Wednesday, February 13, 2013

David Graeber: Debt is bad, or something...?


In the blogosphere, David Graeber is known as a sort-of-leftish guy with a tendency to fight with other people on the left (he has called Slavoj Zizek an "intellectual comedian" and carried on a lengthy feud with Crooked Timber). But in the world at large, Graeber - an anthropologist by training - is known for writing Debt: The First 5,000 Years, a history of...well, the phenomenon of debt. He has also been called the "anti-leader" of the Occupy Wall Street movement (of which I confess to being a bit of an armchair fan). In fact, Graeber is rumored to have personally coined the term "Occupy Wall Street" (though this is unconfirmed). So objectively, he's actually kind of a big deal.

Writing in the Nation in September of last year, Graeber shared his thoughts on debt:
It’s now clear that the 1 percent are the creditors...The overriding imperative of government policy is to do whatever it takes, using all available tools—fiscal, monetary, political, even military—to keep stock prices from falling... 
The overwhelming majority of Occupiers were, in one way or another, refugees of the American debt system. At first, that meant student debt: the typical complaint was “I worked hard and played by the rules, and now I can’t find a job to pay my student loans—while the financial criminals who trashed the economy got themselves bailed out.”... 
We [have] come to see ourselves as members of the same indebted class... 
The rise of OWS allowed us to start seeing the system for what it is: an enormous engine of debt extraction. Debt is how the rich extract wealth from the rest of us, at home and abroad. Internally, it has become a matter of manipulating the country’s legal structure to ensure that more and more people fall deeper and deeper into debt. As I write, roughly three out of four Americans are in some form of debt, and a whopping one in seven is being pursued by debt collectors.
Reading this, one small point immediately jumped out at me - the bit about stock prices. According to Graeber, the people who control the government are A) creditors, and B) will do anything to boost stock prices. But - as anyone who reads the news should know - the main thing the government does to boost stock prices is to lower interest rates and/or print money. And yet creditors are very angry about this, first of all because they fear that money-printing will cause inflation (which erodes the value of the debt they hold), and also because they can't get much of a return on the money they lend in the future. If you don't believe me, read The Economist or Fox Business complaining about how low interest rates hurt savers (i.e. creditors).

So the government's efforts to boost stock prices are actually making creditors very mad. The interests of stockholders and creditors are at odds. Why doesn't Graeber seem to know this?

In fact, this small inconsistency turned out to be a canary in a coal mine. The more I read over Graeber's arguments, the more I realized that many of his ideas about debt seem either contradictory or confusing. Here are my main questions:

...Who?? ...Whom??

"Debt," says Graeber, "is how the rich extract wealth from the rest of us." But sometimes he seems to claim that creditors are extracting wealth from debtors, and sometimes he seems to claim that debtors extract wealth from creditors.

For example, in the Nation article, Graeber tells that The 1% are creditors. We, the people, have had our wealth extracted from us by the lenders. But in his book, Graeber writes that empires extract tribute from less powerful nations by forcing them to lend the empires money. In the last chapter of Debt, Graeber gives the example of the U.S. and China, and claims that the vast sums owed to China by America are, in fact, China's wealth being extracted as tribute. And in this Businessweek article, Graeber explains that "throughout history, debt has served as a way for states to control their subjects and extract resources from them (usually to finance wars)." 

But in both of these latter cases, the "extractor" is the debtor, not the creditor. Governments do not lend to finance wars; they borrow. And the U.S. does not lend to China; we borrow.

So is debt a means by which creditors extract wealth from debtors? Or a means by which debtors extract wealth from creditors? (Can it be both? Does it depend? If so, what does it depend on? How do we look at a debtor-creditor-relationship and decide who extracted wealth from whom?) Graeber seems to view the debtor/creditor relationship as clearly, obviously skewed toward the lender in some sentences, and then clearly, obviously skewed toward the borrower in other sentences. 

But these can't both be clear and obvious. 

How can I extract wealth from the powerless? Inquiring minds want to know.

OK, so here's a pragmatic question. As a newly minted finance professor who writes blog posts defending the Efficient Market Hypothesis, I am now a card-carrying member of America's white-collar mafia. I'm a member of the 1% in spirit (if not actually in income or wealth). So I want to know: How can I pull off the feat with which Graeber credits the creditor class? How can I get rich extracting wealth from the poor and powerless by lending them money?

Well, one thing I could do is to lend some poor people money, and make money off of the interest payments when they pay back the loan. Am I then extracting wealth from them? Well, maybe. But if they were willing to take out the loan, and willing to pay me back - if they intended to pay me back from the very beginning, and followed through - then didn't they benefit somehow from borrowing the money? Maybe they got a house out of the bargain, or a car. In any case, I charged them for a product, and they paid for the product, knowing what they were getting. 

Did I really "extract wealth" from them? And if so, does a grocery store "extract wealth" from me every time I buy a grapefruit?

OK, so instead suppose I lend the poor people more than they can afford to borrow. I trick them on the terms of the loan, offering them a low "teaser" rate that balloons after a few years, and I conceal this in the fine print and lie to them and tell them that they'll be able to pay it back. (This is certainly possible.) So then they default on the loan. They go into bankruptcy, their house gets repossessed, etc. So they lost out.

But didn't I lose out too? After all, I didn't get paid back! I took a loss! Not a very good method for extracting wealth, it seems to me.

OK OK, new idea. Suppose I sell poor people an exploding loan that they'll never be able to pay back, then package this loan off and resell it to Goldman Sachs. When the poor people default, Goldman Sachs takes a hit and I'm in the black. Money extracted!

But did I extract the money from the poor people, or from my fellow One Percenters at Goldman Sachs? Remember, the poor people took a hit from the bankruptcy, but in the meantime they got to borrow some money and not pay it back, due to the protection afforded them by bankruptcy law.

(But didn't Goldman get bailed out by the government when this happened? Sure, but Goldman actually paid the taxpayer back for that bailout, and Goldman's shareholders - One Percenters - took the hit.)

OK OK OK. NEW idea. Suppose poor people could borrow money for 3% if they knew where to look. but they don't know where to look, so I lend them money at 22%. The people pay me back, but they end up paying a lot more than if they had only known they could borrow at 3%. So by tricking them into thinking that 22% was the best interest rate they could get, I extracted wealth from them.

This seems like a good scheme. Can people be tricked? Of course they can - otherwise "con man" wouldn't be a real job. 

This scheme sounds like a winner. But it makes me wax philosophical. Was it the debt that extracted the wealth, or the trick itself? If I sell people a crappy car that breaks down two days after they drive it off the lot, does that mean that cars are a tool for extracting wealth from the poor? Or does it mean that deception in general is a tool for extracting wealth from the poor, and crappy cars, like crappy loans, are just one kind of crappy product that people can be tricked into buying?

Well, maybe I'm splitting hairs here. Maybe I should just stop philosophizing and bend my mind to the task of tricking people into paying higher interest rates than they have to...But it certainly seems to me that Graeber is a bit unclear on exactly how debt "extracts" wealth.

What should we do about debt?

In his article in the Nation, Graeber writes:
Debt cancellation of some sort is going to take place...A debt jubilee, after all, affords the possibility not just of economic renewal, but of intellectual and spiritual renewal as well...if I were to frame a demand today, it would be for as broad a cancellation of debt as possible, followed by a mass reduction of working hours—say to a five-hour workday or a guaranteed five-month vacation.
OK, I admit, I just quoted the part about the five-month vacation because it was an entertaining nonsequitur. But what about this debt cancellation?

Is a one-time debt cancellation all we need to do to remove the problem of exploitation-by-debt? Or do we need to change the way debt works in our society in order to prevent the exploitation from recurring?

One thing we could do is to have periodic debt cancellations, either pre-announced or random. Either way, what that would do is make lenders very unwilling to lend. Interest rates would go way up, because that would be the only way that lenders could turn a profit lending money.

Would this be a good thing? Well, if debt equals exploitation of borrowers, maybe it would be. Or you could just ban people from taking out debt (or ban the payment of interest, as in strict Islamic law). 

But then, people wouldn't be able to borrow to buy houses. They wouldn't be able to borrow to buy cars. They wouldn't be able to borrow to finance their education (as I myself have done twice now). Would this not hurt them? Or in Graeber's ideal society, would these things be delivered by the state for free, thus eliminating the need to buy them at all? (Good luck doing that with a five-month mandatory work prohibition, by the way, but that is a topic for another post.) 

Or would Graeber force potential creditors to lend money to would-be borrowers, even knowing that the debt would be canceled? This is wealth redistribution, of course, but it's an odd kind of wealth redistribution; how much you benefit is directly proportional to how much you ask for. People who value "paying back loans" would be left poor under such a system.

My point here is not that all these ideas are bad (I kind of like the one-time debt cancellation idea, actually...isn't that just what inflation is?). My point is that Graeber is very unclear as to what his ideal long-term debt policy would look like. He should let us know.

What does David Graeber really think about debt?

After writing a 500-page book about 5000 years of debt, David Graeber should be an expert on the topic. Yet his pronouncements on the subject are vague or seemingly contradictory on all of the questions listed above. Does Graeber have a deeper and more precise understanding of the actual mechanics of how debt works than he has demonstrated in his mass-media articles? Does he think that simple, vague, occasionally contradictory messages will be better understood and believed by the populace, and hence lead to better political outcomes, than a more complex but more accurate message?

Or is it simply the case that studying cultural attitudes toward a phenomenon doesn't really convey a solid understanding of how that phenomenon actually works? Is trying to understand debt by analyzing people's attitudes toward debt somewhat akin to trying to understand the physics of a liquid-crystal display by studying the cultural effects of prime-time television?


(Addendum: OK, I have to say, I feel a little bit petty after writing this post. I should say that whatever he overlooks or whatever mistakes he makes, David Graeber fundamentally cares about standing up for powerless people. How many of us can say the same of ourselves? Caring about powerless people is good, and it is important, and most of us just pay lip service to that ideal while only really caring about ourselves and our friends. I wrote this post for the same reason I write other rebuttals - because I'm very stuck in the academic culture of rebutting things that don't make sense to me, only caring about logic, without thinking about the larger context or importance of what I'm talking about. But it is important to step back, after going over all the point-by-point arguments and laughing at the intellectual pissing contests, and think about the broader context. And in the broader context, David Graeber is trying to help the powerless, and should get credit for that, whether you think his ideas are right or wrong.)

144 comments:

  1. Anonymous7:22 PM

    I'm curious how a one time debt forgiveness would work? Seems like this would forever after then be something lenders would have to account for and every President would consider campaigning on.

    What would your goal be as well?

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    1. I'm curious how a one time debt forgiveness would work?

      Well, a total debt cancellation is not possible. But a period of intentional inflation would erode debt across the board.

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    2. Debt forgiveness could work on a targeted basis through more lenient bankruptcy laws. For example, a summary process for cram down on underwater mortgages.

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    3. Yes, I also like the idea of mortgage writedowns. More bang for the debt cancellation buck.

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    4. You're thinking about this more than the people proposing it, I suspect. For them, just cancelling the debt is everything, sort of like eating your seed corn to end your hunger pains.

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    5. Anonymous9:05 AM

      The issue, I believe, is the transfer, or avoidance, of risk that angers the OWS crowd. In the scenarios mentioned above, the last is what has actually happened. The loan originator transferred the risk to GS, and GS was bailed out by taxpayers. The only person who got stuck with risk was the poor sap who lost his house, downpayment and interest payments because he didn't understand the concept of a teaser rate.

      It's the same with education. Students are sold the idea that an education will earn them more money, but in the end it doesn't. They're saddled with debt but the school itself bears no risk on that individual contract. Meanwhile, the school has worked with a bank to make sure the student can make this "investment into his/her future". As Noah says, this is deception. It would be the same if I sold you a car, and organized financing for it, with the knowledge that there was only a 50 percent chance you'd get it out of the parking lot, and there were no consumer protection laws under which you could come and ask for your money back.

      What the powerless want is the ability to avoid being marks. If everyone has a part of the risk, it's easier to see if the deal is legit. When one side can transfer or avoid risk, they don't have your best interest in mind. And being the sucker in such a deal is far worse than just making an investment decision that goes sour.

      so, long story short: debt forgiveness is about evening the playing field on risk performance. You can either jail people retroactively, or agree that the people suckered into deals because the legal framework unfairly stuck them with all the risk meant they should be able catch a break.

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    6. Anonymous10:09 AM

      Let's deal with your lending to "poor people" argument. You don't get the point. It's easy:
      1) Substitute "ever-poorer middle class Americans" for that term.
      2) Sell them mortgage loans they can't afford long-term (collect your bonus mortgage agents)
      3) Repackage those loans and securitize them to "unsuspecting" investment firms (collect your bonus for the sale)
      4) Sell default insurance against those securities, and then sell them off as well
      5) Get rich

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    7. Look at what Iceland did after the mortgage crisis which was, in effect, a qualified debt jubilee. Iceland did the exact opposite of what 1% econ profs like Noah Smith advised. Instead of bailing out the banks, the canceled mortgage debt, nationaled the banks and sent bankers to jail. All the 1% econ profs like Noah Smith predicted doom and gloom for Iceland, when in reality their economy has rebounded faster than any in Europe, while those who have taken the advice of the 1% econ experts (England, and especially Ireland and Latvia) have been the slowest to recover and are mid-way through a lost decade. Jubilees work.

      In ancient times jubilees substituted for bankruptcy law. A good bankruptcy policy, one written to protect the interests of the 99%, would go a long way towards restoring some amount of financial justice to our system. Instead, in 2005, lobbyists for the credit card industry rewrote the bankruptcy law in such a way that it really only benefitted the 1%. We are headed for a massive real debt crisis in part because we don't have real bankruptcy protection at the moment.

      The point of a revolutionary jubilee is not just to cancel the debts once and reboot the system. It is to cancel the debts once and then demand structural changes to how the economy works. We need an economy that works for the 99%. This is something that David Graeber understands and is actually fighting for. Noah Smith's cherry-picked critique beneath contempt, lazy, full of bad faith and willful ignorance. For those of us who are actually suffering under real and crushing debt burdens, these lazy academic pissing contests are just cruel.

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    8. If only the majority of the governments worldwide would adopt what Iceland did to prosecute banks and use that "get out of jail" card and make a turnaround for the country's sake and not for the greedy officials' sake. They made a firm stand. They made the right stand against banks, against unrightful accumulation of debts.

      The world would be a better place, if only.

      I love what Iceland did. That should be common knowledge to all. There should be a book written about that and distributed worldwide.

      Small businesses would thrive.

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  2. I suppose what Graeber means by "extracting wealth" is in the net transfer of interest from debtor to creditor. His comments about nation states do reverse the roles, but let's not forget that nations have a very different financial outlook to firms or families, and so it's not really wrong to consider that debt plays a rather different role. However in this case I do disagree with Graeber — it is China that is extracting a pound of flesh (so to speak) out of America, just as it is the mortgager extracting interest out of the mortgagee.

    The thing Graeber misses, I think is that the transfer of interest is the payment for a service. That is, the money upfront, with the risk of non-repayment, that the borrower will run off with the money. That risk has existed for eternity. Once upon a time it was punished with imprisonment, now bankruptcy laws soften that blow. In the case of China and America, America may choose to pay off the debt in massively devalued currency, or repudiate the debt outright. That's the risk China takes for the interest payments. (And the counter-risk of course being that if America chooses to repudiate its debt, it risks a war, which is the international equivalent of debtors' prison, I guess).

    But let's assume Graeber is right, and that lending really is extracting wealth. Should lending be banned? The thing about banning lending – rather like banning liquor — is that it just drives it under ground, where it can't be regulated, and where those who get exploited can't go to a relevant authority as they themselves have been breaking the law.

    In some ways, I am sympathetic toward Graeber, even if he is completely wrong. I do see debt as a problem — not because it "extracts wealth" but because it leads to complication. If America and China end up going to war over a disagreement about that debt, well then that lending was pretty disastrous. Debt should be kept to a level where it does not lead to dangers of war, dangers of bankruptcy. But unfortunately in the real world, that is pretty difficult.

    As for the jubilee idea, I think that with the issue of unsustainable lending, that becomes an inevitability — either a jubilee by inflation, or a jubilee by outright repudiation or forgiveness. Probably a jubilee by inflation is the less politically problematic of these courses, and the likeliest in the case of the modern world.

    The ancient hebrews had a jubilee every 7 years. On the face of things, I think this is probably quite prudent. It would lead to much higher interest rates, of course, but would allow for lending while reducing dangers of systemic over-indebtedness and over-complicating social and international relations. I'd be interested to see some mathematical models of such a system in comparison to mathematical models of the system we already have. (Who says DSGE is totally useless, eh?)

    The point I guess Graeber wants to get to is that he doesn't think we shouldn't really have a capitalist system at all. There shouldn't be a cost of money, because money (and thus access to the means of production) should be distributed by a central-planning authority. This has been tried many, many times. It has never really worked. It is better to have a well-regulated capitalist system with a safety net and strong opportunities for people who have ideas to have access to capital.

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    1. Yup, pretty much.

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    2. Actually, my main worry about debt is not that it's inherently unfair or provides some sort of massive upward wealth redistribution. It's that in aggregate, it seems to cause economic instability. Since economic instability hurts the poor more than the rich (since losing 10% of your wealth is a lot worse for a poor person than losing 50% of your wealth is for a rich person), this instability is definitely unfair to the poor. But that's not the same as "wealth extraction", exploitation, whatever.

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    3. Yeah instability is what I was getting at with "complication". I just didn't phrase it very well. Good observations on how that hurts poor more than rich.

      I think Graeber's thoughts on debt could do with a little more rigour and solidity. He seems to be arguing mostly from his own political persuasion (anti-capitalism).

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    4. He seems to be, to use my favorite term, emotive rather than analytical.

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    5. Honestly, I suspect it's just Dependency Theory in new clothing - the idea that the rich countries are getting rich off of money transferred from poor countries. He's got a comment near the start of the book where he says he supports debt forgiveness for developing countries because "fifty years of money flowing from poor countries to rich is enough".

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    6. He is clearly approaching things from a cultural point of view. He doesn't care if there is a rigorous economic justification for debt as it is, or as it was. He is interested in the culture. He is interested in how it feels to be in debt or be the debtor. Just because that is his approach does not mean there is not a rigorous economic justification.

      Maybe we in the spirit of academic generosity, I'll just say his position seems to be supported if you imply economic political power from the relative consumer/producer surplus of the transaction.

      If debtors win better terms that get more value from a transaction, they extract value.

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    7. winslowreconomics1:43 PM

      Aziz had it

      "I suppose what Graeber means by "extracting wealth" is in the net transfer of interest from debtor to creditor. His comments about nation states do reverse the roles, but let's not forget that nations have a very different financial outlook to firms or families, and so it's not really wrong to consider that debt plays a rather different role."

      Exactly! Don't stop because your interpretation starts to fall apart.....

      Sovereign states are currency issuers so the U.S. can extract real wealth from China as long as they are willing to take our paper.

      Banks issue their own currency backed by the sovereign state so banks can extract real wealth from borrowers as long as they are willing to borrow.

      Nonbanks issue their own currency usually backed by banks therefore indirectly backed by the state so can extract real wealth from borrowers.

      Private savers save other's currency so have a difficult time extracting real wealth as they have a limited supply.

      Graeber isn't as confused as it appears.

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    8. "There shouldn't be a cost of money, because money (and thus access to the means of production) should be distributed by a central-planning authority."

      What the hell? You *do* realize that he's an anarchist, right?

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  3. Noah, first let me say I pretty much agree with you (as another economist) and I appreciated your useful summary.

    And yet, the work I have done on household behavior leaves me feeling that people don't think about debt the same way economists do. The inconsistencies would probably disappear if we lived in a deterministic world in which people were rational with well-defined preferences and always obeyed their true Euler equation. Inter-temporal optimization is very hard and since leverage amplifies shocks, debt combined with mistakes or even bad luck is a mess.

    People talk about debt with all kinds of inconsistencies as you described from Graeber. To their credit, I will say, that it is possible for the same person to be the exploited and the exploiter in the same transaction...especially when information in incomplete.

    Personally, I think simplifying debt contracts and educating borrowers is important. I have argued that something like a driver's license for debt would be good...but 'good luck with that' is the informed put down I received. So we will continue to have masses with debt but no clue about compound interest. I worry that it's to economists peril to ignore people with odd sounding, inconsistent views about debt like Graeber...though I agree it's not easy to listen to.

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    1. Yup, pretty much.

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    2. Binky Bear3:20 PM

      Economics deals with hypothetical people behaving in hypothetical ways with perfect knowledge and an idealized notion of what is rational and logical. It is nomothetic, eschews non-quantitative information, and is poorly equipped to deal with non-capitalist, marginalized or pre-capitalist societies. Real human behavior exists as statistical information gathered at arms length from "objective" sources (i.e. government agencies) which mediate it for consumption. Economics and economists are employed by the beneficiaries of the dominant system and they serve that system.

      Anthropologists deal with actual people as they exist and it is messy. It is descriptive. Humans behave in ways that are systematically irrational, with idiosyncratic logic systems and values that may differ from what is financially optimal. Often anthropologists are collecting the data that is quantified by others and served to third and fourth parties after it is sterilized. Anthropologists are hired when problems arise-war (e.g. Ruth Benedict), insurgency (human terrain systems), and conflicts between the capitalist world system and the remaining not-quite-capitalist world.

      What disappears from anthropology to economics is consideration for qualitative values and beliefs that lie outside of modern Western capitalist notions. Why do people borrow from payday loan places and pawn shops? Why do so many people live in poverty? Why doesn't the Taliban just quit? Why did the Soviet Union exist? Not rational.
      What do we get for answers? Freakonomics, Doug Holtz-Eakin, Tim Geithner and Charles Murray. Just-so stories, propaganda for the aristocracy, service to the wealthy and backwards racism and classism obscured by carefully massaged statistics and fibs.
      Graeber is an imperfect front man for the current crisis of capitalism but you go to the class struggle with what you've got.

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    3. Anthropologists deal with actual people as they exist and it is messy. It is descriptive. Humans behave in ways that are systematically irrational, with idiosyncratic logic systems and values that may differ from what is financially optimal.

      This is where the economist points out that the collection of a bunch of anecdotes doesn't fundamentally tell you anything except what the people in question have told you. That's the problem with qualitative knowledge - you never know if it's actually representative of what you're trying to study.

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    4. "This is where the economist points out that the collection of a bunch of anecdotes doesn't fundamentally tell you anything except what the people in question have told you. That's the problem with qualitative knowledge - you never know if it's actually representative of what you're trying to study."

      What? Since when is all anthropological research qualitative?

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  4. Anonymous7:50 PM

    Noah, with wealth comes the political power to commit the fraud

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    1. Exactly. It's not the debt per se that is the extraction. It's the ability of people with money to warp the system to favor their interests. Since people with money tend to be the creditors (hence, they can lend), this means the system tends to skew towards them.

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    2. Anonymous2:00 PM

      Smith's obtuseness about your rather straightforward observation can only mean that his economics education is proceeding on spec.

      What a waste!

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  5. Observation on the conundrum of wealth extraction through debt: it's the broker, not the bank, who is the beneficiary, regardless of whether the debt is "good" (affordable) debt, or "bad" (unaffordable) debt. Then, if you take a "let's put the real criminals in jail" mentality, is there a moral or legal position for going after the brokers who benefit even when the customer loses?

    Great post - always refreshing stuff.

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  6. Anonymous8:04 PM

    Are you seriously unaware of the concept of usury?

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    1. Suppose I were. How would you explain this concept?

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    2. Anonymous8:30 PM

      Well, if you want to find out how to "extract wealth from the powerless", you might look at, say, the payday loan industry. You might also want to look into what has been done to bankruptcy laws over the last 20 years. You might want to also consider whether it is actually true that if the debtor successfully files for bankruptcy the lender has necessarily lost money. Or you could continue assuming that if a relationship can be viewed in some sense as voluntary that it can't possibly be exploitative.

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    3. Well, if you want to find out how to "extract wealth from the powerless", you might look at, say, the payday loan industry.

      Suppose I was an alien. Could you explain to me how the payday loan industry extracts wealth? If so, please do!

      Or you could continue assuming that if a relationship can be viewed in some sense as voluntary that it can't possibly be exploitative.

      But I never assumed that...In my post, I wrote that people can be tricked. Which is obviously exploitative.

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    4. Anonymous9:42 PM

      Okay, they have a better understanding of how much a customer is going to be able to pay on average, and they have a much better understanding of their fees and penalties. This allows them to take advantage of desperate people.
      Trickery is only one exception. The post assumes it is the only one.

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    5. "Suppose I was an alien. Could you explain to me how the payday loan industry extracts wealth? If so, please do!"

      In your example, the poor person who was sold the exploding loan now has a default on their credit record, possibly a tax lien, and therefore doesn't want to get a bank account. Yet they are paid in checks. What are that person's financial options?

      Enter the payday loan industry.

      They charge extraordinarily high rates of interest (20% per month, sometimes more) to people who have fewer financial options that most.

      One of my former i-banker colleagues, after doing a bunch of deals for the payday loan industry, liked what he saw so much that he decided to start his own payday loan company. He's a multi-millionaire now.

      Interestingly, one of the investment banking partners we used to work with, who is a deeply religious jew, refused to invest in his payday loan startup because he considered it usury. (Maybe the payday company couldn't guarantee that they would only lend to gentiles?)

      Imagine that - a type of business that's so dastardly that an investment banker won't even invest in it!

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    6. Is the payday loan industry worse than just having no access to credit at all? Usually, if someone's making big money off of something like this, there's a big incentive to undercut them and steal their business. The fact that nobody is lining up to do that makes me believe it's a "bad or worse" situation.

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    7. I'm inclined to follow Brett's line of questioning. Anonymous and Polycapitalist provided descriptions in lieu of anti-payday/usury arguments. A transaction may seem unjust TO YOU, but that begs the question of why you should have an effect on a voluntary transaction. Which is not to say that no such arguments are valid. But what are they?

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    8. Tiercelet2:51 AM

      More to say down-thread, possibly tomorrow when I'm not just being insomniac.

      But! Economics is often claimed to be about the distribution of scarce resources; but nobody admits the extent to which this is completely dependent on mostly-non-economic power relations.

      I would explain usury to an alien as follows:
      Human beings require resources to live, but must trade wealth to get access to them. Not all humans have remotely equal access to wealth. We have decided the poorer must borrow from the richest to supply those basic needs--food and shelter, health care, training to be productive and fully formed members of society who can earn access to resources in the future--in exchange for later, greater, payment. This has the effect that most necessities are most expensive for those least able to pay. Moreover, since these debts are enforceable by the legal system (which has also shown great reluctance to allow the wealthy to take losses from their own financial errors), we have established a system whereby we believe, and will recruit state power to enforce the belief, that the luxuries of the wealthy are more important and more worth protecting than the necessities of the poor.

      Usury is interest-bearing debt on loans which people have no real choice but to take, for the necessities of life and development.

      And contra "voluntary transactions"--power relations are not equal. What is the payday borrower, who is almost certainly unbanked due to various forms of legal discrimination, to do but to cash checks with the lender? What is the student borrower to do, try to find a job without an education when it is nigh impossible to do so with one? Is the mortgage holder to pay extortionate rent forever--to literally support the rent-seeking of the wealthy--while being discriminated against by the tax code? Is the medical borrower to simply choose to die? These transactions are all voluntary the way that sharecropping is, the way that all other forms of serfdom throughout history have been--that is there's always the alternative of rolling over and dying. But I would suggest to anyone who sees this as acts of capitalism between consenting adults that Mr. Corleone has arrived with a business proposal...

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    9. We have decided the poorer must borrow from the richest to supply those basic needs--food and shelter, health care, training to be productive and fully formed members of society who can earn access to resources in the future--in exchange for later, greater, payment.

      Let us not assume that, since it's not a given. As I mentioned down-thread, the vast majority of debt is not coming from a situation where the borrowers have no other options except to go into debt.

      What is the payday borrower, who is almost certainly unbanked due to various forms of legal discrimination, to do but to cash checks with the lender?

      You're assuming that a payday lender is the only option for this. It's not.

      What is the student borrower to do, try to find a job without an education when it is nigh impossible to do so with one?

      Select among majors for ones that they think will pay better, including enough for them to pay off the loan eventually. Or got to a cheaper school, and there are pretty huge differentials in price among post-secondary schools.

      Is the mortgage holder to pay extortionate rent forever--to literally support the rent-seeking of the wealthy--while being discriminated against by the tax code?

      I'm not entirely sure what type of rent you're talking about. Their mortgage payments, or somebody paying their rent payments in exchange for being allowed to live on someone else's property?

      Is the medical borrower to simply choose to die?

      Medical is one of the big "do or die" ones, I agree. But it and other "borrow or die" debt doesn't describe the bulk of debt taken on by Americans.


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    10. Payday loans charge "fees" rather than interest which allows them to charge amounts that would otherwise be deemed usurious. Having said that, it doesn't really change your point as to whether this is again a service for a fee (one in which usury laws would otherwise prevent pay day lenders from charging a high enough rate to justify making a loan to someone that is so broke they can't even make it to their next paycheck) or whether the high rates are "trickery" to the extent they rates are higher than needed because the people needing the money are unsophisticated and desperate. I suspect the latter is the case, which is the reason for usury laws to begin with, though I have not really researched the subject.

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    11. The reason why I suspect the former is because those rates really are quite high. If there's a good profit to be made by selling the same type of stuff at a slightly lower interest rate, you'd expect companies to be doing that and heavily advertising it (just like how the payday lenders advertise themselves today). But we're not seeing it, which makes me suspect that the rates/fees are high for a reason.

      I know that's sort of like the economist saying that there couldn't possibly be a $100 bill sitting on the ground because someone would pick it up, but that type of arbitraging does happen (legal or otherwise). We see it with digital piracy, for example.

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    12. "Is the payday loan industry worse than just having no access to credit at all?"

      This is a false dichotomy. Why can't there be other options?

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  7. Heh Noah, don't you watch movies? Here's how you extract wealth from the poor: you find that guy with the tiny little house on the upper west side that is in the middle of a new Trump Tower development. His mother, who died of cancer, left him the house with one final request "promise me son, that you will never sell this house". Evil property developer gets gorgeous leggy brunette to trick him into taking out a mortgage on the house to help her out of a jam. Mr. Evil swoops in when he falls behind on the payments ... snap!

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  8. I really liked Graeber's book, but his view of the modern international political and economic system seems to lack any real explanatory power. In essence, he seems to be arguing that modern political systems work more or less like an ancient imperial system extracting resources from tributaries with only a then veneer. However, this analogy obscures far more than it reveals so necessarily ends up seeming more confused the more you think about it.

    However, the first half of the book is very good.

    As to how debt can be extractive, it all rests upon the idea of an initial distribution of wealth. Given that one group has a pool of assets that others depend on for success this group has a privileged ability to determine who succeeds and who doesn't. Using this, that group can control society with debt being a major component of this power.

    Debt peonage, sharecropping, and other practices rooted in an agrarian economy are all examples of this. Control of the initial distribution of resources means that I can control everyone dependent upon them.

    If I require a loan to acquire land to farm on, an advance to keep my family few while waiting for the crop, and then forced to market through the store that advanced equipment then I can be kept in de facto debt bondage by the person advancing credit. Provided that I can be kept in debt, wealth can be extracted in the form of interest for my entire life. Sure, the lender may not get the full principle back at my death but will have received more than this in interest. This also restricts social mobility since I have no opportunity to shift occupations while still in debt.

    Now, full blown debt peonage is a rather rare thing in modern developed economies. But from the political fringe Graeber seems to be coming from they see something not dissimilar continuing to occur both between nations and between debtors and creditors today, even if it is rather confused in the details, especially at the international level.

    But on an individual level it is less of a stretch (in my view it's still a stretch, but I at least find the argument coherent).

    Modern debt bondage comes in the form of continued reliance on loans at just about every stage of life. This can consist of short term financing for cash flow problems (particularly among the poor), student loans, auto loans, mortgages, etc. Then at the end, any residual assets are wiped out by end of life care.

    Provided that someone is perpetually in debt wealth is continuously being extracted in the form of interest, maintaining the difference in assets between the classes (because paying interest means I am saving less assets). Debt makes it more difficult to save to free the next generation from the need to take on debt, perpetuating the class system. On net, provided that more interest is extracted from debtors than principle lost to default, the distribution of wealth across society will not change meaning that existing property holders maintain wealth and social position at the expense of everyone beneath them.

    This is ultimately what wealth extraction is, not any individual loan but a state of perpetual debt on one side and a perpetual stream of interest on the other (whether between classes or disaggregated). Because of the pre-existing distribution of wealth social classes are maintained since the lower classes are perpetually in debt, preventing them from amassing assets and insuring that the wealth retain a stream of income to maintain their position.

    To be clear, I don't entirely buy the above, though I do think it reveals some power relationships left unexplored by more mainstream forms of analysis. But I do think it represents the viewpoint, if not of Graeber specifically, then of a certain line of thinking common on the anarchist left. While it fails as an overarching theory of international relations, it probably does have more utility for narrower applications.

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    1. I'm not sure I buy into the modern version of debt peonage. Some debt may be unavoidable - like if you get sick or literally have no other choice but homelessness and/or hunger without borrowed money - but that doesn't really describe most personal debt in the US. Most of it is somewhat discretionary, with it taken on because people are basically doing the same type of thing as creditors, and thinking that they'll have more money in the future because of it. There's usually a non-debt alternative, even if it means lower consumption.

      When those incentives aren't there anymore, the willingness to take on debt does seem to shift . . eventually (it takes time for information to filter down). It's like how law school enrollment is finally tanking after several years of news about how most people taking on debt in second- and third-tier schools are getting screwed instead of finding good-paying jobs after graduating.

      I'm not sure why debt peonage existed in a more agrarian society but doesn't really exist in more developed ones anymore. It could be the alternatives generally sucked more, or that feudal rulers had more control to force people into situations where any income was being drained back out of their pockets.

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    2. I don't really buy it either, at least as a general condition, but I think it is at the root of the contention being made by Graeber and others of a similar political persuasion.

      Where the argument might have more traction is among a rather narrow slice of the working poor who are relatively frequently forced to rely on short term credit in response to illness, unexpected job changes, etc. But this is a narrower problem and trying to extend it to the international system as Graeber does simply confuses the issue.

      That said, I do think it is worthwhile to acknowledge that these people are thinking through the problem in a way that has a certain logic to it that may apply to some individuals some of the time even if it breaks down both when extended too broadly and narrowed to the level of individual loans.

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    3. Oh, I agree.

      To be honest, I think that's part of the problem with Graeber's analysis. His wealth of knowledge about anthropology (and relative lack of knowledge about economics and political science) means that he's tempted to extend his anthro knowledge to broader society, and then fish for examples that support that. It's sort of like someone who has extensive expertise about the Roman Empire, and then talks a lot about how this explains the modern world - while being limited in what they know about what political science and economics have done in terms of research about the modern world.

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    4. "Where the argument might have more traction is among a rather narrow slice of the working poor who are relatively frequently forced to rely on short term credit in response to illness, unexpected job changes, etc. But this is a narrower problem and trying to extend it to the international system as Graeber does simply confuses the issue."

      This "narrow slice" isn't as small as you think, especially on the global scale.

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  9. I also need to add the idea of exploitation and extraction also rely on the view that there are others ways to distribute wealth between have and have nots, or to time shift resources, other than debt. Primarily various norms of reciprocity.

    My personal view is that these are very problematic mechanisms but provided that you believe there is a way to insure that people can get resources in the short term to meet needs as well as to move forward purchases from the future (like getting a house now out of resources you won't earn for 20 years) then it can be said that institutions like debt are exploitative because they rely on charging a cost to individuals to do these things that they shouldn't have to pay.

    For a concrete instance, US insistence on funding higher education through loans rather than from taxes allows current property holders to extract rents from people who desire to be future property holders (often the goal of attaining an education and higher income). Needing to pay interest on the loan means that it is harder to save up for a house, meaning that more debt is required, and harder to ultimately clear debt.

    If education was instead publicly funded then it wouldn't be the case that current property holders are able to extract wealth from prospective property holders (arguably this would require extracting wealth from current property holders to fund prospective property holders through taxes, but it may also be possible that other means of funding could work).

    Point being, institutions matter for how wealth is distributed through society and different institutional set ups alter how current property is privileged relative to individuals ability to contribute to society. Where institutions create barriers which require transferring some of that ability to earn income from those with ability to current property holders then, arguably, institutions are designed to extract wealth rather than maximize social productivity.

    As a caveat, I don't necessarily believe that other institutions can be convincingly shown to be better, but it seems worthwhile to ask the question.

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    1. Tiercelet3:18 AM

      Yes yes yes, this is exactly it. Debt is extractive in the instance when it is used not to fund speculative/business ventures but as a requirement to develop/preserve human capital and life (educational loans/medical debt), or as a requirement to provide shelter and avoid other forms of rent extraction (housing market).

      Note that funding public education is not necessarily to impose some kind of tax burden on the present: seignorage is not a dirty word, especially when by funding the development of human capital you're expanding the future productive capacity of the real economy (and thus growing the goods supply in line with the money supply, i.e. counterbalancing inflation) and regardless, taxing to fund education also has benefits for the already-educated, in terms of living in a society with an educated citizenry and having access to the services provided by same (retiring Baby Boomers will be a lot more interested in a society that has more doctors than more carpenters and baristas, right?)

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  10. I don't want to talk about Graeber, because I also think his analysis of debt is imprecise and not very useful. But I do think the idea of extraction of wealth via lending is unproblematic. First, there is an uncontroversial sense in which any exchange involves extraction of wealth by each party from the other.

    Consider the classic kind of case. You and your neighbor are isolated from much of the world. You raise chickens; He raises corn. From time to time you exchange some chickens for corn. Your operations and output are very stable over time, so your relative prices rarely change.

    However, your neighbor comes down with a rare crippling disease. He reads up about the symptoms online and learns that unless he ingests a specific enzyme, found only in chickens, he will die in two days. As a result his valuation function for chickens changes, while his function for wheat - and everything else he owns - stays the same. An amount of wheat, land and capital equipment which he previously would have been willing to exchange only for 30 years worth of chickens he is now willing to exchange for a single chicken.

    You recognize this change during your bargaining with him, and demand all of his wheat, 9/10's of his land, and his farm equipment as well, in exchange for a single chicken. He accepts the deal. You have wiped him out.

    Is this exchange rational for both parties from an economic point of view? Certainly. The rationality of the exchange is determined relative to the valuation function that the parties possess at the time the exchange is made, not the functions they might have possessed at other times when they had different kinds of knowledge and different needs. And both parties have maximized. They exchanged at a rate such that neither party could have succeeded in obtaining better terms, given the maximizing behavior of the other party. Each party ends up better off from the exchange than he would have been had the exchange not been made.

    Nor is their anything irrational about the wheat farmer's modified valuation function. This isn't a case where the farmer has gone mad and temporarily adopted crazy values. (Something like that could occur, but we needn't assume it has occurred.) The farmer assigns the appropriate value to saving his own life.

    But even though the wheat farmer has maximized, he has less wealth after the exchange, whether we measure the value of the exchange according to the old function or the new function. The wheat farmer was faced with a decision matrix in which there are only two alternatives, both of which involve the loss of wealth. Either he can lose his whole life, or just most of what he owns. So maximizing in this case only means minimizing the loss of wealth.

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    1. I think there's a hidden assumption in that argument, that it's in the chicken farmer's best interest to own and operate both the chicken and wheat farms. That may not be the case, in that the chicken farmer might be better off if he just sells the chicken to the wheat farmer so that he can continue trading for Max Wheat, instead of trying to grow all the wheat himself.

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    2. Wonks Anonymous11:19 AM

      Sounds like Mike Munger's notion of "euvoluntary exchange". Of course Munger is a Libertarian (as in he ran for office on the LP ticket).
      http://mungowitzend.blogspot.com/search?q=euvoluntary
      He also sometimes used the term BATNA for "best alternative to negotiated exchange".

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  11. Also, I think most people would say that the chicken farmer falls into an intuitive category for which standard microeconomics has no established theoretical term - he's a dick. A better person would not maximize and would say something like, "Good God, wheat farmer, take this chicken with my best wishes!"

    Now positive economists might just say, "maximizing is a simplified model that approximates many situations of market exchange and allows us to predict the behavior of those markets tolerably well, but real people don't always maximize." But a lot of people would, I assume, want to say something stronger. The chicken farmer is morally demented. What precisely is wrong with the chicken farmer economics in its present state can't describe, and maybe it falls outside the sphere of economics, but the fact that economists frequently deign to make not just positive descriptive claims, but normative or prescriptive claims, and base those claims on their maximization-based models that are normatively blind to the dementedness of the chicken farmer's behavior, gives us reason doubt the reliability and plausibility of the economists' policy prescriptions.

    The wealthy extract the wealth of the less wealthy not usually by being monstrous giant dicks like the chicken farmer, but by being a little bit dickish all of the time. The less wealthy typically assign different marginal utilities to their next chicken, next restaurant meal, next $100 dollars than do the wealthy, and so are willing to part with more of their wealth for these things. They also are buffeted by more frequent shocks to their valuation functions that make them temporarily willing to surrender more of what they have for smaller quantities of the things they receive in exchange, and just to minimize their loss of wealth. They can be wiped out in stages by making exchanges that maximize every step of the way.

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    1. This makes sense to me...

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    2. You can see other versions of it in real life scenarios, like landlords withholding grain in a famine in order to jack up the prices even higher and get more money out of potentially desperate buyers.

      Of course, that assumes that buyers have no foresight, and don't try to constrain the landlords from doing this before an actual famine occurs. We sort of see this with occasional government action against profiteering in the wake of a natural disaster.

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    3. The wealthy extract the wealth of the less wealthy not usually by being monstrous giant dicks like the chicken farmer, but by being a little bit dickish all of the time.

      There's a song for that:

      http://www.youtube.com/watch?v=37eqoYbj1QM

      And a narrative -- "Let Them Eat Credit":

      http://www.newrepublic.com/article/economy/77242/inequality-recession-credit-crunch-let-them-eat-credit#

      I have no idea of the history of debt. But I don't think anyone needs to look any further than the last 40 years. Over-indebted America is the world's consumer, driving economic growth primarily through super easy credit. Until it hits a brick wall. And then blame teachers. Or Big Bird.

      Go ahead, stick your finger in the fan, it won't hurt! Housing prices will increase forever! Yet, there is only so many times you can dip your hands in that bag-of-tricks before you come up empty-handed.

      Noah, you are a terrible person who probably hates kittens.

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    4. Dan,

      your story is a particular instance of the general result, as I understand it, in basic micro that "if the distribution of initial endowments is unfair, then so will the distribution after exchange be". In your case the chicken farmer finds himself possessing a very highly valued commodity. (Have you read the Economic Jungle chapter in Rubenstein's Economic Fables? You poultry parable reminds me of that)

      Does it make sense to ask whether it's the system of exchange that "extracts value" from one party to another, or whether it's really the initial endowment that's responsible.

      Although you are of course right that given a hugely advantageous initial endowment, people don't have to go ahead and maximize their own utility from that starting point, they could be altruistic, and it's crazy to think that selfish maximization is the "right" thing to do in any sense because it's economically efficient. Hopefully most economists are aware that economic efficiency in that sense is a very poor normative objective, although if so Rubenstein in preaching to the choir.

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    5. answering my own question: yes it's the system of exchange that "extracts value". The value of your endowment is only realised via exchange.

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    6. Thanks for the link Luis.

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  12. "Or does it mean that deception in general is a tool for extracting wealth from the poor, and crappy cars, like crappy loans, are just one kind of crappy product that people can be tricked into buying?"

    Exactly. I agree with this post and certainly believe in the value of financial services (in fact just wrote a post essentially expanding it's expansion among the most vulnerable to "extraction").

    I think what's valuable about Graeber's book is not his definition of the nature of debt, and certainly not his theories for reforming it, but his emphasis on it's long history, and the fact that it's as important if not more than money. Economist are coming around to that now but it's been the money show for a good while now.

    He really is (when you cut through the confusion) condemning trickery, not debt-- it's small manipulations and successful lemon sales accumulated over the centuries that produces a class of people who have means-- the creditors-- and a class of people who don't-- the debtors. Not all of those tricks have to do with financial services, but a lot of them do... that's why there's so much regulation, and so much mistrust and hatred.

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    1. I am skeptical of the idea that the stratification of a society into powerful creditors and dependent debtors is necessarily a result only of scamming and trickery. Free enterprise, competition and free exchange naturally lead to an unequal society in which some of the competitors end up besting the other competitors and ending the competition. Like a board game - in the end, some people win, unless you build in special rules that don't let them win.

      I'm also inclined to think financial instability and fragility the natural result of a system in which people are permitted to borrow and lend at will.

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    2. Does the competition ever actually end without the temporary "victors" changing the rules of the game to protect themselves? We've had a whole bunch of companies that were once dominant in their respective areas, but which are all dead or absorbed since then.

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  13. Anonymous10:30 PM

    Hi Noah. I agree with your analysis, although I don't want to touch the subject of Graeber. There is tendency among people (both on the right and left) to think about debt in moral/political terms rather than economic terms, and this leads to a lot of muddled thinking.

    However, I would like to throw in a couple of points to support the "debt helps the creditor class" thinking: 1st, (already mentioned) most debtors aren't very savvy and are easily tricked in to paying fees &c. which they shouldn't be; 2nd, creditors have built up a system which insures they will continually have debtors (aka profit). For instance, the credit rating system tends to force people to take on debt when they don't need it so that they are able to go in to debt when the debt is actually necessary. All in all, there is much to modern debt which seems like a very exploitative system.

    I suppose what I want to say is: your attack on Graeber, even if accurate, obscures the fact that creditors are indeed capable of exploiting debtors, and these are problems which ought to be fixed.

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    1. I guess they are...but I think usually borrowers are just uneducated and ignorant, and creditors swoop in to take advantage of this fact and profit from their bad decisions...

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  14. The most insightful point Graeber made about debt is how society has historically made it a morality lesson... and then Graeber started moralizing about debt.

    If debt is bad, then if follows that saving must be bad too because that enables the debtors. More accurately, debt is good when it increases production above the debt cost (interest). Debt can be a problem when it poorly invested, particularly if it is spent on speculation. And inequality can create bad debt because the few savers have no place to invest when there is insufficient demand from the many debtors, meanwhile the many borrowers use their debt to pay for necessities which they can't afford in the long run.

    We have to recognize that bad debt is the result of a poor decision by both the lender and borrower. Fixing it requires both sides to take their lumps, usually by restructuring the debt. The choices are extend the term, then reduce the interest rate, and finally write off principal. But savers have more political power, so restructuring tends to be slow and inefficient. We kind of need to force lenders to mark to market their loan portfolios so that they have to recognize their losses and have an incentive to restructure sooner rather than later.

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    1. In the end, I think Graeber thinks debt is bad because he thinks exchange is bad. Much of the book is an attempt to argue that human beings do not have a natural proclivity to "barter and truck" and that all sorts of things that look like exchanges have been revealed by the discerning eye of anthropologists - like Graeber - not to be exchanges at all but to be something else.

      If you have any kind of system in which there are contractual exchanges, and if not every exchange is a spot exchange, but some exchange contracts involve one party performing some time after the other party performs, then there will be debt.

      If you and I make a deal whereby you give me a cow today and I agree to give you a cart next month in return, then once you give me the cow, I have a debt to you. I owe you one cart.

      There is also a lot of confusion in discussions of debt between debt and interest. Whenever the future price is higher than the spot price, there is interest, no matter what kinds of things are being exchanged. If I agree to give you five bushels of wheat today in exchange for you giving me six bushels of wheat next month, then one bushel of wheat is interest. If I am willing to exchange ten chickens for five bushels of wheat on the spot, but require six bushels of wheat if I don't get it until next month, then there is interest in the exchange. But if I agree to accept five bushels of wheat next month for five bushels of wheat I give you now, then there is still debt, but no interest. All this still applies if money is at least one of the things being exchanged.

      For some reason, people seem to lose sight of all this and often think debt and interest have something essentially to do with money, but I think that's just money illusion. Graeber runs with this and argues the creation of debt is concurrent with the creation of money, and the existence of debt is a product of the evil rule of numbers and quantification over our lives.

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    2. Anonymous6:32 AM

      But Graeber has a ton of empirical work done by anthropologists to back him up on this. He doesn't misinterpret spot-exchanges as the only kind of barter. His argument is that 'primitive' society exchange wasn't done by explicit promises to trade one thing for another only at some later point in time. It was implicit that you could simply take whatever you needed or liked from somebody else, without needing to pay a *precisely* similar amount of goods in returns. You didn't agree to five bushels of wheat this month for five bushels of wheat next month, you agreed to give whatever whenever under the implicit knowledge that you could ask for the same. From each according to his needs etc.

      Furthermore he doesn't have a problem with exchange, he has a problem with precisely quantified exchange backed by a coercive state force. He extensively argues that exchange, like communism and hierarchy are somewhat inescapable structures of any society, it's just when they intrude in spheres where they don't belong via coercion that they wreck society.

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    3. But if exchange is legitimate, then what is the problem with the precise quantification and rationalization of it? As a society becomes more economically complex, and wealthier, the networks of exchange are more intricate and time-sensitive, and the scheduling of exchange and quantitative regimentation of exchange become more important. If an enterprise makes a delivery, it has to be able to predict when and how much it is going to get paid, or else it might not be able to acquire its next round of inputs, or pay its employees. This would apply even if the enterprises were worker-run, socialistic ones in a socialized economy. It's a natural accompaniment of economic complexity. One way or another, the society is going to have to have a system of obligations for delivery, with reliable schedules. And these obligations are going to have to be more than expressions of vague and capricious intent. They have to be reliable.

      I found Graeber's discussions dripping with a kind of noble savage romanticism. Why should anyone think the social practices of a walrus-hunting village are applicable to the kind of social life most contemporary people would find acceptable and tolerable?

      As others have said, there isn't enough economics in Graeber's book, and there also isn't enough law. This is inexcusable in a book that purports to be about the history of debt. If I were out to study the nature of debt as it exists now and has existed in the past as a set of established social institutions, the first place I would look is the history of contract law and property law - Roman Law, the common law traditions, modern positive law, etc. A huge amount of jurisprudence is about debt and exchange, and the evolution of the social categories we use for thinking about these issues is inseparable from the evolution of the legal orders that both construct and regulate those institutions.

      Yes, I know Graeber hates the idea of coercion. He's an anarchist and that is something that romantic individualists of both the right (libertarians) and left (anarchists) seem to share. They dream of a world of pure voluntariness. But most people seem to accept and even embrace life under a rule of law. Law can be held in place to some extent by internalized norms grounded in social solidarity and trust. But even in the most committed societies, it is also held in place by coercive enforcement.

      Graeber is free not to like rule of law. But not liking law is no excuse for ignoring it. Even if Graeber wants to critique the complex modern intellectual systems of law, economics and moral thought that underpin existing social and economic institutions, there is no excuse for ignoring so much of that thought. I think that's why a lot of people have felt that once you get past the interesting anthropological anecdotes in the early chapters of the book, the book rapidly diminishes in quality and value.

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    4. I agree there are many problems with Graeber's book, but I don't think he is opposed to exchange as such, or even necessarily its quantification (though he does seem to imply that quantification is a slippery slope likely to lead to bad things though not necessarily the bad thing itself).

      Graeber speaks fairly approvingly of societies in which frequent small exchanges occur between individuals with everyone being in debt to everyone else. Where he seems to have a problem is where the exchanges are vastly unequal. His issues come up where powerful individuals are lending to individuals vastly less powerful then themselves. In these situations he says the weaker individual has few means of recourse against the stronger creating a form of dependency (can't remember if he used that exact term, right general idea however). Graeber's issue is that debt allows an individual who owns great wealth to lend out small portions of it that end up being the bulk of the property of the person it is lent to. The relationship is essentially always one sided, the lender never needs anything from the borrower so is free to try to extract as much wealth as the lender can get away with.

      Now, I agree with criticisms about Graeber not having enough law and economics to really flesh out his argument. But I think he is getting at something important in how this situation results in current property holders having advantages relative to others just making a living and how they have both the incentive and the influence to institutionalize this to their advantage.

      I don't think Graeber really offers up an alternative, it's hard to see how small scale reciprocal exchange networks could ever lead to building innovative firms to make aircraft, generate power, or build microprocessors and it also ignores that many large firms do form something of a reciprocal exchange network amongst themselves (though I'm sure that even if he acknowledged this he'd add that the exclusion of average individuals from this is extremely problematic). But I think it's worth noting that current systems of debt and exchange result in firms with assets to have much greater price setting powers than the disparate individuals that have to go to them in order to fund education, housing, and cover short term income needs. I don't buy his solutions but I do think he is posing a problem worth considering, if you can ignore his forays into anarchist paranoia.

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    5. I wish Graeber had made more explicit connection with the socialist critiques of capitalism. Ultimately, isn't the fundamental problem (or at least issue) here that people who own things are empowered by their ownership title to increase their wealth not by adding value to what they own through labor, but by claiming a share of the value that is added by others? Whether the capital is in the form of money, land, resources or other means of production, its the same thing. Under a system of private property and capital accumulation, a non-working "investor" is able to convey something they own to the ministrations of some laborers, and receive back not just what they conveyed but something of greater value. It could be the resources and machinery of a firm that is conveyed. But it could be money. It's the same process in both cases, and it makes more sense to me to consider them that way in the context of property institutions and contracting institutions, and not fixate on monetary debt.

      I just don't think Graeber has thought through most of these issues very well. It might have been good if instead of writing a book called "Debt: The First 5000 Years", he had juts written a book called something like "Debt and Distribution in Pre-Modern Societies."

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    6. Whether the capital is in the form of money, land, resources or other means of production, its the same thing. Under a system of private property and capital accumulation, a non-working "investor" is able to convey something they own to the ministrations of some laborers, and receive back not just what they conveyed but something of greater value.

      As long as it's a voluntary exchange, I don't really see what the fundamental problem is. If I hire someone to pull the weeds out of my garden, gaining not just the "loss of weeds" but also a bigger raspberry crop out of it, am I screwing over the weed-puller because he only gets what I offered to pay him, and not a share of my raspberry crop?

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  15. "When the poor people default, Goldman Sachs takes a hit and I'm in the black. "

    Seriously? The best scam you can come up with has Goldman as the ultimate stuffee? You'd make a *terrible* investment banker.

    The banks (and especially Goldman) were mostly just intermediaries. The garbage loans got packaged, rated AAA, and dumped on unsuspecting fixed income pension fund managers. None of whom took any losses because they were all *agents* for somebodyelsesmoney. And the rating agencies *worked for* the bankers! Here is a hilarious and very accurate 2 minute explanation of how it happened.

    "Sure, but Goldman actually paid the taxpayer back for that bailout"

    That's a pile of crap. If I sell you $0 worth of stock for $100, and then that stock goes up to $100 three years later, I *still* ripped you off. You *should* be up $100 on the trade. Like I said, you'd make a terrible investment banker. In fact you just perfectly demonstrated your particular role as honorary "member of the 1%": It's just sooo easy to rip people off when they don't even know they got stuffed!

    So it is about debt or is it is about scams? Or is it that debt just lends itself to some really excellent scams. Something interesting: in many repeated games where the players have different time preferences, the most patient player ends up with all the wealth. The banking system gets to be the *most patient* because a) seignorage depresses their funding costs below the equilibrium risk-free rate and b) they live forever. On top of it, funding costs are monotonically decreasing with wealth. In the end, that means the bankers own everything except your marginal cost of labor. And even *that* they are having a go at through student loan inflated tuition.

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    1. Like I said, you'd make a terrible investment banker. In fact you just perfectly demonstrated your particular role as honorary "member of the 1%"

      Ha ha.

      The more you look at empirical finance papers, the more you realize how insanely hard it is to tell who won and who lost from any given trade...

      (Not that Graeber even tries, he just assumes...)

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  16. "Now on what principle can a crime be discovered in a contract advantageous to two parties, with which both parties are satisfied, and which certainly does no injury to anyone else? To say that the lender takes advantage of the borrower’s need of money to demand interest, is as absurd an argument as saying that a baker who demands money for the bread he sells, takes advantage of the buyer’s need for bread." - Turgot

    Oh man! This is by far my favorite post of yours! I hope that makes you really nervous.

    So the 1% controls the 99%? Seriously? Anybody who grasps the concept of dollar voting and consumer sovereignty should understand that the market works because we have the freedom to give our dollars to the people who we feel should have more of society's limited resources at their disposal. It's really not rocket science.

    Also, rather than read Graeber's backwards thinking book...you should really read Le Grand's forward thinking Motivation, Agency, and Public Policy and The Other Invisible Hand. At the very minimum...you should at least mention them to Kimball.

    Also, I've subscribed to Crooked Timber for quite a while and only chuckled out loud twice. Both times had to do with Graeber's book. Exhibit A...

    "… certainly have some attractive qualities, but although Graeber wins the battle against the “Myth of Barter” here I think he loses the war – really, although the discussion of socially embedded exchange is incredibly interesting and illuminating, I think anyone who reads the passage above is going to end up sympathising with the people in the economics department who say that you really can’t organise a modern industrial society on the basis of organising a wife-swapping party every time you want to buy a blanket." - Daniel Davies, Too Big To Fail: The First 5000 Years

    w00t...yeah, I like that. My girlfriend...not so much.

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  17. I'm confused by the LCD analogy. Don't people's attitudes toward debt actually affect the way causality works in the economic system?

    Let's say you were trying to understand how a game of poker works by watching two people play. But say player one and two had a different understanding of the rules. You might say that player one was playing "right" and player two was playing "wrong" based on some canonical thing like Hoyle, but wouldn't the causality at work in the game at hand be affected as much by both players' understanding of how the game worked?

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  18. Not defending Graeber but your arguments seem even weaker to me. Just one example.

    "One thing we could do is to have periodic debt cancellations, either pre-announced or random. Either way, what that would do is make lenders very unwilling to lend. Interest rates would go way up, because that would be the only way that lenders could turn a profit lending money."

    Interest rates go up or down because of monetary policy. Demand and supply forces for interest rates are always a wrong argument since people demand and supply money, not interest rates. And money requires double-entry accounting and can not vanish. Whatever the interest rate is there is always two sides: demand and supply. If supply demands more, then demand supplies less. Therefore argument that debt jubilee forces changes to interest rates have to explain why borrowers are willing to pay more. And what other options do creditors have but to supply credit? And here we even abstract from the banking system intermediation which is a strong one. Banks generally live in nominal business and do not care about interest rates.

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    1. Therefore argument that debt jubilee forces changes to interest rates have to explain why borrowers are willing to pay more.

      What makes you think they'll be willing to pay more? Higher interest rates will more or less destroy demand back down to a new equilibrium level with the amount that creditors are willing to supply.

      And what other options do creditors have but to supply credit?

      They can sit on the money, or spend it on themselves.

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    2. The idea that the supply of credit is perfectly price-inelastic seems obviously wrong to me.

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    3. Tiercelet2:02 PM

      It could be made so.

      We have a banking system where the mortgage borrower takes out a loan with a bank, which then insures that loan with the government, while borrowing from the government any additional funds needed to lend to the mortgage-holder. The bank is doing nothing in this but acting as a middleman and collecting a corresponding toll. We could just as easily lend directly to the consumer from the government*. Those loans could in theory be made solely based on a combination of transparently published underwriting criteria and an inflation index in the housing market. (And of course since government money is constrained only by inflation, not revenue or assets, credit supply becomes a political and macroeconomic decision not governed by private citizens' irrelevant desire for free money.)

      This would also give the government a lot more leverage to stamp out real estate bubbles, by choking off credit access in areas with rapid price appreciation.

      Of course this system would need to be run wisely; but the barriers to running this system wisely are the same as those which prevent a distributed/private system from being run wisely--control fraud, self-dealing, and bad decision making from management.

      * (oh sure, it'd be an invitation to corruption through the preferential treatment of a few politically connected insiders, something that never happens under paragons of private industry like Angelo Mozilo.)

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    4. "The idea that the supply of credit is perfectly price-inelastic seems obviously wrong to me."

      What til you learn about open market operations...

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  19. FWIW, I read part of "Debt" and had a similar reaction. Graeber does not get things like the trade-off between stocks and bonds. He is not an economist, or even a knowledgeable investor.

    But he does get the fact that the banksters and Los Ricos were bailed out, the stock market has recovered, while unemployment remains high and ordinary people remain mired in debt. He gets the bigger picture.

    From what I read of the book, he gets debt peonage, and he talks about how debt is different between members of the upper classes than when they lend to lower classes. He talks about how the debt of householders is different from the debt of businessmen, and why ancient jubilees canceled household debt but not commercial debt.

    He makes enough errors that I do not know what to think. But I do trust Michael Hudson. :)

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  20. Tiercelet4:38 AM

    This "how come creditors are extracting in one case and debtors in another" thing is a little naive -- it's like saying "Man that Newton guy doesn't know anything about gravity, one minute it's the thing that causes an apple to fall to the earth and the next it's the thing that *keeps* the moon from falling! Can't he make up his mind?"

    The difference is in the scale and the relations.

    Tzimiskes has done a pretty good job of showing how domestic debt is exploitative on the part of creditors, so I won't rehash. It's a macro property of the system, not something you as an individual can necessarily tap into at will.

    But how are debts exploitative on the nation-state level? Well, colonialism: the French show up in Madagascar and institute taxes on the people there, creating a debt where there was not one before (in the form of the tax obligation). The British fight a war in China to force the Chinese to allow sale of opium, and then sandbag them with war reparations to boot, creating a debt by fiat. (Think of it as an interest payment on the bullets they received.) But colonial powers arrogate to themselves the role of creditor; I think that's what Graeber means in the Businessweek article: the state uses power to impose a debt on its people, that of not getting kneecapped.

    But what of the US-China situation? First off, remember that a debt cannot exist outside of a power relation capable of enforcing it. When Emperor Charles V decides to stiff the Fuggers, who can they appeal to? (They're actually better off than China, they could at least have gone to the Pope or the other nations of Europe or something). If a mob boss owes you $100, do you think you'll ever get paid other than at his convenience and on his terms? But you'll never say no to making the loan.

    Regardless, China is sending America real resources in exchange for American T-bills that we create at will to infinity. Theoretically that's a debt, but it's one we could pay off with a couple nights' print jobbing. And American money is worthless in China! They're sending us real stuff in exchange for basically American tax credits. Since we know they're not acknowledging some sort of American ability to tax them, they must be accepting worthless-to-them paper in exchange for real goods. We do honor those debts (well, roll them over), but they're worthless unless the Chinese government reversed its flow-of-funds policies, instantly devaluing the very reserves it'd be trying to spend down. Of course this is a conscious policy on the part of the Chinese government--the value they send us is extracted from their workers and their environmental capital, primarily for the benefit of a privileged robber-baron class within China; and Graeber does miss the point that by doing this, China is extracting from the US one of its most important resources (aggregate demand). But the point holds; China is 'lending' real goods against the unenforceable promise of worthless money.

    Or put it another way: technically we're in debt to the OPEC nations for all that oil they've 'lent' us in exchange for dollars. But given the object lesson in Iraq, how likely are they to stop lending any time soon? Even when (as with Saudi Arabia) we won't even take their money for goods like US port infrastructure? What's the point of dollars you can't spend on anything really good?

    The point that Graeber makes, that economists always miss, is that debts (like all other financial arrangements) aren't contracts between equally-well-off landed British gentlemen. They're the product of power relations. They are only as equal as they are equally enforceable and equally overseen by institutions. One need look no further than Bank of America's mortgage servicing reviews to know how that works out domestically...

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    1. FYI, gravity does not keep the moon from falling. If gravity were switched off the moon would not fall.

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    2. I'd put more emphasis on the fact that it's a system benefiting exporters and those who work for them (and who work providing services/goods to the exporter employees) at the expense of everyone else in China. There's nothing really blocking Chinese companies from demanding payment in Yuan, and paying US exporters in Yuan - like how most trade between two or more countries is done. It's just that the Chinese government decided to accept dollars, in the interest of keeping the flow of exports high.

      But given the object lesson in Iraq, how likely are they to stop lending any time soon?

      The US didn't invade them the last time they slammed it with Oil Embargoes back in the 1970s. It's just that they'd be crazy to cut off a major source of income.

      What's the point of dollars you can't spend on anything really good?

      We take their money for a whole host of other stuff, even if it's not "national security sensitive" business like ports.

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  21. This is a good post, because perhaps there is something exploitative about the financial system. Graeber being wrong about exactly what that is, isn't helping his so called cause.

    I can name a tonne of crap that sucks like

    A) HFT traders who make money off of being 300 fiber optic feet from NYSE

    B) Broker/Dealers who get to buy/sell bonds that the government is auctioning/buying (

    C) Free money for people who already have lots of it. (IE real negative rates for borrowing for massive banks ---> whose mgmts get bonuses off the returns they make on this free money)

    D) "public data" - that you can only reasonably get your hands on for +500 000

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  22. fresno dan5:28 AM

    "And yet creditors are very angry about this, first of all because they fear that money-printing will cause inflation (which erodes the value of the debt they hold), and also because they can't get much of a return on the money they lend in the future. If you don't believe me, read The Economist or Fox Business complaining about how low interest rates hurt savers (i.e. creditors)."

    So you believe Fox news? Never hear of the tail of Br'er rabbit???Did it occur to you that greedy, greedy people aren't satisfied getting 99.99% and want 100%, plus any residual value from processing your corpse???

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  23. fresno dan6:21 AM

    And after reading the comments, let me paraphrase Mr. Noah's arguements, but substituting "black" for debtor (or powerless), and "racist" for creditor:

    So how can I extract wealth from the black?
    how can I get rich by oppressing the black?
    (Won't I depress my return by oppresion?)

    Well, I could finance sharecroppers, and make money by taking a share of the crops they grow...
    Am I "extracting" wealth from them? well,maybe.
    "But if they were willing to take out the loan, and willing to pay me back - if they intended to pay me back from the very beginning, and followed through - then didn't they benefit somehow from borrowing the money?"

    Yeah, the high life of sharecropping - thats why there are sharecropper resorts....

    "Did I really "extract wealth" from them? And if so, does a grocery store "extract wealth" from me every time I buy a grapefruit?"

    All voluntary, all the time. I am sure there are plenty of nice legalistic contracts laying out in exquisite detail the rights of the landowner and the sharecropper...so the lawyers and legal system get their cut...

    "But didn't I lose out too? After all, I didn't get paid back! I took a loss! Not a very good method for extracting wealth, it seems to me."

    Funny how the black people stay poor, and the racist stay rich. Who can explain it???

    "OK OK, new idea. Suppose I sell poor black people an exploding sharecropper loan that they'll never be able to pay back, then package this loan off and resell it to Goldman Sachs. When the poor people default, Goldman Sachs takes a hit and I'm in the black. Money extracted!"

    But did I extract the money from the poor people, or from my fellow One Percenters at Goldman Sachs? Remember, the poor people took a hit from the bankruptcy, but in the meantime they got to borrow some money and not pay it back, due to the protection afforded them by bankruptcy law.

    Deja vue all over again - Funny how the black people stay poor, and the racist stay rich. Who can explain it using the precepts of the EMH???

    This scheme sounds like a winner. But it makes me wax philosophical. Was it the debt that extracted the wealth, or the trick itself? If I sell people a crappy car that breaks down two days after they drive it off the lot, does that mean that cars are a tool for extracting wealth from the poor? Or does it mean that deception in general is a tool for extracting wealth from the poor, and crappy cars, like crappy loans, are just one kind of crappy product that people can be tricked into buying?"

    Did the crops extract the wealth? Or was it the land? Black people - its so easy to trick them! Why don't they just move from their lousy sharecropping farm...(Oh yeah, going to jail for not paing a debt....or ganishment of wages - pay the debt back, but eating is optional)

    You know, I was young and naive once too, and thought the EMH was an elegant, logical, encompassing theory too - until reality bitch slapped me silly.

    But if you want a market reason, think about this: Its a profit and loss system, so who took the losses? Or were there no losses??? So why was their TARP?

    http://www.interfluidity.com/v2/2587.html#comment-20804


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  24. rtah1006:44 AM

    Graeber's book is a tour de force, until that final chapter, which is a just a farce. He doesn't seem to understand basic concepts in financial markets and macroeconomics and bizarrely fails to make the case for MMT or the old "Chicago School" policy of government-backed money that the IMF blessed last year (HT Martin Wolf's helicopter money article in the FT yesterday).

    If he had stopped at the penultimate chapter, the book would have more force, as essential reading for anybody looking motivation to slay the debt-money monster, but his how-to-slay manual is lousy.

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  25. To promote this disposition to exchange lands, which they have to spare and we want, for necessaries, which we have to spare and they want, we shall push our trading uses, and be glad to see the good and influential individuals among them run in debt, because we observe that when these debts get beyond what the individuals can pay, they become willing to lop them off by a cession of lands. ... In this way our settlements will gradually circumscribe and approach the Indians, and they will in time either incorporate with us a citizens or the United States, or remove beyond the Mississippi.

    -- Thomas Jefferson to William Harrison in 1803.

    The point of this example is that debt is not being used just as a pair of ledger entries; it is quite consciously being used as an instrument of colonisation and control. It may be that we have two people who represent governments of whatever kind who initially enter into a debt to maximize some utility function, but the expectation - clearly stated here - is that the debt of the Indians will get beyond what they can pay, trigger a default, and then be settled by the exchange of land.

    And while I think that Graebner's book is a bit woolly in places, it could do with a good editor, and he is willing to play fast-and-loose with facts from time to time, he does have a good point at the core. Debt is a social and cultural phenomenon which manifests in a lot of different ways, and it's a lot more than a pair of ledger entries and a discount rate. If I lend a million dollars to Idi Amin in 1971, I'm not just engaging in a financial transaction where the population of Uganda has collectively maximized its utility function by enjoying an early cashflow and I've maximized mine by enjoying a later cashflow in exchange for a coupon equivalent to a particular discount rate. I've coincidentally given a million dollars to a mass murderer to by weapons with which to murder his own population. I suspect in this instance the political and social consequences of the transaction are a lot more interesting than the financial consequences in the form of two book entries and a certificate in the vault of the DTC. I don't think an analysis of this transaction in terms of a discounted cash flow and credit rating will be terribly pertinent to very much at all. But a direct analysis of my political motivations, and Amin's motivations might be more interesting.

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    1. Graebner -> Graeber. Oops.

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  26. Anonymous7:50 AM

    It isn't the debt itself that is exploitative, it is the mal-distribution of income. Wealthy special interests have positioned themselves so they manipulate the rules on how wealth is distributed. Most readers are familiar with college loans. Back in the day, BigG collected taxes and distributed a larger portion of our national wealth to subsidize higher education in the form of State supported Schools.

    Reagan "reformed" that system. Wealth that in the past was distributed to education subsidy is now diverted to the wealthy elites as tax cuts and another portion of the money was directed at individual students as subsidy. However, this "reform" has driven up the costs of college, as institutions must compete on the basis of offering expensive services. This means that the subsidy to students does not even come close to meeting the higher costs. The gap is filled by lenders who are subsidized by BigG and control the rules governing student loans. They Extract a portion of every graduate's salary as an addition tax, only it is the private entity that is taxing, not the government.

    While Noah or anyone can defend lenders as opportunists who take advantage of the rules as written, this overlooks the "reform" of the broader rules that are impoverishing the poor and the middle class in favor of enriching the wealthy elites far beyond their limited contribution to the net economic success. Many of those reforms date back to Reagan and the 1980s. Reagan was all about changing the economic rules to favor the wealthy elites at the expense of the poor and middle class. Reagan's legacy is an unremitting rise in wealth inequality since 1980. The rules of Reaganomics are UNFAIR and there is no reason why we should be stuck with them other than our wealthy elites use their power to maintain their privilege.

    Debt IS a problem for most people. A PrivatizationVoucher system, as is increasingly used for Higher Ed, has been used for health care and other Reaganomic "Get the Government off our backs" schemes. These schemes have all worked to make inequality in the US far worse. Privatization is code for "Privatizing the profits, socializing the costs".

    Inequality is a spiral. The more wealth that special interests collect, the more power they gain to set the rules in favor of even more wealth going to the wealthy elites. The rules surrounding debt are a major factor in feeding the spiral, a "rich get richer" scam that is older than the "company store".

    -jonny bakho

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  27. Of course creditors extract value from the poor.

    When someone is poor they can't exchange the debt they have to others with debt others owe to them - (this is the definition of poor). So what do they have that satisfies their debt? their labor.

    Labor has little value on its own, Labor's value increases with the amount of capital it works with(productivity).

    So capital has no value without Labor, and Labor has little (less) value without capital. This relationship is not always and everywhere exploitative. The question is what is the correct share between the two, how is the profit split? As a practical matter Graeber is right to observe that OFTEN what happens is that people who have very little capital are disadvantaged in this relationship, they end up capturing a smaller share of the output of their Labor and a disproportionate amount goes to the capital.

    Graeber is also right in this case to equate equity and debt - both are capital and capital is money and money is credit. This is his point, and he's right in a very broad analysis.

    Debt cancellation: Once again he is right. We already have debt cancellation - its called bankruptcy. Corporations do it all the time - when? why when they can't pay back their debt. Individuals TRY to do it, but the rules are less fair to individuals - its an outrage for example that the private bk rules were changed just in 2005 to exclude mortgage debt.

    Graeber thinks expansively and he is often contradictory and often incoherent - I read his book and found it frustratingly grand. However, the issue he tackles is contradictory and incoherent and grand as well. Economists prefer to address this topic with elegant and tractable models that have delightfully efficient, unbiased and consistent results - but everyone knows the underlying assumptions needed to make the math work are simplifications. The result is that it becomes too easy to confuse the model with reality. The most useful thing economists can take away from Graeber is a reminder that the thing they are modeling is messy.

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  28. This is a great post; reference to Chicago proposal is appropriate. Would just add this relevant comment by nobel price winner Maurice Allais on the debt pyramid:
    "Today’s world economy rests on gigantic pyramids of debts. Never in the past have there been such an accumulation of promises to pay. Never has it been more difficult to deal with such a situation. In the face of such a situation, all the measures taken serve one purpose only: the postponement of the necessary adjustments by extended new loans and the creation ex nihilo of new means of payment, resulting in further increases in the aggregate volume of promises to pay." (Maurice Allais: The Credit Mechanism and it Implications (1987)) --- Very much like Graeber!

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  29. Phil Koop8:36 AM

    "David Graeber fundamentally cares about standing up for powerless people. How many of us can say the same of ourselves?"

    Sure. Graeber is undoubtedly a better person than me and perhaps even better than you. But in order to actually help powerless people, he is going to have to propose an action that works. And the chances of doing that are just way better if he could form correct ideas on which to base his actions. Otherwise, he needs a miraculous cancellation of errors. So he has to carry the can for his mistakes just like lesser mortals.

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  30. Noah,

    "The more you look at empirical finance papers, the more you realize how insanely hard it is to tell who won and who lost from any given trade..."

    If the trade is done at market value, then that's necessarily true (that *is* the EMH). But the bailouts did *not* occur at market value. Without the government stepping in, market value for investment bank stock was zero dollars, and even their debt was *way* under par. An enterprising state would have paid nothing for the stock. In fact, they would have just let them all go bust, let shareholders get nothing and creditors (non-deposit) take a big haircut, then just take over the assets and continue to operate those institutions like nothing ever happened. Their liabilities would have been wiped clean and the credit of those institutions would have been superb with government ownership. The public would have made a *killing* in the subsequent privatization and the bankers would have gotten killed. Instead recaps were done way above market and the public got screwed.

    So, no, it isn't very hard to tell who won and who lost in this case. The suggestion that the EMH is a good first approximation for transactions between banks and the government is a joke.

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  31. Hi Noah,
    I am QUITE sure that you, of all people, understand what Graeber is trying to say (and I also now understand that you like to take the contrarian position :-) ). Graeber "gets it" at a somewhat muddled, yet intuitive way. His comment on the stock market is what gets in the way of what could be a set of very cogent arguments:
    (1) Creditors ("the 1%") are extracting economic rent.
    (2) It could be argued (as some have) that the deliberate(?) policy of Fed and the Treasury has been to engage in opportunistic disinflation (or even deflation?)
    (3) Of course the Fed is NOT entirely driven, with blinders on, to achieve disinflation. The exegeses of Fed's actions are therefore not straightforward. It has inflated over some periods. However this could be interpreted as interventions during severe market failures (Savings >> desired Investment, globally) that could have led to full-scale deflation. Yet the trend of disinflation over decades is indeed remarkable (I know you have commented on this)
    (4) Yet another manifestation of the "Creditor-Debtor" divide is the cash hoarding in corporate balance sheets, which makes their asset mix less volatile, leading to lower volatility of equity and the upward valuation of debt, typically owned by the 1% ers!)

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  32. In that article you posted, Graeber writes "It’s now clear that the 1 percent are the creditors..."
    From that quote, it is obvious that Graeber is arguing that since the 1 percent are creditors, the government employs policy that favors the 1 percent. This does not mean that government policy is intended to favor all creditors, only the elite creditors of the 1 percent. if most of the 1 percent were debtors, then the government would favor policy in the interest of elite debtors. In fact Graeber makes the point on page 7 (location 155 in the kindle edition) that there is a difference between "cadillac debtors" and "pauper debtors." To put it as simply as possible, government policy is intended to favor the 1 percent.

    So why focus on debt? Well, I think that Graeber in his articles is writing about debt in a capitalistic society, where compound interest and economic volatility can trap people in inextricable webs of debt. The most obvious example he gives is students who took out loans under one set of assumptions, only for the economy to go into the toilet.

    Additionally, Graeber is trying to illuminate is the mechanisms through which the elite exploit and the government supports that exploitation, which Graeber argues has primarily been credit-debt relations going back to the beginning of human civilization. Thus, by studying the debt structures, he hopes one can see both the timeless and the changing nature of power relationships in society. Graeber is trying to show that debt is not a matter of individual choices and responsibility, but it is systemic and structural. It is also justified and normalized through certain cultural institutions and discourses. An example he gives of this in his book is the from a charitable organization that IMF-imposed austerity programs that result in unnecessary deaths (such as the ten thousand people in Madagascar who died because mosquito eradication programs had to be cut) are justifiable because "Surely one has to pay one's debts."

    On this point

    "Or is it simply the case that studying cultural attitudes toward a phenomenon doesn't really convey a solid understanding of how that phenomenon actually works? Is trying to understand debt by analyzing people's attitudes toward debt somewhat akin to trying to understand the physics of a liquid-crystal display by studying the cultural effects of prime-time television?"

    Unlike physical phenomenon, debt is a social phenomenon which cannot be isolated from cultural attitudes, beliefs, desires, values, states of knowledge, and states of technology. After all, cultural attitudes determine why people go into debt, how much debt they go into, and what kinds of debt are tolerated (for instance, up until the twentieth century most states had usury laws).

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  33. Please let us know when you officially join the GOP, and get your complimentary subscription to National Review.

    Also, let us know when you start thinking of the unemployed as shiftless and morally lax.

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    1. Hehehe. It all started when Justin Wolfers teased me at ASSA by saying he'd put me at the left end of the economist ideological spectrum...I told him I'd do a bunch of conservative posts just to show him... ;-)

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  34. Maybe his point - I'm reaching here - is that the 1% extracts wealth from (some of) the 99% , not by the loan itself, but by getting them to accept lower wages; by allowing them the illusion that they are not as bad off as they seem because they can acquire the things they want and need with the combination of wages and increasing personal debt. Until they default. Again, it's a stretch.

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  35. I think that some of your arguments here are disingenuous, especially if you're really trying to argue that creditors aren't extracting wealth from debtors. But I'll admit that I didn't read everything you wrote with the utmost of care, and that's because I get the unsettling feeling that you're being condescending and dismissive of someone just because you got in a twitter battle with him. It feels mean, and ugly, your subsequent protestations about not beating up on the defenseless (condescending much?) notwithstanding.

    Also, I get the impression that Graeber is arguing that we need to look at things in different ways and that standard tools of economic analysis aren't adequate to get a complete understanding of what's going on with debt and related phenomenon, so dismissing him using standard economic analysis is kind of missing the point.

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    1. I think that some of your arguments here are disingenuous, especially if you're really trying to argue that creditors aren't extracting wealth from debtors.

      If you think my arguments are disingenuous, can you find the flaw?

      I didn't argue that creditors can't extract wealth from debtors; I believe they can. But I also strongly suspect that David Graeber doesn't really know they can, and doesn't understand how they can, because he hasn't thought about the economics of the situation.

      I get the unsettling feeling that you're being condescending and dismissive of someone just because you got in a twitter battle with him.

      Did I go after Graeber because he's a mean, rude guy (that one time to me, but many times to others)? Yes, of course! But if he were smarter and less hack-y there would be much less to go after.

      dismissing him using standard economic analysis is kind of missing the point.

      Or maybe I just think his point is...wrong??

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    2. Well, to begin with it seems not at all contradictory to me that debt can be used to extract wealth as either a debtor or a creditor. If you're a creditor and you charge usurious rates to a debtor, you're extracting wealth from that debtor and, presumably, distributing it to your shareholders, so you're redistributing wealth upwards.

      On the other hand, if -- because of military or political power or whatever -- you're a debtor nation that can borrow at extremely attractive terms, it seems like you're in effect extracting wealth since the creditor nation could presumably find another use for its money that would generate a higher return if it didn't feel compelled to lend to the more powerful debtor nation.

      I believe there are other examples, but in any case, whether the debtor or the creditor is extracting wealth has to do with the interest rates associated with the particular transaction rather than simply being a debtor or a creditor, so I don't necessarily see a contradiction in Graeber's saying that the powerful can extract wealth in either role.

      Similarly, if you were living in a food desert, someone might indeed be able to extract wealth from you by selling you a grapefruit if you didn't have options for procuring a grapefruit from another vendor at a more reasonable price.

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    3. because he hasn't thought about the economics of the situation.

      from your blog: But - as anyone who reads the news should know - the main thing the government does to boost stock prices is to lower interest rates and/or print money. And yet creditors are very angry ...

      And while we're on the subject of not thinking about the economics of the situation, when yield (i.e. interest rate) goes down the price of bonds held by the creditors goes up. In consequence we've over the last five years had one of the biggest bond fund rallies in history, many bond funds have delivered 10%+ returns you over the last few years ...

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    4. That's true!

      But inflation definitely hurts holders of existing bonds (we just haven't managed to produce much of that yet).

      And low interest rates reduce the rates creditors can get on new lending, such as mortgages.

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    5. Also, if you want to think about bond prices, I'd step back from the single issue of interest rates and realize that in general, bond and stock prices are negatively correlated...so it's not so easy for the government to help out both creditors and stockholders at the same time! (A liquidity trap, of course, makes this possible, as we're seeing now, but this is not usual.)

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  36. Maybe a way out of the contradiction is suggested by that great poltical economist and thinker, Donald Trump. Yes, I'm kidding, but consider this. He said that if you owe the bank one million dollars, the bank owns you. You owe the bank 100 million dollars, you own the bank.

    In a paradoxical way, once you owe enough to an entity, the entity's health and possibly even its survival depends on keeping the debt alive. You can exert control and impose conditions to the creditor. (That's my problem! I don't owe B of A enough on my mortgage to make them sweat.)

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    1. Now that is an interesting thought...monopoly vs. monopsony power.

      But of course the bank doesn't own you if you owe it $1...

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    2. But it kind of works the opposite way as well. If I owe the bank $900K on a million-dollar mortgage and I don't pay for long enough, they take the house. If I owe them $10K and can't come up with it, they take the house.

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    3. Just to say (beyond this being an interesting feed/post, thanks) that Trump was "extracting" that line from John Maynard Keynes who said in the 30s: “If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours.”

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  37. Anonymous1:50 PM

    I really didn't like this post, because you haven't read the book. If you are like most other economists who've commented on it, you may have looked at Farrell at Crooked Timber, or Beggs at Jacobin, then used their arguments, like the lazy, ignorant poster who goes by Absalon.
    What really made me sad about this post though is how little Noah seems to know about Graeber. He does not advocate for centrally distributed money or whatever was suggested earlier. He is an anarchist. He thinks money was invented at the same time as standing armies. People in finance/banking like to act as if their wealth comes from some random place, but it doesn't. If you read the book, you would see that debt is enforced by violence, be that riot cops at World Bank summits or Roman soldiers in the ancient Levant.
    You should read the book, but at this point you are so committed to being in the 1% having an open mind seems unlikely. Enjoy continuing to extract wealth through "physics formulas" when you are actually extracting wealth through "state sanctioned violence".

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    1. the lazy, ignorant poster who goes by Absalon

      I prefer to think of it as an optimal allocation of my limited resources of time and intellectual capacity under uncertainty.

      OK, so you say Graeber is an anarchist. Another excellent reason for me to not read his stuff. The anarchists, like their Libertarian cousins, are so fundamentally wrong that they are not worth investing the time to fully understand how wrong they are.

      I am an experienced commercial lawyer. I agree that money is a social construct which owes its ultimate existence to the willingness of the state to enforce obligations through state violence. I have no problem with that. It is an extremely useful social construct.

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    2. The problem with anarchists is that the left-leaning ones tend to be part of the "small is beautiful" crowd, as if norms that work well in a village of 100 people will just be super when applied to a nation-state of 300 million. The right-leaning ones don't lean that way, but they have other problems.

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    3. the lazy, ignorant poster who goes by Absalon

      Note:

      1) The original Absalon founded "Merchants' Harbor" and created regional prosperity through the judicious use of violence to enforce law and order and protect property rights

      2) My avatar is a little boy offering to hand you a pig.

      draw your own conclusions.

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    4. Brett said: "The problem with anarchists is that the left-leaning ones tend to be part of the "small is beautiful" crowd, as if norms that work well in a village of 100 people will just be super when applied to a nation-state of 300 million."

      This betrays a misunderstanding of anarchism. Anarchists do not want a nation state. That is the whole point: to get rid of the nation state entirely.

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  38. Anonymous3:34 PM

    "And in the broader context, David Graeber is trying to help the powerless, and should get credit for that, whether you think his ideas are right or wrong."

    Somehow I don't think David Graeber will take the credit... cash maybe, but not credit.

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  39. David Graeber fundamentally cares about standing up for powerless people.

    That's sweet. I care about powerless people too. I have had clients sit in my office and cry and openly contemplate suicide because of their debts. I did the best I could for them and was lucky to get paid for half my time. I care (and Noah you probably care too) about the powerless and the stupid and the unlucky.

    Graeber's motives do not excuse his sloppy thinking or require any of us to take him seriously as an intellectual.

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    1. Wow, I agree 100% with Absalon for once. The opposite of good is good intentions!

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    2. Wow, I agree 100% with Absalon for once.

      Don't worry. It is probably just a fluke. :-)

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  40. A comment on Graeber from an anonymous source I highly respect:

    "I read Graeber's book. Some of the anthropological source material about debt in ancient society was interesting, and the basic premise (debt is as much a power relationship as it is the product of exchange) is one that I am sympathetic to, having spent some time dealing with debt as a legal issue. The rest was quasi-philosophical armchair mumbo jumbo that betrayed a shocking lack of intellectual rigor. He would say a bunch of shit and then "draw" a conclusion that had no immediately obvious connection to what he had just said, but which conveniently happened to fit into his overall narrative and perspective. I finished the book feeling like Graeber was a pretty smart, very well-read hack."

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    1. And I should add that this is definitely what all his media articles seemed like, so I assumed the book would be the same. I am not, so far, questioning that assumption...

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    2. The debate here is not between right and left. It is between rational thought and postmodernism. One thing I have discovered is that you cannot argue with postmodernist viewpoints any more than you can argue with people who believe in astrology or other pseudoscience. The worst enemy of the left is the postmodernist left, which legitimizes wacko right-wingers like Michelle Bachman.

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    3. John S11:12 AM

      I had a pretty similar reaction. Blah, blah, blah, dubious conclusion, rinse & repeat. The book is a chore.

      http://www.economicthought.net/blog/?p=3790#comment-787429174

      How can we take someone seriously who writes that Keynes' most famous work was his "Treatise on Money"?

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    4. Seriously, he said that???

      Facepalm.

      The dude is so sloppy. You read about the Apple-IBM thing, right?

      He doesn't check his facts.

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    5. John S5:33 PM

      Yeah, Delong did some sleuthing on Graeber and Apple:

      http://delong.typepad.com/sdj/2012/04/no-silicon-valley-did-not-and-does-not-partake-of-the-anarchist-utopian-nature-why-did-you-imagine-it-did.html

      If Graeber can't get basic, commonly known facts right, how can we trust him on even the anthropology stuff (let alone economics).

      To me he seems like an academic con man--and a damn good one, too. Who will be the boy of the Emperor's New Clothes?

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  41. I was more or less with you right up to the addendum. How do you know that Graeber is any particular thing? Maybe he does have a great sincere feel for the poor; and maybe not. I wouldn't say there's a lot of evidence either way. He *could* be a saint; or he *could* be another academic hustler looking for tenure at a better university. Who really knows? One thing we do know is that he hasn't spent much time working with lepers in the slums of Calcutta...or Brooklyn.

    I always amazed at the way people who are perceived as "smart" are then taken seriously (mostly by the media) across a whole range of subjects. Economics actually does have an extensive and intricate subject matter, as most people here know, and it takes years to master even a narrow specialty. It's not something that you deduce by spending a couple years out in the woods. Politics is the same way (and religion, too.) They all have extensive and intricate subject matters, and while people can freely bloviate on these things, they shouldn't be taken seriously. Look at Paul Krugman, for example. Could be an excellent economist, for all I know, but I know little about his rather arcane specialty, so I'll have to take the Nobel committee's word for it. But when he writes about politics -- which has it's own very deep and intricate subject and policy matters -- he often sounds like an idiot. I believe he thinks that because he knows about his economics specialty, and especially because he's been certified as smart by a bunch of Swedes, then he must also be smart in politics...against all evidence to the contrary. Or, over on the right, look at the Wall Street Journal's editorial page insistence that global warming is a fraud. Those guys may know something about journalism, but climate scientists they ain't. Their viewpoint is based entirely on willful ignorance and surmise and ideology, rather than a grasp of the subject matter of global warming. So why should anybody pay attention? I feel the same way about Graeber. There's little evidence that he knows what he's talking about, so why worry about him?

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  42. Anonymous11:41 AM

    I'd take another look at the bad loan to the poor person scenario. The contracts are generally more complex than just, "if you don't pay me back, I'm SOL." Look at rent-to-own agreements. Let's say I own a bunch of modular homes. I convince people to sign rent-to-own agreements and use the teaser rates, etc. described above. They will make the first few payments, and continue to try to pay when the rates go up. When they finally default, rather than just losing the remaining loan amount, I keep their payments and retain the asset, which will have roughly the same value it did before. I am now free to do the same thing again and agian.

    When you look at the larger system of debt, who owned all the houses that were sold with subprime mortgages? The banks did. The same banks (as a whole) that were responsible for the bad loans in the first place.

    I'm not saying that this is necessarily what's happening or that it would be profitable, but there is more to it than, "debtor defaults, so creditor loses."

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    1. Sure.

      So the idea here is, the teaser rate might have seemed low, but the monthly payment was actually higher than if I had just rented not-to-own. So I've basically been tricked into paying higher rent. (They also suffer worse credit history, but that doesn't make any $ for me, the extractor).

      I think even this example is not so clear. What if the higher payments were a speculative bet by the renters on the small but real chance that they'd be able to own the house? You pay higher rent, you get the chance to own a house cheaply. And in the meantime, you have a house, and you won't be kicked out, and you know what the rent will be (limited rent-rise risk).

      So while this might be a successful trick, it might not.

      And even if it is a successful trick, does that mean that debt was essential to the trickery? I'm not sure.

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    2. It's not the debt that is essential, it is the information asymmetry. Creditors can only rip off borrowers if they are misinformed or don't understand what they are taking on.

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    3. sorry, I mean if the borrowers are misinformed or ignorant, of course.....

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    4. Frances: I agree...that's what I was trying to get at.

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    5. Well, as a non-economist I have real doubts about the idea that it is logically, conceptually impossible to rip off someone in an exchange---even when that someone is fully informed and rational, and even when the exchange is mutually beneficial.

      Suppose I find you stuck at the bottom of a well out in the middle of nowhere, and I have a rope. I agree to pull you out, but only if you sign your house over to me. You understand my terms, you value your life more than your house, and you are rational; so you accept the exchange.

      Have I not ripped you off nonetheless?

      The trick of course is that I've assumed that you are in an emergency and there's no one else around to help you. But it seems to me that the analogous situation can easily apply in real-world creditor/debtor relations, especially in the aftermath of a recession. You just need borrowers who are liquidity constrained and have limited access to credit.

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  43. That's a good, spirited defense argument that pay day lenders are running a charitable operation. Who knew?

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  44. noiselull10:21 PM

    I'm surprised Robert Murphy hasn't shown up to praise you.

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  45. David Graeber looks at this issue from a different perspective. He's an anthropologist and he looks at it from a historical perspective. He starts by saying that the key part of what drives capitalism is credit(what we call money originated from credit). Historically, you would have a very small part of the population own most of the land and historically, human civilization over the past 10,000 years was agricultural. Ergo, those who ruled the land effectively ruled society. Those that worked on the land would be loaned seed to grow crops and the owners of the land would take the resulting crops from those that worked on it. It was, in a way, exploitation. This is the perspective that Graeber comes from.

    Now, we have an economy that, instead of being driven by land/natural resources, it is driven by the development of capital. When economies shifted from land/natural resources to capital, it removed the power of the select few. Graeber views the amount of debt that we have taken on as exploitation by the financial class over everyone else. I have some sympathy to this view(although I'm not 100% on board with him). He certainly does know what he's talking about; he's very intelligent, very well read, and his book(Debt: The First 5,000 Years) is very, very good.

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  46. One issue here is that there really is no difference between creditors and shareholders. They are hedged. And, the low valuations serve the big boys. These are the exact conditions they wanted all along. Hence, the disappearance of Heinz Foods. There will be many others bought up and consolidated by these conditions they paid Pols to bring on. Never mind pension funds or other small fry mutual funds who don't own any real votes. The real votes are retained by founders and tycoons. They are the real owners playing both sides.

    But, in this case, they are silently divesting of US Treasuries and even their crap mortgage bonds using QE and their Fed (which they own as "members"). So, their skin in this game aka the USD is now decreasing. Inflation/devaluation will be very good for them once they get rid of the last of these bonds. It will eliminate the debts on their balance sheets, since they can stock up with these low rates, and simultaneously translate their FCCY income into more USDs. Also, the #s on Brit Treasury sales over the last year are very revealing. Currency war in the not too distant future?

    Anyway, we know that whatever is happening out there, they are paying for. Since Citizens United, we actually have no idea who is paying for. The 3 branches are doing exactly what they are told to do, or not do, as the case may be, by whoever is paying from wherever in the world!

    In the meantime, this stuff gives clues to how things work in business that are definitely not covered in Econ faculties in the university sector, despite being tax-exempt for public service! It is tedious reading all these blogs by PHDs or whatever when this basic knowledge of how things really work is more or less withheld from them.

    There really is no difference between these people. They play both sides of every equation, creditor (by ownership of banking license)/debtor by choice when it suits them to leverage up, long/short, Neo-Liberal/Communist, Rep/Dem, etc. We really need to start seeing the game for what it really is.

    http://www.ted.com/talks/james_b_glattfelder_who_controls_the_world.html

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  47. "Or is it simply the case that studying cultural attitudes toward a phenomenon doesn't really convey a solid understanding of how that phenomenon actually works? Is trying to understand debt by analyzing people's attitudes toward debt somewhat akin to trying to understand the physics of a liquid-crystal display by studying the cultural effects of prime-time television?"

    But isn't how a phenomenon actually works closely tied into how it's perceived? I think you're giving debt too much credit (ha). It's not physics, it's about agreements between people, which are inherently cultural and affected by how people perceive debt. The experience of giving/receiving debt would inevitably be influenced by those kind of perceptions. I don't really care about this guy's book but to just throw out an entire field of inquiry like that is kind of harsh, to say the least.

    After I finished writing this I realized an earlier poster had made this same point...ah well

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  48. Top discussion. I am re-reading Graeber's Debt now. If I recall the first time I read it I learnt a great deal. I did notice some inconsistency, but actually, that is to be expected. Because the over-arching message is that debt is a social construct. There is no natural law that says debtors should repay creditors. Debt is merely a social tool, whose origins are closely associated with violence and war. Without a formal measure of debt, there is no excuse to take property from other groups. But if you formalise this thing called debt, then we now have an excuse for war. But again, the debt is a social construct, and the guarantee to pay os also a socially constructed obligation.

    Anyway. I will write my thoughts after reading this discussion (and others, and re-reading the book)

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  49. Also, it devotes three-fifths of all carbon revenues to per capita rebates back to the wedding dresses 2013 public. This is essential for several reasons: it is good macroeconomics (more predictable muting of the dampening effect of higher energy costs), good social policy (turning regressive fuel price increases into progressive redistribution), and good politics (countering the understandable fear of households that rising energy bills will slash their living standards). This is the right direction for policy.

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  50. Anonymous5:36 AM

    The idea that an economist can complete his studies and not understand how debt is and has historically been used as a weapon by those with access to the money creation mechanisms available within a given society, and how that system was used in the recent housing bubble to strip-mine the housing stock and credit of ordinary American citizens... using the endless trough of Fed-supplied money to lend to people desperate to purchase a house before they were forever priced out of the market (remember all the fine economists, political leaders and other bankster-friendlies telling all of us the market would go up and up forever) is a bit shocking to me. But the smug and glib half-assed "review" of David Graeber's work you provide here displays your own lack of seriousness, and your own willingness to be a tool for the powerful interests that use their money-creation powers to literally enslave a population that has been systematically deprived of any share in the productivity gains of the past 4 decades. Of course people do not have an option NOT to borrow money. They are desperate to feed their families, access health services, provide shelter and clothing in an economy that only serves the top 1% and exploits the bottom 90% mercilessly. They must borrow because they don't earn enough to provide for their families any other way. To pretend this system isn't thoroughly exploitative, and to only be concerned because it causes "instability" is testimony to your own jaundiced views of the mutual support and duty owed by each of us to the others within our own societies. You have clearly been trained to support the economic status quo, and are a tool of the 1% whether you pretend otherwise or not. The history of capitalism, and especially the American variety, is one of scammers and manipulators using the system to steal with impunity. The idea that the only party that has any responsibility in a lending transaction is the borrower is preposterous. The banksters that have caused all of the terrible and murderous depressions in American history have done so by loaning money they didn't earn (via fractional reserve lending and fiat money creation) to people who desperately need it but may not be able to pay it back, and then seizing the collateral (or in the current mess, seizing the collateral AND being bailed out by the taxpayers) in a madness of self-righteous blather that debt contracts must be honored. Graeber, and many others, are saying no to this outright theft -- a lender has the obligation to ensure money being lent CAN be paid back. If they do not do so they are committing fraud. And the fraud they commit is in service to short term unrealized "profit" that they then translate into fat bonuses for themselves and their cronies. To pretend this system somehow doesn't exist, or that these fraudsters are somehow owed something for their deceit, and that they can lay claim to taxpayer moneys to recompense them for their "losses" is the ultimate corruption of economics and language. And yes, your much-vaunted "stability" goes right out the window along with economic and criminal justice. Read some Bill Black and Michael Hudson. Learn what these bankster/fraudster/criminals have done to our centuries-old land-title systems in pursuit of short term gains... open your eyes you smug fool.

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  51. Anonymous6:54 PM

    In answer to your question concerning debt and tribute. Having a subordinate nation purchase your debt work as a form of tribute is you control the currency the debt is issued in, because you always have the option of simply issuing more currency which is exchanged for real goods.

    In answer to the stock vs money creation - Inflation benefits the first person to receive the new money. Newly issued credit in the US generally goes into the financial sector first (ie stock market) and so creditor class, being the major holder of financial assets tends to benefit the most from it.

    In your final OK OK OK type points - in all of these, your ignoring the role that financial fraud. For example Goldman Sachs never held the exploding loan package. They sold exploding loans to pension funds and their own clients, and than bough credit default insurance to bet that the loans would fail. When AIG, the company that was on the to pay the insurance blow up, the "broke" federal GOV magically pulled 1/2 trillion out of it's ass to cover it.


    Graeber is actually very consistent and cogent, but you have to understand how the game is rigged. You also need to understand how the game is rigged if you plan to get anywhere as an aspiring bankster (may god have mercy on your soul).

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  52. One way to 'extract wealth from the poor through debt' goes like this:

    1) Get people in debt
    2) people, desperately trying to pay their debts, accept jobs for low pay ('you're lucky to have a job' or 'I'll take anything' combined with the dismantling and discrediting of organized labor seem to have been really effectively drilled into enough people to make this work).
    3) If there are great increases in worker productivity without corresponding increasing wages to the debtors, that's a pretty sweet deal.

    If people go bankrupt (increasingly difficult to do), then bummer, but you got yours.

    A focus strictly on the numbers (or I should say, being pretty selective about which numbers you look at) misses this. A huge part of Graeber's book is the connection between debt and slavery and wage slavery is perhaps a loaded term, but it's similar.

    BTW 'I'm a member of the 1% in spirit but not reality' filled me with a sadness I hope to recover from eventually, but good luck with that.

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  53. In reply to your inquiry concerning obligation and tribute. Having a subordinate country buy your obligation act as a manifestation of tribute is you control the cash the obligation is issued in, in light of the fact that you generally have the choice of essentially issuing more money which is traded for true merchandise.

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  54. "One thing we could do is to have periodic debt cancellations, either pre-announced or random. Either way, what that would do is make lenders very unwilling to lend. Interest rates would go way up, because that would be the only way that lenders could turn a profit lending money."

    What evidence do you have for these claims?

    The Bronze Age tradition of periodic debt cancellations was standard policy for thousands of years.

    The most successful modern debt cancellation was the 1948 German Currency Reform that created the German Economic Miracle
    It basically wiped out debts over & above working balances & wage debts owed by employers to employees.
    Apparently debt cancellations are not just a possible policy but indeed the most sensible & effective, as long as the debts are all owed to Nazis.

    What the debt cancellation didn't do was either raise interest rates or inhibit/slow bank lending.

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  55. I have read Graeber's book. I don't share his political views. However, there is a strong logic behind his apparent contradictions: Graeber is an anarchist: he hates the State as well as the Market. This unique point of view brings him to detect paradoxes. I think that Graeber's point about "creditors", "debtors" and "extractors" is not a contradiction but rather a paradox. He refers to the American proverb "if you owe 1 million to your bank, you have a problem. If you owe 1 billion, your bank has a problem". Hence, the border drawn by Graeber is between small debtors and small creditors on the one hand and big debtors and big creditors on the other hand. While, small creditors are in a better situation than small debtors, big debtors are in a better situation than big creditors. The social ladder created by debt climbs as follows (1) small debtors (2) small creditors (3) big creditors (4) big debtors. In that sense he is right to say that China (big creditor) pays a tribute to the US (big debtor). The fact that big debtors are in a better position than all the other has already been observed in many cases: The State towards the savers-taxpayers. The soviet oligarchy towards the kolkhoz shareholders (yes, they were shareholders!). The Hindu Brahmans towards the other Hindu castes. The main reason of their superiority is that they control both legitimacy and violence. At any moment, large debtors can change legislation within a night and seize all their creditor's assets and reverse the relationship. But they will do it only as a last resort ... the so called moral hazard necessary to catch new creditors in the future.

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