Graeber’s Debt book

About a year ago I finished David Graeber’s 2011 book Debt: The First 5000 Years. Since he’s an Occupy Wall Street anthropologist, you might expect me to dislike the book. But I enjoyed it, and learned a lot, even though it does ramble, and his economics is weak.

Graeber’s overall mood is anti-debt:

For thousands of years, the struggle between rich and poor has largely taken the form of conflicts between creditors and debtors – of arguments about the rights and wrongs of interest payments, debt peonage, amnesty, repossession, restitution, the sequestering of sheep, the seizing of vineyards, and the selling of debtors’ children into slavery. By the same token, for the last five thousand years, with remarkable regularity, popular insurrections have begun the same way: with the ritual destructions of the debt records – tablets, papyri, ledgers, whatever form they might have taken in any particular time and place. (After that, rebels usually go after the records of landholding and tax assessments.) As the great classicist Moses Finley often liked to say, in the ancient world, all revolutionary movements had a single program: “Cancel the debts and redistribute the land.” (p.8)

That is sure a dramatic image, and makes one’s opinion on debt seem pretty fundamental. Oddly, Graeber never actually comes out directly against debt. He doesn’t seem to want to forbid it. Instead he seems to just want to set a low bar for forgiving the debts of the poor, mainly because helping the poor is a good thing. The closest thing to an argument I found:

The remarkable thing about the statement “one has to pay one’s debts” is that even according to standard economic theory, it isn’t true. A lender is supposed to accept a certain degree of risk. If all loans, no matter how idiotic, were still retrievable – if there were no bankruptcy laws, for instance – the results would be disastrous. What reason would lenders have not to make a stupid loan? (p.3)

Actually standard economic theory doesn’t say that the results without bankruptcy laws would be disastrous. Yes, the more stuff people can promise as collateral to support loans, or promise to suffer if they fail to pay, the more loans will be made, and the more people there will end up poorer or suffering because they can’t pay loans. But economists can’t say this is bad without adding assumptions about why such poverty is inefficient.

You might say that poverty is economically inefficient because it makes other people feel bad to know it exists, or because it keeps investments from being made in poor folks’ human capital. It could make sense to support general redistribution to deal with such problems. But debt forgiveness is not general redistribution. A policy of forgiving the debts of the especially poor mainly keeps the nearly poor from taking out loans from which they expect to gain overall, and raises the loan interest rates they pay.

Standard economic theory says that such debt forgiveness redistributes to the very poor, but not by taxing the rich. Anticipated future debt forgiveness instead taxes the nearly poor who take out loans and then do well, by raising the interest rates at which they repay their loans.

Yes debts are one of the ways by which people take chances with their wealth level, sometimes rising and sometimes falling. And yes if we stopped the nearly poor from taking such chances we might reduce the numbers of the very poor. But why pick only on loans? There are lots of other ways in which the nearly poor take chances with their wealth level, such as by trying new careers, jobs, neighborhoods, and social groups. Should we try to stop these risky behaviors as well?

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  • http://blog.seliger.com jseliger

    I also read and liked Debt, though mostly for the anthropology. I’m not sure there is a precise argument but I would point to the end of the book:

    A debt is just the perversion of a promise. It is a promise corrupted by both math and violence. If freedom (real freedom) is the ability to make friends, then it is also, necessarily, the ability to make real promises. What sorts of promises might genuinely free men and women make to one another? At this point, we can’t even say. It’s more a question of how we can get to a place that will allow us to find out. And the first step in that journey, in turn, is to accept that in the largest scheme of things, just as no one has the right to tell us our value, no one has the right to tell us what we truly owe. (391)

    Under this reading, his argument is that we should have “genuinely free men and women,” and that right now “no one has the right to tell us our value, no one has the right to tell us what we truly owe.” Which may be true in a spiritual sense but seems less true in a financial sense.

    • Robin Hanson

      It isn’t clear if that means to ban debt or not.

  • http://badoutcomes.blogspot.com/ Robert H.

    I think the historical argument against not forgiving debt is that it leads to debt peonage, debt peonage eliminates the political voice of the debtor and enhances the political voice of the creditor, that leads to more policies that help creditors at the expense of debtors, that leads to more debt peonage, and you get a vicious cycle that can only be disrupted with political unrest. So it’s a political economy, not an economics argument.

    • Robin Hanson

      Well the more obvious political argument was usually that a new leader could get lots of new supporters by a new policy of forgiving debt.

      • http://badoutcomes.blogspot.com/ Robert H.

        That’s true, but I’d point out that in the classical world policies that hurt the debtor class were a lot more common than land redistribution and debt forgiveness. The rich Romans got their wars that bankrupted the small farmer and brought loot to the well connected. The working class , meanwhile, got to see the Gracchi brothers beaten to death. The “rich guys use debt to strip political power from the lower class” dynamic is at least as relevant as the “popular politicians promise debt forgiveness” dynamic.

      • VV

        Only if the debtors had an higher political weight than the creditors.

  • http://juridicalcoherence.blogspot.com/ Stephen Diamond

    In “cancel debt and redistribute the land,” the conjoined demands are inseparable. (If the debts remain, it will lead to reversing the land redistribution: if land isn’t redistributed, new onerous debts will arise.) The call to cancel the debt is raised when there’s a high level of indebtedness of (claimed) iniquitous origin or to reverse (perceived) unfairness. An example of reversing unfairness pertains to the argument that the government bailed out the banks but not mortagagors. An example of the first would be demanding canceling debts and expropriating the banks.

    Regarding jseliger’s comment: saying that “free men” don’t have to pay debts amounts to the claim that the economic functions of debt can be better performed without allowing/requiring folks to become indebted. To make this claim requires a general program for a “free” society. In other words, whether there are institutional arrangements that comport with “spiritual” freedom. (Essentially, the problem of “alienated labor.”)

    The psychological phenomenon of ego depletion (also known as decision fatigue) is relevant to social arguments about debt. ( http://tinyurl.com/cgnt4lq )

  • B

    How does the author propose to get anyone at all to make loans to the poor, if the poor can unilaterally cancel their own debt? I do see some incentive to repay, in that the poor person might wish to maintain her credibility, but I don’t think creditors would want to take that chance, except possibly for a very high rate of interest.

    Surely, it’s better to be allowed to take the risk, than to be all but locked out of the credit market entirely?

  • blogospheroid

    Even in places where debt was banned and equity finance made mandatory, people found ways around it to restore debt contracts in other words. Look at the entire field of islamic finance.

    I’ve seen many solutions to these issues, but have not seen any way of creating the meta-institutions in which these ideas arise as solutions.

    The law should be such that consumer cooperatives are prioritized over equity financed corporations which should be prioritized over debt financed corporations. But how to make this arise in a normal course of negotiations, I don’t know.

    One possibility is that with ubiquitous surveillance/sousveillance, people can finally TRUST equities / other instruments with a variable yield, enough to finance more of the world via production share/ equity rather than debt.

    • IMASBA

      Islamic banking just entails renaming “interest” to “service fee”.

      As for solution, the concept of bankruptcy was already a huge step forward to save people from lifelong debt bondage.

      I believe real estate is the primary cause for high debt worldwide, though in many countries medical bills may be an even bigger problem.

      A for solutions, key steps would be providing affordable health care and keeping housing prices down (or even making it so land can only be leased, not bought) and reducing the public’s penchant for seeing real estate as an investment rather than a place to live, also force vendors to be more upfront about the “small print” that comes with buying stuff on credit (Europe has taken good steps in that direction). Of course someone could still get themselves into trouble via debt some other way but the majority of debt related problems are tied to essentials like health care and housing.

      • Hedonic Treader

        “reducing the public’s penchant for seeing real estate as an investment rather than a place to live”

        People no longer live in just one place all their lives. They are expected to be mobile professionally. It is efficient to rent, and it is efficient to invest in apartments so that others can rent them.

        “provide affordable health care” sounds nice, but someone still has to pay for it and if it is underpriced, some forms will be overconsumed.

      • IMASBA

        “People no longer live in just one place all their lives. They are expected to be mobile professionally. It is efficient to rent, and it is efficient to invest in apartments so that others can rent them.”

        Why are you under the impression that I disagree with you here?

        ” “provide affordable health care” sounds nice, but someone still has to pay for it and if it is underpriced, some forms will be overconsumed.”

        There are a lot of countries where people don’t go bankrupt over medical bills. Apparently it’s not impossible to have such a system. Sure, people their still pay for it but not all at once and their rich pay more.

      • Peter David Jones

        It’s also efficient to buy a house, take on a less than optimal job, and watch the value of the house rise. You could easily end up a winner by the time your retire. I live in a densely populated country where people regularly become millionaires doing this.

      • IMASBA

        “It’s also efficient to buy a house, take on a less than optimal job, and watch the value of the house rise. You could easily end up a winner by the time your retire.”

        Yes, and that’s what I meant with the public’s penchant for seeing for seeing real estate as an investment. Everyone counts on the price of their house rising faster in than overall economic growth and you end up with bubbles and older generations that are rent-seeking money from the younger generations.

        “I don’t see much sign of this happening in the many countries with public health care systems. Perhaps rationing-by-waiting damps it down.”

        Also poor people aren’t savages… Hypochondria is a disorder that has nothing to do with income level.

  • IMASBA

    “Standard economic theory says that such debt forgiveness redistributes to the very poor, but not by taxing the rich. Anticipated future debt forgiveness instead taxes the nearly poor who take out loans and then do well, by raising the interest rates at which they repay their loans.”

    Wouldn’t interest be raised for everyone, including the rich?

    • Robin Hanson

      No.

    • HM

      Not insofar lenders can determine income, as rich borrowers will not be affected by the new debt forgiveness rules.

      • IMASBA

        Even rich people would only take out loans if they can’t afford to pay directly, in other words, their loans have just as much potential of making them pennyless if things go south as the loans of poor people do.

        Also, loans can run for very long times so there is definitely a non-zero risk of the rich person becoming poor for some reason during the duration of the loan.

      • HM

        According to your first paragraph, you seem to believe that for a given loan size, there is an equal risk of personal bankruptcy regardless of income level. I don’t think you believe this.

        On the second paragraph: a non-zero risk does not mean the same risk, so the interest increase would be negligible for rich people compared to poor people.

      • IMASBA

        “According to your first paragraph, you seem to believe that for a given loan size, there is an equal risk of personal bankruptcy regardless of income level. I don’t think you believe this.”

        A $10k debt won’t endanger a multimillionaire much, while it would endanger a poor person, but why the hell would a multimillionaire loan $10k (he can pay that out of pocket and avoid paying interest)? No the multimillionaire loans $10 million and that $10 million debt can definitely get him into trouble.

        “On the second paragraph: a non-zero risk does not mean the same risk, so the interest increase would be negligible for rich people compared to poor people.”

        Maybe a smaller increase, but combined with my first paragraph probably not negligible.

      • http://juridicalcoherence.blogspot.com/ Stephen Diamond

        why the hell would a multimillionaire loan $10k (he can pay that out of pocket and avoid paying interest)?

        That’s a very easy question. He would take out the loan because he thinks his profit rate will be higher than the interest rate.

        If you mean to restrict to personal loans, then the conclusion from your assumptions is that multimillionaires have little need ever to take them. Thus, the conclusion follows that the higher interest rates won’t affect multimillionaires.

      • HM

        Most rich people are rich in human capital, and need to borrow to realize this future human capital in consumption today. Someone having a $100k salary might well have to borrow $50k to buy a car.

        But even then, I can grant your point that loan size increases with income. The point is that if we have loan forgiveness to people who are very poor, say below $5k a year, this loan forgiveness will be a much smaller proportion of these bigger loans. Thus, the generous forgiveness rules lowering extraction possibilities by $5k/year will increase interest rate much less on large loans.

      • Robin Hanson

        Rich people who can’t pay a loan are hardly “penniless” – they usually aren’t remotely destitute in the way that poor folks can be.

      • http://juridicalcoherence.blogspot.com/ Stephen Diamond

        in other words, their loans have just as much potential of making them penniless if things go south as the loans of poor people do.

        Maybe, but the relevant statistic isn’t the probability of their going broke conditioned on going south, but rather it’s the unconditional probability of their going broke.

  • praxeologue

    Or, ban fractional reserve banking. A dollar lent has to be from a dollar saved, period. Just because people consent to such a system does not mean it is logical or enforceable. I cannot sell you a round square much the same way one cannot have multiple valid claims on the same asset as per a FRB system. I wonder sometimes if this faith persists in FRB because there is no natural metaphor to make people realise how daft it is… and given we are supposed to think largely in analogies etc, it is hard to ‘get’ what the FRB system really is. Without it, you would have to guess it would be harder to run into such debt in the first place, not impossible, just less likely.

    How one gets from a system that we have now to a hard money, or fixed nominal quantity system is a trickier question however.

    • Hannes

      FRB does not mean that several people have a claim to the same asset. The assets covering the liabilities are primarily the loan stock of the bank, not the gold/dollar-reserves in its vault. The problem with not having full reserves is entirely due to the limited liquidity of the loan stock, not about there being multiple claims on the same asset.

      • praxeologue

        and the loan stocks of the bank are brought into existence by the frb process itself.. Meaning not backed by any actual new savings… But even if I am misunderstanding something here, let us agree on a full reserve system instead. loans would be far less elastic and to those that charge that it would limit real growth one only has to look at long periods of enormous real growth on systems very close to a hard money system. a gold sovereign was worth more at queen Victoria death than her birth.. A period of enormous real growth. Austrian economists bang on about this and understandably get sidetracked much as an atheist would by a priest at mass… But… I fail to see a problem with their logic and all these kinds of posts do is seem to try and deal with downstream consequences rather than the cause. Excuse editing, ipad keyboard shocking.

      • HM

        Britain in the 19th century had a gold standard and FRB. You have to distinguish between government issued currency being redeemable in gold, and all banks having enough gold to cover all their note issue. Read up on the distinction.

      • HM

        For example, Lombard Street (1873) discusses how to deal with bank runs in Britain. These cannot happen in a full reserve system.

    • IMASBA

      Even with a fixed currency supply you can still lend to people and charge interest, heck, you could even re-create FRB through short selling.

      • praxeologue

        there is nothing wrong with lending… I think the issue is a dollar saved is supposed to represent some foregone consumption, ie some real resources available for someone else to use, via a loan… If terms mediated between buyer and seller by an intermediary like a bank… No problem.., but if as today frb system ponzis it up so that real savings are magnified via credit creation it seems obvious that you get ‘too much debt’ or rather, market eventually realises it is using more capital than has actually been saved… Recent housing crisis is textbook…

      • IMASBA

        Well, FRB does mean the lender can lose more than the capital they own and that is a problem when the lender is a big bank. With a fixed money supply bubbles would still exist (though they might be less frequent), lending to ordinary citizens would be much less frivolous than today, but the 19th century showed this could go as far as inhibiting even promising investments.

    • Michael DC Bowen

      A fixed currency supply is essentially conservative of all economic activity. It enforces a zero-sum on new ideas that ultimately take time to accomplish. It says that you cannot have both WalMart and Amazon.com.

      • IMASBA

        The quantity and quality of goods and services can still increase in a fixed currency supply system and those developments would essentially represent economic growth, they would result in deflation (more stuff can be bought for one unit of currency).

  • efalken

    loans are priced as if the expected loss (default*loss in event of default) is a cost. Making debts easier to break simply increases the cost of borrowing. Changing terms just really inefficient redistribution.

    • http://juridicalcoherence.blogspot.com/ Stephen Diamond

      > Making debts easier to break simply increases the cost of borrowing.

      Bankruptcy laws made debts easier to break. Did they *simply* increase the cost of borrowing? Put otherwise, don’t arguments against debt forgiveness also work against bankruptcy laws, which are a form of debt foregiveness? Don’t they also work against the limited liability corporation, another variety of debt forgiveness?

      • efalken

        You are correct that there are supply and demand effects from lowering the cost of bankruptcy. Clearly the optimum is somewhere between Hammurabi’s code (debtor’s prisons, selling offspring into slavery to pay debts), and simple no-recourse/no-consequences lending. In today’s equilibrium, however, all the costs are passed on to future borrowers, and so changing terms simply is a one-time redistribution, and to work subsequently has to be perceived as ‘one time’ (thus the attractiveness of those ‘year of jubilee refutations’).

        If you think passing on costs to banks is absorbed by the banks, a free way to help consumers, consider that the return on equity for banks has been pretty stable over the past 100 years in the US, in spite of all those changes in laws and institutions (fico scores, etc.). It’s like a payroll tax on ‘employers': it’s paid by the employee, really.

  • JW Ogden

    The way I see it the bottom 10% income and wealth wise in the USA can rarely get loans (other than payday loan and do not think those re what we are talking about forgiving here), so why subsidize debtors? Am I wrong?

    As far as the economic value of loans, I only see 2:
    1. Debt allows people to move some of their consumption to earlier in their lives when they have less income and wealth and when they can enjoy the money more.

    2. Debt allows capital intensive business to grow faster than they would otherwise, allowing the economy to grow faster. (This could be overcome with better equity markets.)

    • IMASBA

      The first point can also be solved for most people: lease your car, lease fancy equipment and rent your home or business location.

  • Jonas

    Loans are different than some of the other risky things the poor do, because loans have to be enforced by the state. So the state is involved one way or another.

    Nevertheless, I’m glad you are directly addressing his arguments. I think a liberal of Graeber’s type would say that the poor should have some other risky options foreclosed as well. Both because they are making bad choices for himself (or induced into making bad choices), and there is collateral harm that is caused (beyond just harm to the person).

  • Marc Geddes

    >You might say that poverty is economically inefficient because it makes other people feel bad to know it exists, or because it keeps investments from being made in poor folks’ human capital.

    It seems that you tend to ignore a much more convincing argument for why poverty is bad: wealth has diminishing marginal utility. Not all people are equally productive, so if we let people keep everything they produce, we can expect the utility of wealth to not be maximized, even if the raw total amount of wealth is maximized.

    But I agree wholeheartedly with your claim that general redistribution is preferable to debt forgiveness, because of the economic side effects of debt forgiveness. I think a very characteristic mistake of left-wing-types is asking themselves “Is society better off with or without this poverty-reducing policy?” when they should be asking “Is this poverty-reducing policy better than general redistribution of equivalent magnitude?” For example, even if a minimum wage is better for society than no minimum wage, it seems unlikely a minimum wage is better than general redistribution.

    • http://overcomingbias.com RobinHanson

      Yes poverty can be seen as inefficient relative to a prior state where more insurance in imagined to have been possible. But then you do want to take into account the other costs of insurance, such as moral hazard.

  • http://juridicalcoherence.blogspot.com/ Stephen Diamond

    >Standard economic theory says that such debt forgiveness redistributes to the very poor, but not by taxing the rich. – R.H.

    > Making debts easier to break simply increases the cost of borrowing. Changing terms just really inefficient redistribution. – efalken

    A tax on borrowing not only makes borrowing more expensive (primarily for the less poor) but it also makes lending (by the rich) more costly.

    Perhaps more specific economic models make more precise predictions, but from these facts alone, it doesn’t seem possible to predict whether forgiving debts redistributes *mostly* from the rich or from the less poor.

    It seems there’s an error in the analysis that says the rich aren’t taxed by loan forgiveness because the analysis doesn’t consider that not only do loans become more costly but also less profitable. In other words, the extent to which the (rich) lender can pass on its costs to borrowers isn’t total (and probably not nearly total: otherwise, lenders would be neutral about loan forgiveness policies.).

    [The basic reason that when redistribution occurs it does so inefficiently is that social coordination is hard: you can’t always manage to coordinate for the optimal result.]

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