Adam Smith…was determined to overturn the conventional wisdom of his day. Above all,  he objected to the notion that money was a creation of government.  In this, Smith was the intellectual heir of the Liberal tradition of philosophers like John Locke, who had argued that government begins in the need to protect private property and operated best when it tried to limit itself to that function. Smith expanded on the argument, insisting that  property, money and markets not only existed before political institutions but [4*] were the very foundation of human society.  It followed that insofar as government should play any role in monetary affairs, it should limit itself to guaranteeing the soundness of the currency.  It was only by making such an argument that he could insist that economics is itself a field of human inquiry with its own principles and laws-that is, as distinct from, say ethics or politics. Smith's argument is worth laying out in detail because it is, as I say,  the great founding myth of the discipline of economics.—David Graeber Debt: The first 5000 Years, 24-25 [numbers added for ease of discussion--ES]
Regular readers know I am an admirer of Graeber's Debt (recall here, here, and here). The book offers a bold vision in which geographically and temporally distant evidence is brought to bear on central issues in political economy. In addition, it alerted me to the significance of the revival of interest among anthropologists in what we may call culturally embedded and shaped human universals, and a willingness to avoid the easy relativism characteristic of much ethnography (and history). Today's post is a bit more nit-picky than my previous ones on Graeber and focuses on a subsidiary issue in the work. It's not an irrelevant issue, however, because Graeber's criticism of Smith frame the work.+ Okay, with that out of the way, let me get started.
The core of Graeber’s argument turns on an extended fictional description, we may call it a thought experiment, of the origin of currency out of the inconveniences of barter. The description of a tribe of “hunters or shepherds” (WN 1.2.3) is introduced at the start of the Wealth of Nations, by Smith to explain the origin and benefits of the division of labor. Graeber has good fun showing that this “faraway fantasy” seems “to be an amalgam of North American Indians and Central Asian pastoral nomads;” (25) the example exhibits “a tendency to slip from imaginary savages to small-town shopkeepers.” (26) As Graeber correctly notes, according the thought experiment, “everyone will inevitably start stockpiling something they figure that everyone else is likely to want. This has a paradoxical effect, because at a certain point, rather than making that commodity less valuable (since everyone already has some) it becomes more valuable (because it becomes, effectively, currency).” (26) After quoting Smith extensively, Graeber helpfully summarizes the upshot of Smith’s narrative, “Using irregular metal ingots is easier than barter, but wouldn't standardizing the units-say, stamping pieces of metal with uniform designations guaranteeing weight and fineness, in different denominations-make things easier still? Clearly it would, and so was coinage born.” (27) Before we accuse Graeber of being unfair to Smith, he explicitly recognizes that Smith quickly turns to how standardized coinage into an instance of abuses of state power, which with its control over the mind can defraud other creditors easily. So, there is ample evidence for Graeber’s claims [1-7] in Smith’s text.*
Now, an alert reader may well be suspicious of the fact that I am calling Smith’s treatment of the origin of money a “thought experiment.” My point in doing so is, indeed, to discount Smith’s commitment to the “faraway fantasy” as articulating the (hypothetical) origin of money and property. There are three mutually supporting reasons for this that draw on significant commitments of Smith articulated later in Wealth of Nations.
First, the whole set up of the thought experiment contradicts Smith’s four-stage stadial theory of the development of civilizations. In it, there is a natural progression from (i) a savage stage of hunter-gathering-fishing; (ii) shepherding by nomadic tribes; (iii) sedentary agriculture; to (iv) commercial society characterized by trading. (WN 5.1.a.3–8) These stages are akin to Weberian ideal types in which the whole order and practices of a society are characterized by its predominant economic organization. To be sure, the four stages do not necessarily follow each other and they can succeed each other out of sequence. Smith also allows that in the territory of a large state the stages coincide. As Graeber notes, it is a very peculiar that Smith seems to mix many different kinds of societies in his example. And a critic of Smith may see in the contradiction outlined in this paragraph as a problem for Smith; my talk of 'a thought experiment' may seem overly charitable using later passages of Wealth of Nations to interpret earlier ones. But it is worth nothing that Smith had already called attention to his embrace of something like a stadial theory in the Introduction of his work (where he draws a prominent contrast between the misery of "savage nations" of fishers and hunters and the "abundance" of commercial society) and (less prominently) in chapter 1 ("progress of society.")
Now Smith does claim that some medium of exchange is adopted by "every prudent man in every period of society, after the first establishment of the division of labor." (WN. 1.4.2) Of course, not everybody is prudent, but even so Smith is here committed to the claim that some medium(s) of exchange is likely to exist in every society. This matters because Smith can be read as claiming that government originates in the (second) shepherding stage where the rich cattle/herd owners institute government in order to defend themselves against the poor as a kind of a protection racket. (WN 5.1.a.15) ISo, that Smith would agree with Locke that there is property and money prior to the formation of government. While Smith is not a contractarian, in this sense he is a Lockean (as I have also argued). And Graeber is surely right in thinking that for much of human history government is really an instrument of the rich and powerful to subjugate the poor and powerless.
Second, however, when Smith address the question of the origin of government and property, Smith does not claim that money and property must proceed government. Rather he claims that "Among nations of hunters," [the first stage], "as there is scarce any property, or at least none that exceeds the value of two or three days’ labour, so there is seldom any established magistrate or any regular administration of justice." (WN 5.1.b.2) So, while Smith thinks it is likely that property will precede the existence of government, he does not think property must precede government. Rather, he thinks that most of the time people in the hunting stage are so poor and relatively equal, there is little reason to expect the rise of a regular government in it. (That is, he allows the existence of some authority and hierarchy, but not full blooded government.) He makes the exact same point at the end of the very long paragraph (which articulates his narrative of the origins of government): "The acquisition of valuable and extensive property [in a shepherding stage], therefore, necessarily requires the establishment of civil government. Where there is no property, or at least none that exceeds the value of two or three days labour, civil government is not so necessary."
So, Smith's position is that in the conditions akin to the Lockean state of nature, government is possible. But this means that for Smith it is explicitly and entirely possible that government can precede the existence of property and the development of a medium of exchange. Rather than seeing a contradiction in two strands of Wealth of Nations, it makes a lot more sense to see that by Smith's lights, the thought experiment does not entail anything about the origin of the institution of adopting a medium of exchange and (later) an official government approved currency. Rather the thought experiment is meant to illustrate why such institutions (medium of exchange/currency, etc.) would be (to speak informally) more welfare enhancing (Graeber uses 'efficient' in his summary of Smith--that's fine, too, if one recognizes it is an informal notion). This is why it shows up in all societies. Of course, Graeber may legitimately claim that Smith's stadial theory is out of date. But that does not touch upon their present debate.
I promised three reasons. For the third, we need to move back to the very first chapter of Wealth of Nations, which precedes the thought example that Graeber criticizes and may, thus, be naively presupposed in its interpretation. I have in mind this famous passage:
Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow citizens. (WN 1.2.2)
Now, the main point here is that trade presupposes mutual interest. And nothing I'll say will undercut that. In addition, as Sam Fleischacker has emphasized, Smith is emphasizing here the significance of mutual persuasion in any trade. It is worth asking what happens to Smith's framework when markets become anonymous, but that's for another time.** However, for present purposes the key point is the final claim--that exchange and begging take place among citizens and so within a political framework. The significance of Smith's point may be missed if one forgets that in the eighteenth century there was an extremely limited (male) franchise based on wealth. So, while Smith does not reduce market and begging relations to their political context, he does not ignore these either.
Let me sum up because I have gone on long enough. Where does this leave Graeber's seven theses? Leaving aside , which is irrelevant for present purposes, we have undermined , and . I think Graeber is right about ; it's clear Smith thinks that money need not be the creation of government. But I don't think Graeber can show that Smith thinks money is never the creation of government.
With regard to , I have shown that Graeber is right that government generally (! begins in the need to protect private property (and in this sense is a Lockean). But it does not follow that Smith thinks government should limit itself to this task. As the one-time Chicago economists, Jacob Viner and George Stigler already showed, Smith's task for government are rather expansive, including (inter alia) the maintenance of a standing arm and the martial spirit of nation (WN 5.1.f.60) the seting up of roads, tolls, canals (WN 5.1.d.5) primarily to be paid for by progressive taxes on wealthy; the maintenance of public health (WN 5.1.f.60); provide for public education for the poor (WN 5.1.f.55); and even imposition of prudential building codes to prevent spread of fire (WN 2.2.94, while defending his financial regulation).
With regard to , it is possible that Graeber is right that for Smith "government should play any role in monetary affairs, it should limit itself to guaranteeing the soundness of the currency." I don't think this is right. If anything, much of Book 2 of Wealth of Nations is a critical treatment of the financial sector--Smith thought it should be regulated carefully including the details of money creation by banks (but about that see my book). It is also possible, of course, that Graeber is right about ; that regardless of Smith's own views, Smith is the source of a myth that became constitutive of the way economics ended up understanding itself and its object of study and the nature of its knowledge. I leave that question for another day.++