Karl Polanyi and the Modern World – Part 7

“I grew up on the butt-end of the English class system. I’m an orphan and I was raised by my grandmother. So I am the greatest example of inter-generational social mobility you’re ever going to see, because I’m a freaking Ivy League professor…How did I do that? because of this thing that gets blamed called the welfare state, that bloated, paternalist, out-of-control, [dis]incentivizing, demotivating piece of crap called the welfare state…”
–Mark Blyth

When I first started writing about The Great Transformation, I had intended to just write one post. That was before I discovered the richness and complexity of Polanyi’s ideas. It also dovetailed well with some other stuff I was already working on regarding the ancient economy and the roots of social institutions.

Here are a couple of good short summaries of Polanyi’s ideas on the Web:

Summary of the Great Transformation by Polanyi (WEA Pedagogy Blog)

Karl Polanyi Explains It All (The American Prospect)

Populist Backlash and Political Economy (Brad DeLong)

The latter one is interesting. It’s a summary of the core ideas of both Polanyi and John Maynard Keynes. The author, Brad DeLong writes: “I find it alarming that here we are, more than one a half decades into the twenty-first century, and the wisdom and true knowledge that is state-of-the-art as far as political economy is concerned is still to be found in the writings of John Maynard Keynes and Karl Polanyi.” The Real World Economics Review blog, a blog of “heterodox” economists and critics of the Neoclassical approach to economics, picked Keynes and Polanyi’s books as #1 and #2 of their ten most influential economics books of the last 100 years. This may explain DeLong’s complaint: one reason why the works of those two economists are ignored is because they had to be ignored in order to make room for the Chicago School free market fundamentalism which has gutted the commons and made the billionaires so much wealthier, even in an era of anemic growth. It’s also interesting to note that DeLong is one of the few economists to openly call himself a Neoliberal (despite the fact that actual Neoliberals typically avoid using that term).

I would be remiss if I didn’t at least mention Neoliberalism. As we saw in our survey, markets are created through government intervention by breaking up pre-existing social structures, especially in a crisis, and imposing them from above. Philip Mirowski, in his book about Neoliberalism Never Let a Serious Crisis Go To Waste, points out that Neoliberals are not in favor of small government at all, rather they desire a powerful state that can impose markets onto every aspect of human life.

He says that in the case of Market failure, the Neoliberal playbook consists of the following steps:

  • Create a “fog of doubt” i.e. confusion, over whether markets really failed at all. This usually takes the form of scapegoating some sort of government “interference” without which things would have been fine. For example, blaming the housing bubble and bust on  government forcing banks to lend to minorities. This has been conclusively disproven, yet market fundamentalists can still insist it’s true because they are in an intellectual echo chamber.
  • Create “new and stranger” markets to solve problems with the previous markets. This has the effect of commodifying even more things, including all of nature itself. The classic case here is creating carbon “cap-and-trade” schemes to deal with climate change rather than just capping emissions.
  • Argue that the market will call forth some sort of “innovation” that will solve the problem. In the case of global warming, this manifests, for example, as Elon Musk worship. The private sector is infinitely innovative, and so long as the “incentives” are right, the Market will solve any problem as long as government doesn’t get in the way. Electric cars, genetically-modified crops, fracking and geoengineering are all proof of this.

He also makes the following points about it:

  • Under Neoliberalism, whoever falls behind has only themselves to blame for not positioning themselves correctly in the Market and not making the most of their “human capital.” That is, there is no one else to blame; it’s all on you and you alone. Failure is your fault, and the self-recrimination and shame of “your fault” culture and an individualist ethos prevents any effective collective response to Neoliberal ideas.
  • Neoliberalism is sustained by a “thought collective” that is structured like a Russian Doll consisting of think-tanks, societies, foundations, universities, professorships, journals, publications, etc., and promoted by well-compensated intellectual prostitutes sustained by money from wealthy donors and corporations who benefit from the philosophy.

I’m a neoliberal. Maybe you are too (Medium)

Neoliberalism, the Revolution in Reverse (The Baffler)

On Neoliberalism: An Interview with David Harvey (Monthly Review)

The crux of the post I was originally going to write was based on a couple articles I read making a similar point: that the reason the so-called “welfare states” provides greater levels of happiness, life satisfaction, stability, and social cohesion is because they “decommodify” things like labor, housing and education to a large extent, removing them from the vagaries of the market and making them into social goods that everyone has access to. At the same time, they retain market institutions for the distribution of genuine commodities. That’s the point of this article, which argues that Bernie Sanders’ ideas of social democracy are rooted in this idea of “decommodification,” and hence those of Karl Polanyi (emphasis mine):

Gøsta Esping-Andersen made a different use of Polanyi in his groundbreaking The Three Worlds of Welfare Capitalism, published in 1990. He found that the right way to understand the differences between the welfare states of the United States, Sweden, and France isn’t necessarily to look at how much money they spend, but at how much they decommodify labor. Decommodification, for him, means that “a service is rendered as a matter of right, and when a person can maintain a livelihood without reliance on the market.” The United States actually spends a lot on welfare, but mostly for people who already have jobs—in the source of income boosts, tax-free benefit packages, and the like—so this spending does little to decommodify labor…

One of the divides within the Democratic primary between Bernie Sanders and Hillary Clinton has been between a social-democratic and a “progressive” but market-friendly vision of addressing social problems. Take, for example, health care. Sanders proposes a single-payer system in which the government pays and health care directly, and he frames it explicitly in the language of rights: “healthcare is a human right and should be guaranteed to all Americans regardless of wealth or income.”

Clinton, meanwhile, describes affordable health care as a right. Clinton also wants higher education to remain a market commodity…Sanders here offers a straightforward defense of decommodification—the idea that some things do not belong in the marketplace—that is at odds with the kind of politics that the leadership of the Democratic Party has offered more or less since Carter and the narrow policy “wonk” focus that tends to dominate coverage.

Whether or not Sanders has read Polanyi—similar language about economic and social rights was also present in FDR’s New Deal, which Sanders argues is the basis of his brand of socialism—Polanyi’s particular definition of socialism sounds like one Sanders would share:

“Socialism is, essentially, the tendency inherent in an industrial civilization to transcend the self-regulating market by consciously subordinating it to a democratic society. It is the solution natural to industrial workers who see no reason why production should not be regulated directly and why markets should be more than a useful but subordinate trait in a free society. From the point of view of the community as a whole, socialism is merely the continuation of that endeavor to make society a distinctively human relationship of persons.”

Sanders’s particular notion of a political revolution—in which people use democracy to change the rules governing our national political economy—is very Polanyian. Polanyi’s socialism has a certain modern appeal when the more traditionally Marxist idea of having the state seize the means of production has been abandoned even by most who identify as socialists. Instead, Polanyi’s relevance for today lies in his arguments that markets need to be subjected to democratic control, that human beings resist being transformed fully into commodities, and a fully realized market society is both impossible, undesirable, and at odds with genuine liberty and freedom.

Karl Polanyi for President (Dissent)

This article elaborates on that point (emphasis mine):

It is arguably the single most important concept in the entire logic of capitalism: commodification, more specifically the commodification of labour. A commodified world is one in which the vast majority of the population is dependent for their economic survival on the sale of their labour power as a commodity in the form of wage or salary work. In other words, to survive, people must sell their ability to work in the same kind of market that exists for any other commodity. As the 18th-century political economist Adam Smith noted, the demand for men is like that for any other commodity. Whatever the many positive and commendable aspects of the market economy, the reduction of people to commodities comes with two negative consequences.

First, when people become commodities they become subject to pitiless market forces beyond their control. They face a world characterised by chronic insecurity, since the market for the sale of their labour is, like the market for any commodity, subject to uncontrollable fluctuation. People become dependent on forces indifferent to them, or to any individual. As the Danish sociologist Gøsta Esping-Andersen put it in The Three Worlds of Welfare Capitalism (1990), ‘the market becomes to the worker a prison’. To survive and try to flourish, people adopt the values and norms of the market prison – competitive individualism, egotism, a focus on short-term material gain. In practice, these values detract from a satisfying life.

Commodification has another, equally destructive aspect. When people are reduced to commodities, they lack the ability to make moral claims on society. Just as we have no moral responsibility to bushels of wheat or consignments of mobile phones, we have no moral responsibility to workers who are conceived of as commodities, labour units instead of people. Not only is a commodity without a right to a job to begin with, it certainly has no right to paid sick days or vacation time, to pensions or healthcare, or to protection against arbitrary dismissal, to say nothing of a guaranteed severance package or similar redundancy benefits.

Rather than being treated with dignity and respect – as valued members of a community whose work contributes to the general good – workers as commodities are merely another factor of production, no more worthy of considerate treatment than the machines they manipulate.

If commodification is so harmful to humans, while the greater market system itself contributes so much to human society, the obvious solution is to maintain the essential features of the market while introducing public policies that serve to ‘decommodify’ workers and their families. Simply put, a society is decommodified to the extent that individuals can maintain something like a middle-class existence if they are unable to successfully sell their labour power as a commodity due to illness, old-age, disability, the need to care for a family member, the desire to improve one’s position through further education, or simply the inability to find (good) jobs when times are hard. The greater the level of decommodification, the easier it is for more people to survive without winning in the labour market.

The creation of a social safety net (the much-maligned ‘welfare state’) is essential to decommodifying people. It assures that those unable to find work will be provided with a minimum income, coupled in its most expansive form with other programmes that limit the extent to which one’s wellbeing is dependent on income – such as ‘family allowances’ (ie child support payments provided by the public), subsidised daycare and housing, and the availability of healthcare as a social right, ie as something (like police protection) that one receives because one is a citizen, not because one can pay for it.

Which political system does happiness economics support (Aeon)

That social democracies are far superior for human happiness is beyond dispute:

Using both individual- and aggregate-level data, I find that life satisfaction is higher in those countries that have the highest levels of decommodification…Critically, all of these relationships obtain regardless of one’s income or social status. Everyone benefits from a more generous welfare state…The fact is that, however we approach the subject empirically, human happiness increases as the level of decommodification increases.

The author then asks an important question:

If there is a strong link between the social-democratic vision of politics and human wellbeing, why does that vision appear to be in retreat? If ‘big government’ makes people happy, why do voters seem to be more inclined to elect governments that are committed to unfettered markets, ‘flexible’ labour laws, and ever-lower social spending?

The author answers that we’re bad at judging what makes us happy. He also points out the obvious–that politics reflects the priorities of the wealthy rather than those of the common people. Surveys over the years have shown that most people support things like universal health care and education, better schools, help for the unemployed, housing for all, a smaller military, etc.

I’ve referred to the book The Power of Market Fundamentalism before. In this review, the author points out why free market fundamentalism is such a seductive philosophy for a lot of people:

..Social naturalism, the idea that markets are pre-political, autonomous, and ultimately guided by natural laws, is not simply something embraced by Chicago school economists or policymakers. Market fundamentalism taps into our individualism, our independence, our conception of freedom, our sense of self, our very ethos. The authors write, “Its exceptional powers, we believe, are rooted in its promise of a world without politics, a world of almost complete individual freedom where the role of government—so often feared as coercive and threatening to our rights—would be kept to an absolute minimum.” This is why the idea of a free market can strike people as intuitive when it is clear it doesn’t work according to the theory.

…Another powerful justification of market fundamentalism, what Albert Hirschman called “the perversity thesis,” has become the guiding ideology of political campaigns to limit government intervention. The thesis holds that the market is “an equilibrium of self-adjustment” and that redistributive social policies to mediate market outcomes actually distort the market mechanism and hurt the people they are intended to help.

TPMF, importantly, contributes new research that pinpoints the moment in history when these ideas—social naturalism and the perversity thesis—became popularized. In 1795, in a small English town called Speenhamland, squires decreed that the poor would be entitled to welfare depending on the going price of bread and their family size. In 1798, Thomas Malthus reacted hostilely in his Essay on the Principle of Population, and argued that poor relief eliminates the scarcity that creates work incentives, thereby creating market disfunction. But this did not immediately translate into legislative change. Many elites worried that abolishing the Poor Law would trigger revolution in the countryside. But in 1834, after push-back from landed elites and clergy and with a new Whig government in power, a Royal Commission Report issued a damning critique of the program, spreading the ideas of Malthus to the population. The Report reframed the agricultural downturn as an “enduring parable of the dangers of government ‘interference’ with the market.” The result was welfare retrenchment, the New Poor Law, which substituted workhouses for relief and laid a foundation for social naturalism that persists today. Markets became embedded in ideas.

The Power of Bad Ideas (Boston Review)

This idea of decommodification – the idea of taking certain things out of the economic sphere and moving them back into the social/political, is a critical one. I’m convinced that it’s something that needs to happen, and that this will become ever more urgent as 1.) Growth comes to an end, and 2.) Formal jobs disappear. This takes us beyond the simplistic dichotomy of our only options being either “free markets” or “central planning.” Rather, it puts the market in its proper place vis-à-vis society:

According to a libertarian way of thinking, the product of the market is just while taxes are a form of theft. The pre-tax distribution of income is fair, while the post-tax one is the result of government “interference” in the economy. But to a Polanyian, this is nonsense, because the pre-tax distribution of income is just as much a product of social and political institutions as is the post-tax distribution. States don’t interfere with markets—they create them. That doesn’t mean that all markets are bad, and Polanyi never imagined that they would all end. It just means that if markets are interfering with other social priorities (like democracy, for example), or producing bad outcomes, you can change the rules that govern what parts of society operate with what kinds of markets.

Polanyi might also point out that even when the market is supposed to be “natural” and self-sustaining, states need to step in to ensure that they work. This was clearly the case in the financial crisis, when the financial markets imploded rapidly, putting the entire payments system and healthy firms at major risk. But it’s also clear in the European Union. The central bank controlling the euro took specific actions to drive Spain and Italy into market chaos to force austerity and neoliberal reforms. This didn’t simply happen on its own; the state had to intervene through markets.


Polanyi also offers a method of left analysis that doesn’t invoke Marxism. Polanyi was influenced by Marxism but his framework doesn’t sit easily with it; for example, he defines classes as cultural formations rather than by their relationship to the means of production. For this reason, as the writer Peter Frase notes, Polanyi has been more popular with theorists and academics seeking “a non-Marxist form of social democracy” that is robust and deeply theorized…

And the political movements arising due to the inability of people to sell their labor power in the Market are exactly in-line with what Polanyi predicted. We have a labor and housing crisis caused by the market – people can no longer afford homes, and the four-decade trend to “discipline” labor has strained society to the breaking point…

Polanyi wouldn’t have been surprised by the rise of Trump. He knew that the double movement—the protective steps that people take when exposed to too much unfettered capitalism—does not always benefit the left. Trump supporters clamoring to make America great again reflect one version of this; they hearken to a time when life was more secure and stable, at least for certain types of working- and middle-class whites.

For Polanyi, it would make sense that the Sanders and Trump insurgencies happened simultaneously, and that there are some people who would rank those two as their favored candidates, in spite of them seeming to come from opposite ends of the political spectrum. Both campaigns are based in part in complaints about the corrosive effects of exposure to global markets. Both are against so-called “free trade” and skeptical of open borders…in spite of all their differences, both Sanders and Trump look like expressions of “double movement” politics.

So that sums up the points I originally wanted to make, but I’d like to make a few more.

I think the above explains the tragic impotence of our politics. Since we’ve completely divided the economic sphere from the political sphere, politicians can do nothing about our exploding social problems except talk about growing the economy and hope for the best. Most of our lives are spent in the economic sphere after all–we need it to procure our food, clothing and shelter. We spend most of our lives “at work”– a totalitarian arrangement where democracy is banished and where you can be commanded what to do and when to do it with no recourse. In the economic sphere we are, essentially, slaves, and it is in this sphere that we spend most of our time.

So we vote for Democrats and Republicans to no avail – they can do nothing but preside over whatever the economic system decrees. If the economic system decrees, for example, that half of the population is redundant to the economic order, or that vast swaths of the country become economic “sacrifice zones,” well then, that’s a shame, but nothing can be done. It’s the “logic” of the economy. Our priority is never to “interfere” in the workings of the Market, because that will make us all worse off, or at least that’s what our leaders say. So we cycle randomly between political parties looking for a savior–from Republicans to Democrats back to Republicans–from Bush to Clinton, to Bush, to Obama, to Clinton–and nothing changes! This is because both parties can do nothing but promise more growth. That’s the extent of their ability to tackle real problems. But, of course, politicians can’t create growth. Sure, they’ll claim once their tax cut passes, or once we repeal this or that regulation, or some other “pro-growth” policy, things will change. But it doesn’t work. Voting doesn’t change anything. It can’t by design.

Think of how we’re supposed to find work now. We’re just tossed into the impersonal market, sink-or-swim style, with some vague notion of finding something to do that we’re “passionate” about. Most people aren’t passionate about any of the crap we are forced to do to earn money. We’re also told that we’re worthless without a college degree, meaning that colleges have become tollbooths to jobs, and charge accordingly. So we become indentured servants, going deeply into debt just to get a mere chance at a job. We are turned into high-risk indebted gamblers just to survive! Think of how insane that is.

We must simply conform to what the market decrees. If that means becoming rootless flotsam hopping in the U-Haul every few years and moving to a new location gambling that there will be jobs there, well, then, you simply have to do that and not complain. If you need to abandon the neighborhood your parents and grandparents and grew up in to look for ajob, then that is what you must do. You must conform to the economy, not the other way around. No wonder social bonds are so strained. And anyone who falls behind, well, they alone are responsible for their plight.

It also indicates why we are addicted to permanent growth. Once growth slows the market stops working and society is thrown into chaos. Unemployment, poverty, homelessness, crime, all increase, and nothing can be done so long as the foundation of society is simply economic market exchange.

The idea that we are all “rugged individualists” engaged in constant, unremitting competition in the market arena is incredibly toxic. No wonder we are constantly at each other’s throats. No wonder we have so many mass shootings. The idea of the market is competition, but competition is not a social glue–it’s a solvent. A society of markets becomes Hobbes’ “warre of all against all.” Here’s a good Reddit comment:

The idea that “competition” is a natural order of things is completely fabricated. Competition is a learned behavior and value, 100%.

A think tank back in the 50s-60s proved this to be true. I forget off-hand which it was, I think the Rand corporation. As I recall after coming up with “game theory” as a way to predict human behavior, they did studies and found that nobody in their studies behaved with the “rational self interest” in the way they had predicted; everyone cooperated with each other instead. And rather than re-evaluating their hypothesis, they just assumed the testing was an anomaly and steamrolled right into the cold war continuing to utilize game theory as their primary model for fighting it.

Cooperation is the natural human tendency, not competition. Competition has simply been heavily indoctrinated into people for the last 50 years or so.

Competition for resources only occurs when there is a perceived threat to one’s own access for those resources. But if there is no threat, then there is no reason for competition (putting yourself at risk of losing out) to be preferred over cooperation (ensuring everyone, including oneself, gets a share of the resources).

Sociopaths got into power during a period of intense paranoia, and they have built the world around them to suit that vision.

I believe that story was told by Douglas Rushkoff in his book Life Inc. Indeed, that cooperation, not competition, was the foundation for human society was pointed out by Peter Kropotkin.

Here’s another good Reddit comment:

The Anglosphere/West Europeans don’t understand how important having a semblance of community which their societies almost totally lack, matters. They depend on money, the state and technology for almost everything so when those mechanisms break their societies will not function.

This makes me think about the book Reinventing Collapse. The thesis of that book is that the United States would be much more vulnerable to an economic collapse than the Soviet Union was. Well, now we can clearly see why. Every aspect of modern American life is utterly dependent on functioning Markets! The Soviet Union was mostly a non-market economy. Yes, it was less “efficient,” but it was far more resilient: even without paychecks, people showed up for work to keep the lights on, the trains running, and the hospitals staffed. People didn’t lose their homes or their jobs. People were less dependent on a market which didn’t deliver goods anyway, as empty shelves and lines testified, so they lived in what was essentially a “pre” market economy: growing their own food, living with relatives in apartments which could not be sold, and bartering for basic supplies. This was how most societies functioned prior to the last two hundred years, making “collapse” a much different concept than how we think of it today.

It’s interesting to contemplate how the Market changes people’s behavior. People are assumed naturally to be acquisitive, competitive, lazy, status seeking, eager to accumulate goods and gain the most money for the least effort, and so forth. Thus, the market is portrayed as a natural extension of human behavior. But as we’ve seen, the idea that all of us need to claw everything we need from the impersonal Market is a very new one. It has never existed before the present. As Polanyi states, “Previously to our time, no society has ever existed that, even in principle, was controlled by markets”. There is nothing natural about how it makes us behave—like greedy, selfish, assholes. So to what extent is our behavior shaped by market institutions, and then the resulting behavior is claimed as our “natural” human nature, and anything going against it “unnatural” and doomed to fail? As David Graeber says:

“At this point, it’s easier to understand why economists feel so defensive about challenges to the Myth of Barter, and why they keep telling the same old story even though most of them know it isn’t true. If what they are really describing is not how we ‘naturally’ behave but rather how we are taught to behave by the market—well who, nowadays, is doing most of the actual teaching? Primarily, economists. … [I]s economics instead a technique of operating within a world that economists themselves have largely created?”

Another side-effect is that everything we do is evaluated through the lens of short-term profit. Nothing can be done that looks to future generations, only immediate profit.  In pre-market societies, the foundations of life were social/religious, rather than productivism/profit. You could never have something like the Gothic cathedrals, which took several lifetimes to build, under the current system. No wonder our culture and built environment are so impoverished.

There are a lot more ideas to discuss based on this, but I’ll end it here.

Now, there’s a guy called Karl Polanyi. Karl Polanyi was a Hungarian refugee writing at the same time as Hayek. and he wrote a book in 1944, the same time he wrote his most famous book The Road to Serfdom, called the Great Transformation. And in the Great Transformation he said, whenever we try to make markets, we forget that they don’t come out of the ground and they’re not given by God. It’s just like globalization. The entire architecture of globalization depends upon legal treaties. When we talk about financial markets and people trading derivitives, we figure these are legal contracts. These are things made by men and women.

Now what Polanyi pointed out is was, when you liberalize to use our contemporary language; when you privatize, integrate, when you create global supply chains, when you outsource, when you do all these things, the people who get hurt by this do not get automatically compensated. And when they figure out that they’re never going to be compensated, they invented democracy. And then they come after the people who have done this to them through the ballot box. There’s no guarantee that you get a nice outcome. There’s no guarantee that you end up with a nice New Deal order with a little bit of redistribution. Let’s remember that Adolf Hitler was voted into power. And at the 1934 election the Nazis got 43.1 percent of the vote…

–Mark Blyth

Karl Polanyi and the Modern World – Part 6

Last time we saw how the utopian project championed by economic liberals–the global “One Big Market” –was created by the forced commodification of land, labor and capital into factors of production, and the institutional separation of society into a totally separate economic sphere and  political sphere. The economy was now “disembedded” — something wholly separate from the wider society and subject to its own “economic” laws, to be kept free from outside “interference.” A new class of professional economists came into being at this time, dedicated to uncovering the deterministic “laws” of the self-regulating marketplace that were as regular and predictable as the laws of physics.

In order to construct the global self-regulating market, economic liberals championed three core concepts after 1820. These were that:

  • Labor should find its price on the market.
  • The creation of money should be subject to an automatic mechanism.
  • Goods should be free to flow from country to country without hindrance or preference.

These led to the following institutions:

  • A competitive labor market
  • The automatic gold standard
  • International free trade.

Polanyi says that after 1830, the concept of market liberalism went from “academic interest” to “boundless activism.” One of these activities was the repeal of the Speenhamland system in England, a sort of Universal Basic Income scheme, and its replacement with the New Poor Law, which was expressly designed to force people into the labor market, designating horrible “workhouses” for those who could not find paid work. Now everyone would have to compete against one another in the labor market to survive.

Although the Poor Law Amendment Act did not ban all forms of outdoor relief, it stated that no able-bodied person was to receive money or other help from the Poor Law authorities except in a workhouse. Conditions in workhouses were to be made harsh to discourage people from claiming…The Poor Law Commissioners were to be responsible for overseeing the implementation of the Act…Despite the aspirations of the reformers, the New Poor Law was unable to make the Workhouse as bad as life outside. The primary problem was that in order to make the diet of the Workhouse inmates “less eligible” than what they could expect outside, it would be necessary to starve the inmates beyond an acceptable level. It was for this reason that other ways were found to deter entrance to the Workhouses. These measures ranged from the introduction of prison style uniforms to the segregation of ‘inmates’ into yards – there were normally male, female, boys’ and girls’ yards.

New Poor Law (Wikipedia)

Polanyi explains that the gold standard was an innovation expressly designed to put the theory of self-regulating markets in place and make it appear as if it were a natural development. That is, it was an institution specifically designed to drive the necessity of global trade. How did it work?

Market liberals wanted to create a world with maximal opportunities to extend the scope of markets internationally, but they had to find a way that people in different countries with different currencies could freely engage in transactions with each other. They reasoned that if every country conformed to three simple rules, the global economy would have the perfect mechanism for global self-regulation.

  • First, each country would set the value of its currency in relation to a fixed amount of gold and would commit to buying and selling gold at that price.
  • Second, each country would base its domestic money supply on the quantity of gold that it held in its reserves, its circulating currency would be backed by gold.
  • Third, each country would endeavor to give its residents maximal freedom to engage in international economic transactions.

The gold standard put a fantastic machinery of global self-regulation into place. Firms in England were able to export goods and invest in all parts of the world, confident that the currencies they earned would be as “good as gold.” In theory, if a country is in a deficit position in a given year because its citizens spent more abroad than they earned, gold flows out of that country’s reserves to clear payments due to foreigners. The domestic supply of money and credit automatically shrinks, interest rates rise, prices and wages fall, demand for imports declines, and exports become more competitive. The country’s deficit would therefore be self-liquidating.

Without the heavy hand of government, each nation’s international accounts would reach a balance. The globe would be unified into a single market place without the need for some kind of world government or global financial authority; sovereignty would remain divided among many nation-states whose self-interest would lead them to adopt the gold standard rules voluntarily.


By the 1800’s the idea that money’s value derived from gold was treated as received wisdom and was generally accepted by people of different political persuasions in all major industrialized countries:

Belief in the gold standard was the faith of the age…namely, that banknotes have value because they represent gold.Whether the gold itself has value for the reason that it embodies labor, as the socialists held, or for the reason that it is useful and scarce, as the orthodox doctrine ran, made for once no difference. The war between heaven and hell ignored the money issue, leaving capitalists and socialists miraculously united… It would be hard to find any divergence between utterances of Hoover and Lenin, Churchill and Mussolini, on this point. Indeed, the essentiality of the gold standard to the functioning of the international economic system of the time was the one and only tenet common to men of all nations and all classes, religious denominations, and social philosophies [26]

The three mechanisms above were all interlocking: they formed a tripod, with the removal of any single leg causing the whole thing to collapse. Polanyi tells us “The sacrifices involved in achieving any one of them were useless, if not worse, unless the other two were equally secured. It was everything or nothing.” That’s why even if one of those things ran into a problem–such as the gold standard– they had to remain in place, because each interlocking piece was needed to reinforce the other.

All Western countries followed the same trend, irrespective of national mentality and history With the international gold standard the most ambitious market scheme of all was put into effect, implying absolute independence of markets from national authorities. World trade now meant the organizing of life on the planet under a self-regulating market, comprising labor, land, and money, with the gold standard as the guardian of this gargantuan automaton. Nations and peoples were mere puppets in a show utterly beyond their control. They shielded themselves from unemployment and instability with the help of central banks and customs tariffs, supplemented by migration laws. These devices were designed to counteract the destructive effects of free trade plus fixed currencies, and to the degree in which they achieved this purpose they interfered with the play of those mechanisms.

The international gold standard and fixed rates meant that a trade imbalance would lead to devastating deflations in the domestic economy. Exports were cheaper for manufacturers, but the rest of the domestic economy would have to cope with falling prices and falling wages. This caused the credit system to frieze up which damaged the domestic economy. To cope with falling wages, grain would have to be as cheap as possible, which necessitated a global grain market free from any price supports for domestic producers. The only way to rectify the imbalance was to increase foreign exports, which meant an elimination of all tariffs and trade barriers. All these parts were interlocking, and the removal of one would cause the system to fail:

Anybody could see that the gold standard, for instance, meant danger of deadly deflation and, maybe, of fatal monetary stringency in a panic.The manufacturer could, therefore, hope to hold his own only if he was assured of an increasing scale of production at remunerative prices (in other words, only if wages fell at least in proportion to the general fall in prices, so as to allow the exploitation of an everexpanding world market)…Nothing less than a self-regulating market on a world scale could ensure the functioning of this stupendous mechanism. Unless the price of labor was dependent upon the cheapest grain available, there was no guarantee that the unprotected industries would not succumb in the grip of the voluntarily accepted taskmaster, gold.

The expansion of the market system in the nineteenth century was synonymous with the simultaneous spreading of international free trade, competitive labor market, and gold standard; they belonged together. No wonder that economic liberalism turned almost into a religion once the great perils of this venture were evident.

What Polanyi calls “token money” was created and regulated by the state to cope with the needs for credit and stable purchasing power in the domestic economy:

But for domestic purposes…specie is an inadequate money just because it is a commodity and its amount cannot be increased at will. The amount of gold available may be increased by a small percentage over a year, but not by as many dozen within a few weeks, as might be required to carry a sudden expansion of transactions.

Token money was developed at an early date to shelter trade from the enforced deflations that accompanied the use of specie when the volume of business swelled. No market economy was possible without the medium of artificial money.

In the absence of token money business would have to be either curtailed or carried on at very much lower prices, thus inducing a slump and creating unemployment.

In its simplest form the problem was this: commodity money was vital to the existence of foreign trade; token money, to the existence of domestic trade. How far did they agree with each other?

To spread the risks around to the widest extent, token money needed to be centrally managed. This led to the establishment of various central banks. This means that: central banks were first created to cope with the effects of the gold standard! This shows the ignorance of the Libertarian/Austrian insistence on the gold standard with the simultaneous efforts to dismantle central banking. The use of token money once again meant that the “free” market required government management (Bitcoin advocates, please note):

Under nineteenth-century conditions foreign trade and the gold standard had undisputed priority over the needs of domestic business. The working of the gold standard required the lowering of domestic prices whenever the exchange was threatened by depreciation. Since deflation happens through credit restrictions, it follows that the working of commodity money interfered with the working of the credit system. This was a standing danger to business. Yet to discard token money altogether and restrict currency to commodity money was entirely out of the question, since such a remedy would have been worse than the disease.

Central banking mitigated this defect of credit money greatly. By centralizing the supply of credit in a country, it was possible to avoid the wholesale dislocation of business and employment involved in deflation and to organize deflation in such a way as to absorb the shock and spread its burden over the whole country. The bank in its normal function was cushioning the immediate effects of gold withdrawals on the circulation of notes as well as of the diminished circulation of notes on business.

The case of money showed a very real analogy to that of labor and land. The application of the commodity fiction to each of them led to its effective inclusion into the market system, while at the same time grave dangers to society developed. With money, the threat was to productive enterprise, the existence of which was imperiled by any fall in the price level caused by use of commodity money. Here also protective measures had to be taken, with the result that the self steering mechanism of the market was put out of action.

Now the institutional separation of the political and economic spheres had never been complete, and it was precisely in the matter of currency that it was necessarily incomplete; the state…was in fact the guarantor of the value of token money, which it accepted in payment for taxes and otherwise. This money was not a means of exchange, it was a means of payment; it was not a commodity, it was purchasing power; far from having utility itself, it was merely a counter embodying a quantified claim to things that would be purchased. Clearly, a society in which distribution depended upon the possession of such tokens of purchasing power was a construction entirely different from market economy.

Libertarians often point to the United States during this period as the exemplar of a self-regulating market delivering prosperity free from government interference. This is their ideal “golden age.” But Polanyi points out that this was only possible due to an endless supply of the “fictitious commodities” of land and labor. Once those failed to grow, the system broke down:

America has been adduced by economic liberals as conclusive proof of the ability of a market economy to function. For a century, labor, land, and money were traded in the States with complete freedom, yet allegedly no measures of social protection were needed, and apart from customs tariffs, industrial life continued unhampered by government interference.

The explanation, of course, was simply free labor, land, and money. Up to the 1890s the frontier was open and free land lasted; up to the Great War the supply of low standard labor flowed freely; and up to the turn of the century there was no commitment to keep foreign exchanges stable. A free supply of land, labor, and money continued to be available; consequently no self-regulating market system was in existence. As long as these conditions prevailed, neither man, nor nature, nor business organization needed protection of the kind that only intervention can provide.

As the lower ranges of labor could not any more be freely replaced from an inexhaustible reservoir of immigrants, while its higher ranges were unable to settle freely on the land; as soil and natural resources became scarce and had to be husbanded; as the gold standard was introduced in order to remove the currency from politics and to link domestic trade with that of the world, the United States caught up with a century of European development: protection of the soil and its cultivators, social security for labor through unionism and legislation, and central banking—all on the largest scale—made their appearance…Thus America offered striking proof, both positive and negative, of our thesis that social protection was the accompaniment of a supposedly self-regulating market.

In fact, the gold standard led to all sort of problems for domestic businesses, which sought ways to limit the damage, something omitted in the happy tales and sunny depictions of yeoman farmers, cattle ranchers, general store owners, and other “rugged individualists” of this time period spun by libertarians:

This aggressive push to wean the economy off of paper currency—and onto hard money—strained the banking system. Demand for specie by customers in New York City exceeded supply, and, on May 9, 1837, banks there responded by refusing specie withdrawal. The suspension of convertibility in the nation’s financial center caused panic that quickly spread to the rest of the country. Banks, looking to replenish the specie in their vaults, refused to make new loans and called in existing loans, triggering a collapse of credit and a severe and prolonged decline in production and employment across the country.

The Man on the Twenty-Dollar Bill and the Panic of 1837 (Liberty Street)

The [1849 California] gold rush constituted a positive monetary supply shock because the United States was on the gold standard at the time. The nation had switched from a bimetallic (gold and silver) standard to a de facto gold standard in 1834. Under the latter, the U.S. government stood ready to buy gold for $20.67 per ounce, a parity that prevailed until 1933. That commitment anchored prices, but the large gold discovery functioned like a monetary easing by a central bank, with more gold chasing the same amount of goods and services. The increase in spending ultimately led to higher prices because nothing real had changed except the availability of a shiny yellow metal.

In his excellent essay on gold standards, the economic historian Michael Bordo documents that the average annual U.S. inflation rate was many times lower under the gold standard (between 1880 and 1914) than in the subsequent 1946-2003 period. However, he shows that the gold standard led to more volatile short-term prices (including bouts of pernicious deflation) and more volatile real economic activity (because a gold standard limits the government’s discretion to offset aggregate demand shock). Bordo documents that short-run prices and real output were many times less volatile after the United States left the gold standard than before. Apart from their macroeconomic disadvantages, gold standards are also expensive; Milton Friedman estimated the cost of mining the gold to maintain a gold standard for the United States in 1960 at 2.5 percent of GDP ($442 billion in today’s terms).

The California Gold Rush and the Gold Standard (Liberty Street)

In the late 1800s, a surge in silver production made a shift toward a monetary standard based on gold and silver rather than gold alone increasingly attractive to debtors seeking relief through higher prices.The U.S. government made a tentative step in this direction with the Sherman Silver Purchase Act, an 1890 law requiring the Treasury to significantly increase its purchases of silver. Concern about the United States abandoning the gold standard, however, drove up the demand for gold, which drained the Treasury’s holdings and created strains on the financial system’s liquidity. News in April 1893 that the government was running low on gold was followed by the Panic in May and a severe depression involving widespread commercial and bank failures.

Gold, Deflation, and the Panic of 1893 (Liberty Street)

Polanyi also argues that colonialism was another response to these problems. In theory the global marketplace was anti-colonial, since everyone had access and any country could enter it and trade on equal terms with everyone else. In practice, however, the world organized into trade blocks behind barriers to protect themselves. By colonizing large parts of the globe, nation-states ensured a reliable source of raw materials (rubber in the Belgian Congo, for example) and reliable export markets for domestic producers. This drove the rush for colonies in Africa and Asia:

The import tariffs of one country hampered the exports of another and forced it to seek for markets in politically unprotected regions. Economic imperialism was mainly a struggle between the Powers for the privilege of extending their trade into politically unprotected markets. Export pressure was reinforced by a scramble for raw material supplies caused by the manufacturing fever. Governments lent support to their nationals engaged in business in backward countries. Trade and flag were racing in one another’s wake. Imperialism and half-conscious preparation for autarchy were the bent of Powers which found themselves more and more dependent upon an increasingly unreliable system of world economy. And yet rigid maintenance of the integrity of the international gold standard was imperative. This was one institutional source of disruption.

At this same time, to cope with the effects of trade and industrialism, you also saw the trend of nation-states becoming larger and more centralized. This was to seek ever-bigger internal markets to secure a competitive advantage. Get big or get out. The large, centralized states we take for granted today, such as Germany and Italy, came into being in the 1870’s. The two great terrestrial empires – the United States and Russia, expanded ocean to ocean while gobbling up territory from their neighbors.

This leads to one of the “paradoxes” of the market—It created an enormous expansion–not contraction–in centralized state power and the reach of the nation-state. Even today we see that the largest capitalist economies always have the largest governments, because they are required to ensure that the system functions as designed:

There was nothing natural about laissez-faire; free markets could never have come into being merely by allowing things to take their course. Just as cotton manufactures—the leading free trade industry—were created by the help of protective tariffs, export bounties, and indirect wage subsidies, laissez-faire itself was enforced by the state. The [eighteen] thirties and forties saw not only an outburst of legislation repealing restrictive regulations, but also an enormous increase in the administrative functions of the state, which was now being endowed with a central bureaucracy able to fulfil the tasks set by the adherents of liberalism…

The road to the free market was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism. To make Adam Smith’s “simple and natural liberty” compatible with the needs of a human society was a most complicated affair. Witness the complexity of the provisions in the innumerable enclosure laws; the amount of bureaucratic control involved in the administration of the New Poor Laws which for the first time since Queen Elizabeth’s reign were effectively supervised by central authority; or the increase in governmental administration entailed in the meritorious task of municipal reform. And yet all these strongholds of governmental interference were erected with a view to the organizing of some simple freedom—such as that of land, labor, or municipal administration.

Just as, contrary to expectation, the invention of laborsaving machinery had not diminished but actually increased the uses of human labor, the introduction of free markets, far from doing away with the need for control, regulation, and intervention, enormously increased their range. Administrators had to be constantly on the watch to ensure the free working of the system. Thus even those who wished most ardently to free the state from all unnecessary duties, and whose whole philosophy demanded the restriction of state activities, could not but entrust the self-same state with the new powers, organs, and instruments required for the establishment of laissez-faire. [146-147]

Consider, for example, the vast bureaucracy involved in credit scores – numbers that track every individual’s behavior to assess their “credit risk.” Or bond ratings agencies. Or the public school and university system. Or the vast bureaucracy which is dedicated to policing people on public assistance to make sure they are spending the money properly and are looking for jobs. Or the vast prison gulags which house the unemployed (modern workhouses). Or the vast system of state-owned and supported roads, ports, and other infrastructure. Or the regulatory apparatus designed to ensure trust and fair-dealing which is necessary for exchange. It takes a lot of bureaucrats–government and otherwise–to make “free and open” markets work properly.

While the drive to create the laissez-faire economy was planned from the top-down and put into place by legislation (or its repeal), the drive to protect society from its ill-effects through some sort of collective protection was spontaneous and unplanned. this leads to one of Polanyi’s most often cited quotes: “laissez faire was planned; planning was not.” While establishing the global market was top-down unified intellectual movement advanced by market liberals, the drive to protect workers and  communities from devastation emerged spontaneously and piecemeal in multiple countries via grass-roots efforts, only later coalescing into broad-based popular movements. Thus, the market project is more accurately described as “collectivist,’ while the drive to rein it in was individualistic:

The countermove against economic liberalism and laissez-faire possessed all the unmistakable characteristics of a spontaneous reaction. At innumerable disconnected points it set in without any traceable links between the interests directly affected or any ideological conformity between them.[156]

The great variety of forms in which the “collectivist” countermovement appeared was not due to any preference for socialism or nationalism on the part of concerted interests, but exclusively to the broad range of the vital social interests affected by the expanding market mechanism.

For if market economy was a threat to the human and natural components of the social fabric, as we insisted, what else would one expect than an urge on the part of a great variety of people to press for some sort of protection?…Also, one would expect this to happen without any theoretical or intellectual preconceptions on their part, and irrespective of their attitudes toward the principles underlying a market economy. Again, this was the case…[156-157]

As he points out, social protection legislation emerges at about the same time in Victorian England and Bismarck’s Prussia, two radically different societies with no ideological connection or coordination between them. By contrast, market institutions such as the dismantling of tariffs and the gold standard were planned, executed and coordinated simultaneously by global elites and bureaucrats as part of a top-down project; indeed they could only emerge this way. An automatically-adjusting global trading mechanism does not just “happen” despite what libertarians claim.

“Collectivist” social movements were constantly scapegoated by market liberals for the system’s failures. According to them it was the  “greedy” businessmen, monopolists, leftist intellectuals, and trade unions whose “lack of faith” was responsible for not adhering to the letter of the program, giving them a built-in excuse:

While in our view the concept of a self-regulating market was Utopian, and its progress was stopped by the realistic self-protection of society, in their view all protectionism was a mistake due to impatience, greed, and shortsightedness, but for which the market would have resolved its difficulties…[148]

When around the 1870s a general protectionist movement—social and national—started in Europe, who can doubt that it hampered and restricted trade? Who can doubt that factory laws, social insurance, municipal trading, health services, public utilities, tariffs, bounties and subsidies, cartels and trusts, embargoes on immigration, on capital movements, on imports—not to speak of less-open restrictions on the movements of men, goods, and payments—must have acted as so many hindrances to the functioning of the competitive system, protracting business depressions, aggravating unemployment, deepening financial slumps, diminishing trade, and damaging severely the self-regulating mechanism of the market?

The root of all evil, the liberal insists, was precisely this interference with the freedom of employment, trade and currencies practiced by the various schools of social, national, and monopolistic protectionism since the third quarter of the nineteenth century; but for the unholy alliance of trade unions and labor parties with monopolistic manufacturers and agrarian interests, which in their shortsighted greed joined forces to frustrate economic liberty, the world would be enjoying today the fruits of an almost automatic system of creating material welfare. Liberal leaders never weary of repeating that the tragedy of the nineteenth century sprang from the incapacity of man to remain faithful to the inspiration of the early liberals; that the generous initiative of our ancestors was frustrated by the passions of nationalism and class war, vested interests, and monopolists, and above all, by the blindness of the working people to the ultimate beneficence of unrestricted economic freedom to all human interests, including their own. A great intellectual and moral advance was thus, it is claimed; frustrated by the intellectual and moral weaknesses of the mass of the people…

This, indeed, is the last remaining argument of economic liberalism today. Its apologists are repeating in endless variations that but for the policies advocated by its critics, liberalism would have delivered the goods; that not the competitive system and the self-regulating market, but interference with that system and interventions with that market are responsible for our ills.

The shorthand used by libertarians today is “capitalism would be a great system if it were ever tried,” or their constant carping about “crony capitalism.”

Polanyi says that neither the spread of the market, nor the counterreaction to it, breaks down simply along class divisions. This is probably in response to Marx’s analysis. Concerning the Market, he says, “The spread of the market was thus both advanced and obstructed by the action of class forces. [162]” Similarly, the response to it was not as simple as the working classes in opposition to the wealthier classes; for example, many small businessmen and landowners wanted protection from the vagaries of the market too: “Briefly, not single groups or classes were the source of the so-called collectivist movement, though the outcome was decisively influenced by the character of the class interests involved.”

One of the side-effects of this interlocking trade mechanism was what Polanyi called “The Hundred Years’ Peace” in Europe from the end of the Napoleonic Wars to the outbreak of World War One. Conflicts at this time were mainly sporadic colonial conflicts (e.g. Boer War, Crimean War, war in the Congo, etc.). What caused this extraordinary historical circumstance? Polanyi attributes it to what he calls haute finance:

For an explanation of this amazing feat, we must seek for some undisclosed powerful social instrumentality at work in the new setting, which could play the role of dynasties and episcopacies under the old, and make the peace interest effective. This anonymous factor, we submit, was haute finance.

Haute finance an institution sui generis, peculiar to the last third of the nineteenth and the first third of the twentieth century, functioned as the main link between the political and the economic organization of the world. It supplied the instruments for an international peace system, which was worked with the help of the Powers, but which the Powers themselves could neither have established nor maintained… Organizationally, haute finance was the nucleus of one of the most complex institutions the history of man has produced.[10]

Polanyi calls this new international system comprised of the gold standard, haute finance and constitutionalism the “balance of power system.” The balance of power system meant that nations gained more from peace than by war.

The influence that haute finance exerted on the Powers was consistently favorable to European peace. And this influence was effective to the degree to which the governments themselves depended upon its cooperation in more than one direction. Consequently, there was never a time when the peace interest was unrepresented in the councils of the Concert of Europe. If we add to this the growing peace interest inside the nations where the investment habit had taken root, we shall begin to see why the awful innovation of an armed peace of dozens of practically mobilized states could hover over Europe from 1871 to 1914 without bursting forth in a shattering conflagration. [14]

The vast majority of the holders of government securities, as well as other investors and traders, were bound to be the first losers in such wars, especially if currencies were affected. …Finance…acted as a powerful moderator…Loans, and the renewal of loans, hinged upon credit, and credit upon good behavior…behavior is reflected in the budget and the external value of the currency cannot be detached from the appreciation of the budget, debtor governments were well advised to watch their exchanges carefully and to avoid policies which might reflect upon the soundness of the budgetary position… [14]

Trade had become linked with peace. In the past the organization of trade had been military and warlike… Trade was now dependent upon an international monetary system which could not function in a general war. It demanded peace, and the Great Powers were striving to maintain it. But the balance-of-power system, as we have seen, could not by itself ensure peace. This was done by international finance, the very existence of which embodied the principle of the new dependence of trade upon peace. [15-16]

Polanyi sees the breakdown of the market system and conflicts over colonialism as the fundamental cause of the First World War. This article gives some detail of the economic origins of the war:

The Economic Causes of the First World War (Socialist Standard)

Following that conflagration, Polanyi says that the nations failed to learn the lessons of the War and sought to reactivate the market society as it had been before, complete with open global trade and the gold standard. This simply set the stage for the Second World War.

In 1924 and after, Europe and the United States were the scene of a boisterous boom and drowned all concern for the soundness of the market system. Capitalism was proclaimed restored. Both Bolshevism and fascism were liquidated except in peripheric regions. The Comintern declared the consolidation of capitalism as a fact; Mussolini eulogized liberal capitalism; all important countries except Great Britain were on the upgrade. The United States enjoyed a legendary prosperity, and the Continent was doing almost as well. Hitler’s putsch had been quashed; France had evacuated the Ruhr; the Reichsmark was restored as by miracle; the Dawes Plan had taken politics out of reparations; Locarno was in the offing; and Germany was staring out on seven fat years. Before the end of 1926 the gold standard ruled again from Moscow to Lisbon.

It was in the third period–after 1929–that the true significant of fascism became apparent. The deadlock of the market system was evident. Until then fascism had hardly been more than a trait in Italy’s authoritarian government, which otherwise differed but little from those of a more traditional type. It now emerged as an alternative solution of the problem of an industrial society. Germany took the lead in a revolution of European scope and the fascist alignment provided her struggle for power with a dynamics which soon embraced five continents. History was in the gear for social change.

An adventitious but by no means accidental event started the destruction of the international system. A Wall Street slump grew to huge dimensions and was followed by Great Britain’s decision to go off gold and, another two years later, by a similar move on the part of the United States. Concurrently, the Disarmament Conference ceased to meet, and, in 1934, Germany left the League of Nations.

These symbolic events ushered in an epoch of spectacular change in the organization of the world. Three powers, Japan, Germany, and Italy, rebelled against the status quo and sabotaged the crumbling institutions of peace. At the same time the factual organization of the world economy refused to function. The gold standard was at least temporarily put out of action by its Anglo-Saxon creators; under the guise of default, foreign debts were repudiated; capital markets and world trade dwindled away. The political and economic system of the planet disintegrated conjointly.[243-244]

Eventually, the world fell into the biggest bust of them all–the global Great Depression. Polanyi argues that one again, the crisis was caused by the adherence to the gold standard and fixed exchange rates that market liberals championed to facilitate free trade. The 1930’s saw the second major breakdown of the international market system. Once again, unemployment soared and countries passed tariffs to try and limit the damage. Polanyi sees the rise of fascism and communism as an inevitable response to the failure of market society: “In reality, the part played by fascism was determined by one factor: the condition of the market system.”

These articles describe the role gold played in the economic disintegration of the world’s major industrial powers which led to the rise of fascism and the Second World War:

What was [the] gold standard and why was it under pressure in 1931?

The idea was that gold reserves represented a foundation for a nation’s currency and securities, allowing government notes to be exchanged for gold at any time at fixed rates. Exchange rates were stable among nations maintaining the gold standard. If a state began spending beyond its means and running deficits, those holding its notes would start converting them to gold, worrying that inflation would devalue the dollar, pound or franc. Conversions could exhaust a country’s gold reserves, punishing the government and the economy. Reserve levels determined how much currency nations could issue, and hence the money supply.

During the Depression, as revenues fell, governments trying to provide services ran growing budget deficits. This unnerved banks and wealthy investors, domestic and foreign, spurring waves of cash-outs (“Here’s your paper money; give me my gold!”). Banks and individuals then hoarded the gold, rather than using it for making loans or new investments.

The result was a continuing spiral of contraction. Credit was throttled, prices and wages fell (there wasn’t enough money moving to sustain them), debtors were hammered (their payments were fixed as their incomes shrank), and ultimately there were widespread defaults on economic commitments (bankruptcies, inability to pay interest due, abandonment of loans, expanding layoffs).

Gold withdrawals gutted the German financial system in the summer of 1931. When the state stopped shipments through exchange controls, the virus spread to Britain. As money evaporated from the banking system, economic activity floundered. Governments had two main options: Defend the exchange value of their currency to prevent inflation, at the price of further slowing the economy, or let the currency devalue to whatever level markets would determine, undermining exchange rates and purchasing power, in the hope that money “rightly priced” would begin circulating more fluidly.

Germany held the mark at a fixed rate, which turned out to be the wrong strategy. Britain let the pound float, at the mercy of the market. Initially the pound fell from $4.85 to less than $4.00. Then it rose to $4.22 before dropping again to $3.91 in early 1932. Bonds denominated in pounds had lost between 15 and 20 percent of their exchange value, but British products suddenly were 15 to 20 percent cheaper to sell abroad. Such tradeoffs punished investors but advantaged exporters. More than a dozen other nations soon followed Britain in abandoning the gold standard.

But France and the U.S. didn’t — with harsh implications before long.

The Gold Standard and the Great Depression: Echoes (BloombergView)

Under a pure gold standard, the government would stand ready to trade dollars for gold at a fixed rate. Under such a monetary rule, it seems the dollar is “as good as gold.”

Except that it really isn’t– the dollar is only as good as the government’s credibility to stick with the standard. If a government can go on a gold standard, it can go off, and historically countries have done exactly that all the time. The fact that speculators know this means that any currency adhering to a gold standard (or, in more modern times, a fixed exchange rate) may be subject to a speculative attack.

A gold standard only works when everybody believes in the overall fiscal and monetary responsibility of the major world governments and the relative price of gold is fairly stable. And yet a lack of such faith was the precise reason the world returned to gold in the late 1920’s and the reason many argue for a return to gold today. Saying you’re on a gold standard does not suddenly make you credible. But it does set you up for some ferocious problems if people still doubt whether you’ve set your house in order.

After suspending gold convertibility in World War I, many countries stayed off gold and experienced chaotic fiscal and monetary policies in the early 1920’s. Many observers reasoned then, just as many observers reason today, that the only way to restore fiscal and monetary responsibility would be to go back on gold, and by the end of the 1920’s, most countries had returned to the gold standard.

…The longer a country stayed on the gold standard, the more overall deflation it experienced. Many of us are persuaded that this deflation greatly added to the economic difficulties of those countries that insisted on sticking with a fixed value of their currency in terms of gold.

13 other countries besides the U.K. had decided to abandon their currencies’ gold parity in 1931…the average growth rate of industrial production for these countries…was positive in every year from 1932 on. Countries that stayed on gold, by contrast, experienced an average output decline of 15% in 1932. The U.S. abandoned gold in 1933, after which its dramatic recovery immediately began. The same happened after Italy dropped the gold standard in 1934, and for Belgium when it went off in 1935. On the other hand, the three countries that stuck with gold through 1936 (France, Netherlands, and Poland) saw a 6% drop in industrial production in 1935, while the rest of the world was experiencing solid growth.

The gold standard and the Great Depression (Econbrowser)

Polanyi published the book as World War Two was raging around the globe. His conclusion was that these events were ultimately caused by the failure of market society. He concluded that that the ideal market society championed by market liberals, where everything (including land, labor and capital) was a mere factor of economic production, and where society was just an accessory to the One Big Market was not only utopian, but ran contrary to fundamental human nature, which is why attempts to construct it would always be doomed to fail (emphasis in the original):

If industrialism is not to extinguish the race, it must be subordinated to the requirements of man’s nature…Nineteenth century society assumed that in his economic activity man strove for profit, that his materialistic propensities would induce him to choose the lesser instead of the greater effort and to expect payment for his labor; in short, that in his economic activity he would tend to abide by what they described as economic rationality, and that all contrary behavior was the result of outside interference.

It followed that markets were natural institutions, that they would spontaneously arise if only men were let alone. Thus, nothing could be more normal than an economic system consisting of markets under the sole control of market prices, and a human society based on such markets appeared, therefore, as the goal of all progress. Whatever the desirability or undesirability of such a society on moral grounds, it practicability–this was axiomatic–was grounded in the immutable characteristic of the race.

Actually, as we now know, the behavior of man both in his primitive state and right through the course of history has been almost the opposite of that implied in this view…The tendency to barter, on which Adam Smith so confidently relied for his picture of primitive man, is not a common tendency of the human being in his economic activities, but a most infrequent one. Not only does the evidence of modern anthropology give the lie to these rationalistic constructs, but the history of trade and markets has also been completely different from that assumed in the harmonistic teachings of nineteenth century sociologists.

Economic history reveals that the emergence of national markets was in no way the result of the gradual and spontaneous emancipation of the economic sphere from governmental control. On the contrary, the market has been the outcome of a conscious and often violent intervention on the part of government which imposed the market organization on society for noneconomic ends. And the self-regulating market of the nineteenth century turns out on closer inspection to be radically different from even its immediate predecessor in that it relied for its regulation on economic self-interest. The congenital weakness of nineteenth century society was not that it was industrial but that it was a market society. Industrial civilization will continue to exist when the utopian experiment of a self-regulating market will be no more than a memory[250]

Polanyi was confident that we could only be saved by pulling back from “pure” market society and re-embedding our economic life in social institutions. In his time, he believed that this was finally starting to happen through things like the abandonment of the gold standard during the war, and political movements like the New Deal and its “Four Freedoms,” including a guarantee of housing and work for everyone. He thought we might finally be learning our lesson.

Sadly, we now know that’s not what happened. After the oil crisis of the 1970’s, Keynsianism, designed to manage the recurring crises of the market and smooth out its excesses, was replaced by a global movement to create a “pure” market society based solely on unremitting competition. Citizens would be replaced with “consumers” transacting in the Market. Government would shrink,at least in theory.

Polanyi would be quick to point out how much Neoliberalism—just as much as its nineteenth-century predecessor—was an artificial creation of central state power rather than its absence. He would point to transnational institutions such as the World Bank, the International Monetary Fund, the Maastricht Treaty, the European Union, NAFTA, and the World Trade Organization, and other organizations/agreements. He would point to the role of the United States military in maintaining this system, as the British Empire did in years prior. He would note the dollar’s role as the world’s reserve currency. He would point to the artificial recasting of the natural world as “natural capital,” a fictitious commodity if there ever was one. He would point to the privatization of essential public services sustained by taxpayer dollars. He would point to what has happened in China over the past several decades as proof that the Market is a creation of strong central governments. He would say it is almost a reenactment of what took place in Britain, with its displaced rural proletariat heading into urban factories, its state supported industries, its trade protections and export-led model, its public infrastructure, it’s police state, its infrastructure development, and so forth. He would point to copyright protections and intellectual property laws. He would point to “welfare to work” schemes as the new poor law. He would point to the fact that the creators of Neoliberalism openly admit that it is imposed from above after some sort of crisis (the Shock Doctrine). And he would point to things like TPP/TTIP/TISA as not a lack of rules, but as a rewriting of them to benefit the needs of stakeholders like international corporations and the investor class over those of the citizenry. Finally, he would point out that the Euro works exactly like the gold standard did, with exactly  the same catastrophic results. Rather than dismantle or limit the market society, we have instead put it on steroids.

And now once again the world is on the brink of collapse…

BONUS: Barter in the modern world.

Soylent Burgers and Cockroach Milk

“The profitability of production cannot expand indefinitely. Any increase in the quantity of soil, water, minerals, or plants put into a particular production process per unit of time constitutes intensification. It has been the burden of this book to show that intensification inevitably leads to declining efficiencies. That declining efficiencies have adverse effects upon the average standard of living cannot be doubted.’
-MARVIN HARRIS, ‘Cannibals and Kings’

This comment made me chuckle: “The futurology future is starting to look worse than the collapse future.” This was on Reddit in response to an article about cockroaches providing the “milk of the future”:

Scientists think cockroach milk could be the superfood of the future (Science Alert)

This really does seem like The Onion at this point. Someone suggested that Reddit’s collapse and futurology boards should merge at some point. Believe it or not, they aren’t all that far apart.

We’ve already been treated to an endless litany of articles about how insect ranching will provide the protein of the future. Then there’s the meat grown in a petri-dish, and the nutrition shake cheekily named Soylent scarfed down by the Silicon Valley crowd so they can cram in a few more hours of work after popping their Ritalin. Now people are questioning whether the government should step in and force us to eat less meat.

And yet we are still simultaneously told that overpopulation and resource depletion are not a problem, and that more growth is good.

This is progress???

One of the things I’ve written about over the years is this idea that technological innovations are inherently good. But it’s clear what’s really going on: desperately trying to maintain the status quo in the face of increasing population pressure and declining resources. There’s a technical term for this: intensification.

Marvin Harris, whose works serve as a guidepost for this blog, warned us that intensification always leads to lower living standards for the majority of people in the long run, while only benefiting a tiny handful. This is a law of history. Over the years, I’ve tried to point out the difference between true innovation which solves problems or allows us to do things we could not do before, and intensification, which is essentially squeezing blood from a stone. In the former category are things like antibiotics and radio, which solve problems (killer infections) or allow us to do new things (communicate globally). In the latter category are things like electric cars (attempting to keep the unsustainable automobile infrastructure alive) and aquaculture (to make up for stripping the oceans bare of wild fish).

For the majority of people, there is no difference, since both are “growth” and growth is always good, full stop. GDP, the yardstick by which we measure progress in the modern world (which even its creator warned us against) is agnostic as to the source of growth, whether it is producing more food to feed hungry people or asthma inhalers to deal with the lung irritants from air pollution.

People tend to forget we’ve been here before.

Back during the Ice Age (late Pleistocene), we H. sapiens lived primarily off of herds of large fauna, especially reindeer, mammoth and bison. This was supplemented with wild salmon in season. The fattiest parts of the animal were the most prized and sought after. Bones were cracked and boiled to extract the grease. Most calories came from nutrient-dense meat and fat, while plants were consumed for their beneficial vitamins and minerals (plants are less calorie dense).

Then the large fauna started to die off. They died off due to a double-blow of a changing climate and increasing human predation. Scientists debate about which was the primary cause, but it’s pretty clear that whenever humans showed up in a pristine environment, the large animals went extinct shortly thereafter. Many of these animals had survived previous climatic changes, so it’s doubtful that climate change alone was responsible. Skeletons riddled with spear points provide more damning evidence for our species.

In response, we launched a broad spectrum revolution – using our omnivorous diet to exploit a wider variety of foodstuffs, particularly plant foods. This began with acorns and pistachios, but soon moved to grass seeds, sedges and pulses. Meanwhile, the prey animals got smaller and smaller, from reindeer and bison, to gazelles and fallow deer, to hares and waterfowl. Instead of the nutritious and diverse food sources of their ancestors, we became more and more dependent upon eating pulverized grass seeds, obtained at the cost of backbreaking labor for harvesting, threshing and grinding.

The human population became mostly vegetarian by necessity, and remained so for roughly the next 8,000 or so years. The problem is, a vegetarian diet doesn’t provide a lot of necessary vitamins, minerals and nutrients for optimal health. Today’s vegetarians can choose from a plethora of foods year round that simply weren’t available to ancient people. They don’t have to worry about what is in season and have the entire world as their larder. In the past, however, the vast majority of people ended up subsisting on a diet of weak beer and gruel. Regular meat consumption became a privilege restricted to the wealthy upper classes, while everyone else went begging. Hunting, an activity once done by all humans everywhere since time immemorial, became the exclusive provenance of kings and princes – society’s rulers. While it is true that too much meat can be detrimental to health, too little is perhaps even more damaging. Humans are meat-eaters, and a certain level of fat and protein is required for optimal health. The protein in grains and legumes is incomplete (the body needs 22 different types of amino acids to function properly; adults can synthesize 13 of those internally, but the other 9 must be obtained from food), and there are no fats (the human brain is over 60 percent fat). Grains produce an over-abundance of omega-6 fatty acids, poisonous lectins to prevent their consumption, have low nutrient density, and high acidity. They are actually a terrible thing to base a primate diet around. But we had no other choice, thanks to intensification.

And this is dramatically reflected by the skeletons of ancient peoples, who show major signs of malnutrition, disease, and stunted growth. At the same time, arthritis and other signs of wear and tear make their appearance on the bones of people who now have to spend hours a day grinding grain in a saddle quern rather than fishing and chasing after wild animals. This gruel also breaks down into simple sugars in the mouth during digestion, meaning that cavities and premature tooth decay became endemic as well.

As population pressure grew, grains, pulses and sedges, once “unpalatable” dietary supplements cultivated by hunter-gatherers for times of extreme scarcity or fermentation into medicinal beverages, became the chief dietary staple for most people. At the same time, humans found themselves preyed upon by a new class of predator: their own kind, which continues unabated to this day.

In order to keep large herbivores from going totally extinct, we embarked upon what Harris called “the greatest conservation project in history”: animal domestication. Meanwhile, cheap carbohydrates from grain are what kept most of the human population alive from day-to-day for thousands of years, such that “bread” is synonymous in all ancient cultures with “food.”

All this came from attempting to exploit resources more intensively from our environment in the face of increasing population pressure.

This sad tale, memorably spun by Jared Diamond some years ago, reflects Harris’ principle: intensification inevitably leads to benefits for the few; misery and oppression for the many.

During periods of deintensifcation, we actually recovered some of the losses. This was due to either 1.) a reduced population or 2.) new lands and resources opened up for exploitation. For example, signs of health improve after the Black Death in Europe for the survivors, due to the reduced population pressure. There were more resources to go around per head. Also, the opening up of the new lands due to colonization (and the dieoff of the native peoples), brought vast new areas of virgin land under cultivation. This led to more wealth, as well as political freedoms. Serfdom waned after the black death, and the American Revolution put Enlightenment principles of representative democracy and justice into practice. Perhaps the most dramatic result came from the harnessing of millions of years of stored sunlight in fossil fuels, combined with the scientific method. This allowed many more people a higher standard of living, even in the face of increasing population and intensifying resource use. It was during this period that “economics” became the guiding principle of our civilization, and it chalked up all benefits to “institutions”–typically capitalist market institutions–rather than a temporary superabundance of energy and resources.

Thomas Jefferson once noted that the Americans in the room were all a head taller than their European counterparts. That’s what happens when you have plenty for everybody. The first Europeans in North America also noted how much taller the Native Americans were. As this article notes, in the past, Americans ate more meat than today, and were healthier as well:

How Americans Used to Eat (The Atlantic)

Eventually, the Malthusian cycle kicked in again. Population grew, the empty spaces filled up, and the frontier was closed. Increasing competition caused wages and purchasing power to drop. People gradually lost what self-sufficiency they had, allowing the elites to consolidate power. People once again began working longer, harder, for less. Sound familiar?

We intensified again – in order to keep up with the demand for meat, we crowded animals together into feedlots in unsanitary conditions and fed them cheap corn (maize), which they are not adapted to eat. To cope with the inevitable sickness which resulted, we pumped the animals full of antibiotics (which has a side effect of increasing growth). It is these miserable and tortured animals which most of us are forced to eat now, thanks to intensification.

However, domesticated meat is less nutritious than the wild variety. The Omega-3/Omega-6 profile is altered, and there are less antioxidants. Omega-6 fatty acids reduce inflammation, which is increasingly being pinpointed as the root cause of just about every disease you care to name, from autoimmune diseases, to Alzheimer’s, to arthritis, to chronic pain, depression, and cancer. At the same time, it’s been shown that grains actually increase inflammation, and are implicated in a host of metabolic diseases:

This Is Your Brain on Gluten (The Atlantic)

While grass-fed, hormone-free beef is still available, it costs more, meaning it is restricted to those with high incomes, just like in the past. And hunting is still primarily an elite sport for the rich in many places (especially outside North America). Just like in the past, the poor people trapped in “food deserts” feed themselves with cheap carbohydrates, now in the form of processed corn and sugar products made by the industrial food system, while the wealthy can purchase boutique ‘lifestyle” products at Whole Paycheck Foods. Malnutrition now takes the form of obesity as well as starvation, although much of the non-industrialized world still deals with empty bellies, stunted growth and vitamin deficiencies, including many of those who produce export crops for the West. That’s on top of poverty and pollution.

When we scraped the oceans clean of fish and poisoned our air and waterways due to industrial pollutants (e.g. mercury ash is a side effect of coal power generation) we turned to fish farming, (aquaculture) – one of the favorite high-tech “innovations” of the futurist crowd. But farmed fish are nutritionally inferior to wild ones. Wild fish travel widely and get their food from a great variety of sources. This means that they have a much better Omega-3 fatty acid profile (which prevents inflammation and helps brain growth). But farmed fish have to be fed. This means their diet is far more restricted, and hence their meat less nutritious (more Omega-6’s). In fact, salmon needs to be fed a pill in order to turn them pink so that consumers will buy them since their meat does not develop its natural color from their diet. As Spencer Wells notes in Pandora’s Seed, were now doing for fish what we did for ungulates some 8000 years ago: a desperate attempt to preserve what remains. Farmed fish is replacing wild fish in supermarkets. As with grass-fed meat, the wild variety is now sold at a premium affordable only to those with high incomes (sound familiar)?

In each and every case, intensification had led to far more work for ultimately inferior products. This is always the result of intensification in the long run.

We are constantly told we can’t go back to hunting and gathering (even if we wanted to). Why is that? What’s left unsaid is the reason: too many people and too much environmental degradation as the result of 6-8,000 years of intensification, which also brought about disease, governments, wars, taxes, poverty, inequality, and so on. Now we’re told we’ve got to eat less meat (which means more grains), live in small, tightly sealed houses, use less water, take shorter showers, and so forth. In essence, that we will “innovate” our way to success. But all of these are signs of lower living standards. And no wonder: seven billion-plus people, all quarters of the earth occupied and brought under the plow, rain forests being chopped down, the most easily accessible fossil fuels plateauing, toxic pollution of the air, land and water, overpumping of ground water, and the stable climate of the Holocene threatened by carbon levels. Intensification caused all of these things; it is not the solution. The next phase of intensification isn’t going to lead to better living standards any more than the last few rounds. Yet we’ve been tricked into thinking it will, because we don’t realize that fossil fuels are what are ultimately responsible for our current living standards (us Westerners, that is), not intensification. And even then, given the levels of stress, overwork, social dysfunction, health maladies and mental disease in industrialized societies, we might be tempted to wonder if even our living standards are all that great to begin with.

Furthermore, we are told that a healthy diet centered around pastured meat, plants and nuts is just not possible because it’s too damaging to the environment, or too “expensive.” That is, “we” need to “feed the world!” But according to the elites (the ones who benefit from intensification, remember) the answer isn’t less people, or curtailing economic growth. No, instead it’s new “innovations” that are profitable to the parasitical corporate owners of this planet: lab-grown meat, hydroponics, vertical gardens, meal-replacement shakes, protein powder from ground-up crickets, steel-and-glass human anthills. “The futurology future is starting to look worse than the collapse future.” Maybe that’s because the collapse future has more room to grow actual real food, live in a house you built yourself with your friends and family, spend time in nature, work less, play more, and get in touch with what we really are, deep down, instead of what industrial society wants to mold us to be.

Now, for the record, I have no problem with eating bugs. The Permaculturist in me says we should exploit all sources for sustenance in our environment such that they work together in a sustainable, harmonious way in line with the earth’s natural ecosystems. Raising insects, as we now do with bees, makes sense. And, yes, the overconsumption of Americans is grotesque and makes us unhappy, and we’d be better off ditching it (which I already do voluntarily). So to be clear: what I am criticizing is not eating insects or deriving milk from cockroaches per se. Nor am I defending the overconsumption produced by status-driven consumer capitalism. Rather, I am critiquing the idea that these futurology trends are signs of progress rather than collapse. Which is why r/collpase and r/futurology increasingly appear to be turning into the same thing.

P.S This comment nails it.

Karl Polanyi and the Modern World – Part 4

Karl Polanyi does not talk about the origins of money in any detail in TGT, yet it is extremely important to his argument. If social relations were centered around markets, and markets around monetary exchanges as libertarians claim, then we would expect money to be a very early invention. In fact, we would expect money and markets to predate the state, or to emerge even in the absence of a central state.

Yet this is not what we find. Recently, a number of economists, historians and anthropologists have probed deeply into the origins of money. What they find is that money began not to facilitate individuals trading in imaginary markets, but as systems of debits and credits that formed when societies grew too large for the basic institutions of reciprocity and redistribution to function at the community level. The systems of debits and credits facilitated redistributive temple and palace economies using the new invention of writing long before they were represented by the paper and metal tokens we now think of as money.

In contrast, the standard “just-so” story of money proposed by economists from Adam Smith onward is this: Money spontaneously evolved because it facilitated trade in an imaginary stateless society. Money evolved by mutual consent to facilitate trading among primitive proto-capitalists for all the stuff they needed. Precious metals were commonly agreed upon as an “intermediate good” that everybody wanted, eventually evolving into standardized coins with standardized weights. The value of the coins derived solely from the amount of precious metal they contained. To remove metal from coins – “debasing” them – was accomplished by government “interference” in the economy causing trade to falter and empires to collapse. Paper is only a representation of precious metal held in a vault somewhere, which is the only “real” money.

Bolstering Polanyi’s argument is the fact that “money” as we know it is a fairly recent invention. Most “primitive” peoples don’t use it. We’ve seen that societies like Egypt, Mesopotamia, pre-classical Greece, and Peru managed to run fairly complex economies using no “money” whatsoever. The first coins were minted in about 600 B.C., and paper money in the West had to wait until the 1600’s (earlier in China) to be widely circulated. Yet the Bronze Age had trading regimes so complex that it has been termed “the first global economy.”

The Lydian Lion is the one coin I’d personally call “The Coin.” It directly preceded ancient Greek coinage, which through Rome begot all Western coinage, and which through the Seleukids, Parthians, and Sassanians begot all Islamic coinage. Indian coinage has largely been a product of Greek, Roman, and Islamic influences. Chinese coinage, though it probably developed independently, was succeeded by Western-style coinage in the late nineteenth century. Other countries in Asia, in Africa, and elsewhere have adopted the Western approach to coinage as well. It’s not chauvinistic, and it’s only mildly hyperbolic, to suggest that virtually all coinage in use today is the progeny of the Lydian Lion, that it’s the Adam of coins…Even though coinage doesn’t appear to have initially served commerce or trade, it’s likely that the Lydians created coins as we know them because they were the first to recognize their profit-making potential, as will be shown below. It would still be possible of course for later governments to earn seigniorage profits by issuing coins in pure gold and silver, just not as easy…

The first coins – no ‘means of market exchange’ but ‘means of gift exchange’? (Real World Economics Review)

As we’ve seen, the economies of true stateless societies were governed by redistribution, reciprocity, and gift exchange, not by money and markets. The redistributor chiefs gave everything away; they didn’t take everything away from the people and charge them money for its use (where would they get the money to pay for it?). It was more akin to “primitive communism” than anything libertarians envision.

The fetishization of money, markets and trade, along with the stateless theories of the origin of money arising spontaneously out of barter, were all part of the formation of “classical” or “Neoclassical” economics in the late eighteenth century and after. This also informed Hobbes’ (mistaken) theories of state formation as solitary individuals mutually agreeing to form a state by voluntarily coming together and giving up a portion of their freedom to a sovereign.

But these are classic cases of what the authors of Sex at Dawn call the “Flintstonization” of history: the erroneous projection contemporary conditions back onto the distant past. If our entire lives are determined by buying and selling in markets and working at jobs, we think, then surely that must have been how people lived their lives in the past as well, right? Wrong!

…Now for [Adam] Smith, the most important function of money is to serve as a medium of exchange.  Because once this is established his apocryphal story expands. As a medium of exchange money facilitates trade, encourages greater specialization and productivity, reduces transactions costs, and allows for the further flowering of capitalism.  It also serves as the beginning of the banking system.  As metals become the preferred medium of exchange, banks are created to store and manage these wealth holdings.  The coining of metal by state governments facilitates this process by standardizing weights and degrees of alloyed purity. The bankers than issue receipts describing the amount of gold stored or deposited on its premises.

Over time, bankers realize that these gold receipts are circulating as money.  They also realize that only a fraction of their holdings are called for on any given day.  Thus they can make loans at interest and issue gold receipts far in excess of their actual holdings.  This emergence of credit further greases the wheels of capitalist exchange, savings, and investment.  However, in the overall economy, money only affects prices and not the process of actual physical production.

Even peak oil author Richard Heinberg repeats this myth:

While early forms of money consisted of anything from sheep to shells, coins made of gold and silver gradually emerged as the most practical, universally accepted means of exchange, measure of value, and store of value.

Money’s ease of storage enabled industrious individuals to accumulate substantial amounts of wealth. But this concentrated wealth also presented a target for thieves. Thievery was especially a problem for traders: while the portability of money enabled them to travel for long distances to purchase rare fabrics and spices, highwaymen often lurked along the way, ready to snatch a purse at knife-point. These problems led to the invention of banking—a practice in which metal-smiths who routinely dealt with large amounts of gold and silver (and who were accustomed to keeping it in secure, well-guarded vaults) agreed to store other people’s coins, offering storage receipts in return. Storage receipts could then be traded as money, thus making trade easier and safer.

Eventually, goldsmith-bankers realized that they could issue paper receipts for more gold than they had in their vaults, without anyone being the wiser. They did this by making loans of the receipts, for which they charged a fee amounting to a percentage of the loan.

Economic History in 10 Minutes (Resilience.org)

This the the “evolutionary origin of money” proposed by Austrian Economist Carl Menger. Menger’s theory is based on the model of thousands of anonymous individuals transacting for their daily needs in “free and open” markets that we have thoroughly debunked over the last few posts:

Karl Menger, an Austrian economist, set out one school of thought as long ago as 1892. In his version of events, the monetisation of an economy starts when agricultural communities move away from subsistence farming and start to specialise. This brings efficiency gains but means that trade with others becomes necessary. The problem is that operating markets on the basis of barter is a pain: you have to scout around looking for the rare person who wants what you have and has what you want.

Money evolves to reduce barter costs, with some things working better than others. The commodity used as money should not lose value when it is bought and sold. So clothing is a bad money, since no one places the same value on second-hand clothes as new ones. Instead, something that is portable, durable (fruit and vegetables are out) and divisible into smaller pieces is needed. Menger called this property “saleableness”. Spices and shells are highly saleable, explaining their use as money.

Government plays no role here. The origin of money is a market-led response to barter costs, in which the best money is that which minimises the costs of trade. Menger’s is a good description of how informal monies, such as those used by prisoners, originate.

On the origin of specie (The Economist)

This is at the core of the libertarian argument. Money and trading does not need the state at all, they say. It is all about individuals making mutually-beneficial trades in free markets with a mutually-agreed upon medium of exchange which evolves spontaneously over time, they say. If the state just “went away” instead of taking from the “makers,” economic life would go on just fine, they argue. Also, in this estimation, a finite stock of precious metals are the only “real” money, and “fiat currency” is an abomination that can only lead to doom.

The problem is that, historically speaking, these ideas are all incorrect. In fact, logic alone uncovers problems with this approach:

In terms of logic, [Adam] Smith’s story is simply not convincing…the barter story that emerged from Smith contradicts both the logic and the historical record… For example, if you grew up in a small town in the western US in the 1970s, you might remember that you could go to the grocery store, pick up groceries, and simply sign a slip a paper acknowledging your receipt of the groceries.  The same could be done in Smith’s hypothetical example.  If the shoe seller or potato seller were trustworthy, the shoe seller could simply create a record of the shoes purchased on credit by the potato seller/shoe buyer and their value in some agreed upon unit of account.  This is not barter and it is not a purchase using a medium of exchange.  Instead it is “the exchange of a commodity for a credit.”  And it is far easier that the use of a medium of exchange.

Was Money Created to Overcome Barter? (Naked Capitalism)

In fact, this actually happened in the real world:

To prove his core point – that money is not currency – [Author Felix] Martin reminds readers of a previous crisis 43 years ago in Ireland. Following an industrial dispute, the nation’s banking system shut down for nearly seven months, with customers unable to withdraw or deposit money. Yet instead of the country grinding to a halt as anticipated, people began accepting cheques or IOUs based on their own assessments of risk. So in a rich and developed economy, albeit one with strong communal links, institutionalised banking was replaced by a personalised credit system – proving, he says, “the official paraphernalia” of banks, credit cards and notes, can disappear “and yet money still remains”.

Money: a Biography by Felix Martin – Review (The Guardian)

So money was not “invented” to overcome barter. Rather, it goes back to the early redistributive economies that we’ve been discussing.

So if there has never been a land of barter, then where did we get money and credit from? A British diplomat named Alfred Mitchell-Innes was one of the first to write about the true origins of money. He published an essay entitled “What is Money” back in 1913:

[Mitchell] Innes (p. 397) argues that systems of credit pre-date coins by over a thousand years.  “The earliest known coins of the western world are those of ancient Greece, the oldest of which, belonging to the settlements on the coast of Asia Minor, date from the sixth or seventh centuries B.C.”  In contrast, the law of debt goes back to at least the Code of Hammurabi in Babylonia 2000 years B.C.  Innes saw that the foundation of society and thereby of credit was that promises or obligations were and are viewed as sacred.  In all societies (p. 391) the breaking of the pledged word, or the refusal to carry out an obligation is held equally disgraceful.”

He goes on to explain how wooden tally sticks and clay shubati tablets were used to track credits/purchases and debits/sales long before the existence of coins.  And that one could repay a debt by returning a credit of the same amount to the lender.  In fact, village fairs were convened so that those holding the debts of others could match credits and debits together and thereby clear their accounts.  Over time others showed up to buy and sell other goods and services or to cater to those in this most basic business of banking.

Was Money Created to Overcome Barter? (Naked Capitalism)

…the earliest uses of money in recorded civilization were not coins, or anything like them. They were tallies of credits and debits (gives and takes), assets and liabilities (rights and responsibilities, ownership and obligations), quantified in numbers. Accounting. (In technical terms: sign-value notation.) Tally sticks go back twenty-five or thirty thousand years. More sophisticated systems emerged six to seven thousand years ago (Sumerian clay tablets and their strings-of-beads predecessors). The first coins weren’t minted until circa 700 BCE — thousands or tens of thousands of years after the invention of “money.”

These tally systems give us our first clue to the nature of this elusive “social construct” called money: it’s an accounting construct. The earliest human recording systems we know of — proto-writing — were all used for accounting. So the need for social accounting may even explain the invention of writing.

This “accounting” invention is a human manifestation of, and mechanism for, reciprocity instincts whose origins long predate humanity. It’s an invented technique to do the counting that is at least somewhat, at least implicitly, necessary to reciprocal, tit-for-tat social relationships.

None of this is to suggest that explicit accounting is necessary for social relationships. That would be silly. Small tribal cultures are mostly dominated by “gift economies” based on unquantified exchanges. And even in modern societies, much or most of the “value” we exchange — among family, friends, and even business associates — is not accounted for explicitly or numerically. But money, by any useful definition, is so accounted for. Money simply doesn’t exist without accounting.

Coins and other pieces of physical currency are, in an important sense, an extra step removed from money itself. They’re conveniently exchangeable physical tokens of accounting relationships, allowing people to shift the tallies of rights and responsibilities without editing tally sheets. But the tally sheets, even if they are only implicit, are where the money resides.

Did money evolve? You might not be surprised (Evonomics)

This comment sums it up succinctly:

Money (a standard unit of account, used to denote debts or assess value) predates coins by millennia, and coins only ever comprised a small fraction of the money in daily use. Most ancient money was in the form of marks on clay tablets or notes on pieces of papyrus, just as it is today (computers replacing clay or papyrus).

A Roman who bought an estate in Italy qualifying him for the equestrian order (one million sesterces) did not haul a cartload of silver around. He arranged for his banker to transfer a sum from his account to that of the vendor, again just as we would today. Ditto mercantile debts. Coins were for spot transactions, untrusted persons and ceremonial gifts (donatives). The real cost of making money was and is in establishing and maintaining the trust needed to support it.

The real costs of making money 2. Where did the silver used to buy Josef come from?

A more recent take on the origins or money is the book Money: A Biography by Felix Martin:

[Felix] Martin sees [money] as based upon a system of credit and clearing from the start. … he says we should view money as a social technology, a set of ideas and practices for organising society. It was created after the collision of Mesopotamian inventions of literacy, numeracy and accounting with Greek notions of equality, and evolved amid struggles for supremacy between sovereigns and their subjects. Ultimately, it was a liberating force for individuals against the state – but also something prone to near-ceaseless speculation and financial crises.

Money: a Biography by Felix Martin – Review (The Guardian)

In fact, the state played a crucial role in the creation of money:

…Take the widespread use of precious metals as money. A Mengerian would say that this happens because metals are durable, divisible and portable: that makes them an ideal medium of exchange. But it is incredibly hard to value raw metals…so the cost of using them in trade is high. It is much easier to assess the value of a bag of salt or a cow than a lump of metal. Raw metals fail Menger’s own saleableness test.

This problem explains why metal money has circulated not in lumps but as coins, with a regulated amount of metal in each coin. But history shows that minting developed not as a private-sector attempt to minimise the costs of trading, but as a government operation. It was state intervention, not the private market, that made metal specie work as money.

That suggests another theory is needed, in which the state plays a bigger role in the origin of money…The fiscal wing of government has a huge incentive to move its economy away from barter. Once money exists, income and expenditure can be measured. That means they can be taxed. And the public purse gets a second boost from seigniorage, the difference between the value of the coins and the cost of producing them. On this account, governments impose taxes payable only in money, creating a demand for money that means it will be widely accepted as payment for goods. The state forces the economy away from barter for its own fiscal purposes.

On the origin of specie (The Economist)

In other words, the use of money created markets, not the other way around! And they were both intentional creations of central states. Charles Goodhart of the London School of Economics published a paper arguing this in 1998:

Mr Goodhart used monetary history to test these competing theories. He examined the overthrow of Rome and a period in the tenth century when the Japanese government stopped minting coins. If the origin of money were purely private, these shocks should have had no monetary effects. But after Rome’s collapse, traders resorted to barter; in Japan they started to use rice instead of coins. There is a clear link between fiscal power and money. The evidence suggests that only “informal” monies can spring up purely privately…

On the origin of specie (The Economist)

Just how much of a state invention is detailed by the book Making Money by Christine Desan; like Felix Martin’s book, a history of money, in this case from late medieval and early modern Europe. This book covers the history of money at the same time as market exchanges were emerging to become central in the social relations of Western Europe:

The central assumption of [the conventional] story is that coins were simply a package in which precious metal traveled. Hence “they had to be assayed and weighed to determine their value in the best of times.” But even that is too optimistic, if the question is whether coins serve as safe assets. Coins did have a metal value, since they could theoretically be converted into bullion, which had its own price, albeit at some cost. But they also had a coin value, which was simply the value dictated by the sovereign, since coins could be used to pay taxes.

The metal value and the coin value were related, but they were related in the sense that the value of a currency today is related to the economic fundamentals of the country that issues it. That is, the relationship between metal value and coin value was managed by the government using a variety of policy instruments. One of those was setting the number of coins that would be minted from a given quantity of metal (and the number of those coins that would be skimmed off the top for the sovereign).

A central principle of late medieval English law..was that the sovereign had the absolute right to dictate the value of money…If Queen Elizabeth said that worn, clipped coins had the same value as brand-new coins from the mint, even if the former had only half the silver content of the latter, then they had the same value. She could say that because the value of pieces of metal depends on what you can use them for, and so long as you (or someone else) can use them to pay debts and taxes, they have value…money was never simply precious metal in another form, but an instrument of commerce artificially created by kings.

Even in the heyday of coins, they were hardly the only form of money. For one thing, most everyday transactions were conducted using debt—what we would call trade credit, although it was used by consumers as well as businesses—because the smallest coin was simply too big to pay a day’s wages, let alone buy a beer, at least in England. For another, as early as the 14th century, carved sticks of wood known as tallies were circulating as money.
Tallies began as records of taxes collected, then became receipts the crown gave to tax collectors for advances of coin (the idea being that, at tax time, the collector could show the tally and say, “I already paid”), and finally evolved into tokens that the government used to pay its suppliers (who could then cash them with tax collectors, who would use them at tax time). In most of the 15th century, a majority of tax receipts came in the form of tallies rather than cash (p. 177). Again, if the government is willing to take take something in payment of taxes, it becomes money.

Similarly, it is true that “problems with coins” led to the development of other forms of money—beginning with trade credit and tallies—but for the most part they were not the transactional problems faced by households and firms, but fiscal and military problems faced by governments.

The Bank of England, which issued the first recognizably modern paper currency, was created because William III needed money to fight wars on the Continent, but there simply wasn’t enough coin in the country to both pay the required taxes and keep the economy functioning. Bank notes were able to function as money because the government was willing to accept them in payment of taxes—which was not true of the notes issued by purely private goldsmith-bankers. In other words, what made Bank notes money, rather than simply paper records of debt, was a political decision necessitated by a fiscal crisis.

Mysteries of Money (The Baseline Scenario)

In fact, metal coins were fiat currency! Both Martin and Desan point to John Locke as the chief culprit in the redefinition of money as a finite stock of precious metals which dominates libertarian thinking today:

…the Bank of England’s formation…coincided with the reconceptualization of money as simply precious metal in another form—a fable told most prominently by John Locke.

In earlier centuries, everyone accepted that kings could reduce the metal content of coins and, indeed, there were good economic reasons to do so. Devaluing coins (raising the nominal price of silver) increased the money supply, a constant concern in the medieval and early modern periods, while revaluing coins (keeping the nominal price of silver but calling in all old coins to be reminted) imposed deflation on the economy. But Locke was the most prominent spokesperson for hard money—maintaining the metal content of coins inviolate. The theory was that money was simply metal by another name, since each could be converted into the other at a constant rate.

The practice, however, was that the vast majority of money—Bank of England notes, bills of exchange issued by London banks, and bank notes issued by country banks—could only function as fiat money. This had to be the case because the very policy of a constant mint price had the effect of driving silver out of coin form, vacuuming up the coin supply. If people actually wanted to convert their paper money into silver or gold, a financial crisis could be prevented only through a debt-financed expansion of the money supply by the Bank of England—or by simply suspending convertibility, as England did in the 1790s.

To paraphrase Desan, at the same time that the English political system invented the modern monetary system, liberal theorists like Locke obscured it behind a simplistic fetishization of gold. The fable that money was simply transmutated gold went hand in hand with the fable that the economy was simply a neutral market populated by households and firms seeking material gain. This primacy of the economic over the political—the idea that government policy should simply set the conditions for the operation of private interests—is, of course, one of the central pillars of the capitalist ethos. Among other things, it justified the practice of allowing private banks to make profits by selling liquidity to individuals (that’s what happens when you deposit money at a low or zero interest rate)—a privilege that once belonged to sovereign governments.

Mysteries of Money (The Baseline Scenario)

Thus we see that money is not “thing” that we can run out of. In our societies, those who control the management and issuing of currency, like the Mesopotamian priests of old, control the society. But this is a social choice as much as anything else. The bankers use their knowledge of the system to enforce an artificial scarcity of money for everyone but themselves.

As David Graeber points out, throughout history, money has circulated between periods where it has been seen primarily as a commodity, and periods where it is seen primarily as a social relationship. These are associated with changes in the underlying society, particularly with periods of either centralized state expansion or collapse. In societies and political regimes with highly centralized and functional bureaucracies which can establish standards, enforce contracts, and adjudicate disputes, money is primarily credit. In circumstances of state breakdown, money once again reverts to commodities, and autarky, rather than market exchanges, prevail. Traveling becomes unsafe, and long-distance trade breaks down. Self-sufficiency becomes paramount. Barter usually becomes prevalent in cases after the breakdown of central states; it’s not the source of markets as we know them:

One of my inspirations for ‘Debt: The First 5,000 Years’ was Keith Hart’s essay ‘Two Sides of the Coin’. In that essay Hart points out that not only do different schools of economics have different theories on the nature of money, but there is also reason to believe that both are right. Money has, for most of its history, been a strange hybrid entity that takes on aspects of both commodity (object) and credit (social relation.) What I think I’ve managed to add to that is the historical realization that while money has always been both, it swings back and forth – there are periods where credit is primary, and everyone adopts more or less Chartalist theories of money and others where cash tends to predominate and commodity theories of money instead come to the fore. We tend to forget that in, say, the Middle Ages, from France to China, Chartalism was just common sense: money was just a social convention; in practice, it was whatever the king was willing to accept in taxes…

As I said Eurasian history, taken in its broadest contours, shifts back and forth between periods dominated by virtual credit money and those dominated by actual coin and bullion. The credit systems of the ancient Near East give way to the great slave-holding empires of the Classical world in Europe, India, and China, which used coinage to pay their troops. In the Middle Ages the empires go and so does the coinage – the gold and silver is mostly locked up in temples and monasteries – and the world reverts to credit. Then after 1492 or so you have the return world empires again; and gold and silver currency together with slavery, for that matter.

What’s been happening since Nixon went off the gold standard in 1971 has just been another turn of the wheel – though of course it never happens the same way twice. However, in one sense, I think we’ve been going about things backwards. In the past, periods dominated by virtual credit money have also been periods where there have been social protections for debtors. Once you recognize that money is just a social construct, a credit, an IOU, then first of all what is to stop people from generating it endlessly? And how do you prevent the poor from falling into debt traps and becoming effectively enslaved to the rich? That’s why you had Mesopotamian clean slates, Biblical Jubilees, Medieval laws against usury in both Christianity and Islam and so on and so forth.

Since antiquity the worst-case scenario that everyone felt would lead to total social breakdown was a major debt crisis; ordinary people would become so indebted to the top one or two percent of the population that they would start selling family members into slavery, or eventually, even themselves.

Well, what happened this time around? Instead of creating some sort of overarching institution to protect debtors, they create these grandiose, world-scale institutions like the IMF or S&P to protect creditors. They essentially declare (in defiance of all traditional economic logic) that no debtor should ever be allowed to default. Needless to say the result is catastrophic. We are experiencing something that to me, at least, looks exactly like what the ancients were most afraid of: a population of debtors skating at the edge of disaster.

And, I might add, if Aristotle were around today, I very much doubt he would think that the distinction between renting yourself or members of your family out to work and selling yourself or members of your family to work was more than a legal nicety. He’d probably conclude that most Americans were, for all intents and purposes, slaves.

Since we looked at the South Seas before for clues to the origin of states, let’s see if they can offer us a clue to the origin of money.

On the Pacific island of Yap, Rai Stones are used in trade and as a from of currency. These are large, circular stone discs carved out of limestone formed from aragonite and calcite crystals. The limestone is not available on Yap itself, only on neighboring islands, so these stones were considered rare and valuable by people. They vary greatly in size: the smallest are measured in centimeters, the largest are several tons. Their value is partly determined by not only their size, but by the difficulty in securing them: “If many people—or no one at all—died when the specific stone was transported, or a famous sailor brought it in, the value of the rai stone increases by reason of its anecdotal heft.”

Rai stones were, and still are, used in rare important social transactions, such as marriage, inheritance, political deals, sign of an alliance, ransom of the battle dead or, rarely, in exchange for food. Many of them are placed in front of meetinghouses or along pathways.

The physical location of the stone may not matter—though the ownership of a particular stone changes, the stone itself is rarely moved due to its weight and risk of damage. The names of previous owners are passed down to the new one. In one instance, a large rai being transported by canoe and outrigger was accidentally dropped and sank to the sea floor. Although it was never seen again, everyone agreed that the rai must still be there, so it continued to be transacted as genuine currency. What is important is that ownership of the rai is clear to everyone, not that the rai is physically transferred or even physically accessible to either party in the transfer.

While the monetary system of Yap appears to use these giant stones as tokens, in fact it relies on an oral history of ownership…As long as the transaction is recorded in the oral history, it will now be owned by the person you passed it on to—no physical movement of the stone is required.


So, we see that the “unit of account” function seems to have been primary, and preceded the “medium of exchange” aspect of money by several millennia at least. Similarly, Yap indicates that the “store of value” function also predates the “medium of exchange” aspect, and that physical transfers of a commodity were less important than social relations. Ownership of stone money was merely transferred from one party to another by collective agreement, without recourse to the actual physical object in question (in this case by oral agreement rather than by writing).

Similarly, precious metals originally seem to have been used primarily to conduct symbolic gift giving (such as in the Kula ring), since they were far too limited and too valuable to be used for day-to-day economic transactions. Both stone money and early coins seem to have been connected to gift-exchange, similar to engagement rings (which were initially dowries – break the engagement and the gold ring is the compensation for going back on your word). Coins grew out of attempts to establish a reliable standard of purity, authenticity and weight by rulers who thereby benefited through segniorage (profits made from issuing money). As we saw, in most early states mining was a “nationalized” industry, meaning coins could only be minted by the authorities. Coins were easier to measure for collecting taxes than paying in commodities. They then began to circulate as money, not before.

In ancient times, precious metals seem to have been used primarily to facilitate long-distance trading, not internal market exchanges. Polanyi argues that long-distance trade, which existed for thousands of years, is what drove markets (not local bartering), and that these markets were kept fundamentally separate from the inner workings of the societies in which they operated. Furthermore, such markets were noncompetitive. Precious metals were not typically used within societies for transactions – reciprocity and credit were. Even when they were, the “value” of what they could purchase was dictated by governments – even gold and silver were fiat currencies whose value came from the need to pay taxes to the central state from the very beginning. As Randall Wray describes:

What we call “money” (coins, tally sticks, paper notes, electronic entries on bank balance sheets) is simply the record of debt, “accounted for” in the money of account. The line between what we want to count as “money” debts or merely as “money denominated” debts is and always has been arbitrary. Most will include a checkable bank deposit in their definition of “money”; most will not include a non-checkable certificate of deposit in that definition.

Typically, people want to apply the term money to those money-denominated liabilities that can be used immediately as a medium of exchange—that is, to buy something, passing hand-to-hand. I am sympathetic. If we look at the modern economy, and focus only on transactions of households, it works pretty well. But going back through time and including transactions of private and public institutions, it gets quite messy.

The argument is not that barter never occurred in ancient times; it certainly did. However, money as we know it did not emerge out of barter, and neither did competitive internal markets as we know them. Capitalism is not just an exchange of goods growing out of barter, but something fundamentally different.

Second, it’s not that there was never any trading or markets in antiquity. There surely were, and they date back to human prehistory. But markets were not the primary focus of social relations, rather they were exclusively mechanisms to procure goods from afar, or to exchange certain goods within societies. “Unplug” markets from society, and they go on much as before, if a bit poorer. Competitive, internal, self-regulating markets did not derive from these types of markets. Inside cultures, the idea of using impersonal market transactions based around money to regulate every aspect of social life would have struck ancient people as offensive and absurd, not to mention inhuman.

So how do we get from that to the market society of today? That’s what we’ll be  taking a look at next time.

Karl Polanyi and the Modern World – Part 3

We have previously shown that ancient economies did not grow primarily out of trading and markets, but rather out of reciprocity, redistribution and householding. Furthermore, redistribution was based on the principles of symmetery, centricity and autarky. Barter and trade formed a minor, tangential portion of these economies. Economies existed for thousands of years prior to money and markets.

All ancient states appear to have grown out of communal feasting in places where agriculture, horticulture, animal husbandry, or fishing (in various combinations) permitted permanent storable surpluses to accumulate. These surpluses were redistributed by various headmen, war chiefs, and tribal leaders or councils. Feasting schedules were determined by religious leaders (shamans) using the lunar and solar cycles going as far back as the Upper Paleolithic (Ice Age). Central repositories were built under the auspices of these leaders to ensure regularity in food and other supplies as climate became more variable and large prey started going extinct. Eventually, the shamans and headmen transformed into the first priest-kings coordinating the collective efforts of early societies under the auspices of religion.

We looked at three early economic models: the Tribute Economy, the Palace Economy, and the Oikos (household) Economy. In each of these, production was done communally. Households typically produced various commodities for their own consumption, and their surpluses were redistributed by various administrators through central repositories. This prosperity caused populations to increase, but at the cost of much more work. Hunting and gathering can support 1 person per square mile; early agriculture can support closer to 100. Population density drove a series of cultural changes and social complexity, unfolding over thousands of years.

The extreme variability of climate strengthened the power of centralized administrations. Populations had become too dense for a return to hunting and gathering for most people. Many of these areas were circumscribed by inhospitable regions that could no longer support dense populations. The 5.9 kiloyear event in about 3200BC seems to be associated with urbanization and the formation of the first proto-states. This was several centuries of cooler and drier weather, not quite as severe as that of the Younger Dryas, but at least as dramatic as the later Little Ice Age. This is associated with the end of the Wet Sahara period and significant desertification.

The Hydraulic Trap

A number of historians and archaeologists have made the case that the need to maintain complex irrigation systems kickstarted the formation of the first complex states.

Both Egypt and Mesopotamia are too arid for rainfall farming and have to rely on irrigation. In Mesopotamia vast irrigation works were constructed in the flat river valley between the Tigris and Euphrates from as far back as 4000 BC. Floods were routed by dams and man-made channels away from cities and farms. The main irrigation canals were lined with burnt brick and sealed with asphalt. Keeping the canals free of silt was a continuous process accomplished by teams of local villagers working together. This led to a high degree of collective action necessary to make a living in this part of the world from an early date.

Egypt has the advantage of the Nile flooding more or less in time with the planting season. This deposits a thin layer of rich, dark humus from further down the river. Nevertheless, early Pharaohs oversaw the construction of vast irrigation works both to control flooding and store and transport river water to distant locations to support growing populations. On the other end of Eurasia, the chaos and unpredictability of the Yellow River, “China’s Sorrow,” led to major flood control works from a nearly date. The legendary Chinese hero Yu the Great is said to have established extensive flood controls back in the third millennium B.C.


Marvin Harris notes that all of these early ancient societies seem to share similar characteristics:

These ancient empires shared one additional feature: each was…a “hydraulic society.” Each developed amid arid or semiarid plains and valleys fed by great rivers. Through dams, canals, flood control, and drainage projects, officials diverted water from these rivers and diverted it to the peasant’s fields. Water constituted the most important factor in production. When it was applied in regular and copious amounts, high yields per acre and per calorie of effort resulted. [1]

Following ideas first articulated by Marx and Wittfogel, he contends that:

…I hold that preindustrial hydraulic agriculture recurrently led to the evolution of extremely despotic agro-managerial bureaucracies because the expansion and intensification of hydraulic agriculture–itself a consequence of reproductive pressures–was uniquely dependent upon massive construction projects which, in the absence of machines, could only be carried out by antlike armies of workers. The larger the river, the greater the flood production potential of the region through which it flowed. But the larger the river, the greater the problems in making use of its potential.

On the one hand, the state undertook the construction of extensive networks of diversionary and feeder canals, ditches, and slice gates to ensure that there would be enough water at the right time; on the other hand, the state undertook the construction of dams, levees, and drainage ditches to avoid the damaging effects of too much water all at once.

The scale of the activities in question literally demanded changing the face of the earth: moving mountains, reshaping riverbanks, digging out whole new riverbeds. Recruiting, coordinating, directing, feeding, and housing the brigades of workers needed for these monumental undertakings could only have been carried out by cadres obedient to a few powerful leaders pursuing a single master plan. Hence, the larger the hydraulic networks and facilities, the greater the overall productivity of the system, the greater the tendency of the agro-managerial hierarchy to become subordinate to one immensely powerful person at its top. [2]

He furthermore contends that these states were particularly despotic, because control of the irrigation works gave these leaders absolute control over whether the farmers could make a living or not. The necessity of submitting to the centralized bureaucracies meant that people had no choice but to submit to despotic systems. This has been referred to as the “Asiatic mode of production,” and “Oriental Despotism”:

Each ancient empire developed its own integrated pattern of social life. From cookery to art styles, each was a universe unto itself. And yet for all their differences, ancient China, India, Mesopotamia, and Egypt possessed fundamentally similar systems of political economy. Each has a highly centralized class of bureaucrats and hereditary despotic overlords who claimed heavenly mandates or were said to be gods in themselves. Excellent networks of government-maintained roadways, rivers, and canals linked every hamlet and village to provincial and national administrative centers. Each village had at least one important person who served as a link between the village and the central administration. Political lines of force ran in one direction only: from top to bottom. While peasants might sometimes own their land, as in China, the bureaucracy tended to regard private property as a gift of the state. Production priorities were set by state tax policies and by regular call-ups of village men and women for work on state-sponsored construction projects. The “state was stronger than society.” Its right to collect taxes, confiscate materials and conscript labor was virtually unlimited. It carried out systematic censuses village by village to determine the available labor power and the tax revenue base. It deployed antlike armies  of workers wheresoever the lords of the realm decreed and undertook the construction of tombs, pyramids, defense works, and palaces whose dimensions are stupendous even by modern industrial standards.

The use of bronze as opposed to iron may have also played a role:

Archaeologists have suggested a theory linking the use of bronze to political centralization. Copper and tin are both scarce and need to be traded, their supplies can be monopolized, and so can trade. This seems to have created both the incentive and the opportunity to concentrate power and develop urban centers, for example in Knossos in Crete which was the core of Minoan Greece. While the Greek Bronze Age cities were destroyed around 1200 BCE and some, like Mycenae, never re-emerged, many, such as Athens re-emerged on the same spot so the early centralization of the Bronze Age may have left a path dependent legacy.

Not every part of the world experienced a Bronze Age, however. Though some parts of Africa, like Benin, are now famous for their bronze work, in general Sub-Saharan Africa jumped right into the Iron Age without ever passing through this intermediate stage.

In contrast to copper and tin, iron is very widely spread as the great archaeologist Gordon Childe put it “cheap iron democratized agriculture and industry and warfare too”. So the jump to Iron Age technology may have impeded the development of states in Africa by making it more difficult for elite to concentrate and monopolize power. Africa never experienced the nascent period of political centralization that Europe did during the Bronze Age, perhaps also with a path dependent legacy.

Why Africa lacked Centralized States – The Role of the Bronze Age (Why Nations Fail)

Robert McNeill, in Plagues and Peoples, suggests that new diseases may have played a role as well:

“Lassitude and chronic malaise…of the kind induced by blood fluke and similar parasitic infections, conduce to successful invasion by the only kind of large-bodied predators human beings have to fear: their own kind, armed and organized for war and conquest…How important parasitic infection of agricultural field workers may have been in facilitating the erection of the social hierarchies of early river civilizations cannot be estimated very plausibly. But it seems reasonable to suspect that the despotic governments characteristic of societies dependent on irrigation agriculture may have owed something to the debilitating diseases that afflicted field workers who kept their feet wet much of the time, as well as to the technical requirements of water management and control which have hitherto been used to explain the phenomenon.” [3]

The Ancient Economy – Historical Examples

Let’s take a look at some ancient economic systems. What we’ll see is that rather than the simplistic and historically ignorant version of events put forth by libertarians, ancient economies employed a wide variety of strategies and organizational techniques with varying levels of effectiveness. Yet they all achieved fairly successful (by the standards of time), functioning societies.

If you like, you can think of the Egyptians as the Soviet Union, the Mesopotamians as Germany or Japan, and the Phoenicians as Singapore.

In different countries the problem was approached in different ways. On the one hand, we have, in Egypt, where ‘Egypt’ and “Pharaoh’ were identified, a system which corresponds to what in the modern world would be called the nationalization of industry. On the other hand, in Mesopotamia, by what we may term a capitalist system, the individual merchant acts on his own initiative but within the limits of the law and subject to the taxation imposed by the state in the general interest. And, lastly, in certain communities such as the Phoenician coast towns, it would seem that the merchants (of whom the ruler would be one) controlled the state in the interests of trade. These differences were not due to ideologies deliberately formatted: man had not then acquired so philosophical an outlook; they resulted mainly from their economic character and resources; but they were very real… [4]

In Egypt the divine Pharaoh was from the outset the Lord of the land and in time, with the suppression of the old feudal nobility, could claim to be its actual owner. In Mesopotamia the entire territory of a city state was the personal property of the city’s god, and the ruler, king or ensi, as the representative of the god–although in the administration he was assisted by the city council–was the real proprietor of that territory. In both countries therefore the government, vested in the person of the ruler, was in theory entitled to the whole produce of the fields; either he could exercise that right literally, taking everything to himself subject only to the costs of production, or he could work the land indirectly, letting the cultivators make what profit they could for themselves, while he received from them a fixed portion of the harvest. [5]

Ancient Egypt:


Egypt’s extreme isolation in the strip along the Nile surrounded by inhospitable deserts meant that it developed as essentially a top-down, state-controlled society. The Pharaoh owned all the land, owned the mines and quarries, built the temples and monuments, organized long-distance trading expeditions, stored and redistributed the grain, supported and patronized artisans and craftsmen, administered the government, ministered the religion, and waged military campaigns. The “commanding heights” of the economy were state-controlled, while the average fellahin or petty merchant went about their daily business.

Markets seem to have played a relatively minor role in the society:

We have no knowledge of any Egyptian laws regulating trade, and this again tends to show that the private trader played no very important part in the land’s economy…this does not mean…that commerce was nonexistent, but it does imply that private merchants, even though they existed and might become wealthy…enjoyed no such social rank as would enable them to build rich tombs for themselves and thereby leave a memorial that would endure to our time…As regards internal trade, it must be remembered that in theory at least the whole land of Egypt was the personal property of Pharaoh…the Pharaohs of the Empire could fairly look upon Egypt as their personal estate…[6]

The Egyptian state was represented by the god-king Pharaoh, and his health and abiding maintenance was connected to the “health” of the state and of the overall health and well-being of the land of Egypt in general: “The building of the colossal tombs of the Egyptian kings was as much an act of faith as was the building of the great cathedrals of medieval Europe, and its object was not simply to minister to the vainglory of the ruler but to take out, as it were, an insurance policy for the culture.” [7]

The god-king owned the gold and copper mines, and the stone quarries. The people who built the massive monuments were state employees, as were the craftsmen who produced the fine metalwork and handicrafts.

Gold was controlled by the state: It was clearly to the country’s advantage that the exploitation of the rich gold-fields in the eastern desert should be reserved to the state and not left to the mercy of private speculators intent on making fortunes for themselves; gold had very early become a weapon far too powerful for the ruler to allow of its source passing into the hands of possible rivals and the embargo upon gold mining was justified both upon public grounds and as a dynastic safeguard…With copper the case was somewhat different. The mines of Sinai lay far off, in a desolate country where the maintenance of mine-workers required elaborate organization for food and transport and where troops were needed to ward off raids from wild nomads…nothing short of a royal authority could have undertaken what were in fact military campaigns on a large scale. [8]

The construction of the tombs and temples meant the state had a monopoly on the stone quarries, as well as construction. Much of this was bound up with the Egyptian state religion:

The monopoly of stone quarrying and that of building construction are complimentary. Only the Pharaoh built temples…from the moment of his ascension to the throne Pharaoh was busy with the preparation of his tomb, and this had to be done with direct labour. There was no question of letting out the work to contractors; the vast numbers of laborers required were called up by the corvee system put into force at the time of the year when agricultural work was slack, and they were in Pharaoh’s own service, organized on military lines (the larger gangs were called aperu, a military term) and supplied with rations from the royal stores. Quarrying, transport, and building were all under Pharaoh’s sole control…Tombs and temples alike required sculptors and goldsmiths and skilled craftsmen of all sorts, and they too were in Pharaoh’s service…Theoretically the craftsmen were free men; but the ablest of them were engaged by the king at a wage for life, and their sons after them…

With the state, in the person of the Pharaoh, exercising such complete control over the natural resources and over the labor forces of the country, there was clearly very little scope left for ‘big business’ by the private merchants. Their place was taken by an elaborate civil service acting with the authority and for the benefit of the crown. Of course there was always plenty of petty retail trade in the village market square and in the town bazaar, though most of the things sold there, grain or oil, animals or manufactured goods, had to pay taxes to the government. But even in the field of direct trade the merchant’s opportunities were very limited; as early as the Third Dynasty we hear of a ‘director of all the King’s flax’ and we may be sure that in all commodities the main stocks were either owned or controlled by the Pharaoh. [9]

Egyptian workers who built the pyramids were supported by the state and given the best care that Bronze Age had on offer:

We might think of state-supported health care as an innovation of the 20th century, but it’s a much older tradition than that. In fact, texts from a village dating back to Egypt’s New Kingdom period, about 3,100 to 3,600 years ago, suggest that in ancient Egypt there was a state-supported health care network designed to ensure that workers making the king’s tomb were productive.

The village of Deir el-Medina was built for the workmen who made the royal tombs during the New Kingdom (1550–1070 B.C.). During this period, kings were buried in the Valley of the Kings in a series of rock-cut tombs, not the enormous pyramids of the past. The village was purposely built close enough to the royal tomb to ensure that workers could hike there on a weekly basis.

These workmen were not what we normally picture when we think about the men who built and decorated ancient Egyptian royal tombs—they were highly skilled craftsmen. The workmen at Deir el-Medina were given a variety of amenities afforded only to those with the craftsmanship and knowledge necessary to work on something as important as the royal tomb.

The village was allotted extra support: The Egyptian state paid them monthly wages in the form of grain and provided them with housing and servants to assist with tasks like washing laundry, grinding grain, and porting water. Their families lived with them in the village, and their wives and children could also benefit from these provisions from the state.

Among these texts are numerous daily records detailing when and why individual workmen were absent from work. Nearly one-third of these absences occur when a workman was too sick to work. Yet monthly ration distributions from Deir el-Medina are consistent enough to indicate that these workmen were paid even if they were out sick for several days.

These texts also identify a workman on the crew designated as the swnw, physician. The physician was given an assistant and both were allotted days off to prepare medicine and take care of colleagues. The Egyptian state even gave the physician extra rations as payment for his services to the community of Deir el-Medina.

Ancient Egyptian Tomb Builders Had State-Supported Health Care (Slate)

It was also recently discovered that the Egyptians had a clever and forward-thinking way of adjusting tax rates based upon the flood levels of the Nile river (i.e. countercyclical fiscal policy):

American and Egyptian archaeologists have discovered a rare structure called a nilometer in the ruins of the ancient city of Thmuis in Egypt’s Delta region. Likely constructed during the third century B.C., the nilometer was used for roughly a thousand years to calculate the water level of the river during the annual flooding of the Nile. Fewer than two dozen of the devices are known to exist. …

Before the completion of the Aswan High Dam in 1970, the Nile flooded the surrounding plains each year in late July or August. As the waters receded in September and October, they left behind a blanket of fertile silt that was essential for growing crops such as barley and wheat.

But the volume of the yearly flood varied widely. If the inundation was inadequate, only a small area of cropland would be covered with the life-giving silt, often resulting in famine. If the water level was too high, it would sweep away houses and structures built on the plain and ruin the crops. …

“During the time of the pharaohs, the nilometer was used to compute the levy of taxes, and this was also likely the case during the Hellenistic period,” says Robert Littman, an archaeologist at the University of Hawaii. “If the water level indicated there would be a strong harvest, taxes would be higher.” …

Ancient Device for Determining Taxes Discovered in Egypt (Economist’s View)

Egypt was mostly a self-sufficient autarky. Markets and trade played a minor role in most people’s lives. Money was nonexistent. Trade was mainly in luxury goods, especially those that were related to the Egyptian religious rituals and mummification. Long-distance foreign trade was carried out under the auspices of the state, either north towards Byblos, or south toward the mysterious land of Punt:

Egypt, as organized by the Pharaohs, was to an unusual degree self-sufficing. The ordinary citizen could be housed, clothed and fed, could furnish himself with the tools of his trade, with the raw material required by his craft and with the ornaments desired by his wife, entirely from the resources of the kingdom; a bountiful nature supplied all the necessities of life.

Egypt’s foreign trade was a trade in luxuries, so far as the individual was concerned, but at least some of those luxuries were really needed for the land’s well-being. The temples could not be built without heavy timbers of hardwood such as did not grow in the Nile valley, and the temple ritual demanded the use of incense which, too, the valley did not produce. Oil–‘the remedy of the body’–was needed both for medicinal and for magico-religious purposes; myrrh, cassia and resin were used for mummification; silver was not found in Egypt… Obviously it was Pharaoh’s duty to arrange for the import of things serving such religious purposes and obviously it was to his interest to keep it in his own hands; foreign trade therefor became a royal monopoly.

The only profitable lines of commerce were two, northwards to the Syrian coast and soutwards to the semi-fabulous Land of Punt; for the first, sea traffic was essential; for Punt, goods could be carried overland by way of the Sudan, or, better, could go by ship from a port on the Red Sea. [10]

Ancient Mesopotamia:


Instead of an all-powerful Pharaoh, Mesopotamia was a network of city-states, and the land of each city-state was owned by the city’s patron god and administered by the temple priests:

According to Sumerian belief the patron god of the city state was the absolute owner of all the state’s territories. Parts of the divine estate would be retained and were still farmed directly by the god’s priests, with serfs as laborers, but the vast proportion was let to individuals; the latter had of course to pay their rent to the temple, in grain or cattle or farm produce, but with what was left to them they could do as they pleased, and their freedom to sell inevitably gave birth to a professional class of wholesale merchants. The temple priests also engaged in trade; the enormous stocks accumulated in the god’s store-chambers were more than sufficient for the needs of the temple and the surplus could be sold, providing funds for the maintenance and adornment of the shrine; and since in the theocratic state of early times the god and the government were synonymous we find the state competing in the market on equal terms with the private merchant. The interesting feature of the Sumerian economy is just this.

Because trade was the life-blood of the community the government was bound to supervise and regulate the activities of the trader; it was obliged to ensure fair dealing between buyer and seller, because fraud destroys credit, and to protect the merchant, because his business is to the state’s advantage; but, as if recognizing that individual initiative is more likely to succeed in commerce than is a bureaucracy undisturbed by competition, it made no attempt whatsoever to replace the private trader by the state…Throughout Mesopotamian history the merchant had, within the limits of the law, a free hand to carry on his business, and it is worth noting how far more effective his purely commercial activities were than those of a government department with its political background. [11]

The Mesopotamian use of third-party merchant middlemen had a series of distinct advantages. Since their trading efforts were not connected with the government, they were free to go wherever they pleased no matter how far from Mesopotamia or little contact between governments there was. Their movements were not dependent on the projection of military power or diplomacy, unlike ancient Egypt where long-distance trade was conducted exclusively by the Pharaoh himself. In Egypt, if there was state breakdown or regime change, foreign trade ground to a halt. In Mesopotamia, by contrast, the traders kept the goods flowing even in periods of state breakdown, which was frequent.

As I have said earlier, the Mesopotamians had very little in the way of natural resources available locally besides grain–no forests, mines or quarries. Thus they became a manufacturing and trading power like Germany or Japan today to procure goods needed from afar:

In Mesopotamia the development of the high civilization of the Sumerians and their successors depended entirely upon foreign trade. The amazingly fertile soil of the river valley gave them an agricultural surplus, which was the essential medium of exchange, and the leisure which could make possible specialization in the arts and crafts as well as the appreciation of the amenities of life; but their country produced no good timber, no good stone, no gold, no silver or copper; all the raw materials for the arts and crafts had to be imported in return either for agricultural produce or for manufactured goods.

Some of the raw materials had to be brought from very far away, and the carriage of bulky goods such as grain over great distances was both difficult and expensive, so that it was better to make payment in something more portable and of greater value in proportion to its size and weight; the need was best met by manufactured goods, but those had to be of a quality that would find them a ready market abroad. If you wanted a good life you had to import, and to import successfully you had to develop taste and technique in industry; local conditions enforced civilization upon Sumer. Thus it is hardly a paradox to say that the Sumerians were, in their day, the world’s best metal workers because they had no metal of their own…[12]

In order to facilitate exchanges, a medium of exchange was established by the temples. Initially, it was the weight of barley, the principal crop of Mesopotamia. Barley being a natural product and highly variable, was soon replaced by weights of metal which are much more consistent as we enter the Bronze Age:

The original medium of exchange, natural in a land pre-eminently agricultural, had been grain–just as the original unit of weight was a barleycorn. With the introduction of metal a second medium was added, copper, the ratio between them being fixed, so that in a written assessment of price both media would be mentioned, or either. Later, as wealth increased, silver and gold came in as standards; gold (in the form of rings) came very seldom into actual use, but silver, weighed in the balance and duly tested for quality (though it might be guaranteed by a stamp such as ‘the seal of Babylon’) was normal currency; thus in Hammurabi’s Code agricultural wages and hiring rates are reckoned in grain, but those of the townsman in silver, while at the same time the concession is made that if a debtor has not money (i.e. silver) or corn to pay but has goods, ‘he shall give to his merchant according to what he has brought, and the merchant shall not object’. [13]

Recently, a “pay stub” was discovered showing that state workers were paid not in money, but in beer:

Ancient Pay Stub Shows Workers Were Paid In Beer (NPR)

Rather than a laissez-faire system, the activities of the private merchants were strictly regulated:

…Foreign trade required heavy financial backing, and it was essential that the merchants should be suitably financed. Moreover, to be successful, trade must be honestly conducted, and therefore commercial dishonesty of any kind, or anything that opened the door to fraud in business, was severely punished. Every transaction in real estate, loans and, in certain conditions, sales had to be put in writing, with the names of the parties recorded; without that, no claim by a professed lender or seller was valid.

To buy, or to receive on deposit, a man’s property from his son or his slave (i.e. from other than the responsible owner) without a written bond duly witnessed, involved the death penalty. The use of false weights or measures annulled any claim made by the creditor, and the prudent merchant therefore employed weights engraved with the guarantee of the state department. The creditor on his side could require a pledge as security for his loan, and this might mean that the debtor, if he had no land or house to his credit, might hand over his wife or his children as slaves; by Hammurabi’s Code such bondage was for three years only, but in later times no limit was put to its duration so long as the debt was unredeemed.

Straight dealing in the town bazaars could be ensured by a competent police force, and petty fraud, easily defined, was a matter for the local courts; the strenuous legistation to which our sources bear witness was drawn up in the interests of foreign trade. It was in the sphere of international commerce that the Sumerian and later the Babylonian people displayed an initiative and a genius for organization which was to affect profoundly the history of man. [14]

The long-distance trade was conducted by family-owned firms who managed a series of long-distance trading outposts. While they are often described as the first private merchants and the beginning of capitalism, Polanyi calls this “marketless trading.” As he describes it, there was no risk, and prices for commodities were essentially fixed by the state. Instead of arbitrage, firms would receive a commission on the amount of turnover passing through their storehouses. That is, the government would rely on these firms to manage the procurement of long-distance commodities, with a stipend paid for performing this valuable service. These were not markets or corporations in any modern capitalist sense of the term.

Economic activities under advanced market conditions may resemble similar activities under premarket conditions while their function is quite different. The distinction between pre- and postmarket should help to avoid that “inverted perspective,” as it might be called, which sometimes induced historians to see strikingly “modern” phenomena in antiquity where in fact they were faced by typically primitive or archaic ones. [15]

The traders of the karum of Kanish were not merchants in the sense of persons making a living out of the profit derived from buying and selling, i.e. price differentials in regard to the transaction in hand. They were traders by status, as a rule by virtue of descent or early apprenticeship, in other cases maybe, by appointment. Unless the appointment was accompanied by a substantial land grant…their revenue derived from the turnover of goods on which a commission was earned. This was the original source of all “profit,” i.e., that pool of goods, including silver, in which eventually the internal members of the firm as well as the external ones, i.e. creditors and partners shared. [16]


While Sir Leonard Wooley seems to be an advocate of the Mesopotamian approach, it should be noted that “free market” society based around usury was extraordinarily unstable, subject to constant regime changes and state collapses. Economic historian Douglass North writes that Mesopotamia in this period was “invaded and overrun by Indo-Europeans (Hittites) and Semites (Amorites); as a result there was a bewildering succession of rulers and empires of varying size.” Michael Hudson argues that debt bondage was major factor in this instability.

Egyptian culture, by contrast, was remarkably stable, with only two major disruptions: one caused by social disintegration due to low Nile floods as a result of the 4.2 kiloyear event (which also ended Sargon’s Akkadian empire and the probably the Indus Valley civilization), and the invasions of the Hyksos as part of the great Bronze Age collapse which afflicted the whole eastern Mediterranean. Jeremy Grantham once pointed out that if all the wealth of Egypt at the beginning of the Old Kingdom was represented by one cubic meter of stuff, by the end of the New Kingdom over 3,000 years later, growing at an average “modern” rate of 4.5 per cent, Egypt’s “wealth” would be larger than our solar system and expanding outward at a nearly infinite rate.

To point to the ludicrous unsustainability of…compound growth I suggested that we imagine the Ancient Egyptians whose gods, pharaohs, language, and general culture lasted for well over 3,000 years. Starting with only a cubic meter of physical possessions (to make calculations easy), I asked how much physical wealth they would have had 3,000 years later at 4.5% compounded growth…And the answers [from econometricians] came back: “Miles deep around the planet,” “No, it’s much bigger than that, from here to the moon.” Big quantities to be sure, but no one came close. In fact, not one of these potential experts came within one billionth of 1% of the actual number, which is approximately 1057, a number so vast that it could not be squeezed into a billion of our Solar Systems.

“Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever” (ThinkProgress)

The Phoenicians

We know that the Phoenicians were the great traders all across the Mediterranean, spreading things such as the alphabet and various exchange techniques, but we know almost nothing of how they did it.  The monuments and clay tablets of Egypt and Mesopotamia are lacking; instead we have mainly weights and measures:

The Phoenician ships did not yet venture across the open sea; theirs was a cabotage trade along the Syrian coast and no farther out than Cyprus, itself in sight from the mainland, but the ramifications of their commerce penetrated far. Excavation on a Phoenician site brings to light a remarkable medley of weights: side by side with the Phoenecian shekel of 224 grammes, itself probably a corruption of the 258-grammes Babylonian shekel and Egyptian sep and deben weights, as well as units of other systems not yet identified; it is clear that the merchants of Tyre and Sidon were dealing with a mixed clientele which included citizens of all the principal countries around them.

This international trade was a very important factor in the progress of man’s civilization that it resulted in an interchange of inventions and ideas between peoples who might never have been brought into contact with Phoenicians and the Cretans, also a commercial people whose sea-going ships had a wider range, acted as the middlemen of a cultural exchange so general in its scope and so fertilizing in its spirit that in the thirteenth century BC we can speak of an ‘Eastern Mediterranean’ civilization.

The effects were indeed profound, but of the machinery by which they were realized we know very little. Texts from Ugarit show that the various states were in accord to protect the interests of their travelling merchants, but no documents survive to explain the organization of the Pheonecian market or the accountancy system employed by Phoenecian financiers. The silence is the more curious in view of the fact that commerce was the sole reason for the existence of these maritime states; everybody was engaged in trade. [17]

The Phoenician economic model in 1100-800 BCE can be described as ‘transnational’: mine Spanish silver, work it in Greece, sell in Levant:

We have scant knowledge of the economy worked in other early cultures outside of Egypt and Mesopotamia at this time:

We have not the evidence to show how far such a system was worked in lands other than Mesopotamia. The presence of Indians at Ur suggests something of the sort, but there are no documents to supplement the witness of the seals, and for China in the Shang period even archeological evidence fails us. [18]

David Graeber sums up the differences between ancient Egypt and ancient Mesopotamia:

One [system] is what you found in Egypt: 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.

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.

What is Debt? – An Interview with Economic Anthropologist David Graeber (naked Capitalism)

Ancient Greece.

The precursors to classical Greek civilization were the Minoan and Mycenaean civilizations. The Minoan civilization seems to have come to and end with the volcanic eruption of Thera. Its successor was the Mycenaean civilization, which was tied in to the first great “global economy” of the Bronze Age, which crumbled after 1170 BC in a series of outside invasions and state failures, probably partly as a result of climate change. Both were organized as a palace economy, as we have seen. Economists Daren Acemoglu and James Robinson write (emphasis mine):

How did the economy of the Greek Bronze Age states work? These states were based on a city where the political elite lived. We have a unique record of the activities of these polities because many clay ‘Linear B’ tablets written by state administrators have survived. Fascinatingly, these tablets have only survived from the period right before these states were destroyed in conflicts (think Troy…). The palaces were burned down, we don’t really know by who (the Sea People?), and the fire baked and preserved the clay. The tablets basically are state records of taxation and industrial production. There was no money and apparently no markets…

The state seems to have taxed agricultural output, though we do not know to what extent they directly owned land. They seem to have controlled nearly all industrial production, for instance of textiles, ceramics, tools and weapons. They monopolized trade, and Killen characterizes trade as a type of reciprocal gift-exchange. This was useful probably because Knossos, for example, one of the best studied of the bronze age states, had neither copper nor tin locally and thus had to import them from outside via this type of exchange.

Since there was no money, the state basically moved around all of the goods itself by fiat. It supplied food and inputs to weavers and then took their output. It stored large amounts of food and goods in the palace complex.

As Killen puts it:

“the key role in the movement of goods and the employment of labour was played, not by a market or money, but by a central redistributive agency… in the Mycenaean world, by a central palace.”

Killen concludes:

“this was a redistributive (or command) economy.”

Central Planning in History – The Greek Bronze Age (Why Nations Fail)

In the power vacuum, Dorian invaders came down through the Balkans and colonized Greece, forming the basis for classical Greek culture. The geography of Greece, shot through with mountains, waterways and rocky soil, ensured that, like Mesopotamia, Greece developed as a network of independent, yet culturally affiliated, city states trading among one another. Rather than empires, Greek city states formed Koina – leagues or commonwealths.The basis of economic production was the oikos, or household:

The oikos was the basic unit of society in most Greek city-states. In normal Attic usage the oikos, in the context of families, referred to a line of descent from father to son from generation to generation. Alternatively, as Aristotle used it in his Politics, the term was sometimes used to refer to everybody living in a given house. Thus, the head of the oikos, along with his immediate family and his slaves, would all be encompassed. Large oikoi also had farms that were usually tended by the slaves, which were also the basic agricultural unit of the ancient economy.

Ancient Greece was a slave-based economy, and also like ancient Mesopotamia, people were constantly falling into debt slavery due to the concentration of wealth, thereby threatening the stability of society. The Greek lawmaker Solon, like Hammurabi before him, passed a series of reforms designed to limit debt peonage and free the debt slaves, preserving the Athenian culture. Thus, we see that the complete “hands off” attitude toward the economic laws of society advocated by libertarians leads always to the same effect: a malfunctioning society of debt serfs enslaved by the one percent, social stagnation, and collapse.

Recently, a new book by Josiah Ober of Standford University argues that the ancient Greek economy was more prosperous and dynamic than previously assumed. From a review:

…Among the more interesting findings: the Greek economy as a whole (not just Athens) grew steeply from 1000-300 B.C.E.; the economy continued to grow in the fourth century, a period sometimes thought of as one of decline; the economy was more urbanized, less reliant on subsistence agriculture, and more diversified than previously thought; and wealth appears to have been relatively equitably distributed (Athens’ Gini coefficient is similar to that of 1950s America), with a significant portion of residents enjoying a decent lifestyle above subsistence (he estimates between 42 and 58 percent of the total population, including non-citizens and slaves).

Beyond the numbers and charts, Ober’s qualitative description of the Greek economy is strikingly modern: high levels of specialization and market competition placed “a high premium on innovation and entrepreneurship,” resulting in a dynamic of “creative destruction” (p. 12). This is a far cry from Moses Finley’s classic model of the ancient economy. According to Finley’s Ancient Economy (1973), social norms and desire for status impeded the development of markets, productive investment, and innovation.

Two examples illustrate the distance between Ober’s and Finley’s methods and conclusions. Finley offers two anecdotes, one from a piece of fiction, the other likely an apocryphal story, to help illustrate his thesis (both come from Rome, but Finley was describing what he viewed as a common Greco-Roman mindset). First is the story of Trimalchio, a character in Petronius’ Satyricon: he is a freedman who makes a fortune in the shipping business, but this businessman is, to Finley, the antithesis of an entrepreneur: he gives up the business to buy a landed estate and live the life of an aristocrat. Finley also includes the story of a man who invented unbreakable glass. Rather than attempt to bring this innovation to market, the man brought the invention to the emperor Tiberius in the hopes of a reward. Tiberius executed him, and suppressed any knowledge of the invention for fear that it would affect the value of gold.

Was Finley right? His anecdotes are hard to shake, but in the forty-odd years since the publication of Finley’s Ancient Economy, we have learned from archaeology and epigraphy that there was more specialization and urbanization in Greece than previously thought. Many scholars now believe that Finley put too much faith in aspirational statements of ideology and underestimated the extent of commerce, markets, and market-based behavior. Nevertheless, Ober’s depiction of Greece as a hotbed of innovation and entrepreneurship, with free-flowing movement of labor and ideas between city-states, is on the far modernist end of the spectrum of views of the Greek economy.

Ober argues that Greece’s economic exceptionalism can be explained by distinctive political institutions and a civic culture that promoted relatively open markets, innovation, and rational cooperation. He argues that a commitment to rule egalitarianism, characterized by citizen-centered government, an expectation of fair and equal treatment from officials, and impartial dispute resolution procedures, encouraged investment in social and human capital and lowered transaction costs. Competition in market-like systems drove innovation and rational cooperation, promoting economic growth. Economic growth, in turn, made the cultural achievements that we associate with Greece possible. Ober also provides an account for Greece’s fall from political independence: the innovative Philip of Macedon selectively incorporated some of Greece’s institutional and military innovations into his centralized, authoritarian regime and used them to conquer the Greek states.

The Stanford School of Ancient History (The New Rambler)

The ancient Greek kingdom of Lydia was apparently the first state to introduce coinage in around 800 BC, thousands of years after the first states. We’ll look at that later.

Ancient Peru:

We see a very similar structure in ancient Peru and Ecuador to what we witnessed in the Old World. The leaders of the Andes region were also redistributor chiefs who collected the fruits of labor throughout the kingdom and redistributed. Like all the other ancient kingdoms so far, the Inka (technically a term referring to the leader, like Pharaoh) engaged in massive construction works, with marvelous stonework shaped without the use of metal tools that amazes even us in our modern world. The Andean road system, in some ways, is superior to our road systems today.

Inca Road: The ancient highway that created an empire (BBC)

In his epic 1491: New Revelation of the Americas Before Columbus, Charles Mann details the essential features of the Inka empire (emphasis mine):

In 1491 the Inka ruled the greatest empire on earth. Bigger than Ming Dynasty China, bigger than Ivan the Great’s expanding Russia, bigger than Songhay in the Sahel or powerful Great Zimbabwe in the West Africa table-lands, bigger than the cresting Ottoman Empire, bigger than the Triple Alliance (as the Aztec empire is more precisely known), bigger by far than any European state, the Inka dominion extended over a staggering thirty-two degrees of latitude–as if a single power held sway from St. Petersburg to Cairo. The empire ecompassed every imaginable type of terrain, from the rainforest of upper Amazonia to the deserts of the Peruvian coast and the twenty-thousand-foot peaks of the Andes between. “If imperial potential is judges in terms of environmental adaptability,” wrote the Oxford historian Felipe Fernandez-Armesto, “the Inka were the most impressive empire builders of their day.”

The Inka goal was to knit the scores of different groups in western South America–some as rich as the Inka themselves, some poor and disorganized, all speaking different languages–into a single bureaucratic framework under the direct rule of the emperor. The unity was not merely political: the Inka wanted to meld together the area’s religion, economics, and arts. Their methods were audacious, brutal, and efficient: they removed entire populations from their homelands; shuttled them around the biggest road system on the planet, a mesh of stone-paved thoroughfares totalling as much as 25,000 miles; and forced them to work with other groups, using only Runa Sumi, the Inka language, on massive faraway state farms and construction projects. To monitor this cyclopean enterprise, the Inka developed a form of writing unlike any other, sequences of knots on strings that formed a binary code reminiscent of today’s computer languages. So successful were the Inka at remolding their domain, according to the late John H. Rowe, an eminent archaeologist at the University of California at Berkeley, that Andean history “begins, not with the Wars of [South American] Independence or with the Spanish Conquest, but with the organizing genius of [empire founder] Pachacuti in the fifteenth century.”

Not only did Pachakuti reconfigure the capital, he laid out the institutions that characterized Tawantinsuyu itself. For centuries, villagers had spent part of their time working in teams on community projects. Alternately bullying and cajoling, Pachakuti expanded the service obligation unrecognizably. In Tawantinsuyu, he decreed, all land and property belonged to to the state (indeed, to the Inka himself). Peasants thus had to work periodically for the empire as farmers, herders, weavers, masons, artisans, miners, or soldiers. Often crews spent months away from home.

While they were on the road, the state fed, clothed, and housed them–all from goods supplied by other work crews. conscripts built dams, terraces, and irrigation canals; they grew crops on state land and raised herds on state pastures and made pots in state factories and stocked hundreds of state warehouses; they paved the highways and supplied the runners and llamas carrying the messages and goods along them. Dictatorially extending Andean verticality, the imperium shuttled people and materiel in and out of every Andean crevice.

Not the least surprising feature of this economic system was that it functioned without money. True, the lack of currency did not surprise the Spanish invaders–much of Europe did without money until the eighteenth century. But the Inka did not even have markets. Economists would predict that this nonmarket economy–vertical socialism, it has been called–should produce gross inefficencies. These surely occurred, but the errors were of surplus, not want. The Spanish invaders were stunned to find warehouses overflowing with untouched cloth and supplies. But to the Inka the brimming coffers signified prestige and plenty; it was all part of the plan. Most important, Tawantinsuyu “managed to eradicate hunger,” the Peruvian novelist Mario Vargas Llosa noted. Though no fan of the Inka, he conceded that “only a very small number of empires throughout the whole world have succeeded in achieving this feat.” [19]

So we see that the state participating in “job creation,” anathema to libertarians, actually goes back to very ancient roots of our economies. Only our devotion to the ideology of the “free market” prevents this sort of thing from happening today.

Acemoglu and Robinson add:

In the Inca Empire, all the land was the Inca’s and large parts were allocated to the Temple of the Sun and other religious cults, others to the army, and yet others to the Crown. The rest which the state did not claim was granted to local communities for their subsistence production. The state lands, distributed throughout the empire, were then worked for free by the local people using various forms of corvée labor. Local people also had to weave llama wool given to them for this purpose by the state.

There seems to have been little or no market exchange but instead the state moved people into different areas where different crops could be grown, the so-called archipelago economy, and then distributed the goods by fiat. For example, Inca administrators who supervised the farming of crown lands would arrange for some of the goods to be moved to Cuzco or other regional capitals, while another part would be stored locally in warehouses. This system, vividly described by the anthropologist John Murra in his book The Economic Organization of the Inka State was a vast system of central planning developed without the aid of Das Kapital or indeed Eurasian role models.

It seems that like farming or democracy, central planning was independently invented many times over in world history. As Murra put it (page 121):

“The Inca state functioned like a market: it absorbed the surplus production of a self-sufficient population and “exchanged” it by feeding the royals, the army and those on corvée as well as by issuing a lot of it as grants or benefactions”

Central Planning in History – Tawantinsuyu (Why Nations Fail)
The Inka people apparently had to work only 65 days a year to procure what they needed, and as noted above, there was no extreme poverty or want. That’s something to consider given the extreme hours worked in modern societies alongside poverty and uncertainty.

So we see, there is nothing “universal” about markets or economic systems: there were many different ways of organizing an economy distinguished by practical concerns rather than strict ideologies like communism or libertarianism.

In ancient times, people were plagued by numerous sources of uncertainty: famines, droughts, earthquakes, tsunamis, volcanic eruptions, a changing climate, plagues, disease, invasions, and so forth. Today, in contrast, our recurring crises are wholly artificial creations caused by our devotion to the Market “god,” which seems eerily like the devotion of ancient people to their capricious deities. A professional class of economists acts as our high priests (except ancient diviners were probably more accurate at prediction).

Next: Where did money come from?

[1] Marvin Harris, Cannibals and Kings, p.237

[2] ibid. pp. 237-238

[3] William H. McNeill, quoted in Peter Jay, The Wealth of Man, p. 21

[4] Sir Leonard Woolley, The Beginnings of Civilization, pp. 321-322

[5] ibid. p. 352

[6] ibid. pp. 322-323

[7] ibid. p. 324

[8] ibid. p. 323

[9] ibid. p. 324

[10] ibid. p. 325

[11] ibid. p. 330

[12] ibid. pp. 329-330

[13] ibid. pp. 331-332

[14] ibid. pp. 332-333

[15] Karl Polanyi, Marketless Trading in Hammurabi’s Time; in “Trade and Market in the Early Empires,” Karl Polanyi et. al., editors. p. 15

[16] ibid. pp. 19-20

[17] Sir Leonard Woolley, The Beginnings of Civilization, pp. 341-342

[18] ibid. p. 341

[19] Charles C. Mann, 1491: New Revelations of the Americas Before Columbus, pp. 64-65, 73-74


The Black Country

note: we will return to our regularly scheduled topic next time.

What is there to say about Brexit that hasn’t already been said?

Well, one thing, at least. One fact that I find of significance but haven’t seen pointed out anywhere else so far is that one of the highest proportions of places voting “yes” was the English Midlands:


Why is that significant? Well, mainly for symbolic reasons. You see, the English Midlands was the birthplace of the Industrial Revolution. A revolution that seems to have run its course.

One area of particular significance  to the Industrial Revolution was called the Black Country. The Black Country has a long history in industrialism; it was the site of significant proto-industrialization which laid the groundwork for Britain’s formal Industrial Revolution going as far back as the 1600’s. It is centered around Birmingham and consists of the boroughs of Dudley, Sandwell, and Walsall.

And how did these areas vote in Brexit? All of them went for it, some by significant margins:

  • Dudley

    Leave 67.6%
    Remain 32.4%

  • Sandwell

    Leave 66.7%
    Remain 33.3%

  • Walsall

    Leave 67.9%
    Remain 32.1%

  • Birmingham

    Leave 50.4%
    Remain 49.6%

  • Wolverhampton

    Leave 62.6%
    Remain 37.4%

EU referendum: The result in maps and charts (BBC)

I’ve often remarked at the irony that the very places where civilization first began–Syria and Iraq–are the most dramatic exhibits in civilizational collapse right now. Another irony – Europe’s most collapsing state is the cradle of Western culture – Greece. Well, here’s another irony: the birthplace of the Industrial Revolution may be one of the first areas in putting the elites on notice that deindustrialization has been a colossal failure, and that the globalist paradigm cannot continue.

It is one of the standard tenets of this blog that the deindustrial economy has been a failure, and that furthermore, we have nothing to replace it with. Our leaders can do nothing under the existing paradigm. We have been in a concealed depression since 1972. All our current crop of leaders can do is to lie and obfuscate to cover-up this state of affairs even as society continues to unravel. They’ve been trying to convince us that the hollowing out of entire countries is just the normal state of affairs, and that it was not the effect of very specific political choices.

Economic “science” was deployed in the late nineteenth century to replace what was formerly known as political economics. Its role was to claim that the economy was totally separate from the political sphere, and subject to “natural” laws as pure as the laws of physics and chemistry. Global trade is one of these, they argued. Politics must never “interfere” with these laws, according to the economic priesthood. The messy democratic process can only hinder prosperity, which can only be developed by total freedom of the merchants to do as they please, the argument went. The core aim of the project was to remove all democratic oversight from the economy whatsoever, and to justify that state of affairs.

Once people finally got a voice in the political sphere, they took advantage of it. A protest vote to be sure, but when it’s the only one you’ve got, well…

The incompetence and self-serving mismanagement of the current crop of elites has done nothing but enrich a tiny group of oligarchs at the cost of the hollowing out entire societies for over a generation now. All they are doing is “managing decline” while telling us it will “eventually” get better, even though “eventually” has been absent for decades. Just like a South Sea cargo cult, we’re going through the motions hoping that prosperity will somehow return if we just do what we did before.

Here’s what Wikipedia has to say about the industrial world’s “sacrifice zones”:

The term de-industrialisation crisis has been used to describe the decline of labour-intensive industry in a number of countries and the flight of jobs away from cities. One example is labour-intensive manufacturing. After free-trade agreements were instituted with less developed nations in the 1980s and 1990s, labour-intensive manufacturers relocated production facilities to Third World countries with much lower wages and lower standards. In addition, technological inventions that required less manual labour, such as industrial robots, eliminated many manufacturing jobs.


About those areas, a common theme emerges:

The heavy industry which once dominated the Black Country has now largely gone. The twentieth century saw a decline in coal mining and the industry finally came to an end in 1968 with the closure of Baggeridge Colliery near Sedgley. Clean air legislation has meant that the Black Country is no longer black. The area still maintains some manufacturing, but on a much smaller scale than historically. Chainmaking is still a viable industry in the Cradley Heath area where the majority of the chain for the Ministry of Defence and the Admiralty fleet is made in modern factories.

Much but not all of the area now suffers from high unemployment and parts of it are amongst the most economically deprived communities in the UK. This is particularly true in parts of the boroughs of Sandwell, Walsall and Wolverhampton. According to the Government’s 2007 Index of Deprivation (ID 2007), Sandwell is the third most deprived authority in the West Midlands region, after Birmingham and Stoke-on-Trent, and the 14th most deprived of the UK’s 354 districts. Wolverhampton is the fourth most deprived district in the West Midlands, and the 28th most deprived nationally. Walsall is the fifth most deprived district in the West Midlands region, and the 45th most deprived in the country. Dudley fares better, but still has pockets of deprivation.

As with many urban areas in the UK, there is also a significant ethnic minority population in parts: in Sandwell, 22.6 per cent of the population are from ethnic minorities, and in Wolverhampton the figure is 23.5 per cent…Resistance to mass immigration in the 1950s, 1960s and 1970s led to the slogan “Keep the Black Country white!”.

The Black Country suffered its biggest economic blows in the late 1970s and early 1980s, when unemployment soared largely because of the closure of historic large factories including the Round Oak Steel Works at Brierley Hill and the Patent Shaft steel plant at Wednesbury. Unemployment rose drastically across the country during this period as a result of the Thatcher government’s neo-liberal economic policies…

Unemployment in Brierley Hill peaked at more than 25% – around double the national average at the time – during the first half of the 1980s following the closure of Round Oak Steel Works, giving it one of the worst unemployment rates of any town in Britain.


The sillon industriel was the first fully industrialized area in continental Europe. Its industry brought much wealth to Belgium, and it was the economic core of the country. This continued until after World War II, when the importance of Belgian steel, coal and industry began to diminish. The region’s economy shifted towards extraction of non-metallic raw materials such as glass and soda, which lasted until the 1970s. The days of prosperity were gone, however, and a trend of unemployment and partial economic dependence on the formerly poorer Flemish Region began, and continues to this day.


In the twentieth century local economies in these states specialized in large scale manufacturing of finished medium to heavy industrial and consumer products, as well as the transportation and processing of the raw materials required for heavy industry. The area was referred to as the Manufacturing Belt, Factory Belt, or Steel Belt as opposed to the agricultural Midwestern states forming the so-called Corn Belt, and Great Plains states that are often called the “breadbasket of America”.

The flourishing of industrial manufacturing in the region was caused in part by the close proximity to the Great Lakes waterways, and abundance of paved roads, water canals and railroads. After the transportation infrastructure linked the iron ore found in northern Minnesota, Wisconsin and Upper Michigan with the coal mined from Appalachian Mountains, the Steel Belt was born. Soon it developed into the Factory Belt with its great American manufacturing cities: Chicago, Buffalo, Detroit, Milwaukee, Gary, Cincinnati, Toledo, Cleveland, Akron, Youngstown, St. Louis and Pittsburgh among others. This region for decades served as a magnet for immigrants from Austria-Hungary, Poland and Russia who provided the industrial facilities with the inexpensive labor resources.

Following several “boom” periods from the late-19th to the mid-20th century, cities in this area in the end of the century started to struggle to adapt to a variety of adverse economic and social conditions. They include: the US steel and iron industries’ decline, the movement of manufacturing to the southeastern states with their lower labor costs, the layoffs due to the rise of automation in industrial processes, a decreased need for labor in making steel products, the internationalization of American business, and the liberalization of foreign trade policies due to globalization. Big and small cities that struggled the most with these conditions soon encountered several difficulties in common, namely: population loss and brain drain, depletion of local tax revenues, high unemployment and crime, drugs, swelling welfare rolls, poor municipal credit ratings and deficit spending…


Look, this isn’t esoteric knowledge, this is Wikipedia, for crying out loud! Yet our elites seem to not be aware of any of this, proclaiming with a straight face that we’ve never had it better. Do they seriously not know the above facts? Could they really not see this coming? Did they seriously think that putting their citizens in head-to-head competition with billions of the world’s poorest workers would somehow not have this effect? Could anyone be that stupid?

The voters aren’t stupid. They know this system has been a failure. They can see it with their own eyes! It’s led to:

  •  Low-wage service jobs.
  • “Bullshit” jobs that seem to have no reason to exist.
  • Temporary and precarious employment. Multiple jobs just to make ends meet.
  • Underemployment.
  • Overwork and underwork (too few or too many hours).
  • Absurd and extreme hoop-jumping for even the simplest jobs.
  • Refusal to invest so much as a penny in training new hires.
  • Dumping all the costs of training onto the backs of already strapped workers.
  • Ghettos.
  • Mass layoffs.
  • A rollback of employee benefits. Elimination of guaranteed pensions and retirement.
  • Extreme wealth and income inequality.
  • An exponential rise in consumer debt.
  • Soaring housing costs and gentrification.

We’ve been waiting for the “next big thing” for forty years now. It’s like waiting for Godot. Name one thing that’s gotten better in the social sphere in the past two decades.

IT delivered some relief, but that is clearly gotten to the point where it a net job destroyer. New industries in biological and materials science, engineering and programming require a small fraction of the labor of old. There are far more newly-minted lawyers, doctors, and MBA’s than there are spots available for them.

Just like an ecosystem, if the base of the pyramid – the autotrophs–fail, everything in the food chain is threatened. The removal of manufacturing jobs killed the base of the economy, and we’ve nothing to replace it with. The old, agrarian economy was destroyed, as was the family structure, in the service of industrialism. Now, those who profited want to walk away from the destruction they’ve wrought as though entire societies were no more than an abandoned mine or exhausted coal seam.

We’ve also seen an unprecedented assault on social safety nets all around the world, even as jobs continue to vanish and poverty metastasize. Governments all over are perennially “tightening their belts,” even as the private sector makes record profits and washes its hands of the need for labor. Desperate people have nowhere else to turn. Local governments respond by criminalizing homelessness and jailing and fining large portions of their populations.

What often forgotten is that even the “winners” of this system are having a horrible time of it. Even for the celebrated “college educated professional” or “STEM worker” the following conditions apply:

  • “Always on duty” thanks to the digital tether. “Laptop on the beach” syndrome.
  • Must show “passion” and dedication” just to have a job at all. Arrive early and leave late. Be an eager beaver. Cult-like atmospheres predominate.
  • Escalating education requirements. Master’s degrees and pH.D’s required for jobs which formerly only required a Bachelor’s degree or less.
  • Neverending certifications and “lifetime learning” just to keep your job
  • Staggering student debt burdens.
  • Stakhanovite work ethics; sacrificing one’s physical and mental health and social relationships for the job.
  • Workplace bullying and Machiavellian office politics.
  • Abuse of employees too scared to quit. This is especially bad where healthcare is tied to the job (the U.S.)
  • Impossible work deadlines. Stress.
  • Overspecialization.
  • The constant threat of replacement, and having to train that replacement.
  • Cost cutting measures to boost stock prices (laying off people and expecting the remainder to pick up the slack).
  • Self medication using Ritalin, Adderall, Modafinil, energy drinks, and other stimulants and psychotropic drugs. Widespread antidepressant use. Medication of children as young as five.
  • Extreme pressure on the children of elite professionals to excel from birth or be labelled a failure and an outcast. Intense competition driving many children to suicide.

That doesn’t sound that great to me, how about you? And those are the much-vaunted “winners” who justify the devastation wrought on those who “can’t keep up.” Thus, the idea that the “cognitive elite” are somehow doing great is baffling to me: they are burned out, heavily in debt, and stressed to the breaking point.

The proliferation of low-wage service jobs has made people desperate to get into the few remaining “good” jobs available where they can accumulate some savings and aren’t treated like a drooling meat sack, in a vicious zero-sum game. And those who are already in those positions know that their middle class status is always conditional and can vanish at any time without warning. One stumble and you might find yourself in a debt snowball that will last the rest of your life. A feeling of terror permeates workers in the economy except for those safely ensconced in the one percent or with dynastic wealth.

As colleges became the tollbooth to any job at all thanks to corporate America, they have became predatory institutions (ludicrously blamed on government education spending – why doesn’t Europe have the same problem, then?). Access to education is primarily located in expensive urban areas and costs a small fortune. No wonder there are such stark class divisions. All the post-industrial economy seems to create are “summer jobs.” It creates a number of supervisory positions, but only for the wealthy and well-connected. For the rest of us, there is a lifetime of stress and uncertainty.

The deindustrialization of the West has left a hollowed-out two-tier society that is unraveling. It is a way of life with no future.

There simply aren’t enough jobs for everyone in a post-Fordist system. Period. full Stop.

When we mechanized agriculture, we absorbed the people into the factories. Allegedly, we’d all be in “services” by now. But as services are automated away, no one can offer a reasonable alternative besides just, “wait and see.

Workplace participation has been declining for decades for men as women displaced them in the workplace, and for workers across the board in the last few years.

Low wage service work is not going to sustain an economy.

Unemployment and the tragic waste of human potential is driving everything from crime to drugs to terrorism to reactionary nationalism to racism to Jihad.

As the agrarian/rural way of life continues to be destroyed thanks to industrialized agriculture, millions have no choice but to continue to flee to the overcrowded slums of the world’s megacities, even as such cities are running low on water and being devastated by climate change, with entirely new diseases emerging. Now there will be no jobs for people when they get there. What are they supposed to do besides form gangs and militia movements like the Taliban, Boko Haram, the Islamic State? Maybe it’s time for a rethink.

And the response of our so-called “leaders” has been nothing more than palliative half-measures, distractions, and meaningless platitudes:

  • Calls for more education and worker retraining.
  • School “reform”.
  • “Enterprise zones”.
  • Generous subsidies to big business and the wealthy.
  • Startups.
  • Entrepreneurship.
  • Mass immigration to “grow” the economy.
  • 3D printing, smartphones, electric cars and solar power (i.e. “Elon Musk will save us!!!”).

Come on, does anyone take any of the above things seriously anymore? Eyerolling is the appropriate response.

Globalism and open borders have been forced upon people from above, and the people have had no say in it whatsoever to this point. It is a standard tenet of Neoliberalism to make sure that democratic forces can never have any effect on economic forces. Neoliberalism ensures that “natural” economic forces are free from all government “interference” (such as tariffs, industrial policy and job creation). It ensures that governments are perennially starved of funds and stripped of real decision making power, meaning citizens have no voice (except to buy or sell in the Market). And it demands that labor is appropriately “disciplined” to keep inflation at bay. Did no one see the problems with this concept?

Is it any surprise that people will take any opportunity to reassert the self-determination that has been denied them under the aegis of Neoliberalism? People have had no way to vent their anger and impotence, until now. It’s a minor blow, and perhaps even irrational on some level, but people who are hurting will take any chance to inflict punishment upon those they don’t like, even if they themselves wind up as collateral damage, as the ultimatum game demonstrates. When you have very little, you don’t care if you suffer as long as someone else suffers more.

So, to state another essential premise of this blog: we are long overdue for the next major social change–technocratic fiddling around the edges just won’t cut it anymore. We are living through a civilizational crisis. We are on the cusp of a historical transition, and the flash points are in the places where the old order has been around the longest and has apparently run its course.

Karl Polanyi and the Modern World – Part 2

Before we go any further, we should take a historical detour. Is the picture I presented last time of the primordial economy according to libertarians an accurate one? Was it really all solitary individuals peacefully making mutually-beneficial exchanges in “free and open” markets using a mutually agreed upon medium of exchange until the state came along to “steal” money from everyone? Does the market economy spontaneously arise from thousands of people walking around bartering for what they need from other people?

As it happens, I’ve been doing research in this area recently. And the answer is, “not even close.”

As David Graeber, an anthropologist and author, has pointed out, in none of the cultures anthropologists have studied that resemble the ancestral past is life ruled by anything like markets as we know them:

[T]here’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.[1]

In fact, in hunter-gatherer economies, there really are no such concepts as “property,” or “ownership.” making markets somewhat difficult. But what about societies that have both sedentism and surpluses, two preconditions for the development of the kinds of larger, specialized economies like the ones we are studying?

Polanyi distinguishes three concepts that define the primordial economy: reciprocity, redistribution, and householding. It is these three concepts that form the basis of the primordial economy, not money or markets.

Reciprocity is described by anthropologist Marvin Harris:

Reciprocity is the technical term for economic exchange that takes place between two individuals in which neither specifies precisely what is expected in return nor when they expect it. Superficially, reciprocal exchanges don’t look like exchanges at all. The expectation of one party and obligation of the other remain unstated. One party can continue to take from the other for quite a while with no resistance from the giver and no embarrassment in the taker. Nonetheless, the transaction cannot be considered a pure gift. There is an underlying expectation of return, and if the balance gets too far out of line, eventually the giver will start to grumble and gossip. Concern will be shown for the taker’s health and sanity, and if the situation does not improve, people begin to suspect that the taker is possessed by malevolent spirits or is practicing witchcraft [2]

…to really see reciprocity in action you must live in an egalitarian society that doesn’t have money and where nothing can be bought or sold. Everything about reciprocity is opposed to precise counting and reckoning of what one person owes to another. In fact, the whole idea is to deny that anybody really owes anything. One can tell if a lifestyle is based on reciprocity or something else by whether or not people say thank you. In truly egalitarian societies, it is rude to be openly grateful for the receipt of material goods or services.[3]

That sounds like the antithesis of market exchanges! Clearly individuals attempting to make a profit or to “get one over” on someone else, as capitalists regularly do (“gotcha” capitalism) would not work in ancient societies. This is because in such societies, one’s social standing was paramount. In ancient societies, hoarding the best for oneself and depriving other people of what they needed for survival would lead to ostracism, not admiration:

The outstanding discovery of recent historical and anthropological research is that man’s economy, as a rule, is submerged in his social relationships. He does not act so as to safeguard his individual interest in the possession of material goods; he acts so as to safeguard his social standing, his social claims, his social assets. He values material goods only in so far as they serve this end.

The explanation, in terms of survival, is simple. Take the case of a tribal society. The individual’s economic interest is rarely paramount, for the community keeps all its members from starving unless it itself is born down by catastrophe, in which case interests are again threatened collectively, not individually. The maintenance of social ties, on the other hand, is crucial. First, because by disregarding the accepted code of honor, or generosity, the individual cuts himself off from the community and becomes an outcast; second, because, in the long run, all social obligations are reciprocal, and their fulfillment serves also the individual’s give-and-take interests best…[4]

Thus Homo economicus, the rational man constantly calculating how he will get ahead by cunningly trading in markets, is a fiction. Man is instead emerged in social relationships, and the economy grows out of that that, not impersonal market exchanges with an eye towards profit.

The second key to the primordial economy is redistribution. Nearly every ancient state was based in part on some sort of central player redistributing the collective fruits of the society to its members. Rather than a dirty word as it is in modern-day America, redistribution is what allowed primitive economies to form. Central repositories where food and goods were redistributed and stored were the earliest structures put up by ancient civilizations. Those who sought power did it by increasing production, first through exhortation and cajoling, and then through reinforcement of mutual obligations and tribute. They then gave away the surplus to their followers as a means of attaining prestige and status.

A well-known example of this phenomenon is the “big man” system of the Pacific Islands. In such societies, competitive feasts are held, with the organizer of the feast seeking esteem and prestige, and getting people to work harder to engender a surplus. But, the big man has no coercive power, and not only doesn’t get the best of everything, but sacrifices his own well-being to make sure others get the “meat and the fat”:

Early in the present century, anthropologists were surprised to discover that certain primitive tribes engaged in conspicuous consumption and conspicuous waste to a degree unmatched by even the most wasteful of modern consumer economies. Ambitious, status-hungry men were found competing with each other for approval by giving huge feasts. The rival feast givers judged each other by the amount of food they provided, and a feast was a  success only if the guests could eat until they were stupefied, stagger off into the bush, stick their fingers down their throats, vomit, and come back for more.

The big man can be described as a worker-entrepreneur–the Russians call them “Stakhanovites”–who renders important services to society by raising the level of production. As a result of the big man’s craving for status, more people work harder and produce more food and other valuables. p. 118

Among the Kaoka-speaking people of the Solomon Islands…the status-hungry individual begins his career by making his wife and children plant larger yam gardens…the Kaoka who wants to become a big man then gets his kinsmen and age-mates to help him fish. Later he begs sows from his friends and increases the size of his pig herd. As the litters are born he boards additional animals among his neighbors. Soon his relatives and friends feel that the young man is going to be a success. They see his large gardens and his pig herd and they redouble their own efforts to make the forthcoming feast a memorable one. When he becomes a big man they want the young candidate to remember that they helped him. Finally, they all get together and build and extra-fine house. The men go off on one last fishing expedition. The women harvest yams and collect firewood, banana leaves, and coconuts. As the guests arrive, the wealth is stacked in neat piles and put on display for everyone to count and admire… [5]

Such big men only arise in societies where intensification of effort produces surpluses. There can be no big men in hunter-gatherer societies, since additional work does not result in additional food. In fact, quite the opposite would occur. Hunter-gatherer societies would not be able to sustain such a surplus, and status-hungry individuals are kept in check. It is the survival of the group, not the individual, that is paramount. Thus, big men can only arise in societies where horticulture, animal husbandry, or agrarian agriculture is present:

Primitive hunters and gatherers work less that we do–without the benefit of a single labor union–because their ecosystems cannot tolerate weeks and months of intensive extra effort. Among the Bushmen, Stakhanovite personalities who would run about getting friends and relatives to work harder by promising them a big feast would constitute a definite menace to society. If he got his followers to work like the Kaoka for a month, an aspiring Bushman big man would kill or scare off every game animal for miles around and starve his people to death before the end of the year. So reciprocity and not redistribution predominates among the Bushmen, and the highest prestige falls to the quietly dependable hunter who never boasts about his achievements and who avoids any hint that he is giving a gift when he divides up the animal he has killed. [6]

In order to maintain their status, the big men must constantly throw new feasts or risk falling back to being a commoner:

The feast-giving days of the big man…are never over. On the threat of being reduced to commoner status, each big man is obliged to busy himself with plans and preparations for the next feast. Since there are several big men per village and community, these plans and preparations often lead to complex, competitive manuevering for the allegiance of friends and neighbors. The big men work harder, worry more, and consume less than anybody else. Prestige is their only reward.[7]

Competitive feasting may seem like some sort of crazy behavior, but as Marvin Harris points out, it serves a very important role in primitive societies:

Under conditions where everyone has equal access to the means of subsistence, competitive feasting serves the practical function of preventing the labor force from falling back to levels of productivity that offer no margin of safety in crises such as war and crop failures.

Furthermore, since there are no formal political institutions capable of integrating independent villages into a common economic framework, competitive feasting creates an extensive network of economic expectations. This has the effect of pooling the productive effort of larger populations than can be mobilized in any given village.

Finally, competitive feasting by big men acts as an automatic equalizer of annual fluctuations in productivity among a series of villages that occupy different microenvironments—seacoast, lagoon, or upland habitats. Automatically, the biggest feasts in any given year will be hosted by villages that have enjoyed conditions of rainfall, temperature, and humidity most favorable to production.[8]

For example, in the case of the potlatch among the fish-foragers of the Pacific Northwest:

Despite the overt competitive thrust of potlatch, it functioned aboriginally to transfer food an other valuables from centers of high productivity to less fortunate villages. I should put this even more strongly: Because of the competitive thrust, such transfers were assured. Since there were unpredictable fluctuations in fish runs, wild fruit and vegetable harvests, intervillage potlatching was advantageous from the standpoint of the regional population as a whole. When the fish spawned in nearly steams and the berries ripened close at hand, last year’s guests became this year’s hosts. Aboriginally, potlatch meant that each year the haves gave and the have-nots took. To eat, all a have-not had to do was admit that the rival chief was a great man.[9]

Redistribution has been observed in nearly every primordial society:

Redistribution has a long and variegated history, which leads up almost to modern times. The Bergdama returning from his hunting excursion, the woman coming back from her search for roots, fruit, or leaves are expected to offer the greater part of their spoil for the benefit of the community. In practice, this means that the produce of their activity is shared with the other person who happen to be living with them. Up to this point, the idea of reciprocity prevails: today’s giving will be recompensed by tomorrow’s taking.

Among some tribes, however, there is an intermediary in the person of the headman or other prominent member of the group; it is he who receives and distributes the supplies, especially if they need to be stored. This is redistribution proper.

Obviously the social consequences of such a method of redistribution may be far reaching, since not all societies are as democratic as the primitive hunters. Whether the redistributing is performed by an influential family or an outstanding individual, a ruling aristocracy or a group of bureaucrats, they will often attempt to increase their political power by the manner in which they redistribute the goods.[10]

That last part is important. Harris believes that redistributor big men eventually evolved into hereditary war chiefs. These war chiefs still accumulated surpluses and still played the role of “great provider,” but now they used a portion of the surplus to pay for an retinue that was dependent upon the chief for their livelihood, such as skilled craftsmen, administrators, and magicians. They began to engage in “image building” activities. They also used a portion of the surplus to support larger war parties and long-distance raiding activities that could not be carried out otherwise. The establishment of an entourage and the undertaking of military activity served to enhance their power and prestige. The “great provider” big men slowly transitioned to being warlords.

We begin to see differences emerging between the elite and the “commoners;” for example, only war chiefs can wear certain regalia of office, and no one can sit higher than them.  However, even these chiefs’ ability to exercise coercive power is still limited, because they cannot cut people off from their primary means of subsistence. In the case of the Trobriand Islands, for example, the chief cannot cut people off from the coasts and lagoons where they derive protein from shellfish and seafood. Also, the yams which form the principal crop cannot be stored for more than a few months. One recent paper argued that cereal crops would be more likely to lead to organized, hierarchical state-level societies because they can be appropriated, unlike roots and tubers which are less vulnerable to being appropriated by authorities and last only a few months.

Kula trade necklace (Wikipedia)

Trading of durable goods, as well, seems to have mainly functioned as a way to bind societies together, rather than trying to secure some form of profit. Not only was feasting competitive, but so was gift giving. Such gifts were not trades to exchange, but rather, gifts to give away. Polanyi uses the example of the Kula Ring maintained by the war chiefs of the Trobriand Islands:

The Kula ring spans 18 island communities of the Massim archipelago, including the Trobriand Islands, and involves thousands of individuals. Participants travel at times hundreds of miles by canoe in order to exchange Kula valuables which consist of red shell-disc necklaces  that are traded to the north (circling the ring in clockwise direction) and white shell armbands that are traded in the southern direction (circling counterclockwise). If the opening gift was an armband, then the closing gift must be a necklace and vice versa. The exchange of Kula valuables is also accompanied by the trade in other items known as gimwali (barter). The terms of participation vary from region to region. Whereas on the Trobriand Islands the exchange is monopolised by the chiefs, in Dobu all men can participate.

All Kula valuables are non-use items traded purely for purposes of enhancing one’s social status and prestige. Carefully prescribed customs and traditions surround the ceremonies that accompany the exchanges which establish strong, ideally lifelong relationships between the exchange parties. The act of giving…is a display of the greatness of the giver, accompanied by shows of exaggerated modesty in which the value of what is given is actively played down. Such a partnership involves strong mutual obligations such as hospitality, protection and assistance…a good Kula relationship should be “like a marriage”.

Kula valuables never remain for long in the hands of the recipients; rather, they must be passed on to other partners within a certain amount of time, thus constantly circling around the ring. However, even temporary possession brings prestige and status. Important chiefs can have hundreds of partners while less significant participants may only have fewer than a dozen.[11]

Polanyi identifies two central features to redistribution networks: symmetry and centricity.

Symmetry means that there is certain element of regularity and balance in the exchanges: “…each coastal village on the Trobriand Islands appears to have its counterpart in an inland village, so that the important exchange of breadfruits and fish, though disguised as reciprocal distribution of gifts, and actually disjoint in time, can be organized smoothly. In the Kula trade, too, each individual has his partner on another isle, thus personalizing to a remarkable extent the relationship of reciprocity.” (p 49) We see this continuing in our modern concept of money, which is a reciprocal obligation of debts and credits denominated in some socially accepted unit of account. For each debtor, there is an equal creditor, and so forth. It’s worth noting, however, the extreme lopsided nature of what economists today refer to “trade,” such as between oil-producing nations and the industrialized world, or in manufactured goods between China and the United States.

Centricity means that some sort of centralized institution is required for the redistributive network to function properly: “The institutional pattern of centricity…provides a track for the collection, storage and redistribution of goods and services. The members of a hunting tribe usually deliver the game to the headman for redistribution. It is in the nature of hunting that the output of game is irregular, besides being the result of collective input. Under such conditions as these no other method of sharing is practicable if the group is not to break up after every hunt. Yet in all economies of kind a similar need exists, be the group ever so numerous.” (p. 49). We see this today in the role of banks as central clearinghouses for debits and credits among members of society, whether it be a private or national bank, and central governments which perform redistributive roles, without which no modern society could function for long.

Polanyi concludes:

Symmetry and centricity will meet halfway the needs of reciprocity and redistribution; institutional patterns and principles of behavior are mutually adjusted. As long as social organization runs in its ruts, no individual economic motives need come into play; no shirking of personal effort need be feared; division of labor will automatically be ensured; economic obligations will be duly discharged; and, above all, the material means for an exuberant display of abundance at all public festivals will be provided.

In such a community the idea of profit is barred; higgling and haggling is decried; giving freely is acclaimed as a virtue; the supposed propensity to barter, truck and exchange does not appear. The economic system is, in effect, a mere function of the social organization. [12]

Redistribution is collecting the surplus produced by the society, and parceling out among the members of the society so that there is no want. Another example is given by the practice of the Cherokee in North America:

The Cherokee, like the Iroquois, had matrilineal and matrilocal institusions and practiced external warfare. Their principal crops were maize, beans and squash. At the center of the principal settlements was a large, circular “council house” where the council of chiefs discussed issues involving many villages and where redistributive feasts were held.

The council of chiefs had a supreme chief, or mico, who was the central node in the Cherokee redistributive network. Bartram reported that at harvest time a large crib, identified as the “mico‘s granary,” was erected in each field. “To this each family carries and deposits a certain quantity according to his ability or inclination, or none at all if he so chooses.” The mico‘s granaries functioned as a public treasury…to fly to for succor” in the case of crop failure, as a source of food “to accommodate strangers, or travelers,” and as a military store “when they go forth on hostile expeditions.” Although according to Bartram every citizen enjoyed “the right of free and public access,” commoners clearly had to acknowledge that the store really belonged to the supreme chief since the “treasure is at the disposal of the king or mico,” who had “an exclusive right and ability…to distribute comfort and blessings to the necessitous.”

The fact that the mico, like the Trobriand chief, was far from being a “king” shows up clearly in Bartram’s comment that when outside the council “he associates with the people as a common man, converses with them, and they with him in perfect ease and familiarity.”[13]

Harris argues that such redistributive networks are what likely bound the earliest proto-states together. Most likely a combination of feasting and redistribution networks, such as potlatch, were the foundation for the earliest proto-economies. These would have functioned thousands of years before the invention of anything resembling money or markets. He furthermore concludes that the ancient monuments we see in various societies are the remnants of such ancient redistribution networks:

Redistribution undoubtedly provides the key to the understanding of numerous ancient monuments and structures which for centuries have puzzled scholars and tourists. As we have seen…”big men,” headmen, and chiefs have the capacity to organize labor on behalf of communal enterprises. Among such enterprises was the construction, involving hundreds of workers, of large canoes, buildings, tombs, and monuments.

Colin Renfrew has drawn attention to the rather striking similarity between the circular Cherokee feast center council houses and the mysterious circular buildings whose wooden post-holes have been found within the precincts of neolithic ceremonial enclosures, or “henges,” in Great Britian and northern Europe. The increasingly elaborate burial chambers, earth mounds, and megalithic alignments characteristic of the period from 4000 BC to 2000 BC in Europe have rather precise parallels among the mounds erected by prehistoric inhabitants of the Ohio and Mississippi valleys, the stone burial platforms and monoloithic statues of Polynesia, and the monolithic tombs and memorials of modern Borneo.

All of these constructions played a role in the smooth functioning of pre-state redistributive systems, serving as the locus for redistributive feasts, community rituals dedicated to controlling the forces of nature, and memorials to the generosity and prowess of deceased “big man” hero chiefs. They seem enigmatic only because they are the skeletons, not the substance, of redistributive systems. Since we cannot see the investment of extra labor in agricultural production, monument-building appears to be a kind of irrational obsession among these ancient peoples. But viewed within the living context of a redistributive system, tombs, megaliths, and temples appear as functional components whose costs are slight in comparison with the increased harvests which the ritualized intensification of agricultural production makes possible.[14]

We know, for example, that feasting and monument construction went hand-in-hand in the earliest complex pristine states in the ancient Near East:

Michael Hudson:…The problem in these early periods was how to get labour to work at hard tasks, if not willingly? For 10,000 years there was a labour shortage. If people didn’t want to work hard, they could just move somewhere else. The labour that built temples and big ceremonial sites had to be at least quasi-voluntary even in the Bronze Age c. 2000 BC. Otherwise, people wouldn’t have gone there…There weren’t that many people in the world in 10,000 BC, 3000 BC or even 2000 BC. If a government got too oppressive, or when they would raise the contributions or taxes too high, people would just flee to another area. Or if they were too much indebted the debtors would flee, as they did from Babylonia around 1600 BC. We are talking about free labor, not slave labor.

We found that one reason why people were willing to do building work with hard manual labour was the beer parties. There were huge expenditures on beer. If you’re going to have a lot of people come voluntarily to do something like city building or constructing their own kind of national identity of a palace and walls, you’ve got to have plenty of beer. You also need plenty of meat, with many animals being sacrificed. Archaeologists have found their bones and reconstructed the diets with fair accuracy.

What they found is that the people doing the manual labour on the pyramids, the Mesopotamian temples and city walls and other sites were given a good high protein diet. There were plenty of festivals. The way of integrating these people was by public feasts. This was like creating a peer group to participate in a ceremonial creation of national identity…to begin with, you would have a beer party to get everybody friendly. You would have big feasts, and also these were the major occasions for socialization. All over the world, communal feasts were the primordial way to integrate societies.

Q: So they built a social contract around these feasts, around this sense of belonging by being at this public works event. It sounds like a fascinating way to keep society on track and organise labour so that civilisation would develop on some level. Have you found any indication of a managerial class and how they developed through the chieftains?

A (Michael Hudson): First the priesthoods, then the accountants and scribes. The calendar keepers were usually the chiefs (there may have been “sky chiefs” and “war chiefs” separately, or perhaps their roles were combined as dynastic rulers developed). Most of the religions were cosmological. They wanted to create an integrated cosmology of nature and society (“On earth, as it is in heaven”). Administration was based on the astronomical rhythms of the calendar, lunar and solar cycles. For instance, you typically find a society divided into 12 tribes, as you had in Israel and also in Greece with its amphictyonies. In a division of 12 tribes, each could take turns administering the ceremonial centre for one month out of the year.

The physical design of cities also was based on the calendar. Big cities would have 12 gates. Most cities had maybe four gates, representing the four seasons or the four quarters of the Earth. The outline of the land and the Earth was based on a calendrical cosmology, much like a mandala.

Ceremonial sites such as Stonehenge also were calendars in miniature, designed so that the light would fall on the stones in a particular way on a solstice or equinox. We have this going back into the Ice Age around 30,000 BC. Alex Marshak’s article in our volume on urbanisation found that these sites already in the Ice Age were usually sited on waterways, so that everybody could get to them. They often were located with mountains in the background and in between them the sun would shine in a particular way on the equinox or on the solstice in a particular alignment that occurred just at that calendrical time. They were recreating the cosmos on Earth….The great ceremonial sites from Stonehenge to Turkey were based on the particular equinox or solstice. Chieftains usually would be the calendar keepers. ..The job of the chieftain was to keep the lunar calendar, trace the waxing and waning of the moon to calculate how long the month would be, and to decide that, “Ah, in this month, six months after the equinox, here’s where we have to get together and have everybody come to the gathering and begin working on the big site”. [15]

Eventually, the redistributive war chiefs would become kings, and the payments in kind would become obligations, or as we call them today, taxes. The chieftainships would thus, little by little, evolve into the first “pristine” states:

The larger and denser the population, the larger the redistributive network and the more powerful the redistributor war chief. Under certain circumstances, the exercise of power by the redistributor and his closest followers on the one side and by the ordinary food producers on the other became so unbalanced that for all intents and purposes the redistributor chiefs constituted the principal coercive force in social life. When this happened, contributions to the central store ceased to be voluntary contributions. They became taxes. Farmlands and natural resources ceased to be elements of rightful access. They became dispensations. And redistributors ceased to be chiefs. They became kings. [16]

Essentially, the redistributive economy evolves into a tribute economy. In the tribute economy, a specified portion of goods are to be returned, or services rendered, to the ruling elite of the country in exchange for the ability to farm a certain piece of land. This is often accompanied by the transition of war chiefs and warlords to true kings.
In the tribute economy, rather than the leader by dependent upon the generosity of the food producers, the power relations are inverted: the food producers are dependent upon the generosity of the king.

For example, the potlatch chiefs eventually became supervisors, making others do the work for them, as Marvin Harris points out:

As I have said, the Kaoka redistributor big man works harder, worries more, and consumes less than anybody else in the village. This is not true of the Kwakiutl chief redistributor. The great potlatch chiefs performed the necessary entreprenurial and managerial functions that were necessary for a big potlatch, but apart from an occasional fishing or sea-lion expedition, they left the hardest work to their followers. The greatest potlatch chiefs even had a few war captives working for them as slaves.

Continuing along the evolutionary line leading from…the impoverished worker-entrepreneur big man, to the semihereditary Kwakiutl chiefs, we end up with state-level societies ruled over by hereditary kings who perform no basic industrial or agricultural labor and who keep the most and best of everything for themselves. At the imperial level, exalted divine-right rulers maintain their prestige by building conspicuous palaces, temples, mega-monuments, and validate their right to hereditary privileges against all challengers–not by potlatch, but by force of arms. Reversing  direction, we can go from kings to potlatch chiefs to big men, back to egalitarian lifestyles in which all competitive displays and conspicuous consumption by individuals disappear, and anyone foolish enough to boast about how great he is gets accused of witchcraft and is stoned to death. [17]

Harris uses the example of the Bunyoro of Uganda as a true kingship level society where the tribute economy is in full bloom:

Ruled over by a hereditary chief called the mukama, the Bunyoro numbered about 100,000, occupied an area of 5,000 square miles of that portion of the central lake area of East Africa which is now known as Uganda, and earned their living primarily by raising millet and bananas.

The Bunyoro were organized in into a feudal, but nonetheless authentic state society. Their mukuma was a king, not a mere redistributor chief. The privilege of using all lands and natural resources was a dispensation granted by the mukama to a dozen or so chiefs, who then passed on the dispensation to the commoners. In return for this dispensation, quantities of food, handicrafts, and labor services were funneled up through the power hierarchy into the mukuma‘s headquarters. The mukama in turn directed the use of these goods and services on behalf of state enterprises.

Superficially, the mukama appears to be just another ‘great provider” redistributor chief….But a comparison of the mukama with the Trobriand of Cherokee supreme chief reveals that power relationships have been inverted. The Trobriand and Cherokee chiefs were dependent on the generosity of the food producers; the Bunyoro food producers were dependent on the generosity of the king. The mukama alone could grant or withold permission for blood vengeance, and failure to contribute to the mukama‘s income could result in the loss of one’s lands, banishment, or corporal punishment. Despite his lavish feast-giving and reputation as a “great provider,” the mukama used much of his income to bolster his monopoly over the forces of coercion. With his control over the central grain stores he maintained a permanent palace guard and heaped rewards on warriors who displayed bravery in combat and loyalty to his person. The mukama also spent a considerable portion of the state treasury on what we would today call “image-building” and public relations.

He surrounded himself with numerous officials, priests, magicians, and such regalia keepers as the custodians of spears, of royal graves, of the royal drums, of royal thrones, and of royal crowns, as well as “putters-on” of the royal crowns, cooks, bath attendants, herdsmen, potters, bark-cloth makers, and musicians. Many of the officials had several assistants. Other advisers, diviners, and retainers hung around the court in the hope of being appointed to a chieftainship. Also present were the mukama‘s extensive harem, his many children, and the polygynous menages of his brothers and of other royal personages. To keep his power intact, the mukama and portions of his court made frequent trips throughout Bunyoro land, staying at local palaces maintained at the expense of chiefs and commoners. [18]

In other words, they had become Immortan Joe from Mad Max.

How did such people usurp power? It’s critical to understand that this can only come about through surplus, not scarcity. While economics argues that is about allocating scarce means to unlimited wants, in early societies, all wants were taken care of. Thus, if some accumulated more, none had to go without. In such societies where everyone is provided for, what does it matter if some work a little harder and accumulate a little more, especially if they are sharing the fruits of their labor with the village?

In a study of the salmon-fishing villages of Keatley Creek in British Columbia, archaeologist Brian Hayden wondered how a hierarchy would form from what began as a village of equals. Over time, in these transegalitarian societies, central storage facilities become attached to people’s houses, and certain houses become larger and more elaborate. Certain fishing grounds become the property of prominent families:

As scarcity transitioned to plenty, the aggrandizers were freed to pursue their goals. Their selfish behavior was no longer grounds for excommunication, because everyone was able to get enough to eat — if they were willing to work. Slowly, through a variety of strategies such as bride prices and competitive feasts, aggrandizers consolidated their power. They developed new sorts of relationships based on debt and obligation. Eventually these strategies led to establishment of private property rights over valuable resources, such as the fishing rocks in the Fraser Canyon.[19]


Whereas the norms of fairness among hunter-gatherers are common to all members of the group, in transegalitarian societies fairness is essentially an agreement among a sufficient number of the wealthy and well-connected, who are able to enforce their version of fairness on the society as a whole.

If Brian [Hayden’s] theory is correct, the process is a slippery slope. What begins as favoritism within a small circle of friends becomes cronyism among the members of an in-group. It’s a system that tends to concentrate power in the hands of a few, but it’s simply a consequence of the natural variability in human personality evolving in conditions of surplus. [20]

Harris argues that one final element is required to tip things over the edge to state-level societies. As redistributor chiefs acquired more and more power and became kings, more and more areas came under their control. In places where people could not run away, they had no choice but to submit to increasingly despotic leaders:

Under what circumstances would a conversion of a redistributive chieftainship to a feudal state be likely to occur? To intensification, population growth, warfare, storable grains, and hereditary redistributors, add one more factor: impaction [21]

As Malcolm Webb has pointed out, all of [early state formation] regions contain fertile soils surrounded by zones of sharply reduced agricultural potential. They are, in fact, river valleys or lake systems surrounded by deserts or at very least dry zones.The dependence of ancient Egypt, Mesopotamia and India on the flood plains of the Nile, Tigris-Euphrates, and Indus is well-known. In ancient China conditions of climate, soil, and topography limited intensive forms of agriculture beyond the river margins of the Yellow River Basin. Central highland Mexico south to Tehuantapec is also dry and in addition “suffers from severe rain shadow effects in the highland basins and stream valleys that were the aboriginal population centers.” And finally, the Peruvian coast is notable for the stark contrast between the lush vegetation bordering the short coastal rivers that flow down from the Andes and the desert conditions that prevail everywhere else. All of these regions present special difficulties to villages that might have sought to escape from the growing concentration of power in the hands of overly aggressive redistributor war chiefs.[22]

The ancient Mesopotamian economy, the world’s first state, was organized as a tribute economy based abound centralized city-states and their associated hinterlands. These cities emerged at strategic places along the vast canal system which distributed water to farms across the alluvial plains of the Tigris and Euphrates river basin. All of the land theoretically belonged to the city’s patron deity, with the priests of the deity running a tribute/redistributive economy out of the temple complexes:

A tributary economy is characterized by a political elite extracting goods and labor from primary producers…The Ubaid economy was by and large a tributary economy: most households had to produce mundane goods such as food and cloth, with surplus being exacted by elites who may have couched this as a voluntary religious duty. Surplus may have been stored extra to guard against disaster, but records of this indicate that payouts in emergencies were a fraction of the total collected. By the Middle Uruk era in the 4th millennium, it had become the norm for mundane utilitarian goods to be centrally produced in cities. A larger pool of available specialized labor offered elites who could afford to employ it the opportunity to commission luxury goods; also, the laborers needed employment, as the cities were too densely populated and the fields too far away for the laborers to have grown their own food. Simultaneously, and likely as a result of this, tribute exactions were increasing. This may have precipitated sedentary agriculturalists to vote with their feet and become nomads or move to a different region (these outcasts were later targeted by governments and known as habiru), or else move into the city. [23]

A related concept is the palace economy. This term was coined to describe the economies of pre-classical (Mycenaean) Greece. In a palace economy, goods are also centrally allocated and redistributed. The palace is also able to keep a number of specialists on hand to produce certain goods that are not practical for the households to produce themselves in sufficient quantities. Palace complexes not only stored a large variety of goods for the society, but also exercised a degree of control over economic production:

The term ‘palace economy’ was coined by archaeologists and historians studying the Mycenaean and Minoan civilisations; that is, Bronze Age Greece and Crete. They noticed similarities to the temple-based city states of Mesopotamia, which had already been studied in detail at that point; but enough differences that a new term was desired. As such, strictly speaking the term only applies to that one historical culture. However, the expression is flexible enough that it has subsequently been applied to other societies which seem to share common features, from the stone-age Inca of Peru to the iron-age Kingdom of Dahomey in West Africa, and even the nuclear-age Democratic People’s Republic of Korea.

The most prominent feature of the Mycenaean and Minoan civilisations was the existence of large palace complexes in each major population centre, which were administrative centres and had vast storerooms attached to them. About one-third of the floor area of a typical Cretan palace was devoted to storage, with rooms lined with big clay jars. Another significant area was devoted to large, well-lit but utilitarianly decorated workrooms. Crete and Greece were the first cultures in Europe to introduce writing (although the Mycenaean alphabet, Linear B, was not deciphered until the 1950s and the Cretan alphabet, Linear A, remains a mystery to this day) and the palaces also contain extensive written records.

The palace economy was based on the principles of centralization and redistribution. This was a society which had already invented writing, but not invented money; and its economic and political system reflected that.
The palace collected contributions of staple produce from the surrounding districts – wheat, barley, figs, olive oil, wine, wool, and so forth. These were placed in storage and carefully catalogued by the scribes. They were then distributed back out again to the people, in shares which were apparently based on their social status and value to the community rather than necessarily being equal.

Some of the produce was allocated as rations to specialist full-time craftspeople, such as weavers or metal-workers, who were employed in workshops attached to the palace compound. The goods they produced would also go to the storerooms. Some would be distributed to the people; other items (the more high-status ones) would be given out by the king as gifts to neighbouring kings or rewards to loyal followers.

The stored foodstuffs would also provide a buffer against famine, since they could be kept in the royal granaries until required. As well as regular rations, some of the food would also be put towards grand feasts on ceremonial and/or religious occasions, to which the people would be invited. This seems to have been a key way of keeping their loyalty and cementing communal feelings.

At one point it was speculated that the palace controlled all aspects of the economy; that the people were required to hand over everything they produced to the king’s officials, and received back as rations everything they needed for subsistence. However, this would be impractical in any society larger than a single village, so it’s now generally accepted that local communities were still mostly self-sufficient, and the palace was collecting and redistributing the surpluses rather than the entire production.

There does seem to have been some degree of central control. The palace would tell certain districts to raise sheep for wool, others to grow grapes for wine, and so on, rather than leaving it to their own discretion. The craftspeople who wove cloth and made pottery and cast bronze were accommodated and fed by the palace – in modern terms they were State employees. As such, it could be called a planned economy, but I’m not sure how meaningful the phrase is in a mostly subsistence agricultural society. Farmers have always had to plan when to plant and when to harvest; and the choice of what to grow, at least in ancient times, was largely determined by “what the soil and climate will bear” and “what seeds I have available” rather than any sort of free choice.

It is suggested that the system of palace economy grew out of the principle of reciprocal gift-giving and sharing between rural communities once specialization took place. A single extended family group growing, say, barley on its farm would naturally consider their crop to be family property, and everybody in the family would be given a fair share of the barley. If the next farm over was growing figs, then it was an obvious idea to offer them half of your barley in return for half of their figs, so you could both eat a more varied diet. But when another nearby farm was growing olives, and another was growing grapes for wine, and another was raising sheep, it all got complicated.
At this point, so the theory goes, someone had the bright idea of suggesting that everybody bring their produce to a central point, and he would count it all up and put it into storage, and then give it out again in fair shares so everybody got a little bit of everything. Of course, since it was his idea and he’d be doing all the work, it was only fair for him to skim a little off the top of everybody’s contribution for his own use, wasn’t it? It seems a perfectly reasonable idea: but that’s how monarchy got started. (At least it’s different to the more usual theory of ‘big man with a gang of thugs beating everybody up until they promise to give him their stuff’!) [24]

As Polanyi notes, redistribution formed the basis of the early economies of both states:

All large-scale economies in kind were run with the help of the principle of redistribution. The kingdom of Hammurabi in Babylonia and, in particular, the New Kingdom of Egypt were centralized despotisms of a bureaucratic type founded on such an economy. The household of the patriarchal family was reproduced here on an enormously large scale, while its “communistic” distribution was graded, involving sharply differentiated rations.

A vast number of storehouses was ready to receive the produce of the peasant’s activity, whether he was cattle breeder, hunter, baker, brewer, potter, weaver, or whatever else. The produce was minutely registered and, in so far as it was not consumed locally, transferred from smaller to larger storehouses until it reached the central administration situated at the court of the Pharaoh. There were separate treasure houses for cloth, works of art, ornamental objects, cosmetics, silverware, the royal wardrobe; there were huge grain stores, arsenals, and wine cellars.

But redistribution on the scale practiced by the pyramid builders was not restricted to economies which knew not money. Indeed, all archaic kingdoms made use of metal currencies for the payment of taxes and salaries, but relied for the rest on payments in kind from granaries and warehouses of every description, from which they distributed the most varied goods for use and consumption mainly to the nonproducing part of the population, that is, to the officials, the military, and the leisure class. This was the system practiced in ancient China, in the empire of the Incas, in the kingdoms of India, and also in Babylonia. In these, and many other civilizations of vast economic achievement, an elaborate division of labor was worked by the mechanism of redistribution. [25]

The final element of the primitive economy was the household. The household was never about exchanges in markets, but production for the members of a nuclear or extended family for self-sufficiency. These were Marx’s “pretty commodity producers.” The household economy played a central role in societies from Mesopotamia to China to Ancient Greece:

The third principle, which was destined to play a big role in history and which we will call the principle of householding, consists in production for one’s own use. The Greeks called it oeconomia, the etymon of the word “economy.”…The individualistic savage collecting food and hunting on his own or for his family has never existed…the practice of catering for the needs of one’s household becomes a feature of economic life only on a more advanced level of agriculture; however, even then it has nothing in common either with the motive of gain or with the institution of markets. Its pattern is the closed group. Whether the very different entities of the family or the settlement or the manor formed the self-sufficient unit, the principle was invariably the same, namely, that of producing and storing for the satisfaction of the wants of the members of the group. the principle is as broad in its application as either reciprocity or redistribution. [26]

Scholars call this the oikos economy. The oikos is a self-sufficient household producing commodities for its own use. This type of economy was common in both ancient Greece and Mesopotamia. In the above examples, households would produce for their own use and give some of the tribute to the temple or palace where redistributors would distribute the surplus, tying together the society in webs of mutual assistance and cooperation.

Textual studies have revealed that the Sumerian é and Akkadian bîtum, roughly translated as household, subsumed various entities not included in the modern Western notion of a household. A household meant anything from a nuclear or extended family living under one roof, all the way to grand temples (a deity’s earthly residence), royal palaces and public officials’ wealthy estates. Temples, palaces and wealthy estates are in modernity referred to as oikoi, with each oikos serving as a socioeconomic unit with a dependent and not-kin-related workforce and management, in addition to animals, pastures, fields, orchards, storage facilities and workshops.

The oikos is identifiable as a large structure (or set of related structures) with evidence of: varied craft residues (bead-making, textiles) and sustenance-related production; storage of raw materials and goods; participation in exchange and accounting; and display and/or exercise of force. With its own accounting and production means, these oikos households must have relied on non-kin labor that was paid in rations, and maintained themselves with some measure of force.

What strongly distinguishes the oikos and tributary economies’ archaeological record is that in the oikos economy, non-elites could work in one or more oikoi and receive rations in exchange; thus, many small kin-based households lacked tools and resources for production, with these instead being held by the oikoi. [27]

So, rather than the state being an aberration, the state is primary, and the economy grows out of it, the exact opposite of what libertarians argue. And rather than the wealthy hoarding the best of everything and claiming “redistribution” is a dirty word, or “theft,” redistribution is at the heart of all ancient economies. Neither goods, not land, not labor, were rationed by prices in impersonal markets until the last few centuries in Western Europe. Finally, rather than scarcity which is emphasized by the modern discipline of economics (which forms a modern-day priesthood akin to the high priests of ancient Mesopotamia or the Aztecs), early economies were based on abundance and plenty, with an elimination of want or extreme poverty. People were not dedicating scarce means to unlimited wants; rather thy were dedicating essentially unlimited means to limited wants through the mechanism of the oikos and palace economies.

Polanyi concludes:

Broadly the preposition holds that all economic systems known to us up to the end of feudalism in Western Europe were organized either in the principles of reciprocity or redistribution, or householding, or some combination of the three. These principles were institutionalized with the help of a social organization which, inter alia, made use of the patterns of symmetry, centricity, and autarchy.

In this framework, the orderly production and distribution of goods was secured through a great variety of individual motives disciplined by general principles of behavior. Among these motives gain was not prominent. Custom and law, magic and religion co-operated in inducing the individual to comply with rules of behavior which, eventually, ensured his functioning in the economic system. [28]

Next time, we’ll take a look at some examples of ancient economies around the world and see how money and markets really emerged.

[1] http://www.nakedcapitalism.com/2011/08/what-is-debt-%E2%80%93-an-interview-with-economic-anthropologist-david-graeber.html

[2] Marvin Harris; Cows, Pigs, Wars and Witches, p. 122

[3] Marvin Harris; Cows, Pigs, Wars and Witches, pp. 123-124

[4] Karl Polanyi; The Great Transformation, p. 46

[5] Marvin Harris; Cows, Pigs, Wars and Witches, p. 117

[6] Marvin Harris; Cows, Pigs, Wars and Witches, p. 127

[7] Marvin Harris; Cows, Pigs, Wars and Witches, p. 118

[8] Marvin Harris; Cows, Pigs, Wars and Witches, pp. 118-119

[9] Marvin Harris; Cows, Pigs, Wars and Witches, pp. 119-120

[10] Karl Polanyi; The Great Transformation, pp. 50-51

[11] https://en.wikipedia.org/wiki/Kula_ring

[12] Karl Polanyi; The Great Transformation, p. 49

[13] Marvin Harris; Cannibals and Kings, p. 111

[14] Marvin Harris; Cannibals and Kings, pp. 111-112

[15] http://michael-hudson.com/2015/04/sovereignty-in-the-ancient-near-east/

[16] Marvin Harris; Cannibals and Kings, pp. 113

[17] Marvin Harris; Cows, Pigs, Wars and Witches, pp. 121-122

[18] Marvin Harris; Cannibals and Kings, pp. 113-115

[19] https://psmag.com/seeing-fairness-evolve-10c0443687f0#.s0hxg0tc5

[20] https://psmag.com/conclusion-the-judgment-of-fairness-3677740ed398#.lbfu4byme

[21] Marvin Harris; Cannibals and Kings, pp. 115

[22] Marvin Harris; Cannibals and Kings, pp. 117

[23] http://studentreader.com/tributary-and-oikos-economies-of-ancient-mesopotamia/

[24] https://www.quora.com/What-is-Palace-Economy

[25] Karl Polanyi; The Great Transformation, pp. 51-52

[26] Karl Polanyi; The Great Transformation, p. 53

[27] http://studentreader.com/tributary-and-oikos-economies-of-ancient-mesopotamia/

[28] Karl Polanyi; The Great Transformation, p. 55

Karl Polanyi and the Modern World – Part 1

Many readers are no doubt already familiar with the work of Karl Polanyi. Polanyi’s writings can be seen as the antidote to libertarian free-market dogma, which has been heavily pushed today by the wealthy via their takeover of much of the economics profession.

It’s a standard tenet of the modern “free market” economics secular religion that money and markets are somehow “natural” expressions of human behavior, and that governments are “unnatural” parasites that simply exist to insert themselves into humans’ instinctive urge to “truck, barter, and exchange.” In their conception, market exchanges are as natural to humans as schools to fish, gaggles to geese, or herds to buffalo. Governments are simply “thugs” who insert themselves into the process to steal from wealthy, productive ants to give to shiftless grasshoppers, and we would better off simply cutting government out of the picture entirely and establishing a pure “market society” where everything under the sun is for sale and traded in voluntary exchanges, with no coercion whatsoever. In fact, they argue, no coercion is even possible in markets, since all market exchanges are totally voluntary exchanges between equals. No one makes an exchange unless both sides will be better off, after all, since each and every one of us are “rational actors.” Economic freedom and political freedom are one and the same. Any restrictions whatsoever placed on the behavior of any market actor is tantamount to “tyranny,” they argue.

To facilitate the “natural” behavior of markets and trading, a neutral medium of exchange item was established long ago by some process of negotiation, absent the state, that would grease the wheels of commerce. This commodity was typically precious metals, the only “real” form of money, in their argument. Money was an invention to facilitate trading, the most “pure” form of human behavior imaginable, they say.

In their conception, in the “primordial economy” of the agricultural village, people traded and exchanged stuff between themselves in voluntary exchanges. Apples for pigs, shoes for chickens, and so forth. There was no coercion involved. The use of gold and silver came about because of the need to trade dissimilar things–the “double coincidence of wants” problem. People just decided to trade their apples for gold one day, with the expectation that they could then trade the gold for what they needed later on, say, chickens.

Then the “Fall” happened when governments were established. Government came along and started “stealing” from the productive elements of society at the point of a sword or a gun in order to feed an unproductive bureaucracy that did nothing but sit around all day and sponge off the hard work of the productive classes, while coming up with a bunch of useless laws and regulations that benefited only themselves. To keep up this state of affairs, they “paid off” the useless-eater classes with “free stuff” confiscated from the “Makers” in order to maintain their power.

Unfortunately for free-marketers, this story has absolutely nothing whatsoever to do actual economic history. Rather, governments are the creators and maintainers of markets, and have been since day one.

How do governments create and establish markets? Polanyi argued that it was by creating what he called “fictitious commodities” out of the foundational elements that arise from human social relations. Thus, rather than being somehow “natural,” markets were forced upon people from above by the commodification of things such as land and labor, and then subjected to the very “unnatural” pecuniary exchanges of these commodities in artificial markets subject to chaotic boom-and-bust cycles that constantly threaten to tear whole societies apart.

Polanyi studied not only economics, but also history and anthropology, two disciplines that have been banished from the modern study of economics. Modern economic “science”  takes the artificial system of money and markets as a given, despite being fairly recent inventions, and studies market exchanges and money flows as if they were some sort of natural phenomenon like gravity or the movement of electrons, rather than human  creations.

This article, Karl Polanyi for President, makes the argument that the campaign of Bernie Sanders, far from being rooted in idea of Marx, is actually rooted in the ideas of Karl Polanyi:

Here’s a story that we hear all the time. The free market is the most effective way of ensuring prosperity. We can ensure that the market is free by getting the government to simply get out of the way, or, at most, fix a few market failures here or provide some economic security. The more parts of life that become like markets, the better. That’s not just because markets are the best for ensuring the good life—it’s that free markets are also a foundation for liberty itself, because economic freedom is political freedom.

Polanyi’s work dismantles this argument in two important ways. The first is to show that markets are planned everywhere they exist. Economic organization is always the result of the state. “Laissez-faire,” he writes, “was planned. . . . [The] laissez-faire economy was the product of deliberate state action.”

Polanyi says that the economy is “embedded” in society—part of social relations—not apart from them. He believes that a pure free market society is a utopian project, and impossible to realize, because people will resist the process of being turned into commodities. In fact, he calls labor a “fictitious commodity,” along with land and money. And this process of turning fictitious commodities into market commodities can only be carried out by the state.

What does he mean by fictitious commodities? Simply that land, labor and capital are not things that people fundamentally traded at all, historically. In order to create a modern capitalist economy, they have to be transformed (hence the title) into things that can be traded like cowrie shells or lapis lazuli.

For example, ca. 7000BC, the residents of Çatalhöyük, one of the earliest Neolithic “proto-cities,” lived near a source of natural obsidian. The obsidian is rare, and residents traded it far and wide, for example, to Mesopotamia. Mesopotamia’s economy was kind of like Japan’s today: they had few natural resources, but a high population (thanks to their complex irrigation system), centralized governments, and a highly skilled workforce. Hence, they had to trade for nearly all the raw materials they needed, from timber, to gemstones, to metals for smithing and smelting (copper and tin). To produce items for trade, they became the earliest “value added” economy where craftsmen would transform the raw materials into valuable items for exchange, like this:


The residents of Çatalhöyük would never have traded in things like land and labor, however. Such a thing would have been totally anathema to them. In fact, land was most likely passed down through generations via ancestral claims, as evidenced by plastered skulls found inside dwellings. They would not have sold their labor either; rather they would have worked cooperatively or in households to produce the food and goods they needed. The only labor “for sale” was due to debt bondage, not labor markets. Interestingly, Çatalhöyük apparently had no extreme class divisions, as evidenced by the identical plans of all the houses and absence of apparent government buildings or temples. People produced goods for their own use, or possibly to trade, yet any conception of capital – money traded for more money – would also have been utterly alien to them.

So how are land, labor and capital turned into commodities that can be bought and sold? By concerted, intentional government action. For example, the Enclosure Movement fenced off the commons and kicked people off their ancestral lands. This made land into a commodity to be traded. The farmers who could no longer support themselves became a landless proletariat who had to sell their labor power to the highest bidder in order to survive. Their labor, once used to sustain the existence of the village, became just another commodity to be bought and sold in a labor market. Necessary goods and services would have been provided for in any society even in the absence of a formal monetary system. Indeed, they have been since the dawn of history. This means that “capital” is just a designation for that which can be bought and sold; it has no independent reality outside of what we assign to it. It is entirely dependent upon a financial system that is created and sustained by the state. These things are embedded in any society’s fundamental social relations, and turning them into commodities for sale is anything but “natural.” This is the central argument of the book. He writes:

Labor is only another name for a human activity which goes with life itself, which in its turn is not produced for sale but for entirely different reasons, nor can that activity be detached from the rest of life, be stored or mobilized; land is only another name for nature, which is not produced by man; actual money, finally, is merely a token of purchasing power which, as a rule, is not produced at all, but comes into being through the mechanism of banking or state finance.

Polanyi argues that a true Market society is a utopian project, as utopian as anything that the Communists of the twentieth century imagined, if not more so. This is because people will resist being turned into commodities. They will rebel, as Number Six did in The Prisoner: “I will not make any deals with you. I’ve resigned. I will not be pushed, filed, stamped, indexed, briefed, debriefed, or numbered! My life is my own!”

Polanyi says that the economy is “embedded” in society—part of social relations—not apart from them. He believes that a pure free market society is a utopian project, and impossible to realize, because people will resist the process of being turned into commodities. In fact, he calls labor a “fictitious commodity,” along with land and money. And this process of turning fictitious commodities into market commodities can only be carried out by the state.

As we know, markets are not inherently stable, but subject to periodic boom-and-bust cycles, manipulation, monopolies and so forth. “Stability is inherently destabilizing.” Rather than “freedom”, markets are a source of coercion and control. This is dramatically different than the libertarian conception of markets being the primary sources of freedom and stability. In fact, ancient societies did everything possible to insulate themselves from the vagaries of markets! Goods were centrally allocated and redistributed. Early societies were mostly self-sufficient. Trading was carried out for natural resources that could not be obtained locally, either by central governments (Egypt, Peru), or by independent actors (Mesopotamia, Canaan). In fact, the earliest trading areas were always kept outside the city gates.

This leads to Polanyi’s other very important insight: If you attempt to turn the fundamental aspects of peoples’ lives into commodities to be bought and sold, you will destroy the very fabric of society!

It’s easy to see why. People need land in order to live, whether as homes or farms. In our society, you need a job in order to survive, but markets are full of periodic gluts and shortages. If you turn land and labor, fundamental things you need in order to survive, into bought-and-sold commodities subject to the random whims of impersonal markets, you will wind up with societies always on the verge of destabilization, chaos and collapse; precisely what we have seen throughout the past one-hundred and fifty years of capitalism:

…the move to markets is inherently destabilizing. Rather than a font of liberty and freedom, markets are also a source of coercion, instability, precarity, and worse. Subjecting all of life to the market wouldn’t result in the freest society but instead one defined by the collapse of social life.

As Polanyi writes:

To allow the market mechanism to be the sole director of the fate of human beings and their natural environment . . . would result in the demolition of society. For the alleged commodity “labor power” cannot be shoved about, used indiscriminately, or even left unused without affecting the human being who happens to be [its] bearer.

. . . In disposing of a man’s labor power the system would, incidentally, dispose of the physical, psychological, and moral entity “man” attached to the tag. Robbed of the protective covering of cultural institutions, human beings would perish from the effects of social exposure [and] social dislocation. . . . Nature would be reduced to its elements, neighborhoods and landscapes defiled,

. . . the power to produce food and raw materials destroyed. Finally, the market administration of purchasing power would periodically liquidate business enterprise, for shortages and surfeits of money would prove as disastrous to business as floods and droughts were in primitive society.

Finally, Polanyi argues that a market society like libertarians imagine is a utopian dream, because any attempt to build a market society will inevitably give rise to a backlash attempting to stop people from being turned into chattel who can be bought and sold like cattle, and land ownrship into a game of Monopoly.  Attempts to fight back against the market society have taken many forms, including socialism, communism, labor movements and periodic “back to the land” movements. These are not unnatural, but rather totally logical responses to attempts to build a “pure” market society on the part of elites:

Polanyi says that a market society is impossible to achieve, in any case, because people resist being turned into commodities. When they are exposed to too much of the market—when markets try to “disembed” from society—people resist, demanding protection from excessive commodification. Lives are more than commodities for those who are living them. This is what Polanyi describes as the “double movement”—the drive for laissez-faire inevitably produces a protective countermovement that insists on shelter from the damaging effects of the market. Welfare and different forms of social insurance are canonical products of this resistance; Polanyi believed fascism was another possible response

And people aren’t the only ones who want to insulate themselves from the vagaries of market forces. Polanyi also argues that enterprises like banks and corporations will always attempt to ensure their stability and continuation by distancing themselves as much as possible from the whims of the Market. This leads to phenomena like bailouts, cronyism, “too big to fail,”  monopolies, copyrights and patents, and so forth. It inevitably leads to a situation where the rich and powerful are protected from market forces, but the common people are exposed to it with no protection; in other words, “socialism for the rich and capitalism for the poor.” It also explains why the “pure” capitalism desired by libertarians is a fantasy. Any state strong enough to create markets is also strong enough to protect selected entities from its deleterious effects.

As Great Britain was the earliest society to undergo this transformation, Polanyi spends a lot of time discussing the Speenhamland system of early industrial England. He argues that markets weren’t created by a dismantling of the rules, but rather a rewriting of them:

In The Great Transformation, Polanyi spends a lot of time discussing the late eighteenth-century and early nineteenth-century English Speenhamland system of poor relief, which essentially provided a basic income, and its replacement with the New Poor Law of 1834, which removed that income support. Historians now doubt that Polanyi accurately characterized some of the problems of Speenhamland, but his core argument remains valid—that changes weren’t “natural,” but simply replaced one set of actors who have power with another. Taking away Speenhamland’s protections made labor a commodity, but that didn’t end state involvement: it was simply that governance was outsourced to the labor market and private actors after the New Poor Law.

The “commodification” of land, labor and goods the into capital can only be achieved by strong, centralized states.  Furthermore, these governments need to be able to provide things like legal support, military support, centralized currency, banking, exchanges, protection, and so forth. This is why capitalist states always have the biggest bureaucracies. The biggest government project in history wasn’t World War Two or the Moon Shot; it was capitalism itself. Marx understood this as well; he declared that governments were “committees for managing the common affairs of the bourgeoisie.”

Economists generally hold that land labor and capital are the three central factors for economic growth under capitalism, and yet, as we have seen, they are all fictitious commodities created by the state itself. Thus capitalism can not happen without the concerted efforts of strong, centralized states. States must carry out this transformation, and then create the conditions necessarily for “self-regulating” markets to be established and sustained form from above.

Thus, far from a “weak” state with as few laws as possible regulating the merchants, only a strong state can assure the transformation necessary to transition into a capitalist power. Furthermore, it takes a strong state in order to maintain it. Capitalism could never have taken off after the fall of Rome, for example. Instead the feudal system embedded the economy in social relationships of mutual obligation (fealty) and self-sufficiency in the from of Manoralism. Trade was once again confined to goods that could not be obtained locally. It was tightly regulated and controlled by the authorities in the form of Champagne fairs held at specific times and in specific places. The power of merchants was strictly circumscribed, just as it was in ancient times. Usury was curtailed.

And China, always a prime candidate for the Industrial Revolution, could never have become a capitalist power. This is not because the state was too powerful, but because it was too weak.

That’s the argument of a book by Peter Vries. Vries points out that, rather than the “weak state” and “free “markets that made Britain an industrial power, it was tightly regulating and controlling the economy that made capitalism possible. China was much closer to the “free market” ideal promoted by libertarians than was England, which is why capitalism could never have taken off there. Here’s a review of Vries by economist Branko Milanovich (emphasis mine):

…[Peter] Vries agrees with Bob Allen’s view that the key ingredients in British industrialization were expensive labor and cheap energy and money. This led to labor-saving innovations which were at the origin of the technological revolution. But England also had, Vries argues, a very strong “infrastructal” state that until 1830 followed protectionist policies and often manipulated tariffs and taxes to help domestic producers, engaging in what would be today viewed as “industrial policy”. Furthermore, England had a big government, high taxes, high government expenditures, “yuge” Navy, enormous debt to GDP ratio, and extravagantly highly paid government officials.

Externally, the country pursued  imperialist and mercantilist policies. Finally, and quite importantly, workers became the proletariat who had to go to the market to sell their labor (that is, lacked the cushion of working on own plot of land), and labor force became “commodified”.

England, in this short sketch, presents four distinguishing features:

  • Favorable factor endowments
  • Capitalism: rational profit-making and commodification of labor
  • Big government
  • Outside projection of power (“fiscal-military, mercantilist and imperialist state”, p. 433).

It is the addition (appendage, as it were) of an acquisitive, determined and big state that distinguishes Vries’ explanation from others which, as he points out, present an idealized Smithian picture of a government of low taxes, strong property rights, and tolerable administration of justice. His views on the importance of the use of force in international trade (on the open seas, “the distinction between peaceful, consensual trade and simple piracy was often very thin if not simply non-existent”, p. 148) makes his views close to Findlay and O’Rourke’s (whose work Vries cites very favorably) and even the world-system theorists. But with the latter, he agrees only that mercantilism and imperialism helped West’s take off but cannot explain it. Which brings us to why China has, as Vries several times mentions, “nil” chance of starting the technological revolution.

Why China did not take off? …Consider the four features that made England take off: they are all reversed in the case of China. China’s labor was cheap, energy and money were expensive. Chinese government was weak, paternalistic and unable to collect taxes. China had no army to speak about and was not engaged in military operations beyond its borders. And finally, production in China was organized in family units: it was the land of household mode of production (p. 204), or as Marx would have said, petty commodity production. Thus, workers could stay at home and work together with their families, often living [close] to the subsistence level. What was lacking was the reserve Army of the unemployed who in order to survive had to “feed” the capitalist engine in the West.

But while China was very unlikely to achieve a technological breakthrough, it was an equally or more market-oriented society as the West, at least as far as market for the consumption goods was concerned; China’s markets were more integrated than European, it conducted greater amount of long-distance trade, and its government was much smaller. So here we would, looking from a neoclassical angle, behold all the ingredients that should help China grow (integrated market, small government, low taxes). Yet  they did not. Qing China, in effect, in Vries’ rendering, sounds much more Smithian than Britain (p. 354) but precisely because it was more Smithian it failed to develop.

The origins of the Great Divergence (globalinequality)

Similarly, Gregory Clark writes:

Medieval England in the years 1200–1500 experienced little or no overall technological advance…Yet medieval England had extraordinary institutional stability. Most individuals enjoyed great security both of their persons and of their property. Markets for goods, labor, capital, and even land were generally free. Indeed if we were to score medieval England using the criteria typically applied by the International Monetary Fund and the World Bank to evaluate the strength of economic incentives, it would rank much higher than all modern high-income economies—including modern England.

A Farewell to Alms, p. 147

So the idea that capitalism and the state are somehow in opposition is the most basic kind of ignorance. It has nothing to do with historical reality. Thus we can see why the “market society” dreamed of by libertarians can never be achieved.

It’s ironic that libertarian followers of Ayn Rand who claim to celebrate individualism and character, are in fact arguing for exactly the opposite! In their conception of society, your value to the Market, reflected in your salary, becomes the only measure of your worth as a human being. And your behavior, rather than being determined your by character, is instead dictated by the impersonal demands of the Market. For example, If you are a CEO, your behavior is determined entirely by Market dictates. It is imperative that your enterprise must grow, and that shareholder value be maximized, and if you need to lay off employees to do this, or cut corners, or whatever, than that is what you must do, because that is what the Market dictates. Individual character has no bearing. If you refuse to do these things, you will be fired and replaced with someone else who will. Anyone who does not subordinate their lives, interests, and behaviors to the “discipline” of the Market will either die or starve (unless they are insulated somehow, such as by a large inheritance). No matter who you are, you are constantly under the obligation to make money, and to engage in the the actions that will make this happen. Can anything be more dehumanizing?

If you think about it for a second, it makes total sense why a market society is an impossibility. Joseph Schumpeter, one of the more influential economists of the twentieth century, persuasively argued that “creative destruction” was an essential feature of capitalist market economies. Yet, logically, this means that, if all of society is subject only to Market forces and nothing else, the entire society itself would be periodically destroyed! Clearly this cannot happen. People will not sit idly by and allow their lives to be periodically destroyed in the service of some abstract conception of the Market. In fact, Schumpeter also argued argued that capitalism was a system that could not be sustained indefinitely. But if capitalism  =  society, then clearly society would be liquidated as well. For example, during the financial crisis, you heard commonly libertarians arguing for Mellonism: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate; purge the rot from the system.” But think about it: this literally advocates for the wholesale demolition of society to preserve the Market! It’s clear why this did not happen, nor will ever happen (no doubt libertarians did not picture themselves losing their homes, or standing in the soup kitchen and bread lines).

Rather, Polanyi argued, the market is a tool that must be subordinated to the needs of society, not vice versa. In fact, this is the only realistic option. A true market society, such as the ones libertarians dream of, is an impossibility, a fantasy, a pipe dream. Any such society would quickly degenerate into chaos and tyranny, not unleash prosperity.

And this brings us back to the populist backlash against Neoliberalism around the world. That’s what we’ll be talking about next time.

Two Futures

Revelation 18:11-13New International Version (NIV):
11 “The merchants of the earth will weep and mourn over her because no one buys their cargoes anymore— 12 cargoes of gold, silver, precious stones and pearls; fine linen, purple, silk and scarlet cloth; every sort of citron wood, and articles of every kind made of ivory, costly wood, bronze, iron and marble; 13 cargoes of cinnamon and spice, of incense, myrrh and frankincense, of wine and olive oil, of fine flour and wheat; cattle and sheep; horses and carriages; and human beings sold as slaves.

A lot of people have been prompted to ask “what’s wrong with capitalism?”

This includes not just its traditional critics, but also its biggest boosters. Any number of prominent economists, ones whom one might think would never admit a flaw in the system, have been contemplating what went wrong. This ranges from prominent economists, to conservative think tanks, to institutions like the IMF and the Federal Reserve.

No one seems to be able to figure it out. For the financial insiders, the cause is always some sort of economic hiccup that can theoretically be cured by an interest rate hike here and there, or some sort of government program. In other words, just fiddling around the edges, or better technocratic management. Dare I suggest that this is a classical case of “cargo-cult thinking” by the high-priests of our capitalist age?

There are a few currently fashionable theories about what’s wrong:

Secular Stagnation. First postulated by Alvin Hansen, and newly championed by Larry Summers, This includes things like lowered population growth causing less demand for goods and services, with low interest rates unable to coax forth more investments.

Innovation Slowdown. Associated with Robert Gordon, this postulates that the “low hanging fruits” of innovation that have transformed the economy have been harvested, and that future innovations will provide lower marginal growth, and that the utility value of future innovations will be harder to monetize.

Resource Bottlenecks. This would include the Peak Oil ideas; that the resources underpinning our economy are simply not available or too costly. Shortages of water or other effects from climate change could be included here.

Debt Overhang. This means that high levels of debt need to written off before growth will resume.

All of the Above?

All of these are seen as just temporary hiccups in the 250 year trajectory of permanently higher growth and living standards by mainstream economists.

But what if the whole system is doomed? What if it’s simply not viable anymore? What if there are no marginal fixes at all? What if there is no cure besides a totally new approach to society, starting from the ground up?

And what if we’re incapable of making that transition?

I thought of this while reading the following passage about the origins of feudalism in the West:

Barbarization was but part of the rapid changes in Roman society, culture, and government that took place during the third and fourth centuries. Partially spurred by such internal problems as plague, a falling birthrate, constitutional instability, and the failure of the Roman world to develop from a labor-intensive system based largely on slavery to a more efficient mercantile or protoindustrial system, and partially by the increased creased external pressures on its overextended frontiers, the Empire had to seek a new equilibrium. (kl 205)

Origins of Feudalism in the West (Understanding Society)

These words struck me in particular: “the failure of the Roman world to develop from a labor-intensive system based largely on slavery to a more efficient mercantile or protoindustrial system.” What if we’re in a similar situation today? What if we face a choice between breaking through and falling back?

I’ve read a lot of discussion concerning our current predicament, from joblessness to automation to economic malaise. Such discussions usually end up in an acknowledgment, sometimes grudging, sometimes not, that capitalism as a system has outlived its usefulness. Or that capitalism is holding us back.

What do I mean by this? I mean the system where more and more people are rendered useless to the economic order. Where ownership is confined to a narrow circle of elites. One in which we pay out of own pocket to make ourselves viable for careers that may or may not exist by the time we’re done training, leaving us jobless AND in debt, unless we come from wealthy families. One where most of our salaries go to pay for the roof over our head, and we’re in debt from birth to death. One where much of new employment consists of providing low-wage on-demand services to a tiny clique of urban corporate technocrats. One where we are turned into economic migrants never able to put down roots. One where vast swaths of the country are dead zones devoid of opportunities besides low-wage service work, government jobs, nursing or drug sales.

I mean corporations peddling identical products designed to quickly wear out or become unfashionable, and flogging them incessantly with advertising. Centrally-planned oligopolies masquerading as “free” markets (cable monopolies etc.). People sitting in air-conditioned cubicles pushing paper all day in socially-useless “bullshit jobs” just so they can earn an income. The “nuisance economy,” where ads are shoved down our throat in order to fund our internet infrastructure. Part-time and temporary jobs with no benefits. Colleges as toll-booths to employment. Hospitals as a hostage racket. Draconian copyright laws. Artificial scarcity of software. And on and on.

We were told that the sequence of economic development is essentially the following:


Manufacturing has already been offshored and automated away. Consider:

Nike is to tackle rising labour costs at its Asian factories by “engineering the labour out” of its shoe and clothing production as it seeks to defend its profits. Don Blair, Nike’s chief financial officer, said its objective was to reduce the number of people making its products as he highlighted the impact of a sharp increase in wages in Indonesia.

The Future of Manufacturing Jobs in Developing Nations (Marginal Revolution)

More than 20 years after Adidas ceased production activities in Germany and moved them to Asia, chief executive Herbert Hainer unveiled to the press the group’s new prototype “Speedfactory” in Ansbach, southern Germany. The 4,600-square-metre plant is still being built but Adidas opened it to the press, pledging to automate shoe production – which is currently done mostly by hand in Asia – and enable the shoes to be made more quickly and closer to its sales outlets…Large-scale production will begin in 2017 and Adidas was planning a second “Speed Factory” in the United States in the same year, said Hainer.

Reboot: Adidas to make shoes in Germany again – but using robots (Guardian)

A Chinese government official told the South China Morning Post that a Foxconn factory has “reduced employee strength from 110,000 to 50,000 thanks to the introduction of robots. It has tasted success in reduction of labour costs. More companies are likely to follow suit.”

Smartphone maker Foxconn replaces 60,000 workers with robots (BoingBoing)

The “replacement” for these jobs was supposed to be service sector jobs. We’ve been simultaneously told that these jobs would replace the lost manufacturing jobs, and then when the low salaries are questioned, we are told that these jobs are only for teenagers or people living with their parents, despite these businesses being open year-round and during school hours, not to mention being the plurality of the newly-created jobs. Any attempt to raise salaries in this sector, we are told, would spur automation and joblessness, yet we are simultaneously told that “automation does not kill jobs,” and the “the amount of work to do is unlimited.” Left unsaid is that, by this logic, only by paying salaries that are so ultra-low that they are competitive with machines can we have sufficient jobs for people.

When you point out that once upon a time, people were paid enough to support a family on one income back when America was a manufacturing power, you are dismissively told that “those days are gone forever.”

Consider that all the calls for “more schooling” and “worker retraining” have been for naught. People dutifully marched off to get more education, but it has not saved the economy, nor the people themselves. The people who would have gone off to higher education years ago still do today, but now a college diploma is a “work chit” for any job at all. Many secondary schools are now nothing more than pre-prison holding cells. As for a path to a viable job, you are on your own. Good luck. Meanwhile, politicians like Hillary Clinton promise to make paying the onerous costs for college easier. Does anyone think that will solve anything?

In the 50 years from 1960 to 2010, the global labor force’s average time in school essentially tripled, from 2.8 years to 8.3 years. This means that the average worker in a median country went from less than half a primary education to more than half a high school education.

How much richer should these countries have expected to become? In 1965, France had a labor force that averaged less than five years of schooling and a per capita income of $14,000 (at 2005 prices). In 2010, countries with a similar level of education had a per capita income of less than $1,000.

The Education Myth (Project Syndicate)

Since 1991, we have done precisely what the education-focused poverty people said to do. Between 1991 and 2014, we steadily reduced the share of adults in the “less than high school” and “high school” bins and increased the share of adults in every other bin…By 2014, the share of adults in the “less than high school” bin declined 9 points from 20.6% to 11.6%. The share of adults in the “high school” bin declined 6.5 points from 36% to 29.5%. Meanwhile, the share of adults with an Associate degree went up 3.9 points, the share with a Bachelor’s degree went up 8.3 points, and the share with a post-Bachelor’s degree went up 4.8 points.

If the poverty rates for each educational bin remained the same, then the upward redistribution of adults from the lower bins to the higher bins would have led to lower overall poverty. But that’s not what happened. Instead, the poverty rate for each educational bin went up over this time and overall poverty didn’t decline at all. In fact it went up.

Why Education Does Not Fix Poverty (Demos)

Is it any wonder people are angry and getting angrier?

Consider that huge areas of the West are post-industrial “sacrifice zones” filled with people who have lost everything, and ready to embrace radical solutions. This includes everything from small towns to inner-cities.

Over the past 35 years the working class has been devalued, the result of an economic version of the Hunger Games. It has pitted everyone against each other, regardless of where they started…The consequences can be seen in nearly every town and rural county and aren’t confined to the industrial north or the hills of Kentucky either. My home town in Florida, a small town built around two orange juice factories, lost its first factory in 1985 and its last in 2005.

In the South Buffalo neighborhood of Lackawanna, homes have yet to recover from the closing of an old steel mill that looms over them. The plant, once one of many, provided the community with jobs and stability. The parts that haven’t been torn down are now used mainly for storage.

In Utica, New York, a boarded-up GE plant that’s been closed for more than 20 years sits behind Mr Nostalgia’s, a boarded-up bar where workers once spent nights. Jobs moved out of state and out of the country. The new jobs don’t pay as well and don’t offer the same benefits, so folks now go to the casino outside of town to try to supplement their income.

Mocked and forgotten: who will speak for the American white working class? (Guardian)

Meanwhile, it’s the same in Europe, where industrialism started, but has long since departed. Cities like Birmingham, Glasgow, Manchester, Belfast, Amsterdam, and many others that once had thriving manufacturing economies have been dealing with blight ever since the 1970s. It’s notable that the radical Jihadists targeting Europe are living in the blighted and abandoned neighborhoods cleared out by deindustrialization:

The sociologists tell us that the distribution of wealth in Brussels follows a pattern that is more commonly found in American cities — wealthy suburbs surrounding a hollowed-out center of poverty and blight. The European norm, exemplified by London and Paris, would have the most expensive and chic areas in the center. Molenbeek fits the American pattern in that it is an area blighted by derelict industrial buildings and is on “the wrong side of the tracks,” which in this case means the wrong side of the canal that splits Brussels into east and west.

Belgium is a failed state (Politico)

And it is a global problem. The capitalist economic model, the ongoing destruction of the agrarian way of life and sending the refugees fleeing to the overcrowded slums and chawls, is no longer viable. The deracinated rural people were assumed to get jobs in sweatshops where they would be producing cheap goods for rich western consumers (the twenty percent who aren’t just trying to get by, that is). We were told how much more fortunate these people were working their sixteen hour days in factories and sleeping in cinderblock dormitories than in their ancestral villages working outdoors and surrounded by their families. But now, the factories aren’t there anymore. Yet, agriculture is still no longer viable for them any more than is manufacturing, for a number of factors. What are these people supposed to do? How much is this contributing to collapse?

Global unemployment is expected to surpass 200 million people for the first time on record by the end of 2017, according a recent ILO study, and limitations of official statistics suggest that the problem is much larger . As conventional measures increasingly fail to produce tight labor markets and jobless recoveries become the norm, economists grapple with this new reality by calling it secular stagnation and by adjusting upwards the rates of unemployment deemed ‘natural’ — but the human, social and economic costs of this growing problem are rarely considered in economic modeling.

A Global Marshall Plan for Joblessness? (Naked Capitalism)

The thing is, we have no viable alternative for a deindustrialized (post-Fordist) economy. Dare I say that our current economic model is failing, and has been for over forty years? We have been in a concealed depression since approximately 1972. The responses to cover this up are running out of steam. And alternatives are being brutally suppressed by elites.

What if we are incapable of moving beyond the current economic model? Clearly, something else is desperately needed.

An alternative economic history

Even though technology is supposed to have no effect on employment, my own view is that we’ve lurched from overproduction crisis to overproduction crisis, with no real alternative. The two things that have saved us were 1.) World War Two, and 2.) Globalism. But now those have run their course.

I believe the Great Depression was caused by a massive labor shock, and this has covered up by economists ever since in the interests of preserving capitalism’s legitimacy. It was claimed that things like “financial panic” or “tariffs” or “not enough money” were the cause. But these were results of overproduction–of putting millions of people out of work and not having enough salaries to shore up the debt-driven economy. They were not the cause.

There was more production, but he salaries were not there to absorb it. The increase in output could not be absorbed at the time.

At the time, the economy was undergoing a great expansion, and new techniques were coming to the fore. The greatest of these were 1.) The electrification of the assembly line, and 2.) The mechanization of agriculture.

If you read the literature from the now long-forgotten Technocracy Movement, you will see statistics pointing out how much production had increased in various industries. I did this as part of a book project a while ago (sadly, abandoned) on the movement. I found some of their old books in the archive of the public library. Their arguments are remarkably familiar if you’ve read any of the current literature concerning automation and the workforce.

But what if they weren’t wrong? What if overproduction really was the cause?

Keep in mind, the Depression dragged on for an entire decade, despite the responses of politicians. This caused a tremendous amount of suffering and political chaos. Government programs ameliorated the worst of the suffering, but didn’t really put the economy on a firm footing, or put things back to the way they were.

For example, you always hear this mic-drop: “ninety percent of us used to work on farms (or whatever number they pull out of their ass), and now just two percent do, and yet we have plenty of jobs, hurr durr!” But that washes away a hell of a lot of history.

Of course, World War Two changed all that. But then again, World War Two was mostly a response to the economic conditions of the Great Depression. During the interwar years, governments took an active role in rebuilding their shattered economies in a way that is unimaginable today.

What really ended the Depression was, let’s not mince words here, government takeover of the economy from 1941-1950. There’s another word for that–socialism. Specifically, War Socialism. The economy under government management and control had eliminated unemployment virtually overnight. Everyone who wanted a job had one.

During this time, the government learned to control and manage large economies. This scared the shit out of the powerful industrialists, who feared they would not be needed anymore.

When the war ended, the industrialists cut a deal. “Give us back control of the economy,” they said, “and well make sure there are plenty of jobs to around, with good benefits.” For the next thirty years was what is called the “Long Boom” or “The Golden Age of Capitalism.” There was plenty of work to go around rebuilding the world, and the people who survived the war did not have to work very hard to ensure their survival. Unions were powerful, government took an active role, and the wealthy and the industrialists grudgingly accepted this state of affairs (while secretly working to undermine it)

The United States was the only industrial power whose industrial base survived the war intact. Work was plentiful. The U.S was the world’s factory floor. Even though manufacturing was never the majority of jobs in the economy, rising wages and unions had spillover effects in the wider economy. African-Americans were automated out of their farming jobs and headed north in the Great Migration. I told that story here.

After the war ended, we invented “The Gospel of Consumption.” People would be encouraged to form nuclear families and consume as much as possible to absorb all the new production. Their appetite for novelty and status would be stoked to keep them buying all of the economic output that was being produced. The television set injected advertising into peoples’ homes and manipulated their desires and insecurities. Big business would create the wants it sought to satisfy.

The government’s creation of the Interstate Highway System and the subsequent buildout of the suburbs, along with the expansion of the internal combustion engine and all its attendant satellite industries (truck drivers, mechanics, drive-in and fast-food restaurants, auto-parts stores, towing, insurance etc.) contributed to a boom in employment from 1950-1970. This would be repeated to some extent with the creation of the “information superhighway” in the 1990’s-2000, which again created a variety of jobs (despite the comical insistence of libertarians that government is always a hindrance to economic growth and development).

The wheels started coming off from ’68-’72. Much of the world’s industrial base had been rebuilt. The Germans and Japanese were able to rebuild using the latest methods and techniques, while American industry had become sclerotic. We were once again facing a crisis of overproduction.

The spike in the cost of oil led to the stagflation of the 1970’s, which allowed the alternative economic theories of the Chicago School to come the fore. These generally fall under the rubric of Neoliberalism. To deal with the “excess of democracy” workers would need to be “disciplined.” To shore up profits, production was offshored to the third world, which would also crush unions. An “new enclosure movement” would sell off the commons to rentier investors. Citizens were relabeled as consumers, pensions were swapped for stock plans, and the market would rule all.

To distract from falling living standards, two tactics were used. In Europe a generous welfare state was provided. In the United States, racial enmity, appeals to religion, and issues of social and cultural affiliation were used to distract the working classes from their falling living standards.

Beginning in the 1970’s Women entered the workforce as men exited. Two incomes were needed where one used to suffice. Later, millions of impoverished workers from the hollowed out third world failed states fled to the Western industrial economies, further depressing wages, wages needed to buy up the overproduction.

After the 1980’s, financialization was another tactic used to deal with the faltering economy. Manipulation of money replaced actual productive growth. Companies were strip-mined for profits. Corporations consolidated to cope with this phenomenon, eliminating tens of thousands of “redundant” employees in the process. restrictions on monopolies were abandoned. Pensions were raided. Shady financial products like “junk-bonds” and “derivatives” created wealth out of nothing. A series of bubbles were inflated and popped. Boom-and-bust cycles became more pronounced. This had the effect of hollowing out the real productive economy and turning financiers into modern-day aristocrats for doing unproductive, socially useless labor which actually subtracted value from the economy as a whole.

In the 1990’s and beyond, globalism rode to the rescue, i.e. the colonization of foreign markets. And the biggest star was Communist China. But after becoming the World’s Factory Floor 2.0, and hollowing out the West in the process, it seems to be faltering:

The main engine of global growth since 2000 has been the rapid industrialization of China. By channeling the vast savings of its population into capital investment, and by rapidly absorbing technology from advanced countries, China was able to carry out the most stupendous modernization in history, moving hundreds of millions of farmers from rural areas to cities. That in turn powered the growth of resource-exporting countries such as Brazil, Russia and many developing nations that sold their oil, metals and other resources to the new workshop of the world.

The problem is that China’s recent slowdown from 10 percent annual growth to about 7 percent is only the beginning. The recent drops in housing and stock prices are harbingers of a further economic moderation. That is inevitable, since no country can grow at a breakneck pace forever. And with the slowing of China, Brazil and Russia have been slowing as well — the heyday of the BRICs (Brazil, Russia, India and China) is over.

There is really only one time-tested way for a country to get rich. It moves farmers to factories and imports foreign manufacturing technology. When you move surplus farmers to cities, their productivity soars — this is the so-called dual-sector model of economic development pioneered by economist W. Arthur Lewis. So far, no country has reached high levels of income by moving farmers to service jobs en masse. Which leads us to conclude that there is something unique about manufacturing.

But here’s the problem: manufacturing is shrinking. Although the total amount of physical stuff that humans make keeps expanding, the percent of our economic activity that we put into making physical goods keeps going down. This is happening all across the globe, even in China. This may partly be because manufacturing has been a victim of its own success — the sector has grown so productive that it’s now pretty cheap to make all the stuff we need. That is exactly what happened in agriculture, after all.

Will the World Ever Boom Again? (Bloomberg)

We now have a consumer society where the consumers are too poor to pay for much of anything. As more retail is disappearing thanks to the internet, those service sector jobs in retail are disappearing too. We’ve seen malls dying all over the country. The age of mall shopping is coming to an end. Good riddance.The retail sector is crumbling thanks to online retailers. Globalism has made goods so abundant that they are virtually free. People are doing their own services online (travel, law) for hardly any cost.

Now both manufacturing and retail are gone.

On the face of it, the economic superpower that is the American consumer should be having a party. Low interest rates and unemployment rates, low oil prices, a high stock market, healthy property prices – nothing it would seem, to put off doing what comes most naturally to them – shopping.

Yet they’re stubbornly refusing to do it – or at least refusing to do it in predictable ways – leaving consumer experts to wonder, as fashion bible Women’s Wear Daily recently did, if the consumer psyche, “bombarded by digital messages, stressed financially and overwrought emotionally”, has “finally exploded”.

Low sales even in healthy economy signal ‘complete shift in shopping’ (Guardian)

What’s killing us fixed costs. Education. Health care. Housing. The internet is not a solution to those, and the “free” market cannot fix the problems it caused in the first place. As those fixed costs head inexorably upward, it is squeezing out consumer spending. All of the wage gains are heading to the top due to superabundance of labor. The job market it broken – all incentives are to automate and create as few jobs as possible, and to poach workers from competitors rather than pay for necessary training. Employers hide behind online job search platforms and sit around refusing to hire anyone besides a “purple squirrel” candidate. Employers couldn’t care less about unemployment individually, but collectively, its reducing their margins. The comments to the above article get it:

So many companies thought they were super smart after keeping the wages so low… too bad that everybody had the same idea, and now they notice they have not enough clients.

A key economic principle is to supply the workforce with enough income to afford the products you want them to buy. Check these companies. I bet the work force is all part time minimum wage. You have to give money to the consumer in order for them to give it back.

Maybe it’s because much of what is being offered for sale in the shops is badly-designed, skimpily-made, short life-span, mainly Chinese-manufactured crap – stuff that 30 years ago would have been considered to be “counterfeit”. We have an entire system of production, distribution and exchange based on taking stuff out of the ground, turning it into junk in police-state China, and then, after a short, credit-financed interval, shoving it all into another hole in the ground. Who really benefits from this?

Its the internet. You can buy what you want, when you want, see reviews and most importantly you have breathing space between looking and buying. This space allows you think “do i actually need this?” Sometimes the answer is no. So many people are buying less stuff.

When people have high rents and mortgages to pay,or when they have to save up for years for a deposit then they don’t have much money for consumer spending. New properties have tiny rooms so there isn’t the space for all that consumer junk. Most of the stuff in shops is either junk or too expensive for most people.

If you live in a medium-sized town that’s not a tourist destination, you will see the same boring chain stores that you see in every other town. Shopping is boring if it’s just the same stores in every town and every mall, all selling the same stuff. Maybe in huge cities like New York there is some imagination to products and window displays but in most places shopping has gotten dull. Yes, I’d rather have an experience like seeing a National Park than seeing another chain store.

Informed consumers making rational choices – the marketing industry’s nightmare.

Yet our genius economists and politicians appear not to care. After all, they’re getting richer. They appear much like the clueless aristocrats of Ancien Régime France. Morris Berman:

The truth is that no system lasts forever; change is the only constant we find in the historical record. As one social critic argued a few years ago (Peter Frase), “humanity has never before managed to craft an eternal social system…and capitalism is a notably more precarious and volatile order than most of those that preceded it.” Wolfgang Streeck, in an article he published in 2014 in the New Left Review, wrote that “What we are seeing today…appears in retrospect to be a continuous process of gradual decay, protracted but apparently all the more inexorable.” Whatever stability capitalism had in the past, he goes on to say, was dependent on the presence of countervailing forces (e.g., labor unions). Today, no force is on hand to check capitalist expansion, balance it out; which suggests that it may undermine itself by being too successful. Everyone in these societies is mesmerized by consumerism, and thus dysfunctions in the system continue to accumulate, because there is not enough structural variety to cope with change. In a word, he concludes, “victorious capitalism has become its own worst enemy”; it is “dying…from an overdose of itself.”

As an example of this, Streeck points out that consumerist culture is absolutely vital for the reproduction of contemporary capitalism. The problem is that producers and consumers tend to be the same people. So when consumers hunt for the best bargain, they defeat themselves as producers, because they drive their own jobs abroad. In addition, corruption is now inherent in the system; it’s hardly a case of a few bad apples…

Dual Process: The Only Game in Town (Dark Ages America)

And automation has clearly presented a challenge to future expansion of the consumer:

The huge rise in automation in agriculture that drove so many people off the land created waves of discontent and dislocation, but eventually — during the Great Depression here in the US — that surplus agricultural labor was absorbed into the then burgeoning industrial sector. So not only did the economy benefit from rising productivity on its farms, but it produced higher paying jobs that enabled the newer working class to become upwardly mobile and aspire to something we have became to call the new middle class. The new jobs paid well enough to compensate for the dislocation of the prior automation. The economy took a step upwards.

Mind you the entire process of absorption took a full one hundred years if we go back and start the clock running at the start of industrialization. Not only this: along the way there were enormous political and social changes that made the end result — a generally higher level of prosperity — possible. This brighter future was not, contrary to the sunny arguments of the libertarian economists, a result of the magic of the marketplace, but was, rather, the result of generations of activism and social protest that eventually put in place truly democratic institutions to mitigate that more dire consequences of capitalism. It is no accident that modern democracy is a much newer arrival on the scene than is modern capitalism.

The advent of a new age of machines enabled the launching of what we know as modern capitalism. And its first notable consequence was to benefit a rise in returns on capital. It was this early history of industrialization that Kuznets so famously captured in his eponymous curve. But since Kuznets we have observed an enormous shift backwards. Not only has inequality risen to near historic levels, but there has been a decided bias towards returns to capital once more.

Here’s the issue: the service sector covers a very wide range of activities, from those remaining laundry washers to brain surgeons. Along the way it includes the hairdressers and bartenders that the Deloitte study highlights. It also includes the engineers, designers, and sundry bloggers…The problem is that many of theses jobs produce lower income than the manufacturing or industrial jobs being displaced by automation. So the new history is radically different from the older history.

Whereas the old displacement eventually created a more prosperous and plentiful middle class, this new displacement may not. Indeed if we take the studies of people like David Autor and his co-authors at MIT seriously, it certainly will not. At least any time soon. Worse as the pace of innovation accelerates automation seems to be working its way up the income scale. Not only are traditional blue collar jobs being automated, but many previously secure white collar jobs are going under also. The result is that we are experiencing a huge bifurcation in society unlike that of the last wave of automation. That last wave consolidated society around a fairly prosperous median. This wave is dividing society into two very different levels. The bulk of people are finding themselves compressed between stagnant wages and rising costs, with automation a major factor in the wage compression. Whilst, at the same time, a much smaller group benefit from the wages flowing to their skills.

Automation and History (Real World Economic Review)

Clearly our current economic model is failing. What will replace it?

What Next?

Karl Marx apparently thought that there were only two options available after the breakdown of capitalism: forward to socialism or backwards to barbarism. After reviewing the above, I’m inclined to agree. I would label these two futures as:

1.) Post Capitalism

2.) Neo-Feudalism

What would postcapitalism look like? Well, it might look a lot like what Paul Mason has written about in his book of the same name. Postcapitalism is not socialism, but it has certain socialistic aspects.

Mason looks at the inequality and unemployment situation. He also agrees that changes in technology call for a transformation of the economy, but he argues that the natural changes that should come about are being suppressed.

Mason argues that capitalism goes through Kondratieff waves of approximately fifty years, during which new inventions bring forth changes in the system. He argues that the needed changes right now are being suppressed and stagnated to maintain the status quo.

  • 1790-1848: the factory system, steam and canals. Turning point the late 1820s depression. Collapse with the 1848-51 revolutions in Europe, Mexican War and Missouri compromise.
  • 1848-mid-1890s: railways, the telegraph, steamers, stable currencies. Peaked in the mid-1870s with financial crises leading to the Long Depression of 1873-96.
  • 1890s-1945: electrical engineering, the telephone, scientific management and mass production. Turning point at the end of the First World War, ending with the Great Depression.
  • Late 1940s-2008: transistors, synthetics, factory automation, nuclear power and automatic calculation. Peaked with the 1973 oil shock, followed by extended instability but no major depression.
  • In the late 1990s, overlapping the previous cycle, the initial elements of the fifth wave appear: the internet, mobile phones and information goods.

But it has stalled. And the reason it has stalled has something to do with Neoliberalism and something to do with the technology itself.

Mason argues that the fundamental shift to information technologies:

Postcapitalism is possible because of three major changes information technology has brought about in the past 25 years. First, it has reduced the need for work, blurred the edges between work and free time and loosened the relationship between work and wages. The coming wave of automation, currently stalled because our social infrastructure cannot bear the consequences, will hugely diminish the amount of work needed – not just to subsist but to provide a decent life for all.

Second, information is corroding the market’s ability to form prices correctly. That is because markets are based on scarcity while information is abundant. The system’s defence mechanism is to form monopolies – the giant tech companies – on a scale not seen in the past 200 years, yet they cannot last. By building business models and share valuations based on the capture and privatisation of all socially produced information, such firms are constructing a fragile corporate edifice at odds with the most basic need of humanity, which is to use ideas freely.

Third, we’re seeing the spontaneous rise of collaborative production: goods, services and organisations are appearing that no longer respond to the dictates of the market and the managerial hierarchy. The biggest information product in the world – Wikipedia – is made by volunteers for free, abolishing the encyclopedia business and depriving the advertising industry of an estimated $3bn a year in revenue.

Almost unnoticed, in the niches and hollows of the market system, whole swaths of economic life are beginning to move to a different rhythm. Parallel currencies, time banks, cooperatives and self-managed spaces have proliferated, barely noticed by the economics profession, and often as a direct result of the shattering of the old structures in the post-2008 crisis.

And he argues that Neoliberalism is way of holding back change:

Neoliberalism…has morphed into a system programmed to inflict recurrent catastrophic failures. Worse than that, it has broken the 200-year pattern of industrial capitalism wherein an economic crisis spurs new forms of technological innovation that benefit everybody.

That is because neoliberalism was the first economic model in 200 years the upswing of which was premised on the suppression of wages and smashing the social power and resilience of the working class. If we review the take-off periods studied by long-cycle theorists – the 1850s in Europe, the 1900s and 1950s across the globe – it was the strength of organised labour that forced entrepreneurs and corporations to stop trying to revive outdated business models through wage cuts, and to innovate their way to a new form of capitalism.

The result is that, in each upswing, we find a synthesis of automation, higher wages and higher-value consumption. Today there is no pressure from the workforce, and the technology at the centre of this innovation wave does not demand the creation of higher-consumer spending, or the re‑employment of the old workforce in new jobs. Information is a machine for grinding the price of things lower and slashing the work time needed to support life on the planet.

As a result, large parts of the business class have become neo-luddites. Faced with the possibility of creating gene-sequencing labs, they instead start coffee shops, nail bars and contract cleaning firms: the banking system, the planning system and late neoliberal culture reward above all the creator of low-value, long-hours jobs.

The end of capitalism has begun (Guardian)

This article makes a similar point, our addiction to capitalism, our insistence that private ownership is good, social ownership is bad, everyone must work to live, and let the market decide, are actually holding back progress. We’re creating work for it’s own sake, and hobbling true innovation to preserve the status quo:

Here lies the greatest obstacle to human progress — the longstanding connection between work and income. As long as everything is owned and the only way to obtain access to that which is owned is through money, and the only way to obtain money is to be born with it or through doing the bidding of someone who owns enough to do the ordering around — what humans call a “job” — then jobs can’t be eliminated. As a worker, any attempt to eliminate jobs must be fought and as a business owner, the elimination of jobs must involve walking a fine line between greater efficiency and public outcry. The elimination of vast swathes of jobs must be avoided unless seen as absolutely necessary so as to avoid angering too many people who may also be customers.

…Google wants to advance technology but at the same time, it doesn’t want to answer the questions those advancements will raise. This appears to be a clear example of a major obstacle for human progress. It’s the same likely reason companies like McDonald’s haven’t dived in with both feet to greatly automate their operations and vastly reduce their labor forces. The technology exists, but they aren’t doing it. Why?

Perhaps it’s because as long as people need jobs as their sole source of income, companies have the potential of stepping onto a public relations landmine by automating their jobs out of existence, or being seen as responsible for others doing so. Eliminating jobs also means not only cutting employees, but demand itself.

Putting humans out of work should be a public relations win, not a loss, and so mankind needs to make sure no one left without a job, for any amount of time, is ever unable to meet their most basic needs. Everyone needs a non-negotiable guarantee of income security, so that the elimination of jobs breeds not fear, but excitement. The loss of a job should be seen as an opportunity for new real choices. And so some amount of basic income should be guaranteed to everyone — universally — as a starting point upon which all can earn additional income.

Humanity Needs Universal Basic Income in Order to Stop Impeding Progress (Huffington Post)

What does barbarism look like? Well, pretty much like today.

Is there any doubt that we live under increasing barbarism? Inner-city ghettos. Shuttered factories. Abandoned small towns. Opiate addiction. Social dysfunction. Child poverty. Mass shootings. Lowered rural life expectancies. Medical debt. Permanent wars in the Middle East. Terrorist attacks. Suspension of civil liberties. Militarized police. Mass surveillance. Austerity in Europe. Bailouts. Mass unemployment. Overcrowded prisons. For-profit prisons. Tent cities. Police shakedowns. Criminalization of poverty. Debtors prisons. Offshore tax havens. Empty apartments as safe deposit boxes for absentee wealthy in major cities while ordinary workers are priced out.The race to the bottom. Four hundred Americans having as much wealth as half the workforce. Sixty-five people owning as much as the world’s poorest 3.5 billion people. And a complaint media that tells us to ignore all of it – things have never been better!

I’ve called this concept Neofeudalism. This is the alternative, where a tiny slice of people own everything, and the rest of us are rendered largely redundant in the economic order and left to fend for ourselves. The strategy boils down to this: transfer the rest of ownership of everything important to the aristocrats/oligarchs. This has been the historic norm for thousands of years, and it’s time tested and proven. Almost everyone is poor and has no important prospects or say in society. Recall Cullen Murphy’s definition of Feudalism: “a dispersal of political authority amongst a hierarchy of persons who exercise in their own interest powers normally attributed to the state.” He adds:

My worry now is that we’re moving away from this great sense of government as a public calling—if you’re thinking benignly, in the interest of efficiency, or if you’re thinking malignly, in the interest of greed—and toward something very different, something market driven. In the end it amounts to getting the government that you pay for. Not just that you’ve paid for as a people, but that you’ve paid for as individuals. It’s happening all around us, usually in the guise of some deal that’s just too good to walk away from, and it’s happening in virtually every sector of public endeavor. Even if one can make the case that privatization makes sense in this instance or that instance—or even in every instance—the effect over time is going to be that there’s no government left, that all power of one sort or another is in private hands. Ultimately the result is to bring back feudalism. And we’re well on the way to it.

In this interview with Michael Hudson, he makes a similar point:

Michael Hudson: “Well, try reading books about how England was in the thirteenth century. We’re moving, essentially, [to] Neofeudalism to make a long story short. People are going to find that instead of free government services as before, now they have to pay for them. And if they pay for these essential services–and most public services are essential, that’s why they’re in the public sector to begin with; to keep them out of the hands of monopolies—now all of the sudden the public services that were provided on a subsidized basis or freely are going to be privatized without any price regulation for it, and all of the sudden people are going to have to pay market prices that include interest charges, Wall Street underwriting charges, the cost of dividends, exorbitant management fees, bonuses for management, political contributions, buying off judges, buying off the courts, buying off the politicians to make sure that the people are not able to stop your gouging them. That’s how the system is developing.”

And Paul Craig Roberts says that We Have Entered The Looting Stage Of Capitalism (actually, we entered it back in the 1980’s in the West, and the 1970’s in Latin America):

The banks don’t want Greece to be able to service its debt, because the banks intend to use Greece’s inability to service the debt in order to loot Greece of its assets and resources and in order to roll back the social safety net put in place during the 20th century. Neoliberalism intends to reestablish feudalism—a few robber barons and many serfs: the One Percent and the 99 percent.

The way Germany sees it, the IMF is supposed to lend Greece the money with which to repay the private German banks. Then the IMF is to be repaid by forcing Greece to reduce or abolish old age pensions, reduce public services and employment, and use the revenues saved to repay the IMF.

As these amounts will be insufficient, additional austerity measures are imposed that require Greece to sell its national assets, such as public water companies and ports and protected Greek islands to foreign investors, principally the banks themselves or their major clients.

So far the so-called “creditors” have only pledged to some form of debt relief, not yet decided, beginning in 2 years. By then the younger part of the Greek population will have emigrated and will have been replaced by immigrants fleeing Washington’s Middle Eastern and African wars who will have loaded up Greece’s unfunded welfare system.

In other words, Greece is being destroyed by the EU that it so foolishly joined and trusted. The same thing is happening to Portugal and is also underway in Spain and Italy. The looting has already devoured Ireland and Latvia (and a number of Latin American countries) and is underway in Ukraine.

We’re already seeing the fallout: Dynastic wealth being essential for a decent life. No class mobility. Poverty. People consigned to a huge “precariat” and “unecessariat.” School-to-prison pipelines. Militarized police forces. Eliminationism. It’s what we’re seeing right now in inner-cities, the Rust Belt, and Appalachia. Even non-poisoned water is a luxury while the elite retreat to cities and gated communities, and much of the country is transformed into an open-air prison, where desperation drives people to addiction, murder and suicide.

Barbarism indeed.

A society that condemns huge swaths of its members to penury is a failed society. A society where all the benefits of labor accrue to a tiny elite while things get harsher for the majority is a failed society.

A comment to this Marginal Revolution article about people not moving around like economic flotsam to seek “opportunity” made this salient point:

If a permanent feature of your civilization is that a large fraction of the population must leave their communities, families, etc. in order to have a chance at the basics of life, a family, home, some measure of security, it is evidence that YOUR CIVILIZATION DOESN’T WORK!

A lot of people have looked at increasing rates of automation and unemployment/underemployment and seen that, barring a change, this is where we’re headed. The ones not affected, such as engineers and other assorted STEM graduates, will adopt a “first they came for…” mentality, as they currently have, until it is far enough along, and by then no one will be left to be able to speak out for them.

So I believe we’re at a turning point, similar to the fall of Rome and the end of feudalism. Like then, we face a collective choice: break through to the new and better system which provides technological sophistication, lowered work hours, more leisure time, self actualization, and more democracy; or the alternative leading to social unrest, lower living standards, reactionary politics, desperation, authoritarianism, and environmental collapse.

Marx believed that a socialist society could only be realized out of the superabundance created by capitalism. The superabundance would bring about contradictions that would bring about its own demise. That’s exactly what we’re seeing. It is the the abundance of capitalism that is causing its demise. Automation naturally leads to the logical conclusion that the means of production should be collectively owned, rather than owned by a small circle of elites while the rest of humanity is excluded from meaningful participating in the economy.

In any case, the last time a change of this magnitude, i.e. a civilizational shift, occurred in the West was during the fourteenth and fifteenth centuries, during which time the medieval world began to come apart and be replaced by the modern one. In his classic study of the period, The Waning of the Middle Ages, the Dutch historian Johan Huizinga depicted the time as one of depression and cultural exhaustion—like our own age, not much fun to live through. One reason for this is that the world was literally perched over an abyss, something that emerges very clearly at the end of The Tempest, by Shakespeare, written as late as 1610. What lay ahead was largely unknown, and to have to hover over an abyss for a long time is, to put it mildly, a bit of a drag. The same thing was true of the collapse of the Roman Empire, on the ruins of which the feudal system slowly arose. It is also true of our situation today, which is why the “solutions” proposed by political figures are little more than bad jokes. These people have no vision because they can’t grasp what is happening, and therefore what is required.

So it seems we will either break through to postcapitalsm the way capitalism emerged from feudalism – a resource based society, with a much more equitable distribution, worker ownership, peer-to-peer transactions, participatory economics, much less work/worksharing, non-carbonized fuel sources, and a steady state economy centered around wellness.

Or, we will fail to make a transition clinging desperately to the old system as the living standards for the majority of the world’s workers converge at a third-world poverty level while individual people control more wealth than nation-states and distribute it by whim. Where hollow states exist solely to protect wealthy interests, including a digital panopticon enforcing the status-quo, while the former middle-class is left to fend for itself in violence-wracked economic dead zones. Where the absentee owners live in seasteads and vacation in outer space while formerly-prosperous citizens live in tent cities, shantytowns, or overcrowded prisons.

The choice is ours. I’m not optimistic, although the rising tide of opposition to Neoliberalism around the world (whether voters recognize it as such or not) indicates that the future is still in flux. Marx famously said that history repeats itself, first as tragedy then as farce. Can there be any better confirmation of this than the Donald Trump candidacy?

The Impossibility of Debt-Free Money

A few additional notes on the previous post.

One issue that always arises is that of “debt-free money.” I myself have raised this issue in the past. But, as we saw in the previous post, money is debt, therefore there can be no such a thing as debt free money. Money by definition is an IOU. As we saw, money is always a credit-debt relationship, recorded on government balance sheets. That’s simply a consequence our medieval double-entry bookkeeping system. If there were no debt, then there would be no money. Since money is debt, as we saw previously, it is even possible to say there is such a thing as debt free money?

Randall Wray, one of the leading economists working in this field, says “no way.” Debt-free money is an impossibility, like a one-sided coin. He writes: “…Money is always and everywhere else an IOU…All money… is debt. It is on the liability side of issuer and asset side of holder. You cannot change that through confusing semantics.”

Wray calls proponents of debt-free money “cranks” and wrote a series of posts last year pointing out the impossibility of debt-free money. I suppose proponents of debt-free money are just as misguided as those who claim that “the debt” will mean entire nations will all be living in abject poverty in the future due to paying off all their debts (to who, Martians?)

Randy Wray: Debt-Free Money and Banana Republics (Naked Capitalism)

Randy Wray: Debt-Free Money and Banana Republics, Part II (Naked Capitalism)

Randy Wray: The Value of Redemption (Debt Free Money, Part 3) (Naked Capitalism)

Randy Wray: American Colonial Currency (Debt Free Money, Part 4) (Naked Capitalism)

Some people wonder, can we not spend money into the economy without it being somehow recorded as a government debt?

The problem is simple – adding money into the economy under the current system adds to the “national debt” which as we saw, are only interest-bearing assets recorded by the Fed. Paying off the debt merely consists of exchanging securities for dollars by transferring between accounts. Nevertheless, “fiscal conservatives” can easily handicap any government measures by demagoguery over “the debt we’ll leave to our grandchildren!!!” It’s a powerful message to the average Joe Sixpack, and its hard to counter, especially with the eye-popping numbers used in the modern U.S. economy.

In other words, can the government spend on a bunch of stuff without it being a corresponding liability somewhere on the books that gets “fiscal conservatives” all hot and bothered?

The answer appears to be no.

Wray argues that we cannot suspend the rules of accounting, and have any validity to calling what would be issued under such a system “money.” He argues that redeemability is an essential feature of money. Issuing “stuff” as wealth with no corresponding relationship to pay it back, either as a loan or thorough taxes, is not issuing money. Sure, you can use a commodity, like gold or plastic or paper, but is is not money unless it is recorded on a balance sheet somewhere, and can be used to extinguish the tax liability. For example, if you hand your jacket to a coatroom clerk and receive a token in return, it is money. Why would you just get a coatroom token with a claim on nothing? That’s not money. What use is it? Wray argues that redeemability is a key feature of any money. If we did not record this debt against the government balance sheets, there would be no tax liability to “redeem” as money.

Imagine a cloakroom that issues “debt-free” cloakroom tokens. These look just like the normal token issued by a cloakroom, but they are not debts. You can return them to the cloakroom, but you don’t get a coat. The cloakroom attendant refuses to recognize the tokens as debt. They are your assets, but not cloakroom debts.

What is a “debt-free” cloakroom token? It is a piece of plastic, a piece of cardboard, a piece of paper. It is “wealth-based”, not “debt-based”. Its value is determined by the value of the plastic, cardboard, or paper.
Imagine a sovereign that issues “debt-free” coins. They look like normal coins, but when you take them back to the exchequer, your taxes are not paid. The exchequer does not recognize them as a debt—as a promise to redeem yourself in tax payment–but rather as a bit of base metal.

Why would you want the debt-free cloakroom token? Why would you want the debt-free coin? Only for its wealth-value (whatever that might be). It is not money.

As MMT says, “taxes drive money”. If you cannot use the sovereign’s token to pay your taxes, it is nothing but a piece of paper, hazelwood stick, or metal. If you cannot redeem the token for your coat, or for the taxes you owe, why would you want it?

A “debt-free money” would not be evidence of a debt. What would it be?

Wray goes on to argue that issuing a bunch of “stuff” with no credit-debt relationship is not money. They might just as well issue bananas:

…Maybe a banana? I like bananas. If the sovereign or cloakroom attendant offered me a token banana, I’d take it. I wouldn’t worry whether I could redeem it. I’d eat it. If I weren’t hungry, I might exchange it for a newspaper at the kiosk. Maybe the news agent is hungry for a banana.

But I don’t find it useful to call bananas money. Even if I can trade them for newspapers. Bananas are not “issued”. They are cultivated, harvested, transported, marketed. They’ve got value. But they are not money. Calling bananas money is a perversion of the language.

Instead of bananas, he might have better have used cacao beans as an example. Cacao beans were commonly used as money in the Aztec Empire. Potatoes are another great example. Stable and long-lasting, potatoes have been used as medium of exchange in peasant villages. One Russian farmer even tried to create potato-backed money.

None of these are likely to help us, though. I know in Life Inc., Douglas Rushkoff describes money being created by slips issued for grain delivered to a central repository and used as money. He argues against the idea of “centralized money.”

Towns that had been in shambles since the fall of the Roman Empire and had lived under strict feudalism were finally coming into their own. This all hinged on the use of local currencies — grain receipts — through which people transacted. They were what we would now call “demurrage” currencies that were earned into existence. Towns ended up creating more value than they knew what to do with! They started investing in their infrastructure and their windmills and their water wheels; and also in their future in the form of cathedrals and other tourist attractions…The Vatican and central Rome did NOT build the cathedrals. The funds came from local currency, which was very different than money as we use it now. It was based on grain, which lost value over time. The grain would slowly rot or get eaten by rats or cost money to store, so the money needed to be spent as quickly as possible before it became devalued. And when people spend and spend and spend a lot of money, you end up with an economy that grows very quickly.

Beyond Life Inc: Talking with Douglas Rushkoff (Reality Sandwich)

As much as I enjoy Rushkoff’s work, this is one area where I think he’s way off base.

I think people are still getting hung up on the “medium of exchange” aspect. They still see dollars as being like gold coins that we use to grease exchange operations and solve the famous “double coincidence of wants” problem. As such, they can be anything, including slips of paper. But as we’ve seen, money is more than that.

Imagine if we had a “super counterfeiting” machine. It somehow defeats all the checks put in place to verify the veracity of a dollar bill, from the inks to the serial numbers to the paper. We could then issue this “money” with no corresponding debt. We would, in effect, have “debt-free money.”

I think we can see why this is wrong. Sure, we can present this at a store, and the clerk might even take it, being none the wiser. But, by just being able to crank out this “debt free” money at will, we will almost certainly cause inflation, and if we run the “super counterfeiting” machine fast enough, we would probably cause a lot of inflation. All this new “money” would be floating around, but with no limit on its creation. There is no record of it on the books. That’s why it is illegal.

Imagine if some of these bills got back to the government. How would they account for all this new money? They would probably shred it. Or, if they were so impressed by the accuracy of our new machine that they decided our new money press was worth continuing to use (essentially turning us into a mint), they would record every dollar we printed on their spreadsheets, meaning we could use them to pay our taxes as well as pay for stuff. Thus, the system would be in balance again. But we would not have “debt-free” money.

So “debt free” money is sort of like counterfeiting as far as I can tell.

[The debt-free money cranks] argue that the irrational fear of government debt is what constrains our government spending; we cannot spend enough to get the economy growing because the outstanding stock of federal government debt prevents Congress from allocating more funding…Hence the conceit is that if we found another way—printing debt-free money—to finance spending without issuing more debt, Congress would jump at the chance to spend more.

And if government would spend more, then we wouldn’t need so much private debt to keep the economy afloat. While I’m somewhat sympathetic to this view of political realities (although I do not believe Congress would start up the printing presses), the operational realities are quite different from what is imagined.

Our debt-free money folks…believe that government first receives taxes, or asks banks for loans, and then it spends. They want to avoid sending government to banks to borrow bank money, for which banks charge interest. Government then supposedly spends the bank deposits created through the bank loans, and then has to either tax or borrow more bank money to pay the interest.

But that is not true. Government cannot spend “bank money”; it can only write checks on its deposit account at its central bank. What it spends is central bank reserves. Central bank reserves are the liability of the central bank—which is a branch of government.

When Treasury sells bonds to banks, it is not borrowing bank money. Again, it cannot spend bank money so there would be no purpose in borrowing it. Banks that buy bonds must use central bank reserves to purchase them; the central bank debits bank reserves and credits the Treasury’s deposit at the central bank. The Treasury spends central bank money, the liability of the central bank. As the central bank is a branch of government, it is the government’s own IOU that the Treasury is spending.

Indeed, the only way the Treasury can spend is by writing a check on its account at its central bank. All Treasury spending takes the form of spending central bank IOUs. It is always “debt-financed” spending, using government debt.

Telling the Treasury to stop selling bonds will not stop the government from going into debt…

Wray argues that what people are really upset about is having to pay interest to the bankers on the money we issue. He argues that since debt-free money is impossible, we just need to adopt a zero interest rate policy (ZIRP) forever to solve that problem:

Debt-free stimulus, or more generally a debt-free government finance spending proposal, actually requires interest payment on debt, unless the central bank adopts a permanent policy of ZIRP. Either the Fed or the Treasury must pay interest on debt to avoid ZIRP. We can have the Fed issue the debt rather than the Treasury, but it is still debt and it still pays interest. Or we have permanent ZIRP. This is why I made the claim that all debt-free money proposals reduce to permanent ZIRP.

Wray concludes:

My point is that we use double entry book-keeping, and if “money” (however defined) is someone’s financial asset then it is another’s liability. Call it a “credit” (from the point of the view of one holding it), or a “debit” from the other’s point of view; or a debt; or a liability. What debt-free monetary cranks insist is that the money they want the government to create will show up only on the holder’s balance sheet as an asset, with no liability on anyone’s balance sheet. That is what I object to. Some argue that the Treasury, itself, treats coins as “equity”, not “debt”. Fine. Equity is on the liability side of the balance sheet. Twist and mangle the language all you want. But at least do the balance sheets correctly.

Wray argues that a lot of the proposals about “debt free” money on the table rely upon a debt-for-equity swap at some point. The debt is merely relabeled as equity–voila, no more debt! After all, if we hold “equity” in something, that sounds a lot better than holding “debt.” Wray considers this as simply a matter of semantics, and not a serious “debt free” money proposal.

Changing the terminology from “debt money” to “liability money” is of course possible. By the same token we could instead invent a definition of “debt” that excludes Treasury liabilities, too. Treasury liabilities such as bills and bonds are much like the Fed’s liabilities: both are presumably backed by the full faith and credit of the Congress and both pay interest. We could invent a new term to cover all such liabilities, replacing the usual term, which is debt. I’m open to suggestions from our wordsmiths.

Yves Smith adds:

…any financial asset is someone’s else’s financial liability. This is ever and always true…Some readers sought to depict “equity” as a way to square the circle, that they could have an asset that is not a liability to some other party or entity.

The stock you hold (if you do [own] shares) is most assuredly a liability. Go look at any corporate balance sheet. It is not on the asset side of the ledger. Equity is a residual claim on a company’s assets and the cash flows they generate. They are the most junior. Equity is an extraordinarily ambiguous legal claim, to the degree that [entrepreneurship] expert, Professor Amar Bhide at Fletcher, has long argued that it is not appropriate to be traded on an anonymous basis…

Another issue, which seems to pervade discussions about “money” is that people want “money” to be a stable store of value over time. Na ga happen, ever. Any financial asset, and money is a financial asset, is subject to all sorts of vagaries. Physical assets are no safer. That prime [coastal] real estate may be under water in 20 years. Gold has been volatile (just look at its price chart in any currency from 2008 till now) and also has different values in different settings…The desire to have money be concrete seems to be linked in many cases to the enthusiasm for gold or gold-currencies. But gold’s value isn’t enduring or fixed in any way; it’s value depends on the structure of social relations…

Like anything else, “value” is what others are willing to pay for it. After 2008, that $500,000 house was now “worth” something more like $150,000. Where did that $350,000 go? And don’t forget entropy!

Another hang-up I always hear is that money can be created “out of nothing!” But as we see, money is not a “thing,” it is a social relation, and thus has always been created out of nothing, just like a new vocabulary word (“that word was created out of nothing!”), or points on a scoreboard. The U.S. government was created “out of nothing” too–essentially pieces of paper (the Declaration of Independence, the Constitution). The corporation was created “out of nothing” as well–it’s just a legal construct with an existence on paper.

If money were not created “out of nothing,” how else could it be created? Digging stuff out of the ground? It makes a bit more sense to index it to something like fossil fuels, which provide the energy that underpins our economy. The problem is, not everything in the economy is “stuff” made from energy; some of it is services, or ideas. If you pay me for busking on the subway or cutting your hair, we really didn’t use that much more energy. And if I invent a new type of engine, that knowledge is worth at least as much as the fuel poured into it. Just the name “Coca-Cola” and the recipe is worth more than all the bottling plants and office buildings of the company all over the world. The knowledge of how to build a fire is “worth” as much as the sticks or the kindling; the labor to build a house as valuable as the materials. We need enough money for the things we wish to transact with in money, not just for the amount of concrete durable goods we can produce. Don’t forget things like insurance and futures contracts.

Besides, the banks don’t create money out of nothing; they draw on their reserve accounts (checking accounts) at the Federal Reserve. Fractional reserve banking does create more money from deposits, on the idea that not everyone will want their deposits at once. The issue here, however, is what fraction can be lent out as deposits. It currently stands at 10%. If we were to up the reserve requirements, money creation would go down. Would that be a good thing?

The interest paid to the banks is the real issue. As we saw, we cannot spend money into the economy without creating debt. But is it necessary for students to go heavily into debt to fund their education, or homeowners to go broke paying for inflated real estate prices? Do borrowers have to pay usurious credit card rates to make up for their lost incomes? As Michael Hudson has argued, the interest money paid to the banks is a net loss from the productive economy, even though we register enormous bank profits as a net gain.

By the way, that’s another thing to consider the next time you hear about how the rich got there though “hard work.” As we saw, bondholders receive additional money for holding bonds through mere keystrokes. How are they getting rich through “superior talent and hard work?” In fact, financial instruments like this are the main way people get rich over time. Keep in mind that bonds can be passed own through generations tax-free.

Another issue might be actually offering negative interest rates. This would essentially be, as I understand it, demurrage currency as mentioned above–money that loses value over time unless it is spent. Demurrage currency was another popular proposal to deal with money shortages (the “Miracle of Wörgl”). Of course, this would apply only to money kept in bank accounts, not to pieces of paper, and such a proposal might invite hoarding. This is why it’s linked to ideas to get rid of cash entirely. But is seems to me that people would just flee to some commodity not controlled by government interest rates, such as gold and silver (where there really would be a huge spike in prices).

Fear of government is the hangup here. People don’t trust governments. No cash means a record of every transaction, and governments are now pushing this to make us “safer.”

A final issue involves the issuance of bonds. As I pointed out, future generations will not only be the debtors, but also the creditors, otherwise, who would we all the money to? But I conveniently glossed over the issue of who gets the money in the future. The redistributional effects are the real concern here, not the debt per se. Wikipedia has a good summary:

  • For every dollar of debt held by the public, there is a government obligation (generally marketable Treasury securities) counted as an asset by investors. Future generations benefit to the extent these assets are passed on to them.
  • As of 2010, approximately 72% of the financial assets were held by the wealthiest 5% of the population. This presents a wealth and income distribution question, as only a fraction of the people in future generations will receive principal or interest from investments related to the debt incurred today.
  • To the extent the U.S. debt is owed to foreign investors (approximately half the “debt held by the public” during 2012), principal and interest are not directly received by U.S. heirs.
  • Higher debt levels imply higher interest payments, which create costs for future taxpayers (e.g., higher taxes, lower government benefits, higher inflation, or increased risk of fiscal crisis).
  • To the extent the borrowed funds are invested today to improve the long-term productivity of the economy and its workers, such as via useful infrastructure projects or education, future generations may benefit.
  • For every dollar of intragovernmental debt, there is an obligation to specific program recipients, generally non-marketable securities such as those held in the Social Security Trust Fund. Adjustments that reduce future deficits in these programs may also apply costs to future generations, via higher taxes or lower program spending.

National Debt of the United States (Wikipedia)

Finally, we ought to wonder where the opposition to these ideas come from. After all, if the government injects more money into the economy, won’t most of that money end up in the pockets of wealthy people–the people who own all the companies and the businesses and so forth. Won’t they be the prime beneficiaries of increased private sector spending? Why are they so diametrically opposed to these ideas, then?

This is doubly disingenuous, since there can be no doubt that the wealthy have some conception about how the money system works, otherwise they would not be wealthy. Surely they know that government funds are unlimited, or that bonds are merely savings accounts at the Fed.

I think part of it is that fact that many businesspeople need to “balance their books,” so they naturally assume the government should too. This is especially true of small business owners who have to especially worry about servicing their debts. Trying to explain to them that the government does not operate under the same rules as they do is nearly impossible. From what I’ve seen, small business owners tend to fall into a distinct personality type. They don’t like to change their minds, are type-A workaholics, see themselves as martyrs and Atlases balancing the world on their backs, have chips on their shoulders, and are overwhelmingly Republican.

The other reason is simpler, and more cynical. They are willing to sacrifice the economic well-being of the country to achieve certain goals. What goals are those? Keeping workers in fear. Pushing down wages. Abusing workers and demanding more and and more from them for less pay. Keeping unemployment high to keep workers terrified of losing their jobs.

By claiming “the government can’t crate jobs,” and portraying government spending as “waste” and government-funded activities as somehow illegitimate, they increase their own power. If we realize that the government can buy and procure whatever it needs from the private sector on our behalf, so long as those resources are on offer, including unused labor, it reduces our dependence on the plutocrats. That’s why they fundamentally hate democracy:

I have often suggested here that a key characteristic of mainstream economics is its fundamental distaste for democracy. We read it in the way in which economics pours scorn on government – even democratic government – as an automatic and inevitable problem in the achievement of efficiency, whatever that is. The anti-social bias is palpable.

Why Trump? (Real World Economics Review)

Another reason is that they hate the social safety net. They hate Social Security, hate Medicare, hate welfare. They simply hate anything that makes the lives of working people a little bit less brutal and uncertain. Simply put, they are pure sociopaths.

So they are willing to suffer, so long as we suffer more! One is reminded of the old joke about the genie who promises his rescuer one wish, but with the caveat that his wish will be granted to his enemy twice over. He asks to be beaten half to death.

As I like to point out, the people who know how the money system operates have no qualms about using it for their own benefit. Want proof? Did anyone ask how we were going to pay for the Gulf War 2? Did anyone ask how we’re going to pay for the F-35 jet fighter? I didn’t hear that on the news. Yet they constantly proclaim that the government is “broke” and we need to raise the Social Security retirement age. Were there any qualms about using the power of money creation to make bankers and investors whole? That was deemed “necessary.” Yet making our crumbling and hurting communities whole leads to outcries of “we can’t afford it!!!”

Finally, why do the rich pay more in taxes if we do not need taxes to fund spending? This is simply because of the marginal worth of money. The wealthy will not notice the money removed from their accounts to the same extent people living closer to subsistence will.

In fact, much of their “wealth” is sitting idle and unproductive, doing nothing more than increasing the prices for housing and rare artwork. Recall that taxes are to remove purchasing power so that there is room for government spending. It makes sense to remove “unproductive” wealth. Salaries are almost all spent on necessities. On the other hand “unearned” wealth sits idle most of the time. Despite the propaganda that all of this money fuels investments that put us all to work, it is clear that this is not happening, and that there is far more money than is needed to invest in real productive activities. That’s should be removed as taxes to make room for government activity which really would invest in productive things, like a smart grid, new school buildings, or intercontinental high-speed rail.

Since we do not to tax to raise the funds we need, it is our choice what to tax. In our system, we tax earned wealth higher than unearned wealth! This is crazy!

Evidence from the social sciences demonstrates that beyond a certain income threshold, people’s sense of well-being depends much more on their relative purchasing power than on how much they spend in absolute terms. If top tax rates were a little higher, all homes would be a little smaller, all cars a little less expensive, all diamonds a little more modest and all celebrations a little less costly. The standards that define “special” would adjust accordingly, leaving most successful people quite satisfied.

Are You Successful? If So, You’ve Already Won the Lottery (New York Times)