Jeff Hummel sent me a critique of David Graeber’s book, Debt: The First 5000 Years. Jeff has given me permission to run an edited version. Here it is:

I have read David Graeber’s Debt: The First 5000 Years thoroughly and despite Graeber’s readability, scholarship, and erudition, it is a very bad book. Its tone is much too polemical. More important, when it gets to the more recent history that I know well, it is riddled with errors and distortions. Beyond that, it suffers from serious conceptual confusions, and in his excellent critique, Robert Murphy has only scratched the surface.

Nonetheless, Graeber’s work is emerging as the most challenging defense of the chartilist (i.e., State) theory of money and has evoked mixed reactions even from Arnold Kling and Tyler Cowen. Let me therefore mention that Leonidas Zelmanovitz, a Liberty Fund fellow, has a fine dissertation arguing that chartilist evidence does not undermine Menger’s analysis.

Partly inspired by Murphy’s comments, here are some of my own thoughts on Graeber’s book. To start with, he makes several different historical claims, not all of them compatible:

(1) Credit transactions preceded and dominated spot transactions in early human societies.

(2) Media of account emerged before media of exchange.

(3) Barter was unknown (or at least extremely rare) WITHIN early human societies.

Notice that point (1) is incompatible with either (2) or (3). Early credit transactions must have involved barter (contradicting number 3) or media of exchange (contradicting 2). There is no other logical possibility. Yet because Graeber’s peculiar concept of barter excludes a farmer trading a pig for delivery of an ax in two weeks (to use Murphy’s example), his claim that barter was non-existent tends to become true by definition. Murphy was not the only one to catch this semantic sleight of hand; it is even exposed by an Amazon commenter on the book.

Graeber’s terminological tautology appears to stem from his confusing (a) the limited ability of credit to mitigate the problem of the double coincidence of wants with (b) the substantial ability of multilateral exchange to do so. Multilateral networks are in reality what he is partly describing when he invokes “systems of broad, non-enumerated credits” (more on the “non-enumerated” part below). Consider the standard three-person THEORETICAL trading problem, where A wants only what B is selling, B wants only what C is selling, and C wants only what A is selling. The lack of a double of coincidence of wants can be solved by using one of the goods as a medium of exchange in two bilateral trades OR by conducting a single multilateral trade. Obviously for small groups, where people know and trust each other, the latter is often more likely and convenient. Whether such a multilateral exchange takes place at one moment in time (a spot transaction) or is extended through time (a debt transaction) is of secondary relevance, although the possibility of debt transactions certainly increases the potential scope of multilateral exchange.

Graeber’s book quotes examples taken from several econ principles texts of hypothetical barter transactions that he claims have no basis in history. But the authors design these examples merely to illustrate why monetary exchange is more efficient for complex economies. They imply no accuracy with respect to historical details, with the possible exception of the quotations taken from Adam Smith’s Wealth of Nations. It would make as much sense for Graeber to ridicule grade-school arithmetic texts because of their fanciful use of apples to illustrate addition. Graeber goes on to set up an additional straw man with his assertion that economists universally believe that the emergence of money necessarily preceded the development of credit. This is utter nonsense, nowhere supported in the economics literature. Every competent economist fully understands that you can have debt transactions without money. They simply recognize that money facilitates credit as it facilitates other exchanges and, therefore, find monetary credit easier and more relevant to explicate.

Indeed, an extended defense of the historical claim that money spontaneously evolved from barter is almost unique to the Austrian School and Carl Menger (whose first name Graeber misspells as “Karl” and whom Graeber mistakenly accuses of “adding various mathematical equations” and coming up with the term “transaction costs,” possibly confusing the economist Menger with his son, Karl, who was a mathematician). Menger’s story is in no way undermined by the discovery that what preceded monetary exchange was barter debt transactions rather than barter spot transactions. Moreover, Graeber’s classification of Sumerian temples as non-States actually reinforces the Menger story. And his blanket assertion that “non-state bureaucracies . . . are off the map of economic theory” is simply absurd, as if he thinks that economists are unaware that the private firms they analyze often have bureaucracies.

Nor is the Menger scenario compromised very much by the claim that media of accounts emerged before media of exchange, which has been suggested by many anthropologists and accepted even by Tyler Cowen and Randy Kroszner in their Explorations in the New Monetary Economics. The only serious challenge Graeber raises is his assertion that most media of account arose from legal penalties or were otherwise arbitrarily imposed. However, as Murphy points out, it seems implausible that something could emerge as a medium of account without already being widely enough marketable to provide at least some guidance about its value relative to other goods. The only reason this poses no puzzle to Graeber is that he apparently considers most prices to be significantly arbitrary and is entirely oblivious to their vital role in workable resource allocation.

This leads to Graeber’s naive infatuation with the reciprocal altruism of hunter-gatherers and of assorted tribal societies, an arrangement he labels “communism.” The term “reciprocal altruism” comes from evolutionary biology, which has an extensive literature that Graeber seems unfamiliar with. He also embraces the bizarre and unsupported idea that economics assumes away altruism and cannot analyze it. Then couple this with Graeber’s erroneous insistence that trade requires an equality of value. In short, he truly does not comprehend the subjectivist analysis of Menger or the obvious fact that voluntary exchange can NEVER take place with an equality of value and instead rests on a reverse inequality of value.

You can now appreciate how he derives his hard and fast distinction between “systems of broad, non-enumerated credit” and those where “people borrow things from one another and expect an equivalent of exactly the same value.” He views the precise economic calculation that money permits as a sharp and pernicious transformation rather than an important evolution along a spectrum of human interactions that resulted in greater prosperity. This makes him stubbornly impervious to Friedrich Hayek’s astute observation: social and economic systems that work well in small groups where nearly everyone knows each other would be devastating for a large, complex society with an extensive division of labor.

I could go on and on. Graeber misrepresents even scholarly work tending to support his conclusions, such as the article on barter by Caroline Humphrey [gated], which is far more subtle and circumspect in its conclusions and even discusses the category of “delayed barter,” i.e., barter debt transactions. He attributes to Ludwig Mises mainstream economic ideas that Mises repeatedly, explicitly, and emphatically rejected, indeed some ideas that even many mainstream economists reject. Overall, he continues to caricature the entire economic discipline without any sincere effort to address its analysis. He fails to appreciate the crucial difference between government-issued fiat money (a form of what monetary economists call outside money, with a net wealth effect) and bank-issued redeemable money such as deposits and banknotes (called inside money). And what can we make of a scholar who actually takes seriously the suggestion that the U.S. government initiated the first Gulf War because of Saddam Hussein’s decision to sell oil for euros rather than for dollars?

But Graeber does get some important things right. He, like me, advocates the repudiation of government debts, although he unfortunately advocates the same for private debt. And Debt: The First 5000 Years opens with a compelling example from Madagascar of a process Leonard Liggio used to describe as the dominant motif of European colonialism in Asia and Africa. The imperialist powers imposed head or hut taxes payable only in European sanctioned money, that natives could earned by working in a European-owned mine or on a European-owned plantation, thus indirectly extracting coerced labor. This does show that the State, while definitely not necessary for the origin and evolution of money, has had enormous influence on what people use as money. We therefore will never attain an entirely free-market monetary system until all taxation is abolished.