Monday, August 29, 2011

One Take on Debt and Money

Over the weekend a CESJ member sent us a link to an interesting interview on the origins of money on "Naked Capitalism." The interviewee was economic anthropologist David Graeber, who holds the position of "Reader" in Social Anthropology at Goldsmiths University in London, and was formerly an associate professor of anthropology at Yale. Philip Pilkington, a writer in Dublin, Éire, interviewed Dr. Graeber. The interview is titled, "What Is Debt? An Interview With Economic Anthropologist David Graeber."

Before we get into the meat, we have to settle two things. One, citing a blog titled "Naked Capitalism" in no way alters our commitment to the Just Third Way or our aversion to public nudity. In any event, a quick review of the blog suggests that none of the contributors is addressing what we define as the chief characteristic of capitalism: concentration of ownership/control of capital in private hands. (Which dovetails nicely into our definition of socialism: the abolition of private property in capital and concentration of ownership/control in the hands of the State.) Instead, the contributors seem to be defining capitalism as "that which is not socialism," just as socialists of all schools tend to define their position as "that which is not capitalism." The bottom line here is that, due to the "negative" nature of such definitions, it's probably better to jettison the labels and get to work on the definitions, as we've tried to do with the CESJ glossary.

Two, okay, we admit it. We had to look up what the heck a "Reader" is at a British university. It's "A university teacher, especially one ranking next below a professor. (Chiefly British.)" (The Farlex Free Dictionary.) Who knew? Well, evidently the British . . . .

Now down to brass tacks . . . which is probably not what you want to find in your meat, but it's better than lead buckshot, and, anyway, let's not worry too much about mixed metaphors at this point. The confusion over debt and money and mixing up the two is much more serious. We understand "debt" and "credit" as simply two names for the same thing. We also take "credit" and "money" as two forms of the same thing, basing this on the work of Henry Dunning Macleod. These mix-ups and confusion have hampered discussion in this area for far too long. This has, in our opinion, seriously crippled the ability of the Powers-that-Be to recognize the potential inherent in the Just Third Way, especially as applied in Capital Homesteading, to solve today's economic (and thus political) problems.

Dr. Graeber is the author of Debt: The First 5,000 Years, which just came out in July, and is rated high on Amazon's sales list — less than 700 as of this morning. This is not a review of Dr. Graeber's book. We haven't read it, although we intend to . . . as soon as we get that crate of Round Tuits we ordered a decade ago.

No, all we want to do in this posting is make a few observations, and direct you to the interview and, possibly, the book. After reading them, you can form your own opinion — and maybe do a 500-word review of the book from a binary economics perspective that we can post on this blog (thereby doing my day's work for me).  Yes, Dr. Graeber describes himself as an anarchist, and a member of the IWW, but that doesn't mean he can't have some good ideas.

Oh, yes. One more thing we should mention before we start. Dr. Graeber appears to be "Currency School," and binary economics is "Banking School." All that means is that on occasion we'll be using the same terms for different things, and different terms for the same things. We'll try to explain any differences as we go along — they appear to be semantic, which accounts for the verbosity of this introduction, which is almost as long as our observations.

The usual story (which Dr. Graeber traces to Adam Smith's The Wealth of Nations, 1776), is that money arose out of barter. Ookamagook had a surplus of something that he traded to Ugh, both going away satisfied. Thus was barter and The Spirit of Capitalism born, out of which money developed.

Dr. Graeber contends that, no, what happened in One Million Years B.C. (B.C.E. for the P.C.) was that Raquel Welch saw a fur bra that she wanted and went into debt to get it, promising Ghu-Knows-What in exchange at some future date (maybe a peek under the bra). As the system of exchange became regularized, money came into being. Not necessarily coined money, of course. That didn't come on the scene until around 750 B.C., depending on your source. The money was in the form of bills of exchange, maybe clay tablets, sometimes papyrus sheets, maybe even just a handshake, that promised delivery of something of value at some future date in exchange for something of value received at the present time.

Here's our first semantic speedbump. If you define money (as we do) as "anything that can be used to settle a debt," then the invention of debt and money — two sides of the same coin Cumal — were concurrent events. Money doesn't necessarily mean currency, although currency (assuming it's not counterfeit or something) necessarily means money.

This, however, is semantic quibbling in The Greater Scheme of Things, just as discussion whether Smith came up with the original theories as to the origin of money, or whether Sir William Petty or John Locke, or Ivan Ivanovitch did isn't germane to the issue. Yes, it's probably important, but we're discussing the theory, not who developed it.

What caught our attention here is that, contrary to most thought, Dr. Graeber's contention appears to put credit where it belongs: first in line. Thus, to be absolutely correct, you'd have to say that money is a form of credit, not that credit is a form of money.

Of course, this is something of a chicken-or-the-egg type statement. If money is anything that can be used to settle a debt, then credit and money appeared simultaneously — you can, after all, settle a debt by giving back the item for which you traded a promise to pay.

Does this make any difference, then? Well, yes. Conceptually it's a big help in understanding money (and credit), or credit (and money). If we understand that money, as "anything that can be used to settle a debt," is the flip side of debt itself, then all money is a debt, a promise that must be redeemed.

Which, of course, leads directly into, "redeemed with what?"

With production of marketable goods and services.

It's a basic principle of binary economics (and one branch of classical economics, i.e., that of Smith, Thornton, Say, Fullarton, Moulton, et al.), as well as plain common sense, that you have to produce something before you consume it. The purpose of production, as Adam Smith pointed out, is consumption . . . not reinvestment. We don't produce in order to produce more. Rather, we produce in order to have lunch.

Thus, it makes sense that matters might have proceeded along the lines suggested by Dr. Graeber. Ugh the caveman sees that Ookamagook has two spears when Ookamagook only needs one. Ugh gets the bright idea that if he had a spear he could get a little hunting in, have a nice dinner with the missus, maybe take the little woman to a fertility dance or two, and so on.

The problem is that Ugh flunked spear-making 101 at good old Mammoth U, and has been subsisting on roots and berries, which is not what Mrs. Ugh was led to expect when Ugh gave her father that basket of acorns as the bride price. Mrs. Oop gets real meat twice a week and has a bear-claw necklace. And furthermore, if I'd known what a lazy, shiftless, good-for-nothing you really were, I'd never . . . where are you going? I'm not finished talking to you!

Where's he going? Over to Ookamagook's cave to see if he can come to a deal about that extra spear, say, his next two kills in exchange for the capital tool necessary to produce future meals, and possibly a warranty should the spear not prove suitable even if used as directed. Of course, the deal depends on whether Ookamagook accepts Ugh's bills of exchange, that is, Ugh's creditworthiness, and believes that Ugh will deliver the goods as promised. Once Ugh's creditworthiness has been established, of course, then the deal can go through, and both parties are better off: Ugh gets the means of hunting effectively and obtaining some protein and a quieter spouse, and Ookamagook gets a quantity of meat for which he didn't have to slog through the bog and fight the heelflies and sabertoothed tigers.

Once this sort of thing becomes well-established, specialization can step in and people get the bright idea of producing for market instead of just for themselves. Jane Jacobs, in fact, in The Economy of Cities (1970), posited that hunter-gatherers, not farmers, were the cause of permanent settlements, as professional hunting took over from occasional surpluses that had to be disposed of. Farming developed later. (We're not saying we accept that, but it is an interesting hypothesis . . . that we have no intention of dealing with. Binary economics is interesting enough, thank you.)

What Dr. Graeber's analysis does is cast grave doubts on the validity of Keynesian economics, indeed, the whole of the Currency Principle. If debt conceptually precedes money (even if both are created simultaneously and by the same operation), and we keep in mind that production must precede consumption — or, obviously, you can't consume, can you? — then the Currency School principle that saving must precede investment is clearly in error. It's based on a paradox: how do you cut consumption in order to save to have the wherewithal to form capital so that you can produce marketable goods and services if you haven't produced anything first out of which you can save?

Going into this a little bit deeper, we see that, while until the 17th century or so most capital was, in fact, financed by reducing consumption and accumulating money savings, two problems crop up. One, the process had to start somewhere, and it had to start with extension of credit in order to be able to produce anything in order to have something to save. Future savings — the present value of future production — not past savings, necessarily started the process, just as Dr. Graeber contends.

Two, from the 17th century onward (and look at a development curve), most capital was not financed out of past savings, but future savings. As long as capital was financed out of past savings, development was a long, slow, and painful process. Once development could be financed by future savings — as was possible with the reintroduction of commercial banking and the invention of central banking — the "development rocket" took off. The rate of capital formation after the 17th century is almost vertical, where previous to that it was pretty much horizontal.

Dr. Graeber's analysis might very well help a number of people realize that economic development need not be tied to past savings, but can be financed using future savings. That is, we can change from our perception that we are tied to cuts in past and current consumption to finance new capital, and realize that we can use increases in future production. We are no longer bound to the slavery of past savings, just as Moulton explained in The Formation of Capital (1935).

Adding in Louis Kelso's insights as to the necessity of expanding the base of capital owners throughout the world, and we have an answer to the mess that the politicians and academic economists have gotten us into by relying on bad assumptions about money and credit, private property, and banking and finance.

It's something to think about — so you might want to look into Dr. Graeber's book and get back to us. There are a couple of jogs in the interview — we're not convinced of his claims about chartalism and its prevalence during the Middle Ages, for example — but that's piddly stuff, and doesn't affect the basic question here. Dr. Graeber's work is well worth looking into.

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