When economists and anthropologists debate

Bloomberg Businessweek posted an article about David Graeber, "a 50-year-old anthropologist—among the brightest, some argue, of his generation—who made his name with innovative theories on exchange and value" and his role in the ongoing "Occupy Wall Street Process."

While I respect what he is trying to do to advance his beliefs, I have to disagree with his ideas about the nature and origins of money and consequently how it relates to debt (two things the article considers the center of what protesters are angry about):

"Economics textbooks tell a story in which money and markets arise out of the human tendency to “truck and barter,” as Adam Smith put it. Before there was money, Smith argued, people would trade seven chickens for a goat, or a bag of grain for a pair of sandals. Then some enterprising merchant realized it would be easier to just price all of them in a common medium of exchange, like silver or wampum. The problem with this story, anthropologists have been arguing for decades, is that it doesn’t seem ever to have happened. 'No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money,' writes anthropologist Caroline Humphrey, in a passage Graeber quotes.

People in societies without money don’t barter, not unless they’re dealing with a total stranger or an enemy. Instead they give things to each other, sometimes as a form of tribute, sometimes to get something later in return, and sometimes as an outright gift. Money, therefore, wasn’t created by traders trying to make it easier to barter, it was created by states like ancient Egypt or massive temple bureaucracies in Sumer so that people had a more efficient way of paying taxes, or simply to measure property holdings. In the process, they introduced the concept of price and of an impersonal market, and that ate away at all those organic webs of mutual support that had existed before."

Here we go again.

Let me answer by using a famous philosophical thought question: if a tree falls in a forest and no one is around to hear it, does it make a sound? I know we are scientist and it is of great prerogative that we base our findings in facts that are observable and backed by proof. But even if we don't have proof, it doesn't mean the fact is not true. It's just that we don't have enough evidence to prove the fact is true. Just like in statistical regression analysis, you don't say you do not reject the null hypothesis for higher p-values: you say you fail to reject the null hypothesis.

Because if this is not the case, I can argue against Graeber using the same reasoning: are there proofs that it was governments/states that created money? I don't think there are. So now we have to base our conclusions on two conjectures. Which one is stronger?

That money is created by the state is a weak conjecture based on the simple fact, which is true then and is still true today, that any one single entity (individual or government) is not omnipotent--such entity will never have all information. How did governments choose which is the right form of money to create? Did the emperor woke up one morning and thought, "Ooo, I like them shiny things. Let's use gold as our money!" Rome wasn't built in a day, and neither was Ancient Egypt and Sumer, so it will be a wonder at what point did the state decide what type of money and when to implement the use of the money. Surely the state has to be extremely knowledgeable about the workings of markets and transactions to be able to come up with the perfect medium of exchange. But this again is likely not the case. As Friedrich August von Hayek states it in one of his famous works, "The Use of Knowledge in Society" (1945), "a centrally-planned market could never match the efficiency of the open market because any individual knows only a small fraction of all which is known collectively":

"The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate 'given' resources-if 'given' is taken to mean given to a single mind which deliberately solves the problem set by these 'data.' It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge not given to anyone in its totality."

Now let's turn to the other conjecture. Is it possible that the origin of money is an evolutionary process which began in barter trade and ultimately ended up in more manageable and saleable form that greatly improved exchanges and transactions? I see this as a more stronger conjecture. Carl Menger was one of the first to point this out, in his famous work, "On the Origin of Money" (1892). In it, he says that money is not created by a state edict, but money evolved in the marketplace. It was the individuals who decided what is the most marketable good that can be used as a medium of exchange. It is the market that chose which commodity is best as a medium for exchange in terms of saleability, durability, and transportability. Money did not come immediately, but instead evolved through time as the market discovers new commodities that are more saleable, more durable, and more transportable. For Menger, the state only came in to perfect what the market considered was money by recognizing and regulating the medium:

"Money has not been generated by law. In its origin it is a social, and not a state-institution. Sanction by the authority of the state is a notion alien to it. On the other hand, however, by state recognition and state regulation, this social institution of money has been perfected and adjusted to the manifold and varying needs of an evolving commerce, just as customary rights have been perfected and adjusted by statute law."

The development of money is one example of Menger's complete theory of social institutions. For Menger, social institutions arise from individuals interacting with each other, and each with his or her own subjective knowledge and experiences. Together and through time, these human actions spontaneously evolved and eventually created institutions. Money is an institution, where individuals find certain patterns of behavior, such as the use of gold coins as a medium of exchange, that helped in attaining a person's goals more efficiently, such as for transactions, and then adopt such behavior.

Bottomline is, money itself has desirable qualities, among them are three things that Menger points out--saleable, durable, and transportable. It's highly unlikely that any one person, and at a very short time, can come up with one commodity that has these properties. The creation of money is evolutionary, and it involves more than one person accepting such commodity as medium of exchange.

So let's give up on this no-proof-of-barter-economy argument, shall we?

Institutions as Capital?

In the recent Liberty Forum held in New York sponsored by the Atlas Economic Network, Michael Fairbanks, philanthropist and author of a couple of books, talked about the elements that characterize the process of creating prosperity. His talk, heavily based in his framework "Changing the Mind of a Nation: Elements in a Process of Creating Prosperity", advocates moving away from economists' common view of prosperity as a "flow" concept to a "set of stocks" concept. This basically considers prosperity as "the enabling environment that improves productivity." This is connected to Mr. Fairbanks's work of finding ways to improve people's lives through enterprise development and technological innovation.

I took great interest in how he enumerates seven kinds of capital (the "prosperity as a stock" he refers to, page 1 to 2):

1. Natural endowments such as location, subsoil assets, forests, beaches, and climate.
   
2. Financial resources of a nation, such as savings and international reserves.
   
3. Humanly made capital, such as buildings, bridges, roads, and telecommunications assets.
   
4. Institutional capital, such as legal protections of tangible and intangible property, efficient government departments, and firms that maximize value to shareholders and compensate and train workers.
   
5. Knowledge resources such as international patents, and university and think tank capacities.
   
6. Human capital, which represents skills, insights, capabilities.
   
7. Culture capital, which means not only the explicit articulations of culture like music, language, and ritualistic tradition but also attitudes and values that are linked to innovation.
   

I take exception on how he considers the last four as social capital. Unless he has a broader concept of social capital, the term is typically used to pertain to the value of network trusting relationships between individuals in an economy. “Social capital” can be considered capital in the sense that strengthening the network will help an individual achieve his or her productive endeavors. However, by categorizing institutional capital and knowledge resources as social capital, the analytical discourse gets confused. The former pertains to economic and political institutions and the latter to technology or knowledge resources, which are different from the term “social capital” as commonly used in the literature. For instance, can institutions be considered as a form of capital? One of the most basic things you learn in economics is that capital is a factor of production that is not wanted for itself but for its ability to help in producing other goods. Institutions are therefore not capital because these are not factors of production. Institutions are, in a sense, the rules of the game--it can either enhance or diminish productivity. Good institutions are productivity-augmenting, much like technology in a standard neoclassical growth model.

Mr. Fairbank’s reference to Nobel Laureate Douglass C. North under the section "Institutionalize the Change” also needs some clarification. He cites: "Douglass North writes that institutions are norms. Change needs to create new norms of behavior. We look not to creating new institutions but to upgrading existing institutions that have reached their functional limits due to globalization, changes in how prosperity is created, and worldwide shifts in values and attitudes. This means improving the rule of law and building democracy to upgrading schools, private firms, and civic organizations."

From this citation, it can be gleaned that North is referring to institutions as the “rules” of the game. Categorizing it as capital makes it more like a "tool" of the game, which is far from what North describes it to be in his famous treatise on institutions (from his 1991 JEP article, "Institutions"):

"Institutions are the humanly devised constraints that structure political, economic and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights). Throughout history, institutions have been devised by human beings to create order and reduce uncertainty in exchange. Together with the standard constraints of economics they define the choice set and therefore determine transaction and production costs and hence the profitability and feasibility of engaging in economic activity... Institutions provide the incentive structure of an economy; as that structure evolves, it shapes the direction of economic change towards growth, stagnation, or decline."

Institutions are hardly factors of production used by the economy as they pursue economic growth. Institutions' contribution can be thought of similar to technology's contribution to economic growth--they augment production and expand an economy's production possibility frontier. But institutions cannot be found in either the x-axis or the y-axis.

It can be construed as the framework or environment under which economic players – labor, consumers, and capitalist – interact. Being a framework, economic players cannot individually control institutions as they would any machinery and make tradable goods out of raw resources, much like they would do with capital.

The view that institutions augment the typical neoclassical growth model is hardly new. There are papers, such as Daron Acemoglu, Simon Johnson, and James Robinson's 2001 paper "The Colonial Origins of Comparative Development" where institutions are analyzed within the framework of the neoclassical model. The literature, however, is yet to come up with a comprehensive theory that will capture how institutions contribute to economic growth. Some papers such as Jose Aixala and Gema Fabro's "A Model of Growth Augmented with Institutions" and Edinaldo Tebaldi and Ramesh Mohan's "Institutions-augmented Solow Model and Club Convergence" attempt to do this. But there is still much that needs to be done.

I may take a crack at this frontier.

Class Attendance Among Students: A Transactions Cost Perspective

We are in the middle of an academic semester and we are in a somewhat troublesome predicament. While students are attending the lecture classes, few are attending the individual discussion sessions. Most of the time, less than ten out of twenty students attend in each lab session.

It's not their fault--attending the discussion sessions is not required. It has never been since. But it was different this time because in the previous semesters, attendance was perfect. The reason for perfect attendance was the weekly quizzes. We use the weekly quizzes as what Oliver E. Williamson might consider as "hostage." Students have to attend if they want to take the quiz. The quiz, of course, matters for a student's final grade.

It is different this semester. The quizzes are administered online and during the weekend. So for students who may not really care about attending discussion sessions or who think that they can breeze through the semester attending the lectures and studying the class textbook by themselves, there is really no incentive to attend.

What is the transaction here? You may say it's the fact that the student decided to pursue their respective chosen degrees. But we can look at a more micro level. We can consider the pursuit of a degree consisting of further individual transactions, namely the enrollment in different subjects. Students enroll in a subject with the sole purpose of obtaining a benefit--passing and getting a good grade (and hopefully learning as well)

Ex ante costs aside (like monetary and non-monetary costs involved in the process of enrolling), let's concentrate on ex post transaction costs. Definitely, among such transaction costs are typical day-to-day activities students undertake going to classes and studying for tests--all with the ultimate goal of eventually passing the course and getting a grade

If attendance is not required in either lecture or dicussion sessions, and if students feel attending only lecture classes is sufficient enough to get a good grade, then for some students there is really no point in attending discussion labs. So we are really in an institutional arrangement where not attending discussion labs is a rational choice for students.

Now, if we change the arrangement, we should definitely expect a change in the behavior of the students. This turns out to be the case when we instituted a policy wherein there is an incentive for students to attend lab classes. For the remaining lab classes until the end of the semester, we will check attendance. At the end of the semester, we announced that we will randomly select two sessions where we will award 5 points of credit toward the final grade for those who are present during that session. While the effect is not a perfect attendance, there is indeed a significant change in the number of those who started to attend.

We can certainly make the case that there are three types of students in this case. The first type are those who regularly attend, and these are the students that are really interested in learning. The second type are those that started to attend after instituting the new incentive scheme. We can say that for these students, they value a higher grade and the transaction costs involved in attending the lab sessions are low compared to the benefits of getting that higher grade.

In retrospect, you wonder if the differences in the behavior of the students reflect the fact that the benefits one student gains is subjective, or could it be that the transaction costs turned out to be the one that is subjective in nature. Let's face it, some students are really constantly determining if that extra incentive is really worth all the hassles of going to lab sessions. Or maybe some students are really just plain lazy.