this is a myth simply because if there were places where
everyday transactions took the form of: "I'll give you twenty chickens
for that cow," we'd have found one or two by now. After all people have
been looking since 1776, when the Wealth
of Nations first came out. But if you think about it for just a
second, it's hardly surprising that we haven't found anything.
Think about what they're saying here — basically: that a bunch of
Neolithic farmers in a village somewhere, or Native Americans or whatever,
will be engaging in transactions only through the spot trade. So, if your
neighbor doesn't have what you want right now, no big deal. Obviously what
would really happen, and this is what
anthropologists observe when neighbors do engage in something like exchange
with each other, if you want your neighbor's cow, you'd say, "wow, nice
cow" and he'd say "you like it? Take it!" — and now you owe him one. Quite often people don't even
engage in exchange at all — if they were real Iroquois or other Native
Americans, for example, all such things would probably be allocated by
women's councils.
So the real question is not how does barter generate some sort of medium
of exchange that then becomes money, but rather, how does that broad sense of
"I owe you one" turn into a precise system of measurement —
that is: money as a unit of account?
By the time the curtain goes up on the historical record in ancient
Mesopotamia, around 3200 BC, it's already happened. There's an elaborate
system of money of account and complex credit systems. (Money as medium of
exchange or as a standardized circulating units of gold, silver, bronze or
whatever, only comes much later.)
So really, rather than the standard story — first there's barter,
then money, then finally credit comes out of that — if anything its
precisely the other way around. Credit and debt comes first, then coinage
emerges thousands of years later and then, when you do find "I'll give
you twenty chickens for that cow" type of barter systems, it's usually
when there used to be cash markets, but for some reason — as in Russia,
for example, in 1998 — the currency collapses or disappears.
This is a fascinating perspective;
it had never even occurred to me that someone might claim that money existed
before barter. Even so, Graeber's position seems
untenable, as I'll try to point out below.
No Record of Barter Transactions?
Graeber thinks he has
dealt the Mengerian account a death blow by saying,
"if there were places where everyday transactions took the form of:
'I'll give you twenty chickens for that cow,' we'd have found one or two by
now."
Yet this doesn't follow at all. At
least in the Misesian exposition, the original
state of pure, direct exchange — where people just exchanged in order
to obtain goods that they directly valued — would last very briefly.
The advantages of indirect exchange, where people acquired some goods
intending to trade them away again in the future, were so obvious and great
that the practice would have begun almost immediately.
Now the transition from an economy
characterized by frequent indirect exchange, to an economy
using money, would involve the snowball effect we discussed in the beginning
of this article. Specifically, as people sought to acquire goods that were
more marketable than the ones they started out with, the most marketable of
goods would see their superiority amplified. I don't recall Menger or Mises ever giving a
guess as to how long this transition would take, but it's not fatal to their
theory if anthropologists only have evidence of markets based on money (as
opposed to markets based on direct exchange, or what the layperson means by
"barter").
First of all, let's be more
specific about what Graeber thinks he would need to
find. One of the standard disadvantages of barter is that it requires far
more prices than a system using a single medium of exchange (i.e., a money). For example, if there are just 20 goods in the
economy, then a board showing all the relevant price ratios in a system of
direct exchange would need (20 x 19) / 2 = 190 unique prices. In contrast, if
an economy with 20 goods were using money, then a board at the marketplace
would only need to show 20 unique prices. So is Graeber
really that surprised to not find evidence of traders dealing with 190
prices for a small economy, as opposed to discovering the advantages of money
and then posting money prices?
This leads to a related point: Mises believed that economic calculation (for which money
prices are necessary) was a pillar of economic rationality and civilization
itself. So again, it's not surprising that Graeber
and his colleagues haven't found evidence of civilizations with bustling
markets and written records that were still relying on barter pricing.
Finally, we have actual case
studies of communities developing money prices from scratch: namely,
prisoners who end up using cigarettes as the common medium of exchange. The
classic work here is Radford's 1945 article, "The
Economic Organization of a P.O.W. Camp." There is nothing in
Radford's account that conflicts with the standard economists' story about
the origin of money. The prisoners certainly weren't giving each other things
from their Red Cross kits as gifts or as loans. No, they first were trading
(in a state of direct exchange) and cigarettes quickly became the money in
their community for all of the reasons that economists typically cite.
And to reinforce the point we made
earlier, Radford explains that the prices (quoted in cigarettes) of various
items were posted on a board. If Graeber and his
colleagues stumbled upon the ruins of this P.O.W. camp, they would presumably
conclude that there was never a preexisting state of barter, because they
only found boards listing prices quoted in terms of cigarettes. There were no
boards listing the thousands of pairwise permutations of direct-exchange
ratios, and so clearly the Mengerian story must
have been wrong — so would go the erroneous reasoning of Graeber.
To see the merits of the Mengerian account — and to understand just how fast
economies can evolve from barter to the use of money — the reader
should look at Jeff Tucker's whimsical account of children exchanging
Halloween candy in his dining room. (Hint: Neither Tucker nor his wife
swooped in to provide a unit of account for the children.)
Graeber's Own Story Is Nonsensical
Above I have argued that Graeber's critique of the Mengerian
account poses no threat. Now I want to go further and show that Graeber's rival explanation quite simply makes no sense
on the face of it.
Remember that Graeber
says before people traded goods directly, there first developed a system of
money as a unit of account. This was how people allegedly kept track of their
complex debt relationships, based on the loans made of various goods (and
presumably services).
But hold on a second. Without
having a network of antecedent barter pricing, how would these primitive
peoples know how many units of the money to assign to each type of good and
service?
For example, let's stipulate for
the sake of argument that before people ever thought of exchanging goods with
each other, they first would grant loans of those goods. So, Neighbor A has a
bad harvest and borrows 10 bushels of corn from Neighbor B, on the
understanding that he owes this to Neighbor B and must make up for it down
the road.
At the same time, Neighbor B's
camel dies so he asks Neighbor C if he can borrow one of his spare ones.
Neighbor C agrees to this. Finally, Neighbor C needs a pig, which he borrows
from Neighbor A.
Thus Neighbor A owes 10 bushels of
corn to Neighbor B, but he in turn owes a camel to Neighbor C, who in turn
owes a pig to Neighbor A. If I understand Graeber's
position, he is arguing that these types of debts were systematized and
reduced to a common denominator by the authorities somehow. For example,
perhaps the authorities would simplify the above relationships by saying that
on net, Neighbor B just owes a certain number of Temple Units to Neighbor A,
and a larger number to Neighbor C.
Yet the only way to calculate the
exact numbers would be to have the "money" prices (quoted in Temple
Units) for bushels of corn, camels, and pigs. Is Graeber
suggesting that the authorities came up with the relative prices for all the
goods in their economies, without having a single instance of people trading
the goods against each other to see what their market values really were?
It's true, I haven't logically
ruled out the possibility of Graeber's
interpretation. Rather, I think he doesn't know enough about the economic
analysis of exchange in order to correctly characterize his anthropological evidence.
For example, later in the interview he says,
[In Mesopotamia at] first there
were giant bureaucratic temples, then also palace complexes, but they weren't
exactly governments and they didn't extract direct taxes — these were
considered appropriate only for conquered populations. Rather they were huge
industrial complexes with their own land, flocks and factories. This is where
money begins as a unit of account; it's used for allocating resources within
these complexes.
Interest-bearing loans, in turn,
probably originated in deals between the administrators and merchants who
carried, say, the woollen goods produced in temple
factories (which in the very earliest period were at least partly charitable
enterprises, homes for orphans, refugees or disabled people for instance) and
traded them to faraway lands for metal, timber, or lapis lazuli. The first
markets form on the fringes of these complexes and appear to operate largely
on credit, using the temples' units of account.
It's one thing to
suggest that civilization started as a centrally planned economy, where
temple authorities came up with the prices of all goods and services (quoted
in terms of a money that they invented from scratch) before anyone had ever
engaged in barter.
Yet it is incomparably more
implausible to suggest that these merchants — using the money prices
invented by central planners, and yet who had never witnessed a single act of
barter — then went to "faraway lands" and managed to trade
woolen goods for metal, timber, and lapis lazuli. Does Graeber
really expect us to believe that these merchants engaged in long-distance
loans? Or does he concede that at least here there were spot trades
occurring, and at prices dictated by supply and demand, not by the
temple authorities back home?
Conclusion
It is true that Carl Menger's account of the origin of money is largely a form
of armchair reasoning. In that respect, anthropologists with economic
training have much to offer in filling in the story with actual historical
details.
Unfortunately, David Graeber's rejection of the standard account leads me to
believe that he doesn't really understand the claims that people like Menger and Mises made.
Furthermore, his own explanation flies in the face of not only basic economic
logic but also well-documented examples of the emergence of a new money.
Robert P. Murphy
Essay originally
published at Mises.org
here.
With permission
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