The Archdruid Report - Archive

Since the beginning of the current series of Archdruid Report posts on economics, I’ve wondered in an idle sort of way if it might come to the attention of a professional economist or two. Last week’s post, though, seems to have settled that issue. I deliberately begged a question in that post, one that cuts to the core of conventional economic theory, and it would have taken a degree of self-control exceedingly rare in any profession for a mainstream economist to read the discussion and not rise to the bait.

I’m referring, of course, to the cavalier way in which the concept of money was treated in last week’s post. In terms of mainstream economics, it’s nonsense to talk about wealth or value without discussing how those things are reflected in some form of pricing mechanism – that is, how they’re measured in money. The widely held belief that the wealth produced by nature is valueless until it’s transformed into something else by human labor, in fact, bases itself largely on the fact that nobody has to pay the nonhuman world for that wealth, and so figuring out its price poses a major challenge – not insoluble, but significant enough that few economists have been willing to take it up.

Since Adam Smith launched modern economics in 1776 with The Wealth of Nations, unresolved disputes over the nature of money have formed a fault line running straight through the heartland of economic thought. Some economists – these days, the majority – treat wealth and money as interchangeable concepts. Others – the minority nowadays – draw a sharp distinction between them. Those who accept the identity of money and wealth seem most often to think of the rules governing money as something akin to laws of nature, untainted by human purposes and agendas; those who draw a distinction between them tend to see those rules as social constructs that benefit some people at the expense of others.

Longtime readers of The Archdruid Report will probably have little trouble guessing where along this spectrum of debate I can be found. It’s simple cultural chauvinism to insist that the particular, and peculiar, form of money used in contemporary Western societies is the only one that matters. Over the span of human history, money is a fairly late invention, and until very recently it played only a small part in the lives of most people even in the societies that used it; until the eighteenth century, even in the Western world, a majority of all goods and services were produced and exchanged within the household economy, or in local customary economies that made no use of money, and only the well off could expect to handle money on a daily basis.

Every human society has had some social mechanism for distributing goods and services. Paleoanthropologists have argued that it was precisely the evolution of food sharing within bands of ancestral humans that gave our species the evolutionary edge to expand across the globe in the face of wide variations in habitat and the rigors of ice age climates. Hunting and gathering societies around the world have intricate arrangements for sorting out who gets how much of the various natural sources of wealth available to them; so do the horticultural and pastoral human ecologies that evolved out of the hunter-gatherer pattern. Some of these latter use a particular trade good in certain contexts as a general marker for value – think of the shell-bead wampum strands used by the First Nations in eastern North America, for example – but these get used only in a restricted class of prestige exchanges, and play no role in everyday exchanges of goods and services. The same thing was true of gold and silver coinage in many ancient and medieval societies; most of the population of medieval England, for example, could expect to go from one winter to the next without seeing more than a handful of silver coins.

From a broader perspective, then, a money system of the sort we use today is simply one way of managing the distribution of goods and services within a particular kind of human society. Modern economics textbooks dodge this point by comparing money to only one other form of exchange – simple barter, in which (let’s say) a physician and a farmer have to negotiate how many bushels of wheat are worth a cure for an illness – and insisting on that basis that money is inevitable because the alternative is so clumsy. Surely, though, this puts the cart before the horse. It’s only when exchanges have already become subject to a market system that exchanges are conceptualized in such terms, and that presupposes that some standard measure of abstract value – that is, money – already exists. It’s worth mentioning that such great civilizations as Egypt of the pharaohs had farmers and physicians aplenty for tens of centuries before anybody thought of money.

What sets money apart from other systems is not its convenience – quite the contrary, as such alternatives as household production of goods and services, or traditional economies of gift and customary exchange, are quite a bit more convenient for most purposes, since the extra steps imposed by the need to bring money into the situation can be done without. Rather, money has three distinctive features relevant to the present discussion. First, to the extent that it can replace other forms of distribution and exchange, it draws all economic activity into its own ambit. That can (and very often is) used for political control, but this is a side effect. The principal effect of this property of money is to turn a society into an economic monoculture.

This elimination of economic diversity has been discussed in previous posts, but it deserves more attention than I’ve given it so far. Diversity is the basis of stability in any ecosystem, human or otherwise; when a significant proportion of goods and services are produced in the household economy, for example, the vagaries of the market economy have a limited influence on everyday life; that limitation goes away once goods once made at home have to be purchased in the market with money. Thus it’s no accident that over the last four centuries, as the market has supplanted the household economy and other patterns of production and distribution of wealth, economic crises have become progressively more frequent, more severe, and more widely felt. The effects of the Dutch tulip mania and the South Sea bubble were restricted to a relatively small proportion of their respective societies; this was hardly true of the Great Depression of the 1930s, and seems to be turning out even less true of the Great Recession now under way.

The second distinctive feature of a money economy is that it makes it harder, not easier, to value certain classes of goods. What E.F. Schumacher called primary goods – goods produced directly by nature without human intervention – are perhaps the best examples. Most traditional societies around the world, it bears noticing, have no trouble whatever recognizing the value of primary goods and finding ways to integrate that value into their own systems of exchange. The salmon ceremonies of First Nations along the northwest coast of North America are good cases in point.

These societies have a gift economy in which rank and social influence are gained by giving away goods – a system that once provided a very efficient means of distributing wealth of many kinds through their societies – and they treat the arrival of the annual salmon runs in exactly the same spirit, as a mighty gift from the Salmon People that must receive an appropriate response. Anthropologists who treat these arrangements purely under the heading of religion (or, less politely, superstition) are missing one of their central points; they are, among other things, ways of integrating relationships between human communities and the natural world into the traditional economy, so that the value of the salmon harvest is always weighed in decisions that might affect it, and traditional practices that preserve salmon runs are given potent economic sanction.

Such arrangements are common – indeed, very nearly universal – in moneyless economies. They can also be found in money economies; one of these days I ought to devote a post to the elegant ways in which the classical Greeks, who had money and weren’t at all afraid to use it, set up lively economic exchanges with their own fragile ecosystem. (Like the salmon ceremonies, these are normally treated purely in terms of religion or superstition, and their economic and ecological dimensions have thus rarely been noticed.) Still, the more completely an economy becomes subject to money, the more difficult it becomes to include primary goods in economic calculations. The Salmon People are perfectly capable of participating in a gift economy, one might say, but there’s no way they can cash a check – or, for that matter, write one.

The third distinctive feature of money is subtler, and very often misunderstood. Unlike other systems of distributing goods and services, money functions as a good in its own right, and the right to use it functions as a service. To some extent this is a legacy of the time when money was made of some culturally valued substance – wampum strings in eastern Native North America, say, or gold and silver in medieval Europe – but it opens the door to unexpected developments.

If money is treated as a good in its own right, and the use of money is treated as a service in its own right, then instead of exchanging money for ordinary goods and services and ordinary goods and services for money, it becomes possible and profitable to exchange money for money. The entire world of finance, from savings accounts and installment loans up through the dizzying abstractions of today’s derivative markets, unfolds from this third property of money. When money plays a relatively minor role in a society, this dimension is correspondingly small; as the volume and pervasiveness of money expands, so does the scale and impact of the arrangements by which money makes money; when money dominates a society, so does the world of finance, and the amount of money being traded for money can exceed by several orders of magnitude the amount of money being traded for goods and services.

What makes this problematic is that the rules governing money are not the same as those governing other goods and services. Unlike goods and services that have their own value, money is only worth what it can buy; unlike goods and services that must be produced by labor from resources, money can be conjured from thin air by dozens of different kinds of financial alchemy, or by the momentary whim of a government. Nor does the amount of money in circulation have to have anything at all to do with the amount of other goods and services available. All these differences mean that the economy of money can very easily slip out of balance with the economy of nonfinancial goods and services.

It’s useful, in fact, to extend one of E.F. Schumacher’s insights further than he did, and speak of the economy of money as the tertiary economy of the modern world. If the primary economy consists of the natural processes that provide goods and services to human beings without human labor, and the secondary economy consists of the conjunction of human labor and natural goods that produces those goods and services nature itself doesn’t provide, the tertiary economy consists of the circulation of monetary goods and financial services that, at least in theory, fosters the distribution of the products of the secondary economy.

Last week’s post pointed out that the secondary economy depends on the primary economy. In the same sense, the tertiary economy depends on the secondary economy – all the money in the world, it’s fair to say, won’t allow you to buy a good or a service that the secondary economy doesn’t produce. Perhaps the greatest problem with contemporary economic thought is that it inverts this relationship, treating the tertiary economy of money as the prime mover, with the secondary and primary economies dependent on the world of money. This odd and disastrous inversion, and its implications in a world of rapidly depleting natural resources, will be the theme of next week’s post.