Believe those who are seeking the truth. Doubt those who find it. Andre Gide

Friday, July 25, 2014

Debt: The First 5000 Years

Ah, the airport bookstore. As monetary theorist and history buff, I could not resist this tantalizing title: Debt: The First 5000 Years. The book is authored by anthropologist David Graeber, a leading figure in the Occupy Wall Street movement. But what grabbed me was the summary on the back cover, which states (among other things) that every economics textbook is wrong in the way it explains the emergence of money, which goes something like this: "Once upon a time, there was barter. It was difficult. So people invented money." [p28].

I think we (economists) have to score one for the anthropologists here. I remember being taught that story and it took me some time to figure out it was wrong. What makes barter difficult? We are taught that the difficulty stems from a "lack of coincidence of wants." Consider, for example, an island populated by three people, Adam, Betty and Charlie. Adam wants breakfast, Betty wants lunch, Charlie wants dinner. Adam can deliver dinner, Betty can deliver breakfast, and Charlie can deliver lunch. There are no bilateral gains to trade (no voluntary trade would occur between any arbitrary pairing of individuals). And yet, there are clearly multilateral gains to trade.

The solution, we are told, is to introduce a monetary object and endow it to Adam, who may then purchase his breakfast from Betty with cash. Betty then uses her money to buy lunch from Charlie. Charlie then uses his money to buy dinner from Adam, and so on.

As anthropologists have pointed out for a long time, there is really little evidence of trade taking this form in primitive communities (see: Famous Myths of Fiat Money, by Dror Goldberg). Instead, these societies operated as "gift giving" economies, or informal credit systems. The principle should be familiar to all of us: it is reflected in the way we trade favors with friends, family, and other members of social networks to which we belong.

What then, explains monetary exchange (really, the coexistence of money and credit)? According to Kiyotaki and Moore, Evil is the Root of All Money. "Evil" here is interpreted as the existence of untrustworthy (noncooperative) people. Untrustworthy individuals readily accept gifts from the community, but cannot be trusted to fulfill their implicit obligation to reciprocate in-kind when an opportunity to do so arises. However, we know from game theory that a system of "cooperative" exchange might still be sustained if untrustworthy people can be compelled to behave properly, say, by the threat of punishment for noncompliant behavior (e.g., ostracism from the community).

The punishment/reward system that implicitly exists in gift-giving societies requires (to the extent that some community members are untrustworthy) a communal monitoring of individual behavior. In small communities, "everybody knows everything about everyone" and so this is arguably why "communistic" societies can be sustained in small groups. It also suggests why the arrangement breaks down for larger groups. The virtual communal data bank -- a distributed network of computer brains -- is simply not capable of recording all the information necessary to support an informal credit system in a large population. In a large population, people can remain anonymous. We necessarily become strangers to most people. And its tough to trust a stranger (a person you are not likely ever to meet again).

Nevertheless, multilateral gains to trade may still exist even among strangers. And if credit is difficult, or impossible, then the solution is money (see: The Technological Role of Fiat Money, by Narayana Kocherlakota). According to this theory, money serves as a substitute for the missing communal memory. Contributions to society are now measured not by virtual credits in the collective mind of the community; instead, they are recorded by money balances (this assumes, of course, that money, like virtual credit, is difficult to counterfeit/steal).

So, in a nutshell, economic theory suggests that we use informal credit arrangements to govern exchange among people we know (family, friends, colleagues, etc.) and we use money to facilitate exchange with "strangers." The emergence of money then seems tied to the emergence of strangers. An obvious explanation for this is population growth (and the associated rise of large urban areas).

One thing I learned from Graeber is that the relative importance of money and credit seems to have waxed and waned over time. Money (in particular, coinage) emerged around 800BC and remained significant until about 600AD, an era associated with many great empires, and the associated need to pay transient professional armies. With the collapse of the great empires, new states emerged, increasingly under the regulation of religious authorities. Coinage declined in importance, with credit systems taking over (600AD-1450AD). This latter observation is consistent with the general decline of urban areas in western Europe, but Graeber points to many other factors as well. Monetary exchange waxes once again with the age of the "great capitalist empires" (1450-1971AD).

My comments above only scratch the surface of the book's much broader thesis concerning the moral nature of debt. The presentation is not as clean as it could be, the analysis is sloppy in several places, and the conclusion is rather weak but, heck, it's still a very interesting read. If nothing else, it encouraged me to interpret various aspects of history in ways that I am not accustomed to.

Alas, every gain comes at a price (beyond the $22 cash I paid for his book). His opening chapter, in particular, is so annoying that it almost led me to abort the enterprise. In the book, and in the many interviews he gives, he relays the following story (source):
And one of the things that really fascinated me was the moral power of the idea of debt. I would tell stories to people, very sympathetic people, liberal lawyers, well-meaning do-gooder types, and you’d tell these stories about horrible things. You know, in Madagascar, for example, the IMF came in with these policies, you have to cut the budgets because, god knows, we can’t reduce the interest payments you owe to Citibank, they owed all this money. And they had to do things like get rid of mosquito eradication programs, as a result that malaria returned to parts of the country where it had been wiped out for a hundred years and tens of thousands of people died and you had dead babies being buried and weeping mothers. I was there, I saw this sort of thing. You described this to people and the reaction would be, well, that’s terrible, but surely people have to pay their debts. You’re not suggesting they cancel it or default, that would be outrageous. And one of the things that really fascinated me was the moral power of the idea of debt.
I'm not completely sure, but if I was to relay this story to the average person I know, I would hardly expect them to say "well, that's terrible, but surely people have to pay their debts!" I'm pretty sure that most of the people I know would have replied "that's $^%& outrageous!" But then, maybe I don't know too many "sympathetic" people, liberal lawyers and well-meaning do-gooder types.

Moreover, I'm pretty sure that a significant majority of the people I know would have questioned the claim that the IMF kills African babies. After all, we are not speaking here of a paragon of good government.
Since Madagascar gained independence from France in 1960, the island's political transitions have been marked by numerous popular protests, several disputed elections, an impeachment, two military coups and one assassination. The island's recurrent political crises are often prolonged, with detrimental effects on the local economy, international relations and Malagasy living standards. (source)
Of course, malaria was for a long time a big problem on the African continent (see here) and elsewhere. But the disease was practically wiped out with the use of the pesticide DDT (see here). The use of DDT was then banned, owing to pressure from "well-meaning do-gooder" environmental groups. [Evidently, the ban was primarily for agricultural use, and only sometimes in vector control]. Now, according to this source:
In the 1980’s Madagascar stopped using DDT and immediately had an epidemic of malaria, resulting in the death of more than 100,000 people.
Hmm. And according to this source:
A strong malaria epidemic with a high mortality rate occurred on the Madagascar Highlands in 1986-88. Vector control and free access to antimalaria drugs controlled the disease.
This latter source also mentions the lack of immunity and a shortage of medicaments as factors contributing to the mortality rate. Is Graeber suggesting that the shortage of medicaments was the consequence of IMF imposed austerity measures on Madagascar's government and the desire to service Citibank debt? It seems an unlikely story (although, it's not easy to find details). According to this data from the World Malaria Report, almost all the resources for fighting malaria in Madagascar originates from international aid organizations, like USAID and The Global Fund. Did the IMF prevent these agencies from doing their good work?

Finally, let me point readers to Ken Rogoff's defense of IMF policies here. See also the article here, by Masood Ahmed.

Make no mistake, the malaria episode described by Graeber is a tragic story. People were dying and somewhere the resources existed that could have mitigated the losses (a continued program of DDT spraying would have prevented it altogether). Among other things, the government of Madagascar could have reallocated resources away from some expenditure (say, military, which is 1% of GDP according to CIA Factbook) toward medicaments. That it evidently chose not to is revealing. Does Graeber truly believe that a "debt jubilee" for governments of this nature would have prevented the episode in question? (Note: I am not against debt jubilees.)

Graeber has many useful and interesting things to say in his book. I personally find it annoying that a scholar and writer of such high caliber has to resort to stories like this to sell his ideas. But maybe that's just me. In any case, my recommendation is to read the book and filter out as much of the noise as you can. 


  1. OT: Nice interview with Woodford.

    Does his paper explain the incentive and method by which un constrained traders trade against the CB? If this is the crux of LT asset purchases being ineffective (less effective?) than assumed, I'd like to understand his thinking more clearly.

    1. Thanks, Dustin. I have not read the paper! I was just asking those questions on the fly. My guess is that he does. :)

    2. Sumner, Wren-Lewis, Kling and Roche (and JKH in the comments) comment on your interview too.

      I read Graeber's book when it first came out. He had a long series of comments in response to a post that Robert Murphy did on an interview he gave on it, which is like a mini version of the book. Murphy dutifully collected all David's comments into one post and addressed that.

      Plus I noticed that Brad DeLong has done a series of articles on the book taking Graeber to task on his history.

    3. Thanks, Tom. I see I am late to the party on Graeber's book!

    4. David, re: your Woodford interview, I'd especially like to know your view on this comment (link above) that Sumner gave (this is in response to the final bit of the interview):

      "We haven’t even scratched the surface of what monetary policy can achieve. For instance NGDPLT is 100 times more potent than fiscal stimulus."

      How do you suppose he calculated that factor of 100? Any guesses?

    5. Well, I doubt whether we should attach any significance to the number. What Scott is saying is that a NGDPLT is more effective than fiscal stimulus. I cannot claim to fully understand the argument. It sounds so simple and yet, I cannot seem to absorb it. I will keep trying (in between everything else I have to do!)

    6. David thanks. I'm glad to hear that someone as knowledgeable and bright as yourself struggles with these concepts as well. (but perhaps rather than be glad I should be worried! :D)

  2. Maybe one person's signal is another person's noise. After all, it is morality that is at issue here.

    I do think you minimize the "moral effect" of debt and contract. This is pretty strongly established in history and social science. On one hand, it relating to the religious concept of sin as debt. On the other, there is strong confirmation bias on the part of creditors, who tend to be the powerful, to promote this ideology with a normative requirement to pay debt and honor contract that sacralizes these rules beyond positive law and economics.

    There is also huge criticism of the IMF on the left over it's acting as enforcer. It's hardly limited to Graeber.

    Brad DeLong lands more substantial criticisms of some factual points in Graeber's Debt, and while I think these stick, I don't see them don't vitiate Graeber's overall point about debt as the origin of money rather than to overcome the double coincidence of wants in afflicts barter.

    This view of money is hardly original with Graeber, and it is at least as old as the work of A. Mitchell Innes paper in the early 1900's. Contemporaneously, Randy Wray of UMKC has written rather profusely about this, as well as Michael Hudson, also of UMKC. This view distinguishes Old Keynesianism and Post Keynesianism from neoclassical economics and its contemporary offspring. If you are interested in pursuing this line of thinking, I recommend reading Wray.

    1. Here is a short recent post by Wray at Alphaville on this.

      Mission Finance: why money matters – Randall Wray

    2. Thank you, Tom ... I will take a look!

    3. Tom, that post by Wray was rather disappointing. On the annoying side is his claim that EMH and MM theorem imply that "finance does not matter." My goodness. And as for his explanation of private money creation, yes it is correct and well-known (among economists). The idea that keystroke money can always guarantee "full employment" seems far fetched, and he does not answer the most basic question (which he poses) to determine ex ante what constitutes a good or bad investment. Yes, I think we all know this? What am I missing?

    4. I sent you there primarily because he distinguishes the barter-medium of exchange-neutral veil theory v. the unit of account, record of debt theory. There's only so much one can cover in a post of that scope. He backs it up elsewhere. Here's a list of his working papers at Levy Institute.

      He also has a couple of books summarizing MMT for non-economists.

      He's also working on a macro text with Bill Mitchell of Australia

      Bill Mitchell published the definitive MMT text on full employment with Joan Muysken, Full Employment Abandoned: Shifting Sands and Policy Failures.

  3. DA: In any case, my recommendation is to read the book and filter out as much of the noise as you can.

    David Warsh: "David Graeber, the prolix London anthropologist ... attaches inordinate significance to a chicken-and-egg theory of the primordial ancient origins of credit."

    DA: One thing I learned from Graeber is that the relative importance of money and credit seems to have waxed and waned over time.


    From the late 400s through the 1000s--the early part of the period known as the Middle Ages--Europeans struggled to survive as monarchs, knights, and raiders divided Western Europe. There were few towns, little trade, almost no education, and almost constant warfare...

    William's successors continued to try to lessen the power of the nobles. Henry I (1100-1135) began to pay his officials salaries, making them more dependent upon him. He also established a royal court and a treasury that audited the accounts of the kingdom.

    From Welty & Greenblatt, The Human Expression

    1. Arthur, you are usually more direct in your comments and criticisms. What is your point?

    2. :)
      Two points. First, I mean to agree with your recommendation to filter out noise, and expand on it with the David Warsh quote, which I thought was wonderful. But I hit a wrong key and deleted the whole text of my comment, and didn't reconstruct it properly.

      If you say filter out the Graeber noise, I say AMEN!

      My second point: You say you "learned from Graeber" that the "importance of money" waxes and wanes. That surprised me. I offer the example of "little trade" and non-monetary economy until some time after William the Conqueror, when Henry I started making payment in money -- and presumably accepting payment sometimes in money, rather than always in kind.

      It was a new waxing of money, and the rise again of monetary economy. We don't need Graeber for that. And frankly, we can probably learn more from this historical episode than from anthropological imaginings of prehistory. But I could read only a few pages of Graeber's book.

  4. Interesting post. Gift giving or 'gift exchange' is a powerful concept. For a living example, see university departmental politics.

    Africa is sad and tragic. Much of the improvements in health outcomes have come from technology of foreign origin that was also supplied and implemented by foreigners. Famine effects have been blunted by donated food.

    The results have been run-away population growth and numerous Neo-Malthusian conflicts and crisis over diminishing resources.

  5. I see you buy into the DDT fable. Following up your link, I find a guy who manages to write a couple of pages about the miracle pesticide without mentioning the teeny, tiny detail that the mosquitoes developed resistance to DDT long before the use of the stuff was limited. At this point, dousing the world with DDT won't kill many bugs, but it will wipe out many kinds of birds. Meanwhile, there are now and there always were human health exceptions to the ban on DDT. The DDT story is a right-wing hobby horse.

    1. Yes, it seems reasonable to suppose that the bugs will develop resistance (the birds should as well, no?). Nevertheless, the "right wing hobby horse" seems interested in saving lives. What you suggest as an alternative policy if you were living in a land of malaria?

    2. It isn't that it's reasonable that the bugs will develop resistance. They did develop resistance and they did so very quickly, while the birds were not so adaptable. The scientists know a great deal about insect resistance to DDT including the actual biochemical ways that the bugs defeat the poison. This isn't economics. It's science.

      You're assuming that malaria made a come back because of limitations on DDT use. That's demonstrably untrue.. It's just an ideologically convenient idea, a right wing hobbyhorse that's fun to ride but goes no place.

    3. Jim, please stop with the useless labels and stick to the facts. Can you point me to source that explain this alternative view in lay terms? Thanks. (And feel free to answer the question I posed to you: what alternative do you recommend?)

    4. Info on DDT is hardly difficult to come by. I checked out the Wikipedia entry on DDT after your last comment. Seemed pretty balanced and quite extensive. I'm amused by your notion that I'm selling the "alternative view." That's like a climate denialist calling somebody who believes in global warming a propounder of the alternate view.

      My irritation comes from the way in which you simply assume you are right as if using a heck of a lot of DDT is obvious the answer to malaria and the only thing preventing the use of this commonsense solution is the goddam environmentalists. If it were really a question of a trade off between human and animal life, we could have a different argument. Your question to me, however, is based on a false premise.

      I'm hardly an expert on public health measures so I'm not going to pose as one by improvising a program for dealing with malaria. I'm aware that there are many ways to control mosquitos some that involve draining their breeding sites (something that was effectively done in many places before the era of DDT), some that involve alternate pesticides, some that involve the consistent use of mosquito netting. Incidentally, though DDT is no longer the magic bullet it once was, it is useful when applied to mosquito netting, a practice that nobody is interested in stopping as far as I know
      —the notion that there was ever a complete prohibition on DDT use for mosquito control is part of the right-wing narrative.

    5. Alright, fair enough Jim. You are right that I should have researched the DDT controversy more before sharing my thoughts.

  6. Oh brother.... Cutting back use of DDT probably did increase malaria contraction rates in the near-term.

    Was the decision righteous? I have no idea. But cutting back then probably saved us all from a larger malaria-related disaster a few years down the road due to building resistance and other factors.

    What both sides of this shrill debate enjoy ignoring is the fact that some human sub-populations living in malaria zones manage to largely avoid malaria. Before, during and after DDT was used as an insecticide.

    There appear to be lots of ways of diminishing if not solving the malaria threat without broadly applying generic insecticides.

    1. Westlope, it's good to see you back. Where have you been? :)

  7. In a private email, Mark writes:

    Dear David,

    Off topic from your post, but the DDT ban is one of those things that everyone knows about but just isn't true. What Rachel Carson was complaining about and what was banned by various organizations like the EPA and the Stockholm Convention was the use of DDT for agriculture, which is what lead to the buildups of high environmental concentrations. However, DDT was always allowed against disease vectors like malarial mosquitoes.

    Now, back to economics.


  8. Hi David! I occasionally read and digest without opining. ....

    Or I could write, gee, i dunno. Busy losing money on a TLT short? Engrossed with getting wrong calls on oil markets? Getting bitten by safe mossies in beautiful British Columbia? :-)

    What I recall, is that agricultural bans were followed by voluntary reductions in DDT applications over large areas like suburbs. In any event, curtailing agricultural use would have been sufficient to allow much larger numbers of malaria-bearing mosquitos to survive.

    Furthermore, rural people faced greater challenges and possessed fewer means to for using other methods of combatting malaria.

    FWIW, my 'expertise' in malaria comes from falling sick with cerebral malaria (plasmodium falciparum (sp?)) in Uganda. The same strain of malaria killed two Canadian geologists working in Zimbabwe in the 1980s.

    I lost over 30% of my haemoglobin and felt severely depressed for over 6 weeks following my cure. But sure was happy to end up in a hospital run by Irish Catholic nuns and receive cutting edge medicine. Three days in hospital cost US$7.00 transacted on the 1:11 black market for Uganda shillings. (circa 1980)

    As far as I recall, any DDT bans were never completely enforced/respected but use did plummet.

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