So far as some people are concerned, when it comes to bashing economists, any old stick will do.

That, at least, seems to be true of those anthropologists and fellow-travelers who imagine that, in demonstrating that certain forms of credit must be older than either monetary exchange or barter, they’ve got some of the leading lights of our profession by the short hairs.

The stick in this case consists of anthropological evidence that’s supposed to contradict the theory that monetary exchange is an outgrowth of barter, with credit coming afterwards. That view is a staple of economics textbooks. Were it nothing more than that, the attacks would hardly matter, since finding nonsense in textbooks is easier than falling off a log. But these critics have mostly directed their ire at a more heavyweight target: Adam Smith.

In The Wealth of Nations, Smith observes that

When the division of labour has been once thoroughly established, it is but a very small part of a man’s wants which the produce of his own labour can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for. Every man thus lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society.

But when the division of labour first began to take place, this power of exchanging must frequently have been very much clogged and embarrassed in its operations. One man, we shall suppose, has more of a certain commodity than he himself has occasion for, while another has less. The former consequently would be glad to dispose of, and the latter to purchase, a part of this superfluity.

But if this latter should chance to have nothing that the former stands in need of, no exchange can be made between them. The butcher has more meat in his shop than he himself can consume, and the brewer and the baker would each of them be willing to purchase a part of it. But they have nothing to offer in exchange, except the different productions of their respective trades, and the butcher is already provided with all the bread and beer which he has immediate occasion for. No exchange can, in this case, be made between them.

He cannot be their merchant, nor they his customers; and they are all of them thus mutually less serviceable to one another. In order to avoid the inconveniency of such situations, every prudent man in every period of society, after the first establishment of the division of labour, must naturally have endeavoured to manage his affairs in such a manner as to have at all times by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry.

What’s wrong with that? In the words of Cambridge anthropologist Caroline Humphrey, as quoted in a recent article on the subject in The Atlantic  (the appearance of which inspired the present post), what’s wrong is that “No example of a barter economy, pure and simple, has ever been described, let alone the emergence of money... All available ethnography suggests that there has never been such a thing.”

Now, the mere lack of historical or anthropological evidence of past barter economies is itself no more evidence against Smith’s account than it is evidence in favor of it: after all, if barter tends to get as “clogged as embarrassed” as Smith maintains, we should not be surprised to find no evidence of societies that relied on it. That lack might only mean that societies either came up with money quickly, or perished equally quickly. Instead of refuting Smith’s theory, in other words, the lack of evidence of barter may simply reflect survivorship bias.

Julio Huato, in his astute review of Graeber’s book, makes the point most cogently: “Graeber’s attitude,” he writes,

is like that of a chemist rejecting the idea that unstable radioactive isotopes of a certain chemical element exist and tend to evolve into stable isotopes because the former are only exceptionally found in nature, while the latter are common.

But the problem with Smith’s understanding, according to Graeber, isn’t merely that anthropologists can find no evidence of barter societies. It is, rather, that those same anthropologists have plenty of evidence of societies that subsisted, if they didn’t thrive, despite neither having money nor relying upon barter. Instead of relying on “quid-pro-quo” exchanges, whether direct or indirect, they managed by resorting to subtle forms of credit, if not outright gift-giving.

As our Atlantic correspondent explains:

If you were a baker and needed meat, you didn’t offer your bagels for the butcher’s steaks. Instead, you got your wife to hint to the butcher’s wife that you two were low on iron, and she’d say something like, “Oh really? Have a hamburger, we’ve got plenty!” Down the line, the butcher might want a birthday cake, or help moving to a new apartment, and you’d help him out.

Far be it for me to deny that trade of this sort happens, even in modern societies, or even that entire communities have at various times depended on it. Heck, I once taught a short course on economic anthropology an entire section of which was devoted to gift giving and other sorts of “ceremonial exchange.”

What I do deny, and vigorously, is anthropologist David Graeber’s claim that the existence of gift economies undermines, not just Adam Smith’s account of money’s origins, but “the entire discourse of economics.”

Hear our correspondent once again:

According to Graeber, once one assigns specific values to objects, as one does in a money-based economy, it becomes all too easy to assign value to people, perhaps not creating but at least enabling institutions such as slavery…and imperialism.

There you have it. By claiming that societies could thrive only by means of monetary exchange, Adam Smith is supposed to have given shape to an “economic discourse” according to which all things, including people, are bound to be valued in terms of money, thereby “enabling” slavery and imperialism and…well, the whole capitalist catastrophe.

That nothing could be more grotesquely unjust to Adam Smith than Graeber’s attempt to paint him as an enabler of slavery and imperialism is (or ought to be) painfully obvious. But if fair play is not Professor Graeber’s forte, neither is a solid, or even a more than exceedingly superficial, understanding of the tenets of modern economics.

Had Graeber’s purpose been, not to document economists’ ignorance of anthropology, but to show that at least one anthropologist doesn’t know the first thing about economics, I dare say that he could have done no better than to write Debt: The First 5000 Years.

Consider the opening passage of “The Myth of Barter,” Graeber’s second chapter, and the one in which he sets out his central claim that Smith, by getting the story of money wrong, took a fateful wrong turn:

What is the difference between a mere obligation, a sense that one ought to behave in a certain way, or even that one owes something to someone, and a debt, properly speaking? The answer is simple: money. The difference between a debt and an obligation is that a debt can be precisely quantified. This requires money.

“A history of debt,” Graeber observes two paragraphs later, “is thus necessarily a history of money.”

This is simple, all right. But a moment’s thought reveals that it is also simply wrong. One can incur a debt by borrowing some non-monetary good or goods, just as well as by borrowing money, where repayment is also to be made in goods, and is no less precisely quantified than a monetary obligation might be.

To say, “Give me a hamburger today and I’ll repay you two hamburgers on Tuesday,” is to offer to go into debt to the tune of (precisely) two hamburgers. That money is both fungible and relatively (though in practice not infinitely) divisible makes it an especially convenient object of debt contracts. But that is a difference in degree rather than in kind.

Far from being innocuous, the error with which Graeber’s chapter opens is but one crack in the severely-flawed foundation upon which his entire critique of both modern economics and commercial society rests. That foundation consists of the view that money is, not only uniquely (and precisely) quantifiable, but something capable of precisely measuring the value of other things:

What we call “money” isn’t a “thing” at all; it’s a way of comparing things mathematically, as proportions: of saying one of X is equivalent to six of Y.

Monetary exchange, in turn,

is all about equivalence. It’s a back-and-forth process involving two sides in which each side gives as good as it gets. … Each side in each case is trying to outdo the other, but, unless one side is utterly put to rout, it’s easiest to break the whole thing off when both consider the outcome to be more or less even.

In other words, monetary exchange, being but an “impersonal” matter of mathematics, is a contest that must result either in a stalemate, with neither side winning, or in a bargain by which one side rips the other off. Gift exchange, on the other hand, “is likely to work precisely the other way around — to become a matter of contests of generosity, of people showing off who can give more away.”

I leave it to the reader to imagine how, by means of repeated appeals to this sort of reasoning, Graeber manages to paint Adam Smith (and most economists since) as an apologist for slavery, imperialism, and pretty much every ungenerous and unkind activity under the sun.

There’s just one problem. Just as money is in truth no more “quantifiable” than hamburgers, so, too, is it the case than money is no more a “measure” of value than a hamburger is. By that I mean, not that a hamburger is also capable of measuring the value of other things, but that neither it nor any sort of money is capable of doing so.

The idea that money is a “measure of value,” like the related idea that exchanges are necessarily exchanges of equivalents, is among the hoariest of economic fallacies. It plays a prominent part in Aristotle’s economics — and, not coincidentally, in Aristotle’s condemnation of all sorts of “capitalist” activity

Smith himself, in subscribing to a modified labor theory of value, was unable to break free of it. It is more than a little ironic that Graeber, in flinging all sorts of undeserved criticism at Smith, cleaves to him when it comes to his one indisputable mistake.

The notion that money is a “measure of value” is but a particular instance — albeit one that has managed to linger on in some economics textbooks — of the mistaken belief that economic exchanges are exchanges of equivalents.

In his book Money: The Authorized Biography, Felix Martin, like Graeber, takes the “measure of value” notion seriously, and attempts to build from it a critique of both modern economics and modern monetary economies. In reviewing that work, I explained Martin’s mistake by observing that when a diner sells me bacon and eggs for $4.99, “that doesn’t mean that bacon and eggs are worth $4.99, ‘universally’ or otherwise. It means that to the diner they are worth less, and to me, more.”

Grasp this little strand of truth. Pull on it. Keep on pulling. And watch Martin’s critique unravel. Graeber’s critique, with its fatuous dichotomy of generous credit transactions on one hand and antagonistic monetary transactions on the other, rests on the same fallacy, and is no less gimcrack.

My concern, though, isn’t with Graeber’s sweeping condemnation of modern economics, or of the economic arrangements for which modern economists are supposedly to blame. It’s with his particular claim that there’s no merit in Smith’s account of the origin of money, or in the later accounts of other economists, including Carl Menger.

Despite what these economists have argued, money couldn’t have grown out of barter, Graeber insists, because the “fabled land of barter” that these accounts posit never existed. Instead, credit came first, sometimes in subtle and elaborate forms that made it indistinguishable from gift-giving; then came money, in the form of coins. Barter, finally,

appears to be largely a kind of accidental byproduct of the use of coinage or paper money: historically it has mainly been what people who are used to cash transactions do when for one reason or another they have no access to currency (my emphasis).

So, how true is Graeber’s account, and just how fatal is it to the “fable” that economists like to tell? For answers, we need look no further than the evidence Graeber himself supplies. For on close inspection, that evidence itself suffices to show that, notwithstanding the fact that credit is older than barter, Smith’s theory is, after all, not all that far removed from the truth.

A paradox? Nothing of the sort. The simple explanation is that, while subtle forms of credit or outright gift giving may suffice for affecting exchanges within tightly-knit communities, exchange within such communities hardly begins to take advantage of opportunities for specialization and division of labor that arise once one allows for trade, not just within such communities, but between them, that is, for trade between or among strangers.

One need only recognize this simple truth to resuscitate Smith’s theory from Graeber’s seemingly fatal blow. Simple forms of credit may come first; but such credit only goes so far, because it depends on a repeated interaction, and the trust that such interaction both allows and sustains. That affection and other such “moral sentiments,” to use Smith’s own term, also play a large part is evident from the fact that, within families even today, monetary exchange and barter play hardly any role: every family is, if you like, a vestigial “gift” economy.

It’s absurd to suppose that Smith himself failed to recognize that credit (or something like it) functions in place of either barter or money in families; and hardly more so to suppose that he denied that it might do the same in somewhat larger but still tightly-knit communities. Little Adam Smith did not, presumably, bargain with his mother over bed and board, or find his efforts to secure those and other necessities “embarrassed and choked” for want of either double coincidences or cash.

Nor could anyone aware of passages like the following, from Smith’s Theory of Moral Sentiments, suppose that he considered mutual aid unimportant except within nuclear families:

In pastoral countries, and in all countries where the authority of law is not alone sufficient to give perfect security to every member of the state, all the different branches of the same family commonly chuse to live in the neighbourhood of one another. Their association is frequently necessary for their common defence. They are all, from the highest to the lowest, of more or less importance to one another.

Their concord strengthens their necessary association; their discord always weakens, and might destroy it. They have more intercourse with one another, than with the members of any other tribe. The remotest members of the same tribe claim some connection with one another; and, where all other circumstances are equal, expect to be treated with more distinguished attention than is due to those who have no such pretensions.

It is not many years ago that, in the Highlands of Scotland, the Chieftain used to consider the poorest man of his clan, as his cousin and relation. The same extensive regard to kindred is said to take place among the Tartars, the Arabs, the Turkomans, and, I believe, among all other nations who are nearly in the same state of society in which the Scots Highlanders were about the beginning of the present century.

If Smith recognized, at least implicitly, that, in families and other tight-knit communities, “credit” serves in place of either barter or money, Graeber for his part is forced to admit that, when it comes to trade between strangers, credit won’t serve:

Now, all this (meaning the lack of evidence of a “fabled land of barter”) hardly means that barter does not exist — or even that it’s never practiced by the sort of people Smith would have referred to as “savages.” It just means that it’s almost never employed, as Smith imagined, between fellow villagers. Ordinarily, it takes place between strangers, even enemies (my emphasis).

Later Graeber writes,

What all … cases of trade through barter have in common is that they are meetings with strangers who will, likely or not, never meet again, and with whom one certainly will not enter into any ongoing relations. …

Barter is what you do with those to whom you are not bound by ties of hospitality (or kinship, or much of anything else).

No doubt. But how big a problem is this for Smith? Let pass the silly remark about “savages.” (An anthropologist ought, one would think, to be capable of resisting the temptation to pass judgement on an 18th-century Scotsman’s choice of words according to 21st-century notions of political correctness.)

The question is, what did Smith really “imagine”? His story of the butcher and the baker notwithstanding, his reference to pastoral societies makes it perfectly evident that he understood the difference between conduct among “villagers” and conduct among strangers. His theory of the origins of money ought to be understood accordingly.

It is a theory of how, when opportunities for trade arise among strangers, bringing with them further scope for the division of labor, trade will be “choked and embarrassed” if it must occur by means of barter, but will cease to be so once barter gives way to the employment of money. In portraying such cases as exceptions to the rule that “credit” proceeds barter, Graeber simply fails to understand that such “exceptions” are all that matters in assessing Smith’s theory.

Nor will it do to suggest that Smith’s understanding of money’s origins confuses what happens within societies or communities with what happens between them. Such a view depends on arbitrarily rigid definitions of “community” and “society” that overlook these concepts’ inherently elastic nature: formerly separate communities cease to be so precisely to the extent that commerce takes place between them.

Smith, for his part, recognizes this. Moreover he understands that the rise of commerce, meaning commerce among strangers, serves in turn to reduce the relative importance of ties of kinship and such, further increasing thereby the importance of monetary exchange. Here is the passage from the Theory of Moral Sentiments that immediately follows the previously-quoted one on pastoral societies:

In commercial countries, where the authority of law is always perfectly sufficient to protect the meanest man in the state, the descendants of the same family, having no such motive for keeping together, naturally separate and disperse, as interest or inclination may direct. They soon cease to be of importance to one another; and, in a few generations, not only lose all care about one another, but all remembrance of their common origin, and of the connection which took place among their ancestors. Regard for remote relations becomes, in every country, less and less, according as this state of civilization has been longer and more completely established.

It has been longer and more completely established in England than in Scotland; and remote relations are, accordingly, more considered in the latter country than in the former, though, in this respect, the difference between the two countries is growing less and less every day. Great lords, indeed, are, in every country, proud of remembering and acknowledging their connection with one another, however remote. The remembrance of such illustrious relations flatters not a little the family pride of them all; and it is neither from affection, nor from any thing which resembles affection, but from the most frivolous and childish of all vanities, that this remembrance is so carefully kept up.

Should some more humble, though, perhaps, much nearer kinsman, presume to put such great men in mind of his relation to their family, they seldom fail to tell him that they are bad genealogists, and miserably ill-informed concerning their own family history. It is not in that order, I am afraid, that we are to expect any extraordinary extension of, what is called, natural affection.

In short, a generous reading of Smith, far from making him out to be a right bungler when it comes to matters ethnographic, yields a relatively sophisticated view, according to which kinship and “credit” first predominate, but then give way, as strangers meet, first to barter, but eventually to monetary exchange, which in turn allows for the growth of commerce, which ends up reducing the role of kinship and kin-based credit relationships.

If Graeber’s reading of Smith is ungenerous, his reading of Carl Menger is … well, it’s obvious that Graeber hadn’t read Menger at all, for if he had he could not possibly have written that Menger improved upon Smith’s theory mostly “by adding various mathematical equations” to it, or that Menger “assumed that in all communities without money, economic life could only have taken the form of barter.” (Nor, for that matter, could he have failed to note that the senior Menger, unlike his mathematician son, spelled Carl with a “C.”)

Instead, Graeber would have had to admit that Menger understood perfectly well that “credit,” in Graeber’s loose sense of the term, is older than either monetary exchange or barter.

Menger’s appreciation of the importance of what he sometimes referred to as “no-exchange” economies is especially evident in his 1892 article, “Geld,” in the Handwörterbuch der Staatswissenschaften  (pp. 730-57), from which his more well-known article “On the Origins of Money” is extracted. According to Menger,

Voluntary as well as compulsory unilateral transfers of assets (that is, transfers arising neither from a ‘reciprocal contract’ in general nor from an exchange transaction in particular, although occasionally based on tacitly recognized reciprocity), are among the oldest forms of human relationships as far as we can go back in the history of man’s economizing.

Long before the exchange of goods appears in history, or becomes of more than negligible importance…we already find a variety of unilateral transfers: voluntary gifts and gifts made more or less under compulsion, compulsory contributions, damages or fines, compensation for killing someone, unilateral transfers within families, etc.

Far from exemplifying Graeber’s claim that economists “begin the story of money in an imaginary world from which credit and debt have been entirely erased,” Menger explicitly recognizes that

people had probably tried to satisfy their wants, over immeasurable periods of time, essentially in tribal and family no-exchange economies until, aided by the emergence of private property, especially personal property, there gradually appeared multifarious forms of trade in preparation for the exchange proper of goods. …

Only then, and hardly before the extent of barter and its importance for the population or for certain segments of the population had made it a necessity, was the objective basis and precondition for the emergency of money established.

In light of such evidence — which, bear in mind, comes from a work published several decades before Mauss’s pathbreaking work on gift exchange — the attention given to Graeber’s critique, and the fact that even some economists saw merit in it (if only temporarily), tells us that there is, after all, at least one impulse among humans that’s more deep-seated than their “propensity to truck, barter, and exchange.” I mean, of course, their propensity to let themselves be thoroughly bamboozled.

This post first appeared at Alt-M.