Monday, October 26, 2015

The Rise of States, Inequality, and Economics - part 5

Last time we saw that the idea that money came out of loans extended by the temples of Mesopotamia, and ancient systems of justice. These units of account circulated as money. It was also encouraged by trading regimes. But in most cases,social relationship and local exchange prevailed.

So once you have money, do markets then naturally emerge? You need money for markets to form, but once money is introduced, is it accurate to say that the markets we think of today just naturally" came into being?

As Graeber points out, it is out of the primordial debt to the state that markets emerge. Furthermore, the state uses this power to issue coinage that must be returned to it. These coins are demanded as acceptance of payment. this allows internal markets to form as a way of provisioning soldiers. Only after the state creates money can we have markets. And markets are also creations of the state:
Since the Barter myth didn’t hold up Graeber attends to another foundational myth of economics. Money and markets don’t arise spontaneously out of barter societies as a resolution to the coincidence of double needs. Rather they arise through state intervention. Graeber gives an illuminating hypothetical example: 
  "Say a king wishes to support a standing army of fifty thousand men. Under ancient or medieval conditions, feeding such a force was an enormous problem- unless they were on the march, one would need to employ almost as many men and animals just to locate, acquire, and transport the necessary provisions. On the other hand, if one simply hands out coins to the soldiers and then demands that every family in the kingdom was obliged to pay one of those coins back to you, one would, in one blow, turn one’s entire national economy into a vast machine for the provisioning of soldiers, since now every family, in order to get their hands on the coins, must find some way to contribute to the general effort to provide soldiers with the things they want. Markets are brought into existence as a side effect." 
Boom. Money, taxes, and markets all in one fell swoop. In other words the “economy” arises as a way to meet artificial needs created by the state desiring to have a class of people who aren’t occupied with meeting their own needs: soldiers, aristocrats, priests etc… 
But if this is the way that it develops what could give the state sufficient gravitas, sufficient authority to pull such a maneuver? Setting aside the proposition that states are just glorified thugs (admittedly plausible), what would persuade so many people through history to go along with this arrangement? 
Here is where economists get to work on another myth that Graeber dismantles. Some economists which subscribe to this state/credit theory of the origin of money propose that there is something called “Primordial Debt”. This is the idea that just being alive is a kind of debt. They suggest that early religions held that all of our time on earth is borrowed from death and that sacrifice arose as a way of making a payment in lieu of our lives on this primordial debt. Supposedly, kings and emperors just claimed this religious impulse for themselves, our primordial debt became a debt to the state and there you have it, justification for all sorts of schemes like money and taxes.
Debt: Primordial Debts (Two Friars and a Fool)

Here's Graeber himself:
Taxes are also key to creating the first markets that operate on cash, since coinage seems to be invented or at least widely popularized to pay soldiers – more or less simultaneously in China, India, and the Mediterranean, where governments find the easiest way to provision the troops is to issue them standard-issue bits of gold or silver and then demand everyone else in the kingdom give them one of those coins back again. Thus we find that the language of debt and the language of morality start to merge.
In Sanskrit, Hebrew, Aramaic, ‘debt,’ ‘guilt,’ and ‘sin’ are actually the same word. Much of the language of the great religious movements – reckoning, redemption, karmic accounting and the like – are drawn from the language of ancient finance. ..How did this happen? Well, remember I said that the big question in the origins of money is how a sense of obligation – an ‘I owe you one’ – turns into something that can be precisely quantified? Well, the answer seems to be: when there is a potential for violence. If you give someone a pig and they give you a few chickens back you might think they’re a cheapskate, and mock them, but you’re unlikely to come up with a mathematical formula for exactly how cheap you think they are. If someone pokes out your eye in a fight, or kills your brother, that’s when you start saying, “traditional compensation is exactly twenty-seven heifers of the finest quality and if they’re not of the finest quality, this means war!”

Money, in the sense of exact equivalents, seems to emerge from situations like that, but also, war and plunder, the disposal of loot, slavery. In early Medieval Ireland, for example, slave-girls were the highest denomination of currency. And you could specify the exact value of everything in a typical house even though very few of those items were available for sale anywhere because they were used to pay fines or damages if someone broke them.

But once you understand that taxes and money largely begin with war it becomes easier to see what really happened. After all, every Mafiosi understands this. If you want to take a relation of violent extortion, sheer power, and turn it into something moral, and most of all, make it seem like the victims are to blame, you turn it into a relation of debt. “You owe me, but I’ll cut you a break for now…” Most human beings in history have probably been told this by their debtors...
What is Debt? – An Interview with Economic Anthropologist David Graeber (Naked Capitalism)

So markets are consequence of war and conflict, not peaceful trade. Back to Wray:
In summary, money first existed as a unit of account. The development of private, alienable property allowed private loans. As loans came to be written in a standard money of account, the means of payment function of money developed. This gradually permitted production for market to earn the means of settling debts, which generated a medium of exchange function for money. The first standardized money of account was wheat, but it was subsequently replaced by barley. Money, recorded as a debt denominated in a unit of account, would be created as part of a forward debt contract. Money acting as a medium of exchange or means of payment would take a physical form (wheat or barley, and later, clay tablets, wooden tally sticks, metal coins, or paper IOUs), denominated in terms of the idealized money of account. Because production in a market system is always monetary production, its purpose is to realize production in money form. Thus, the purpose of production in a “market” economy is to accumulate money-denominated units of the social measure of wealth. Accumulation of money-denominated assets becomes the universally recognized path to wealth; the money of account becomes the social unit of value.
Under this capitalist market, the settling of credits and debits (or, we might say, the selling of usury) is the primary focus, with actual production being secondary:
The market, then, is not viewed as the place where goods are exchanged, but rather as a clearing house for debts and credits. Indeed, Innes rejected the typical analysis of the medieval village fairs, arguing that these were first developed to settle debts, with retail trade later developing as a sideline to the clearing house trade. On this view, debts and credits and clearing are the general phenomena; trade in goods and services is subsidiary—one of the ways in which one becomes a debtor or creditor (or clears debts). Innes viewed the creditor-debtor relation as the fundamental social relation lying behind money’s veil. There is no “natural” relation-free money that lies behind the credit money.

So the conventional view is of an expanding web of markets, from town and village, then spreading to the cities, then to the entire country, then between countries, and eventually to the world. But as Karl Polanyi points out, this is exactly backwards. Small-scale economies were self-sufficient and embedded in social relations, households, and local custom. The "market" actually began in towns where extensive trade came together. These markets were extensively regulated. The reason they were in specific towns and trading areas was actually to protect the local economy from the market.

Here's Karl Polanyi:
The logic of the case is, indeed, almost the opposite of that underlying the classical doctrine. The orthodox teaching started from the individual's propensity to barter; deduced from it the necessity of local markets, as well as of division of labor; and inferred, finally, the neces    sity of trade, eventually of foreign trade, including even long-distance trade. In the light of our present knowledge we should almost reverse the sequence of the argument: the true starting point is long-distance trade, a result of the geographical location of goods, and of the "division of labor" given by location. Long-distance tradae often engenders markets, an institution which involves acts of barter, and, if money is used, of buying and selling, thus, eventually, but by no means necessarily, offering to some individuals an occasion to indulge in their alleged propensity for bargaining and haggling. 
Eventually, the market comes to subsume the social relations of Europe. This, however, was not without conflict. Money, prices and markets eventually spead not outward, but inward, from the great trading towns on the rivers to the villages:

At a later stage, as we all know, markets become predominant in the organization of external trade. But from the economic point of view external markets are an entirely different matter from either local markets or internal markets. They differ not only in size; they are institutions of different function and origin. External trade is carrying; the point is the absence of some types of goods in that region; the exchange of English woolens against Portuguese wine was an instance. Local trade is limited to the goods of that region, which do not bear carrying because they are too heavy, bulky, or perishable, plus both external trade and local trade are relative to geographical distance, the one being confined to the goods which cannot overcome it, the other to such only as can. Trade of this type is rightly described as complementary. Local exchange between town and countryside, foreign trade between different climatic zones are based on this principle. Such trade need not imply competition, and if competition would tend to disorganize trade, there is no contradiction in eliminating it. In contrast to both external and local trade, internal trade, on the other hand is essentially competitive; apart from complementary exchanges it includes a very much larger number of exchanges in which similar goods from different sources are offered in competition with one another. Accordingly, only with the emergence of internal or national trade does competition tend to be accepted as a general principle of trading.

These three types of trade which differ sharply in their economic function are also distinct in their origin. We have dealt with the beginnings of external trade. Markets developed naturally out of it where the carriers had to halt as at fords, seaports, riverheads, or where the routes of two land expeditions met. "Ports" developed at the places of transshipment. The short flowering of the famous fairs of Europe was another instance where long-distance trade produced a definite type of market; England's staples were another example. But while fairs and staples disappeared again with an abruptness disconcerting to the dogmatic evolutionist, the part was destined to play an enormous role in the settling of Western Europe with towns. Yet even where the towns were founded on the sites of external markets, the local markets often remained separate in respect not only to function but also to organization. Neither the port, nor the fair, nor the staple was the parent of internal or national markets. Where, then, should we seek for their origin?

It might seem natural to assume that, given individual acts of barter, these would in the course of time lead to the development of local markets, and that such markets, once in existence, would just as naturallv lead to the establishment of internal or national markets. However, neither the one nor the other is the case. Individual acts of barter or exchange—this is the bare fact—do not, as a rule, lead to the establishment of markets in societies where other principles of economic behavior prevail. Such acts are common in almost all types of primitive society, but they are considered incidental since they do not provide for the necessaries of life. In the vast ancient systems of redistribution, acts of barter as well as local markets were a usual, but no more than a subordinate trait. The same is true where reciprocity rules: acts of barter are here usually embedded in long-range relations implying trust and confidence, a situation which tends to obliterate the bilateral character of the transaction...
Indeed, on the evidence available it would be rash to assert that local markets ever developed from individual acts of barter. Obscure as the beginnings of local markets are, this much can be asserted: that from the start this institution was surrounded by a number of safeguards designed to protect the prevailing economic organization of  society from interference on the part of market practices. The peace of the market was secured at the price of rituals and ceremonies which restricted its scope while ensuring its ability to function within the given narrow limits. The most significant result of markets—the birth of towns and urban civilization-was, in effect the outcome of paradoxical development. Because the towns, the offspring of the markets, were not only their protectors, but also the means of preventing them from expanding into the countryside and thus encroaching on the prevailing economic organization of society. The two meanings of the word "contain" express perhaps best this double function of the towns, in respect to the markets which they both enveloped and prevented from developing.

The typical local market at which housewives procure some of their daily needs, and growers of grain or vegetables as well as local craftsmen offer their wares for sale, shows an amazing indifference to time and place. Gatherings of this kind are not only fairly general in primitive societies, but remain almost unchanged right up to the middle of the eighteenth century in the most advanced countries of Western Europe. They are an adjunct of local existence and differ but little whether they form part of Central African tribal life, or a cite of Merovingian France, or a Scottish village of Adam Smith's time. But what is true of the village is also true of the town. Local markets are, essentially, neighborhood markets, and, though important to the life of the community, they nowhere showed any sign of reducing the prevailing economic system to their pattern. They were not starting points of internal or national trade.

Internal trade in Western Europe was actually created by the intervention of the state. Right up to the time of the Commercial Revolution what may appear to us as national trade was not national, but municipal. The Hanse were not German merchants; they were a corporation of trading oligarchs, hailing from a number of North Sea and Baltic towns. Far from "nationalizing" German economic life, the Hanse deliberately cut off the hinterland from trade...The trade map of Europe in this period should rightly show only towns, and leave blank the countryside—it might as well have not existed as far as organized trade was concerned. So-called nations were merely political units, and very loose ones at that, consisting economically of  innumerable smaller and bigger self-sufficing households and insignificant local markets in the villages. Trade was limited to organized townships which carried it on either locally as neighborhood trade or as long-distance trade—the two were strictly separated, and neither was allowed to infiltrate the countryside indiscriminately.

Such a permanent severance of local trade and long-distance trade within the organization of the town must come as another shock to the evolutionist, with whom things always seem so easily to grow into one another. And yet this peculiar fact forms the key to the social history of urban life in Western Europe. It strongly tends to support our assertion in respect to the origin of markets which we inferred from conditions in primitive economies.
The Great Transformation, pp. 60-63

Randall Wray:
...all pre-capitalist societies are much more similar to one another than any is to capitalism. The origins of markets based on use of money lie in the early development of private property; however, money and monetary production remained “embedded” in noneconomic social relations until the emergence of a “monetary economy” relatively recently...
According to Polanyi, the attempt at creating a self-regulating market economy failed,thus engendering a protective response to limit the functioning of markets precisely because they could not accomplish desired social provisioning. Finally, Heilbroner argues that the creation of capitalist society represented a revolutionary movement in which an economic system is created whose overriding function is to accumulate “capital,” rather than to ensure social provisioning. This continual “expansive metamorphosis of capital” is the essential logic of capitalism. Furthermore, this logic of accumulation takes the form of accumulation of greater nominal values. Clearly, capitalism—a system based on nominal accumulation—is a system very different from previous institutionalized interactions among humans and between humans and nature.
Richard Heinberg writes:
Here is all of economic history compressed into one sentence: As societies have grown more complex, larger, more far-flung and diverse, the tribe-based gift economy has shrunk in importance, while the trade economy has grown to dominate nearly every aspect of people’s lives, and has expanded in scope to encompass the entire planet...
Today we take money for granted. But until fairly recent times it was an oddity, something only merchants used on a daily basis. Some complex societies, including ancient Egypt, managed to do almost completely without it; even in the U.S., until the mid-20th century, many rural families used money only for occasional trips into town to buy nails, boots, glass, or other items they couldn’t grow or make for themselves on the farm. In his marvelous book The Structures of Everyday Life: Civilization & Capitalism 15th-18th Century, historian Fernand Braudel wrote of the gradual insinuation of the money economy into the lives of medieval peasants: “What did it actually bring? Sharp variations in prices of essential foodstuffs; incomprehensible relationships in which man no longer recognized either himself, his customs or his ancient values. His work became a commodity, himself a ‘thing.'”
Economic History in 10 Minutes (Richard Heinberg)

Where did this idea of trade come from? the first global economy was developed by the Arabs around the Indian Ocean in the tenth through twelfth centuries. These great Muslin trading regimes eventually came into contact with Europe whose royalty desired the goodds of the Far East. The goods avaiable in the fairs, from silks to linens to perfues to pearls to spices to sugar predomnatly came from Muslim lands. The crusades brought much of this into Europe via plunder. It was actually these Arabic trading regimes which first developed the ideas of "free markets"
Imagine a society with a deep distrust of government. In this society the government is basically restricted to matters of defense. The job of the government is to guard the borders and defend against invaders in order to maintain a safe area for its citizens to prosper. Meanwhile, in this society the most highly valued activity is commerce. Merchants are seen as heroes who take heroic risks to reap huge rewards and retire, ideally in lavish comfort. The government is strictly prohibited from involving itself in commerce, and most everyone agrees that wealth and poverty are down to the work of the individual in the unregulated market. Does this society sound like Ayn Rand’s paradise? It is actually a fairly accurate description of Muslim Caliphates in the Middle Ages.
This is no coincidence. Adam Smith appears to have borrowed some of his ideas, particularly the concept of “the invisible hand of the market”, from medieval Persian writers. Even more directly the roots of Western Capitalism are found in the interactions with Muslims during the crusades. The famous “invention of banking” by the Knights Templar most textbooks talk about wasn’t so much an invention as it was straight up imitation of their Muslim enemies for the purposes of war. Usury was such a reviled practice that it was only deemed acceptable in the context of Holy War against infidels. Christians thought it fitting to destroy the Muslims with their own evil tools.

This marriage of war and trade in the west is foundational. At the heart of capitalism is the notion that trade is really just a less-violent type of warfare. I can beat you in business, and if that fails, then I’ll beat you with mercenaries. The merchants of Venice and Florence kept their own mercenary armies, and as the tools of trade grew in popularity profit-making endeavors were increasingly backed by the power of the state. Columbus was back by the Queen of Spain and it is no surprise that his trade expedition, when it failed to find the wealthy civilizations of the far east to profit from, turned to conquest as an alternative way to profit. Trade and war were much the same thing to him.

The violence of trade in western societies is a stark contrast with the Muslim Caliphates of the Middle Ages which, because of their strict separation between government and commerce never thought of sending in the soldiers if a trade fell through. If contemporary Libertarians were consistent in their convictions they too would advocate a reduced military for pure defense and a non-interventionist foreign policy. The combination of a laissez-faire deregulated economy and a neo-conservative imperialist foreign policy is especially toxic. Manipulating oil prices with drone warfare is the sort of thing the monster behind the 4th Crusade, Pope Innocent III, would have approved of, especially since the victims are those infidel Muslims.
What Muslim Caliphates and Libertarians Have in Common (Two Friars and a Fool)

As Constantinople fell, Europeans looked for alternative means to access Asian markets, and began the voyages of discovery, which culminated in the landing of Christopher Columbus in Hispaniola. This opened up the plunder of the New World by Western Europe. As wealth flowed in, markets became ever more prominent. Arabic ideas of "impersonal markets" were pressed into service.
Once money and markets became to dominant economic force, the expansion of money became the overriding goal. This was the birth of capitalism. As social relations disintegrated, people needed to meet their needs by earning money in the market. And it was governments who forced the market on the wider society.
It was obvious to the classical political economists that, if left to itself, the free market would require centuries to produce the conditions necessary for the invention of capitalism. A great many things stood in the way of a quick and "orderly" transition from feudalism to capitalism, but especially the remarkable tenacity with which the rural peasants adhered to traditional agricultural practices and subsistence farming. Even when wages in the city were high, the peasants refused to accept factory jobs and stayed on their farms. They preferred a life full of holidays, not manufactured goods. And, when times got rough, the peasants would agree to make salable commodities, but only if they could make the commodities in their homes, out of which they could not be enticed, even when the wages for the exact same work was twice as high in the factories! To the political economists and "moral philosophers" of the 18th century, the peasants weren't within their rights; they revolted because they were rude and uncivilized, morally defective or psychologically impaired. In any case, the peasants were standing in the way of "progress" and "civilization." What capitalist had time to wait around until the peasants evolved on their own? None. Only the state -- that is, only the state's monopoly on and ability to use legalized violence -- could force these people to do what the "economic rationality" of others dictated that they do. And what if the peasants resisted, which they did in fact do? "Send troops into the blazing districts," screamed Edward Gibbon Wakefield in 1831; "proclaim martial law; shoot, cut down, and hang the peasants wholesale, and without discrimination" (emphasis in original). 
Following Marx, who originally found a variation of the term in The Wealth of Nations, Perelman calls these concerted interventions by the state instances of "primitive accumulation..." 
Drawing upon personal diaries, letters written to colleagues and newspapers, and lectures delivered to college classes, i.e., texts that are usually ignored by contemporary political economists, Perelman shows that all of the classical political economists -- yes, even Adam Smith -- believed in, lobbied for and directly benefited from English or French primitive accumulation. Drawing upon these same texts, Perelman is also able to suggest why Adam Smith worked so hard to avoid the subject in The Wealth of Nations. The history of primitive accumulation, especially in Ireland and Scotland in the 17th and 18th centuries, proved that Smith was right when he told his students: "Laws and government may be considered in every case as a combination of the rich to oppress the poor, and preserve to themselves the inequality of the goods which would otherwise be soon destroyed by the attacks of the poor, who if not hindered by the government would soon reduce the others to an equality with themselves by open violence" (emphasis added). It just wouldn't do to discuss or even openly acknowledge the reality of primitive accumulation and the oppression of the poor by the rich, especially in a book such as The Wealth of Nations, which was written as much to curry favor amongst politicians, potential benefactors and Smith's peers, as it was to set forth a theory or methodology of modern economics. And so, Smith carefully followed the advice he himself had given his students ten years before The Wealth of Nations was published: if we desire to sway the opinion of sensitive or unsympathetic readers, "we are not to shock them by affirming what we are satisfied is [in fact] disagreeable, but are to conceal our design and beginning at a distance, bring them on to the main point and having gained the more remote ones we get the nearer ones of consequence." 
Smith thus managed to avoid the fate of his fellow Scot, Sir James Steuart, who was imprudent enough to be completely honest. Ten years before Smith's book came out, Steuart published An Inquiry into the Principles of Political Economy, which was not, as Perelman says, based "on the airy fiction of a [voluntary] social contract." It was instead based upon the frank recognition that ancient slave societies such as Sparta offered, in Steuart's own words, "the perfect plan of [modern] political economy." Because they forced people (the poor and the conquered) to produce for others as well as for themselves, slave societies suppressed what Steuart called "idleness" and "the laziness of the people," and thereby allowed the masters and rulers to eat and live luxuriously without doing any work of their own. Thus, Steuart argued, slave societies were able to become much wealthier, stronger and longer-lasting than free societies, in which the poor and the conquered are allowed to produce only as much food as they themselves need. But Steuart thought Sparta to be a "violent" and barbaric republic because it wasn't Christian: e.g., it allowed people to enslave other people. And so Steuart championed capitalism, a putatively enlightened form of slavery in which "men are [instead] forced to labor because they are slaves to their own wants," in particular, to their need for food. But Steuart wasn't willing to wait for plagues, famines or wars to make the British masses hungry enough to submit to capitalist slavery. It was in fact possible that these catastrophes wouldn't come or wouldn't be severe enough to do the job and in precisely the way desired. And so Sir James advocated that the state should forcibly evict the masses of rural peasants from the land, turn their farms into pastures, and thereby create the hunger, poverty and misery necessary to provide capitalism with sufficient numbers of people willing to submit themselves to wage labor. Though he wasn't the only writer of the time to be completely honest about the brutality of the invention of capitalism, Steuart's book was objected to, taken to task and then completely forgotten about. It struck a nerve, the very one Adam Smith tried to soothe.
Mass Murder and Slavery: The Invention of Capitalism (Not Bored)

The coercive power of the elites was replaced by the coercive power of the market. Power was now based on the ownership of money. Here's Chris Dillow:
You might find it odd that state intervention is necessary for the development of free, well-functioning markets. You shouldn't. As Karl Polanyi pointed out, it was state intervention which drove the development of markets in the 15th and 16th centuries. 
David Graeber writes:
    "Despite the dogged liberal assumption...that the existence of states and markets are somehow opposed, the historical record implies that the exact opposite is the case. Stateless societies tend also to be without markets" (Debt: the first 5000 years, p50)

All this poses the question. Why, then, haven't we seen state help to create what Robert Shiller has called financial democracy?

It's certainly not because of a commitment to laissez-faire: the massive implicit subsidy to banks tells us that the state is very happy to intervene in the financial system.

Instead, the answer was pointed out by Marx: the state serves the interests of capitalists, not the people. And financial capital would rather financial markets consisted of rent-seeking than of enhancing aggregate welfare. Crony capitalism has encouraged  financialization, not financial democracy.
In this sense, a well-functioning market economy requires that the state be freed from the grip of capitalists. In some respects it is capitalism that is the enemy of a market economy, and Marxism that is its friend.
Markets need Marxism (Stumbling and Mumbling)

Or to put it another way, all markets require socialism. Otherwise all you have is feudalism, or perhaps "oriental despotism,"not liberal market economies at all.  It was state intervention, not the absesnce of state intervention, that allowed the Industrial Revolution to flourish. The reason the Industrial Revolution took off in England is commonly attributed to "private enterprise" and a lack of government relative to strong, centralized states" like China, which is portaryed as Oriental Despotism constantly stealing everything it can from productive classes and merchants. As Gregory Clark writes:
The popular misconception of the preindustrial world is of a cowering mass of peasants ruled by a small, violent, and stupid upper class that extracted from them all surplus beyond what was needed for subsistence and so gave no incentives for trade, investment, or improvement in technology. These exclusive and moronic ruling classes were aided in their suppression of all enterprise and innovation by organized religions of stultifying orthodoxy, which punished all deviation from established practices as heretical. The trial and condemnation of Galileo Galilei by the Holy Inquisition in 1633, for defending the Copernican view that the earth revolved around the sun (figure 8.1), seems an exemplar of the reign of superstition and prejudice that was responsible for the long Malthusian night.

There may have been societies before 1800 that fit this popular stereotype. There were frequent attempts by religious authorities to impose fallacious dogmas about the natural world. But we shall see that, as an explanation of the slow technological advance of the world as a whole before 1800, the prevailing view makes no sense. It is maintained only by a contemporary variety of dogmatism—that of modern economics and its priestly cast (sic).
Gregory Clark, A Farewell to Alms, p. 145

But the reality is totally wrong. It was China that was much more like Adam Smith's liberal paradise than was England:
Mercantilism, as practiced throughout this period in Great Britain, was not simply a fascination with collecting gold. The British government actively looked to strengthen manufacturing (of imported raw materials) and used military and naval power to open markets with that purpose in mind. To do this it taxed heavily, borrowed heavily, and spent heavily. 
What to make of this? There is no necessary link between strict laissez-faire policies and growth. The first industrial nation in the world was anything but laissez-faire, and it intervened far more deeply into its economy than China, which functioned in some sense as the idealized “night watchman” state of Adam Smith. There is little to no evidence that government “just getting out of the way” leads to development. The interventions Great Britain did make certainly resulted in massive monopoly rents to small groups of people at times. So let’s not go overboard in the other direction and conclude that massive state interventions are necessary or optimal. But it is valuable knowing just how un-laissez-faire Britain was during this period.
Great Britain and Laissez Not-so-Faire Economics (The Growth Economics Blog)

The reason that it's so difficult to get to the markets free from all government interference that libertarians so desire is that it has never existed!

Now the coercive power of elites was replaced by the coercive power of markets. And the coercive power of markets has but one goal - to expand the supply of money forever by turning the earth's raw materials into waste as fast as possible.
What is remarkable is how we’ve blinded ourselves to the coercive element of our own system. From Robert Heilbroner in Behind the Veil of Economics:
    "This negative form of power contrasts sharply with with that of the privileged elites in precapitalist social formations. In these imperial kingdoms or feudal holdings, disciplinary power is exercised by the direct use or display of coercive power. The social power of capital is of a different kind….The capitalist may deny others access to his resources, but he may not force them to work with him. Clearly, such power requires circumstances that make the withholding of access of critical consequence. These circumstances can only arise if the general populace is unable to secure a living unless it can gain access to privately owned resources or wealth…"

    "The organization of production is generally regarded as a wholly “economic” activity, ignoring the political function served by the wage-labor relationships in lieu of baliffs and senechals. In a like fashion, the discharge of political authority is regarded as essentially separable from the operation of the economic realm, ignoring the provision of the legal, military, and material contributions without which the private sphere could not function properly or even exist. In this way, the presence of the two realms, each responsible for part of the activities necessary for the maintenance of the social formation, not only gives capitalism a structure entirely different from that of any precapitalist society, but also establishes the basis for a problem that uniquely preoccupies capitalism, namely, the appropriate role of the state vis-a-vis the sphere of production and distribution."

What struck me about Heilbroner’s discussion, as if he was tip-toeing around the issue, and it was not clear whether because he could not formulate a crisp description of the power relationships, or that it was clear to him but he really didn’t want to come out and say what he saw.

Ian Welsh ventures where Heilbroner hesitated to go:

    "The fundamental idea of our current regime is one that most people have forgotten, because it is associated with Marx, and one must not talk about even the things Marx got right, because the USSR went bad. It is that we are wage laborers. We work for other people, we don’t control the means of production. Absent a job, we live in poverty. Sure, there are some exceptions, but they are exceptions. We are impelled, as it were, by Marx’s whip of hunger. It took a lot of work to set up this system, as Polyani notes in his book “the Great Transformation”, but now that it has happened, it is invisible to us."

We have to sell our labor (or be supported by someone who does that) as a condition of survival. Now that may not seem peculiar since that has been the state of affairs in most advanced economies for generations. The seeming exceptions, like farmers and even fishermen, are now little capitalists; they own equipment and sell their goods to wholesalers of various sorts. This order was imposed after the feudal era. As Yasha Levine explained, citing Michael Perelmen’s The Invention of Capitalism:

    Faced with a peasantry that didn’t feel like playing the role of slave, philosophers, economists, politicians, moralists and leading business figures began advocating for government action. Over time, they enacted a series of laws and measures designed to push peasants out of the old and into the new by destroying their traditional means of self-support.

    “The brutal acts associated with the process of stripping the majority of the people of the means of producing for themselves might seem far removed from the laissez-faire reputation of classical political economy,” writes Perelman. “In reality, the dispossession of the majority of small-scale producers and the construction of laissez-faire are closely connected, so much so that Marx, or at least his translators, labeled this expropriation of the masses as ‘‘primitive accumulation.’’

    Perelman outlines the many different policies through which peasants were forced off the land—from the enactment of so-called Game Laws that prohibited peasants from hunting, to the destruction of the peasant productivity by fencing the commons into smaller lots—but by far the most interesting parts of the book are where you get to read Adam Smith’s proto-capitalist colleagues complaining and whining about how peasants are too independent and comfortable to be properly exploited, and trying to figure out how to force them to accept a life of wage slavery.

And this might put the “failure of capitalism” theme in context. If you have a system that requires that people sell their labor as a condition of survival, yet fails to provide enough opportunities to sell labor to go around, you have conditions for revolt. Hungry, desperate people having nothing to lose. That, and not charity, is the root of the welfare state, to provide a buffer for when the capitalist system chokes up and presumably on a short-term basis, fails to provide enough jobs (that and to provide for people who are infirm, handicapped, or otherwise cannot work, which communities in England did in the early modern era).

So you can see the obvious tension: the capitalist classes in America, to increase their riches further, have been squeezing workers harder by not hiring as they did in the past. We’ve never had a “recovery” in the post-WWII era with so little of GDP growth going to labor (meaning both hiring and wage increases). In the past, the average was over 60% and the lowest was 55%. I haven’t seen a recent update, but the last figures I saw was that the level for this “recovery” was under 30%. Yet simultaneously, theres’s a full-bore effort on to gut the remaining safety nets. If this isn’t a prescription for social and political instability, I don’t know what is.

And Welsh gives some clues in a must-read new post as to why we are in a mess:

    "Basically, being a hunter-gatherer is about as good as it gets for most of human existence. There are some better agricultural societies to live in for brief periods (certain periods of Roman history, say) but they are rare. Industrial society produces better medicine and goods, but we work harder and have vastly more chronic disease even at the same age, and industrial society includes as its concommitent things like the widespread rape in the Congo and African poverty: that’s a requirement of our society, is not incidental."

   " But hunter-gatherers lose confrontations with pastoralists and agricultural societies. It’s a great way to live, but more dense societies were better at violence, so hunter-gatherers were forced to the margins…."

    "If you want a society, then, which is prosperous and egalitarian, with the proceeds of increased production going to everyone and not just a few, you must have an internal structure of power which gives ordinary people quite a bit, makes concentration of power in private hands difficult, makes the government unable to use too much power against its own citizenry while (and this is the important bit) still being able to defend itself externally, and able to resist internal putsches. Egalitarian societies which cannot defend themselves get overwhelmed by hierarchical societies which are better at violence."

    "This extends to monetary matters. If outsiders with money can buy up your society and upset your internal political and productive relationships because they are more efficient, or just bigger, or have their capital more concentrated: if you will let them buy you up because some part of your society wants to cash out, then whatever internal relationships you have are vulnerable. This has happened to vast swathes of the third world, where Westerners come in and buy out traditional relationships. NAFTA pushed millions of Mexicans off their farms, made Mexico weaker because those people now needed to pay for food (often foreign, and also less nutritious) and made Mexico, objectively, worse off than before NAFTA. But some Mexicans got very rich by selling out…"

    "We think of irrationality as bad, but rational decision making leads to be betrayal. If someone’s going to offer me more than I can otherwise earn to betray the rest of my people, a lot of folks are going to take that deal unless they have the irrational belief that it’s wrong, and a rational belief that if they do it, those who have an irrational belief in the system will hurt them, or even kill them."

    "This is ideology. Any ideological system that doesn’t produce people willing to die and kill for it, will lose to an ideology that does. The question is not whether violence is permitted, the question is when it is permitted. Most of us want to live in a peaceful society, I certainly do. But that peace is always and everywhere undergirded by rules about when to commit violence, a willingness to do so and an ability do it well. Societies and ideologies that do not do violence well exist at the sufferance of those who do, and live under the conditions and in the places that those good at violence permit. Generally very bad conditions."
This is a very nasty conundrum at the root of power that few like to discuss so directly. It should not be surprising that there are no easy answers, and even enlightened compromises are difficult to keep in balance over time.
The Coercive Power of Capitalism (Naked Capitalism)

The nineteenth century was a time of great upheaval and a seeking out of alternatives to the capitalist monster that was eating the planet. Despite the material improvements, social unrest was rampant. The reason there was so much questioning of the economic system, and so much unrest, in the nineteenth and early twentieth centuries is that, unlike today, people actually remembered a time before markets and capitalism:
In “Age of Acquiescence,” [Steve] Fraser pursues a comparison often noted between our time and what Mark Twain called “The Gilded Age,” those decades of the last turn of the century when wealth and power were gathered at the top and powerlessness and poverty collected at the bottom. Why, Fraser asks, do workers and citizens today accede to the inequalities and injustices of capitalism that they refused to accept 100 to 150 years ago? After the Civil War, farmers and workers responded to the explosion of corporate power and financial wealth with desperate acts of violence and audacious feats of political creativity. The reason they could see a utopia beyond industrial capitalism, says Fraser, is that they remembered a reality before industrial capitalism. Their vision of the future was fueled by a memory of the past.
In 1820, 80% of Americans were self-employed; by 1940, 80% worked for someone—or something—else. “The individual has gone,” declared John D. Rockefeller, “never to return.” Driven into the mills and the mines or onto the rails, these refugees from the shop and the farm were injured, maimed, or killed (35,000 per year) by industrial capitalism. They were the lucky ones. Many Americans couldn’t get work at all. In the 1870s, unemployment became a census category for the first time. So desperate were jobless New Yorkers that they got themselves arrested just to enjoy a night off the streets, in jail. They also struck, marched, organized, bombed and killed, launching decades of class warfare, literal and metaphoric, that would haunt the country’s elites for years to come.

The fact of unemployment, Fraser writes, struck these men and women “as shocking, unnatural, and traumatic,” as did the astronomic new wealth of the nation’s plutocrats. That’s because they remembered a life before wage labor and their pervasive dependence on—and the compulsion of—the market. So powerful was this memory of a pre-capitalist past that it framed the way they understood their enemies: well into the twentieth century, Fraser reminds us, FDR was railing against “economic royalists” and “Tories of industry.” Not merely as propaganda but as a residue of the world not long ago left behind.

But it was precisely that memory, Fraser argues, that shock of the new, that made these rebels so ready to demand something even newer: a cooperative commonwealth, in which production would be collectively managed and profit democratically shared. Scandalized by the novelty of capital, they did not opt for an escapist nostalgia. They instead turned to the state, traditionally an object of opprobrium, and demanded that it assume new responsibilities: take over industry, tax wealth, supply credit, store surpluses—all for the sake of a vision drawn from a pre-capitalist past:

It is undeniable that the movement owed its fervor and sense of political and moral peril to the republican, smallholder mentality of the Revolution. Passionate attachments to immemorial traditions and ancient creeds—one might say to a useable or empowering past—were conjoined to creative methods of reconfiguring the future, all as a way of escaping the torments of an intolerable or even fatal present.

What Fraser shows, with vivid set pieces drawn from the nation’s most violent battlefields, is that far from presenting itself as the enemy, the past was viewed by workers and farmers as a resource and an ally. In part because the capitalist right so heartily embraced the rhetoric of progress and the future (no one, it seems, was content with the present). But more than that, historical memory enabled workers and farmers to see beyond the horizon of the capitalist present, to know, in their bones, what Marx was constantly struggling to imprint upon the mind of the left: that capitalism was but one mode of economic life, that its existence was contingent and historical rather than natural and eternal, and that because there was a past in which it did not exist there might be a future when it would cease to exist. Like the nation, capitalism rests upon repeated acts of forgetting; a robust anti-capitalism asks us to remember.
We have the left and right all wrong: The real story of the politics of nostalgia and tradition (Salon)

The reason economists try and persuade us that markets are the source of our prosperity and not, say, the compounding results of scientific discovery, the exploitation of certain key fundamental technology suites (electricity, chemistry, biology), or the exploitation of trillions of barrels of stored sunlight in the form of fossil fuels, is to keep the power in the hands of those who control the money - the big banks and the owners of land and capital.  Around this time, economists began to describe such a thing as an "economy" being distinct from the wider society, and "economic" behavior as distinct from any former restrictions on morality. "economic" behavior was to always seek to maximize self interest, and this was considered "rational" and thereby, "moral."

To accomplish this, economists constructed a model of human nature where rational utility maximizing atomized individuals constantly seek maximum benefit at minimal cost; where buyers and sellers meet in impersonal open markets which cannot be gamed and prices are "discovered;" and where all social provisioning is determined solely by self-interest. The basic unit of society was now the atomized individual, "a lightning calculator of pleasures and pains, who oscillates like a homogenous globule of desire of happiness under the impulse of stimuli," with no obligations to his fellow man. Collective ownership, such as of a commons, was depicted as inefficient because it was not subject to the "discipline" of the market.

Economists then chart the behavior of markets with mathematical precision, even while neglecting to study the real world of goods which underlie the markets, and then claim that they are only "real"  social science because they use complex equations and quantification.

We seem to have succeeded despite markets, not because of them. Markets rely on state subsidies and intervention. They are dependent upon negative externalities, but do everything they can to limit positive externalities, since an individual firm cannot profit from them (i.e. privatize profits and socialize losses). They encourage planned obsolescence - things are made with the minimum care and effort. The drive to efficiency eliminates all quality and workmanship - goods are shoddy and designed to break to increase turnover. Technological innovations is often suppressed due to competition, such as FM radio, or alternating current. Multiple firms produce identical products and then spend millions to differentiate themselves with no real benefit. Firms naturally do have no desire to compete, and so depress profits, and so sectors of the economy naturally head toward monopolies unless broken up by the state. Today we are in a situation where corporations need to spend billions of dollars to convince us buy in sufficient amounts to keep the market functioning and the money growing, to pay back previous loans. It is a runaway train.

What I find ironic about the whole thing is that rituals to bring together the community in public feasting rituals and collective communal bonding ten thousand years ago ended up in a system where individuals are almost perfectly alienated from each other.

And that brings us to today.

Sunday, October 25, 2015

The Rise of States, Inequality, and Economics - part 4

In the last few posts we charted the course from competitive feasting rituals abound beer organized by "big men"where sedentary societies would intensify agricultural production. Labor is donated to the tribe, cooperate labor efforts center around beer feasting and building monolithic ritual stone centers where the movements of the sun and moon are tracked  dictating the harvest times, and central grain storehouses are constructed to feed the tribe in times of famine. In certain places, irrigation works are constructed. The headmen who supervise this construction and redistribute the surplus eventually develop into a hereditary class of rulers and administrators, possibly with a strong religious element as well, linking religion and the incipient state.

Eventually abundance eventually gives way to scarcity as the population increases. A landless proletariat of workers develops. People become dependent on society as the forests are felled, and the land is given over to agriculture and industry. Hunting and gathering is no longer possible, and there is a large class of landless laborers who are dependent upon the distributive largess of the state and the domesticated plants and animals produced under its aegis. When this happens, elites gain ever more power. In circumscribed area, they become hereditary despotic elites. They then assimilate tribes around them. The war chiefs morph into kings proper. The centralized leaders are now the chief coercive factor of social life. Distinctions between rich and poor begin to appear and are institutionalized through private property laws and customs (e.g. caste systems). Conquered neighboring people are compelled to provide tribute to the great leaders of the incipient empires, while prisoners-of-war are turned into slaves.

Surpluses are great enough to allow for an unproductive elite class, military specialization, and various artisans, poets, builders, craftsmen, and so forth. As these craftsmen move to cities, there is a great development of complexity, industry, and specialization of labor. Metalworking appears, first gold and silver, then copper, and quickly, bronze (and later, iron). We see "luxury" artifacts, from cups and jewelry to cloth and sculpture. Houses begin to differentiate social class.

Reciprocity and redistribution give way to corvee labor, taxes, and the household economy. We saw that as elites become kings, the extract "tribute" from the primary producers, leading to a tribute economy. Over time, as there are too many elites and too few producers, this shifts to an oikos (household) economy, the basis of oikonomia, or economics. In these cultures, an upper caste of kings, priests, bureaucrats, administrators and military leaders forms. Urbanization occurs leading to more social complexity. A priestly class appears linking religion and the state. The temples form the central storehouses and ritual centers, and become the focus of the social life of the various households.

So how do we get from that to money and markets that we are familiar with today?

The standard view is that money comes about because people in a village would barter items. To avoid the "double coincidence of wants" problem, a standard mutually agreed-upon item would be substituted instead as an intermediary to facilitate the buying and selling of goods in "free" markets. This item (usually precious metals) was considered "real" money, and everything since is just a layer of abstraction on top of this "real" money. This is the Metallism theory of money proposed by Carl Menger. Note that Menger's theory dismisses the state and only includes private individuals. Menger and other Austrian economists were dedicated to advancing the idea that money evolved without the state, and that economic interactions were voluntary exchanged based upon barter. He wanted to prove that money could arise spontaneously as "a market-led response to barter costs." This became one of the founding myths of economics. For more on this view, see: The Economist On Money and the State (Capitalism Magazine)

But as we've seen, that's not what happened at all. Like Hobbes "voluntary" theory of state formation, where "solitary" individuals agree to come together and form cities and invest power in a despot to prevent everybody from killing one another, it is a "Flintstonization" of history - a projection of contemporary conditions onto the past.

As vast trading network formed in the Bronze age and cultures entered into economic transactions with unrelated individuals, it's likely that some trade and barter did take place. But this was secondary to social life. Reciprocity, redistribution, corvee labor, tribute, and household production for local use formed the primary basis of economic transactions for nearly all people prior to the seventeenth century all around the world, as we've seen.

Money did not function as a way to replace barter. David Graeber makes this point in Debt, the First 5,000 years:
[David] Graeber shows how the idea of barter was created in exactly this way: as a thought experiment by economists trying to explain their discipline. But the myth of barter was never really compared against actual human societies. It was was simply assumed that barter must be what people do when they don’t have money and all sorts of imaginary scenarios were concocted, without reference to historical records, to explain the invention of money and gradually increasing complexity of this new thing they called “the economy”.

This doesn’t mean that barter doesn’t exist at all, but that it didn’t precede money or debt and it never formed the basis of trade within a society. Barter happens in two main situations: between people who are relative strangers who will probably never meet again, and in large societies accustomed to using money where money is temporarily in short supply. What these two scenarios have in common is that the parties entering the exchange expect it to be an unencumbered, even antagonistic affair, where everyone is acting primarily in self-interest.

Economists imagine that complications arising from barter are what gave the impetus for creating money. For example they describe something called the double coincidence of needs: you and I both have to need what the other has for a direct trade to work. But the truth is much simpler. Barter doesn’t work in a small village or tribal setting because it presumes antagonism between the people involved in the exchange. If we live in a village where we see each other on a daily basis though, we can’t afford this kind of antagonism. I can’t seek my own gain at your loss because we are in a long-term relationship. Instead we will come up with a way of accounting for debts. When you need wheat I will give it to you with the understanding that when I need ham you will return the favor.

This is what we actually see happening in ethnographic study and in the historical record. Means of accounting for credits and debts arose first. Money came later as a way to make these debts transferable and barter only happens on the fringes, between people of different tribes where a direct one-time exchange makes sense, or alternatively in societies like ours where we are so accustomed to trade being conducted in self-interest or where we trade so often with people with whom we have no long-term relationships that when money is scarce we resort to barter.
Debt: The Myth of Barter (Two Friars and a Fool)

Here's Graeber himself:
The story goes back at least to Adam Smith and in its own way it’s the founding myth of economics. Now, I’m an anthropologist and we anthropologists have long known this is a myth simply because if there were places where everyday transactions took the form of: “I’ll give you twenty chickens for that cow,” we’d have found one or two by now. After all people have been looking since 1776, when the Wealth of Nations first came out. But if you think about it for just a second, it’s hardly surprising that we haven’t found anything.

Think about what they’re saying here – basically: that a bunch of Neolithic farmers in a village somewhere, or Native Americans or whatever, will be engaging in transactions only through the spot trade. So, if your neighbor doesn’t have what you want right now, no big deal. Obviously what would really happen, and this is what anthropologists observe when neighbors do engage in something like exchange with each other, if you want your neighbor’s cow, you’d say, “wow, nice cow” and he’d say “you like it? Take it!” – and now you owe him one. Quite often people don’t even engage in exchange at all – if they were real Iroquois or other Native Americans, for example, all such things would probably be allocated by women’s councils.

So the real question is not how does barter generate some sort of medium of exchange, that then becomes money, but rather, how does that broad sense of ‘I owe you one’ turn into a precise system of measurement – that is: money as a unit of account?

By the time the curtain goes up on the historical record in ancient Mesopotamia, around 3200 BC, it’s already happened. There’s an elaborate system of money of account and complex credit systems. (Money as medium of exchange or as a standardized circulating units of gold, silver, bronze or whatever, only comes much later.)
What is Debt? – An Interview with Economic Anthropologist David Graeber (Naked Capitalism)

And here's economist Randall Wray:
Anthropologists note that the typical case in tribal society is one of chronic underproduction: there is little attempt to produce much beyond a subsistence level, nor to hoard for unforeseen natural disasters. The attitude commonly found in tribal society is one of confidence that biological needs will be satisfied. In these societies, there is little concern for personal possessions; indeed, personal accumulation of property is normally viewed with disdain, and is made nearly impossible by the aforementioned redistribution and sharing. Similar conditions prevail in those societies based on a central authority (whether chief, king, or priest), who receives obligatory transfers and then redistributes some of this to the community. While such societies certainly are not communistic, the redistributive function tends to ensure some minimal satisfaction of material wants. Finally, within the feudal manor one again finds a nearly self-sufficient economic unit whose redistributive process is designed to meet subsistence requirements.
From the State Theory of Money to Modern Money Theory: An Alternative to Economic Orthodoxy (Randall Wray, The Levy Instite, PDF). Remaining citations from here UNO. Notes in original.

So, then, how did markets and money appear? Based on anthropological and archaeological research, money began as a standard unit of account set by temples to determine equivalency of debits and credits under the community. These were originally set according to measures of wheat and barley. These unites of account were eventually quantified in terms of precious metals (or sometimes clay, or certain other items), and these items circulated in the market as a type of "money." Thus, debits and credits became quantified, such that everything was made equivalent to everything else (100 bushels of barley = 2 cows = a pound of silver, etc.) so that the central repository could function and items could be redistributed. Written records began to keep track of the debits and credits. In other words, money began as credit. This is known as the Credit Theory of Money, and it long predates coins of paper money. Once debt markets were formed, private individuals usurped the role of the temples.
We've seen that voluntary corvee labor was supplied as ones' "debt" to the overall community in return for a portion of the feasting surplus. We've also seen that the conquering of neighboring tribes and hunter-gatherer peoples caused the rise of chattel slavery, where people were bought and sold on the market. Now a new type of slavery  emerged: debt slavery. If one cannot pay one's debts, he or she becomes the property of the lender, compelled to surrender their freedom of agency and work for the lender without recompense until the debt is repaid. These are three of the four major modes of slavery (wage slavery being the fourth).

Once there is a division of labor, inequality, and private property, there is uncertainty over the ability to supply all of ones' own needs, or the needs of one's family. Every household, no matter how prosperous or productive, is going to need something it does not produce internally at some point. Thus, it needs to go to the central store. Once the household economy forms, one's loyalty is to the household rather than the tribe, and reciprocity and redistribution recede in importance. The embedded social relations that determine the village economy disappear along with the social obligations, leading to the need for a new type of economic relation:
However, with the development of private property in land, one (usually, the individual household) becomes personally responsible for meeting material wants. As productive activities become increasingly divorced from other social activities, that is, as reciprocity and redistribution come to play a very small role in economic processes ... existential uncertainty is created because the social assurance of a minimal level of subsistence disappears. Individual insurance could then only be built up by producing and holding a margin of security in the form of excess production over minimum needs.

The “existential uncertainty” that is generated by the introduction of private property is thus a crucial element in the alternative explanation of the passage from ceremonial to market exchange. In tribal society, reciprocal and redistributive modes of social integration ensure that the material needs of any particular individual in society will be met according to the ability of the tribe to do so. This does not mean that one will never go hungry, but that there is no distinction between the economic conditions of the individual and the society as a whole.
This brings about the introduction of loans, or credits, from one household to another to meet their needs:
The role of existential uncertainty can be seen in the behavior of individual landowners who are unable to meet their needs from their own personal productive efforts. Their existence thus depends on being able to borrow means of subsistence from other individuals. Heinsohn and Steiger postulate that this is the basis of the first economic exchange, and it takes the form of a loan in which one private producer extends physical product which he has accumulated as his margin of security to a borrower who, in exchange, promises to furnish his labor whenever the lender should require it in order to ensure his own survival.

Thus, the earliest form of economic exchange produced forward contracts which, in the extreme, took the form of debt bondage in which the “debtor initially rendered himself in the power of the creditor as a debt serf and the creditor at any time during the credit term could call upon the debtor—even up to his extermination”.

When debt bondage was abolished, the creditor faced existential uncertainty during the period of the contract. This uncertainty was over the lender’s ability to survive periods of depressed production. For running this risk, the lender required payment in the form of interest. Note that this is not risk of failure of repayment, but the risk of the lender failing to survive a change in his circumstances as a result of not having his emergency surplus available. The abolition of bondage created the conditions under which loans must include interest. These loans, and interest, were initially “in kind,” and in many cases, the interest could be paid out of the natural fecundity of the loaned item. For example, the loan of a bushel of wheat today can be repaid with two bushels at the end of next year. However, as the types of loans expanded, and as the terms of repayment became standardized, repayment would take a standard form—denominated in a unit of account, or a “money of account.” The first money of account was a wheat unit. Temples seem to have played a role in standardizing the unit of account. The creditor and debtor required a neutral witness to, and enforcer of, private contracts. In return for this service, the temple would receive a portion of the interest on loans.

These in-kind fees (plus tribute paid to the temple) led to the accumulation of large stocks of grain, animals, and other goods with significant carrying costs. In order to reduce such costs, the temples encouraged the development of a standardized wheat unit of account. This was also to the advantage of borrowers and lenders, for now repayment was not necessarily linked to the natural fecundity of loaned items. Thus, the original wheat money of account began to serve as the means of payment allowing repayment to take many forms (a cow loan is repaid with wheat). The barley grain was later substituted because of its invariable unit weight. Of course, even barley grains entail large transactions and storage costs. After temples began to act as depositories for creditors (by holding for them the payments of debtors), transactions costs could be reduced by substituting stamped metal for barley on withdrawal. Storage costs were reduced when the temple accepted the stamped metal in payment of tribute or fees for its service as witness in private contracts. In order to deal with counterfeiters, temples eventually switched to stamped precious metals.
Thus, the temples serve as the "banks" making loans to people in times of hardship, as well as the clearinghouses certifying the debt/credit relationships among disparate households (all under the watchful eye of the gods). Eventually, this debt relationship becomes quantified as a sort of accounting trick so that items of different quality can be exchanged in debt relationships. This becomes the "standard of account" which begins to function as money. The equivalence is set by the community as a whole. But for most people, their needs would have been modest and met within the household, and trade was mainly engaged in by elites for certain exotic items which could not be produced locally.
The origins of money are not to be found, then, in a hypothesized exchange society based on barter. Instead, money develops as a unit of account, or, as the terms in which debts are written: “A money of account comes into existence along with debts... Money proper in the full sense of the term can only exist in relation to a money of account”. When private loans are made, the lender gives up private property in exchange for an IOU issued by the debtor, which represents a forward contract. This private contract must include an interest premium, the size of which is determined by the estimate of the existential uncertainty faced by the lender who has given up reserves that provide security in the face of an unknowable future. Thus, all forward contracts involve “wheat now for more wheat later” propositions, which are monetary propositions, with money serving as a unit of account.
Note, we have a  distinction made  between “money” and “assets denominated in the money of account.” This may seem simple, but it is crucial. It was the central authorities, the temples, who set the necessary units of account:
It has long been recognized that early monetary units were based on a specific number of grains of wheat or barley. As Keynes argued, “The fundamental weight standards of Western civilization have never been altered from the earliest beginnings up to the introduction of the metric system”. He shows that the early money of account in Babylonia was the mina, a unit of measurement consisting of 10,800 grains of wheat. These weight standards were then taken over for the monetary units, whether the livre, sol, denier, mina, shekel, or later the pound. As another example, the Roman pound was equal to 6912 grains of wheat. Furthermore, “all weight standards of the ancient and also of the medieval world...have been based on either the wheat grain or the barley grain”. Of course, weight units pre-exist money—they were already in use to measure tribute paid to temples. These weight units were carried over into the monetary units in which credit money and, later, commodity money was denominated.

It is significant that the standard coins of Greece and Babylonia (the stater and shekel, respectively) each had a weight equivalent to 180 barley grains— implying that the unit of account came before the coin. Hudson (2004) explains that the early monetary units developed in the temples and palaces of Sumer in the third millennium BC were created initially for internal administrative purposes: “the public institutions established their key monetary pivot by making the shekel-weight of silver (240 barley grains) equal in value to the monthly consumption unit, a ‘bushel’ of barley, the major commodity being disbursed” .

Hence, rather than the intrinsic value (or even the exchange value) of precious metal giving rise to the numeraire, the authorities established the monetary value of precious metal by setting it equal to the numeraire that was itself derived from the weight of the monthly grain consumption unit. This leads quite readily to the view that the unit of account was socially determined rather than the result of individual optimization to eliminate the necessity of a double coincidence of wants.
David Graeber describes the emergence of centralized states in Mesopotamia and Egypt. Writing comes into the picture as means of describing debt relations. When writing comes in, we have the beginnings of "history" as we know it. By this time, thousands of years had already passed since mankind had lived as hunter-gatherers. In the grain-based cultures of Mesopotamia and Egypt, the economic relations had transformed to debt/credit relations mediated by the temples.
...[W]hat you found in Egypt [was]: a strong centralized state and administration extracting taxes from everyone else. For most of Egyptian history they never developed the habit of lending money at interest. Presumably, they didn’t have to.
 For example, see: Ancient Egyptian Tomb Builders Had State-Supported Health Care (Slate)
Mesopotamia was different because the state emerged unevenly and incompletely. At first there were giant bureaucratic temples, then also palace complexes, but they weren’t exactly governments and they didn’t extract direct taxes – these were considered appropriate only for conquered populations. Rather they were huge industrial complexes with their own land, flocks and factories. This is where money begins as a unit of account; it’s used for allocating resources within these complexes.

Interest-bearing loans, in turn, probably originated in deals between the administrators and merchants who carried, say, the woollen goods produced in temple factories (which in the very earliest period were at least partly charitable enterprises, homes for orphans, refugees or disabled people for instance) and traded them to faraway lands for metal, timber, or lapis lazuli. The first markets form on the fringes of these complexes and appear to operate largely on credit, using the temples’ units of account. But this gave the merchants and temple administrators and other well-off types the opportunity to make consumer loans to farmers, and then, if say the harvest was bad, everybody would start falling into debt-traps.

This was the great social evil of antiquity – families would have to start pawning off their flocks, fields and before long, their wives and children would be taken off into debt peonage. Often people would start abandoning the cities entirely, joining semi-nomadic bands, threatening to come back in force and overturn the existing order entirely. Rulers would regularly conclude the only way to prevent complete social breakdown was to declare a clean slate or ‘washing of the tablets,’ they’d cancel all consumer debt and just start over. In fact, the first recorded word for ‘freedom’ in any human language is the Sumerian amargi, a word for debt-freedom, and by extension freedom more generally, which literally means ‘return to mother,’ since when they declared a clean slate, all the debt peons would get to go home.

...eventually the Egyptian approach (taxes) and Mesopotamian approach (usury) fuse together, people have to borrow to pay their taxes and debt becomes institutionalized.
As Michael Hudson describes:
We have all sorts of documents around the 14th and 13th centuries, especially about the hapiru, bands of debt fugitives and others, who some people translate as Hebrews. Rome was said to have been founded by exiles and runaways, mainly runaways from debt who created their own society there. Flight from debt goes way back.

You could say that the progress of civilisation for the last thousand years, since feudal times, has been a dissolution of autocratic feudal power toward more democratised power. The problem is that land has been democratised on credit. So instead of owing money to landlords, homeowners now owe money to their bankers.
When the Hebrews demanded freedom from slavery in Egypt, was it really debt slavery they were fleeing? Note that they instituted the Jubilee as part of their law code. Interestingly, the Hebrews follow the evolution charted earlier, from charismatic leader and high priest (Moses and his brother Aaron) to his (unrelated) successor Joshua, to the period of the ad-hoc chieftains known as the Judges, and the itinerant prophets, to the establishment of formal kingship under King Saul and a formal priesthood, culminating with the building of the massive stone temple under King Solomon as the "official" place of worship. The Bible charts very closely the outline of power I described in part one. But I digress...

This is the Credit Theory of Money, and it is likely that this is the true origin of monetary relations, not some use of gold to create markets so people could haggle over what they wanted from someone else. That didn't happen - communities met their own people's needs. The Credit theory of Money, was developed by A. Mitchel Innes:
Mitchell Innes used his wide knowledge of history to demonstrate that creditor/debtor relationships had long pre-dated the development of coinage, and had given birth both to money, as a unit of account, accounting and (probably) writing, as a way of keeping score. Money preceded and facilitated free markets, not vice versa. Moreover, even when coinage was developed, it was almost always less than full-bodied, often mere was brought into being by growing specialisation, notably that between professionals, especially engineers (controlling water flow in Egypt, bridge building in Rome), and ordinary farmers. The professionals had, (and have), a monopoly of specialist knowledge, and used this to metamorphose into religious and dominating castes, who used their positions to exact taxation from the general public. See also: Was Money Created To Overcome Barter? (Naked Capitalism)

In fact, there is ample evidence from the ancient world that this was how money worked, with coins being a mere sideshow.

In ancient Rome, for example, we tend to think of the coins issued as the major form of money. But this is not the case. In ancient Rome, trade, credit and banking systems tied the Mediterranean economy together, not coins. In no way could "debasing" of coinage lead to  a fall of the Roman Empire. Here's Financial Times columnist Izabella Kaminska describing the Roman Economy based on a paper by a professor of Roman history:
[H]aving explained why it’s not necessarily fair to blame Roman coinage debasement for third century hyperinflation and the ultimate fall of Rome — which, ironically, was much more likely the result of technological stagnation and political upheaval ... — it’s worth delving a little deeper into how the Roman monetary system really worked, and what it might genuinely teach us about our modern day economy...So let’s begin with evidence for a credit economy in the first place and the idea that the standard definition of money “pecunia” is much far reaching than many suppose, starting with Republican times.

[W.V Harris of Columbia University] notes in his 2006 paper [A Revisionist View of Roman Money] that this is fairly easy to establish:

    "How did Cicero transfer the 31⁄2 million sesterces he paid for his famous house on the Palatine (Fam. 5.6.2 — this was by no means the largest property price we know of in the classical city of Rome), at a time when Rome had practically no gold coinage? It seems singularly unlikely that his slaves counted out and loaded 31⁄2 tons of silver coins and transported this cargo through the streets of Rome (not that Roman ideas of inconvenience were necessarily the same as ours). When a certain C. Albanius bought an estate from a certain C. Pilius for 111⁄2 million sesterces (Cic., Att. 13.31.4), did he physically send him this sum in silver coins? Without much doubt, these were at least for the most part paper, or rather documentary, transactions (the crucial documents will have been waxed tablets). "

As for bullion:

   " It is frequently imagined that, under the Republic at least, large payments were made in gold bullion, and there was indeed bullion in circulation; but there is no evidence in Cicero’s extensive writings or elsewhere that gold was a regular means of payment before the minting of gold under Caesar’s dictatorship. Expert scholars have sought for evidence that individuals bought things with gold or silver bullion under the Republic, and have found none. Andreau points out, the archaeology of the Vesuvian cities, which has produced every imaginable kind of find, has never produced a single ingot of gold or silver. Of course we do have some explicit evidence of gold bullion in private hands under the Republic (Cic., Cluent. 179), but it was apparently a store of wealth, to be exchanged against more spendable assets in times of emergency. ‘Gold’ was what a very rich man such as Rabirius gave to a friend such as Cicero who was scurrying into exile ...but this has nothing to do with ordinary business life. In imperial times, once again, we sometimes find gold bullion in private hands (e.g. Ulpian in Dig., but it is implicitly not counted as pecunia, and seldom used in business or property transactions, as far as we know. There was an important exception, which does not invalidate the general conclusion: bullion sometimes had to be used to buy things from across the frontier, the eastern frontier at least: hence it was sometimes on sale at Coptos and Alexandria."

So, what you had for the most part was a wealth system made up of land, property, slaves, loan assets and bullion, for store of value and emergency use only — that is, to be used when your credit was shot or unknown to your counterparty.


As to those who question how Rome could have operated a credit economy without a viable clearing system, Harris says:

   " When economists define credit-money, they sometimes, admittedly, make matters more complicated than I have made them in this account, but that is because they quite naturally have recent and current conditions in mind, and not the world that existed before the invention of clearing banks. ‘A credit money system presupposes the existence of the institutions of private property, contracts, enforcement, and clearing’, says one. But historically speaking, as we shall see, the last of these four elements is a wonderful convenience but not in fact a necessity."

    "In the Roman scheme of things what you paid with was commonly pecunia, though other words such as nummi were also standard. It is therefore quite important that pecunia could have a very wide meaning. ..Ulpian claims that ‘the term pecunia includes not only coinage but every kind of money whatsoever, that is, every substance (omnia corpora); for no one doubts that substances are also included in the definition of money’ (Dig. 50.16.178). Clearly it is not Ulpian’s intention here to deny that documents could represent money but simply to assert that such things as wine and wheat could indeed count."

   ' The important point for us in any case is that pecunia could include loans. And in fact Cicero in a published speech simply takes it for granted that nomina were a form of pecunia, that is to say that credit, at least in a certain form, was money ...For Tacitus, it is reasonably clear that pecunia included credit...Then comes the question of safe assets and investable loans. Harris notes that whilst temples and cities where known to provide loans, on the whole the Roman credit market was based on credit and debt transactions between private individuals:

    "But these [city and temple loans] are probably minor phenomena, whereas debt was in fact the life-blood of the Roman economy, at all levels. The normality of nomina (i.e. outstanding loans) among the assets of the rentier class has already been commented on: nomina were a completely standard part of the lives of people of property, as well as being an everyday fact of life for great numbers of others. Nothing could be further from the truth than a scholar’s contention that it was only under extraordinary circumstances that the creation of credit-money took place. In a modern economy the standard cautious investment for the well-to-do is, or at least used to be, government bonds; in the virtual absence of bonds, governmental or otherwise, the Roman well-to-do relied heavily on nomina. Describing the credit crisis of a.d. 33, Tacitus (Ann. 6.16.3) remarks that all senators were more extensively involved in money-lending than the law allowed (‘neque enim quisquam tali culpa vacuus’). We know that by the late Republic virtually every aristocrat whose affairs are attested in the sources lent money, and it was normal for the less illustrious senators to do so too. Augustus was evidently regarded as something of a stickler for having tried to keep the equites up to old-fashioned aristocratic standards by punishing those among them who borrowed money at lower rates of interest in order to lend it at higher ones (Suet. 39)."

And as Harris says, there’s no reason why this pattern of lending should have changed much under the Empire. A point emphasized by the fact that Roman statutes reference practices and procedures for dealing with loan recoveries. And it was in this context that early banks came into being, catering as much to the elite as to the lower classes, according to Harris.
What have the Romans ever done for us? (FT Alphaville)

And while we consider "financial innovation" to be an exclusive invention of the modern world that drives our prosperity (and not, for example, fossil fuels), it turns out that such financial products were just as common thousands of years ago:
In general, we know few details about economic life before roughly 1000 A.D. But during one 30-year period — between 1890 and 1860 B.C. — for one community in the town of Kanesh, we know a great deal. Through a series of incredibly unlikely events, archaeologists have uncovered the comprehensive written archive of a few hundred traders who left their hometown Assur, in what is now Iraq, to set up importing businesses in Kanesh, which sat roughly at the center of present-day Turkey and functioned as the hub of a massive global trading system that stretched from Central Asia to Europe. Kanesh’s traders sent letters back and forth with their business partners, carefully written on clay tablets and stored at home in special vaults. Tens of thousands of these records remain...
The traders of Kanesh used financial tools that were remarkably similar to checks, bonds and joint-stock companies. They had something like venture-capital firms that created diversified portfolios of risky trades. And they even had structured financial products: People would buy outstanding debt, sell it to others and use it as collateral to finance new businesses. The 30 years for which we have records appear to have been a time of remarkable financial innovation...Over the 30 years covered by the archive, we see an economy built on trade in actual goods — silver, tin, textiles — transform into an economy built on financial speculation, fueling a bubble that then pops. After the financial collapse, there is a period of incessant lawsuits, as a central government in Assur desperately tries to come up with new regulations and ways of holding wrongdoers accountable (though there never seems to be agreement on who the wrongdoers are, exactly). The entire trading system enters a deep recession lasting more than a decade. The traders eventually adopt simpler, more stringent rules, and trade grows again.
The V.C.s of B.C. (The New York Times)

A second, and related, theory, is the State Theory of Money. this idea stems from the fact of people owing a sort of "primordial debt" to the state, simply by means of our existence. The means to pay off this debt become a standard circulating unit of money. It doesn't matter what money is, as long as it can pay off the debt to the state it counts as money - wampum, cowrie shells, quetzal feathers, gold bars, pieces of paper, bits in a computer. It the requirement of taxes that "legitimates" money, not legal tender requirements or tradition.

This stems from the ancient practice of wergild - an ancient Germanic legal code where compensation is provided to the victim of a crime by the perpetrator to maintain social justice. This allowed an exact "price" to but put on everything (including human life) to determine equivalencies in the payment of restitution. This, not impersonal markets, is where prices began. These "prices" were debts that the society could impose on individuals who transgressed against the collective. To get back into good graces with society, the debts needed to be paid.
Weregild (also spelled wergild, wergeld, weregeld, etc.), also known as "man price", was a value placed on every being and piece of property in the Salic Code. If property was stolen, or someone was injured or killed, the guilty person would have to pay weregild as restitution to the victim's family or to the owner of the property. Weregild payment was an important legal mechanism in early Germanic society; the other common form of legal reparation at this time was blood revenge. The payment was typically made to the family or to the clan.

The debt owed to that state means that the unit of account used by the state becomes the money that circulates in the economy as a universal means of payment. This is known as the "State Theory of Money," or Chartism.
[T]he chartalist—or state money—approach...emphasizes that money evolves not from a pre-money market system but rather from the “penal system” based on the ancient practice of wergild...Hence, it highlights the important role played by “authorities” in the origins and evolution of money. More specifically, the state (or any other authority able to impose an obligation) imposes a liability in the form of a generalized, social unit of account—a money—used for measuring the obligation. This does not require the pre-existence of markets, and, indeed, almost certainly predates them.

Note that the state can choose anything to function as the “money thing” denominated in the money of account:  “Validity by proclamation is not bound to any material” and the material can be changed to any other so long as the state announces a conversion rate (say, so many grains of gold for so many ounces of silver). The state chooses the unit, names the thing accepted in payment of obligations to itself, and (eventually) issues the money-thing it accepts. In (almost) all modern developed nations, the state accepts the currency issued by the treasury...The material from which the money thing issued by the state is produced is not important (whether it is gold, base metal, paper, or even digitized numbers at the central bank). No matter what it is made of, the state must announce its nominal value (that is to say, the value at which the money-thing is accepted in meeting obligations to the state) and accept it in payments made to the state.
I'll interject here to say that it's probably not true that the state could require anything to act as money. For example, apples would probably not work. Nor would pieces of paper that anyone could make with an inkjet printer. It needs to be something reasonably rare, secure, and not counterfeitable. This is probably why gold and silver were used - they are chemically stable, rare, resistant to destruction, and verifiable.
Assume that the State chooses something that anyone can reproduce, supply or counterfeit very easily, say earth-worms or dead flies. Then the supply of money would shoot up, hyperinflation would ensue, and the monetary system would become useless. Many of the early monetary units, e.g. tally sticks, coins purposefully broken in two parts, clay tablets within casings, had no intrinsic value, but their credit/debt value could be uniquely confirmed. One of the problems of electronic money is the perceived danger of hacking and fraud. I have always contended that the margin between the intrinsic (bullion) worth of coinage and its nominal value will be a function of the power of the State authority.

Back to Wray's account:
Whether the government’s IOU is printed on paper or on a gold coin, it is indebted just the same. What, then, is the nature of the government’s IOU? This brings us to the “very nature of credit throughout the world,” which is “the right of the holder of the credit (the creditor) to hand back to the issuer of the debt (the debtor) the latter’s acknowledgment or obligation” (. The holder of a coin or certificate has the absolute right to pay any debt due to the government by tendering that coin or certificate, and it is this right and nothing else which gives them their value. It is immaterial whether or not the right is conveyed by statute, or even whether there may be a statute law defining the nature of a coin or certificate otherwise.

Hence, we can integrate the state money and credit money approaches through the recognition of the “very nature of credit,” which is that the issuer must accept its own IOUs...Typically, the money-thing issued by the authorities was not gold-money, nor was there any promise to convert the money-thing to gold. Indeed, as Innes insisted, throughout most of Europe’s history, the money-thing issued by the state was the hazelwood tally stick...Other money-things included clay tablets, leather and base metal coins, and paper certificates.

Why would the population accept otherwise “worthless” sticks, clay, base metal, leather, or paper? Because these were evidence of the state’s liabilities that it would accept in payment of taxes and other debts owed to itself. The key power of the state was its ability to impose taxes: “the government by law obliges certain selected persons to become its debtors.... This procedure is called levying a tax, and the persons thus forced into theposition of debtors to the government must in theory seek out the holders of the tallies or other instrument acknowledging a debt due by the government”.

Contrary to orthodox thinking, then, the desirability of the money-thing issued by the state was not determined by intrinsic value, but by the nominal value set by the state at its own pay offices. Nor was the government’s money forced onto the public through legal tender laws. It is certainly true that governments often do adopt legal tender laws, but these are difficult to enforce and hence often ineffective. The power of government to impose a tax and to name what will be accepted in tax payment is sufficient, and certainly trumps legal tender laws.

Once the state has created the unit of account and named what can be delivered to fulfill obligations to the state, it has generated the necessary pre-conditions for development of markets. As Innes argued, credits and debts preceded markets, and indeed, created the need for markets. The primordial debt is the tax obligation, which then creates the incentive for private credits and debts and then for markets. Indeed, evidence from early Babylonia suggests that early authorities set prices for each of the most important products and services—perhaps those accepted to meet obligations to the authorities.

Once prices in money were established, it was a short technical leap to creation of markets. This stands orthodoxy on its head by reversing the order: first money and prices, then markets and money-things (rather than barter-based markets and relative prices, and then numeraire money and nominal prices). The next step was the recognition by government that it could issue the money-thing to purchase the mix it desired, then receive the same money thing in the tax payments by subjects/citizens. This would further the development of markets because those with tax liabilities but without the goods and services government wished to buy would have to produce for market to obtain the means of paying obligations to the state.
Note how this debt owed to the state is very similar to the corvee labor debts that ancient people volunteered to build the giant stone monuments. People provided labor in return for the debt of being granted land to farm by the whole community. That is, they repaid their ownership of communal land by payment of labor debt to a centralized authority that supervised the collective redistribution and beer feasts. This "primordial debt" becomes the foundation for centralized money.

Today, we pay our obligations to society in money rather than labor, and we provide labor to get the money to pay our obligation to the state. In return, the state defends us, settles disputes via the courts, and keeps order (similar to a feudal lord). The state also provides in times of scarcity from "central stores." i.e. social insurance. It also redistributes (just like ancient societies). And, most importantly, the state creates the market economy. This is exactly what David Graeber, and earlier, Karl Polanyi, pointed out.

This "primordial debt" is similar to the "hut tax" imposed in British colonies. Authorities would impose (by violence) a "hut tax" on the huts in a village. The payment demanded for this tax was in the currency used in the colony. The only was to get this money to pay the tax was to work for wages for an employer. This caused the villagers to leave the reciprocal economy and go to work in the money economy for wages for the colonail masters, providing a ready source of labor. Or, they had to sell their crops to the colonail masters for export to gain the currecny needed to pay the tax.  Thus, the colonialists created "markets" in villages where none before existed.
The hut tax was a type of taxation introduced by British colonialists in Africa on a per hut or household basis. It was variously payable in money, labour, grain or stock and benefited the colonial authorities in four related ways: it raised money; it supported the currency; it broadened the cash economy, aiding further development; and it forced Africans to labour in the colonial economy. Households which had survived on, and stored their wealth in cattle ranching now sent members to work for the colonialists in order to raise cash with which to pay the tax. The colonial economy depended upon black African labour to build new towns and railways, and in southern Africa to work in the rapidly developing mines. 

Once money enters the picture, only then can markets form. But as we'll see, markets are just as much creations of the state as money.