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Thursday, May 19, 2016

A Postscript On Barter

One of the topics around the origin of money that I ignored in my previous article was the ongoing arguments about the role of barter in the history of money. Tom Hickey at Mike Norman Economics raised the objection that mainstream economics is based around a mythology of barter. Although I think the historical analysis around barter was dubious, I would argue that it is a distraction when discussing economics. (Once again, the study of history is an entirely legitimate field of enquiry, but I would leave history to the historians.)

Tom Hickey's comments:
The simple answer to the importance of the history of money in theory of money is historical. Neoclassical economics is based on the barter-commodity theory of money, which implies that money is a neutral veil.
The opposition of some economists to this deficient assumption was not only to point out that money does not function as a neutral veil in modern monetary economics, but also that the narrative on which the barter-commodity theory of money is erroneous. For example, the commodity theory leads to the assumption that gold is money, or gold, silver and copper are money, and that other forms of money are just tokens for these real assets.
So, yes, economists have to take the history of money into consideration into order to avoid the false assumptions that afflict conventional economic methodology, a principal one of which is that a modern economic is a barter economy rather than a monetary economy. This has lead to wrong conclusion and disastrous policy based on them.
Jerry Brown similarly commented on that article:
We should care about the origins of money. I think that the reason Wray emphasizes the history of money is to show that the classic econ story of money evolving as a way to facilitate barter exchange in previously (supposedly) exclusively barter exchange economies is the wrong way to look at the function of money. Especially in our monetary economies today. That false (in my opinion) barter exchange history is still being used today as a foundation to support a lot of very shaky neoclassical economics.
I will respond in two parts: with regards to the historical debate, and the modern relevance.

Historical Origin Debate

A great many classical/neoclassical economics texts (going back to Adam Smith) contained a fairy story along the following lines. During the "Olden Days," people traded goods amongst each other without the use of money (called barter). This was inconvenient. A particular good was found to be easier to trade (such as silver), and then all goods were traded against this common commodity, which became money for the society.

This fable is so familiar that I will not bother fleshing out the details.

I think it would be safe to say that the classical economists' treatment of this history was shoddy. Even Anwar Shaikh, who otherwise attempted to argue in favour of the relevance of classical economists, shied away from saying their historical analysis of barter was valid.

If societies did not engage in barter, then it is clear that money could not have arisen from it.

However, barter transactions did exist in ancient societies. At the minimum, different tribes which had no other dealings with each other, had no choice but to trade equivalents for equivalents. Therefore, even if "domestic" societies were not organised around barter, we cannot declare barter to be entirely mythological.

My reading of the state of knowledge of the field is that we lack the historical records to firmly answer the question whether money arose out of barter. The development of writing appears to be associated with record keeping, and that record keeping was quite often associated with monetary records.

I did nor discuss this aspect of the monetary origin question in my previous article, as I was focussed more on the debate about the role of the state in the origins of money. (Was money created by the government, or the "private sector"?) The following quotation of Anwar Shaikh (Chapter 15 of Capitalism) was what I had in mind.
This is a most revealing fantasy [BR - referring to a Chartalist "fable"]: passive populations, no classes, a benevolent and neutral state, and both money and taxes imposed for the common good. But we know that states arise after money, and that taxes are resisted at every stage... 

Barter As The Basis Of Mainstream Economics

One reason that I was vague about quoting the mainstream myth about barter is that I do not have access to a mainstream economics text that refers to it. I believe that barter fables were a feature of undergraduate textbooks until relatively recently, but based on my sampling, the stories have been culled from the curriculum.

The standard complaint about neoclassical economics by post-Keynesians is that it is now just soulless mathematics (or gibberish cloaked with mathematical symbols). Parables about barter transactions are far too humanistic to appear in modern economics papers, and I certainly have not seen any. Therefore, debunking origins parables has little relevance to academic debates with neoclassical economists.

Is the theory based upon a barter economy? Perhaps that is so. However, the core is mathematical, and how one interprets the mathematics is largely a judgement call. However, we need to see why this is inapplicable to modern societies. The question whether some ancient society used barter is besides the point. From the perspective of a neoclassical economics, the only thing that really matters is whether the mathematics used reflects the society we live in.

One might plausibly argue that the political economy of neoclassical is based upon a barter myth. (Which is presumably why the myth was spread despite the lack of historical evidence.) The idea being that if one debunks the barter origins theory, one undermines the political appeal of neoclassical economics.

This theory seems fairly shaky. The only pro-free market group that actively peddles myths about the origins of money are Austrians. This reflects the reality that there are almost no modern Austrians in academia, and the Austrian movement is forced to keep regurgitating the same quotations from long-dead economists, who accepted the barter myths that were popular at the time. However, spending time studying monetary history to debate Austrians is a huge waste of time. Any Austrian who called into question the fundamental beliefs of the Austrian school is going to be excommunicated, and so there is little chance of having a constructive discussion.

Austrian economics is certainly a tenacious belief system, and is well represented in finance and on the internet. However, it is not taken seriously within academia. One of the reasons for this is that the Austrian movement actively peddles myths about the monetary system. Therefore, it makes little sense to get involved in the myth-making business, and at the same time attempt to be taken seriously within academia.

(c) Brian Romanchuk 2016


  1. I usually have issues when someone says "neoclassical economics describes barter". There are a lot of assumptions on this. In my view this is best avoided in favour of "neoclassical economics is junk" :-)

  2. Here is a paper by Michael Hudson - Debt vs. Barter Theories of Money’s
    Origins - 29 pages.

  3. Thank you for featuring my comment, you made my day. And thanks for pointing me to Tom Hickey's posts on this. He says everything I was thinking plus some. And expresses it far more clearly than I would have.


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