Thursday, 9 February 2012

The intellectual void at the heart of the Occupy movement

The Bayesian algorithm at Amazon recommended David Graeber’s book, Debt: The First 5,000 Years with the product description
Economic history states that money replaced a bartering system, yet there isn’t any evidence to support this axiom. Anthropologist Graeber presents a stunning reversal of this conventional wisdom. For more than 5,000 years humans have used elaborate credit systems to buy and sell goods. Since the beginning of the agrarian empires, humans have been divided into debtors and creditors. Through time, virtual credit money was replaced by gold and the system as a whole went into decline. This fascinating history is told for the first time.
I tell my students, almost exclusively looking towards careers in banking or insurance, that they should take some interest in the “nature of money”, given this is the central topic of their current studies and future careers. Practising what I preach I thought I would get Graeber’s book.

The claim that “This fascinating history is told for the first time.” is publicist’s hyperbole. Within economics there has always been a debate as to the nature of money. Nicole Oresme wrote a Treatise on the Origin, Nature, Law, and Alterations of Money in the mid fourteenth century and then Copernicus wrote on On the Minting of Coin long before he wrote on the planets. In the first decades of the nineteenth century, the Bullionist Debates dominated British economics while the 1900 book The Wonderful Wizard of Oz is sometimes seen an allegory in favour of the State Theory of Money, that money is created by governments, as opposed to the Commodity Theory, that money is the most convenient commodity to facilitate exchange.

In the twentieth century it was anthropologists, like Malinowski and Mauss, who challenged the standard economic argument that money emerged out of barter.  More orthodox was  John Maynard Keynes’s A Treatise on Money , motivated by the conundrum, in the historical record, that credit existed before money. In 1985 the anthropologist Caroline Humphrey summarised the situation saying that
Barter is at once a cornerstone of modern economic theory and an ancient subject of debate about political justice, from Plato and Aristotle onwards. In both discourses, which are distinct though related, barter provides the imagined preconditions for the emergence of money …[however] No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing.1
A modern narrative of this story, though not novel, would be interesting, and Graeber’s book is full scholarship, summarising the work of other social scientists who have addressed the basic question “what is money”. It presents a strong case that the standard economic argument, that first there was barter and then money emerged as a commodity to facilitate exchange, is myth unfounded in fact. This is important since so much of contemporary monetary policy has been based on the assumption of money as a commodity.

The fact that Graeber castigates modern orthodox economics is important since it sets the benchmark against which he should be measured.

In addition, there is  a note referring to the novelist Margaret Atwood
[Atwood] then proceeds to explore the nature of our sense of economic morality …Despite the brilliance of many of its arguments, the result is a rather sad testimony to how difficult it is for the scions of the North Atlantic professional classes not to see their own characteristic ways of imagining the world as simple human nature.2
As a (middle class) novelist, Atwood is falling into the trap of subjective analysis, something the scientist, even political scientists and certainly anthropologists, should avoid.

The problem is, that when Graeber begins to consider exchange in the context of financial markets, he relies onsimilar economic and subjective assumptions.
In the case of …commercial exchange, when both parties in the transaction are only interested in the value of the goods transacted, they may well – as economists insist they should – try to seek the maximum material advantage3
Given that up to this point the book has given a series of examples of when observed behaviour does not mimic economic theory, it is striking that this one point is made based on that same economic theory without further comment. Graeber goes on to say
What marks commercial exchange is that it’s “impersonal”: who it is that is selling something to us, or buying something from us, should in principle be entirely irrelevant.4
The fact is, that when sociologists and anthropologists observe the actions of financiers, they realise that the economic theory is not, in fact, put into practice. While the market is capable of automating trade, so that decisions are based only on value, the markets emerged, evolved and exist on the basis of trust between participants, an emotions centred on personal relationships.

The sociologist Donald MacKenzie highlights this when discussing how Leo Melamed, the chairman of the Chicago Mercantile Exchange negotiated with the academic, Milton Friedman, about sponsoring a paper advocating the introduction of currency futures in the early 1970s. The speculators at the Merc, and the CBOT, were acting together in, what they believed, was the common good, to create the market, and not in their personal interest, maximising their wealth by focussing on competitive trading. This leads to the “delightful paradox”, that it seemed
the very markets in which Homo economicus, the rational egoist, appears to thrive cannot be created (if they require the solution of collective action problems, as in Chicago) by Homo economicus.5
The belief that markets are about maximising wealth, rather than creating networks, comes out of political philosophy, emerging in early Victorian Britain with the liberal philosopher John Stuart Mill arguing that economics
is concerned with [man] solely as a being who desires to possess wealth, and who is capable of judging the comparative efficacy of means for obtaining that end.6
Around the same time, the poet-, Alfred, Lord Tennyson, wrote about nature “red in tooth and claw”. In 1859 Darwin published the Origin of the Species which explained evolution in terms of natural selection. In the popular perception, nature became seen as being driven by a bitter struggle for survival, un-regulated by the ethics of divine architect. It was the leading economist at Cambridge University of the time, Alfred Marshall, who would synthesise Mill’s approach to economics with Darwinian metaphors7 in the late nineteenth century. In the twentieth, Friedman defined ‘positive economics’ as being disconnected from morality and his views have been summarised as
Any deviation from that single–minded pursuit of profit–maximisation by the admission of some other social responsibility is “fundamentally subversive”, “pure and unadulterated socialism”, something which could “thoroughly undermine the very foundations of our free society.” Businessmen subjected to “a social responsibility other than making maximum profits for stockholders” cannot know what interests to serve.8
While this is the view from broader society, it is not natural in finance. This point is captured in a key case in the English courts in 1950, Buttle v Saunders. Saunders managed a trust for Buttle, and had agreed to sell a piece of land owned by the trust for £6,142 to a Mrs Simpson. Before the transaction had become legally binding, another person offered the trust £6,400 for the land. However, Saunders believed “my word is my bond” and declined the higher offer in favour of the original agreement with Mrs Simpson. The beneficiary of the trust, Buttle, took Saunders to court, and the court ruled in favour of Buttle
The only consideration which was present to [the trustees] minds was that they had gone so far in the negotiations with Mrs Simpson that they could not properly, from the point of view of commercial morality, resile from those negotiations.
‘Commercial morality’ was not a valid consideration and the sale to Mrs Simpson was declared null and English home-buyers could never again be certain that a purchase would be completed, ‘gazumping’ had arrived, not at the instigation of the financial adviser but on the insistence of a judge.

The scientist Graeber has fallen into the trap that he criticises the novelist Atwood of having succumbed to; he is imagining financiers rather than studying them. This is significant because it means his whole thesis is based on an assumption of what finance is about, this assumption is based on what academic economists imagine what it is about, rather than what the actual behaviour of bankers tells us.

Googling Graeber I discover that he is a central figure in the “Occupy” movement and is regarded as providing an intellectual justification for the physical manifestation of the movement.  However, I view this justification as being, itself, based on a false axiom/assumption, and that is the assumption about the nature of finance.

While we can acknowledge and accept the point the FCIC makes in concluding that
there was a systemic breakdown in accountability and ethics. The integrity of our financial markets and the public’s trust in those markets are essential to the economic well–being of our nation. The soundness and the sustained prosperity of the financial system and our economy rely on the notions of fair dealing, responsibility, and transparency.9
The critical question is whether the lack of ethics the FCIC report is endogenous to the markets, and possibly incompatible with them, as an Occupy protester may argue, or whether the natural ethics of the market have been expunged by a series of commentators external to the markets, from Mill to Friedman. The point is, coming to this question with anarcho-communist preconceptions is not going to help a serious analysis.

That said, Graeber does acknowledge that finance has not always been as it is now. He remarks that the Medieval understanding of finace was concerned with maintaining social relations. This leads me to suggest that there is a blind-spot for many of the commentators on finance, and that is in regard to the problem of randomness.

Mill, Marx, Darwin and Dickens were all contemporaries living at a time when science was attempting to relegate randomness, chance, to history. In the 1830s English law criminalised most forms of gambling, the consequence was the difficulty Melamed had in creating a foreign exchange futures contract in 1970. Marxism proved popular not with the industrial proletariat, but in agrarian economies of Russia, China and Cuba, societies exposed to random climatic changes. Richard Dawkins is often heard stating that “evolution is not a random process”. Novels of the nineteenth century repeatedly use the device of a character being ruined by reckless speculation or feckless gambling.

The economic theory that developed at this time followed the dominant cultural direction. Laplace had advised that mechanics should be confined to the physical science, while the social sciences should employ probability to manage uncertainty10, however, economists ignored this advice and built their science on deterministic mechanics11.

The point is, earlier generations had accepted chance as an integral part of life, in particular economic life. Scholastic analysis of finance, which Graeber commends, was based on a distinction between what would happen with certainty and what was subject to chance.  The pioneers of mathematical probability, Pascal, Fermat, Huygens and J. Bernoulli all came to the topic trying to understand finance. 

Further back in time, gambling is an almost universal feature of primitive society. For the Greeks, the brothers Zeus, Poseidon and Hades cast lots to divide up the universe, Zeus winning the sky, Poseidon the sea and Hades the underworld. Hindus believe the world was a game of dice played between Shiva and his wife, while at the heart of the epic tale of the Mahabharata is an, unfair, dice game between the Kauravas and the Pandavas.12

Contemporary anthropologists recognise that gambling plays a fundamental role in contemporary neolithic communities. Consider a case observed in an Australian aboriginal group, the Momega in a remote area of Arnhem Land around 1980. The community had access to social security payments and there was often a surplus left over after essentials had been bought. As the anthropologist, Jon Altman, studying the group observed
this surplus was not equally bestowed. …This variability in bestowal was extremely arbitrary and it resulted in inter–household variability in access to cash.13
This variability can seen as subjective discrimination of the community by the Australian government. Gambling, according to Altman, “acted effectively to both redistribute cash …[it] provided a means for people with no cash income to gain cash”14 and from a small stake a larger cash reserve could be generated. The random distribution created by gambling, while not uniform, some would lose a lot, some win a lot, was none the less objective and most people ended up with a fair share of the cash this was important in a non-hierarchical community because it meant that the arbitrary bestowal of money was not corrected by another subjective distribution, such as redistribution by a chief.

Another anthropologist, William Mitchell considered the role that gambling plays in disrupting hierarchical social structures, such as the Indian caste system, by studying the Wape in New Guinea around the same time
An important task of Dumont’s classic study of Indian caste was to demonstrate how inequality is maintained. My task is the obverse, that is, to reveal how the Wape defeat the formidable principle of hierarchy to maintain male equality. How do the Wape, who, as individuals, desire wealth and who, since the 1930s, have been directly tied to a world capitalist market system, prevent wealth from being successfully manipulated by a few men to raise themselves above others? The paradoxical answer is deceptively simple: through gambling.15
This is an explanation for the pervasive nature of gambling in neolithic communities, appearing in the Vedic scriptures, potlach ceremonies of North America, and in aboriginal Australia and New Guinea and the Hazda16; it is an objective, fair, mechanism for the redistribution of wealth.


We can criticise Graeber’s methodology and his reliance on unsupportable assumptions, but the real failure of the Occupy movement is their inability to appreciate the positive aspects of gambling and speculation, central to the markets.Perhaps they should read more anthropology and less Dickens.

Notes

1 Humphrey (1985, p 48)
2 Graeber (2011, p 404, n5)
3 Graeber (2011, p 103)
4 Graeber (2011, p 103)
5 MacKenzie (2008, p 151)
6 Persky (1995, quoting Mill, p 223)
7 Backhouse (1985, 10.1), Thomas (1991)
8 Watchman (2001, p 27)
9 FCIC (2011, p xxii)
10 Katz (1993, p 685)
12 Sahlins (2003, p 27), Brenner and Brenner (1990, p 1–5)
13 Altman (1985, p 56)
14 Altman (1985, pp 60-61)
16 Sahlins (2003, p 27)

References

    Altman, J. (1985). Gambling as a mode of redistributing and accumulating cash among aborigines: a case study from Arnhem Land. In Caldwell, G., Dickerson, M., Haig, B., and Sylvan, L., editors, Gambling in Australia, pages 50–67. Croom Helm.
    Backhouse, R. (1985). A History of Modern Economic Analysis. Blackwell.
    Brenner, R. and Brenner, G. A. (1990). Gambling and Speculation: A theory, a history and a future of some human decisions. Cambridge University Press.
    FCIC (2011). The Financial Crisis Inquiry Report. Technical report, The National Commission on the Causes of the Financial and Economic Crisis in the United States.
    Graeber, D. (2011). Debt: The first 5,000 years. Melville House.
    Humphrey, C. (1985). Barter and economic disintegration. Man, 20(1).
    Katz, V. J. (1993). A History of Mathematics: an Introduction. Harper Collins.
    MacKenzie, D. (2008). An Engine, Not a Camera: How Financial Models Shape Markets. The MIT Press.
    Ménard, C. (1987). Why was there no Probabilistic Revolution in economic thought? In Kruger, L., Gigerenzer, G., and Morgan, M. S., editors, The Probabilistic Revolution: Volume 2: Ideas in the Sciences. MIT Press.
    Mitchell, W. E. (1988). The defeat of hierarchy: Gambling as exchange in a Sepik society. American Ethnologist, 15(4).
    Persky, J. (1995). Retrospectives: The ethology of Homo economicus. The Journal of Economic Perspectives, 9(2):221–231.
    Sahlins, M. (1972 (2003)). Stone Age Economics. (Routledge).
    Thomas, B. (1991). Alfred Marshall on economic biology. Journal of Financial Intermediation, 3(1):1–14.
    Watchman, P. (2001). A legal framework for the integration of environmental, social and governance issues into institutional investment. Technical report, UNEP Finance Initiative/Freshfields Bruckhaus Deringer. .

2 comments:

  1. I beg to disagree with your interpretation of the principles of
    the Occupy (Wall St. etc.) movement(s). Rather than blaming
    gambling and speculation and, if one wishes to generalize, the
    entire financial industry for the economic morass in which
    developed societies find themselves, these movements protest
    the barriers to equal opportunities that with time have been
    erected. Indeed, at the core of the American dream as well as
    of most other democracies is the belief that if one puts enough
    efforts and dedication, barring misfortunes, one ought to be
    able to succeed. I am not knowledgeable of other countries'
    recent histories, but I can say that the economic policies of
    the last 30 years (since the onset of trickle down economics)
    have increasingly burdened the great majority of Americans, and
    made it increasingly arduous to gain access to opportunities
    and upward social mobility. Nothing exemplifies this better
    than the ballooning cost of education and the ensuing student
    loan crisis. In short the divide between the 1% and the 99% is
    not just access to ``smart investment'' for smart money, but
    rather the barriers that make these and many other such
    opportunities almost sure impossibilities. Before the Occupy
    movements, at least in the US the sense that income and wealth
    and the consequent opportunities were still distributed
    consistently with the feasibility of the American dream was
    widespread. This is well exemplified by the study of Norton and
    Ariely
    (http://www.people.hbs.edu/mnorton/norton%20ariely%20in%20press.pdf).
    The Occupy movements radically changed that perception.

    Arguably, the most significant parable on the role of
    randomness in Humanity is the lottery in Plato's myth of Er.
    The order in which the souls to be reincarnated can select
    their new lives is random, the choices are their own. A
    poignant conceit of the blend of chance and choice that,
    starting from birth takes place in our lives. While much
    randomness is beyond our control, perhaps as much arises from
    societal intercourse, and we can call this gambling. I think
    that most would agree that a society is fair when gambling is a
    fair game. The point of the Occupy movements is that this is no
    longer the case, and the practices of the financial industry in
    the last decades provide some of the most egregious examples.
    Wall St. (and the 1%) is the dealer, it's gotten better than
    even chances, or, to use quantitative finance, the 99%'s gains
    in this game follow a supermartingale.

    And how could it be a fair game when gains are privatized and
    losses are billed to the tax payer?

    ReplyDelete
  2. Tim,

    The more I continue blogging, the more apparent to me is that the research and treatment of the subject's nuances and detail takes a lot of work!

    Thank you for taking the time to further our understanding!

    ReplyDelete