The Myth of Barter

An Economic Fairy Tale That Benefits the Ruling Class

Key takeaways:

1. The idea that early human societies graduated from the barter system into using money is a widely accepted myth.

2. The Myth of Barter is obviously wrong; early societies used credit instead.

3. This piece of economic dogma illustrates how the financial interests of the ruling class tend to define popular belief itself.

The Fairy Tale We All Believe In

Once upon a time—in the pristine and primeval past—human societies used the barter system to swap goods and services. But bartering is forever hampered by a problem called the “double coincidence of wants”. This term refers to the burdensome fact that both parties in every barter exchange need to have something the other party wants. A hunter with a broken spear, for example, needs to meet a hungry spear-maker to trade meat for a new weapon.

“In order to avoid the inconveniency of such situations,” wrote Adam Smith in Wealth of Nations, “every prudent man in every period of society, after the first establishment of the division of labour, must naturally have…at alltimes by him…a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange.”

Smith was talking about money. He suggested that humans invented money as an intermediary to facilitate commerce. Because it’s ALWAYS in demand, money neatly solves the double-coincidence-of-wants problem. Instead of waiting for the spear-maker to get hungry, the hunter can simply use money to buy a new spear.

We all know the rest of the story. The advent of money facilitated an explosion in the complexity of human society, catapulting us through a spectacular history of labor specialization and technological innovation.

It’s an inspiring tale. One that you can read in any modern economics textbook, potentially accompanied by the above quote from Adam Smith. But it’s simply not true. This story is pure economic mythology. When you stop to think for a minute, it’s quite obviously a fable…

The Truth About Barter & Credit

It fell to the late anthropologist David Graeber, in our own time, to notice that there’s no actual evidence whatsoever of bartering within early human societies. In his influential 2011 book, Debt: The First 5,000 Years, Graeber pointed out that bartering generally takes place among people who are used to money but have lost access to it, such as in prisons or after the collapse of the Soviet Union.

Early human societies used debt instead of bartering. If your neighbor asks to borrow a cup of sugar, you don’t insist on immediately taking something of equal value from their house. Instead, your neighbor “owes you one”. Owing someone a favor—or having a favor owed to us—is a universal human experience which long predates the advent of money.

“The point is so obvious,” wrote Graeber, “that it’s amazing that it hasn’t been made more often. The only classical economist I’m aware of who appears to have considered the possibility that deferred payments might have made barter unnecessary is Ralph Hawtrey. All others simply assume, for no reason, that all exchanges even between neighbors must have necessarily been what economists like to call ‘spot trades’.”

Adam Smith wrote during the early days of the Industrial Revolution. Like us, Smith was used to large, modern societies where buyers and sellers generally don’t know each other. He overlooked the fact that, within early human societies, everyone knew everyone. Because transactions weren’t anonymous, they didn’t need to be conducted as “spot trades”. Hunters could ALWAYS acquire a new spear without having to wait for the spear-maker to get hungry, simply by owing the spear-maker a favor to be redeemed at a later date.

Our economics textbooks assure us that the barter system gave rise to money, and then money gave rise to banking and debt. But in reality, the reverse is true. Debt actually predates money, and money predates the barter system. Given how objectively wrong our mythology is, why did it take David Graeber until 2011 to realize it?

How Coins Created Markets

Adam Smith’s mistaken barter → money → debt framework allows modern economists to portray the state as an intruder in otherwise naturally-occurring markets. Smith himself defined a “free market” as free from rent. We’ve rejected Smith’s idea of a free market, but the term has now come to mean “a market free from government intervention”. Graeber argued that this phrase is a contradiction-in-terms because markets are created by states, making the two wholly inseparable.

Graeber proposed that the advent of coins is actually what gave rise to markets. Fielding armies is brutally expensive because soldiers need equipment and salaries and three square meals a day. The difficulty of raising sufficient tax money to meet these expenses has been one of history’s longest recurring themes.

But around 600 BC, Bronze Age kings figured out how to harness the full productive output of their subjects, rather than the mere fraction they could extract via taxation. They simply decreed that while taxes were still payable in precious metals, the metal now needed to be stamped with a picture of the king’s own face, or some other governmental mark certifying its weight and purity.

The citizenry welcomed this standardization because loose lumps of precious metal no longer had to be weighed out during every single transaction. After kings started paying their soldiers with personalized coins, their subjects had no choice but to earn the coins they needed to pay their taxes by feeding, outfitting, or entertaining soldiers.

Before long, some began indirectly earning their coins from other civilians, who had earned them from soldiers. Broad domestic markets sprang up to service the workers who serviced the military. David Graeber argued that exclusive acceptance of standardized physical tokens as tax payments is what really gave rise to these markets.

Despite being obviously wrong, the Myth of Barter is still used to portray the state as some kind of artificial intruder into natural markets. That’s because economic orthodoxy is a perennial hostage to the interests of the monied elite, both by accident and by design. The notion that states and governments are merely weeds growing in our economic flower garden justifies tax cuts and deregulation, policies that greatly enhance the profit margins of the property-owning class. But David Graeber’s observation about the Myth of Barter is a convincing argument that states are much more like gardeners than they are like weeds.

Conclusion

David Graeber wrote that we “simply assume, for no reason” that human societies before money must have involved barter instead of debt. But, of course, there IS a reason; the ruling class financially benefits from this fairy tale that we all believe in. That’s why it’s been preserved in our economic textbooks for two centuries, despite obviously being wrong. For the wealthy elite, the Myth of Barter is load-bearing. And in all times and places, popular beliefs tend to be shaped by the economic interests of the ruling class.

Since you made it this far, patient reader, kindly consider hitting the ❤️ button above or below; it really helps!

Further Materials

In fact, there is good reason to believe that barter is not a particularly ancient phenomenon at all, but has only really become widespread in modern times. Certainly in most of the cases we know about, it takes place between people who are familiar with the use of money but, for one reason or another, don’t have a lot of it around. Elaborate barter systems often crop up in the wake of the collapse of national economies: most recently in Russia in the ‘90s and in Argentina around 2002, when rubles in the first case, and dollars in the second, effectively disappeared. Occasionally one can even find some kind of currency beginning to develop: for instance, in POW camps and many prisons, inmates have indeed been known to use cigarettes as a kind of currency, much to the delight and excitement of professional economists. But here too we are talking about people who grew up using money and now have to make do without it—exactly the situation “imagined” by the economics textbooks with which I began.
The more frequent solution is to adopt some sort of credit system. When much of Europe “reverted to barter” after the collapse of the Roman Empire, and then again after the Carolingian Empire likewise fell apart, this seems to be what happened. People continued keeping accounts in the old imperial currency, even if they were no longer using coins. Similarly, the Pukhtun men who like to swap bicycles for donkeys are hardly unfamiliar with the use of money. Money has existed in that part of the world for thousands of years. They just prefer direct exchange between equals in this case, because they consider it more manly.
David Graeber, Debt: The First 5000 Years, 2011, Page 56