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Sunday, February 26, 2012

Daniel Davies: Too Big To Fail: The First 5000 Years

Daniel Davies on the history and purpose of debt contracts (this is from a series of posts at Crooked Timber discussing David Graeber's new book Debt: The First 5,000 Years):

Too Big To Fail: The First 5000 Years, by Daniel Davies: One of the many fascinating pieces of information that David Graeber tosses off like shrapnel in Debt is that the first recorded appearance of the word “freedom” in a political document is in a Sumerian proclamation of a debt amnesty or jubilee.

What interested me, however, from the point of view of a professional banker, is that the document in question provided only for the discharge of personal debts of the Sumerians; commercial debts of merchants were not discharged. ... The point I am trying to make here is that as well as being the first mention of the word “freedom”, this proclamation marks the first recorded instance of a regulator-sanctioned selective default. ... So from the start to the beginning of the story of debt, it has always mattered whether or not you were on the right side of what the relevant regulator wanted to accomplish. ...

I think this because commercial debts between merchants are a really important part of the story here. Not only are they, in simple numeric terms, a much bigger part of the picture than debts between individuals in social groups, or even tax obligations between subjects and rulers, the fact that trade credits between merchants have generally, even in conditions when other kinds of debt relation were being repudiated, tended to be preserved and honored, gives us a few clues toward an alternative story of debt over the last 5000 years.

The Babylonian merchants weren’t included in the debt amnesty, of course, because to have upset their trading accounts would have done serious damage to the commercial basis of Babylonian society – to put it frankly, they were too big to fail. ...

So it is noticeable that the concept of “too big to fail” has grown up hand in hand with the concept of the debt relation for the entire traceable history of debt. Although the parallel track of debt as obligation, religion and morality has certainly been there, and is described expertly in the book, from day one it has been recognized among merchants and men of commerce that the point of the debt relation is to serve the organization and arrangement of commercial need.

To my mind, this fact rather colors one of the central theses of Debt – the idea that debt has from its origins been entwined with slavery, military tribute and imperialism. I’d advance the suggestion that of course the first people to start codifying the debt relation were the first emperors and rulers; they were the first people who ever came across the problem of organizing a productive economy larger than a small village or subsistence farming community. The fact that debt has its origins in the creation of tax-collecting, military societies seems to me to be equivalent to the fact that NASA invented Teflon – they had to do it, in order to solve the problems put in front of them. ...

I’ve repeated myself to a boring extent in the past on the subject of the science of economics being basically a branch of control engineering (“economic cybernetics”, as the Russians called it) which went rogue in the 19th century and got caught up in a whole load of moral and political philosophy that didn’t belong there. Debt as per Graeber’s book is an example of this – the debt contract is basically a tool of industrial organization that escaped from the laboratory and ran wild. But I think he underestimates the extent to which there have always been domesticating influences on the concept, and the extent to which the debt relation has always been, correctly, the subject of revision and reappraisal, with the basic underlying question being that of economics rather than anthropology – “How do we best organize the decision making process with regard to production, consumption, and exchange?”

Having said that, there are some situations where Graeber’s analysis seems completely accurate. Countries don’t have bankruptcy codes governing them, and so in the sphere of international debt negotiations, one can see all the pernicious aspects of the “folk-economics” version of the debt contract that Graeber describes. Looking at the relationship between the European Union and Greece, or even Ireland, one can see that the debt relation is being specifically shaped into a tool for exercising power... IMF programs seem to be typically designed to fail, to put the client country into the position of a defaulting debtor and entirely reliant on the mercy of its creditors. So ... the book ... is very useful in looking at debt-relations outside the commercial codes that govern most of the world’s actually existing debts, and it’s a very salutary reminder of what happens when people forget that debt ... really only ought to be ... the legal system’s best guess at what kind of arrangements would best serve the general purposes of commerce. It is, as Graeber intimates, when the debt relation takes on an independent life of its own that the problems all start.

[More here.]

    Posted by on Sunday, February 26, 2012 at 10:50 AM in Economics, Financial System | Permalink  Comments (28)


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