Adam Smith's Fanfiction: Debunking The Commodity Theory of Money
A foundational element of Marxism is the critique of political economy as a field in and of itself. Following this tradition, I will address a critique of political economy that has become more relevant in the modern world, especially following the development of Modern Monetary Theory and the work of David Graeber in his book Debt: The First 5000 Years. In this work, Graeber criticizes the Commodity Theory of Money by challenging the assumption Adam Smith made in his work The Wealth of Nations. In an attempt to explain why money arises from primitive societies, Smith begins by offering an abstract theory of a world without money. His view is that money arises to solve the problems associated with barter as a primary medium of exchange. However, it falls flat in several ways:
The barter economy has no basis in anthropological or archaeological evidence.
This theory presupposes a developed society before state-backed money.
It implies the possibility of what we’ll call a non-mediated currency.
To begin, we will take a look at Adam Smith’s bare assertion:
When the division of labor has been once thoroughly established, it is but a very small part of a man’s wants which the produce of his own labor can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labor, which is over and above his own consumption, for such parts of the produce of other men’s labor as he has occasion for...
But when the division of labor first began to take place, this power of exchanging must frequently have been very much clogged and embarrassed in its operations. One man, we shall suppose, has more of a certain commodity than he himself has occasion for, while another has less...The butcher has more meat in his shop than he himself can consume, and the brewer and the baker would each be willing to purchase a part of it. But they have nothing to offer in exchange, except the different productions of their respective trades…No exchange can, in this case, be made between them…Many different commodities, it is probable, were successively both thought of and employed for this purpose. In the rude ages of society, cattle are said to have been the common instrument of commerce; and, though they must have been a most inconvenient one, yet, in old times, we find things were frequently valued according to the number of cattle which had been given in exchange for them.
The Wealth of Nations Chapter 4. On the Origin and Use of Money
Adam Smith
Here, Smith Asserts that money arises in the form of commodity trade to circumvent the need for direct trade of one thing to another, aka barter. Instead, different commodities are agreed upon as a universal medium of exchange or money. However, to address the first issue I raised, there is no evidence that this ever occurred in primitive societies. According to the anthropologist Caroline Humphreys, all available research shows two things that challenge the notion of the barter economy:
No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing…
Anthropologists have also tended to see barter as a transaction of the primitive economy, although in the classic examples, such as Malinowski (I922), Thurnwald (I934-5) and Sahlins (I972) the ethnographic diversity and complexity of distribution is recognized. Dominated by other activities considered to be ‘more socially embedded’, such as ceremonial exchange, gift-giving, sharing of food, or dues to chiefs, barter is found in a corner of the economy and one that is despised by the people and anthropologists alike. Barter, according to Sahlins summarizing a wide range of ethnography, is ‘negative reciprocity, the unsociable extreme’. Characterized as ‘haggling’, barter is held to take place with outsiders, along with ‘chicanery’ and ‘theft’, each participant trying to outwit the other with an eye to his own benefit (I972: I95).
Barter and Economic Disintegration
Caroline Humphreys
Beyond just asserting that there doesn’t exist a proper understanding of the barter economy held within one society, she also explains that much of the economic activities resembling barter, that being the exchange of items without a shared medium, are actually part of a social end, not a material or commercial end. Examples are ceremonial exchange, gift-giving, and sharing food. In addition, a critical point was made on the topic of barter. Barter is unsociable and akin to theft; barter happens between outsiders and is seen as a battle of wits like haggling. It’s difficult to cite a counter to this argument because there was never material proof to support the idea of barter as a dominant medium of exchange. However, speculation and conjecture have existed as far back as Aristotle, who references it as a unit of account in his work Politics. However, Aristotle does this in passing, showing that the assumption has existed historically but must also have been an abstraction because the theory arises when money is already widespread and historical records are more lax than they are currently. That is to say, “How would Aristotle know one way or another?”
Knowing the origin of money seems feasible only if you think of history like Adam Smith did. That means there could be a time when a complex society existed without state-backed currency. This idea is necessarily false, at least from a Marxist perspective, because all modes of production leading out of primitive communism follow a tendency for surplus to accumulate. Surplus does not accumulate without money as large quantities of consumable goods will expire if not used, and a large amount of luxury goods and status symbols like clothing and accessories are valueless if not weighed against and tied to a currency. Thus, money arises from power consolidating around someone who can best exploit labor. This person in question must have acquired the following:
Monopolized control over specific resources.
A base of people willing to defer to him.
Land on which people other than him live.
First, they must have resources because accumulation can not occur if people are not allowed to hold resources as private material, which is why Communists seek to abolish private property. Second, they must have people who will defer to them because this marks a divergence from egalitarianism toward hierarchy or class society. Lastly, they need land as this establishes an area of control and essentially means that territory can be considered “his land,” the resources on it “his resources,” therefore making the people on said land “his people.” This is all made possible by the invention of agriculture, which allows man, for the first time, to produce our own resources with a base of laborers and an area we are tied to to do said agriculture. In other words, we have created our first sovereign and thus given rise to the “Ancient Mode of Production” or “Slave Society.”
To facilitate these class societies, everyone engaged in economic activities needs to overextend; this means taking out loans for things you don’t have. In the same way, a business requires credit to start if you do not have the total cost in hand; a society where surplus is limited necessitates taking out resources now and paying for them later. This is an early account of debt or credit, as far back as ancient Sumer circa 3500 BC. Debt would be recorded in the form of coins, quantified in barley bushels. These quantities were then accounted for by being tokenized into Shekels, which must be paid back with anything valuable. In short, money was a unit of account, not of value but instead an account of debt. But who owns the debt if a debt-based currency is issued societally, not as a peer-to-peer transaction? The answer lies in the Jubilee years of the Ancient Israelites. Jubilee was a practice in which enslaved people were freed, and debts were canceled as enforced by the king by order of God every 50 years. My argument is this: if a king can cancel debt on a broad scale, then all debts must end with him, canceling debts must in some way benefit him, and money (tokenized debt) is only valuable insofar as it is tied to him.
While it is around this point in history that money is minted into coins, which get traded for resources, this is after money is used exclusively as a unit of debt. In other words, “money,” as we understand it now, is invented after debt/credit. The classical understanding is that the reason that money is in the form of minted coins is because it is a reflection of the commodity value of the metal it is made of. To directly address the second issue I bring up regarding Smith, that being that society doesn’t arise before state-backed money, let’s retake a look at Historical Materialism. The transition from one mode of production to another manifests in accumulation and a shift in who holds said surplus. As I mentioned earlier, it is not feasible to hold surplus in anything if it can’t be weighed against a unit of value because consumables spoil, and luxury items have little use-value relative to their exchange value except to quantify and store wealth. That is why money must be formalized as a concept and standardized in a specific form. Accumulation and debt are hard to track without money.
Lastly, we will talk about what I will call “unmediated currency,” or currency that functions without an authoritative entity. The assertion of Smith seems to coincide with Hobbes’ concept of states arising from a state of nature after advanced society has developed. Hobbes describes a situation in which states are formed as people band together to prevent needless conflict, and Smith does something similar with money. The state of nature described by Hobbes is akin to Smith’s barter economy debacle. An imaginary state of chaos for which people band together to create a solution. These both assume that you can have a complex society with accumulation before money and without needing accumulation to get to that point of development. The idea of unmediated currency is the tendency of Liberals to assume that money can be created and maintained without needing a legal status to monopolize it. For example, USD is a legal tender in America, but if you accept it, I can pay a debt in Bitcoin. Bitcoin is an excellent example of the flaws of an unmediated currency in that it isn’t tied to a particular governing entity, isn’t backed by a government, and isn’t reliant on any regulation to operate (regulation as in to check up on and fix not as in legal regulations).
My issue with Bitcoin is that it doesn’t act as a currency, and I’ve seen no indication it ever will. For starters, its value is tied to USD, and that’s how we measure it. As a result, people tend to hold it as a security or asset, not a currency. Another type of cryptocurrency, a stablecoin, was invented to address this issue. A stablecoin is a cryptocurrency tied directly to a fiat currency, usually USD. So, even in practice, you still need fiat to keep Bitcoin working. Also, the price fluctuates way too much for it to make a sound currency, and the overarching culture around Bitcoin is that it is best to hold it, not spend it. Every significant transaction made in Bitcoin in history has been a massive loss to the buyer who gave away their Bitcoin, which is now valued much higher than when they used it as a currency. This is why I see no evidence that it will ever work as a currency because, thus far, it hasn’t been one.
Unmediated currency is impossible because it is the form of currency Smith describes in his theory of money. If money arises as a social contract to solve the problem of barter and not because a state started minting it, then money has an origin as a social contagion, not as a means of utility to the state, similar to how Bitcoin is now. If a state does not create a specific currency, it can’t command the use of that particular currency because it cannot control it. For all intents and purposes, the state might as well command everyone to barter at that point because it can’t claim taxes on something it doesn’t have complete faith in. To Smith, this isn’t an issue as the dominant feature of money isn’t control or class relations but exchange from producer to consumer since states can form without monetary accumulation.
In summary, Adam Smith’s view of barter as the origin of money falls flat, with no anthropological evidence to back it up, and falls into logical error. I presented my perspective on money as a perquisite for accumulation and described unmediated currency. This article will be part of a three-article series debunking common claims surrounding Liberal and Classical Economics. Look out in the near future for the next two articles.
