Saturday, August 27, 2011

Adam Smith On Bargaining (Again)

Naked Capitalism carries a post (26 August) by David Graeber, Reader in Social Anthropology, at Goldsmith’s University of London (HERE): and author of: ‘Debt: The First 5,000 Years

“What is Debt? – An Interview with Economic Anthropologist David Graeber conducted by Philip Pilkington, a journalist and writer based in Dublin, Ireland.

Philip Pilkington: Let’s begin. Most economists claim that money was invented to replace the barter system. But you’ve found something quite different, am I correct?

David Graeber: Yes there’s a standard story we’re all taught, a ‘once upon a time’ — it’s a fairy tale.

It really deserves no other introduction: according to this theory all transactions were by barter. “Tell you what, I’ll give you twenty chickens for that cow.” Or three arrow-heads for that beaver pelt or what-have-you. This created inconveniences, because maybe your neighbor doesn’t need chickens right now, so you have to invent money.

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.)

So really, rather than the standard story – first there’s barter, then money, then finally credit comes out of that – if anything its precisely the other way around. Credit and debt comes first, then coinage emerges thousands of years later and then, when you do find “I’ll give you twenty chickens for that cow” type of barter systems, it’s usually when there used to be cash markets, but for some reason – as in Russia, for example, in 1998 – the currency collapses or disappears.

David Graeber develops his argument in his rather folksy way and runs Adam Smith’s concepts together in a misleading manner. And David had the benefit of over 250 of years of field research, not available to Adam Smith, and still seems to get some basics wrong. Plus, David believes in the substantial misrepresentation of Smith invented (not too strong a characterisation as readers of Lost Legacy will recognise) by modern attributions to Adam Smith of ideas he never expressed. Post-1870 neoclassical economists and advocates of so-called theories of Homo economicus of perfect rationality, ignore Smith’s clear stances on moral sentiments and his ‘other-regarding’, not purely ‘self regarding’, views on self-interest. David has had access to the works of the Adam Smith, born in 1723 in Kirkcaldy, and shows no signs of having read them, yet. The Kirkcaldy Adam Smith had a quite different persona to the 20th-century ‘Adam Smith’, invented in Chicago.

Adam Smith centred his historical method on the early propensity for humans to engage in exchange relations which was never limited to mere notions of ‘trade’ in the modern sense (something that Polanyi – author of the Great Transformation, 1941 - sometimes conflated). Smith studied the origin of languages early in his career (first published in 1761). Two or more humans had to engage in exchange relationships to agree to common sounds and meanings, and signs, for understandable communications to commence – and continue. This is probably why Smith linked the origin of languages as "the necessary consequence of the emergence of the “faculties of reason of speech” (WN, 1776). The widespread (and separate) exchange relationships in scattered early human societies had their early origins in human sociability (in the ‘first age of man’).

Building on the human propensity to exchange, and before the complex ‘gift’ propensities noted by Maus, the natural forms of reciprocity, practised by primates and other species, were rooted in that same sociability among con-specifics. Reciprocity can involve a notion of ‘debt’ in the sense implied by David; but it need not, at least for as long as a non-reciprocated act is tolerated (depending on local cultural norms). Reciprocation may not be the sole motive that initiates an exchange transaction, but a failure to ‘close’ the transaction can cause resentment, and a refusal to engage in subsequent transactions can promote avoidance reprisals (including violence) that is still true today – though uncompleted obligations can remain ‘open’ for years (others must be ‘closed’ within hours).

Reciprocation exchanges – its rewards and penalties for non-reciprocation – are well-covered in anthropology and social psychology (as David presumably knows), and by primatologists too (See Dunbar on the social role of gossip). While people can be – and some are - beneficent (an important virtue for Smith) without expecting reciprocation, social life intrudes sometimes to make reciprocation mandatory (severe scarcity). In my research on 'the pre-history of the bargain', I have found that the exchange relation in these cases is in effect a progression, over many generations: ‘If you take the benefit, you ought to contribute in return', albeit later. This becomes, under later social pressures of scarcity or danger: ‘If you take the benefit, you must contribute’ in return, albeit later. The giving and return were originally separated in time; gradually it became an obligatory ‘quasi-bargain’ form of exchange. And this goes on for millennia without the involvement of money. That came much later when ‘kingdoms’ formed (Mesopotamia, and all that). Kings issued coins as payment to their armies as symbols of their awesome power, and travellers exchanged their coins for local currency, via the temple networks across Euro-Asia, close to trade routes).

Bargaining (an instance of an immediate exchange): ‘Give me that which I want, and you shall have this which you want” (Wealth Of Nations) evolved from social quasi-bargains in some places and times, while traditional quasi-bargains continued, as well as pure reciprocation obligations, in remnant societies of the kind that David and his colleagues investigate.

Taking a nursery-level approach to transferring the behaviours of remnant societies across to commercial societies without exploring how one, in some places, but not others, evolved is not valid evidence against Adam Smith’s approach. He dealt with 'nations', not small bands.

Adam Smith did not postulate that exchange in “transactions took the form of: “I’ll give you twenty chickens for that cow” in the first ages of man. Far from such a wild generalisation, Smith's thinking about the central role of exchange in human sociability was far more pointed than that, and of far earlier vintage (the 'necessary consequence of the faculties of reason and speech', Wealth Of Nations) than David’s folksy sounding ‘bunch of Neolithic farmers’ (and therefore long before ‘ancient Mesopotamia’ too). I agree with him – if such represents David’s level of knowledge of Adam Smith and Wealth Of Nations, let alone his apparent ignorance of Smith’s Theory of Moral Sentiments (1759) – “it’s hardly surprising that we haven’t found anything” if that is what they are looking for.

The transactions that Smith mentions were illustrative of the third and ‘fourth ages on man’ – ‘age of farming’, with nearby ports and towns, and ‘age of commerce’. In the famous ‘beaver-deer’ parable, Smith referred to a possible method of finding a common value in the transaction without a common unit of money, primarily to illustrate his first stab at a ‘labour theory of value’, not as a comment on alleged anthropological facts, of which he, like his contemporaries, were bereft of field experience. David’s mocking, 230 years later, of Smith’s non-knowledge of the contents of ‘Anthropology 101’ is a cheap shot.

Hence, David’s image of ‘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!” Indeed, modern observations speak of a native hunter taking his skins to a trading post in which the hunter denigrates his skins and praises the trader’s trade goods to the point of absurdity, and the trader mimics the hunter’s negotiating norms by denigrating his own trade goods, while praising the hunter’s skins, which is often a long prelude to their arriving at a ‘fair’ exchange rate to complete their transaction, with both of them happy. Different forms of such parlaying occur in many societies. So what? Indeed, what has it got to do with the very long pre-history of exchange behaviour, going back to long before the ‘hydraulic societies’ of Egypt, Babylon, India and China, mentioned by David, flourished briefly, leaving their stone detritus across the Eurasian continent.

When Smith does speak of modern bargaining, witnessed in the 18th century, he directed our attention to a crucial aspect of it, melding Moral Sentiments with Wealth Of Nations. This too is often quoted – perhaps his most famous statement – but is seldom understood (again from ignorance of Moral Sentiments, 1759).

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities but of their advantages” (WN, I.ii.2: 26-7).

Smith makes it clear we operate our self-interest by addressing the self-love (self-interests) of others. In exchange by bargaining we have to be ‘other-directed’ and not ‘self-directed’.

The rest of David’s hypotheses are similarly semi-spurious in content – jumping from Mespotamia to Nixon’s presidency has an appealing “Huffington Post” feel about it. Some parts are interesting, others speculative, or stretched (follow the link).

But I suggest that David first goes back to Adam Smith and gets his thinking right before embarking on these wider issues.

I also note that this is the third article on interviews conducted by Philip Pilkingon of Dublin that I have commented upon critically. He too might wish to reflect that his pre-suppositions about Adam Smith require some attention. Yes, I realise he is only asking the questions, but the answers he elicits suggest he should ask more pointed questions about the knowledge his interviewees have of Adam Smith.



Blogger Gavin Kennedy said...

Dr Greaber objects to my referring to him as “David” despite my “not knowing me or being on sociable terms with me in any way”. Only referring to a first name after a formal introduction seems too formal for a blog post.

Dr Graeber writes:“I am objecting to the tradition that bases itself on Smith much more than Smith himself, who was a man of his time and a brilliant, fascinating and complex character.” And I am objecting to the modern, wholly invented presentation of Adam Smith as if he was in some way connected to the ideas of neoclassical economics, such as Homo economicus, perfect human rationality, the maximisation of utility hypothesis, Pareto's theorem, and General Equilibirum, and the wholly mythical Adam Smith “concept’, of the “invisible hand”. Dr. Graeber claims to know of the neo-classical hijacking of Adam Smith’s name to give support to current policies and analysis that cannot be derived from his writings.

Dr Graeber is of the opinion that” “Mr. Kennedy’s first objection to show the man simply doesn’t know what he’s talking about.” Yet, I based my criticism not on a dispute about the division of labour. I wrote about Adam Smith's historical method on the early propensity for humans to engage in exchange relations which was never limited to mere notions of ‘trade’ in a modern sense.” Dr Graeber, sees “truck, barter, and exchange” as meaning fully fledged “trade” , when Smith’s main point was the notion of the early phenomenon of “exchange” that permeates all of human experience and it those “exchange” relations arose from “the necessary consequences of the faculties or reason and speech” (Wealth Of Nations.

I explored the human sociality of the “exchange” phenomenon, broader than central that a compressed argument of a mere 5,000 years, which was of less import historically in the 200,000 years of human existence (and the 5 million before that of the hominid lines, let alone the earlier and contemporary behaviours of related primates with “reciprocity” experiences and primitive “bargaining” over meat-for-sex exchanges). The violent seizure and division of land as experienced in the middle years of the ‘ages of farming and shepherding’ (Mesopotamia, etc.,) accelerated the barter/trade relationships of multiple divisions of labour, far beyond those imagined exchanges of Adam Smith (arrows for meat, etc.,). Again, only had reports of travels, often fictional, by contemporaries visiting the Americas.

There were complex exchange relations over long distances long before money exchanges began, but exchange by barter also played a part. Stone-age axes were exchanged within Britain and North America, and across Europe (marked by their local geology).

The problem with searching for barter trade arrangements in surviving societies today is that using their non-existence as evidence that it never occurred in Europe and Near Asia because it didn’t occur in North America, Pacific Islands, parts of Africa, etc., may well be a false negative. Where it did occur, these places tended to develop from shepherd/farming civilizations to quasi-market societies over millennia; crudely those without barter exchanges, didn’t develop (most did not survive).

Some of them were – and often still are – looking in the wrong places.

1:30 pm  
Blogger Blissex said...

I am amused that this is presented as "news" by anybody, as there is a very clear discussion reported by Warren Mosler from nearly a hundred years ago which begins with the famous quote by Adam:
"From The Banking Law Journal, May 1913.
By A. Mitchell Innes."

and I think Warren also mentions a book a little over a hundred years old, "the Babylonian woe" by David Astle.

3:58 pm  
Blogger Blissex said...

I am amused that this is presented as "news" by anybody, as there is a very clear discussion reported by Warren Mosler from nearly a hundred years ago which begins with the famous quote by Adam:
"From The Banking Law Journal, May 1913.
By A. Mitchell Innes."

and I think Warren also mentions a book a little over a hundred years old, "the Babylonian woe" by David Astle.

3:59 pm  
Blogger Gavin Kennedy said...

Thank you for the reference and the link. I read it quickly today and will read it again more slowly later.

It raises some interesting ideas and much historical detail. I liked the reference to money as a unit of account and a not store of value.

Kings, Emperors, etc., often used coins to symbol their power and legitimacy - enforcing them as legal non-rejectable tender for the payment of debts. And paying their armies in coin, with their image on them, made refusal of them a risky business for local sellers of goods, notwithstanding their often short tenures of rule or occupation.

In Italy in the 70s, when I was seconded to the UN FAO in Rome, there was a shortage of small change, and several banks issued paper currency for small amounts, which we got as change for purchases. As shop generally accepted them to, the unofficial system seemed to work. Since the end of the gold standard, £1 paper currency in the UK is backed by a meaningless "promise the pay the bearer one pound'. In Scotland we have our own currency notes and Bank of England notes. Issuing too much credit or too many currency notes destablises the system. It seems to have been ever thus. When Captain Cook visited Tahiti the currency used for trade (nuts and sex) by seamen were iron nails from the ship's stores (even by extracting nails from the hull!).

'Money' becomes whatever is accepted by sellers - in Prisoner of War camps in the 1940s, the currency was cigarettes. Cook's and PoW 'informal' money is well documented.

I shall come back when I have studied the 1913 article more closely.

12:12 pm  

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