On the Austrian Theory of Money, a Reply to David Graeber

David Graeber and Robert Murphy have been debating the validity of the monetary regression theory.  They seem to be talking past one another.  Graeber is assuming that Austrian theory agrees with neo-classical theory in areas where it does not, and Murphy is assuming that Graeber is substantially more familiar with Austrian ideas than he seems to be.  To clear up the confusion, we need to take a step back and start at the beginning.

Like all theoretical sciences, economics is concerned with the identification of invariants.  Austrian theory and the more mainstream neo-classical theory agree on this much, but strongly disagree on methodology.

Standard treatments of economics begin by attempting to model human decision making and then apply techniques inherited from classical mechanics to aggregate these individual decision functions into economic relationships.  As Graeber is no doubt aware, the conventional approach relies on the Von Neumann-Morgenstern utility theorem and its normative description of rational behavior.  (More recent approaches use cumulative prospect theory, but the differences need not concern us here.)

Austrians have long contended that this approach is untenable and unscientific.  First, any non-trivial economy is too highly dimensional and too non-linear to be analytically tractable.  Conventional economic theories rely on various idealizing simplifications.  Austrians contend that these idealizations render the results meaningless.  At a minimum, they assume away the very questions economics ought to focus on answering.  More importantly, the analogous physical theories rely on the studied system being linear time-invariant.  (Thus a physicist can model motion in the absence of friction because his answer will merely need a simple correction).  Real economies do not have this property; consequently, the standard idealizations do not produce approximately correct claims, they produce nonsense.

Second, Austrians do not think that economic theories should depend on decision theory.  Because no tractable theory of decision making can capture all the nuances of actual human beings, the “laws” identified by standard economics are not true invariants, they depend on an underlying decision theory that is known to be false.  And, again, because of the inherent complexity and non-linearities involved, we cannot even claim that these “laws” should be approximately correct, as far as we know, they can be arbitrarily wrong.

In the Austrian account, the economy cannot be explained by a series of differential equations modeling the impact of perfectly rational human decisions.  The economy is a complex adaptive system that emerges from the interactions of real human beings.  Barring the development of substantially better mathematical tools, we simply cannot make the kind of quantitatively precise statements made by other schools of thought.  At best we can make qualitative statements about the necessary properties of economic systems.

Thus far, Austrians seem to agree with Graeber:

[Conventional economics assumes] that human beings are rational, calculating exchangers seeking material advantage, and that therefore it is possible to construct a scientific field that studies such behavior. The problem is that the real world seems to contradict this assumption at every turn.

Austrians confront this problem head-on.  Human action is taken as a given; whatever the nature of the underlying decision process, Austrian claims will remain valid.  Instead of making a series of ludicrous idealizations, Austrians develop their theory by a series of thought experiments or, as Ludwig von Mises calls them, imaginary constructions.  Via these thought experiments, Austrians attempt to prove that certain properties of economic systems are logically necessary and thereby identify the invariants of economics.

Graeber believes that he has anthropological evidence disputing the conclusions of Austrian economics.  He is wrong on several counts.  First, he incorrectly assumes that economics does not account for the situations that have been observed.  Second, he relies on observations from economically primitive societies to refute claims only applicable to more developed economies.  Third, he assumes that by showing that a thought experiment is contrived, he has disproved the conclusions drawn from it.

For example, Graeber presents multiple examples of trade as it actually takes place in primitive societies and argues that these examples contradict the predictions of economic theory.  In fact, these examples are well known and explicitly accounted for:

Ethnology and history have provided us with interesting information concerning the beginning and the primitive patterns of interpersonal exchange. Some consider the custom of mutual giving and returning of presents and stipulating a certain return present in advance as a precursory pattern of interpersonal exchange. […]  However, to make presents in the expectation of being rewarded by the receiver’s return present or in order to acquire the favor of a man whose animosity could be disastrous, is already tantamount to interpersonal exchange.

Thus, far from falsifying the claims of economics, Graeber’s examples are actually cases of the very bartering that he wishes to prove did not take place.  (Economically, “barter” applies to all interpersonal exchanges that do not involve money; exactly what form the barter transactions take is an empirical question and beyond the reach of economic theory.)

Moreover, Graeber seems to believe that the Austrian account of money rules out the possibility of credit-bartering.  It does not.  The use of spot transactions to illustrate the nature of pre-monetary price formation is merely a descriptive convenience.  The arguments have nothing to say about credit because it is irrelevant to the thought experiment.  All that is required is that the transactions be “direct” exchanges (as opposed to “indirect,” i.e., monetary, exchanges):

The elementary theory of value and prices employs, apart from other imaginary constructions to be dealt with later, the construction of a market in which all transactions are performed in direct exchange.

Importantly, this construct is 1) imaginary and 2) very general.  A transaction in the economic sense is much broader than formal haggling between merchants; mutual gifting and other such examples are deliberately included.  This imaginary construction is made in full and complete awareness of the fact that true economic calculation requires money; “money prices are the only vehicle of economic calculation.”  In the Austrian account, money’s role as the enabler of economic calculation is paramount.

Turning to the theory of money in particular, economics does not claim that money is a universal phenomena.  Rather,

money presupposes an economic order in which production is based on division of labor and in which private property consists not only in goods of the first order (consumption goods), but also in goods of higher orders (production goods).

Thus economics actually predicts, in complete agreement with Graeber’s evidence, that his primitive tribes will not need or develop money.  Rather, the need for economic calculation, and thus money, will arise in situations like those he describes as existing in ancient Mesopotamia.  A band of a dozen or so people does not need money to make reasonable decisions between alternatives, but a massive temple complex with “thousands of people engaged in agriculture, industry, fishing, and herding” needs to measure inputs and outputs — it needs money.  The question is how money developed.

Once we have money, it is easy to see that it is valued because it can be used in exchange.  But if money is valuable today because it can be exchanged for things people want, this seems to lead to an infinite regress.  At some point there was no money, so how did we go from having no money to having a money that is valued almost exclusively because it can be used in exchange?

The Austrian explanation is that goods in a pre-monetary economy are not all equally marketable. “While there is only a limited and occasional demand for certain goods, that for others is more general and constant.”  People can either exchange directly (barter) or they can exchange indirectly (by trading what they have for something more marketable with the intention of using the more marketable good to acquire what they want).  Thus, even if a person doesn’t need something specific right now, he will be willing to trade his less marketable goods for goods that are more marketable because this will put him in a better position to get what he wants in the future.  This process creates a positive feedback loop — as more people trade less marketable goods for more marketable ones, the value of the more marketable ones is increasingly determined by the marketability itself instead of its original use-value.

In this way an economy sufficiently complex to need money can develop it.  The money will be a good that had preexisting exchange ratios with other economic goods (so that people can trade for it) and it will be a good that was initially relatively more marketable than the others (so that people will want to trade for it).

Graeber’s account of Mesopotamia supports these conclusions.  The economy was sufficiently complex to need money.  Silver had preexisting exchange ratios in the form of cultural understandings and credit arrangements.  It was highly marketable because of the demand by temple complexes and thus it emerged as money (and, hence, the unit of account).

In fact, it would seem that this logic is stronger in an economy dominated by credit transactions instead of spot ones.   Because the future is uncertain, lenders do not know for sure what they’ll need at the time of repayment.  Conversely, the borrower doesn’t know exactly what he’ll have in the future. Consequently, both of them are motivated to demand that repayment be in the form of a highly marketable commodity.  (Indeed, the collection rules for the Judean legal system are based on marketability.)

Thus, despite his claims to the contrary, Graeber has not disproved economics.

35 comments… add one

  • Graeber has an agenda which comes before everything else for him.

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  • Akiva,

    This is my first time to your site, here by way of Bob Murphy and David Graeber.

    That was a very informative and enlightening post. As with most controversies of this sort, both sides are right to some extent. Your post here was an excellent illustration of why that is so often the case.

    I’ll be back to read more of your writing.

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  • I think your argument is persuasive and your conclusion (“Thus, despite his claims to the contrary, Graeber has not disproved economics.”) is spot on. Both Murphy and Wildberry cut Graeber too much slack and give him too much credit.

    In the debate, Graeber attacked economics in general and Austrian economics in particular as unscientific, implied–if he did not declare–that he had considerable knowledge of AE, and referred to himself as an “economic anthropologist.” But his comments in the several forums where the debate has been argued demonstrate a profound ignorance of the Austrian method, and, I believe, several of the “facts” he adduced wouldn’t stand up in court.

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    • Ned,

      You may be right, I don’t know Graeber beyond what has been exposed here. But if Akiva is right about talking past one another, then Graeber must have said something that is valid.

      Where Graeber goes off the rails is to conclude, incorrectly I think, that if he is right about the standard order or emergence of money in a society in which there is a prior period in which money does not exist, that this settles the larger issue of whether economics in general and AET in particular is falsified.

      Murphy is wrong, IMHO, where he insists that money must arise AFTER a particular series of events and that somehow after that point in time for that particular society, money is always the basis for calculations of value in exchanges. Obviously, even in a advanced western economy, like the U.S., much of the phenomena that Graeber describes occurs to this day. David Friedman makes reference to it in his book “Laws Order” and cites the author who writes about Shasta ranchers. I shared a story about something similar in rural Mississippi.

      Graeber lost me,though when he claimed that “capitalism is a poor way to implement communism”. I think he tries to define those terms in ways that reveal his weakness in the fundamentals of economics and specifically AET.

      Perhaps it is just that Graeber does not acknowledge that AET addresses those human actions which are preceded by economic calculation, and fails to recognize that, though socially important and valuable calculations do take place in the context of “gift” and “credit” exchange, where he uses “credit” to mean “indebtedness”, such exchanges are not within the scope of catallactics.

      Graeber could have offered his anthropologic data as a challenge to AET to show how this is consistent with that economic theory, and Murphy could have responded much like Akiva did.

      That is not what happened, and I am grateful, therefore for Akiva’s comments here.

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  • Yes, Graeber makes the assertion that there is no evidence for barter in ancient economies. That alone should discount his entire theory.

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  • Economically, “barter” applies to all interpersonal exchanges that do not involve money; exactly what form the barter transactions take is an empirical question and beyond the reach of economic theory.

    Can you please explain why you think this is a justified conflation? Unless I am mistaken, it seems to presume that societies can neatly be divided into money/nonmoney societies.

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  • I mean, one way to read the statement would be to see it as an assertion that “economists” take this to be a verity, but that makes the whole thing a tad circular/vacuous, since the point that follows from Graeber’s work (and others, but I digress) is that “economics” does not describe all possible modes of interaction that have to do with the exchange (broadly conceived) of goods and services and whatnot. Anyway, not to be rude, but is that what you meant, or are you trying to say something else?

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    • First you have to keep in mind what we are trying to do — find true statements about economic systems that do not depend on an underlying decision theory. So we take human action as a given and then abstract away the unnecessary details so that we are left with broad categories. The categories are necessarily complete — we want to cover all possible forms of action.

      All theoretical sciences work by this same principle; physics for example has the concept of “force.” Because, it is impossible to enumerate every possible occurrence, we use abstract categories to derive general rules that apply to all the specific instances that category covers.

      So “interpersonal exchange” is a category. It includes merchants haggling, but it also includes mutual gifting or even charity. Now interpersonal exchanges can be split into those that involve money and those that do not. By convention, we call the non-monetary ones “barter” — it is much shorter than “non-monetary interpersonal exchange.” By itself this isn’t claiming anything, it’s just a category we use as a basis for reasoning about these types of situations.

      So, in answer to your question, “‘economists’ take this to be a verity” because it is a defined abstraction, and these abstractions allow us to make statements that encompass “all possible modes of interaction.”

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      • By convention, we call the non-monetary ones “barter” — it is much shorter than “non-monetary interpersonal exchange.”

        This is not how barter is normally defined by non-Austrians.

        It is usually defined as “the direct spot exchange of commodities between parties each trying to maximize their utility.”

        This explicitly excludes gift & credit exchange along with monetary.
        For almost all purposes your definition is useless.

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    • P.S. In reference to your comment about this article on Graeber’s blog post, the first part of the article is there because the discussion was missing context and because Graeber repeatedly made claims about “economics” that rightfully only apply to one specific school of thought. I wanted to clear those problems up before dealing with the issue itself. Absent that contextual background, it would seem like I was simply rejecting Graeber’s claims out of hand when I said, “economically, ‘barter’ applies to all interpersonal exchanges that do not involve money.”

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  • Foppe, Akiva certainly doesn’t need me to respond, but just in case he hasn’t the time nor the inclination, let me offer this: You seem, like Graeber, not to understand praxeology and the Austrian method. Austrian economics, as opposed to other schools including neo-classical, is the study of human action. Now if you know of any exchange, in the broadest possible meaning of that word, that does not involve purposive human action then you may say that economics (specifically AE) does not describe all modes of interaction that have to do with exchange (and much, much more). However, exchange (and much, much more) is well within the compass of human action and thus discoverable in all of its ramifications by AE.

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  • Ned: you are perfectly correct in assuming I know little to nothing about AE, which is why I’m simply responding to what is written here. Yet your response does not tell me anything substantive about AE ‘praxeology’ or methodology; all you give me is a bunch of very general statements that probably describe the way pretty much every social scientist thinks about the scope and rigor of his own work, but that (by itself) tells me very little about the actual methodology, and/or the boundaries AE has decided to set for itself.

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    • Foppe, you acknowledge the obvious when you admit you know little or nothing of AE. However, you say regarding my comment: “that (by itself) tells me very little about the actual methodology, and/or the boundaries AE has decided to set for itself.”

      Foppe, both Akiva and I have told you that the boundaries of AE are set by human action in all of its manifestations, and that AE’s methodology is a priori. I wish I could give you a sufficient course on AE in a blog-length comment, because if I could the world would certainly be a more civilized place, but it isn’t that easy. In many respects, AE is simple; but it is not easy. It is particularly difficult to grasp for anyone who thinks he or she already knows what science is all about, or all there is to know about what science is. However, if you have an open mind and would like learn something about AE, its method, and its reach, particularly as it impacts the empirical “evidence” adduced by Professor Graeber, which is the crux of the discussion that has arisen out of Graeber’s interview and Murphy’s criticism thereof, you could discover why you and he both err if you will take the time to read two very small books, both publications available free of charge on line thanks to Mises.org. They are: THE ULTIMATE FOUNDATION OF ECONOMIC SCIENCE, by Ludwig von Mises, approximately 155 pages; (http://mises.org/books/ufofes/default.aspx); and ECONOMIC SCIENCE AND THE AUSTRIAN METHOD, by Hans-Hermann Hoppe, 88 pages. Professor Graeber would also benefit from reading these two books, for they could save him from errors in his work as an “economic anthropologist.”

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      • It is particularly difficult to grasp for anyone who thinks he or she already knows what science is all about, or all there is to know about what science is.

        Yes, you have both asserted (something akin to the idea) that “the boundaries of AE are set by human action in all of its manifestations, and that AE’s methodology is a priori.” But as I already suggested the first time, that statement by itself does not mean anything to someone not already familiar with AE (or any theory, for that matter). It is a statement of intent, not of method. Which is why I suggested it would be helpful if you could spend a few choice words explaining that. But rather than doing that, you decide to treat me to a fairly repetitive, rather patronizing reply, apparently in an attempt to make me enthusiastic about AE, which “I might be able to learn if I have an open mind”. Only at that point do you supply something by way of substantive information, but then only in the form of two entire treatises. Is it really that hard to summarize the main points?
        Anyway, for various reasons (starting with the fact that your assertion that social sciences methodology can be a priori suggests a certain scientific naivete on your part, and supplemented by what this says), I am not convinced of the methodological soundness of praxeology.

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        • Foppe: “Anyway, for various reasons (starting with the fact that your assertion that social sciences methodology can be a priori suggests a certain scientific naivete on your part, and supplemented by what this says), I am not convinced of the methodological soundness of praxeology.”

          No, it is as I suggested, that someone trained as an empiricist and taught that the empirical way is the only way to discover anything, will find it hard or even impossible to grasp the scientific method of the Austrian-economic science. Such blindness is sometimes described as cognitive dissonance. Of course you wouldn’t be convinced since you have acknowledged that you know nothing about it, and now petulantly declare, so to speak, “And you can’t make me learn anything about it either–so there; take that.”

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      • You are incorrectly assuming the universal existence of the
        • right to the product of one’s labour
        • right to engage in exchange
        • right to property
        • right to engage in production
        • buying & selling

        Your defintion of barter is incorrect & utterly useless.

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      • the boundaries of AE are set by human action in all of its manifestations, and that AE’s methodology is a priori.

        What use is Austrian economics when it comes to analyzing non-market economies?

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  • (excuse grammatical errors)

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  • Graeber proved that commodity money didn’t come into existence at least 1500 years after credit money was in use. And he showed that barter is not how primitive societes transact.

    You can define “human action” or prexeology” to be whatever you want, it has no bearing on this simple historic fact: all money is debt. And all debt is money, albeit with differing liquidity/acceptability.

    So he disproved Menger’s theory driven by “logic” (Menger’s logic), but not necessarily disproved the rest of Austrian theorizing. It just casts doubt on whether “logic” is a good method to understand nature, maybe that is why most sciences went towards empiricism.

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    • “Graeber proved that commodity money didn’t come into existence at least 1500 years after credit money was in use. ”

      Credit money requires negotiable instruments. These are a relatively late innovation, the earliest legal records that can be read as allowing for negotiability come from the 1st century BCE. If Graeber had evidence that this legal innovation came into existence substantially earlier, that would be a major discovery in and of itself and I would fully expect him to have mentioned this at some point in the discussion. He has not done so.

      Moreover, Graeber’s own description of his work doesn’t mesh with your claims about it. He’s not talking about credit in the form of some mythical “temple unit.” He’s talking about a credit-dominated economy that uses silver, a commodity, for money.

      “And he showed that barter is not how primitive societes transact.”

      I’ve already explained why he has not shown this. And I don’t even think he’s trying to claim it. He’s using “barter” in a different sense than economists do. So when Graeber says that primitive societies do not “barter”, he means they don’t transact in a certain form. When an economist says that primitive societies “barter”, he means that they transact without money. Neither claim speaks to the other.

      As for the rest of your comment, I seriously doubt that you even bothered to read the post. Feel free to contribute something constructive, but simply reasserting your premises is not going to change anyone’s mind.

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      • Credit money requires negotiable instruments.

        Huh? Are you familiar with the phenomenon of a ‘bar tab’, or similar arrangements with neighborhood stores such as they existed a while ago? Why would these things require ‘negotiable instruments’ that only became available in the first century BCE?

        He’s talking about a credit-dominated economy that uses silver, a commodity, for money.

        Have you read this article as well? Because unless you’re referring to a specific example, this seems to be covered in the 5th or so paragraph already.

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        • Credit money is not the same thing as transacting on credit. In the original interview and everything he’s posted since Graeber is talking about transacting on credit, not about credit money.

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          • I can see some stuff written in I.1.25-30, but I’m not at all convinced that it is very sensible.
            It/You seem to be saying that there is an important distinction between stuff that is payable on demand in principle even while it is delayed, and another type, which is delayed. What does the difference consist in? Usury?

          • “I can see some stuff written in I.1.25-30, but I’m not at all convinced that it is very sensible.”

            You are looking in the wrong place for negotiability rules. The Romans didn’t have them as far as anyone can tell. You need to look at (mostly) Aramaic sources to find the stuff I’m talking about. But this is a side-point.

            “It/You seem to be saying that there is an important distinction between stuff that is payable on demand in principle even while it is delayed, and another type, which is delayed. What does the difference consist in? Usury?”

            I honestly have no clue what point you are trying to make. A credit transaction means that it isn’t spot — i.e. somebody delivers later instead of now. Credit money means that some standardized unit of debt (e.g., US Treasuries) circulates as money. Nothing Graeber has said has anything to do with credit money.

          • Ah, so you are interested in circulation. Perhaps this is relevant? Debt, p. 214:

            Mesopotamia (3500-800 BC)
            We have already had occasion to note the predominance of credit money in Mesopotamia, the earliest urban civilization that we know about. In the great temple and palace complexes, not only did money serve largely as an accounting measure rather than physically changing hands, merchants and tradespeople developed credit arrangements of their own. Most of these took the physical form of clay tablets, inscribed with some obligation of future payment, that were then sealed inside clay envelopes and marked with the borrower’s seal. The creditor would keep the envelope as a surety, and it would be broken open on repayment. In some times or places at least, these bullae appear to have become what we would now call negotiable instruments, since the tablet inside did not simply record a promise to pay the original lender, but was designated “to the bearer” — in other words, a tablet recording a debt of five shekels of silver (at prevailing rates of interest) could circulate as the equivalent of a five-shekel promissory note — that is, as money.5
            We don’t know how often this happened; how many hands such tablets would typically pass through, how many transactions were based on credit, how often merchants actually did weigh out silver in rough chunks to buy and sell their merchandise, or when they were most likely to do so. No doubt all this varied over time. Promissory notes usually circulated within merchant guilds, or between inhabitants of the relatively well-off urban neighborhoods where people knew one another well enough to trust them to be accountable, but not so well that they could rely on one another for more traditional forms of mutual aid.6 We know even less about the marketplaces frequented by ordinary Mesopotamians, except that tavern-keepers operated on credit, and hawkers and operators of market stalls probably did as well.7

            Notes:
            5· Pruessner (1928) was perhaps the first to point this out.
            6. They appear to have been widely used by Old Assyrian merchants operating in Anatolia (Veenhof 1997).
            7· Powell (1978, 1979, 1999:14-18) provides an excellent assessment of the evidence, emphasizing that Babylonians did not produce scales accurate enough to measure the tiny amounts of silver they would have had to use to make ordinary household purchases like fried fish or cords of firewood in cash. He concludes that silver was largely used in transactions between merchants. Market vendors therefore presumably acted as they do in small-scale markets in Africa and Central Asia, today, building up lists of trustworthy clients to whom they could extend credit over time (e.g., Hart 1999:201, Nazpary 2001).

          • What he’s calling “credit money” isn’t the same thing that an economist would call “credit money.” Even if there’s enough evidence to conclude that these debt arrangements were actually negotiable, that doesn’t automatically make them the money. They are still calculating in terms of silver.

            To have credit money, people have to account in terms of the credit notes. In other words, the notes need to have a value independent of the debt they record. Assuming that negotiability existed, it is entirely conceivable that these credit claims (or, more realistically, some subset thereof) could have become the money. I find that conclusion unlikely given the evidence I’ve seen, but there’s nothing in economics that rules out the possibility.

      • Mesopotamian Bronze age “silver money” was “credit money”, it’s value set by fiat & issued by the temples & palaces, & accepted, along with other commodities at prices (ratios) fixed in an administered price system, in payment of obligations owed to the temples & palaces.

        “It was the overall schedule of price equivalencies, created along with weights and measures to form a system of interlocking parts able to coordinate resource flows and denominate debts owed to the public institutions.” – Michael Hudson

        Money was created “to facilitate settlement of the debts that ensued from Mesopotamia’s specialization of production as between the large institutions and families on the land. The debts owed by traders to the temples and palaces for commercial advances were part of this system, as were rent debts. Viewing trade as barter obscures these debt relations between public and private enterprise.” – Michael Hudson

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  • To Dr. Graeber and other,

    It seems clear that many of you are not really familiar with the concepts of Austrian econimics (AE) as evidenced by your use of terms of neo-classical economics as though they are applicable directly to AE.

    A good intro is a series of short youtube videos made by an intelligent girl who goes by the name of praxgirl.

    So far there are 10 videos posted.

    http://www.youtube.com/user/praxgirl

    Watch them in order to get the full meaning.

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  • Good post, but it misses the crux of the Graeber, MMT, Institutionalist, Keynesian, Creditary, Chartalist, Monetary Analyst (Schumpeter’s term) story.
    Money simply is not, is nothing like a good or a commodity or a thing or a claim to a thing, and could not and did not develop from them or direct barter transactions. Money is transferrable credit/debt – a social relationship between two agents recognized in some sphere . The Austrian story is very much like confusing a marriage – a social relationship- with the wedding ring – a thing – which only represents it. Menger makes a fundamental category error at the beginning.
    What he’s calling “credit money” isn’t the same thing that an economist would call “credit money. It is confusing to use “economist” to refer to only one group of economists – the ones who subscribe to Menger’s et al’s commodity theory of money. To the other schools of economics – dominant during the middle of the last century – ALL money is credit money, and they use “credit money” about the same way Graeber does. Money is a form of credit; all money is debt. Dollar bills, Treasury bonds, bank reserves, gold coins, tally sticks are all negotiable credit/debt instruments. Graeber, along with these many others, holds that there is no evidence for the commodity theory, and it is a terrible description of actual economies.
    The same applies to “barter” – “Economically, “barter” applies to all interpersonal exchanges that do not involve money” – is not the usual definition. The usual definition, barter meaning exchange of goods and services, commodities, of course rules out “credit-bartering” – exchanging commodities for credits. Of course if the word “barter” is redefined to mean all exchanges, then barter has to come before money. The point of credit/state/chartalist theories of money is that basically once you have “credit-bartering” you have a creditary economy, a monetary economy. Money is defined as negotiable credit/debt. Credit/debt is the fundamental concept, not money. And neither have anything to do with any commodities in essence.

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  • Eh, Calgascus, can you explain this: “Money is a form of credit; all money is debt. Dollar bills, Treasury bonds, bank reserves, gold coins, tally sticks are all negotiable credit/debt instruments. Graeber, along with these many others, holds that there is no evidence for the commodity theory, and it is a terrible description of actual economies.”

    This seems to me to be so obviously wrong that I find it hard to believe that anyone would buy it. Gold, the universal first choice of most people among all forms of money, is not a form of credit nor is it a debt. Gold coins are merely gold, a commodity, cast into a convenient size, shape and form. No credit nor debt nor State need be involved. If what you say is the position of “Graeber, MMT, Institutionalist, Keynesian, Creditary, Chartalist, [and] Monetary Analyst, then Mises HUMAN ACTION should be required reading for all of those you mention who would like to improve the quality of their output.

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    • Ned Netterville:

      Gold, the universal first choice of most people among all forms of money, is not a form of credit nor is it a debt. Gold coins are merely gold, a commodity, cast into a convenient size, shape and form. No credit nor debt nor State need be involved.

      Gold was not the first form that money took.
      All money, regardless of physical form, represents a debt.

      The value of almost all Gold coins is set, by fiat, by the issuer, that, in the case of ancient coins, is always the public sector.
      Any gold standard is also a fiat system, the value of gold being set by government instead of by markets.

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  • My main interest was clearing up semantic points. People will talk past each other if they do not understand each other’s definitions. Pretty much the history of economics in a nutshell. :-)
    Gold, the universal first choice of most people among all forms of money No, in basically every way. Gold was a historical latecomer. And since nobody has a gold standard, it is not used as money anywhere in any sense nowadays. Do people pay their bills with gold? Do people save in gold, like dragons sitting on their hoards? Why not have a theory that applies to what people actually do, to Human Action in the real world? And then notice that it implies that the Austrian theory is founded on a spectacularly wrong category mistake.
    Monetary Analysis is the most general term – Schumpeter usefully divided economics into Monetary Analysis & Real Analysis, basically the division between creditary/state theories and commodity theories. Mises & Menger simply did not understand what the Monetary Analysts were saying, and I am not sure that people here do either. Although there was some progression in Mises’s understanding, perhaps if he had lived to 140 he would have gotten it. The best & most careful current exposition of the nature of money is Ingham’s The Nature of Money. Again, the Austrian error could not be more fundamental. They have a theory of “wedding rings” (a particular physical representation of a relationship) which they confuse with the relationship itself ( “marriages”; the credit/debt relationship and a particular type of such a relationship: money).

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  • Calguscus: Naah!

    Gold is the first choice–as a matter of people’s preference. I did not say it was temporally the first thing used as money. That is your straw man. Own it. Read what I wrote and dispute that rather than flailing your misinterpretation. And talk about talking past each other. You didn’t say a word in support of your amazing assertion that gold is a form of debt (or credit), unless your curous reference to semantics and definitions was a subtle acknowledgment that you were wrong.

    All fiat currencies are imposed by force, the force of legal-tender laws forcibly removing people’s freedom to chose what it is they will use for contracts and to settle debts, “public and private,” as those dollar fiats put it. The fact that those fiats are only used because people are forced to use them demonstrates beyond argument that gold (and to a lesser extent silver) are the people’s first choice (think preference, not time) in money. Care to prove me wrong? Get rid of those legal-tender laws, as well as any counterfeiting laws designed to protect governments’ fiat-money monopolies, and then we can argue about it.

    The rising dollar price of gold ($1795 at the moment) indicates that many people today are using gold as a store of wealth, which is to say, as money. It is being used by more and more smart people who have had it up to their choking point with those ceaselessly depreciating fiat currencies they are forced to accept, which drain away rather than store their hard-earned wealth. That is precisely what people in the real world are actually doing with gold. You should try it. Those who have been using it to store their wealth as it comes in (viz., for money), which they don’t need immediately for transaction requiring legal tender, have, over the past decade or so, found that their gold very effectively served to store their wealth–if it hasn’t also made them a little wealthier. The only reason gold hasn’t replaced fiats in people’s exchange transaction is because they are forced by law to use fiats.

    Calguscus, you assert, without a shred of logical support:

    “Monetary Analysis is the most general term – Schumpeter usefully divided economics into Monetary Analysis & Real Analysis, basically the division between creditary/state theories and commodity theories. Mises & Menger simply did not understand what the Monetary Analysts were saying, and I am not sure that people here do either.”

    Monetary analysis??? Mises invented it! Before his THEORY OF MONEY AND CREDIT, monetary analysis didn’t exist. His dissertation on the subject at a very young age remains the most comprehensive and authoritative monetary analysis yet written. Schumpeter wouldn’t have been able to make his unfortunate division had not Mises introduced him to monetary analysis. But divide it from “real analysis?” Come, come. It can’t be done–if it is to be considered economics rather than tiddliwinks.

    The first comprehensive exposition on money remains the best ever written, viz., Mises 1912 classic, THE THEORY OF MONEY AND CREDIT.

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  • “Economically, “barter” applies to all interpersonal exchanges that do not involve money; exactly what form the barter transactions take is an empirical question and beyond the reach of economic theory.”

    This is not the usually definition (or Graeber’s) of barter.
    Barter is defined as a form of economic echange involving the immediate direct exchange of commodities by two parties both trying to maximize their utility.
    This excludes credit, monetary & gift exchange.

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  • Graeber’s account of Mesopotamia supports these conclusions. The economy was sufficiently complex to need money. Silver had preexisting exchange ratios in the form of cultural understandings and credit arrangements. It was highly marketable because of the demand by temple complexes and thus it emerged as money (and, hence, the unit of account).

    Nonsense.

    Silver was acquired, refined, standardized, issued into the economyc as silver money, sanctioned, valued & set as the unit of account, by the temples & palaces (public sector).
    The value of “silver money” was set by fiat equal to a gur of barley.

    From expert Michael Hudson:
    “The essential point to recognize is that the early monetary system was a more complex phenomenon than the monetary commodity itself. Its major initial application was to facilitate settlement of the debts that ensued from Mesopotamia’s specialization of production as between the large institutions and families on the land. The debts owed by traders to the temples and palaces for commercial advances were part of this system, as were rent debts.

    “‘Money’ was more than a commodity; it was the overall schedule of price equivalencies, created along with weights and measures to form a system of interlocking parts able to coordinate resource flows and denominate debts owed to the public institutions.”

    “Rulers were charged with maintaining the rhythms of nature, they proclaimed Clean Slates to restore balance by annulling debts owed to the palace, its collectors and other creditors.”

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