The Nature of Unemployment

While doing some research on History Stack Exchange, I came across this answer concerning unemployment, and I thought it was relevant to share here:

There is no such thing as a “labor shortage”. “Labor Shortage” is just a propaganda term used by employers who are trying to find some excuse to pay less.

For example, many manufacturers complain that there is a “shortage” of machinists. What this means is that they would like to pay machinists $10 an hour and, surprise, surprise, no machinist wants to work for $10 an hour. If the manufacturer offered $100 an hour, he would have machinists coming out of his ears. He would have machinists lining up at his front door wanting to work for him. He would have machinists flying from all over the world to work at his factory.
Likewise, employees use the same political language. They say there is a “job shortage”. Of course, there is no job shortage. If you are willing to work for $5 an hour you will find hundreds of employers willing to hire you. In fact, for $5 an hour * I * will hire you.

There is no such thing “labor shortages” and “job shortages”. They are just made up terms used by people for political purposes.

https://history.stackexchange.com/a/12977

That’s an interesting take on it. Of course, there might be a true labor shortage if there literally weren’t enough people to keep society running, in which case we would have zero unemployment. This would be an “all hands on deck” situation where everyone’s labor is required simply to survive.

Another phrase you’ll often hear is that we need to import people to the jobs “Americans won’t do.” Well, they would do them if you paid them well enough. The fact is, this is just an excuse by employers to keep wages low.

Another exchange clarifies the point:

I think he meant labour shortage in the sense that there were actually more available jobs than workers. – Saal Hardali May 27 ’14 at 17:49

You don’t seem to get it. There are an infinite “number of jobs”. If you and your friends agree to work for me for 25 cents an hour I will hire you all, even if you have a thousand friends. I just “created” 1000 jobs instantly. You seem to have the erroneous idea that “jobs” are some kind of fixed commodity. A “job” is just some guy willing to pay some other guy to do something. – Tyler Durden May 27 ’14 at 18:08

Another question asks whether there was unemployment in ancient Rome. The commenter answers that what we think of as “unemployment” was not relevant to earlier pre-capitalist societies::

The modern definition of unemployed is “having looked for work recently”. I’m not entirely sure that definition is appropriate for Rome. Modern Western Liberal Democracy is organized around the notion that “companies” provide employment, and that people seek employment. Unemployment results in a dramatic decline in economic and social status.

Although there were workshops in Rome, and there were teams that organized to perform tasks that no individual could, I’m not aware of anything that resembles the modern limited liability corporation. Roman politics and economics were based more on relationships than on companies. Romans belonged to a family, and to a tribe, and usually to some kind of patron/client relationship. Depending on their social class, they may have also belonged to one or more social organizations (e.g. burial society). If someone wanted to work, they would rely on these connections to find them employment. “Unemployment” didn’t really result in the kind of economic and social decline we find today because these social bonds provided a safety net. If for some reason you were isolated from your social network, that might be a definition similar to “unemployed”, but there were mechanisms (adoption, social organizations, etc.) that made the social networks fairly resilient.

https://history.stackexchange.com/a/12821

There is no unemployment in foraging societies either, for example. Unemployment presumes a market society where we must earn wages or some sort of other income to survive. The wealthy rely on passive income from investments; the rest of us have to sell our labor. And despite the insistence of the “financial independence” crowd (Mr. Money Mustache, et. al.), is is not possible for all members of society to live off of passive income. It also assumes that we have enough surplus in the first place to invest in passive-income generating schemes, which most of us do not by design. We can’t all be six-figure software engineers (in which case, software engineers would not worth very much).

What brought this to mind was this discussion with Warren Mosler over MMT’s counter-intuitive idea that unemployment is actually created by governments, and the unemployment rate is always a policy choice. In other words, it is not like a hurricane or a fire that is out of our control. It is a human-created phenomenon. Here is Mosler explaining some important aspects of the job market:

[15:41] “The labor market is not a fair game, with or without unemployment, because people have to work to eat. Business only hires if they can make a certain return on equity that they think is a good deal, otherwise they don’t hire. Nothing bad happens to them if they don’t hire. And so mainstream, elementary game theory will tell you this is not a fair game, and so you’re going to expect real wages to gravitate towards subsistence levels, whatever that is, unless there’s some support for labor.”

“Now, we used to have a lot of support for labor with labor unions, and then in the 1980’s they were all broken, and that’s when the wedge started being driven between productivity and labor, where the productivity kept going up, but everything started going to profits instead of wages. It’s pretty clear in the data that that’s what happened, because labor lost its support…The principle is that real wages are going to stagnate near subsistence unless you do something to support them because its not a fair game.

“You could have unemployment down to everybody’s got a job except this one last guy who’s unemployed, and then he sees a job offer. Well, he’s got two choices—take the job or his family can’t eat. It’s not like all these other people have jobs so I can demand more money. You look at his position—he’s not in any better position because everybody else has a job. So it’s absolutely not a fair game.

So it shouldn’t be any surprise that wages aren’t going anywhere, even with unemployment coming down. The Philips curve doesn’t seem to be working the way some have suggested…which says as that as you get towards lower and lower unemployment wages will go up and up. It’s just not happening, and that’s why.”

This seems to be lost on nearly all economists, who are stumped by the fact that wages aren’t rising, even in the face of “full” employment. But why would they?

The economy may be booming, but nearly half of Americans can’t make ends meet (L.A. Times)

The fall in those wages has alarmed some economists, who say paychecks should be getting fatter at a time when unemployment is low and businesses are hiring. “This is odd and remarkable,” said Steven Kyle, an economist at Cornell University. “You would not normally see this kind of thing unless there were some kind of external shock, like a bad hurricane season, but we haven’t had that.”

The falling wages promise to exacerbate historic levels of U.S. inequality. Within the labor force, it means workers who were already making less are falling further behind. And if private laborers as a whole are seeing their earnings flatten while the economy as a whole grows at an annual rate of more than 2 percent, that means the gains are going almost exclusively to people already at the top of the economic ladder, economists say

For the biggest group of American workers, wages aren’t just flat. They’re falling. (Washington Post)

Then Mosler explains the basics about why unemployment is an artificial creation of the state, rather than a “natural” phenomenon. In doing so, he explains the origin of money, and what the public debt really is—the money supply:

[26:20] “The other critically important contribution of Modern Monetary Theory is that the cause of unemployment, by design, is taxation…The monetary circuit theory begins with businesses borrowing money to hire people. MMT says, no, the money story begins before then. Why is anybody working for this money to begin with? Where does the money story start? It starts with a government trying to provision itself.

“We show examples like when the British colonized Ghana. They wanted to grow coffee there. How do you do it? What you have is a state—the British at the time—that wanted to move resources, which was human labor, from whatever these people were doing in Ghana before they got there in a non-monetary society. They wanted to get them into the coffee fields…”

“What the British did was they implemented a tax. They started a new currency—let’s call it the crown—and so they offered crowns for people who wanted to come work in the coffee field. But nobody wanted to work for crowns, nobody had ever heard of it; there’s no reason to give up hunting and fishing and taking care of the children to go down to the coffee fields and pick coffee for this crown thing…So what they did was, they implemented a hut tax. They all lived in these grass huts. They said there’s going be a ten crown a month tax on every hut, and if the hut doesn’t pay its tax, we’re going to go burn it down. They had the military.”

“So now they’ve created this tax liability – everybody has to pay 10 crowns a month or get your house burned down. And so now they’ve created something which didn’t exist before-that’s people looking for paid work in a currency, which is what we call unemployment. Unemployment is not people looking for volunteer work for the American Cancer Society who can’t get a job — it’s people who need money. And it’s created by taxation. In a non-monetary society where you don’t have monetary taxation, there’s no unemployment as we know it. There can’t be. It’s just not applicable.”

And so the taxation, by design, is there to create people who need the currency for the further purpose of provisioning the government — in this case, provisioning the British with labor in their coffee fields. They would then have all these people showing up looking for work in the coffee fields, and now they could hire them and pay in crowns because the people need it to pay the tax. They understood that they had to get paid first before they could pay the tax. The British would spend first and then collect the tax. And, of course, the British would always spend more than they collected, because people would earn the money first, and they would earn more than was needed to pay the tax normally…”

So the British always ran a deficit; they always spent more than they collected, and those extra crowns they spent were called the money supply. Those were the crowns people had in their pockets or in their homes, or the merchants would have them in their shops, and they all knew that the British would spend more than they collected, and that’s where the money supply came from, and that spending more than you collect is called deficit spending, and the amount that you spend that more than you collect is called the public debt, and they all knew the public debt was the money supply, as they casually called it back then. Today we’ve lost sight of that.”

We have twenty trillion of public debt; what is it? It’s not wrong to define it as the money supply for the economy. If the government has spent twenty trillion more than they’ve taxed, and those dollars sit out there in bank accounts, until they get used to pay taxes. So the twenty trillion are the dollars spent by the government that haven’t yet been used to pay taxes. That’s our public debt, and that’s all it is.

The money story starts with the government trying to provision itself, which is very different form the mainstream story.

I did some research into the British efforts in Ghana. What Mosler stated above is confirmed on the BBC’s own Web site:

One of the central pillars of colonisation was tax. The European powers did not want Africa to be a drain on their treasuries, and they wanted the colonies to pay their own way. They also wanted people to enter into the cash economy. Taxation was a way of driving people into working for money.

The competence of a French colonial official might often be measured by how much tax he was able to collect. This could be in the form of a poll tax or a tax on homes. For the ordinary people, especially those who were not earning money through labour or selling goods, taxation was an intolerable burden. Resentment turned to anger in many parts of Africa…

The Story of Africa (BBC)

Here is some more detail about the British and French colonial activities in West Africa: 8: Colonial Rule in West Africa (WASSCE History Textbook)

So the libertarians are partly right where they say that taxes are imposed by state violence. Where they fall down is the fact that these were effectively unmonetized traditional societies before state violence, and not barter economies like Adam Smith imagined. International markets destroyed these societies; they were not an integral part of them, except as supplemental places of surplus exchange. It was the violence itself that created the markets of which libertarians are so deliriously enamored!

They were also created by law. The competitive labor market in Britain was established in 1834, before which, industrial capitalism as a social system did not exist. What Britain did internally it later did externally.

Colonialism and hut taxes destroyed the traditional provisioning methods of these societies. Rather than the traditional subsistence agriculture which had always fed the people, the colonizers wanted farmers to grow cash crops for export. This meant that food producers were now dependent upon the money gained from selling that crop to buy whatever else they needed, including food. And the amount of money they gained from that crop was entirely determined by distant global commodity markets over which they had no control.

Sometimes people wonder how it is that a country like Côte d’Ivoire can produce a nonedible crop such as cocoa but at the same time have difficulty feeding its people. The answer to this question involves two factors: colonialism and the introduction of cash crops.

The European colonial powers in sub-Saharan Africa, most notably France and Britain, expanded indigenous agriculture to include cash crops geared to the wants of European consumers and industries. The production of these cash crops for export depended upon plantation and sharecropper systems. Britain organized the commercial production of cocoa in Ghana, wool and coffee in Kenya, and tea in Zimbabwe. France arranged the production of peanuts in Senegal and Mali, and cocoa and bananas in Côte d’Ivoire.

The economic shift toward cash crops significantly decreased the production of goods for local food needs and at the same time destroyed indigenous handicraft industries.

The kingdom of Bugunda, in what has been Uganda since 1894, provides a good example. Once Bugundan peasants were forced by British colonists to produce cotton and coffee for export, the local barkcloth and pottery crafts disappeared. Likewise, people began working in mines, fields, and plantations for export production in order to pay household or hut taxes and retain access to land. As a consequence, indigenous societies lost cultural knowledge and agricultural production for local food needs declined. Indigenous labor and resources were used to sustain and develop European urban and industrial needs.

Child Labor in Sub-Saharan Africa, by Loretta Elizabeth Bass p. 32

So the “staving African” and “starving Indian” stereotypes were a product of the creation of Market society, and not natural features of their daily existence, and certainly not due to “low IQ” as the Alt-Right race fetishists would have it. The “poverty line” used by international agencies is exclusively determined by the cash income earned by people in these post-colonial economies. The fact that there was no poverty line before colonialism is always ignored. Today, the raising of the poverty line in developing countries is used as the primary defense of Neoliberalism by its supporters.

Capitalist logic defines poverty in strict monetary terms, such as the poverty line, in which people don’t possess enough money to purchase basic goods from the market. In this way, capitalism not only makes people dependent on the market for survival, but also does not acknowledge alternative factors which contribute to human wellbeing, such as health, education, affection, the environment, or life in the community.

The Obsolescence of Capitalism (Medium)

Later, marketing boards were introduced to deal with the random price fluctuations that were the cause of so much misery:

The extraction of the agricultural surplus for urban/industrial development has been a common objective of both colonial and postindependence rule. Colonial authorities imposed various taxes (head taxes, hut taxes) and compulsory planting of selecting export crops to stimulate the production of export crops and to capture the agricultural surplus. Shortly after World War II, the British colonial government introduced marketing boards in their East and West African colonies following the relatively successful record of marketing boards in Australia and New Zealand since the 1930s. The objective of the marketing boards was to stabilize producer prices and foreign exchange earnings and to reduce interseasonal price movements.

In the 1960s and the 1970s, numerous African governments introduced grain boards to control producer prices and food grains and to channel food to the urban centers. Boards usually accumulate and carry stocks to mitigate both intra- and inter-annucal flucturations in price and supply, and develop distribution systems to facilitate the transfer of grain from surplus to deficit regions.

A Survey of Agricultural Economics Literature Volume 4; edited by Lee R. Martin pp. 44-45

A lot of MMT’s recommendations are about creating a “marketing board” for jobs—a “job board” for society was it were, that would stabilize prices and demand for the commodity called “labor”. These would provide ways for people to earn the money that market society requires as a condition of survival rather than leaving it up to the “free” market, which has devastated so many communities across the world.

ADDENDUM: This is tangential, but one of the comments I sometimes see in discussions surrounding economics is something on the order of, “capitalism has always existed…”

Um, no. This is an incredibly ignorant statement, and oblivious to economic history. Yet it’s surprising how many people seem to believe it, or toss it off as if were some sort of obvious statement. It’s only possible if we define capitalism so broadly as to lose all meaning of the term. I thought this comment to an article at the Guardian did a good job of illustrating what’s wrong with this kind of reasoning:

Jesus. Capitalism involves people thinking rationally about their self interest therefore all instances of people thinking rationally about their self interest are engaging in capitalist modes of though.

Football is a sport that involves players running therefore anyone who is running is a football player.

Christmas is a religious festival marked by people exchanging gifts therefore whenever people exchange gifts they are celebrating Christmas.

Demographics Redux

A while back, I wondered if the low unemployment rate was down to simple demographics.

The reason I thought that was this chart:

Look at that peak. The peak plateaus from what I can tell, about 1958-1963. It then falls off a cliff and bottoms out around the year I was born – 1973, and never recovers, despite a very slight uptick in the late 1980’s (the “echo boom”)

While It’s harder to find data for other countries, here’s Canada. It appears to bottom out in the late nineteen-eighties:

In the U.K. it was more of a bactrian instead of dromedary hump, possibly due to the rationing years. But the cliff still occurs at approximately the same time:

Wikipedia has more data on it: Mid-twentieth century baby boom.

It notes that the baby boom was the strongest in Australia and New Zealand, which I didn’t know. It notes that in Europe, it was the strongest in France and Austria, and weakest in Southern Europe. It includes this chart for the United States:

Someone born in 1963 would be 1963 + 2020 = 57. That’s the youngest cohort. The oldest would be those born about 1947. 1947 + 2020 = 73. 55-65 is prime retirement age.

Note that we’re also hearing about how the stock market—where many retirement savings are invested—is at all-time highs. This puts retirement in reach for many baby Boomers.

This means that the people at the bottom of the trough would be my age and younger – 47. Again, note that while it increases slightly, the birth rate never recovers.

Now, I’m told that these are supposedly my “peak” working years. That is, workers in my age range are desirable – not too old, but old enough to acquire experience. But there are hell of a lot less of us than there have been in the very recent past!

That’s before you consider the demographic effects of increased mortality and incarceration which took such a huge toll on people who became adults after the sharp turn to the Right that began with Reagan in 1980. The “deaths of despair” began increasing after the year 2000. That means a lot of people are simply “missing” from the work force due to the tragedies of modern life. I’ve seen a heartbreaking number of people around me dying before their time–people in their thirties, forties and fifties.

When I first posited the idea, some readers had objections to it, and they made very good points. But I still thought that demographics must have some sort of impact, given the charts, above.

What brought this back to my attention was this article posted at TYWKIWDBI, which deals specifically with Minnesota, but is also relevant to the U.S more generally:

The Minnesota economy will also be squeezed as the last baby boomers retire in the decade. The 3 million-person labor force will essentially stop growing in the first five years of the 2020s, demographers say, and pick up only slightly after that.

This leveling off is already being felt across the state. Job vacancies have outnumbered the unemployed in Minnesota for two years. Businesses, governments and ordinary people find it’s harder to get things done. Hiring is especially challenging at restaurants, factories, schools and hospitals. Things aren’t delivered on time.

Such difficulties are mainly seen as effects from an economic upturn that, having started after the 2008-09 recession, has lasted longer than any other. But they’re also a product of the less-understood slowing of population growth…

This pattern is projected to continue into the 2030s and 2040s. There were so many baby boomers that their deaths from old age will offset the number of people being born or immigrating. By 2034, the Census Bureau says there will be more Americans over 65 than under 18. Similar challenges exist around the world. As populations become larger, it’s harder to sustain previous high rates of growth.

Population trends (TYWKIWDBI)

Which confirms the observations I made back then.

The precedent for the overall size of the economy has been set by the Baby Boom. Economies do not like to shrink, if for no other reason than to generate sufficient growth to pay back past loans. Thus, employers will continue to search for enough employees to keep the economy the size it was during the Boomer years with a shrinking pool of workers.

That’s excellent news for us workers, as it places a modicum of power back in our hands instead of being totally on the side of employers. There are the headwinds of automation and globalization to contend with, of course, complicating the situation. But if there is less competition for jobs, perhaps colleges will not be able to turn entire generations of Americans into indentured servants. They will lose their role as guardians and tollbooths to a moderately comfortable middle-class life, which would be a positive development, indeed.

This will, of course, be framed as horrible, horrible in the mainstream media, which is owned by major corporations and run for their benefit. Of course, the reason the media will declare this as a very serious threat is precisely because it benefits workers over capital and threatens to raise wages for workers–a process which is so far being fiercely resisted by big business.

There will be urgent and persistent calls for increased immigration in the mainstream corporate media, especially if there is a trend of rising wages. While Trump’s immigration policies are barbaric, if the average American sees the benefits of a tight labor market, Trump will (unfortunately) remain popular. the Left has really shot themselves in the foot by encouraging mass immigration for the past several decades, which decimated what used to be their base of working-class people, as the chart above shows. Instead, they counted on support from a small niche demographic of wealthy, upper-class urban professionals who did not have to compete with immigrants and benefited from the low wages in the service sector.

That came around to bite them. That’s not enough to win. Immigration was a wedge here in the States, and we saw it as a major wedge in the most recent U.K. election which gutted the Labour party. Both ostensibly “leftist” parties paid the price for abandoning their working-class constituencies by embracing the globalism touted by what’s often been termed the “professional managerial class” (PMC).

It should also be noted that recessions generally take a decade to shake out “naturally” that is, without the appropriate Keynesian counter-stimulus. Since the meltdown began in 2008; 2018 would be when we would expect the economy to start recovering in earnest, and this is pretty much what occurred. Again, unfortunately this occurred when Trump was in office. Of course, he’ll tout his tax cuts, but there is zero evidence that this has had any effect besides enriching the donor class. The quality of the new jobs is another matter as well, but that’s for another time.

So natural economic cycles have joined with demographics in the U.S. to encourage a relatively favorable economy for average people, at least for now. Trump will run out in front of the parade and claim he is leading it. The challenge for the rest of us it to ensure that the means of preventing rising wages and worker empowerment employed by corporations will not be effective. That will give us some ability to make things better in the future.

Incidentally, the population rate in the U.S. continues to decline, most likely because the demise of the middle class: US has slowest population growth rate in a century as births decline (The Guardian)

Housekeeping Notes

Over the New Year I changed the WordPress theme. I felt the old one was getting a bit stale. While I liked the banner picture up top, I felt it was taking up too much screen real estate.

I like the cleanliness and overall layout of this WordPress theme. There are couple of issues, however. For one, the font is a bit too big, but you can adjust this in your browser. If you have a scrolling wheel, CTRL+Scroll will shrink the size.

More pressingly, the new font  prevents me from bolding parts of the quoted text. Overall, I like how quoted text is broken out, but I’m used to bolding specific passages of interest. I’ve been told by readers that this is helpful. So it’s kind of big deal that I can’t do this anymore.

I’ve also noticed that subheadings are coming in at the same font as the title, instead of smaller. This can be confusing, since subheaders make it look like multiple posts.

Theoretically, if I can get access to the cascading style sheets for this theme I can tweak it. But so far I’ve been unable to figure out how to do that in WordPress. I may have to pick a different theme entirely if I can’t figure out how to tweak this one.

Anyway, apologies to readers for these issues. Hopefully I can resolve them quickly. Normally I like to write new content instead of fiddling with WordPress, but I guess I’ll have to bite the bullet and figure this stuff out. Thanks for your patience.

UPDATE: the new theme appears to correct many of these problems. Let me know if there are any other issues. Thanks!

The Legal Nature of Money

Last time we looked at the Book The Code of Capital. The big idea of that book is that what constitutes capital – wealth generating assets – is the way they are encoded by laws. Law is what flips and asset from just another idea or piece of paper into something you can make money off of. And now theoretically anything can be coded as capital – even one’s own labor.

But law is intimately involved in more than just capital. It’s also behind what constitutes money.

We think of money as some neutral thing. But underneath it lies the same system of laws and regulations that creates capital. Certain types of money take precedence over others. Certain types of money have a higher claim on real resources, and those claims are determined by the state via law.

I’ve read about that idea before, but it was reinforced by this podcast with Rohan Grey, an attorney originally from Australia who writes about the money system. Here his is on the essential legal nature of how we order and design our economy and economic transactions:

[10:01] Rohan Grey: “I sometimes think of the scene in The Matrix where he’s kind of looking at everything and [seeing] the the green lines of code [behind everything].”

“Not that I would recommend anybody go to law school, but one of the things that is good about going to law school is that it trains you to see the legal ‘code’ behind almost every issue.”

“You know, you’re walking down the street and you see something, and go, ‘wow, that’s a lawsuit waiting to happen.’ Or you see someone putting up electrical wires, and you think, ‘I wonder who approved the local council ordinance for that to happen this way,’ or something.”

“So there’s just so many different things where, to borrow a line from the poet Rilke, ‘Don’t be confused by the surfaces; in the depths, everything is law.’

And so when you think about what money is, there’s a lot of times where people get hung up on either the physicality of it–whether it’s paper, or a coin, or a blip on a computer screen. They think money is the thing that they can point to, or the thing that they can hold.”

“There are other people who think that, very crudely speaking, money is what money does. If something is a store of value; if something is a medium of exchange, it is money.”

“Whereas, I think what we would say is that money is first and foremost a *relationship*. It’s a statement of social relations between people. And those social relations are structured by law and legal dynamics.”

“To give this an example or analogy, when people talk about what property is–property isn’t the thing…If I had a house, that wouldn’t be my property. My property would be the legal title to the house. And that wouldn’t mean that I suddenly owned the house. It would mean that I had a set of legal rights, and legal claims, against other people.”

“So when we talk about the property right to a house, the first thing that comes to your mind is a house. What we’re really thinking about is the relationship between me, and everyone else in the world, with respect to the house. It’s that web of invisible filaments between me and the state, between me and you, between me and other people who inhabit the house. That web is what the property right is, not the house itself.”

“So, to take that idea to money, it doesn’t matter whether we’re taking about a coin, or a paper note, or an account entry on a balance sheet, or a computer blip on a screen. The essence of money is the legal relationships that are structured between me and other people with respect to some sort of instrument, or some sort of monetary value.”

“And that relationship can be structured in different ways. It can be a form of private credit. So if I ‘owe you one,’ in the kind of broad favor sense, that might not be money. But if I owe you *one dollar*, and you know you can take me to court over that, and then you can take that IOU that I have for you…and give it to somebody else, and that person can take me to court, than that might be money. So something that started off as a sort of personal, informal favor, can become money once it gains certain legal properties.”

“Another kind of money–or the kind of money that the MMT story starts with and thinks is the most central to modern societies where most relationships go beyond the people that you know by name…the dominant form of money is the money that the state issues and says, ‘we will accept this for any legal debt that you owe to us, or to other people.'”

“So the way that MMT boils that down for the average person, is to say, ‘taxes drive the value of government money.’ Out of all the kinds of money that could be out there; out of all the kind of private credit relationships…the most important is the one that the state says will be acceptable for its own IOUs–its own debts to itself: taxes, court judgements, criminal fees and fines, [penalties]–that kind of money has the most wide acceptability because everybody knows that at some point they might incur legal damages. They might be sued. They might have to pay taxes. They might have to pay some sort of fee or fine. And if *they* don’t have to pay, someone else is going to have to pay, which means that if they accumulate some money, at the very least they’re going to be able to offload it to somebody else who needs it.”

…There’s only two things in life that are certain: death and legal liability risk. Even if you think you’re off-grid, even if you’re living in the Canadian wilderness and hunting bison with a bow and arrow…somebody could come along and get in an altercation with you, and the next thing you know you’re getting a court summons because they’ve sued you for hurting them…So it’s almost impossible to image a world where you’re not at risk. Even if you don’t have an *actual* bill from the government due tomorrow, you’re at risk of facing a bill from the government, even if you don’t have to pay taxes.
So that idea that at some point you might find the need to pay some sort of legally-denominated debt means that you–and anybody who is in a similar postion–is going to want to make sure you have access to some of the money that can pay that debt.

Which means that the best way to think about that money…is that it’s a tax credit, or that its a legal credit. And therefore, any instrument–whether it’s virtual or physical–that legally is recognized as being a tax credit, is going to have some degree of money[ness].

In Rohan’s telling, rather than money in the abstract, the fundamental social nature of money is taken into consideration. This is eliminated in standard economics curricula, which assumes everyone to be atomized strangers to everyone else, with no prior dealings.

We saw that even with “primitive money.” Earlier we looked at the essay “Primitive Money” by George Dalton. There we saw that “primitive” money isn’t used so much as a means of exchange for settling spot transactions between strangers, as it is in our culture. Rather, money is used as a means to discharge social obligations between people in a society.

Primitive money performs some of the functions of our own money, but rarely all; the conditions under which supplies are forthcoming are usually different; primitive money is used in some ways ours is not; our money is impersonal and commercial, while primitive money frequently has pedigree and personality, sacred uses, or moral and emotional connotations. Our governmental authorities control the quantity of money, but rarely is this so in primitive economies.

There are a couple of reasons why this is so. For one, there are very few “strangers” in traditional societies. For another, markets are not very important to society. They are tangential places of exchange, but they don’t order social relations, nor are hypothetically “self-adjusting” markets the sole means of resource distribution.

In our society, our social relationships tend to be structured primarily by money transactions in markets. There are exceptions of course—we still have families, after all. We can think of citizenship as another way to structure social relations between people.

But in traditional societies, social relationships are not structured around money. They are structured by other things—usually kinship. Money is simply one of the means of discharging one’s social obligations.

Some common social obligations are weddings and funerals. Bridewealth and dowries are a couple of examples. But delict and crime is another example, and one which which illustrates the social nature of money. In these cases, what constitutes payment will be determined by the authorities, and how much is required for the settlement of various offenses will also be determined by the relevant authorities. Ancient legal codes had a schedule of payments from one group to another based on the offense committed.

Relating to Rohan Grey’s argument above that the necessity of having a means of settlement with the authorities establishes the type of money that is most in demand, in many cultures what constitutes the acceptable means of settlement becomes the first type of money. In some cultures this is cattle; in others it might be shells, or metal coins, or whatever. Things than become priced in whatever that is, and a range of equivalencies are created (5 goats = 1 cow, etc.).

We’ve just abstracted so much that we’ve lost sight of this relationship.

If any means of settlement between two people or groups of people constitutes money, than we have an awful lot of different types of money. How do we differentiate them? The following are taken from a paper by Stephanie Bell entitled “The Hierarchy of Money.

In [G. F.] Knapp’s treatment, all money represents a Chartal means of payment. That is, all money is a ‘ticket’ or ‘pay-token’, which gains validity by proclamation that it will be accepted as a means of payment. These ‘tickets’ or ‘tokens’ which individuals/institutions have proclaimed acceptable as a means of payment do not become money until they have been accepted by another individual/institution.

Going back to Keynes, then, a great number of ‘things’ will answer to the ‘description’ or ‘title’ of money. That is, every plane ticket, pre-paid phone card, movie ticket, subway token, etc. is a form of Chartal money. It will, therefore, be useful to narrow our focus and to proceed with a simplified discussion of ‘the hierarchy’.

This is where the concept of a hierarchy of money comes in. And that hierarchy is once again determined by laws and legal institutions.

..a money’s place within the hierarchy depends on the degree to which it is accepted by society…

…the ‘hierarchy of money’ can be thought of as a multi-tiered pyramid where the tiers represent promises with differing degrees of acceptability. At the apex is the most acceptable or ‘ultimate’ promise. But if all promises are denominated in the same unit of account, why are some deemed more socially acceptable than others? Whose promises will be the most acceptable? And why would anyone agree to hold the relatively less acceptable promises?

The paper than goes on the list the numerous relationships structured by debt, and where they sit on the tier of money. The bottom tier consists of the debts of firms and households. The top tier consists of the debts owed to the state. The reason why the state’s debts rank higher than others is because the means of settlement with the state do not have to be converted into anything else in order to be valid:

To get business and household debts accepted, they might be made convertible into the debt of someone higher in the pyramid and may also require interest payments to compensate for the risk associated with holding less liquid assets…Unlike households and firms, state promises and certain bank promises would be accepted even if they were not convertible into anything else…Likewise, the state’s promises do not depend on convertibility into anything else…Recall that As the ‘decisive’ money of the system, both the state’s promises and banks’ promises rank high among the monies of the hierarchy…the legal obligation to pay taxes and the state’s proclamation that it will accept its own currency at state pay-offices elevate the state’s liabilities to the top of the pyramid, rendering them the promises with the highest degree of acceptability.

It concludes:

In short, not all money is created equal. Although the government, banks, firms and households can create money denominated in the social unit of account, these monies are not considered equally acceptable. Only the state, through its power to make and enforce tax laws, can issue promises that its constituents must accept if they are to avoid penalties. The general acceptability of both state and bank money derives from their usefulness in settling tax and other liabilities to the state.

What makes the capitalist system unique is that the debts between individuals can be monetized—that is converted into the state’s ultimate means of settlement, thus expanding the money supply. Again, this is entirely a creature of law. As Pistor pointed out, the state’s money unit can be used to structure horizontal relationships between individuals, and not just vertical relationships between the citizens and the state:

The test of ‘moneyness’ depends on the satisfaction of both of two conditions. First, the claim or credit is denominated in an abstract money of account. Monetary space is a sovereign space in which economic transactions (debts and prices) are denominated in a money of account. Second, the degree of moneyness is determined by the position of the claim or credit in the hierarchy of acceptability. Money is that which constitutes the means of final payment throughout the entire space defined by the money of account. Pigou’s ‘money’ was ‘proper’ not simply because it was backed by gold, but because the state pronounced the abstract money of account and established its exchange rate with gold.

A further important consideration is the process by which money is produced. Credit relations between members of a giro for the book transfer and settlement of debt were, as Innes observed, extensively used as early as Babylonian banking. However, these credit relations did not involve the creation of new money. In contrast, the capitalist monetary system’s distinctiveness is that it contains a social mechanism by which privately contracted credit relations are routinely ‘monetised’ by the linkages between the state and its creditors, the central bank, and the banking system.

Capitalist ‘credit money’ was the result of the hybridisation of the private mercantile credit instruments (‘near money’ in today’s lexicon) with the sovereign’s coinage, or public credits. The essential element is the construction of myriad private credit relations into a hierarchy of payments headed by the central or public bank which enables lending to create new deposits of ‘money’ – that is the socially valid abstract value that constitutes the means of final payment.

Credit and State Theories of Money by L. Randall Wray et. al., pp. 214-215

This is actually quite important in understanding how money not just as an abstract thing, but a way of social ordering created and reinforced by the state. Thus, you cannot have a market economy without a very specific set of laws and legal institutions established by states. And since the state is intimately involved, it makes no sense to argue that the state should somehow “get out of the way” of the market relations it established in the first place through laws, as libertarians argue for.

Christmas used to be just the way we lived every day

I’ve been studying a lot of history, and what I’ve read over the past few years has led me to the conclusion that the ideals we associate with the Holidays here in the Anglo-Saxon world—spending time with our loved ones, taking a break from our labors, feasting, singing, dancing, and reveling; helping the poor, lonely and downtrodden; charity, fellowship and brotherhood; putting aside conflict and working for peace; cooperation; open-handed generosity; and just basically celebrating human-centered values….

…These were one just the way we acted 365 days a year.

In other words, before Capitalism, Christmas was year round.

Once upon a time, we all lived in gift economies. This was what “economic” behavior consisted of, not buying and selling with gold coins in impersonal markets, and certainly not trying to “profit” from the people in your community whom lived and worked with every day. This fact has been conclusively demonstrated by anthropology.

At Christmas, we revert to this atavistic gift-giving economy, with only conscience and sentiment compelling our behavior rather than necessity or rationality. It is not our instinctive nature to “truck and barter” as Adam Smith had it; it is our nature to be reciprocal, as even lesser primates demonstrate. We do not like to be only receivers; we like to be givers as well. Of course, we so today in the context of a wider capitalist economy (we still buy our presents from corporations, by and large). But the fact that we mark out a special time to revert to gift-giving is fascinating, and tells us something, I think. If there is some “natural” economic behavior based in human nature, then I believe this must be it.

Before the advent of Capitalism, European society was organized around the values promoted by the Catholic church. Of course, these were often honored far more in the breach than in the observance. Men aren’t angels, after all. But this was seen as the ideal for human society and human behavior, even if it was practically unattainable due to our fallen nature. Our fellow Christians were our brothers, and even charging interest on loans was forbidden.

Now, the ideal for human society—its lodestar, if you will—is making money, consumerism, and maximizing stock valuations and the Gross Domestic Product.

This was the “disembedding” of the economy from human-centered social values that I’ve talked about so often based on the ideas of Karl Polanyi. What became recast as “economic” behavior became permanently divorced from the moral order or pro-social behavior. Activities that would have once been looked down as immoral and sociopathic upon became celebrated above all others (such as raising the price of essential medicine for sick people). There once was such a thing as a moral economy.

Now we were expected to behave according to the cold, hard calculus of market logic; that is, rationally, selfishly and hedonistically. What was good for me was paramount; what was good for thee—or for the society—was not, even if some pseudo-philosophers like Bernard de Mandeville insisted that they were actually one in the same.

This, then, became the ideal, not Christian charity or brotherhood. Even more extraordinarily, such behavior became recast as man’s “natural” state—just the way humans are. And this is continually emphasized even today by evolutionary biologists who claim indisputable recourse to timeless scientific truth. Hence, any behavior which deviated from  this norm—like charity, giving stuff away, renunciation, or working less—is, by definition, “unnatural”; aberrations  marring a nominally “rational” human species. The conception of man as a social being defined in relation to his fellow man—as well as to the broader society in which he was embedded—was abandoned as a quaint, old-fashioned relic of ignorance and superstition. We were now all self-sufficient Robinson Crusoes, each washed ashore on our own private island.

And that’s where we are today. I think we’ve forgotten that it ever used to be another way.

However, during Christmas, we are granted “permission” to deviate from this behavior just a little bit—and for a limited amount of time. A “pass” as it were, to abandon the cold, hard logic of the market ethos to give stuff away, to be freely generous, to not care so much about money, to spend time in “nonproductive activities” (like caroling and decorating), and to just basically have fun without an overseer constantly looking over our shoulder (let the brandy flow!) When your neighbor invites you over for Christmas dinner because you are all alone at Christmas, they do not present you with a bill afterwards (well, some hard-core Ayn Rand supporters might, LoL).

The Holiday season allows us just a brief period to act in the ways we used to do all the time.

It’s at Christmas when we take a short break from the capitalist ethos and turn back the clock to the values we used to have the whole year round. To what it meant to be a member of a society. back to the days when the prevailing ethos was inspired by the Church instead of the Market. In fact, during Christmas, these values are even celebrated— glorifying God, childlike innocence, caring for the lonely, sick, and less fortunate, merriment and good cheer, and just basically looking after one another. In other words, acting pro-socially.

When Market society came along, it stripped away all that. People were expected to behave “economically”, and that behavior became disembedded from society. In fact, we are compelled to act this way, regardless of our most deeply-held beliefs and sentiments.

And this “economic” behavior is quite different than what preceded it. The pursuit of individual gain became paramount. In turn, this required a whole new new set of values: hoarding, a certain callousness and indifference towards poverty, a nose-to-the-grindstone work ethic, a belief in “self-reliance” and looking down upon those with less as “lazy” and “charity cases.” Society became comprised of winners and losers—a zero-sum game played out in the competitive arena of the Market.

This was a profound shift that I don’t think we’ve really come to terms with deep down even today. Markets came along and colonized every aspect of human life, so it’s no wonder we need a break from itsometimes! And the Holidays have become that break for us in the capitalist world; that reversion to pre-capitalist values. A brief glimpse into what Charles Eisenstein once referred to as “the more beautiful world our hearts know is possible.”

But, the question is, do we truly act “unnaturally” during the Holiday season and “naturally” the rest of the year, as capitalist apologists wold have it? Or is, perhaps, it the other way around?

Sadly, it only lasts during the season. Then it’s back to “normal”. It’s back to the “every man for himself” ethos. Back to “basic human nature.”

I suspect this originated with Charles Dickens. It’s no secret that Dickens was a trenchant critic of the callous society that capitalism has engendered in the Anglo-Saxon world of his time. He used his writing to appeal to the human heart in a way that only a great writer can—to appeal to the values that had been overshadowed in place of those of greed and accumulation. He reminded us all of what it meant to be human. This is most apparent in A Christmas Carol, but these values permeate his writings. Dickens lived in a time when remnants of that older tradition still survived, albeit in isolated pockets. We probably have him to thank for giving us just a brief respite from the viper pit that is normal, everyday capitalist society.

It’s truly ironic that this exists alongside the orgy of crass consumerism and consumer fetishism that Christmas has become. But then, we are a bundle of contradictions, are we not?

I would suggest that if people enjoy the feelings of warmth produced by the Holidays, as so many do (suicide rates decline dramatically during the Holiday season rather than increase), then I advise people to remember that this used to be the way we lived all the time. And really, nothing is stopping use from living that way again, at least as individuals. To make a choice. To realize—if only at the personal level—the more beautiful world that our hearts know is possible.

And in that may lie the hope of a better world for all.

Merry Christmas, Happy Holidays and a Happy New year to all my readers!

Fun Facts, December Edition

The share of wealth held by the Forbes 400 more than doubled from $1.27 trillion in 2009 to nearly $3 trillion this year (2019).

The amount of taxable income for the wealthiest group of US citizens dropped from 27% in 2009 to around 23% this year, the first time they were effectively taxed lower than the nation’s working class.

https://www.businessinsider.com/forbes-400-wealth-doubled-last-decade-as-tax-rate-fell-2019-11?utm_source=reddit.com

Top 1%: Wages up 158% since 1979
https://ritholtz.com/2019/12/top1-wages-up-158/

Just 100 companies are responsible for 71% of global emissions.
https://www.theguardian.com/sustainable-business/2017/jul/10/100-fossil-fuel-companies-investors-responsible-71-global-emissions-cdp-study-climate-change

Five Companies own 80% of all stock in S&P 500 listed companies
https://www.reddit.com/r/ABoringDystopia/comments/cko4jx/5_companies_own_80_of_all_stock_in_sp_500_listed/

The Big Five tech firms have acquired more than 600 startups in the last two decades. Google alone has acquired one company per month, on average, for the past 17 years. This amounts to a disproportionate share of all startups acquisitions in the US.
https://promarket.org/the-cost-of-america-oligopoly-problem/

The rate at which children are being admitted to U.S. emergency rooms for sexual abuse almost doubled between 2010 and 2016, new study finds. Researchers believe the rise could be related to increases in human trafficking.
https://www.physiciansweekly.com/increasing-emergency-department-admissions/

There are now 2,101 billionaires globally – up almost 40% from five years ago
https://www.cnbc.com/2019/11/08/ubs-there-are-now-2101-billionaires-globally-up-40percent-in-5-years.html

Dennis Ritchie; who invented the C programming language, co-created the Unix operating system, and is largely regarded as influencing a part of effectively every software system we use on a daily basis; died 1 week after Steve Jobs. Due to this, his death was largely overshadowed and ignored.

Ritchie and Kernighan (and the rest of the Bell Labs guys) are almost unknown to the public, despite creating the basis for modern programming and developing the foundations for all the software we use today.
https://www.reddit.com/r/todayilearned/comments/a31ce0/til_dennis_ritchie_who_invented_the_c_programming/

Note that many of the people who *actually invented* the things that made the IT revolution possible are unknown to the general public. A lot of them worked in government labs, too. Instead, we’re treated to constant invocations of “Billgatestevejobs” (or, more recently, “Jeffbezoselonmusk”) by the media and politicians.

The guy who discovered insulin wanted it to be cheaply available to everyone, so he sold the patent to a university for only $1. They sold that patent to a pharmaceutical company that now manufactures it for $3 and sells it for $370 (A 12,000% markup). But only in America, where loopholes in patent law have allowed them to keep the patent alive long after it should have expired.
https://www.treehugger.com/health/inventors-insulin-sold-their-patent-buck-why-it-so-expensive.html
Too bad Americans only vote on guns and fetuses.

The wealth of the richest 1% of Americans is close to surpassing the wealth of middle class.
https://www.bloomberg.com/news/articles/2019-11-09/one-percenters-close-to-surpassing-wealth-of-u-s-middle-class

Technically, this means there is no middle class anymore. News flash.

A 2017 study by the Economic Policy Institute (EPI) found that in the ten most populous states, an estimated 2.4 million people lose a combined $8 billion in income every year to theft by their employers. That’s nearly half as much as all other property theft combined last year—$16.4 billion according to the FBI.
https://www.gq.com/story/wage-theft

Over the course of the year, Americans collectively spent 70 billion hours behind the wheel—an eight percent increase since 2014.
https://newsroom.aaa.com/2019/02/think-youre-in-your-car-more-youre-right-americans-spend-70-billion-hours-behind-the-wheel/

In 1960, the median gross rent was $71, or $588 in today’s dollars. The current median US rent is $1,700.
https://www.businessinsider.com/more-millennials-planning-to-rent-forever-cant-afford-housing-2019-11

Fake guns are banned in the downtown Las Vegas district, but real guns are OK.
https://vegaschanges.com/2019/11/20/fake-guns-banned-in-downtown-las-vegas-district-but-real-guns-are-ok/

With his Thanksgiving vacation, President Donald Trump’s golf hobby has now cost Americans an estimated $115 million in travel and security expenses ― the equivalent of 287 years of the presidential salary he frequently boasts about not taking.
https://www.huffpost.com/entry/trump-golf-trips-millions-thanksgiving_n_5ddedbefe4b0913e6f7865cf

The blood of poor Americans is now a leading export, bigger than corn or soy
https://boingboing.net/2019/12/09/leeched.html

Puerto Rico Has Lost 4% Of Its Population
https://www.cracked.com/article_26717_5-huge-news-stories-media-straight-up-forgot-about.html

Americans take fish antibiotics because it’s cheaper than a visit to the doctor.
https://www.theguardian.com/us-news/2019/dec/11/fish-antibiotics-human-use-cheaper-than-doctor

One in every 200 people are homeless in England.
https://www.ft.com/content/092ab022-20de-11ea-b8a1-584213ee7b2b

Nearly half of US residents to be ‘obese’ in 2030; 1 in 4 to have ‘severe obesity,’
https://www.usatoday.com/story/news/nation/2019/12/19/nearly-half-u-s-residents-obese-2030-harvard-study-finds/2699318001/

Australia’s biggest forest fire has now destroyed an area seven times the size of Singapore.
https://www.smh.com.au/national/nsw/the-monster-a-short-history-of-australia-s-biggest-forest-fire-20191218-p53l4y.html

Sigurd the Mighty, a ninth-century Norse earl of Orkney, has the dubious distinction of being the only person to have been killed by an enemy he had already decapitated several hours earlier.
https://readicon.com/bizarre-viking-deaths-sigurd-the-mighty-killed-by-a-bite-from-a-severed-head/

Neoliberalism – Final Notes

The original Neoliberals worried that the hoi polloi would vote for policies which would benefit themselves, and by doing so, undermine the autonomous workings of the “free” market.

Today, we are in a place where the public goes out of their way to vote against politicians who promise them benefits like shorter working hours, protection from employer abuse, subsidized childcare and housing, and higher quality social services.

How did this happen? It’s an upside-down Bizarro world.

We saw this recently play out in the UK election this past Thursday. While on the surface, exiting a trade deal is not Neoliberal (we’ll talk about that in a minute), most of the rest of the Conservative platform is explicitly Neoliberal—i.e. built around austerity—and has been since Thatcher.

The Labour Party Manifesto, by contrast, was a full-on rejection of Neoliberalism. Just a few of their policy proposals:

  • Banning zero-hours contracts and introducing a minimum wage of £10. Workers whose shifts were cancelled at the last minute would be entitled to compensation.
  • Improving support for parents of children with disabilities.
  • Ensuring the right to join a union and and end to union-busting activities.
  • Building 100,000 new rental units available to all. Building 8,000 units specifically for those sleeping rough (i.e. the homeless)
  • Capping rent raises to the rate of inflation, and forbidding developers to sit on land that could be put to good use.
  • Free in-home care for those over 65.
  • Ending the creeping privatization of the National Health Service, and increasing NHS funding by 4.3% annually. Adding prescriptions and dental care to services covered. Hiring an additional 4,500 health care workers, and budgeting an extra £1.6b for mental health care.

Yet people overwhelmingly voted for Neoliberalism instead, handing Labour it’s biggest defeat since 1935.

I saw a video from The Guardian where Labour volunteers were out canvassing voters on the day of the election. The attitude of one formerly Labour voter summed up the problem. He was asked what he wanted to see in the Labour Manifesto that wasn’t in it. “Realism,” he answered. The next defecting Labour voter lamented, “It’s a fantastic manifesto in the sense that everything’s for free. I mean, it’s crazy!”

And that has been Neoliberalism’s greatest triumph. It’s simply become the way things are. There really is No Alternative (TINA), as Thatcher famously declared. It seems that, after such a long time, people have acquiesced to the logic of Neoliberal scarcity. A better world is *not* possible. It’s unrealistic. Don’t even contemplate it.

In other words, Neoliberalism has won the war against hope.

The rich will get richer forever, with declining living standards and immiseration for the vast majority of citizens. The most vulnerable and precarious will almost certainly not survive.

If you take a wild animal and cage it long enough, it will forget what it was like to be free. Even throwing open the cage doors and giving it an option to escape, it will choose to remain in captivity. We might express this as, forty-odd years of Neoliberalism have induced learned helplessness in the population of the industrialized world. They simply cannot accept or imagine anything else. As Mark Fisher wrote in Capitalist Realism: Is There No Alternative?:

Capitalist realism as I understand it cannot be confined to art or to the quasi-propagandistic way in which advertising functions. It is more like a pervasive atmosphere, conditioning not only the production of culture but also the regulation of work and education, and acting as a kind of invisible barrier constraining thought and action.

Capitalist Realism: Is There No Alternative? (Wikipedia)

One of Neoliberalism’s most remarkable triumphs is that it has conquered the thought patterns of the working population as we’ve seen, and yet almost nobody is consciously aware that it even exists!

Does Neoliberalism exist?

Believe it or not, one of the major debates is over whether Neoliberalism actually exists or not! There are a surprising number of people who insist that there is no such thing.

This comes from the fact that people who promote Neoliberal doctrines (which I’ve described at length) almost never refer to themselves as Neoliberal. Also, they argue that Neoliberalism doesn’t have a set series of doctrines, therefore it is not an intellectually coherent program and cannot be identified by any label. For example, see:

The Myth of Neoliberalism (Colin Talbot)

What is neoliberalism and why is it an insult? (Sky News)

Neoliberalism usually masquerades as “enlightened centrism,” and its economic ideas as “just common sense,” which stands apart from ideology. Neoliberals claim that only their opponents are ideologues.

It’s a non-ideological ideology.

Lately, some Neoliberals have taken to calling themselves “Classical English Liberals,” in response to the excesses of Neoliberalism, a term that has about as much meaning today as Mercantalist, Malthusian, or Physiocrat. This allows them to support Neoliberalism while at the same time washing their hands of its negative effects and excesses. News flash: it isn’t 1820 anymore, and we’re not debating the Corn Laws.

While there is some debate on what is or is not Neoliberal, the same can be said for literally any intellectual movement. The fact that I could write two posts about Neoliberalism, and the fact that its thought patterns can be explicitly defined and its intellectual history traced out, means that, yes, there is such a thing as Neoliberalism, whatever the people who subscribe to its doctrines and promote its ideals choose to call themselves. For more on this debate, see:

Yes, neoliberalism is a thing. Don’t let economists tell you otherwise (New Economics Foundation)

“Neoliberalism” isn’t an empty epithet. It’s a real, powerful set of ideas. (Vox)

As we’ll see below, we can very tell Neoliberals by the rhetoric they use, as well as the polices they propose.

Chris Dillow thinks that maybe calling Neoliberalism a coherent system is a bit too much, and perhaps Neoliberalism is just descriptive of what we’re living under, rather than a proscriptive set of policies. He also considers much of its “philosophy” as rationalizations for policies that make the rich richer—the actual goal of such policies:

I’m not sure about that word “system”. Maybe it attributes too much systematization to neoliberals: perhaps unplanned order would be a better phrase. But it’s better to think of neoliberalism as a bunch of arrangements (“system” if you remove connotations of design) rather than as an ideology. Ed has a point when he says that almost nobody fully subscribes to “neoliberal ideology”: free market supporters, for example, don’t defend crony capitalism.

And it’s useful to have words for economic systems. Just as we speak of “post-war Keynesianism” to mean a bundle of policies and institutions of which Keynesian fiscal policy was only a small part, so we can speak of “neoliberalism” to describe our current arrangement. It’s a better description than the horribly question-begging “late capitalism”.

This isn’t to say that “neoliberalism” has a precise meaning. There are varieties of it, just as there were of post-war Keynesianism. Think of the word as like “purple”. There are shades of purple, we’ll not agree when exactly purple turns into blue, and we’ll struggle to define the word (especially to someone who is colour-blind). But “purple” is nevertheless a useful word, and we know it when we see it.

If neoliberalism is a system rather than an ideology, what role does ideology play?

I suspect it’s that of post-fact justification…

On Neoliberalism (Stumbling and Mumbling)

The Shock Doctrine

Neoliberalism is typically implemented via shocks, either natural or artificial. I can discern three basic kinds of shocks: political, economic, or natural.

Political shocks are man-made, and include coups d’etat, military invasions, or legislative stalemates such as debt ceiling crises, for example. Economic shocks include things like sovereign debt crises, or an episode of inflation (or hyperinflation). Natural shocks include hurricanes, tsunamis, volcanic eruptions, and other natural disasters.

Initially, Neoliberalism was applied in the United States due to the debt default crisis in New York City in the 1970’s. Politicians refused to step in, and let the city die: “Ford to City: ‘Drop Dead'”, read the famous headline in the New York Daily News. The city’s debt restructuring was the rollout of Neoliberalism according to David Harvey’s book on the topic.


The next major rollout, and the one that people often use to define its start, was the military coup d’etat in Chile. Neoliberal economists from the University of Chicago—the so-called “Chicago Boys”—were tasked with restructuring Chile’s economy along Neoliberal “market-based” principles. Those opposed to this agenda found themselves persecuted and, of course, murdered.

This unleashed a familiar pattern of Neoliberalism the world over – faster economic growth combined with staggering inequality. Branko Milanovic recently wrote a good summary of this process:

Chile indeed had a remarkably good record of growth, and while in the 1960-70s it was in the middle of the Latin American league by GDP per capita, it is now the richest Latin American country…

While Chile leads Latin America in GDP per capita, it also leads it terms of inequality. In 2015, its level of income inequality was higher than in any other Latin American country except for Colombia and Honduras. It exceeded even Brazil’s proverbially high inequality. The bottom 5% of the Chilean population have an income level that is about the same as that of the bottom 5% in Mongolia. The top 2% enjoy the income level equivalent to that of the top 2% in Germany. Dortmund and poor suburbs of Ulan Bataar were thus brought together…

Such extraordinary inequality of wealth and income, combined with full marketization of many social services (water, electricity etc.), and pensions that depend on the vagaries of the stock market have long been “hidden” from foreign observers by Chile’s success in raising its GDP per capita.

Chile: The poster boy of neoliberalism who fell from grace (globalinequality)

As a result, Chile today is one of the many locations around the world where protestors are clashing with the state.

The shock which inaugurated Neoliberalism in the Anglo-Saxon world was the persistently high inflation of the 1970’s. This was brought down by the Federal Reserve raising interest rates (the cost of money) to staggeringly high rates in order to induce a recession and unemployment. It was thought that this was necessary to bring down inflation. The official who presided over this—Paul Volcker—died last week, causing many people to revisit this affair.

That ushered in monetarism, which we covered in the first part of this series. Neoliberal economists then introduced something called the “natural” rate of unemployment (NAIRU)—how many people had to be out of work for inflation to be low enough. Full employment was no longer a policy goal anymore—unemployment was, at least it’s “natural” rate.

In Iraq, the goal was to rebuild the country along Neoliberal lines after the unprovoked invasion by the United States. The thought was that Iraq could be rebuilt through privatization and the magic of the market (including selling off the oil reserves to private energy corporations). Years later, Iraq is a failed state and, like Chile, another location of major uprisings against the government.

The 2008 financial crisis caused “austerity” to be introduced in the Eurozone. Sovereign debt crisis such as Greece led to the wholesale destruction of the welfare state to pay off creditors. This has been discussed at length elsewhere. However, the removal of control over currency by any single nation-state appears to have explicitly designed to prevent Keynesian expansionary policies during a downturn, and to force a Neoliberal agenda on sovereign governments:

…[Robert] Mundell [came] up with a weapon that would blow away government rules and labor regulations…

“It’s very hard to fire workers in Europe,” he complained. His answer: the euro.

The euro would really do its work when crises hit, Mundell explained. Removing a government’s control over currency would prevent nasty little elected officials from using Keynesian monetary and fiscal juice to pull a nation out of recession.

“It puts monetary policy out of the reach of politicians,” he said. “[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business.

He cited labor laws, environmental regulations and, of course, taxes. All would be flushed away by the euro. Democracy would not be allowed to interfere with the marketplace…

Mundell explained to me that, in fact, the euro is of a piece with Reaganomics:

“Monetary discipline forces fiscal discipline on the politicians as well.”

And when crises arise, economically disarmed nations have little to do but wipe away government regulations wholesale, privatize state industries en masse, slash taxes and send the European welfare state down the drain.

The Euro is a Big Success – No Kidding (Greg Palast)

Brexit is, of course, the ultimate in “manufactured crises.” While on the the surface, it may not seem Neoliberal, there has been good evidence that the crisis has been artificially designed in order to create a chaotic environment where the British welfare state, which was established after the Second World War, can be sold off to private corporations, especially American ones. This poster to Reddit sums up the Neoliberal game plan:

Here’s the playbook that’s being slowly unfurled:

Chaotic Brexit is by design. Orderly Brexit would be too legible, too accountable, and too democratic.

1. Chaotic Brexit is a gift to oligarchs: they learned how to profit from pillaging infrastructure in a chaotic transition from the fall of the Berlin Wall and they’re hungry for more.

2. Post-Brexit, UK is no longer covered by the various EU trade agreements, including those that provide critical supplies to the NHS. Due to Brexit, tax revenues fall and the UK government is left with large budget gaps in multiple areas. Don’t worry, private equity funds will happily lend them money.

3. Tories will wait 6-9 months to let pain begin hitting more and more people as shortages in supplies and personnel degrade NHS services. Let people get angry, let them suffer from disease and pain, and let them get desperate for a scapegoat.

4. Luckily, the Tories already have several scapegoats lined up: Corbyn, the EU, what’s left of unions (particularly among the NHS staff). These will be trotted out to focus outrage on other parties and the Tories will have a great solution: let the free market fix how broken the NHS has become.

5. Enter barely-regulated US pharma companies ready and happy to provide all the supplies the NHS is suffering from shortages of at massive price hikes. With the UK and NHS’ negotiating leverage severely degraded by Brexit, popular outrage, and general devaluation of the British pound, pharma companies can charge whatever they want.

Edit: Many of you have astutely pointed out that pharmaceutical companies are highly regulated. They are not wrong. The approval, production, and ongoing post-marketing safety reporting of drugs and medical devices is highly regulated (although 510k applications in medical devices do present a serious loophole) by the FDA. Compliance with these regulations is expensive and regulations have been modified over time to guard against new forms of health risks. However, drug pricing in the USA’s “free market” is poorly regulated and this has led to price increases substantially greater than the rate of inflation for many commonly-used and generically-produced drugs, such as insulin or epinephrine auto-injectors, which has placed considerable financial strain on healthcare providers and consumers. This is the basis of the above statement regarding “barely-regulated US pharma” companies, which are currently lobbying against Medicare-For-All and Congressional efforts to rein in runaway drug prices. Remember to vote.

G_o_o_d_n_a_s_t_y comments on Boris Johnson abruptly shuts down press conference after being asked if he had spoken to Donald Trump about ruling the NHS out of a future US/UK trade deal. (Reddit)

Another Redditor adds:

The term for this is called Managed Decline, and its been Conservative policy since the Thatcher era.

– The victims of managed decline include:
– British Rail
– British Telecom
– The Gas and Electric Boards/National Grid
– Parts of the NHS
– Entire cities like Glasgow or Liverpool
– Nationalised heavy industries including coal mining, ship building and steelworking.
– The probation service, and some prison services.

Please don’t let the NHS be another notch on it’s belt.

That plan was revealed by a series of leaked documents. The British upper class looked across the Atlantic and saw the obscene fortunes made by American oligarchs presiding over a precarious, demoralized and disempowered citizenry, and desired that system much more than the European continental system, with it’s high taxes and worker protections. The United States is the goal. By removing itself from the Eurozone, Conservatives believe, they can rebuild Britain more along the American model, and therefore the remove obstacles to hollowing out society to increase their riches:

That’s not an accident, says conference presenter Lucas Chancel of the World Inequality Lab. He notes that during this period, both the U.S. and Europe were exposed to globalization and changing technology. But the U.S. experienced a much sharper rise in inequality.

Rather than simply trying to make up for unequal pay through tax-code redistribution, Europe’s economy delivers more equitable paychecks from the outset. Economists call this strategy “pre-distribution.” Chancel suggests that the Europeans accomplish this through policies and institutions that improve workers’ bargaining power — such as strong labor unions and higher minimum wages. And they push to make workers more productive, for example through broad-based access to education and health care.

Whether U.S. voters will embrace such policies is an open question. But it’s clear that rising inequality has made America exceptional — and not in a good way.

Why America’s 1-Percenters Are Richer Than Europe’s (NPR)

The natural disasters that engender Neoliberalism include Hurricane Katrina, which hit New Orleans in 2005, and hurricane Maria, which hit Puerto Rico in 2017. Rather than rebuild what was there, the “wiping out” of existing infrastructure allows redevelopment to be structured along Neoliberal principles–privatization and selling of formerly public lands and assets to privateers and cronies. The costs of rebuilding causes budget shortfalls and debt crises that can be used to foist these “cost saving” measures on an unwilling public, especially since cities and provinces do not have control over the currency they use.

Hurricanes Irma and Maria left Puerto Rico in tatters, but it would be a mistake to blame the weather for Puerto Rico’s suffering; Puerto Rico was put in harm’s way by corrupt governments doing the work of a corrupt finance sector, then abandoned by FEMA, and is now being left to rot without any real effort to rebuild its public services so that they can be privatized and used to extract rent from the island’s residents.

Puerto Rico didn’t suffer a “natural disaster”: it was looted and starved long before the hurricanes (BoingBoing)

What Neoliberalism is not.

I originally meant to illustrate Neoliberalism by contrasting it with anti-neoliberal policy proposals. One comment about the Labour Manifesto, above, was, “a complete broadside against Neoliberalism.” Yet, as we saw, this broadside failed, and Neoliberalism will continue unabated, in fact even stronger than it was before.

In the United States, only the dissident wing of the Democratic party supports anti-neoliberal proposals, particularly Bernie Sanders. Most of the other candidates, to one degree or another, are Neoliberal.

Elizabeth Warren, for example, describes herself as “capitalist to her bones,” and simply wants a “fairer” form of capitalism. In her view, if we get closer to the perfect competition envisioned by economic textbooks, she believes, the magic of the market will sort things out. In other words, the problem isn’t capitalism per se, but rather it’s that we have “bad” capitalism (crony capitalism) instead of the “good” kind. She favors an activist government to correct “distortions” in markets, not to bypass them altogether.

Andrew Yang is campaigning on the idea of a Universal Basic Income. Whether or not that is Neoliberal is debatable. I would argue that it is, however. One of UBI’s proponents was one of the major architects of Neoliberalism—Milton Friedman (as Yang himself often points out). The reason Friedman favored a UBI scheme was because it would allow for the welfare state to be scaled back, because people could just take their checks and go out shopping in markets for everything that they needed. As we’ve seen, this is consistent with Neoliberal ideology. While Yang has stated he does not wish to eliminate targeted social programs altogether, he has been coy on this point.

In other words, UBI is the ultimate voucher system.

Perhaps this can be best illustrated by a field guide to tell whether politicians are Neoliberal. Here’s a useful guide to the words and phrases Neoliberals use:

  • If a politician uses the term “affordable” they are Neoliberal.
  • If a politician talks about “choice” they are Neoliberal.
  • If a politician talks about how the “private sector” can solve important problems rather than governments, they are Neoliberal.
  • If a politician calls for means testing, they are Neoliberal.
  • If a politician calls for vouchers, they are Neoliberal.
  • If a politician talks about “public/private partnerships,” they are Neoliberal.
  • If a politician touts “private charity” as the solution to social problems, then they are Neoliberal.
  • If a politician considers the budget deficit an existential crisis and harps about the debts we owe “to our grandchildren/China,” they are Neoliberal.
  • If a politician constantly talks about all the stuff “we can’t afford” then they are Neoliberal.
  • If balancing the budget is their highest (or only) priority, they are Neoliberal.
  • If a politician talks about lowering taxes or “tax credits” they are Neoliberal.
  • If a politician constantly bashes government—particularly without evidence backing the claims—then they are Neoliberal.
  • If a politician talks in terms of “win-win,” they are probably Neoliberal.
  • If they decry “interference” in the markets, they are Neoliberal.
  • If they want to channel the public’s money into the stock market, they are Neoliberal.

It’s clear from this list that the vast, vast majority of politicians in both parties in the United States at every level are Neoliberal to their core. Nor can the outdated “Left vs. Right” paradigm determine whether a politician is Neoliberal or not.

What do politicians opposed to Neoliberalism call for? Among other things:

  • They want the government to play a more active role in managing the economy and in solving problems.
  • They call for higher taxes on capital and wealth.
  • They call for prudent restrictions on the movement of capital.
  • They call for decreasing the power of financialization by enacting a financial transaction tax.
  • They call for cracking down on tax cheats and offshore tax havens.
  • They want universal programs available to all, rather than means-testing.
  • The want the government to provide services directly to the public at cost, rather than forcing people go out and shop.
  • They call for the decommodifcation of essential goods and services (e.g. health care and education), rather than trying to make them “affordable” and forcing you to go shopping for them.
  • They call for guaranteed jobs programs.
  • They see the country’s citizens as having certain inherent rights, unlike Neoliberalism where all you are entitled to is what you can claw forth from impersonal markets. For example, Franklin Roosevelt’s “four freedoms” is exactly the opposite of Neoliberalism.

Labor is protected by law. Abuse of labor is illegal. Health care, education and child care are decommodified. Banking is tightly regulated. The foxes do not guard the henhouse. No more socialization of profit and risk, and privatization of profits and publicly-funded innovation.

Government debt numbers are not a cause for alarm. States spend freely on their citizens. Inflation is a concern, but it is not all-encompassing. Labor is protected and is able to push for increased wages that come from productivity increases. Labor is also able to push for increased leisure time from productivity gains. Note that economists like Keynes assumed this would be the case.

In fact, Social democracy can be seen as an antidote to Neoliberalism.

Karl Polanyi, who was opposed to free-market fundamentalism, defined socialism simply as, “the tendency inherent in an industrial civilization to transcend the self-regulating market by consciously subordinating it to a democratic society.”

In other words, markets are an excellent servant, but a poor master. Note that this is not incompatible with private ownership, free enterprise, or even markets in general. He just believed that markets should be suborned to the common good.  What a concept!

Too bad it’s just “too radical” and “unrealistic”.

BONUS: This is a good comment from Jeff Martin that I saw on Ian Welsh’s post. It makes an important point: the institutions of Neoliberalism were explicitly design to foreclose any alternatives. I touched on that a bit above with the creation of the Euro, but this adds some important points (emphasis mine):

Every aspect of neoliberalism either was explicitly developed so as to foreclose alternatives, or functions that way, consistently, owing to the systemic logic of its structures. Whether the free movement of capital, deindustrialization, regulatory arbitrage (whether between nations or utilizing supranational tribunals) , or (yes), mass migration, neoliberalism operates by means of blocking avenues of redress and socio-economically atomizing the people who might potentially unify to effectuate any reform. When neoliberals bang on about there being No Alternative, the significance is not merely rhetorical, and not a simple reference to the established order resisting change in the name of its prerogatives. Rather, every single neoliberal deform is intended – objectively intended, as in: this is how neoliberal policy functions in the political economy, regardless of what any individual neoliberal thinks about it between his ears – to prevent the re-erection of previously-existing social democratic bulwarks, or the erection of new ones.

Free movement of capital represents the perpetual threat of the capital strike: raise taxes too high, implement monetary policy in the interests of the people, nationalize or even regulate an industry in the public interest – in sum, do any of the things that are necessary for broad prosperity and flourishing – and capital can “stay on the sidelines” or leave the country.

The related offshoring regime is an effective veto on real union power. It is to unions what capital mobility is to the nation writ large.

And so on and so forth.

And the important thing, from my perspective, is that neoliberalism is not a monolithic thing, though it often functions as though it were; there is no Neoliberal Central, rather, neoliberalism is a series of overlapping and intermingled networks of financial and political power. It is not an emergent phenomenon of these networks; it *is* these networks. It is a thing like a hydra. And that’s why, in my opinion, attempting to confront the thing all at once, as if on an open plain of battle, with massed armies, for the Final Battle, will prove so futile. Instead, it is necessary to isolate each of the networks, as if in a free-fire cauldron, and concentrate fire on them. Proposing maximal openness, but of a different, or slightly different type, as a means of fighting neoliberalism is proposing coordinated resistance everywhere, all at once – the mother of all collective action problems.

At a level fairly close to the surface, the ideology of neoliberal reformists is, “To him who already has everything, more will be given; and from him from whom everything has already been taken, more will be required – but if we keep doing this long enough, it will be awesome.” I’m not sure it’s realist so much as magical realist, and that’s the problem.

Is Socialism Contrary to Human Nature?

In a recent column, philosophy professor Ben Burgis takes on the idea that socialism is “unnatural”, that is, somehow contrary to basic human nature:

…one of the most persistent claims of socialism’s critics…is the idea that socialism is not just impractical or even immoral but unnatural. Economist and libertarian social critic Murray Rothbard, for example, entitled a book of his essays Egalitarianism as a Revolt Against Nature. Psychology professor and science popularizer Steven Pinker breezily asserts in The Blank Slate: The Modern Denial of Human Nature that “socialism and communism…run against our selfish natures.”

The grim view of human nature painted by these critics has roots as fresh as evolutionary psychology and as ancient as the doctrine of original sin. It’s been used to motivate arguments against socialism not just by libertarians like Rothbard, neoliberal centrists like Pinker, or various right-wing critics of progressivism … but even by someone as firmly “on the left” as The Young Turks (TYT) host Cenk Uygur. When a C-SPAN caller asked Uygur about Marxism, he flatly stated that, “Human nature does not work the way that communists want it to work.” In some versions of this critique, the point is generalized from human nature to nature in general…

Socialism and Human Nature (Arc Magazine)

Burgis goes on to debunk many of these criticisms, but I’d like to take them on from a different perspective. I’d like to use some of the historical and anthropological works we’ve looked at over the past few years. To do that, we need to take a look at some of the history of thought on this issue.

Fundamentally the question being asked here is, what is human nature? To some extent, this is an impossible question to answer. As Chris Ryan writes in Civilized To Death, “To ask ‘What is human nature?’ is like asking ‘What’s the natural state of [water]?’ So much depends on conditions. Liquid, solid, gas—temperature and pressure make all the difference.” (p. 120)

While the question of human nature may be impossible to answer definitively, let’s take a trip through the beginnings of anthropology and sociology to see if we can at least shed a little light on it. This will help us to determine whether or not human nature—so far as we can determine what it is—is fundamentally incompatible with socialist ideals of liberty, solidarity and collective ownership, as mainstream economists assert.

The Father of Anthropology.

We could start with Lewis Henry Morgan. He was an attorney and senator who lived in upstate New York in the nineteenth century. At this point in history, the Native American tribes, although decimated by disease and territorial expansion, still had remnants of their original social structure intact. Morgan became adopted into the Seneca tribe, which was part of what has come down to us as the Iroquois League (although they obviously did not call themselves that). He studied their social organization from a scientific/intellectual perspective. It was one of the first attempts by a Western-European based culture to understand other cultures rather than just obliterate them.

Morgan traveled around the western United States investigating the kinship relations of various Native American tribes. For tribes further afield, he sent questionnaires to missionaries who were living with tribal cultures on other continents.

Morgan is considered to be “the father of anthropology” for his discovery that the primordial form of human social organization was not solitary, contractual or territorial, as many Enlightenment philosophers had believed, but based on kinship; that is, descent from a common ancestor, whether real or imagined. The social arrangement based around this concept was called the tribe: “Tribes were the initial social structures human created to further their survival.” (1)

The flexibility of this arrangement stems from three features. First, if you traced your lineage further back in time to a more remote ancestor, then you could enlarge the circle of kinship. Thus, even disparate tribes could be conjoined if they had a more remote ancestor in common (again, real or imaginary—often times imaginary). Second, non-blood relatives could be “adopted” into an extended family to increase the size of the tribe, as Morgan had been. Such adoption would determine their social roles. This is called fictive kinship by anthropologists. Third was the joining of previously unrelated people through the marriage partnership, called affinal relationships. The children of such a union share the genetics of both their mother and father’s families, and therefore both families are invested in the offspring’s future and become interrelated even though they were not before (what we call in-laws in English, a rather bizarre term, as laws are usually a stand-in for kinship). As Robin Dunbar notes, marriage is not about the parent’s families; it’s about the children. Through affinity, families could be joined, recombined, and enlarged. Marriage was also a major source of political alliances until relatively modern times, even in Western Europe.

The other thing of note was that kinship was not at all uniform–whom one regarded as a parent, sibling, cousin, or other relative varied greatly across tribal cultures. For example, in the Iroquois culture, one’s mother was not just one’s biological mother, but all of her sisters as well (whom we would call aunts). Similarly, one’s father was not only one’s biological father, but also all of his brothers (whom we would call uncles). In many cultures, those whom we would call cousins were regarded no differently than our brothers and sisters, with the same terms being used for both. In some cultures, one’s biological father and his family were not even considered to be related to you at all—only your mother’s relatives were! In these cultures, the major male figure in your life would be your mother’s brother instead of your biological father. In many cultures, parallel cousins (children from a parent’s same-sex sibling) were considered your relatives, but cross cousins (from an opposite-sex sibling) were not.

Such kinship relations organized the tribe’s entire social structure. They defined one’s rights, duties, debts and obligations relative to the rest of the tribe. They also dictated whom one could and could not marry (e.g. one’s cross-cousin, but not one’s sibling, with parallel cousins often being considered siblings). Relationships were defined by status–older over younger, men (in some aspects) over women, husbands over wives, parents over children, brothers over cousins, kinsmen over strangers. etc. As later writers would put it, social relations were primarily status-based rather than contract-based (whether the contract was written or implied). Government-citizen; employer-employee; business partner, and even husband-wife relationships were examples of contract-based relationships in European societies (since marriage could be dissolved and was primarily concerned with legal matters such as inheritance).

All of this was more important than geography, which did not matter at all. You could live right next door to someone and, if they were not a part of your tribe, then you had no obligatory social relationships with them. There was no such notion as “citizenship” based on living in a common circumscribed territory, or under the same nominal government. Plus, many tribes throughout history were nomadic, and thus they could not have based their shared identity on any particular piece of land or territory. Of course, in practice, most people did live closest to their tribes and kinsmen, muddying the issue.

The notion of a social contract was equally problematic. Written contracts could not work, since most tribal cultures did not use writing. And the notion of an implied contract would be impossible without a shared cultural heritage (particularly language and religion), which only existed among members of the same tribe to begin with.

And so, it was clear from the evidence that kinship was the universal and primordial form of human social organization, with all others being later inventions, sometimes much later inventions. Such arrangements had been preserved in cultures all over the world even up until Morgan’s time (the late 1800’s), and still exist in remote places all over the world today.

Morgan wrote a book about his discovery called Systems of Consanguinity and Affinity of the Human Family. He then followed it up with his best-known work, Ancient Society, in which he outlined the basic structures along which he believed all ancient societies around the world had been constituted.

Morgan’s book was hampered by its depiction of societies progressing through definite stages from Savagery to Barbarism to Civilization. Aside from the derogatory connotations of these terms, the very notion of all cultures passing through a predictable series of stages has been soundly rejected by modern anthropologists, as has the notion of some societies being more “highly evolved” than others (although this is enjoying a recrudescence thanks to the Alt-right). Social development does not have a direction, up, down or otherwise. In Morgan’s defense, however, nearly all scholars in the nineteenth century framed their arguments as a sequence of stages, probably influenced by biological evolution. This mistaken notion colored the thinking of scholars in all sorts of disciplines regardless of their political views until deep into the twentieth century.

Despite this drawback, the core of Morgan’s work—his argument that consanguineal kinship formed the basis of human social organization, with all other arrangements following later—has proven basically correct. Subsequent anthropology was built on this foundation, even if rejected some of Morgan’s other claims.

Dunbar’s Number and fractals

If we accept that kinship and tribes were the primordial form of human social organization, is there a way of knowing the size of those tribes? In other words, apropos of our discussion of kinship groupings, is there a “natural” size of social organization?

Although Morgan didn’t know it at the time, subsequent research has come up with an answer. The evolutionary psychologist Robin Dunbar had the idea that the size of the neocortex relative to the rest of the brain was roughly correlated to group size in social animals. From this, he calculated that the “mean group size” of humans would be around 148 people, often rounded up to 150. This has been called “Dunbar’s Number” in his honor. Another group of researchers arrived at a larger number, around 290 (with a median of 231)—the Bernard/Kilworth number.

Furthermore, there are a series of widening “concentric circles” of social relations, with each having a different relation to an individual. Again, this is due to the cognitive limits in the human brain.

According to the theory, the tightest circle has just five people – loved ones. That’s followed by successive layers of 15 (good friends), 50 (friends), 150 (meaningful contacts), 500 (acquaintances) and 1500 (people you can recognise). People migrate in and out of these layers, but the idea is that space has to be carved out for any new entrants.

Dunbar’s number: Why we can only maintain 150 relationships (BBC Future)

Even though the numbers differ on the amount of close, personal relationships we can maintain, we can see that there is a definite upward limit on that number. It is not 500. It is not 1,000, or 10,000, and certainly not a million. This means that there is a “natural” size limit for human social groups, based on our evolutionary heritage.

Dunbar’s number is found all throughout human social groupings, from the size of military units, to the size of Mennonite villages, to the size of small businesses, to the length of people’s Christmas card lists (back when people still did that). And while Iroquois villages could be as large as several thousand people, the longhouse—the center of village life—tended to hold between 20-90 people, consisting of several matrilineal families, each with their own space. The longest one ever excavated could hold 180 people.

According to Dunbar and many researchers he influenced, this rule of 150 remains true for early hunter-gatherer societies as well as a surprising array of modern groupings: offices, communes, factories, residential campsites, military organisations, 11th Century English villages, even Christmas card lists. Exceed 150, and a network is unlikely to last long or cohere well.

Dunbar’s number: Why we can only maintain 150 relationships (BBC Future)

Human social organization also appears to be fractal. Again, Morgan could not have known this, since the concept of fractals was only described by mathematician Benoit Mandelbrot in 1975. A fractal is a geometric figure where each part has the same statistical character as the whole. That is, self-similar patterns occurring at progressively larger and smaller scales.

The recursive (or fractal) nature of human social organization allows it to scale up and down as needed, presumably based around the Dunbar number, above. Thus, the structure of the family is basically the same as that of the clan, which is basically the same as that of the tribe, which is the same as that of the nation, which is the same as that of the confederacy; repeating the same basic structure at progressively larger scales. Another way of describing this structure is recursive, much like Russian Matryoshka dolls nesting inside each other.

Incidentally, only humans seem to capable of doing this. Even our closest animal relatives—chimpanzees and bonobos—despite being gregarious and highly social animals, cannot accomplish this sort of flexible social scaling. Language is an example of another recursive structure unique to humans, which also plays a social grooming and bonding role.

Numerous scholars in the nineteenth century noted that In the age of monarchy, rulers would commonly depict themselves as benevolent fathers, with their subjects as the children, and the kingdom being a kind of large-scale family. Even in the twentieth century, dictators who ruled over millions of people like Joseph Stalin and Mao Zedong often depicted themselves as benevolent uncles.

****

So, now we’ve limned at least a little bit of what human nature might look like. It’s based on kinship—whether real or fictive—and based around social groupings of no greater than perhaps 150-250 close relationships (what has been humorously termed the monkeysphere), repeated on progressively larger and larger scales, creating a sort of nested group of widening social circles, with different social relationships inside each circle.

By contrast, living in larger, denser environments surrounded mostly by strangers has been sometimes referred to as a Behavioral Sink. This is based on John C. Calhoun’s studies of mouse behavior in overcrowded and highly stressful environments.

The Iroquois

Morgan’s work had a huge impact in Europe, and he was cited by scholars as diverse as Charles Darwin, Sigmund Freud, and Karl Marx.

It’s that last one that especially concerns us given our topic of conversation. Morgan wrote several papers on the Iroquois system of economic organization, as well as describing it in Ancient Society.

However, it is important to note that social, economic and political relationships were not typically separated from each other in tribal cultures–all were interwoven. This characteristic of early economies was referred to by economic historian Karl Polanyi as embeddedness. Embeddedness refers to the degree that “economic” behavior (for individual pecuniary gain) is constrained by non-economic factors, whether political, religious, or social. Status in most Native American societies, for example, was not conferred by wealth, and the hoarding of wealth would have been impossible due to social pressures. In some Native American cultures (notably the Pacific Northwest), social status was conferred by giving away acquired wealth in elaborate ceremonies (potlatch). Would-be chiefs would compete to see who could give away the most, and hence gain the most prestige.

The Iroquois longhouses previously mentioned were home to several matrilineal clans–people related to each other on their mother’s side. Because of their matrilineal nature, the longhouses were collectively managed by the matriarchs (eldest women) of each clan (the Clan Mothers), who formed a Clan Mothers Council. No one went without shelter.

Iroquois villages had a system of communal land distribution–all land was owned in common by the entire village and parceled out to various clans and families to cultivate. Clans had usufructary rights, meaning they had rights to the produce generated from land that they farmed collectively, but they had no permanent ownership claims over the land itself. So long as produce was being cultivated on it, an individual or clan had rights to the plot. Once a plot was no longer cultivated, it reverted to the collective ownership of the tribe, to be redistributed as needed by the Clan Mothers Council. Thus, when land was “sold” to Europeans, the Iroquois had no understanding that they had given up rights to it permanently (hence the pejorative term, “Indian givers”). Land was considered sacred, and thus could not “belong” to any single person or family.

Agriculture was based around the “three sisters”–corn, beans and squash. Plows were not used; agriculture was slash-and burn (swidden), meaning that new plots were cleared each growing season, and worked with hoes. If useful farmland around the village became depleted, the village had to move to another location (another reason social relations could not be based around land).

Work was performed cooperatively. There was a typical gendered division of labor, with women responsible for child-rearing, planting, cultivating and harvesting crops; while men did hunting fishing, trading, building and forest management. The majority of the tribe’s goods were produced by the women. No money was used–economic exchange was conducted as a gift-based economy.

The produce of the village was stored in collective granaries in the longhouse, which each clan had access to as needed. Everyone had as much as they needed, and no one starved or went hungry.

As for political leadership, Iroquois tribes were not completely egalitarian, but were led by a sachem, what we might crudely refer to as a chief. But, critically, the office of sachem was conferred to an individual by members of the tribe via collective deliberation, and could be rescinded at any time if the sachem failed to perform adequately. And—most critically of all—the office of sachem was not hereditary. A sachem’s family did not have any special claim on the office, and it was not passed down from father to offspring, as was monarchy in Europe. Nor did the sachem have special claim to excessive wealth far greater than that of other members of his tribe.

Sachems could not issue orders or command other people to do things. They could not exert control over other members of the tribe, like a European king or dictator, or a capitalist boss or executive. There was no permanent, standing army or police force among the Iroquois, so there was no way of enforcing any orders by the sachem or anybody else. Every member of the tribe was free to do as he or she pleased, bound only by the requirements of kinship and social convention.

Among the Iroquois league, decisions were made collectively by the various representatives of the tribes, with no one tribe being able to strongarm the other ones. Here is a good description from testimony before the bureau of Indian Affairs given by one Cephas A. Watt (2):

The CHAIRMAN. Mr. Watt, you stated that you weren’t one of the regular chiefs. How are the regular chiefs selected here among the Indians?
Mr. WATT. They are elected by the clan.
The CHAIRMAN. Elected by the clan. Explain what you mean by that.
Mr. WATT. They have the clan system. There are eight clans.
The CHARIMAN. Among the Senecas?
Mr. WATT. Among the Senecas; and there are four on each side of the house, you see. The four clans here do not intermarry, which is their general rule, ad they have to go over to the other four clans to select their mates; and those clans, or clan mothers appoint the chiefs, that is, the oldest woman in the clan appoints him. Of course, these clans all follow their mother’s side, it doesn’t make any difference what the father might be–he might be a Japanese, but so long as he has an Indian mother the children are legitimate Senecas, and they share in all the usual privileges. So they select some of the clan whom you might say is “a good Indian” of the clan, as their chief. There might be 25 in that clan, and they select on of them as chief.
The CHAIRMAN. By whom is he selected; by the clan itself, or by the clan mother, you say?
Mr. WATT. Yes; by the clan mother. Of course, they all have to agree.
The CHAIRMAN. But the selection is made by the clan mother?
Mr. WATT. Yes. And then they are confirmed by the Six Nations chief, and the head chief of the Six Nations.
Mr. HARRISON. But you have to have a condolence meeting of your clan, don’t you?
Mr, WATT. Yes, they have a condolence ceremony, where they are lectures by the chiefs; admonished to be good.
Senator WHEELER. Do they always follow the admonition that they get?
Mr. WATT. Well. some of them do, but when they see that the chief himself is not living up to the requirements as to his character it is different.
The CHAIRMAN. What is the term of office of these regular chiefs?
Mr. WATT. It is supposed to be for life. That is, it is for as long as he is of–
Senator WHEELER interposing. Good behavior.
Mr. WATT. Yes.
The CHAIRMAN. And if the chief dies or resigns, a new meeting is held and a new chief is selected?
Mr. WATT. A new meeting is held an a new chief is selected.
The CHAIRMAN. I understood you to say that you were a chief of come kind here. How did you get your title of “chief”?
Mr. WATT. I haven’t been through the condolence ceremony yet, but I have been appointed by my clan mother and I have been elected, and it holds good until a condolence ceremony is held.
The CHAIRMAN. What clan do you belong to?
Mr. WATT. I don’t just understand, but I think I belong to the Heron clan.
Senator WHEELER. That is a fish clan?
Mr. WATT. Long-legged bird.

Ancient Law and Primitive Property

Now, the obvious objection to this is: sure, that’s fine for bunch of “primitive” savages running around the forests of North America, but what’s all that got to do with Europe?

It’s here where a few other scholars come into the mix. One of them based his experiences not on the natives of North America, but on India (the actual Indians).

Sir Henry Sumner Maine was a judge, legislator and legal scholar who had spent many years in British India. There he noted that Indian law was profoundly different than that of England. In India, the laws were based around something he called the “Joint Undivided Village” or the “Joint Undivided Family” which was headed by the eldest male clansman, who exercised “despotic” control over the whole family. Laws had little to do with individual behavior, contracts, or inheritance, because these were not relevant to village society.

From his studies of the legal codes of the ancient Romans, the ancient Germanic laws which had been transcribed (such as the Salic Law), and the laws of ancient Ireland (the Brehon Laws), Maine concluded that these ancient law codes could only be properly understood by the realization that these societies had all been constituted along the same basic lines as the Indian villages he had witnessed! From this he concluded that the basic unit of ancient societies was not the individual, but the extended family (ie. House or Clan):

The Family then is the type of an archaic society in all the modifications which it was capable of assuming; but the family here spoken of is not exactly the family as understood by a modern. In order to reach the ancient conception we must give to our modern ideas an important extension and an important limitation. We must look on the family as constantly enlarged by the absorption of strangers within its circle, and we must try to regard the fiction of adoption as so closely simulating the reality of kinship that neither law nor opinion makes the slightest difference between a real and an adoptive connection.

On the other hand, the persons theoretically amalgamated into a family by their common descent are practically held together by common obedience to their highest living ascendant, the father, grandfather, or great-grandfather. The patriarchal authority of a chieftain is as necessary an ingredient in the notion of the family group as the fact (or assumed fact) of its having sprung from his loins; and hence we must understand that if there be any persons who, however truly included in the brotherhood by virtue of their blood-relationship, have nevertheless de facto withdrawn themselves from the empire of its ruler, they are always, in the beginnings of law, considered as lost to the family.

It is this patriarchal aggregate—the modern family thus cut down on one side and extended on the other—which meets us on the threshold of primitive jurisprudence. Older probably than the State, the Tribe, and the House, it left traces of itself on private law long after the House and the Tribe had been forgotten, and long after consanguinity had ceased to be associated with the composition of States. It will be found to have stamped itself on all the great departments of jurisprudence, and may be detected, I think, as the true source of many of their most important and most durable characteristics. At the outset, the peculiarities of law in its most ancient state lead us irresistibly to the conclusion that it took precisely the same view of the family group which is taken of individual men by the systems of rights and duties now prevalent throughout Europe.

The Ancient Greeks and Romans, the Celts, the Germans, the Slavs—each and every one had begun as a collection of village communities where kinship defined the overall social structure and all major resources—except for minor chattels—had been owned and held in common.

In other words, very similar to what Morgan described of the Iroquois.

Maine describes a progression from the Joint Undivided Family, to the House Community, to the Village Community (his terms). At each stage, property becomes less communal and more alienable:

…The group which I have placed at the head, the Hindu Joint Family, is really a body of kinsmen, the natural and adoptive descendants of a known ancestor…so long as it lasts, it has a legal corporate existence, and exhibits, in the most perfect state, that community of proprietary enjoyment which has been so often observed…in cultivating societies of archaic type…

The House-Community, which comes next in the order of development, has been examined by M. de Laveleye, and by Mr. Patterson, in Croatia, Dalmatia, and Illyria…These House-Communities seem to me to be simply the Joint Family of the Hindus, allowed to expand itself without hindrance and settled for ages on the land. All the chief characteristics of the Hindu institution are here—the common home and common table, which are always in theory the centre of Hindu family life; the collective enjoyment of property and its administration by an elected manager.

Nevertheless, many instructive changes have begun which show how such a group modifies itself in time. The community is a community of kinsmen; but, though the common ancestry is probably to a great extent real, the tradition has become weak enough to admit of considerable artificiality being introduced into the association, as it is found at any given moment, through the absorption of strangers from outside. Meantime, the land tends to become the true basis of the group; it is recognised as of preeminent importance to its vitality, and it remains common property, while private ownership is allowed to show itself in moveables and cattle.

In the true Village-Community, the common dwelling and common table which belong alike to the Joint Family and to the House-Community, are no longer to be found. The village itself is an assemblage of houses, contained indeed within narrow limits, but composed of separate dwellings, each jealously guarded from the intrusion of a neighbour. The village lands are no longer the collective property of the community; the arable lands have been divided between the various households; the pasture lands have been partially divided; only the waste remains in common.

Thus, Maine came to the conclusion that, “We have the strongest reason for thinking that property once belonged not to individuals nor even to isolated families, but to larger societies composed on the patriarchal model;” and that “by far the most important passage in the history of Private Property is its gradual elimination from the co-ownership of kinsmen.” In addition, transfers of land were never between individuals, but between groups, and so it was far more ceremonious than the mere signing of a contract: “As the contracts and conveyances known to ancient law are contracts and conveyances to which not single individuals, but organised companies of men, are parties, they are in the highest degree ceremonious…” He found evidence of this all over Europe:

…the mode of transition from ancient to modern ownerships, obscure at best, would have been infinitely obscurer if several distinguishable forms of Village Communities had not been discovered and examined…

The chiefs of the ruder Highland clans used, it is said, to dole out food to the heads of the households under their jurisdiction at the very shortest intervals, and sometimes day by day. A periodical distribution is also made to the Sclavonian villagers of the Austrian and Turkish provinces by the elders of their body, but then it is a distribution once for all of the total produce of the year. In the Russian villages, however, the substance of the property ceases to be looked upon as indivisible, and separate proprietary claims are allowed freely to grow up, but then the progress of separation is peremptorily arrested after it has continued a certain time. In India, not only is there no indivisibility of the common fund, but separate proprietorship in parts of it may be indefinitely prolonged and may branch out into any number of derivative ownerships, the de facto partition of the stock being, however, checked by inveterate usage, and by the rule against the admission of strangers without the consent of the brotherhood.

It is not of course intended to insist that these different forms of the Village Community represent distinct stages in a process of transmutation which has been everywhere accomplished in the same manner. But, though the evidence does not warrant our going so far as this, it renders less presumptuous the conjecture that private property, in the shape in which we know it, was chiefly formed by the gradual disentanglement of the separate rights of individuals from the blended rights of a community.

Our studies in the Law of Persons seemed to show us the Family expanding into the Agnatic group of kinsmen, then the Agnatic group dissolving into separate households; lastly the household supplanted by the individual; and it is now suggested that each step in the change corresponds to an analogous alteration in the nature of Ownership.

Many remnants of this arrangement remained even in Maine’s own time. It could be seen even in Western Europe, particularly in a region called Ditmarsh, and also in Switzerland where all land was communally owned by the canton, and the cantons were united in a larger Swiss federation (similar in many ways to the Iroquois league), with no one canton being in charge of all the others. And the Swiss, like the Iroquois, had no standing army.

But the most pervasive examples came from outside Western Europe. Eastern Europe preserved such communities in something closer to their original form. Maine refers to such villages in Sclavonia and Dalmatia (what is today Croatia) and in Russia. He also refers to communities farther afield in India, the Middle East, and Java (modern day Indonesia).

The naturally organised, self-existing, Village-Community can no longer be claimed as an institution specially characteristic of the Aryan races. M. de Laveleye, following Dutch authorities, has described these communities as they are found in Java; and M. Renan has discovered them among the obscurer Semitic tribes in Northern Africa. But, wherever they have been examined, the extant examples of the group suggest the same theory of its origin [as] the Germanic village-community or Mark; ‘This lowest political unit was at first, here (i. e. in England) as elsewhere, formed of men bound together by a tie of kindred, in its first estate natural, in a later stage either of kindred natural or artificial.’

In the end, such village communities were supplanted by the feudal system in Europe. Capitalism developed out of this feudal system:

The Manor or Fief was a social group wholly based upon the possession of land…At this point the notion of common kinship has been entirely lost. The link between Lord and Vassal produced by Commendation is of quite a different kind from that produced by Consanguinity…there would have been no deadlier insult to the lord than to attribute to him a common origin with the great bulk of his tenants. Language still retains a tinge of the hatred and contempt with which the higher members of the feudal groups regarded the lower…There is, in fact, little to choose between villain, churl, miscreant, and boor.

The break-up of the feudal group, far advanced in most European countries, and complete in France and England, has brought us to the state of society in which we live. To write its course and causes would be to re-write most of modern history, economical as well as political…

Maine’s investigations were taken up by others, most notably the Belgian political economist Émile de Laveleye, who wrote a book about the subject called Primitive Property (De la Proprieté et de ses Formes Primitives). In it, he documented copious examples from every corner of the globe confirming that property was at first held in common, and only gradually did it fall under the exclusive ownership of individual families. Then, only much later does it proceed to belong to single, solitary individuals, who then claim “absolute” rights over it in perpetuity, and this process progressed the furthest in the Anglo-Saxon countries. From the introduction to Laveleye’s work by T. E. C. Leslie:

Sir Henry Maine in his lectures at the Middle Temple was, I believe, the first to lay down with respect to landed property the general proposition, afterwards repeated in his Ancient Law, that “property once belonged not to individuals, nor even to isolated families, but to larger societies.”…Sir Henry Maine’s residence for several years in India, had enabled him to collect fresh evidence from existing forms of [Hindu] property and social organization, in support of his original doctrine, that the collective ownership of the soil by communities larger than families, but held together by ties of blood or adoption, was in eastern as well as in western countries the primitive form of the ownership of the soil…To the evidence previously collected by Sir H. Maine and the Danish and German scholars already referred to, [Lavaleye] has added proofs gathered from almost every part of the globe. Ancient Greece and Rome, Medieval France, Switzerland, the Netherlands, Russia, the southern Slav countries, Java, China, part of Africa, Central America, and Peru, are among the regions laid under contribution…

The preponderance of evidence was that, in every corner of the globe, it was not private property, but collective property, that was the primordial form of resource ownership. This has been further confirmed by studies of foraging groups, among whom private property is virtually unknown.

Marx and Engels believed from such evidence that primitive societies were universally matrilineal and matriarchal (a state they called, following an earlier scholar called Bachofen, the Mutterecht, or Mother-right). It was only after societies switched to a patriarchal model, they asserted, that the communal ownership of property became overthrown by individual patriarchal families:

…this revolution – one of the most decisive ever experienced by humanity – could take place without disturbing a single one of the living members of a gens. All could remain as they were. A simple decree sufficed that in the future the offspring of the male members should remain within the gens, but that of the female should be excluded by being transferred to the gens of her father. The reckoning of descent on the female line and the matriarchal law of inheritance were thereby overthrown, and the male line of descent and the paternal law of inheritance were substituted for them.

As to how and when this revolution took place among civilized peoples, we have no knowledge. It falls entirely within prehistoric times. But that it did take place is more than sufficiently proved by the abundant traces of mother-right which have been collected, particularly by Bachofen. How easily it can be accomplished can be seen in a whole series of American Indian tribes, where it has only recently taken place and is still taking place under the influence, partly of increasing wealth and a changed mode of life (transference from forest to prairie), and partly of the moral pressure of civilization and missionaries…

Today, anthropologists tend to regard this as far too simplistic. Not all societies passed through these stages, and looking for universal stages common to all societies is futile. Each case is unique. However, there is a good argument to be made that this is a reasonable description of the progression of societies now broadly classified as Indo-European, which includes much of Europe and India, as well as those of Semitic origin—including most of the ancient Near East.

Subsequent scholarship, by Michael Hudson especially, has shown that rather than surplus-generating activities originating with individual self-starting “entrepreneurs”, such activities began in the public (temple) sector for the benefit of the community. Furthermore, non-commercial debts owed to the public sector were periodically annulled in “debt jubilees” and forfeited land was frequently returned and redistributed.

Hudson counters that [Greece and Rome]…are not actually where our financial system began, and that capitalism did not evolve from bartering, as its ideologues assert. Rather, it devolved from a more functional, sophisticated, egalitarian credit system that was sustained for two millennia in ancient Mesopotamia (now parts of Iraq, Turkey, Kuwait and Iran). Money, banking, accounting and modern business enterprise originated not with gold and private trade, but in the public sector of Sumer’s palaces and temples in the third century B.C. Because it involved credit issued by the local government rather than private loans of gold, bad debts could be periodically forgiven rather than compounding until they took the whole system down, a critical feature that allowed for its remarkable longevity.

The Key to a Sustainable Economy Is 5,000 Years Old (Truthdig)

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I think you can understand from the above why Marx was so intrigued by the accounts of the Iroquois League in Morgan’s work. The Iroquois nation was a living, breathing example of “primitive communism” in action. Marx took extensive notes on Morgan’s work. After his death, Friedrich Engels organized the notes and published them as The Origin of the Family, Private Property, and the State.

Subsequent scholarship in the late nineteenth century had confirmed that arrangements like those of the Iroquois were not the exception, but seemingly the norm all over the entire world, including Western Europe, which had begun as numerous tribal societies during the fall of the Western Roman Empire.

Thus, the idea that money and absolute private property were permanent, universal, and necessary features of the human condition was clearly contradicted by such accounts. If someone asked for an actual example of communism in action, here was something Marx and his followers could point to as an example of something very much like they were advocating to replace capitalism: collective ownership of the means of production, with economic and political decisions being made by collective deliberation among equals, cooperative labor, and everyone having access to the collective store of what was produced by the whole society. Inheritance was not bequeathed to individual offspring; rather essential resources were redistributed as needed. And leaders were elected and served for as long as they were seen to be able to perform their duties ethically. They could not pass down wealth and titles to their offspring in perpetuity (but their offspring could occupy the same office if the public so desired).

Unless one were to argue that the Iroquois and their culture were somehow unnatural, it would be impossible to deny such a thing was at least, in theory, possible. And if it was possible, the question became how best to make it happen, not whether such a thing could even exist, or whether it was somehow against human nature. As Marx and Engels concluded in Origin:

…once the gens is given as the social unit, we also see how the whole constitution of gentes, phratries, and tribes is almost necessarily bound to develop from this unit, because the development is natural. Gens, phratry, and tribe are all groups of different degrees of consanguinity, each self-contained and ordering it own affairs, but each supplementing the other. And the affairs which fall within their sphere comprise all the public affairs of barbarians of the lower stage.

When we find a people with the gens as their social unit, we may therefore also look for an organization of the tribe similar to that here described; and when there are adequate sources, as in the case of the Greeks and the Romans, we shall not only find it, but we shall also be able to convince ourselves that where the sources fail us, comparison with the American social constitution helps us over the most difficult doubts and riddles.

And a wonderful constitution it is, this gentile constitution, in all its childlike simplicity! No soldiers, no gendarmes or police, no nobles, kings, regents prefects, or judges, no prisons, no lawsuits – and everything takes its orderly course. All quarrels and disputes are settled by the whole of the community affected, by the gens or the tribe, or by the gentes among themselves; only as an extreme and exceptional measure is blood revenge threatened-and our capital punishment is nothing but blood revenge in a civilized form, with all the advantages and drawbacks of civilization.

Although there were many more matters to be settled in common than today – the household is maintained by a number of families in common, and is communistic, the land belongs to the tribe, only the small gardens are allotted provisionally to the households – yet there is not need for even a trace of our complicated administrative apparatus with all its ramifications. The decisions are taken by those concerned, and in most cases everything has been already settled by the custom of centuries. There cannot be any poor or needy – the communal household and the gens know their responsibilities toward the old, the sick, and those disabled in war. All are equal and free – the women included. There is no place yet for slaves, nor, as a rule, for the subjugation of other tribes…And what men and women such a society breeds is proved by the administration inspired in all white people who have come into contact with unspoiled Indians, by the personal dignity, uprightness, strength of character, and courage of these barbarians. p. 52

It’s also worth noting that humans have a capacity for sharing and cooperation as well as well as self-aggrandizing greed, as Burgis notes:

The usual socialist response to what I will call the Human Nature Argument is to question the truth of the premise. Where anti-socialists play up our capacity for selfishness, our cruelty, and our tendency to arrange ourselves into dominance hierarchies, socialists usually emphasize our capacity for cooperation, compassion, and solidarity. So, for example, in G. A. Cohen’s Why Not Socialism? we’re asked to wonder why society shouldn’t be able to function like a camping trip, where families share equipment and resources and whatever else they individually brought, rather than assert their exclusive use over those goods.

Socialism and Human Nature (Arc Magazine)

As we’ve seen, that’s pretty much how humans functioned for most of history. Most transactions are—by their very nature—communistic, as anthropologist David Graeber has often pointed out: When we are working on a project and ask our coworker to hand us a hammer from the toolbox, he doesn’t immediately turn around and ask ‘and what are you going to pay me for it?’.

In fact, as he also points out, corporations themselves are islands of communism floating in a sea of capitalism. I’ve worked for many corporations, and when I ask for a pen from the collective storeroom, I usually I get one. I don’t have to pay to put my food in the refrigerator. I don’t pay the electric bill for my individual computer or telephone. And when I ask a coworker to help me out with something, I don’t have to give him or her money over and above whatever he or she is being paid to be there. Thus, a corporation functions much like the “joint family” or household Maine described.

Similarly, while people do often have a tendency to be greedy and selfish, the degree to which we let them indulge in those impulses is entirely socially determined. Capitalism argues that the rich “deserve” their spoils, and that their hoarding behavior and lust for power will make us all better off in the long run due to the Invisible Hand. That view is getting harder and harder to justify with each passing year, especially as growth slows due to planetary (and other) limits. As Christopher Boehm argues in Hierarchy in the Forest, foragers practice a kind of “reverse dominance hierarchy” designed to keep the arrogant and greedy in check. As he put it, “In short…an apparent absence of hierarchy was the result of followers’ dominating their leaders rather than vice versa…an egalitarian relation between followers and their leader is deliberately made to happen by collectively assertive followers.” (3)

To bring up yet another nineteenth century scholar who hasn’t been mentioned yet, Piotr Kropotkin was a Russian writer of minor nobility who is associated with anarchism. Trained as a biologist, he expected to find a brutal “struggle for survival” everywhere in nature, as he had been taught by the followers of Darwin. Instead, everywhere he looked, he found cooperation to far more pervasive than competition in the realm of biological life:

Kropotkin expected to see the brutal dog-eat-dog world of Darwinian competition. He searched high and low—but nothing. “I failed to find, although I was eagerly looking for it,” Kropotkin wrote, “that bitter struggle for the means of existence, among animals belonging to the same species, which was considered by most Darwinists (though not always by Darwin himself) as the dominant characteristic of the struggle for life, and the main factor of evolution.”

Instead he saw mutual aid—everywhere. “In all these scenes of animal life which passed before my eyes,” Kropotkin wrote, “I saw Mutual Aid and Mutual Support carried on to an extent which made me suspect in it a feature of the greatest importance for the maintenance of life, the preservation of each species and its further evolution.”

And it wasn’t just in animals. The peasants in the villages he visited were constantly helping one another in their fight against the brutal environment of Siberia. What’s more, he noted a correlation between the extent of mutual aid displayed in a peasant village and the distance of that village from the hand of government. It was just as the anarchists had suggested. “I lost in Siberia,” he wrote, “whatever faith in state discipline I had cherished before. I was prepared to become an anarchist.”

The Russian Anarchist Prince Who Challenged Evolution (Slate)

Another example of humans voluntarily cooperating in extreme circumstances is given by Rececca Solnit’s book, A Paradise Built in Hell.

And so, it is very strange indeed that evolutionary biology and psychology have come to be associated with the reactionary right and wielded as weapons in their favor. That human’s evolved tendencies favor Right-wing ideals is a topsy-turvy inversion of what has historically been the nature of the arguments about what is closest to human nature.

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So the idea that communism is somehow uniquely “unnatural” is a very recent one, and not really consistent with the findings of anthropology. The people most closely studying primitive societies in the nineteenth century were the socialists, anarchists, Marxists, and similar philosophies, not the “Classical Liberals” or capitalists. It’s pretty clear from Adam Smith’s writing that, although he did an outstanding job describing the English mercantile economy of his own day, his historical knowledge was nonexistent. Even what little was known about primitive economies (for example, from accounts of Native Americans) was ignored by Smith, who instead used inductive reasoning to arrive as his incorrect account of primitive barter economies (which anthropologists universally acknowledge never existed). Even today, evolutionary biologists who promote the virtues of Neoliberalism (such as Steven Pinker) deride their intellectual opponents as “Marxists” (or, in the case of Jordan Peterson, as “Post-modern Neo-Marxists”).

When it comes to studying human nature, it was the socialist/anarchist Left, not the laissez-faire Classical Liberals, who were diving into the anthropological literature and grappling with it. In those days, the “human nature” argument was far more associated with the socialist Left than the apostles of capitalist Progress. Far from being unnatural, Marxists would have seen their ideas as conforming to a more natural, egalitarian social order that had been usurped, first by kings and priests, and then by greedy capitalist bosses.

The opponents of socialism and communism, by contrast, had to argue against earlier and more “natural” forms of human social organization being superior to the commercial capitalism of their day. In these cases, primitive societies—presumably comporting far more closely with evolved human nature—were considered to be inferior and poor examples to emulate—commercial Capitalism and markets were simply a “higher” and “more evolved” form of social organization, they asserted.

Really, according to all the evidence, it is capitalism that is unnatural.

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Now, the real argument against the information above isn’t that it is unnatural. It is this: ideas about how our ancestors lived in small, horticultural communities surrounded by kith and kin centuries or millennia ago are not applicable to modern industrial societies with global trade networks and millions of unrelated strangers interacting on a daily basis.

That’s true, but notice that the argument has been completely flipped on its head! It’s not that socialism is unnatural, it’s that it is incompatible with the unnatural environment we find ourselves in today.

And that’s a very different argument. By this standard, everything about our current way of life is unnatural, and appeals to evolutionary biology and psychology to justify the status quo are deeply flawed from the start.

Not only that, as Burgis points out, proponents of socialism are more concerned with ideas surrounding such mundane issues as ownership, legal rights, wealth and property distribution, and so forth, and it would be preposterous to claim that there is some “natural” form of any of these things that we can discern from a study of evolutionary biology. All of those things are, to one degree or another, recent artifices necessary for modern society to function. Being artifices, we can arrange them as we wish. Evolution—whatever it supposedly decrees—is no impediment.

Even if Pinker and Uygur did have a reasonable objection to a specific vision of socialism put forward by Marx, how is this is supposed to generalize into what Pinker breezily lumps together as “socialism and communism” in general? If “from each…to each” is unrealistic, it hardly follows that public ownership of the means of production is intrinsically unrealistic.

Let’s assume for the sake of argument that Marx was wrong to think that the combination of automation and collective ownership of machines would one day make it unnecessary for human butchers, brewers, and bakers to continue to be given material incentives to produce our dinners. I would argue that we can have socialism and incentives. It’s unlikely that workers in a democratic economy would feel the need to incentivize anyone by paying them 287 times what others were paid — the average pay differential between workers and CEOs last year in the United States — but this doesn’t mean they’d settle on completely flat pay scales either. If anything, they might reverse some of the inequalities we’re accustomed to under capitalism.

Socialism and Human Nature (Arc Magazine)

Perhaps the most basic argument against the fact that the kind of capitalism we’re living under now is somehow compatible with basic human nature is that fact that we’re so disturbed by the current levels of hyper-inequality. When we see the excesses of the super-rich, or how poor people are being taken advantage of, we get angry (those of us who aren’t Libertarians or Neoliberals, anyway). The current levels of anger and frustration at the grotesque levels of inequality present in modern societies should serve as proof that there is nothing “natural” about our current arrangement from an evolutionary standpoint.

Add to that the fact that high levels of inequality are correlated with social instability and pathologies like depression and suicide. Whatever its statistical flaws, the book The Spirit Level does make a good case that high inequality isn’t healthy for societies. And Marx was hardly the first to point this out. From the Gracchi brothers, to Wat Tyler and John Ball, to the Diggers, there has always been resistance to extreme wealth inequality. After all, no one gets disturbed about too much generosity or too much sharing, or a dearth of depression and suicide. Even Thomas Jefferson was disturbed by inequality:

The general spread of the light of science has already laid open to every view the palpable truth, that the mass of mankind has not been born with saddles on their backs, nor a favored few booted and spurred, ready to ride them legitimately, by the grace of God. These are grounds of hope for others…

Ultimately, one could argue that our modern way of life, whatever our political beliefs—capitalism, libertarianism, communism, socialism, anarchism, or whatever—is contrary to human nature, no matter who owns the means of production or how we organize work and leadership. But that’s a whole other can of worms…

(1) The Psychology of Patriotism, The Shepherd Express, July 02, 2019.
(2) Source (Google Books)
(3) Christopher Boehm, et. al., Egalitarian Behavior and Reverse Dominance Hierarchy (PDF)

The Origin of Paper Money 8

US one dollar bill, obverse, series 2009.jpgThis is sort an afterward or corollary to our story of paper money. This describes how we here in the United States ended up with the “Almighty Dollar.” Believe it or not, this was not present after the Revolution, but took a very long time to materialize.

The history of central banking in the U.S. is too much to get into here, but this post from the Minneapolis Fed sums it up probably better than I could: A History of Central Banking in the United States. It’s actually a good summary and a quick read. The WEA Pedagogy blog cited earlier has come out with a second post on the development of central banking in Europe in the nineteenth century: Central Bank History (2/5) 1814-1914 Hundred Years Peace

Believe it or not, at this time, aside from minted coins, there was no national paper currency in the United States. Not only that, but state governments were actually prohibited from issuing their own currency! Instead, as in other Western nations, the government permitted people to use whatever they wanted as currency. Only private banks issued banknotes:

Before the Civil War, the United States was on a bimetallic system with both gold and silver serving as the basis for money. Practically, however, gold was the de facto standard since very little silver coin was in circulation. American currency consisted of bank notes and coin, with the bank notes convertible on demand into specie: paper money was thus “backed” by gold.

The federal government issued no paper currency of its own and there were no federally chartered banks; state banks issued thier own bank notes. Thus in the 1850s the domestic monetary system was comprised of may hundreds of different state banks, each issuing its own paper currency.

This was problematic since the value of a bank note (as opposed to its face value) depended on the financial status of the issuing bank, and, with so many different banks, it was hard to know what money was worth.

Furthermore, there were no deposit insurance programs and no central bank. In contrast to the state banking system, the international gold standard served the United States well since its biggest trading partner and creditor, Great Britain, was also on the gold standard.

The Color of Money and the Nature of Value: Greenbacks and Gold in Postbellum America (American Journal of Sociology) p. 10 (PDF)

In this era, banking was regulated by the states. Despite their importance to the financial system, pretty much anyone could start a bank and issue their own banknotes; all they needed was sufficient startup capital. This was called “free” banking by its proponents, but it acquired another less complimentary nickname: wildcat banking

By action of the state legislatures a bank was held to be not a corporation, which then and for many more years required a charter from the state, but a voluntary association of individuals and thus, like blacksmithing or rope-making, open to anyone. There were rules, most notably as to the hard-money reserves to be held against notes and deposits…But frequently failure to abide by regulations was discovered only after the failure of the bank made the question academic… (Galbraith, p. 88)

Although banks were required to held enough gold reserves to be able to redeem their banknotes in specie on demand, often that could be circumvented just by moving a set amount of gold around the state ahead of the regulators, as in Michigan:

…[I]n Michigan…commissioners were put in circulation to inspect the banks and enforce the requirement [of 30 per cent reserve of gold and silver against note circulation]…Also put in circulation just in advance of the commissioners, was the gold and silver that served as the reserve. This was moved in boxes from bank to bank; when required, the amount was extended by putting a ballast of lead, broken glass and (appropriately) ten-penny nails in the box under a thinner covering of gold coins. p. 88

The results, as one might expect, were not good:

by the time of the Civil War, the American monetary system was, without rival, the most confusing in the long history of commerce and associated cupidity. The coins coming to the Amsterdam bourse were simplicity itself by comparison.

An estimated 7000 different banks notes were, in greater or lesser degree of circulation, the issue of some 1600 different or defunct state banks.

Also, since paper and printing were cheap and the right of note issue was defended as a human right, individuals had gone into the business on their own behalf. An estimated 5000 counterfeit issues were currently in circulation.

No one could do any considerable business without an up-to-date guide that distinguished the wholesome notes from the less good, the orphaned and the bad. A Bank Note Reporter or Counterfeit Detector was essential literature in any significant business enterprise. (Galbraith, p. 90)

It was not a recipe for financial stability, to put it mildly. NPR’s Planet Money describes the situation on the ground during the pre-war era of wildcat banking:

So I’m looking at the Howard Banking Company’s $5 bank note. It’s…a Santa Claus note…You get a picture, I think, of the bank president up in the left-hand corner. And then right in the middle, you get a picture of Santa Claus on a sleigh.

So what basically this note will do is that if you have this note, Santa Claus and all, you’ll go to the Howard Banking Company. And they are obligated to pay you $5 in gold and silver coins if you demand it at their bank.

If you demand it at their bank, but nobody else outside that bank is required to give you gold or silver for the note or, for that matter, even to accept it at all. Sometimes people might choose to take the bill at full face value. Sometimes they might not want it. Sometimes they’ll say, yeah, I’ll accept it but it’s a $5 bill. I’ll give you $4 for it. A dollar bill was not always worth a dollar in this world.

Now, you could argue – and some people do – that this universe of 8,000 different kinds of currency is the free market at work and that this market for bank notes helped keep banks honest. But this world, it did create huge problems for people…

The Birth Of The Dollar Bill (NPR)

What kind of problems did it create?

What if you run a store? What if you run that bar in New York and some guy walks in and gives you some bill that you’ve never seen before? What do you do? Well, that’s when you take out your trusty bank note reporter, this huge book the size of a phone book. This thing, it tells you what bills are in circulation, what they’re supposed to look like and how much they might be worth.

You would take out this big…encyclopedia-looking thing…You’d look in this. You’d find the Howard Banking Company list. It would then tell you where the bank was. And then it would tell you at what discount the note was to be accepted at.

So, for instance, if this was a particularly good bank, $5 note would trade at $5. You, as a bartender, would accept it at that. If it was trading at a discount, it would also say that. If the bank had defaulted, you’d know that. And you’d know that it’s worthless and not to accept it.

And these books, new ones come out every month to keep up with the news. And you have a different book for every city. This is because a bill from, say, a Boston bank might be worth $5 in Boston but only $4 in New York. Usually, the further you get from a bank, the less its money is worth. People’s money loses value just because they’re traveling.

The Birth Of The Dollar Bill (NPR)

In fact, it could be argued that entire monetary history of the United States after the 1830’s was one long clusterfuck. Although the United States would accidentally create, for the first time, a true national paper currency due to the financing needs of the Civil War, it would undermine those innovations after the war by trying to go back on the gold standard. The use of a bimetallic (gold & silver) standard was a sort of compromise  position between gold and fiat. But back then endless debates about the true nature of money (much like today) had no clear resolution:

In the accepted, and it must be added, far from the inspired view of the monetary history of the United States, the years after 1832 were deplorable. Free banking, the resulting bank failures, then greenbacks, agitation for more greenbacks and the pressure, partly successful, for the coinage of cheap silver combined with the recurrent panics to make the financial system of the United States, as Andrew Carnegie held, ‘the worst in the civilized world.’ (Galbraith p. 85)

Greenbacks and National Banks

What brought this madness to an end was, once again, war–this time the United States Civil War. The northern and southern United States split into two separate nations who immediately went to war with each other for control of the North American continent, especially its western expansion.

The industrialized Union needed to raise funds to prosecute its war against the predominantly agrarian Confederacy. because the Confederacy was the source of nearly all the cotton for a massive sector of England’s economy, the South believed that England would intervene on their behalf to put an end to the “cotton famine.” England did not, instead finding other sources of cotton in Egypt and India.

The escalating cost of the war forced the Union government to go off of the international gold standard and–much like in the Revolutionary war—issue fiat money. And the ultimate in fiat money were the greenbacks. They were called this because they were printed in green ink (as is U.S. money today, which is often informally referred to as ‘greenbacks’, but this is something different). The U.S. government issued slips of paper and used them to pay its contractors and suppliers. It declared them to be good for payment of all domestic debts, by law (fiat). And, crucially for MMT concepts, they could be used to settle all debts with the federal government—i.e. taxes, fees and fines. Greenbacks were not good for international debts, customs duties and interest payments on the national debt. Greenbacks were not convertible into gold, and no one claimed that they were. But they were the first true national paper currency, and were useful all across the country (outside of Dixie), unlike the state bank notes. Thus, they began to circulate more broadly throughout the economy.

With the outbreak of the [Civil War], the U.S. economy was severely disrupted, and U.S. government revenues plunged as Union military expenditures soared. The fiscal crisis of the Northern state meant that it could not pay its suppliers and contractors. Moreover, speculators hoarded gold and there was a general liquidity crisis.

By the end of 1861, Northern banks had to suspend convertibility and cease to exchange specie for their bank notes. Thus, the United States went off the gold standard.

The daunting problem facing Salmon Chase, then secretary of the treasury, was a daunting one: how to fund public spending with a huge deficit and an inconvertible currency?

The first step toward a solution began in early 1862 when the government issued greenbacks, inconvertible paper money that by law was legal tender…The government also raised new taxes (including tariffs and an income tax) and borrowed to cover the deficit…By the end of the war, issuance of $450 million of greenbacks had been authorized, and the total currency more than doubled between 1861 and 1866…

Greenbacks were never thought to be a permanent solution, much less a new type of currency for the United States; rather, they were seen as a stopgap measure. It was thought that after the war, they would be replaced by “real” money, that is, money backed by gold:

…this was basically the first dollar bill issued by the U.S. government, though during the war, these dollars, they were not always worth a dollar in gold…So this was not a plan to establish a single national currency. It was a plan to fund war…

[T]he greenbacks…were seen as an emergency thing, something a government would only do in time of war. The underlying belief was that these greenbacks were temporary in the sense that we would issue them, the war would end and that…within 10 years, they’d be gone. The problem was that the consumers kind of liked them. Would you rather use a bill issued by a bank you’re not sure exists or would you want to use a bill that everyone recognizes?

Despite increased taxes and the issuance of greenbacks, the government’s costs continued to soar as the war raged on:

Thus, federal revenues grew thirteenfold…but…the national debt grew from $65 million to 2.7 billion…

To cover this national debt, the government needed to borrow. How would it do that? The usual way for governments to borrow was to sell war bonds. But the Union came up with an ingenious idea to encourage loans to the government: If one bought U.S. government bonds (which is loaning money to the government, remember), then they could use those bonds as backing to open a national bank, as opposed to a state bank. Thus, a system of national banks was created for the first time.

The national banks were different from the state banks in several crucial ways. Most notably, if you had bonds held by the U.S. government, you could issue “official” U.S. government banknotes against them. What was backing these banknotes was, of course, the government’s debt (i.e. the loans to the government). Thus, once gain we see that paper money represents the government’s liabilities. The more government debt, the more money that could be issued. This is basically the MMT conclusion: the government’s debt represents the savings surplus of the private sector.

To encourage loans to the government, a new system of nationally chartered banks replaced the old one of state-chartered banks … national banks … are regulated not by states but by the federal government. These banks are created during the Civil War and they also help raise money for the Union because in order to be a national bank, you had to buy government bonds. In other words, you had to lend money to the government.

The Birth Of The Dollar Bill (NPR)

The National Banking Act of 1863 mandated the creation of national banks whose notes were backed by government bonds. Upon deposit of federal bonds with the comptroller of the currency, investors could establish a private bank and issue national bank notes up to 90% of the value of the bonds….this made it profitable to organize national banks and thus to loan money to the government by purchasing its bonds.

The government also placed a tax on the state bank notes:

Though predictably the state banks opposed the National Bank Act, initially they did not suffer. The suspension of specie payments in 1861 relieved them of the always unwelcome need to redeem their notes in hard cash. The greenbacks … were made legal tender and served instead.

But on 3 March 1865, a mere month before Appomattox, the financial power again asserted itself. Congress was persuaded to pass additional legislation sweeping all state notes away.

A tax of 10 per cent per annum was levied on all state bank issues with effect from 1 July 1866. It was perhaps the most directly impressive evidence in the nation’s history that the power to tax is, indeed, the power to destroy.

Bank failures continued after the banning of the notes and on some years were epidemic – 140 suspensions in 1878; 496 in 1893; 155 in 1908. Most of the casualties were small state banks. For another sixty-five years these continued to be created. and the resulting loans and deposits continued to put or sustain marginal but aspiring farmers and deserving and undeserving entrepreneurs in business. (Galbraith, pp. 91-92)

Between the failures of state banks and the increasing desire to use national banks, the dollars issued by the national banks gradually took over–another manifestation of Gresham’s Law. This proves another point – that the credit that is most favored is that of the sovereign rather than that of other individuals.

Of course, you could say the the government put their thumb on the scale by taxing the state banknotes.This is often depicted by the usual suspects as a diabolical statist plan by the “evil” government to take over the money supply and crush “freedom”. While I couldn’t find the rationale for doing this, one could make the point that since the state banks were not providing funds for the war effort, the tax was an entirely justifiable way to force them to contribute to the war effort in another way.

The net effect was a decline in state banks and an increase in the importance of the national banks:

From 1860 to 1870 the number of state banks declined from 1,579 to 261, while the number of national banks went from zero to 1,612. National bank notes were legal tender in the same way that greenbacks were: payable for all public and private debts, except for import duties and the interest on the national debt. The new national banking system also helped standardize the currency, although that was not its primary intent.

For all its problems, the national banking system fulfilled its original purpose of selling government bonds and funding the war. In addition to would-be bankers, government bonds were sold directly to the public, an innovation promoted by the financier Jay Cooke. By enlisting a large sales force, advertising in the newspapers, and appealing to patriotism, Cooke was able to sell hundreds of millions of dollars worth of bonds.

The Color of Money and the Nature of Value: Greenbacks and Gold in Postbellum America (American Journal of Sociology) p. 10 (PDF)

The United States had established—totally by accident—a consistent national currency for the first time after the Civil War:

So after the Civil War, the only paper money that’s circulating is the greenbacks and the bank notes issued by the national banks. And those bank notes issued by the national banks, they all start to look alike. So in the post-war years, there’s this convergence. Bills are looking more and more uniform. And for the first time, they’re all worth what they say they’re worth…So the United States at this point has kind of accidentally stumbled on an economic innovation – a $10 bill that is worth $10 in New York and in Connecticut and in New Jersey. You can take it all the way to Wyoming and it is still worth $10. And now, finally, if you’re a bartender – life is much easier…

So this really is how we got from a world of 8,000 kinds of money and of monthly guides that tell you if a $5 bill is actually worth $4 to the world basically that we know today, where if somebody gives you a $5 bill, you know it’s worth $5. This makes travel and trade much, much more efficient.

After the war, the debate was, once again, whether or not to go back on the gold standard. But there was a problem: thanks to the war, there was simply too much money floating around. Some way had to be found of reducing the amount of greenbacks in circulation. One enthusiastic goldbug even advocated a weekly bonfire of greenbacks! The problem was that such a policy would be deflationary at at time when farmers and small businessmen were hurting:

Wartime inflation had depreciated greenbacks in relation to gold, and so, for example, the value in gold of $100 of greenbacks averaged $97.00 during February 1862 but was down to $35.00 by January 1864. (I have rounded these numbers to the dollar-CH)

If greenbacks were convertible to gold, enterprising persons could buy them cheaply on the market and “sell” them at face value to the Treasury and thus make a profit. Hundreds of millions of dollars of greenbacks were in circulation, and had the government declared these paper notes convertible into specie, the Treasury would soon have exhausted its entire gold supply.

And so, if there was any hope of making money convertible into gold once again, the first step would have to be a drastic reduction of the amount of greenbacks in circulation. The government attempted to retire the greenbacks, but their timing was terrible as the nation was slipping into another recession. The contraction of the money supply especially hit debtors like small farmers. As a result of popular pressure, the power to retire greenbacks by the treasury Secretary was rescinded; only about $48 million were retired.

Resistance to…hard money policy raised the larger question or whether a return to gold was desirable and whether resumption was a suitable goal for monetary policy. Related to this was the issue of how to repay the national debt, for although the law required that interest be paid in coin (and not in greenbacks), it was unclear whether the principal also had to be repaid in coin.

To do so seemed particularly unfair to some since in the darkest days of the war the government sold its bonds for greenbacks. As a result, speculators could buy, for example, $100 in greenbacks on the market with only $35.00 in gold, and with those greenbacks purchase $100 in government bonds, hoping that both the interest and principal would be repaid in gold.

The Color of Money and the Nature of Value: Greenbacks and Gold in Postbellum America (American Journal of Sociology) p. 10 (PDF)

But why retire the greenbacks at all? As Benjamin Franklin had pointed out long ago, an increase in the money supply increases economic activity. And constraining money creation with something like the gold standard severely limited the amount of money that could be issued by government, much as the hated British had done to the colonies back before the Revolution.

The debate over the gold standard shaped up along economic lines:

Farmers and other agrarian groups were heavily reliant on credit and so were hurt when money became tight. Thus, the ideas of the greenbackers found a receptive audience in American farmers who would later support the Populist movement. Greenbackism also enjoyed a brief popularity among mercantile traders, insurance brokers, capitalists of the Pennsylvania steel industry, and certain sectors of the labor movement.

Bullionism, on the other had, found support among bankers, financiers, bondholders and importers, all of whom stood to lose from inflation and gain from an appreciation of the currency.

The Color of Money and the Nature of Value: Greenbacks and Gold in Postbellum America (American Journal of Sociology) p. 10 (PDF)

In the 1870’s, the “hard money” position won out and the United States went back on the gold standard. The result was a general deflation and a series of painful crashes and depressions, including the “Long Depression” (which was called the “Great Depression” prior to 1929). Between the end of the Civil War and the Panic of 1907, there were a large number of financial panics, crises, depressions, etc. You can go visit Crisis Chronicles on the Liberty Street (NY Fed) blog to read about them in more detail. In brief, here are some of the major ones:

– Panic of 1873, a US recession with bank failures, followed by a four-year depression
– Panic of 1884
– Panic of 1890
– Panic of 1893, a US recession with bank failures
– Panic of 1896
– Panic of 1901, a U.S. economic recession that started a fight for financial control of the Northern Pacific Railway
– Panic of 1907, a U.S. economic recession with bank failures.

List of economic crises (Wikipedia)

The banking panic of 1907 eventually led to the creation of the Federal Reserve System, but that’s a story for another time.

The Greenback Legacy

By allowing the government to increase the money supply without worrying about convertibility to gold or increasing debt, the economy improved. After the war, many believed that the government should continue to do this: they even formed a Greenback Party to advocate for this.

Even today, some have made an argument for such a policy to be revived. Ellen Brown has written about this on her Web of Debt blog:

Helicopter money is a new and rather pejorative term for an old and venerable solution. The American colonies asserted their independence from the Motherland by issuing their own money; and Abraham Lincoln, our first Republican president, boldly revived that system during the Civil War. To avoid locking the government into debt with exorbitant interest rates, he instructed the Treasury to print $450 million in US Notes or “greenbacks.” In 2016 dollars, that sum would be equivalent to about $10 billion, yet runaway inflation did not result. Lincoln’s greenbacks were the key to funding not only the North’s victory in the war but an array of pivotal infrastructure projects, including a transcontinental railway system; and GDP reached heights never before seen, jumping from $1 billion in 1830 to about $10 billion in 1865.

Indeed, this “radical” solution is what the Founding Fathers evidently intended for their new government. The Constitution provides, “Congress shall have the power to coin money [and] regulate the value thereof.” The Constitution was written at a time when coins were the only recognized legal tender; so the Constitutional Congress effectively gave Congress the power to create the national money supply, taking that role over from the colonies (now the states).

Outside the Civil War period, however, Congress failed to exercise its dominion over paper money, and private banks stepped in to fill the breach. First the banks printed their own banknotes, multiplied on the “fractional reserve” system. When those notes were heavily taxed, they resorted to creating money simply by writing it into deposit accounts. As the Bank of England acknowledged in its spring 2014 quarterly report, banks create deposits whenever they make loans; and this is the source of 97% of the UK money supply today. Contrary to popular belief, money is not a commodity like gold that is in fixed supply and must be borrowed before it can be lent. Money is being created and destroyed all day every day by banks across the country. By reclaiming the power to issue money, the federal government would simply be returning to the publicly-issued money of our forebears, a system they fought the British to preserve.

Trump’s $1 Trillion Infrastructure Plan: Lincoln Had a Bolder Solution (Web of Debt)

And just like back in the late 1800’s, such ideas are opposed by a radical conservative movement that wishes to go back to free (wildcat) banking, abolish the central bank altogethet (just like Andrew Jackson), and go back on the gold standard. One prominent example is Gary North:

Ellen Brown is the latest in a long line of pro-fiat money, anti-gold currency, monetary statists who have infiltrated the conservative movement. They have accomplished this for over 50 years by the tactic of wrapping themselves in a flag of opposition to the Federal Reserve System. I call them false-flag infiltrators.

False-flag infiltrators are remnants of a left-wing American political movement of the late 19th century: the Greenbackers, named after the green currency issued by the North during the Civil War. These paper bills were unbacked by gold. Consumer prices rose by 75%, 1861-65.

The Greenbackers were opposed to the gold standard because it kept prices low. They wanted the government to inflate the currency, so that debtors could pay off their debts with cheap money. They had a small political party for almost two decades, the Greenback Party. It 1878, it merged with a labor Party to become the Greenback Labor Party. It went out of existence after 1888. Its main leader, James Weaver, co-founded the Populist (People’s) Party in 1891. It was a farm-bloc party that promoted fiat money in order to let farmers pay their debts with cheap money and also because they thought inflation would raise farm products’ prices more than the prices of other goods.

There was never any question of the Greenbackers’ politics. They were leftists, and openly sided with government controls on the economy…

https://www.garynorth.com/public/department141.cfm

Of course, today paper isn’t used very much anymore, and neither are coins. I’m sure most of us have used plastic debit cards and credit cards (hopefully paying it off immediately) to buy things. Money is now primarily electronic transfers between computer spreadsheets maintained by banks. Virtual money.

Conclusions

So what (if anything) have we learned about paper money?

Well, the first lesson, to me, is that paper money was inevitable. There was simply no amount of gold and silver anywhere in the entire world to run the kind of economy we were entering after 1700, much less today. All of the gold ever mined in human history would fit into a cube 20 meters on a side. Such a cube could easily fit on one of those giant supertankers bringing our goods over from China many times over.

When gold and silver was not enough, the quest was on for another thing to back paper money. Land was the first idea, as we’ve seen. Eventually paper money money became backed by the sovereign’s debt. Paper money became circulating government liabilities. It still is today.

Paper money was invented independently in many places, indicating to me that it must have been an inevitability. The Chinese were the first to do it, and used it on and off for about 500 years (c. 950 to 1455). Ironically, they stopped using it just at the time when the New World was being colonized by Europeans, which sent massive amounts of silver their way. But soon it was invented independently in the North Atlantic trading economies, which went on to dominate the rest of the world.

Long before “official” paper money was issued by central governments, there were things like bills of exchange, municipal bonds and annuities, and shares in joint-stock corporations. That is, much of the value transfer in the European economy was already done via paper instruments and ledgers long before paper money came on the scene, and so it’s inevitable that people made the leap. They just had to get over the cultural baggage of “money” being simply a substitute for precious metals—baggage that even today many people hold on to. Money creation was done by private banks via the stroke of a pen long before governments began issuing it. Even today, banks create most of the money in the world via keystrokes.

The first paper money were simply IOUs. Such IOU’s were issued by private individuals before governments. Eventually the government took over and issued their own IOUs, which soon changed hands as money. This is because the government’s credit is usually the most reliable. This feeds into ideas that there is a “pyramid” of what constitutes money, with the government’s money as the ultimate means of settlement at the apex.

The faith in paper money is based on the stability of the government issuing it. Just like the credit of an individual determines how much faith people have in an IOU, so too with governments. The IOUs of Zimbabwe or Venezuela are very different than those of Japan or Switzerland. Throughout history, problems with money are almost always related to political crises, and not simply to “debasement”. Debasement of currency is usually more of a signal of decline than a cause.

Another point is one I’ve made repeatedly: every major financial innovation has been created in order help states fund wars. That is, financial innovations were ways for states to aggregate and control the resources necessary to wage war. They were then later pressed into the service of trade and technological development. Paper money is a prime example of this. No country in history has decided to simply lose a war or surrender to a foreign power in order to limit their money supply or adhere faithfully to a precious metal standard.

Paper money was an instrument of revolution. How much has the modern world been affected by its creation? Would there even be a modern world without it? Without the ability to issue money in excess of the gold and silver floating around, neither the American nor French Revolutions would have succeeded. These paved the way for everything that came after—both socially and politically.

Is there a danger of uncontrollable inflation with paper money? Sure. But incomprehensibly more damage is done to the average citizen by locking your financial system into artificial handcuffs. Such systems are designed exclusively for the benefit of international merchants (who wish to have the money they make in one country’s market have the same value in their home country), while at the same time causing terrible harm to domestic populations who suffer from the resulting depressions.

As Tim Harford puts it, “While we may not always be able to trust central bankers to print just the right amount of new money, it probably makes more sense than trusting miners to dig up just the right amount of new gold.” He adds, “mainstream economists generally now believe that pegging the money supply to gold is a terrible idea. Most regard low and predictable inflation as no problem at all – perhaps even a useful lubricant to economic activity.”

In fact, it is a lack of inflation which makes debts harder to pay off. Hard-money policy has always been advocated by bankers and other big creditors, and yet the reactionary Right has somehow made this into a populist cause. Incredible!

This Reddit comment succinctly sums up the problems with tying money to gold, or anything else (I have combined two comments here):

1. Gold is scarce, and not enough of it is being found to match the increasing GDP of the world. Therefore it’s deflationary, and tends to entice people to hoard it, because simply owning the wealth makes you even wealthier as demand for it increases dramatically over supply. This chokes your economy as the poor fight over scraps and the rich do nothing. Leads to severe deflationary recessions every 5-10 years.

2. Finding a large cache of gold can royally fuck up an economy as wealth plummets overnight. There is literally nothing but luck controlling this. There’s an instance in history, of an African warlord who made a great trek to the middle east, giving out vast supplies of his wealth … during the trip, because he had so much of it, it was useless to him. He ended up crashing nearly every economy he passed through. (Mansa Musa)

3. Gold is actually very abundant on earth, but not easily accessible. There’s trillions of tons in our core, for example. And billions of tons dissolved in our oceans. Right now, gold isn’t worth the effort to extract it; but make it the driver of the worlds largest economy and people will start working on technology to get the gold out of the ocean. Pretty soon the economy will crash again.

4. In the distant future, all materials will be able to be produced in fusion furnaces. All elements were created from fusion of hydrogen during supernovas, and once fusion technology gets to the right place, we’ll be able to make any stable element we want. Gold, at that point, will become infinite. It is for this reason that we’d better figure out how to perfect fiat currencies, because we’re at the precipice of a demand-less society. One could make the argument that energy then becomes the chief currency of the world (as if it already isn’t!), but our sun provides more than enough for our civilization a billion times over.

Bottom line; basing currency on physical items is dumb and constrains us too much. It leads to crashes and gives us absolutely no ability to prevent them from happening. It’s dumb.

People … forget the single most obvious answer, which also happens to be a major reason we ditched it in the first place: it would allow any other country of sufficient size (read: China, Japan, Britain, the EU, and possibly Russia, Saudi Arabia, Australia due to their hard asset base(s)) to manipulate our currency by flooding/hoarding gold on the open markets.

Does anyone, who seriously understands international finance, think that if we handed the keys to our economy to China, that they wouldn’t use it to their ends? People that are pro-gold are a special breed of stupid.

It’s also worth noting that persistently high inflation is almost always due to other boneheaded things that governments do above and beyond simply “money printing.” In the Unites States in the sixties and seventies, we decided to ramp up a war on the other side of the world because of the “domino effect.” And we didn’t raise taxes to pay for it. We also built our entire economy around a substance whose supply ended up being controlled by countries who hated us (i.e. oil). Boneheaded!

All of this goes to say that given the history of paper money, the description of how our money system works by MMT seems basically correct. And, as MMT advocates point out, it is descriptive more than prescriptive. However, a proper understanding of what money is and how it works in modern industrial economies does lead to some policy recommendations. Perhaps the simplest one is this: any politician who claims that “we can’t afford it” should be voted out of office immediately. Another is that the low-information voters who claim to be “socially liberal but economically conservative” are just middle-of-the-road dimwits who haven’t a clue about how money and government finance work and should have their voting rights revoked.

Sources

I’ve mentioned some of the sources I’ve used throughout this series of posts, but I thought I’d list them here for convenience.

The major sources were Money: Whence it Came, Where it Went by John Kenneth Galbraith, originally published in 1975, with a revised version released in 1995 which is the the one I used. The other is The History of Money by Jack Weatherford, which came out in 1998. This one is a bit outdated, and ignores the insights of more in-depth and recent works in monetary theory.

One particularly notable one is this one: Money: 5,000 years of Debt and Power by Michel Aglietta. This is from Verso and was originally published in French.

Another major source is this article from The New Yorker: The Invention of Money

Crisis Chronicles is a series of posts by the New York Federal Reserve on its blog Liberty Street Economics: https://libertystreeteconomics.newyorkfed.org/crisis-chronicles/

There is a good summary of the various chapters of Glyn Davies’ History of Money on this site: http://projects.exeter.ac.uk/RDavies/arian/llyfr.html

The WEA Pedagogy Blog is doing a 5-part series on the history of central banking (also accessible on the Real World Economic Review blog). Part one is available here: https://weapedagogy.wordpress.com/2019/03/31/origins-of-central-banking/

The Minneapolis Fed has good history of central banking in the United States as noted above, and is available here: A History of Central Banking in the United States.

I’ve also used the following PDFs: Benjamin Franklin and the Birth of a Paper Money Economy by Owen F. Humpage

Paper Money and Inflation in Colonial America by Owen F. Humpage

The Color of Money and the Nature of Value: Greenbacks and Gold in Postbellum America by Bruce G. Carruthers and Sarah Babb

Land Bank Proposals 1650-1705 by Charlie Landale

If podcast are your preferred medium, these two are good. The first is Tim Harford’s recounting of the birth of paper money in China in his podcast 50 things that made the modern economy: https://www.bbc.co.uk/programmes/p059c7g1

And NPR’s Planet Money podcast did a podcast on the birth of the dollar bill after the Civil War: Episode 421: The Birth Of The Dollar Bill