# Billionaires bear the burden of proof

Sep 15 JDN 2458743

A king sits atop a golden throne, surrounded by a thousand stacks of gold coins six feet high. A hundred starving peasants beseech him for just one gold coin each, so that they might buy enough food to eat and clothes for the winter. The king responds: “How dare you take my hard-earned money!”

This is essentially the world we live in today. I really cannot emphasize enough how astonishingly, horrifically, mind-bogglingly rich billionares are. I am writing this sentence at 13:00 PDT on September 8, 2019. A thousand seconds ago was 12:43, about when I started this post. A million seconds ago was Wednesday, August 28. A billion seconds ago was 1987. I will be a billion seconds old this October.

Jeff Bezos has \$170 billion. 170 billion seconds ago was a thousand years before the construction of the Great Pyramid. To get as much money as he has gaining one dollar per second (that’s \$3600 an hour!), Jeff Bezos would have had to work for as long as human civilization has existed.

At a more sensible wage like \$30 per hour (still better than most people get), how long would it take to amass \$170 billion? Oh, just about 600,000 years—or about twice the length of time that Homo sapiens has existed on Earth.

How does this compare to my fictional king with a thousand stacks of gold? A typical gold coin is worth about \$500, depending on its age and condition. Coins are about 2 millimeters thick. So a thousand stacks, each 2 meters high, would be about \$500*1000*1000 = \$500 million. This king isn’t even a billionaire! Jeff Bezos has three hundred times as much as him.

Coins are about 30 millimeters in diameter, so assuming they are packed in neat rows, these thousand stacks of gold coins would fill a square about 0.9 meters to a side—in our silly Imperial units, that’s 3 feet wide, 3 feet deep, 6 feet tall. If Jeff Bezo’s stock portfolio were liquidated into gold coins (which would require about 2% of the world’s entire gold supply and surely tank the market), the neat rows of coins stacked a thousand high would fill a square over 16 meters to a side—that’s a 50-foot-wide block of gold coins. Smaug’s hoard in The Hobbit was probably about the same amount of money as what Jeff Bezos has.

And yet, somehow there are still people who believe that he deserves this money, that he earned it, that to take even a fraction of it away would be a crime tantamount to theft or even slavery.

Their arguments can be quite seductive: How would you feel about the government taking your hard-earned money? Entrepreneurs are brilliant, dedicated, hard-working people; why shouldn’t they be rewarded? What crime do CEOs commit by selling products at low prices?

The way to cut through these arguments is to never lose sight of the numbers. In defense of a man who had \$5 million or even \$20 million, such an argument might make sense. I can imagine how someone could contribute enough to humanity to legitimately deserve \$20 million. I can understand how a talented person might work hard enough to earn \$5 million. But it’s simply not possible for any human being to be so brilliant, so dedicated, so hard-working, or make such a contribution to the world, that they deserve to have more dollars than there have been seconds since the Great Pyramid.

It’s not necessary to find specific unethical behaviors that brought a billionaire to where he (and yes, it’s nearly always he) is. They are generally there to be found: At best, one becomes a billionaire by sheer luck. Typically, one becomes a billionaire by exerting monopoly power. At worst, one can become a billionaire by ruthless exploitation or even mass murder. But it’s not our responsibility to point out a specific crime for every specific billionaire.

The burden of proof is on billionaires: Explain how you can possibly deserve that much money.

It’s not enough to point to some good things you did, or emphasize what a bold innovator you are: You need to explain what you did that was so good that it deserves to be rewarded with Smaug-level hoards of wealth. Did you save the world from a catastrophic plague? Did you end world hunger? Did you personally prevent a global nuclear war? I could almost see the case for Norman Borlaug or Jonas Salk earning a billion dollars (neither did, by the way). But Jeff Bezos? You didn’t save the world. You made a company that sells things cheaply and ships them quickly. Get over yourself.

Where exactly do we draw that line? That’s a fair question. \$20 million? \$100 million? \$500 million? Maybe there shouldn’t even be a hard cap. There are many other approaches we could take to reducing this staggering inequality. Previously I have proposed a tax system that gets continuously more progressive forever, as well as a CEO compensation cap based on the pay of the lowliest employees. We could impose a wealth tax, as Elizabeth Warren has proposed. Or we could simply raise the top marginal rate on income tax to something more like what it was in the 1960s. Or as Republicans today would call it, radical socialism.

# Social construction is not fact—and it is not fiction

July 30, JDN 2457965

With the possible exception of politically-charged issues (especially lately in the US), most people are fairly good at distinguishing between true and false, fact and fiction. But there are certain types of ideas that can’t be neatly categorized into fact versus fiction.

First, there are subjective feelings. You can feel angry, or afraid, or sad—and really, truly feel that way—despite having no objective basis for the emotion coming from the external world. Such emotions are usually irrational, but even knowing that doesn’t make them automatically disappear. Distinguishing subjective feelings from objective facts is simple in principle, but often difficult in practice: A great many things simply “feel true” despite being utterly false. (Ask an average American which is more likely to kill them, a terrorist or the car in their garage; I bet quite a few will get the wrong answer. Indeed, if you ask them whether they’re more likely to be shot by someone else or to shoot themselves, almost literally every gun owner is going to get that answer wrong—or they wouldn’t be gun owners.)

The one I really want to focus on today is social constructions. This is a term that has been so thoroughly overused and abused by postmodernist academics (“science is a social construction”, “love is a social construction”, “math is a social construction”, “sex is a social construction”, etc.) that it has almost lost its meaning. Indeed, many people now react with automatic aversion to the term; upon hearing it, they immediately assume—understandably—that whatever is about to follow is nonsense.

But there is actually a very important core meaning to the term “social construction” that we stand to lose if we throw it away entirely. A social construction is something that exists only because we all believe in it.

Every part of that definition is important:

First, a social construction is something that exists: It’s really there, objectively. If you think it doesn’t exist, you’re wrong. It even has objective properties; you can be right or wrong in your beliefs about it, even once you agree that it exists.

Second, a social construction only exists because we all believe in it: If everyone in the world suddenly stopped believing in it, like Tinker Bell it would wink out of existence. The “we all” is important as well; a social construction doesn’t exist simply because one person, or a few people, believe in it—it requires a certain critical mass of society to believe in it. Of course, almost nothing is literally believed by everyone, so it’s more that a social construction exists insofar as people believe in it—and thus can attain a weaker or stronger kind of existence as beliefs change.

The combination of these two features makes social constructions a very weird sort of entity. They aren’t merely subjective beliefs; you can’t be wrong about what you are feeling right now (though you can certainly lie about it), but you can definitely be wrong about the social constructions of your society. But we can’t all be wrong about the social constructions of our society; once enough of our society stops believing in them, they will no longer exist. And when we have conflict over a social construction, its existence can become weaker or stronger—indeed, it can exist to some of us but not to others.

If all this sounds very bizarre and reminds you of postmodernist nonsense that might come from the Wisdom of Chopra randomizer, allow me to provide a concrete and indisputable example of a social construction that is vitally important to economics: Money.

The US dollar is a social construction. It has all sorts of well-defined objective properties, from its purchasing power in the market to its exchange rate with other currencies (also all social constructions). The markets in which it is spent are social constructions. The laws which regulate those markets are social constructions. The government which makes those laws is a social construction.

But it is not social constructions all the way down. The paper upon which the dollar was printed is a physical object with objective factual existence. It is an artifact—it was made by humans, and wouldn’t exist if we didn’t—but now that we’ve made it, it exists and would continue to exist regardless of whether we believe in it or even whether we continue to exist. The cotton from which it was made is also partly artificial, bred over centuries from a lifeform that evolved over millions of years. But the carbon atoms inside that cotton were made in a star, and that star existed and fused its carbon billions of years before any life on Earth existed, much less humans in particular. This is why the statements “math is a social construction” and “science is a social construction” are so ridiculous. Okay, sure, the institutions of science and mathematics are social constructions, but that’s trivial; nobody would dispute that, and it’s not terribly interesting. (What, you mean if everyone stopped going to MIT, there would be no MIT!?) The truths of science and mathematics were true long before we were even here—indeed, the fundamental truths of mathematics could not have failed to be true in any possible universe.

But the US dollar did not exist before human beings created it, and unlike the physical paper, the purchasing power of that dollar (which is, after all, mainly what we care about) is entirely socially constructed. If everyone in the world suddenly stopped accepting US dollars as money, the US dollar would cease to be money. If even a few million people in the US suddenly stopped accepting dollars, its value would become much more precarious, and inflation would be sure to follow.

Nor is this simply because the US dollar is a fiat currency. That makes it more obvious, to be sure; a fiat currency attains its value solely through social construction, as its physical object has negligible value. But even when we were on the gold standard, our currency was representative; the paper itself was still equally worthless. If you wanted gold, you’d have to exchange for it; and that process of exchange is entirely social construction.

And what about gold coins, one of the oldest form of money? There now the physical object might actually be useful for something, but not all that much. It’s shiny, you can make jewelry out of it, it doesn’t corrode, it can be used to replace lost teeth, it has anti-inflammatory properties—and millennia later we found out that its dense nucleus is useful for particle accelerator experiments and it is a very reliable electrical conductor useful for making microchips. But all in all, gold is really not that useful. If gold were priced based on its true usefulness, it would be extraordinarily cheap; cheaper than water, for sure, as it’s much less useful than water. Yet very few cultures have ever used water as currency (though some have used salt). Thus, most of the value of gold is itself socially constructed; you value gold not to use it, but to impress other people with the fact that you own it (or indeed to sell it to them). Stranded alone on a desert island, you’d do anything for fresh water, but gold means nothing to you. And a gold coin actually takes on additional socially-constructed value; gold coins almost always had seignorage, additional value the government received from minting them over and above the market price of the gold itself.

Economics, in fact, is largely about social constructions; or rather I should say it’s about the process of producing and distributing artifacts by means of social constructions. Artifacts like houses, cars, computers, and toasters; social constructions like money, bonds, deeds, policies, rights, corporations, and governments. Of course, there are also services, which are not quite artifacts since they stop existing when we stop doing them—though, crucially, not when we stop believing in them; your waiter still delivered your lunch even if you persist in the delusion that the lunch is not there. And there are natural resources, which existed before us (and may or may not exist after us). But these are corner cases; mostly economics is about using laws and money to distribute goods, which means using social constructions to distribute artifacts.

Other very important social constructions include race and gender. Not melanin and sex, mind you; human beings have real, biological variation in skin tone and body shape. But the concept of a race—especially the race categories we ordinarily use—is socially constructed. Nothing biological forced us to regard Kenyan and Burkinabe as the same “race” while Ainu and Navajo are different “races”; indeed, the genetic data is screaming at us in the opposite direction. Humans are sexually dimorphic, with some rare exceptions (only about 0.02% of people are intersex; about 0.3% are transgender; and no more than 5% have sex chromosome abnormalities). But the much thicker concept of gender that comes with a whole system of norms and attitudes is all socially constructed.

It’s one thing to say that perhaps males are, on average, more genetically predisposed to be systematizers than females, and thus men are more attracted to engineering and women to nursing. That could, in fact, be true, though the evidence remains quite weak. It’s quite another to say that women must not be engineers, even if they want to be, and men must not be nurses—yet the latter was, until very recently, the quite explicit and enforced norm. Standards of clothing are even more obviously socially-constructed; in Western cultures (except the Celts, for some reason), flared garments are “dresses” and hence “feminine”; in East Asian cultures, flared garments such as kimono are gender-neutral, and gender is instead expressed through clothing by subtler aspects such as being fastened on the left instead of the right. In a thousand different ways, we mark our gender by what we wear, how we speak, even how we walk—and what’s more, we enforce those gender markings. It’s not simply that males typically speak in lower pitches (which does actually have a biological basis); it’s that males who speak in higher pitches are seen as less of a man, and that is a bad thing. We have a very strict hierarchy, which is imposed in almost every culture: It is best to be a man, worse to be a woman who acts like a woman, worse still to be a woman who acts like a man, and worst of all to be a man who acts like a woman. What it means to “act like a man” or “act like a woman” varies substantially; but the core hierarchy persists.

Social constructions like these ones are in fact some of the most important things in our lives. Human beings are uniquely social animals, and we define our meaning and purpose in life largely through social constructions.

It can be tempting, therefore, to be cynical about this, and say that our lives are built around what is not real—that is, fiction. But while this may be true for religious fanatics who honestly believe that some supernatural being will reward them for their acts of devotion, it is not a fair or accurate description of someone who makes comparable sacrifices for “the United States” or “free speech” or “liberty”. These are social constructions, not fictions. They really do exist. Indeed, it is only because we are willing to make sacrifices to maintain them that they continue to exist. Free speech isn’t maintained by us saying things we want to say; it is maintained by us allowing other people to say things we don’t want to hear. Liberty is not protected by us doing whatever we feel like, but by not doing things we would be tempted to do that impose upon other people’s freedom. If in our cynicism we act as though these things are fictions, they may soon become so.

But it would be a lot easier to get this across to people, I think, if folks would stop saying idiotic things like “science is a social construction”.

# The unending madness of the gold standard

JDN 2457545

If you work in economics in any capacity (much like “How is the economy doing?” you don’t even really need to be in macroeconomics), you will encounter many people who believe in the gold standard. Many of these people will be otherwise quite intelligent and educated; they often understand economics better than most people (not that this is saying a whole lot). Yet somehow they continue to hold—and fiercely defend—this incredibly bizarre and anachronistic view of macroeconomics.

They even bring it up at the oddest times; I recently encountered someone who wrote a long and rambling post arguing for drug legalization (which I largely agree with, by the way) and concluded it with #EndTheFed, not seeming to grasp the total and utter irrelevance of this juxtaposition. It seems like it was just a conditioned response, or maybe the sort of irrelevant but consistent coda originally perfected by Cato and his “Carthago delenda est. “Foederale Reservatum delendum est. Hey, maybe that’s why they’re called the Cato Institute.

So just how bizarre is the gold standard? Well, let’s look at what sort of arguments they use to defend it. I’ll use Charles Kadlic, prominent Libertarian blogger on Forbes, as an example, with his “Top Ten Reasons That You Should Support the ‘Gold Commission’”:

1. A gold standard is key to achieving a period of sustained, 4% real economic growth.
2. A gold standard reduces the risk of recessions and financial crises.
3. A gold standard would restore rising living standards to the middle-class.
4. A gold standard would restore long-term price stability.
5. A gold standard would stop the rise in energy prices.
6. A gold standard would be a powerful force for restoring fiscal balance to federal state and local governments.
7. A gold standard would help save Medicare and Social Security.
8. A gold standard would empower Main Street over Wall Street.
9. A gold standard would increase the liberty of the American people.
10. Creation of a gold commission will provide the forum to chart a prudent path toward a 21st century gold standard.

Number 10 can be safely ignored, as clearly Kadlic just ran out of reasons and to make a round number tacked on the implicit assumption of the entire article, namely that this ‘gold commission’ would actually realistically lead us toward a gold standard. (Without it, the other 9 reasons are just non sequitur.)

So let’s look at the other 9, shall we? Literally none of them are true. Several are outright backward.

You know a policy is bad when even one of its most prominent advocates can’t even think of a single real benefit it would have. A lot of quite bad policies do have perfectly real benefits, they’re just totally outweighed by their costs: For example, cutting the top income tax rate to 20% probably would actually contribute something to economic growth. Not a lot, and it would cut a swath through the federal budget and dramatically increase inequality—but it’s not all downside. Yet Kadlic couldn’t actually even think of one benefit of the gold standard that actually holds up. (I actually can do his work for him: I do know of one benefit of the gold standard, but as I’ll get to momentarily it’s quite small and can easily be achieved in better ways.)

First of all, it’s quite clear that the gold standard did not increase economic growth. If you cherry-pick your years properly, you can make it seem like Nixon leaving the gold standard hurt growth, but if you look at the real long-run trends in economic growth it’s clear that we had really erratic growth up until about the 1910s (the surge of government spending in WW1 and the establishment of the Federal Reserve), at which point went through a temporary surge recovering from the Great Depression and then during WW2, and finally, if you smooth out the business cycle, our growth rates have slowly trended downward as growth in productivity has gradually slowed down.

Here’s GDP growth from 1800 to 1900, when we were on the classical gold standard:

Here’s GDP growth from 1929 to today, using data from the Bureau of Economic Analysis:

Also, both of these are total GDP growth (because that is what Kadlic said), which means that part of what you’re seeing here is population growth rather than growth in income per person. Here’s GDP per person in the 1800s:

If you didn’t already know, I bet you can’t guess where on those graphs we left the gold standard, which you’d clearly be able to do if the gold standard had this dramatic “double your GDP growth” kind of effect. I can’t immediately rule out some small benefit to the gold standard just from this data, but don’t worry; more thorough economic studies have done that. Indeed, it is the mainstream consensus among economists today that the gold standard is what caused the Great Depression.

Indeed, there’s a whole subfield of historical economics research that basically amounts to “What were they thinking?” trying to explain why countries stayed on the gold standard for so long when it clearly wasn’t working. Here’s a paper trying to argue it was a costly signal of your “rectitude” in global bond markets, but I find much more compelling the argument that it was psychological: Their belief in the gold standard was simply too strong, so confirmation bias kept holding them back from what needed to be done. They were like my aforementioned #EndTheFed acquaintance.

Then we get to Kadlic’s second point: Does the gold standard reduce the risk of financial crises? Let’s also address point 4, which is closely related: Does the gold standard improve price stability? Tell that to 1929.

In fact, financial crises were more common on the classical gold standard; the period of pure fiat monetary policy was so stable that it was called the Great Moderation, until the crash in 2008 screwed it all up—and that crash occurred essentially outside the standard monetary system, in the “shadow banking system” of unregulated and virtually unlimited derivatives. Had we actually forced banks to stay within the light of the standard banking system, the Great Moderation might have continued indefinitely.

As for “price stability”, that’s sort of true if you look at the long run, because prices were as likely to go down as they were to go up. But that isn’t what we mean by “price stability”. A system with good price stability will have a low but positive and steady level of inflation, and will therefore exhibit some long-run increases in price levels; it won’t have prices jump up and down erratically and end up on average the same.

For jump up and down is what prices did on the gold standard, as you can see from FRED:

This is something we could have predicted in advance; the price of any given product jumps up and down over time, and gold is just one product among many. Tying prices to gold makes no more sense than tying them to any other commodity.

As for stopping the rise in energy prices, energy prices aren’t rising. Even if they were (and they could at some point), the only way the gold standard would stop that is by triggering deflation (and therefore recession) in the rest of the economy.

Regarding number 6, I don’t see how the fiscal balance of federal and state governments is improved by periodic bouts of deflation that make their debt unpayable.

As for number 7, saving Medicare and Social Security, their payments out are tied to inflation and their payments in are tied to nominal GDP, so overall inflation has very little effect on their long-term stability. In any case, the problem with Medicare is spiraling medical costs (which Obamacare has done a lot to fix), and the problem with Social Security is just the stupid arbitrary cap on the income subject to payroll tax; the gold standard would do very little to solve either of those problems, though I guess it would make the nominal income cap less binding by triggering deflation, which is just about the worst way to avoid a price ceiling I’ve ever heard.

Regarding 8 and 9, I don’t even understand why Kadlic thinks that going to a gold standard would empower individuals over banks (does it seem like individuals were empowered over banks in the “Robber Baron Era”?), or what in the world it has to do with giving people more liberty (all that… freedom… you lose… when the Fed… stabilizes… prices?), so I don’t even know where to begin on those assertions. You know what empowers people over banks? The Consumer Financial Protection Bureau. You know what would enhance liberty? Ending mass incarceration. Libertarians fight tooth and nail against the former; sometimes they get behind the latter, but sometimes they don’t; Gary Johnson for some bizarre reason believes in privatization of prisons, which are directly linked to the surge in US incarceration.

The only benefit I’ve been able to come up with for the gold standard is as a commitment mechanism, something the Federal Reserve could do to guarantee its future behavior and thereby reduce the fear that it will suddenly change course on its past promises. This would make forward guidance a lot more effective at changing long-term interest rates, because people would have reason to believe that the Fed means what it says when it projects its decisions 30 years out.

But there are much simpler and better commitment mechanisms the Fed could use. They could commit to a Taylor Rule or nominal GDP targeting, both of which mainstream economists have been clamoring for for decades. There are some definite downsides to both proposals, but also some important upsides; and in any case they’re both obviously better than the gold standard and serve the same forward guidance function.

Indeed, it’s really quite baffling that so many people believe in the gold standard. It cries out for some sort of psychological explanation, as to just what cognitive heuristic is failing when otherwise-intelligent and highly-educated people get monetary policy so deeply, deeply wrong. A lot of them don’t even to seem grasp when or how we left the gold standard; it really happened when FDR suspended gold convertibility in 1933. After that on the Bretton Woods system only national governments could exchange money for gold, and the Nixon shock that people normally think of as “ending the gold standard” was just the final nail in the coffin, and clearly necessary since inflation was rapidly eating through our gold reserves.

A lot of it seems to come down to a deep distrust of government, especially federal government (I still do not grok why the likes of Ron Paul think state governments are so much more trustworthy than the federal government); the Federal Reserve is a government agency (sort of) and is therefore not to be trusted—and look, it has federal right there in the name.

But why do people hate government so much? Why do they think politicians are much less honest than they actually are? Part of it could have to do with the terrifying expansion of surveillance and weakening of civil liberties in the face of any perceived outside threat (Sedition Act, PATRIOT ACT, basically the same thing), but often the same people defending those programs are the ones who otherwise constantly complain about Big Government. Why do polls consistently show that people don’t trust the government, but want it to do more?

I think a lot of this comes down to the vague meaning of the word “government” and the associations we make with particular questions about it. When I ask “Do you trust the government?” you think of the NSA and the Vietnam War and Watergate, and you answer “No.” But when I ask “Do you want the government to do more?” you think of the failure at Katrina, the refusal to expand Medicaid, the pitiful attempts at reducing carbon emissions, and you answer “Yes.” When I ask if you like the military, your conditioned reaction is to say the patriotic thing, “Yes.” But if I ask whether you like the wars we’ve been fighting lately, you think about the hundreds of thousands of people killed and the wanton destruction to achieve no apparent actual objective, and you say “No.” Most people don’t come to these polls with thought-out opinions they want to express; the questions evoke emotional responses in them and they answer accordingly. You can also evoke different responses by asking “Should we cut government spending?” (People say “Yes.”) versus asking “Should we cut military spending, Social Security, or Medicare?” (People say “No.”) The former evokes a sense of abstract government taking your tax money; the latter evokes the realization that this money is used for public services you value.

So, the gold standard has acquired positive emotional vibes, and the Fed has acquired negative emotional vibes.

The former is fairly easy to explain: “good as gold” is an ancient saying, and “the gold standard” is even a saying we use in general to describe the right way of doing something (“the gold standard in prostate cancer treatment”). Humans have always had a weird relationship with gold; something about its timeless and noncorroding shine mesmerizes us. That’s why you occasionally get proposals for a silver standard, but no one ever seems to advocate an oil standard, an iron standard, or a lumber standard, which would make about as much sense.

The latter is a bit more difficult to explain: What did the Fed ever do to you? But I think it might have something to do with the complexity of sound monetary policy, and the resulting air of technocratic mystery surrounding it. Moreover, the Fed actively cultivates this image, by using “open-market operations” and “quantitative easing” to “target interest rates”, instead of just saying, “We’re printing money.” There may be some good reasons to do it this way, but a lot of it really does seem to be intended to obscure the truth from the uninitiated and perpetuate the myth that they are almost superhuman. “It’s all very complicated, you see; you wouldn’t understand.” People are hoarding their money, so there’s not enough money in circulation, so prices are falling, so you’re printing more money and trying to get it into circulation. That’s really not that complicated. Indeed, if it were, we wouldn’t be able to write a simple equation like a Taylor Rule or nominal GDP targeting in order to automate it!

The reason so many people become gold bugs after taking a couple of undergraduate courses in economics, then, is that this teaches them enough that they feel they have seen through the veil; the curtain has been pulled open and the all-powerful Wizard revealed to be an ordinary man at a control panel. (Spoilers? The movie came out in 1939. Actually, it was kind of about the gold standard.) “What? You’ve just been printing money all this time? But that is surely madness!” They don’t actually understand why printing money is actually a perfectly sensible thing to do on many occasions, and it feels to them a lot like what would happen if they just went around printing money (counterfeiting) or what a sufficiently corrupt government could do if they printed unlimited amounts (which is why they keep bringing up Zimbabwe). They now grasp what is happening, but not why. A little learning is a dangerous thing.

Now as for why Paul Volcker wants to go back to Bretton Woods? That, I cannot say. He’s definitely got more than a little learning. At least he doesn’t want to go back to the classical gold standard.

# Yes, but what about the next 5000 years?

JDN 2456991 PST 1:34.

This week’s post will be a bit different: I have a book to review. It’s called Debt: The First 5000 Years, by David Graeber. The book is long (about 400 pages plus endnotes), but such a compelling read that the hours melt away. “The First 5000 Years” is an incredibly ambitious subtitle, but Graeber actually manages to live up to it quite well; he really does tell us a story that is more or less continuous from 3000 BC to the present.

So who is this David Graeber fellow, anyway? None will be surprised that he is a founding member of Occupy Wall Street—he was in fact the man who coined “We are the 99%”. (As I’ve studied inequality more, I’ve learned he made a mistake; it really should be “We are the 99.99%”.) I had expected him to be a historian, or an economist; but in fact he is an anthropologist. He is looking at debt and its surrounding institutions in terms of a cultural ethnography—he takes a step outside our own cultural assumptions and tries to see them as he might if he were encountering them in a foreign society. This is what gives the book its freshest parts; Graeber recognizes, as few others seem willing to, that our institutions are not the inevitable product of impersonal deterministic forces, but decisions made by human beings.

(On a related note, I was pleasantly surprised to see in one of my economics textbooks yesterday a neoclassical economist acknowledging that the best explanation we have for why Botswana is doing so well—low corruption, low poverty by African standards, high growth—really has to come down to good leadership and good policy. For once they couldn’t remove all human agency and mark it down to grand impersonal ‘market forces’. It’s odd how strong the pressure is to do that, though; I even feel it in myself: Saying that civil rights progressed so much because Martin Luther King was a great leader isn’t very scientific, is it? Well, if that’s what the evidence points to… why not? At what point did ‘scientific’ come to mean ‘human beings are helplessly at the mercy of grand impersonal forces’? Honestly, doesn’t the link between science and technology make matters quite the opposite?)

Graeber provides a new perspective on many things we take for granted: in the introduction there is one particularly compelling passage where he starts talking—with a fellow left-wing activist—about the damage that has been done to the Third World by IMF policy, and she immediately interjects: “But surely one has to pay one’s debts.” The rest of the book is essentially an elaboration on why we say that—and why it is absolutely untrue.

Graeber has also made me think quite a bit differently about Medieval society and in particular Medieval Islam; this was certainly the society in which the writings of Socrates were preserved and algebra was invented, so it couldn’t have been all bad. But in fact, assuming that Graeber’s account is accurate, Muslim societies in the 14th century actually had something approaching the idyllic fair and free market to which all neoclassicists aspire. They did so, however, by rejecting one of the core assumptions of neoclassical economics, and you can probably guess which one: the assumption that human beings are infinite identical psychopaths. Instead, merchants in Medieval Muslim society were held to high moral standards, and their livelihood was largely based upon the reputation they could maintain as upstanding good citizens. Theoretically they couldn’t even lend at interest, though in practice they had workarounds (like payment in installments that total slightly higher than the original price) that amounted to low rates of interest. They did not, however, have anything approaching the levels of interest that we have today in credit cards at 29% or (it still makes me shudder every time I think about it) payday loans at 400%. Paying on installments to a Muslim merchant would make you end up paying about a 2% to 4% rate of interest—which sounds to me almost exactly what it should be, maybe even a bit low because we’re not taking inflation into account. In any case, the moral standards of society kept people from getting too poor or too greedy, and as a result there was little need for enforcement by the state. In spite of myself I have to admit that may not have been possible without the theological enforcement provided by Islam.
Graeber also avoids one of the most common failings of anthropologists, the cultural relativism that makes them unwilling to criticize any cultural practice as immoral even when it obviously is (except usually making exceptions for modern Western capitalist imperialism). While at times I can see he was tempted to go that way, he generally avoids it; several times he goes out of his way to point out how women were sold into slavery in hunter-gatherer tribes and how that contributed to the institutions of chattel slavery that developed once Western powers invaded.

Anthropologists have another common failing that I don’t think he avoids as well, which is a primitivist bent in which anthropologists speak of ancient societies as idyllic and modern societies as horrific. That’s part of why I said ‘if Graber’s account is accurate,’ because I’m honestly not sure it is. I’ll need to look more into the history of Medieval Islam to be sure. Graeber spends a great deal of time talking about how our current monetary system is fundamentally based on threats of violence—but I can tell you that I have honestly never been threatened with violence over money in my entire life. Not by the state, not by individuals, not by corporations. I haven’t even been mugged—and that’s the sort of the thing the state exists to prevent. (Not that I’ve never been threatened with violence—but so far it’s always been either something personal, or, more often, bigotry against LGBT people.) If violence is the foundation of our monetary system, then it’s hiding itself extraordinarily well. Granted, the violence probably pops up more if you’re near the very bottom, but I think I speak for most of the American middle class when I say that I’ve been through a lot of financial troubles, but none of them have involved any guns pointed at my head. And you can’t counter this by saying that we theoretically have laws on the books that allow you to be arrested for financial insolvency—because that’s always been true, in fact it’s less true now than any other point in history, and Graeber himself freely admits this. The important question is how many people actually get violence enforced upon them, and at least within the United States that number seems to be quite small.

Graeber describes the true story of the emergence of money historically, as the result of military conquest—a way to pay soldiers and buy supplies when in an occupied territory where nobody trusts you. He demolishes the (always fishy) argument that money emerged as a way of mediating a barter system: If I catch fish and he makes shoes and I want some shoes but he doesn’t want fish right now, why not just make a deal to pay later? This is of course exactly what they did. Indeed Graeber uses the intentionally provocative word communism to describe the way that resources are typically distributed within families and small villages—because it basically is “from each according to his ability, to each according to his need”. (I would probably use the less-charged word “community”, but I have to admit that those come from the same Latin root.) He also describes something I’ve tried to explain many times to neoclassical economists to no avail: There is equally a communism of the rich, a solidarity of deal-making and collusion that undermines the competitive market that is supposed to keep the rich in check. Graeber points out that wine, women and feasting have been common parts of deals between villages throughout history—and yet are still common parts of top-level business deals in modern capitalism. Even as we claim to be atomistic rational agents we still fall back on the community norms that guided our ancestors.

Another one of my favorite lines in the book is on this very subject: “Why, if I took a free-market economic theorist out to an expensive dinner, would that economist feel somewhat diminished—uncomfortably in my debt—until he had been able to return the favor? Why, if he were feeling competitive with me, would he be inclined to take me someplace even more expensive?” That doesn’t make any sense at all under the theory of neoclassical rational agents (an infinite identical psychopath would just enjoy the dinner—free dinner!—and might never speak to you again), but it makes perfect sense under the cultural norms of community in which gifts form bonds and generosity is a measure of moral character. I also got thinking about how introducing money directly into such exchanges can change them dramatically: For instance, suppose I took my professor out to a nice dinner with drinks in order to thank him for writing me recommendation letters. This seems entirely appropriate, right? But now suppose I just paid him \$30 for writing the letters. All the sudden it seems downright corrupt. But the dinner check said \$30 on it! My bank account debit is the same! He might go out and buy a dinner with it! What’s the difference? I think the difference is that the dinner forms a relationship that ties the two of us together as individuals, while the cash creates a market transaction between two interchangeable economic agents. By giving my professor cash I would effectively be saying that we are infinite identical psychopaths.

While Graeber doesn’t get into it, a similar argument also applies to gift-giving on holidays and birthdays. There seriously is—I kid you not—a neoclassical economist who argues that Christmas is economically inefficient and should be abolished in favor of cash transfers. He wrote a book about it. He literally does not understand the concept of gift-giving as a way of sharing experiences and solidifying relationships. This man must be such a joy to have around! I can imagine it now: “Will you play catch with me, Daddy?” “Daddy has to work, but don’t worry dear, I hired a minor league catcher to play with you. Won’t that be much more efficient?”

This sort of thing is what makes Debt such a compelling read, and Graeber does make some good points and presents a wealth of historical information. So now it’s time to talk about what’s wrong with the book, the things Graeber gets wrong.

First of all, he’s clearly quite ignorant about the state-of-the-art in economics, and I’m not even talking about the sort of cutting-edge cognitive economics experiments I want to be doing. (When I read what Molly Crockett has been working on lately in the neuroscience of moral judgments, I began to wonder if I should apply to University College London after all.)

No, I mean Graeber is ignorant of really basic stuff, like the nature of government debt—almost nothing of what I said in that post is controversial among serious economists; the equations certainly aren’t, though some of the interpretation and application might be. (One particularly likely sticking point called “Ricardian equivalence” is something I hope to get into in a future post. You already know the refrain: Ricardian equivalence only happens if you live in a world of infinite identical psychopaths.) Graeber has internalized the Republican talking points about how this is money our grandchildren will owe to China; it’s nothing of the sort, and most of it we “owe” to ourselves. In a particularly baffling passage Graeber talks about how there are no protections for creditors of the US government, when creditors of the US government have literally never suffered a single late payment in the last 200 years. There are literally no creditors in the world who are more protected from default—and only a few others that reach the same level, such as creditors to the Bank of England.

In an equally-bizarre aside he also says in one endnote that “mainstream economists” favor the use of the gold standard and are suspicious of fiat money; exactly the opposite is the case. Mainstream economists—even the neoclassicists with whom I have my quarrels—are in almost total agreement that a fiat monetary system managed by a central bank is the only way to have a stable money supply. The gold standard is the pet project of a bunch of cranks and quacks like Peter Schiff. Like most quacks, the are quite vocal; but they are by no means supported by academic research or respected by top policymakers. (I suppose the latter could change if enough Tea Party Republicans get into office, but so far even that hasn’t happened and Janet Yellen continues to manage our fiat money supply.) In fact, it’s basically a consensus among economists that the gold standard caused the Great Depression—that in addition to some triggering event (my money is on Minsky-style debt deflation—and so is Krugman’s), the inability of the money supply to adjust was the reason why the world economy remained in such terrible shape for such a long period. The gold standard has not been a mainstream position among economists since roughly the mid-1980s—before I was born.

He makes this really bizarre argument about how because Korea, Japan, Taiwan, and West Germany are major holders of US Treasury bonds and became so under US occupation—which is indisputably true—that means that their development was really just some kind of smokescreen to sell more Treasury bonds. First of all, we’ve never had trouble selling Treasury bonds; people are literally accepting negative interest rates in order to have them right now. More importantly, Korea, Japan, Taiwan, and West Germany—those exact four countries, in that order—are the greatest economic success stories in the history of the human race. West Germany was rebuilt literally from rubble to become once again a world power. The Asian Tigers were even more impressive, raised from the most abject Third World poverty to full First World high-tech economy status in a few generations. If this is what happens when you buy Treasury bonds, we should all buy as many Treasury bonds as we possibly can. And while that seems intuitively ridiculous, I have to admit, China’s meteoric rise also came with an enormous investment in Treasury bonds. Maybe the secret to economic development isn’t physical capital or exports or institutions; nope, it’s buying Treasury bonds. (I don’t actually believe this, but the correlation is there, and it totally undermines Graeber’s argument that buying Treasury bonds makes you some kind of debt peon.)

Speaking of correlations, Graeber is absolutely terrible at econometrics; he doesn’t even seem to grasp the most basic concepts. On page 366 he shows this graph of the US defense budget and the US federal debt side by side in order to argue that the military is the primary reason for our national debt. First of all, he doesn’t even correct for inflation—so most of the exponential rise in the two curves is simply the purchasing power of the dollar declining over time. Second, he doesn’t account for GDP growth, which is most of what’s left after you account for inflation. He has two nonstationary time-series with obvious exponential trends and doesn’t even formally correlate them, let alone actually perform the proper econometrics to show that they are cointegrated. I actually think they probably are cointegrated, and that a large portion of national debt is driven by military spending, but Graeber’s graph doesn’t even begin to make that argument. You could just as well graph the number of murders and the number of cheesecakes sold, each on an annual basis; both of them would rise exponentially with population, thus proving that cheesecakes cause murder (or murders cause cheesecakes?).

And then where Graeber really loses me is when he develops his theory of how modern capitalism and the monetary and debt system that go with it are fundamentally corrupt to the core and must be abolished and replaced with something totally new. First of all, he never tells us what that new thing is supposed to be. You’d think in 400 pages he could at least give us some idea, but no; nothing. He apparently wants us to do “not capitalism”, which is an infinite space of possible systems, some of which might well be better, but none of which can actually be implemented without more specific ideas. Many have declared that Occupy has failed—I am convinced that those who say this appreciate neither how long it takes social movements to make change, nor how effective Occupy has already been at changing our discourse, so that Capital in the Twenty-First Century can be a bestseller and the President of the United States can mention income inequality and economic mobility in his speeches—but insofar as Occupy has failed to achieve its goals, it seems to me that this is because it was never clear just what Occupy’s goals were to begin with. Now that I’ve read Graeber’s work, I understand why: He wanted it that way. He didn’t want to go through the hard work (which is also risky: you could be wrong) of actually specifying what this new economic system would look like; instead he’d prefer to find flaws in the current system and then wait for someone else to figure out how to fix them. That has always been the easy part; any human system comes with flaws. The hard part is actually coming up with a better system—and Graeber doesn’t seem willing to even try.

I don’t know exactly how accurate Graeber’s historical account is, but it seems to check out, and even make sense of some things that were otherwise baffling about the sketchy account of the past I had previously learned. Why were African tribes so willing to sell their people into slavery? Well, because they didn’t think of it as their people—they were selling captives from other tribes taken in war, which is something they had done since time immemorial in the form of slaves for slaves rather than slaves for goods. Indeed, it appears that trade itself emerged originally as what Graeber calls a “human economy”, in which human beings are literally traded as a fungible commodity—but always humans for humans. When money was introduced, people continued selling other people, but now it was for goods—and apparently most of the people sold were young women. So much of the Bible makes more sense that way: Why would Job be all right with getting new kids after losing his old ones? Kids are fungible! Why would people sell their daughters for goats? We always sell women! How quickly do we flirt with the unconscionable, when first we say that all is fungible.

One of Graeber’s central points is that debt came long before money—you owed people apples or hours of labor long before you ever paid anybody in gold. Money only emerged when debt became impossible to enforce, usually because trade was occurring between soldiers and the villages they had just conquered, so nobody was going to trust anyone to pay anyone back. Immediate spot trades were the only way to ensure that trades were fair in the absence of trust or community. In other words, the first use of gold as money was really using it as collateral. All of this makes a good deal of sense, and I’m willing to believe that’s where money originally came from.

But then Graeber tries to use this horrific and violent origin of money—in war, rape, and slavery, literally some of the worst things human beings have ever done to one another—as an argument for why money itself is somehow corrupt and capitalism with it. This is nothing short of a genetic fallacy: I could agree completely that money had this terrible origin, and yet still say that money is a good thing and worth preserving. (Indeed, I’m rather strongly inclined to say exactly that.) The fact that it was born of violence does not mean that it is violence; we too were born of violence, literally millions of years of rape and murder. It is astronomically unlikely that any one of us does not have a murderer somewhere in our ancestry. (Supposedly I’m descended from Julius Caesar, hence my last name Julius—not sure I really believe that—but if so, there you go, a murderer and tyrant.) Are we therefore all irredeemably corrupt? No. Where you come from does not decide what you are or where you are going.

In fact, I could even turn the argument around: Perhaps money was born of violence because it is the only alternative to violence; without money we’d still be trading our daughters away because we had no other way of trading. I don’t think I believe that either; but it should show you how fragile an argument from origin really is.

This is why the whole book gives this strange feeling of non sequitur; all this history is very interesting and enlightening, but what does it have to do with our modern problems? Oh. Nothing, that’s what. The connection you saw doesn’t make any sense, so maybe there’s just no connection at all. Well all right then. This was an interesting little experience.

This is a shame, because I do think there are important things to be said about the nature of money culturally, philosophically, morally—but Graeber never gets around to saying them, seeming to think that merely pointing out money’s violent origins is a sufficient indictment. It’s worth talking about the fact that money is something we made, something we can redistribute or unmake if we choose. I had such high expectations after I read that little interchange about the IMF: Yes! Finally, someone gets it! No, you don’t have to repay debts if that means millions of people will suffer! But then he never really goes back to that. The closest he veers toward an actual policy recommendation is at the very end of the book, a short section entitled “Perhaps the world really does owe you a living” in which he very briefly suggests—doesn’t even argue for, just suggests—that perhaps people do deserve a certain basic standard of living even if they aren’t working. He could have filled 50 pages arguing the ins and outs of a basic income with graphs and charts and citations of experimental data—but no, he just spends a few paragraphs proposing the idea and then ends the book. (I guess I’ll have to write that chapter myself; I think it would go well in The End of Economics, which I hope to get back to writing in a few months—while I also hope to finally publish my already-written book The Mathematics of Tears and Joy.)

If you want to learn about the history of money and debt over the last 5000 years, this is a good book to do so—and that is, after all, what the title said it would be. But if you’re looking for advice on how to improve our current economic system for the benefit of all humanity, you’ll need to look elsewhere.

And so in the grand economic tradition of reducing complex systems into a single numeric utility value, I rate Debt: The First 5000 Years a 3 out of 5.