Tue, 13 Sep 2011
Early in my career, I read Homer and Sylla’s A History of Interest Rates and learned that credit predates money and probably predates barter. As a finance professor I was thrilled to read a top notch economic historian like Richard Sylla say that finance predates economics: barter is economics, even money is economics, but credit is quintessential finance. No wonder that decades later I still love this book. In a blog post last year, I recommended Homer and Sylla as the one book on financial history that we should all read.
Of course, I did worry whether Homer and Sylla were right or were merely making a casual remark, but the other books that I read (for example, Polanyi, Trade and Markets in the Early Empires) confirmed the primacy of credit over money and barter. In the anthropological and sociological literature, there appeared to be a consensus on this issue.
So long as this account was confined to obscure books read only by a technical audience, there was no great controversy about it. But then, David Graeber wrote a book entitled Debt: The First 5,000 Years and more importantly talked about it in the widely followed economics blog Naked Capitalism. Austrian economists in particular were very upset with him and criticized him only to climb down subsequently. In his latest post at Naked Capitalism, Graeber provides a detailed description of how credit was transformed into money.
The post is worth reading in full especially the passage where Graeber writes that “Homo Oeconomicus ... is ... an almost impossibly boring person—basically, a monomaniacal sociopath who can wander through an orgy thinking only about marginal rates of return”. I entirely agree with this but in a way very different from what Graeber intends. The only way to succeed in finance is to assume that the other person is a monomaniacal sociopath; and that is true whether you are doing high frequency trading or negotiating with the people who borrowed your money years ago but are unwilling to repay it now. As for orgies, anybody who has seen a trading room (or read about it in books like Liar’s Poker) knows that such minor distractions do not impede the true sociopath’s ability to concentrate on making as much money as possible off the other person.