What Have Economists Ever Done for us?
By Andrew G Haldane, Bank of England (this article first appeared at VOXeu)
There is a long list of culprits when it comes to assigning blame for the financial crisis. At least in this instance, failure has just as many parents as success. But among the guilty parties, economists played a special role in contributing to the problem. We are duty bound to be part of the solution (see Coyle 2012). Our role in the crisis was, in a nutshell, the result of succumbing to an intellectual virus which took hold of the body financial from the 1990s onwards.
One strain of this virus is an old one. Cycles in money and bank credit are familiar from centuries past. And yet, for perhaps a generation, the symptoms of this old virus were left untreated. That neglect allowed the infection to spread from the financial system to the real economy, with near-fatal consequences for both.
In many ways, this was an odd disease to have contracted. The symptoms should have been all too obvious from history. The interplay of bank money and credit and the wider economy has been pivotal to the mandate of central banks for centuries. For at least a century, that was recognised in the design of public policy frameworks. The management of bank money and credit was a clear public policy prerequisite for maintaining broader macroeconomic and social stability.
Two developments – one academic, one policy-related – appear to have been responsible for this surprising memory loss. The first was the emergence of micro-founded dynamic stochastic general equilibrium (DGSE) models in economics. Because these models were built on real-business-cycle foundations, financial factors (asset prices, money and credit) played distinctly second fiddle, if they played a role at all.
The second was an accompaying neglect for aggregate money and credit conditions in the construction of public policy frameworks. Inflation targeting assumed primacy as a monetary policy framework, with little role for commercial banks’ balance sheets as either an end or an intermediate objective. And regulation of financial firms was in many cases taken out of the hands of central banks and delegated to separate supervisory agencies with an institution-specific, non-monetary focus.
Coincidentally or not, what happened next was extraordinary. Commercial banks’ balance sheets grew by the largest amount in human history. For example, having flatlined for a century, bank assets-to-GDP in the UK rose by an order of magnitude from 1970 onwards. A similar pattern was found in other advanced economies.
This balance sheet explosion was, in one sense, no one’s fault and no one’s responsibility. Not monetary policy authorities, whose focus was now inflation and whose models scarcely permitted bank balance sheets a walk-on role. And not financial regulators, whose focus was on the strength of individual financial institutions.
Yet this policy neglect has since shown itself to be far from benign. The lessons of financial history have been painfully re-taught since 2008. They need not be forgotten again. This has important implications for the economics profession and for the teaching of economics. For one, it underscores the importance of sub-disciplines such as economic and financial history. As Galbraith said,”There can be few fields of human endeavour in which history counts for so little as in the world of finance.” Economics can ill afford to re-commit that crime.
Second, it underlines the importance of reinstating money, credit and banking in the core curriculum, as well as refocusing on models of the interplay between economic and financial systems. These are areas that also fell out of fashion during the pre-crisis boom.
Third, the crisis showed that institutions really matter, be it commercial banks or central banks, when making sense of crises, their genesis and aftermath. They too were conveniently, but irresponsibly, airbrushed out of workhorse models. They now needed to be repainted back in.
The second strain of intellectual virus is a new, more virulent one. This has been made dangerous by increased integration of markets of all types, economic, but especially financial and social. In a tightly woven financial and social web, the contagious consequences of a single event can thus bring the world to its knees. That was the Lehman Brothers story.
These cliff-edge dynamics in socioeconomic systems are becoming increasingly familiar. Social dynamics around the Arab Spring in many ways closely resembled financial system dynamics following the failure of Lehman Brothers four years ago. Both are complex, adaptive networks. When gripped by fear, such systems are known to behave in a highly non-linear fashion due to cascading actions and reactions among agents. These systems exhibit a robust yet fragile property: swan-like serenity one minute, riot-like calamity the next.
These dynamics do not emerge from most mainstream models of the financial system or real economy. The reason is simple. The majority of these models use the framework of a single representative agent (or a small number of them). That effectively neuters the possibility of complex actions and interactions between agents shaping system dynamics.
The financial system is an archetypical complex, adaptive socioeconomic system – and has become more so over time. In the early years of this century, financial chains lengthened dramatically, system-wide maturity mismatches widened alarmingly and intrafinancial system claims ballooned exponentially. The system became, in consequence, a hostage to its weakest link. When that broke, so too did the system as a whole. Communications networks and social media then propagated fear globally.
Conventional models, based on the representative agent and with expectations mimicking fundamentals, had no hope of capturing these system dynamics. They are fundamentally ill-suited to capturing today’s networked world, in which social media shape expectations, shape behaviour and thus shape outcomes.
This calls for an intellectual reinvestment in models of heterogeneous, interacting agents, an investment likely to be every bit as great as the one that economists have made in DGSE models over the past 20 years. Agent-based modelling is one, but only one, such avenue. The construction and simulation of highly non-linear dynamics in systems of multiple equilibria represents unfamiliar territory for most economists. But this is not a journey into the unknown. Sociologists, physicists, ecologists, epidemiologists and anthropologists have for many years sought to understand just such systems. Following their footsteps will require a sense of academic adventure sadly absent in the pre-crisis period.
37 Comments
Please let me be more concise…
The majority of Economists are social justice workers. (JMK)
From this perspective there are two common defects…
1) they either do not understand history or ignore it
2) despite their training, they do not apply the basic
laws of economic principals because it would fail their
social justice agenda
I agree with Hans. And would add another decades-old axiom that also applies…….”It is difficult to see bad outcomes when your compensation depends on you not seeing them”. krb
Thank you for the kind words, KRB…
I do like your quote as well..
Wow… I have no idea what you’re talking about… “social justice?” Are you joking? It seems to me that the dominant school of economic thought these days is Chicago school neo-classicism (Milton Friedman style monetarism), which is what the author of this article is identifying with his complaint that policy has been focused exclusively on targeting an inflation rate through monetary policy, to the exclusion of all other considerations.
If anything I associate Chicago School neo-classicism (the right wing of neo-classicism) with neo-liberalism and free market fundamentalism, or what William K. Black calls, “theo-classicism.” That line of thinking is much more in line with Ayn Rand, Friedrick Hayek, Milton Friedman, Alan Meltzer, John Taylor and John Cochrane than it is with “social justice” philosophers or economists.
Mr Brown, my comments were strictly related to the title of this thread..
Please do not forget, that Uncle Milton was a supporter of free markets, without or limited governmental manipulation…
Your list of distinguished “thinkers” are more than likely to advocate individualism, than the JMK’s clan, in which social engineering plays a central role..
In 1960 Friedman exhibited the same views as Fisher (1937) and Soddy. Friedman later changed along with the Chicago School. It is probably good to think of the Chicago School as two parts – old and new, and as well Uncle Milt. The later in life Milt fell under the spell of monetarists. Old Chicago School was the opposite of monetarism, which is why it got attacked.
“The construction and simulation of highly non-linear dynamics in systems of multiple equilibria represents unfamiliar territory for most economists….”
This sentence alone accurately captures the failings of modern economics. Economics (as a science) doesn’t always have to be framed in high caliber, esoteric mathematics. Economists, such as Hyman Minsky and Steve Keen, correctly identified the instabilites of asset/credit markets, and predicted their subsequent collapse (all with minimal mathematical treatment).
The first indication of maturity for economics as a “science” would be the acknowledgment that NOT all natural phenomna can be modelled by mathemtaics. Physicists have been aware of this for decades (Heisenberg uncertainty theorem, wave-particle duality, fluid mechanics, etc…).
Economists seem to think the more mathematical rigor they can throw at something, the more convincing (and impressive) their work will be…I remain skeptical of that.
Even weather forecasting, population dynamics and other living systems are similar to economies and markets. That is, very small differences in starting point has dramatic differences the outcome. That is, the butterfly effect.
It is actually worse than that. Predictions of weather cannot change the weather, but economics is a model of collective human behavior, and credible models will have a real effect upon the system they are trying to model. As people try to front-run the model’s predictions, they will change the outcome to prevent outsized profits from being earned by all except the very earliest adopters. The same dynamics would apply if you had a cross-temporal communications system. If it had only one user he would end up as the global ruler, but many users would front-run each other so fast that the future timeline would become a blur.
That’s an interesting way to put it. I’m not sure what you’re specifically referring to, but I’ve often had a related thought about the difference between predicting the weather and predicting the economy: one’s open loop (weather prediction) and the other a feedback system.
I wonder if non-linear feedback control theorists (usually in the math or engineering departments) would have some insights into “closing the loop” on such a system.
I have a background in control systems myself, but never delved too much into non-linear systems. Mostly we tried to adapt the tools of liner systems into the non-linear world (extended Kalman filters, and robust control). A famous result from the linear world, is that the “oberver” (the tracking filter) can be separated from the controller (feedback control law) in the analysis, even in noise corrupted systems. I’m sure that there’s probably no such equivalent in the non-linear world… but it’s been a while since I was in school!
I wonder if particle filters might be a natural fit to economics?
I think this feedback problem is one of the reasons Keen has stated that we’re a long way from making useful predictions (the moment you do, people will take notice and the game will change!), but that his models are useful for qualitative insights.
There’s nothing wrong with “mathematical rigor.” But all the mathematical rigor in the world won’t help you if you’re underlying assumptions are flawed or not supported by the empirical evidence.
Also, the mathematics of mainstream economists has been flawed to begin with, regardless of the flaws in their assumptions and lack of support in the empirical data.
For example, neo-classical economists have conducted empirical studies which have blown holes in the theory of “utility maximization” which neo-classicals use as the basis of what “rational” “representative agents” do in the economy. The rational representative agent is what underlies the “micro-economic” underpinnings of neo-classical mainstream macro theory.
Also, neo-classicists themselves have found big problems with the mathematics of aggregate supply and demand curves. Just one example is the Sonnenschein–Mantel–Debreu theorem, and how that relates to the aggregate demand curve.
For another example of a problem with the neo-classical theory of value, look up Piero Sraffa and the Cambridge Capital Controversy.
The mainstream approach to all these core mathematical problems has been to ignore them. The same as what they have done regarding economic history. Anthropologist David Graeber has documented how archaeologists, historians, and anthropologists fully expected the evidence to support the arm chair economists supposition that money derived from barter (part of the rational neo-classicals use to ignore banks, money, and debt in their theories). What they found instead (with more and more evidence over the past 125 years) is that money derived from debt and credit. David complains that economists ignore the findings of these other fields, and keep printing the same historical mis-information in every economics text book which comes out!
It’s not that difficult. Here we have a huge 200 years old (or more) company named CAPITALISM INC. backed by all the tribes of economists (keynesian, monetarists, austrians, MMTers…) which for decades presented a wonderful balace sheet but… forgot to take care of depreciations and amortisations, that is CAPITALISM INC. used the resources of the 100% owned EARTH INC. which is valued zero in the balance sheet (so amortization of zero is zero). So this is my question: will you buy the shares of a company which made a huge investment WITHOUT taking care of amortisations ? And did you believe in the intellectual quality of all those (economists) who encouraged this marvelous Ponzi machine ? Would you like to spend one word to defend a category who don’t know the principles of thermodinamics but are deciding how our society (that is a thermodinamical system) should work ?
Alberto, humans really do not learn from history (world wide socialistic and nationalistic movements speak for itself). If there is a crises people start to doubt and question everything, primarily the economic system. The consequence of these thoughts are always the same like history tells us – establishing a new “socialistic” or “nationalistic” world which then should be paradise for all of us. This new system will be free of problems and unintended consequences of course. Peace and full employment will be established forever in this “infinite” social world.
The resources of EARTH INC. (commodities; like consumable) do not have to be amortized since these are not investments in a sense of that they pay interest rate. So there is no logic way to amortize goods which pay no interest. Quite the opposite is true, since commodities (and consumables) create in general costs (for storage) they can not be treated like investments in durable goods.
To control the supply of these scarce goods the capitalistic systems operates with the price mechanism which includes the storage costs (and all other costs). So people like you should preferably advocate for free markets with a free price system.
There’s a long history of proper monetary thought. Solon’s reforms, the first 300 years of Rome’s history. The schoolastics. The list of their names, over the centuries, includes John Locke (1692, 1718),
Benjamin Franklin (1729), George Berkeley (1735), Charles de Montesquieu (1748, in Montague (1952)), Thomas Paine (1796), Thomas Jefferson (1803), David Ricardo (1824),Benjamin Butler (1869), Henry George (1884), Georg Friedrich Knapp (1924), Frederick Soddy (1926, 1933, 1943), Pope Pius XI (1931) and the Archbishop of Canterbury.
The Progressive Era, John Stewart Mill as well as the French Physiocrats described in detail how to tax rents out of the economy. A free market is generally free for predators to take rents. It is a road to debt peonage, as we are seeing.
The price mechanism is bounded by the law. For example, regulatory costs are included in price. Capitalism needs to be saved from itself with proper taxation, good law, and real money. Otherwise, yes we are headed toward some sort of Statism.
REN, I agree. But the debt problem has nothing to do with resources of “EARTH INC.” which are not “amortized”. It is a clearing problem… A matter of a sound monetary system, which in fact I think we are lacking today. All the sweet talk about MMT or MR will not transfer our money into sound money.
But again, it is wrong proclaim a “new” (old) socialistic world because CAPITALISM INC. is the evil root of all our problems today.
I’m not advocating a NEW socialism and I’ve probably had to complement the term “amortized” with “not replaced”. This was the meaning of my rather confused post. Here we have a system that predates the reources where it can find them. At the beginning, resources were found at home, then in Asia, Africa, now in the extreme north etc… Resources have not an owner they are a collective property of mankind and they must be treated that way. On the contrary, Apple is a private company and I’ve no problem to see capitalism efficent in that way. I hope I’ve been a little more precise now. Anyway I’m appreciating some comments, REN’s as always.
Economist Steve Keen is going to be pleased that Andrew G Haldane (the author of this article) is advocating many of the same ideas that he’s been advocating for years now. Some of the sentences he uses are the SAME as Dr. Keen’s favorite quips. For example:
“Second, it underlines the importance of reinstating money, credit and banking in the core curriculum,…”
Keen says that every talk he gives! He says neo-classical economists don’t consider “money, banks, or debt” in their models.
Keen also says that the history of economic thought is no longer taught in the mainstream neo-classical economics departmens, just as the author implies here.
Keen also advocates borrowing from other disciplines the use of non-linear complex dynamic systems models and analysis rather than the DGSE or equilibrium analysis, which is what neo-classical economists use. Keen adds that these models are a LONG way from making useful numerical predictions, but they can give much better qualitative insights into the functioning of the economy. Keen has developed such models. See debtdeflation.com (one of Keen’s websites) for more information. Keen was recently at the Fields Institute of applied mathematics in Canada getting some help from the mathematicians to refine his models.
Most economists don’t even know the difference between money and debt. In 2012, accounting rules were finally updated to define money. (It is equity of the commonwealth, essentially equity in the total amount of goods and services.)
Yamaguchi’s system dynamics approach has had peer review the last four years, and he has modeled the entire world economy. Peer review is by system dynamics experts, not economists. His models show we are in a cul-de-sac with our current money system.
Thanks for letting me know about Yamaguchi. I was not aware of his work.
Most economists are not trained in systems dynamics. But, it appears to be a very powerful tool, similar is some regards to Keen’s “engineering” models. Yamaguchi and his doctoral students have spent the last four years modeling the world economy, and of course the U.S. economy.
“Also, the mathematics of mainstream economists has been flawed to begin with, regardless of the flaws in their assumptions and lack of support in the empirical data.”
Yes, precisely !…the foundations themselves (axioms) rest on quicksand…”efficient markets”, “rational agents”, the prisoner’s dilemma (which has been proven).
Two huge issues here: 1) the role that academic approaches to economics have played in the current real world situation (and how and why they have done so in the past, and might need to change in the future).
2) What real-world measures are called for to deal with the current global system.
Addressing the second, as the more acute and critical one, I would take issue with Haldane’s implicit suggestion that the solution is to go back to an earlier era: “For at least a century…{t}he management of bank money and credit was a clear public policy prerequisite for maintaining broader macroeconomic and social stability.”
Haldane himself then proceeds to describe a major reason why we can’t go back: the tremendously greater complexity, interconnectedness and speed of interaction within the global financial system.
However, not unrelatedly, the world has also shifted from one dominated by the west and centered in London, with the later addition of New York, with the rest of the world’s natural and human resources available for exploitation with little native capacity to resist (with the US expansion across a continent, the most extreme case). This meant a tremendous rate of credit driven expansion for western economies, while providing even ordinary working people in the west, a sufficiently improving living standard to keep them acquiescent as well, for much, though by no means all of that period.
Now, not only are we living in an increasingly multipolar world, but again not unrelatedly, we are pushing up against resource and environmental limits, that have heretofore never been a factor on this scale.
Obviously, all three of these factors have had a complex relationship to technological development, whose future role is difficult to foresee. However, the most prudent, if not the most likely forecast would be that the rate of growth, at least as measured by resource consumption/environmental impact must slow dramatically.
Moreover, social justice, another interconnected aspect, far from an ideological nicety, becomes a consideration of utmost real importance, when a rapidly rising tide can no longer lift the boats of all who might possibly exert any say in matters, and instead, social media and also near ubiquitous access to automatic weaponry, high explosives, sophisticated electronic devices, ‘hi-tech’ know-how, etc. have extended the ‘franchise’ to near universality.
It is for such reasons that in my view, fundamental change is called for, such as radical revisions in the ‘fractional reserve’ banking system that evolved during an era when a handful of central banks could believe they were capable of calling the shots. Paradoxically, the solution likely will also need to embody (as Haldane? also called for) a radically simplified approach.
The radical revison is circular filing Fractional Reserve bank money. It is time for the trash pile; and good riddance.
Can we make money debt free or not? The obvious answer is yes.
Makers of Goods and Wares simply need a stable money supply so they can use money. Money stands in as a good during a transaction. It can divide itself to match the value of a good, thus allowing price discovery.
How can bank money (BM) be stable when it drains away into nothingness at a high rate? BM also has debt contracts as a counter to BM formation. Those contracts are an exponential. We overlay an exponential onto a natural organic economy? The natural world does not grow exponentially. It really is a crazy system, and very surprising that so few economists call it out for what it is.
At least this article’s author is having a mea culpa, making him an outlier in the profession.
Your posts, along with the MR account of the way the system really works, have led me to focus on the current Fractional Reserve system as a root of the problem.
My instincts for compromise and continuity push me to ask whether banks can be allowed to function to some extent as they have. This is one reason why I have been asking if it would be feasible to establish an effective ’50% reserve’ requirement, which in my understanding would enable the banking system to create at most 1 dollar of credit/debt ‘money’ for every dollar of base money (compared I think to 9 collars of debt currently – with asset prices increased by an order of magnitude corresponding to the increase in dollars bidding for them, no wonder ordinary people have to go deep into debt to buy a house, get an education or medical care, etc). This would eliminate any real exponentiality (1 to any power is still 1).
However, I am open to the possibility that something more radical may be required. Part of my problem is how to predict how any radical change would play out – until something is actually tried. Perhaps, mathematical modeling that does not include patently absurd (though unacknowledged) starting assumptions, may be a help here.
Colin, I hope this doesn’t post twice. Chk out the chart of the century:
http://economicedge.blogspot.com/2010/03/most-important-chart-of-century.html
It is simple, change in gdp divided by change in debt. It shows a phase change transition. It is a mathematical certainty, given the structure of a debt based system. The debt claims will have to be written down, or we go to another system.
Personally, I prefer another system, where the claims are bought down with debt free money, as the claims come due. Also, we can have full employment simultaneously.
Interesting future.
I remember seeing that chart some time ago (perhaps reposted by Barry Ritholz?). I have certainly resisted all along the notion that ‘recovery’ means Americans being able to return to accumulating debt, but I now have a better understanding of the role this plays in our current system.
If we have really reached some kind of ‘saturation point’, change is upon us, regardless of our preferences for economic systems or theories.
That’s an interesting chart. Thanks for posting it!
I don’t see a problem with a debt based money, as long as some limitations are put in place. Those limitations are justified because banks really do have a charter to create money/debt out of thin air… a power not enjoyed by most “businesses.” Thus they should be treated as “special” businesses, similar to the way we treat monopolies: as wards of the state.
I believe economists such as Steve Keen have demonstrated mathematically that debt based economies can function indefinitely (though with a regular business cycle superimposed) without exploding. I think what that chart that you posted shows is the effects of an out of control financial services sector which has effectively captured the government: a fox guarding the hen house scenario… wherein the amount of profits going to finance (which is nothing more than overhead on the real economy) has gone from 10% to over 40%. Guess who has all the campaign dollars now? Will any meaningful limits be placed on the financial wards of the state in such a scenario, or will the state be corrupted to serve the purposes of the specially chartered financial institutions and their related industries (e.g. “private equity” AKA “leveraged buyout companies, etc.)?
According to anthropologists debt was the basis of money and has served as a crude form of “money” in primitive modern day societies (actually these primitive economies are “gift economies” rather than strictly debt based, but the two are related). Barter is really only used as the basis of an economy when a group of people, familiar with money as we know it (e.g. prisoners), are deprived of their money for some reason.
I see some value to mathematical modeling, but I don’t believe it can capture the role of human nature.
Perhaps a debt-based economy can function without ‘exploding’, provided the debt ratio is kept strictly limited.
Mitigating the harmful effects of even a ‘regular’ business cycle (meaning what we’ve grown used to – with only the more vulnerable members of global society taking it on the chin) would have value.
However, the degree of credit/debit creation that we have historically accepted may inevitably lead to enough of the concentration of wealth and influence that we currently see, to fatally compromise the system. At what point does ‘drag’ or ‘overhead’ become malignancy?
We had such a system once – it was called a gold standard. Miners dug gold out of the ground and deposited it with the Government, which issued currency for the gold at the statutory rate. A wild west of unregulated banks took deposits and issued credit far in excess of their deposits, and every 20 years or so confidence was lost and there was a bank run which made many banks go bust and made their deposits disappear to “money heaven”. The Federal Reserve System was created to prevent that 20-30 year boom-bust cycle. So instead of a 20-30 year cycle we now have a 70-100 year cycle. And it is different, since TPTB will kick the can as long as they can. So, the timelines of busts are streeetccchhhheeeddd out over a much longer timeline, with unknown consequences. Perhaps, we will one day go back to the old-fashioned gold standard. If we do, the world will have gone full circle.
Man you are full of unfounded assertions today.
Are you familiar with David Graeber’s book “Debt: The First 5000 Years”? Graeber is an anthropologist, and his book documents just what you’d alluded to: switching back and forth between a metal based monetary system and a credit based one. He claims that the evidence points to the very first civilizations having a credit based system. Barter was always present, but only used for irregular trade between strangers, never the basis of the economy. Later, the large empires in Greece, Rome, India, and China needed convenient way to provision their standing armies, since these empires were based on a system of constant conquest, pillaging, and enslavement. That’s when coins were invented and became the worldwide basis of money. Interestingly, the Phoenicians, the biggest trade based empire, were late adopters of coinage, preferring their credit system for centuries beyond the invention of coins. When the great empires either collapsed, or were forced to change course (like in China), then nobody was minting coins any longer, economies reverted back to credit systems, but the credit was denominated in the coinage of the old empires! Eventually coins (and paper money) redeemable in precious metals made a comeback, and for centuries that again was the basis of money… up until about 1971 when Nixon closed the Gold Window. We are now back on a credit/debt based system…. again denominated in the old metallic based currency (much like after the fall of Rome). Who knows what will come next?
My sense is that credit/debt systems operating, particularly in periods without a functional currency, depended on close personal ties based on family and/or close-knit ethnic and religious communities.
Ezamples of the latter include Jains in India, Fulani (?) Muslim traders in the western Sahel, Jews in Europe and Asia, Quakers and early Calvinists in the west, etc. A system serving Muslim clients operates currently.
Such systems could eventually become quite elaborate: up until the Renaissance, credits and debits within a wide network of European trade were cancelled and remaining balances settled on an annual basis at Besancon in a great fair outside the auspices of any major political power. (A significant cofactor to consider would be the history of forms of interest in relation to such systems).
The role of trust and honest dealing between associates could not have been more salient.
Mechanistic approaches to economics may disregard human intangibles and value systems. Whatever may develop in future, I would not discount their importance.
Wow, you sound like you already know quit a bit about it. I have not yet finished Graeber’s book (and indeed I’ve skipped around in it a bit), but what you say largely agrees with him I think.
He brings up the “gift economy” of primitive societies (both past and present) for example. The idea here is that debts are categorized into rough equivalences, and you’re right, this is done between people that all know and mostly trust each other. Say I admire your cow… then you are typically obliged to GIVE me the cow. Then I’m obliged to do or give something back to you eventually which is roughly equivalent (i.e. do work for you, or present you with a couple of lambs when they are born, etc.). Barter doesn’t enter into this kind of day to day economy… only when strangers from the tribe on the other end of the valley visit does immediate this for that barter take place.
Gift economies, by their nature, are inexact. If I repay you with something that’s seen to be too little, then the creditor (you) can humiliate me. If I repay you with “more” then I’m seen to be the “bigger” man, and you now owe me. If I repay you an exact equivalence, then it really means I want nothing more to do with you. Lots of social interactions get played out through this kind of economy.
I was watching a clip from Penn and Teller the other day featuring their travel through Egypt. I noticed that they had an experience much like Graeber referred to. Teller admired a woman’s bag, so she gave it to him! Very different than what we in the West are used to.
Graeber goes on to discuss the “temple economies” of ancient Sumer. He also makes the point that debts really only become quantified exactly when societies adopt legal means of redress for wrongs done. For example, a code of law may spell out PRECISELY how many chickens it takes to compensate someone for losing an eye, etc. In these cases the counter parties are insistent on the EXACT amount… and if you don’t have the 20 chickens, then you’d better have three goats!… or there’s going to be trouble!
BTW Colin, I took a crack at responding to your question to Cullen regarding bank capital. I’m not sure I’m correct, but I had similar questions several months ago and asked both Scott Fullwiler and Cullen. Scott wrote me back answering some questions I had about his article “Krugman’s Flashing Neon Sign.” I recommend the article!
I also found some good example bank balance sheets various places… with explanations. So hopefully my answers are actually correct and not confusing!
Thanks Tom, and see my reply on the Q&A site.
I have a background in anthropology (see Ruth Benedict’s classic “Patterns of Culture” for a colorful but concise account of a ‘gift culture’ run amok – the NW Native American potlach: something like it always seems to happen when some people have access to too much ‘stuff’ – and others end up with too little). This has been supplemented by historical reading (I learned about the Besancon fairs from Fernand Braudel, who pioneered an spproach focusing more on geography and economic developments.)
Until discovering PC, I avoided economics, because I could make no sense of it. I really need to look at the Graebner book, but I’m already spending too much time on this site.
Ah, that explains why you’re so knowledgeable! Even though I was an Engineering major in college, I did take an anthropology class, and I recall the contrast between the Hopi and Pacific NW Indians and their crazy sounding potlach’s.
Graeber has done some interviews on the web. Plus, if you go to mises.org (an Austrian site), and look up “Anthropologist” under Robert Murphy’s columns, you’ll find a LOT of info. Murphy criticized an interview Graeber did about his book (w/o actually reading the book) and Graebner responded with a series of very detailed and LONG comments. Interestingly, Murphy never joined in, but Graebner jousted with several Austrian adherents commenting there. Later Murphy collected Graebner’s responses, and published that in summary form… and then published his response in yet another article. In the end, Murphy tried to smooth over some of his earlier criticisms but basically declared victory. I’m telling you all this because by the time you finish reading Graebner’s comments you’ve basically seen a large part of the book!
The book itself gets a little philosophical for me, which induces me to skip ahead to the next juicy bit! I’d still recommend it though.
I might add that I don’t see ‘gift’ exchange systems as embodying ‘money’ in any true sense, although they draw on the same psychological substrates (Cullen has a somewhat different take here).
In my view, in addition to establishing a standardized unit of account, ‘money’ involves a symbolic relationship to the actual goods and services that are exchanged, underpinning the desire for it to be ‘real wealth’ that can be both hoarded as a store of value, and transferred. Even when currency is just paper, rather than shiny metal, it is dressed up with ‘sacred’ emblems conveying the sovereign status of the issuer/guarantor. And even when we know that it is just deleting electronic digits in one computer location, and entering them in another, we have to think about it as something material, that ‘flows’ from one place/owner to another.
By contrast, my sense would be that the obligation established in receiving a gift is personal, and must be repaid directly: A could not make a gift to B and then transfer B’s obligation to reciprocate from himself to C. One could also not ‘hoard’ such obligations indefinitely: the reciprocation would have to occur within a fairly limited time period, set by custom.
It’s probably worth splitting financial markets away from the rest of free markets when it comes to assuming that the invisible hand analogy is a good one.
Model-making is inevitable, and will always involve exclusion of some things but there has been a tendency to then proceed with the assumption that the excluded things either do not exist or never change and so don’t matter.
Which can lead to errors.