If only the hot air of its supporters where as limited in supply as Bitcoin itself.

Correction: The original article mistakingly claimed that an LA Times quote used in the article was from anarchist-capitalist economist David Friedman, son of Milton Friedman, but it is a different author, David Friedman, a Senior Fellow at the New America Foundation.

I only have a few minutes for a post today, so this will be brief, to start with, I’ll be at Stammtisch late today, probably around 11pm.

Last week I wrote about Bitcoin and the Public Function of Money

What started as a trickle, grew into a gusher of economic quackery, as Bitcoin proponents came out of the woodwork to add their 0,00002 bitcoins to the discussion.

As I mention in the previous article, Bitcoin is a very significant development, I am pro-Bitcoin. But it’s remarkable how much zombie economics lurks in the Bitcoin trenches.

The most significant response, in terms of time spent typing, at least, comes from Erik Voorhees, “a Bitcoin entrepreneur” who concludes: “There were many other fallacies in Dmytri’s article, but this one on the nature of money’s origin and purpose is crucial. Money does not originate from the State, and does not derrive its virtues from compatibility with tribute. Indeed, as Bitcoin will prove, money functions best when the State’s coercive perversions are far removed.”

Never mind that that Erik does not appear to be familiar with the meaning of the term “fallacy” (hint: it does not mean wrong), but his article depends on the idea that the origin of money and money prices is barter, Erik is quite clear: “The origin of money is barter. In fact, money derives directly and unavoidably from barter.”

So, since I’m in a bit of hurry, I’ll just repost what I added to the comments section:

@Erik, I have to admit it’s a little tedious to respond to articles that depend on long discarded nonsense like the barter origin of money. We know from anthropology, most recently written by David Graeber, that money prices do not predate taxes, and that there was no barter before money, or even commodity prices defined in other commodities. The barter origin theory of money is well know to be false. So before you call other people’s understanding of money “misguided” you should perhaps update your own scholarship on the subject.

Anthropologists gradually fanned out into the world and began directly observing how economies where money was not used (or anyway, not used for everyday transactions) actually worked. What they discovered was an at first bewildering variety of arrangements, ranging from competitive gift-giving to communal stockpiling to places where economic relations centered on neighbors trying to guess each other’s dreams. What they never found was any place, anywhere, where economic relations between members of community took the form economists predicted: “I’ll give you twenty chickens for that cow.” Hence in the definitive anthropological work on the subject, Cambridge anthropology professor Caroline Humphrey concludes, “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing”
a. Just in way of emphasis: economists thus predicted that all (100%) non-monetary economies would be barter economies. Empirical observation has revealed that the actual number of observable cases—out of thousands studied—is 0%.
b. Similarly, the number of documented marketplaces where people regularly appear to swap goods directly without any reference to a money of account is also zero. If any sociological prediction has ever been empirically refuted, this is it.
– David Graeber

Just to repeat for emphasis: Cambridge anthropology professor Caroline Humphrey concludes, “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing”

I guess just like religious fanatics that don’t stop making ridiculous claims about history from the Bible just because they are disproved by material fact, the barter origin of money crowd are likewise determined not to know that money did not emerge from barter.

But beyond Erik’s incorrect anthropology of money, he makes the claim that “money functions best when the State’s coercive perversions are far removed.” and here I agree with him compeletely. However, we must understand what function money actually performs in society.

Erik and others would like to believe that functions like financing public goods and counterbalancing financial cycles and sectors are not necessary so that a pure-specie form of money will do, but that is not the case, not even celebrated right-wing “anarcho-capitalist” economist believe it.

For instance, in the Liberation Technologies list I posted a quote from David Friedman.
In a 2002 article for The Los Angeles Times, Friedman wrote “Until U.S. economic growth is more balanced and its emerging public finance challenge more manageable, it’s likely that our economic prospects will fail to fire investors’ and consumers’ enthusiasm. An expanding public sector may be necessary at a time of global terrorism.” Ok, so he invokes Terrorism, but non-the-less, Friedman, the anarcho-capitalist economist, is admitting that fiscal stimulus is needed to counterbalance sectors.

Much like his father Milton Friedman, who did much to make Von Mises and his ilk better known in the mainstream, non-the-less also understood the need for counter-cyclical fiscal policy, as my original article explains.

The fact is, until we develop non-State ways to provide the socially necessary functions provided by State money to freely associating, networked communities, we will not move beyond the State form, because these functions are necessary and having a monopoly on them will keep the State in place. But that’s all in the original post, so even if Erik and co refuse to know this, I don’t need to repeat it here.

Now, the reason that many do refuse to believe that these functions are necessary come from two other incorrect views common among the zombie economics set, in addition to the false belief that money came from barter, they also usually believe in the quantity theory of money and the efficient market hypothesis.

The former, like the barter origin theory, is well known to be false, though there has been literally thousands of papers that prove this, a nice blog from Bill Mitchell comes to mind where he argues: “They trot out phrases like “too much money chasing too few goods” – a vision derived from the old classical Quantity Theory of Money, which via an identity (that is, an accounting statement) – MV = PQ (where M is the money stock, V is turnover or velocity of that stock in transactions per period, P is the price level and Q is real GDP) – links monetary growth to prices.

So it is a matter of accounting that the money stock (M) times the velocity of money – the turnover of the money stock per period (V) is equal to the price level (P) times real output (Q).

To render that a theory of inflation, the mainstream had to directly link M to P and they did that by assuming that V is fixed (despite empirically it moving all over the place) and claiming that Q is always at full employment as a result of free market adjustments.”

The Quantity theory of money depends on the idea that velocity in the economy is fixed, and that there is never unemployment. As both these assumptions are false, the theory is also false.

But underlining all this is a belief in the efficient market hypothesis. That is the real reason the faithful want to believe the barter origin and quantity theories so badly, because they want to deny that we need any public forms because they believe that markets are magical efficiently mechanisms that always allocate productive assets to the most productive use, and always justly reward participants according to their contributions.

This is, of course, also false. Just like bureaucratic processes, markets also have asymmetries of power and information, and the singular focus on profit fails to adequately address other issues like social and environmental justice.

Neither markets nor planning are inherently efficient, both are equally able to misallocate productive assets and result in unjust and unsustainable outcomes. And both will remain components of human society that we need to improve.

Ok, more on that later, but I need to run now, so see some of you in the wee hours at Cafe Buchhandlung.

17 comments

  1. Pingback: If only the hot air of its supporters where as limited in supply as – dmytri | Bitcoin News Bits - CoinBits.com
  2. David Friedman

    “Ok, so he invokes Terrorism, but non-the-less, Friedman, the anarcho-capitalist economist, is admitting that fiscal stimulus is needed to counterbalance sectors.”

    While complaining about other people’s errors–in particular, taking David Graeber’s account of the origin of money for gospel–you might be a little more careful about your own. That quote may perhaps be from someone named David Friedman—I have no monopoly on the name. But it isn’t from me, and I’m pretty sure I am the only anarcho-capitalist named David Friedman.

    And I’ve been on record as a supporter of the idea of privately issued money—see my article on the Cato Site—since long before the invention of bitcoins.

  3. Peter Šurda (@PeterSurda)

    Dmitry, first of all, I apologies for assuming you understand German. You have a German surname and wrote you’re in Germany, so I assumed you live there.

    The only thing your post proves is that you, similarly as some of the anthropologists, do not understand economics. I read Graeber’s book by the way. Even if everything Graeber said was correct, the only think he would have proved is that credit transactions pre-date spot transactions. That does not disprove barter. Barter does not imply spot transactions. Other than that, Graeber provides, in his own words, proof for the origin of money through market. All the examples he lists, he also says himself that things which were already demanded and highly valued by market participants start acting as money. At best, the chieftains, rulers or priests made the money that already existed more official. Graeber misleadingly thinks that this “officialisation” is what makes money into money.

    If you have a commodity money and no money substitutes, there cannot logically be any monetary policy, because no institution can create or destroy money without having to bear to full market price for that. Even if you say it’s necessary, it still does not make it logically possible.

    Last but not least, your most important error. The distinction between “private” and “public” is only an interpretation that occurs in our head. There is no separate “private action” and “public action”, they are merely a different way of describing the same phenomenon. No good can benefit “the public” other than benefiting particular individuals, and no cost can be borne “by public” other than being born by particular individuals. If you agree that the holders of Bitcoins should be free to do with their Bitcoins whatever they want, then there is no additional condition possible. Any attempt to add an additional condition requires that holders of Bitcoin are not free to do what they want, i.e. violence. That you deny it does not make contradictions logically possible.

  4. Peter Šurda (@PeterSurda)

    The logical error is apparent here as well:

    “This is, of course, also false. Just like bureaucratic processes, markets also have asymmetries of power and information, and the singular focus on profit fails to adequately address other issues like social and environmental justice.”

    Again, the only two logically available options are that they holders of Bitcoins (money, whatever) are free themselves to choose what to do with them (peace, voluntaryinsm, free markets), or they are not (slavery, war, taxation, regulation, statism). There are no other logically available options. If you don’t like the outcome of market forces, your only alternative is violence. This you need to keep in mind when criticising anarchocapitalists.

  5. Dmytri

    Hey Peter, no problem assuming I speak German, my German should be better by now, after over 8 years in Berlin.

    You wont get a strong argument from me with regard to my understanding economics, all I can say that is that I try to understand, it’s obvious I’m not a scholar, and have no formal qualifications.

    In the quote that I employed, Graeber says “Similarly, the number of documented marketplaces where people regularly appear to swap goods directly without any reference to a money of account is also zero.” this makes it quite clear that commodities never have been exchanged with commodities.

    A pre-money barter economy has never existed.

    Money came first, and only after money existed, did money prices, or even fixed amount of commodities exchanged for other fixed amounts of other commodities, come into practice. Since there never was barter before money, it’s a little ridiculous to continue to argue that money emerged from barter. And if barter does not imply spot transactions, please explain what it is exactly that barter does imply, and how this relates to the origin of money.

    And yes, in modern social forms there is a very clear distinction between public and private, and yes, public actions are actions by individual as well. None the less, we have clearly identifiable public institutions, that perform obvious functions, and we don’t need to entertain any sort of semantic navel gazing to try to understand how they work, and how similar functions can be not only provided in theory, but accomplished in fact.

    And there has never been, nor will there ever be any society that has only “commodity money and no money substitutes,” and we certainly don’t have such a society now, and such we do have monetary policy, and if we are seriously looking at building new forms of association, new ways to produce and share, that are not State based, then we will also need to deal with monetary policy.

    But, to use your language, your biggest error is this statement “Any attempt to add an additional condition requires that holders of Bitcoin are not free to do what they want, i.e. violence. That you deny it does not make contradictions logically possible.”

    More than just an error, it illustrates the most bizarre cognitive bias that afflicts many anarcho-capitalists, a frequent disinterest in bothering to understand arguments, and, rather than respond to them, repeat their own banal “state=violence” talking points ad nauseam.

    Nothing I wrote requiers anything of Bitcoin holders at all. My argument is that Bitcoin is not a good form of money for collective forms to use internally, that it doesn’t fullfil the public function of money, and that as such, Bitcoin should not be used for this purpose.

    Bitcoin is perfectly viable as a circulating asset used in exchange, and having the properties of specie while being digital is very significant. I also believe that the informal and translocal economy is an important, and Bitcoin has clear utility for this sort of trade.

    Now you believe that we should not provide anything outside of markets, that everything, including health, education and justice, should be provide by private firms competing for revenue, that we have no responsibility for the health of others or the children of others, which means that Bitcoin is enough for your purposes.

    But I don’t agree, and many others don’t either. I want a society based on mutual aid, where the necessities of life are provided for all, and thus we need forms of money that can perform countercyclical functions, so that when, for instance, the economy is poor, stimulas can occur and benefits can maintain not only aggregate demand, but also human dignity. A currency with a fixed supply can not perform such counter- cyclical functions.

    And yes, we agree in as much as that this new society can only come about by voluntary, free association. My premis is that people will join co-operative commercial societies that do require them to pay fees in a form of money that the society itself issues, and they will do so because they want to participate in the resulting economy. Such money and fees create the public sector in the macroenomics of such a society’s economy.

    In case you haven’t noticed, that makes the “contradiction” you thought clever enough to tweet about and make two comments here about completely moot. You simply can’t imagine that people would freely chose to produce and share in ways other than as capital accumulating agents in for-profit markets, but that is just your own lack of imagination, not any sort of logical contradiction.

    I warned you, I’m pro-bitcoin and anti-state, so if you really want to engage with my arguments, your habitual talking points wont suffice.

  6. Dmytri

    David, it’s an honour to have you come here and point out this mistake. Yes, I rechecked the article, and indeed it is a different David Friedman! My apologies for the misattribution. I will update the article to correct it.

    Actually, I came across that article looking for your fathers work on counter-cyclical fiscal policy. Since it’s well know that he did, at least at a certain point in his career, write about the necessity of such policy, and though, as far as I understand, he preferred monetary means to fiscal means, he none the less understood that counter-cyclical policy is necessary.

    When I came across the LA Times article, I guess it was just too good to be true to find you arguing for counter-cyclical policy as well, I guess I should have remembered that if something sounds too good to be true, it probably is, but honestly at that moment it never occurred to me that it might be somebody else named David Friedman. Again, I apologize.

    And sure, we all make errors, but actually making errors yourself is no reason to not complain about the errors made by others, so, the errors that I write about are not rendered moot by the fact that I too make errors, as we all do. I for one greatly appreciate my own errors beng complained about, and eagerly replace a wrong idea with a right one when I get the chance.

    As for “taking David Graeber’s account of the origin of money for gospel,” not sure where the derogatory allusion to “gospel” is coming from. Does “agree with” mean the same thing as “taking as gospel” to you?

    Graeber is a significant scholar, who wrote a major work, and cites many sources including Caroline Humphrey. Whatever errors his work has, and like all of ours, it is certain to have some, it’s high-profile enough that many will certainly complain about them. Yet, to my knowledge, nobody has factually disputed the facts that I cite, specifically, that there was no such thing as barter before money. This also is consistent with every other scholar I have read on the subject, Hart, Davis, Patterson, Maus and even Engels, so why would I not believe this? Don’t you?

    I’m also a supporter of the idea of privately issued money, but as money plays many roles, I’m not sure that a privately issued specie-form is the best choice for the provision of what might be described as “social insurance,” since the quantity needs needs to counterbalance financial cycles and sectors. Do you disagree with this? Or do you feel that a fixed-supply private currency like Bitcoin is adequate to deal with issues such as unemployment, economic cycles, import/export fluctuations, public infrastructure, environmental justice, etc.

    Keep in mind that I’m not asking you if the state is needed to provide these things, as I too can envision a future where these are provided by freely associating networked communities, I’m asking if the form of money these communities use to supply these needs can be practically fixed in supply? I don’t think it can.

    Best,

  7. Erik Voorhees

    “they believe that markets are magical efficiently mechanisms that always allocate productive assets to the most productive use, and always justly reward participants according to their contributions”

    Dmytri, thank you for taking the time to respond to my original critique of your piece. I would like to clarify one very important mistake you’re making. Regarding your above quote… nobody thinks this. No free market advocate believes that markets always allocate resources productively, nor that they always justly reward people. You’re mischaracterizing the argument because it’s easy to prove that markets don’t always allocate things perfectly. I’ll be the first to agree with that.

    But markets TEND toward efficiency, and they TEND toward rewarding individuals justly. It’s a messy process, but the tendency toward improving the average life of those involved in such a system is real. Further, markets tend to do these things better than central planning. Again, it’s a tendency, not an absolute.

    What is absolute, however, is the moral argument – that it is immoral to use force to control people who have not harmed anyone else. It is immoral to imprison a man for ingesting a plant, and it is similarly immoral to imprison a man who refused to pay a “minimum wage” that you prefer him to pay to someone else. It is immoral to prevent two individuals from trading with each other, on whatever terms they both voluntarily decide upon, whether those people are neighbors or live across borders or oceans. It is immoral to seize the property of one man and use it to pay another for his crops, or to seize the crops and feed yet someone else. It is immoral to, with one hand, force a man to use your money, while with the other hand printing more of it for yourself. Print all the money you want, but don’t use violence to force anyone into using it, for that is immoral. And indeed, being “charitable” with other peoples’ money is not charity. One should feel no great satisfaction from theft, even if the proceeds are donated elsewhere.

    Using force against those who have not aggressed upon anyone else is immoral, and simply by refraining from such force you suddenly permit a free market. A free market is merely the absence of the use of coercion in economic society. Those of us building the Bitcoin system are doing so primarily in order to reduce the coercion being used upon people.

    It’s fine if Graeber disagrees with Bitcoin as money, or if you do, and you’re both welcome to discuss and argue in favor of your opinions… we’re just asking that you don’t coerce your opinions upon others. Indeed, if your arguments are so good, they shouldn’t require force in the first place, and if you’ve agreed to abstain from force, then you’ve permitted a free market, and we thank you.

  8. Erik Voorhees

    “In the quote that I employed, Graeber says “Similarly, the number of documented marketplaces where people regularly appear to swap goods directly without any reference to a money of account is also zero.” this makes it quite clear that commodities never have been exchanged with commodities.”

    I’ll also comment on this… you do realize, don’t you Dmytri, that just because someone writes a book it doesn’t mean they are correct. To say that commodities never have been exchanged with commodities, or that “no two individuals ever bartered in ancient times” is quite an astounding claim. You can call me a fool for not believing it, if you’d like :)

  9. Peter Šurda (@PeterSurda)

    Dmytri, unfortunately it does not look like you got any of my arguments. You just repeat what you already said, without addressing my points. Maybe I can’t explain it well. But wanting something does not make contradictions possible. It only can result in failure.

    So, let me try again. In all the examples Graeber mentioned where he said “this point is when money emerged”, already whatever he calls money was highly valued and widely desired good at that time. He mentions grain, slaves, silver and other things which I forgot. These were all already liquid goods in economic sense at the time when, according to him, money emerged. That he does not use the term “barter” to refer to such a pre-money civilisation is irrelevant, because it misses the economic aspect of it.

    The distinction between public an private exists only in our heads. In order to disprove it, you would need to show a good that cannot be consumed by anyone particular, and whose production does not burden anyone particular either. In the absence of such a proof, public and private are merely two different descriptions but not separate phenomena. That you are unable to make such re-interpretation does not disprove my argument. Wanting them to be different does not make it so.

    The point of anarcho-capitalism is not money and profit or the absence of indirect transactions or “sharing”. What money and profit however allow is to conduct a widescale decentralised coordination of satisfaction of needs in an ideologically impartial fashion. Money is simply a more efficient replacement for other types of coordination of production and consumption. And people who want to satisfy their needs more efficiently simply tend to prefer it, and through the network effect, result in increasing the satisfaction of other people’s needs as well.

    Last but not least, a system with commodity money and no money substitutes is possible if the monetary base has sufficiently low transaction costs, and Bitcoin is a potential example of it. But let’s hear about monetary policy from Mises:

    “If a country has a metallic standard, then the only measure of currency policy that it can carry out by itself is to go over to another kind of money. It is otherwise with credit money and fiat money. Here the state is able to influence the movement of the objective exchange value of money by increasing or decreasing its quantity.”

    And Milton Friedman:

    “If a domestic money consists of a commodity, a pure gold standard or cowrie bead standard, the principles of monetary policy are very simple. There aren’t any. The commodity money takes care of itself.”

  10. Dmytri

    @peter:

    Graeber, like many others, notes that no barter society has ever existed. The word Barter has a pretty clear meaning, even Wikipedia knows that “Contrary to popular conception, there is no evidence of a society or economy that relied primarily on barter.”

    Money created markets, not the other way around. Therefore the idea that Money emerged from Barter is ridiculous, no matter how much you try to torture logic to avoid knowing this. The barting “pre-money civilizations” to which you refer did not exist.

    And once again your public/private ontological navel-gazing is neither interesting, nor relevant. There does not need to be some essential difference between “public” and “private” for us to identify public institutions and their functions. You can tell the difference between the public library and a book store, even if they are both just ways that individuals provide books to individuals. Just as easily as we can identify existing public institutions and their functions, I have described already very specifically what exactly would constitute the public in the co-operative commercial societies I’m proposing, so their is no mystery or philosophical wonder here.

    Markets do not co-ordinate production, production is always and everywhere co-ordinated by planning, what markets do is extend social production beyond the scale of simple reciprocation and trust, by encapsulating transactions into exchange prices, and thereby not requiring the participants to maintain any close relations, as gift and kin-communal economies did.

    And Von Mises and Friedman are flat wrong, as credit creates endogenous money supply growth that in no way depends on the size of the monetary base. The “IOU” is an always available money substitute.

    And Peter, it’s not that I, or anybody else probably, has not “got” your arguments, it’s that you simply never tire of repeating them, no matter how many times they are refuted. This characteristic is so common among “anarchist capitalists” that it’s pretty much a cliche. So, short of some unexpected burst of insight from you, this will be my last response to you. Because, to be honest, I really don’t care what your cult thinks of my work, because unlike you, I know that the bulk of your theories have been unequivocally refuted. So, please, kindly take your act elsewhere.

  11. Dmytri

    @Erik

    Graeber’s claims should not be considered correct because he wrote a book, but because he makes his case convincingly, and his facts and arguments are consistent with every all the other research in the fields, as I wrote in my response to David Friedman:

    Graeber is a significant scholar, who wrote a major work, and cites many sources including Caroline Humphrey. Whatever errors his work has, and like all of ours, it is certain to have some, it’s high-profile enough that many will certainly complain about them. Yet, to my knowledge, nobody has factually disputed the facts that I cite, specifically, that there was no such thing as barter before money. This also is consistent with every other scholar I have read on the subject, Hart, Davis, Patterson, Maus and even Engels, so why would I not believe this?

    The point is not if anybody, anywhere ever swapped goods, to point is that if this was ever a significant economic practice, which it was not.

    Money created markets, not the other way around.

  12. Dmytri

    @Erik, I appreciate that you don’t subscribe to the efficient market hypothesis, but I’m affraid the bad news is that many do, some quite fanitically. You are entitled to your belief that markets tend toward efficiency, but I don’t believe even this. Neither markets nor planning has any particular tendency with regard to efficiency, rather I believe, as I’ve said a few times in this discussion, the social necessities of markets does not extend from any tendency to efficiency, to repeat what I wrote to Peter:

    Markets do not co-ordinate production, production is always and everywhere co-ordinated by planning, what markets do is extend social production beyond the scale of simple reciprocation and trust, by encapsulating transactions into exchange prices, and thereby not requiring the participants to maintain any close relations, as gift and kin-communal economies did.

    I’m saddened to see that you reverted to your irrelevant red herrings about force, after you have already admitted on twitter that I have made no arguments in favour of force.

  13. Brian

    “No example of a barter economy” – Americans should know this is completely false, given that the island of Manhattan, New York was famously purchased from the native americans with some beads and trinkets.

    Most hunter-gatherers used barter.

  14. Dmytri

    @brian, is this a serious comment or are you joking? Hunter-gathers used barter? The purchase of Manhattan for beads? People really exist that believe these things? #facepalm

  15. Dmytri

    You refer to the exhaustively empirically researched work of Caroline Humphrey as “un-evidenced assertions from Cambridge academics” after linking, as evidence, a wikipedia article that refutes your own argument.

    I’m speechless.

    http://en.wikipedia.org/wiki/Peter_Minuit#Purchase_of_Manhattan:

    An 1877 embellishment of the myth claimed that the Dutch offered “beads, buttons and other trinkets,” though there is no evidence for this.[7] However, according to researchers at the National Library of the Netherlands: “The original inhabitants of the area were unfamiliar with the European notions and definitions of ownership rights

  16. Anonymous

    well, some like to be an active part of “that” part of the american nightmare: the sociopathic hillybilly digging for gold, private property as the highest good, abundancy of the commons (including the natives), and the government far away, it is not Nietzsche’s Zarathustra but Henry David Thoreau’s Walden who is hording cybergold and hiding in the cypherpunk trenches for the final battle, some hardcore christian last battle for tribal survival, probably an oedipal reaction to the bad treatment when they left Old-empirialist-Europe. meanwhile the tea party has been sponsored by the us oligarchy. as democracy has to get rid of the neonazis, us based anarchists probably have to shrug off their libertarian ancestors.. :)

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