The End of Growth: Adapting to Our New Economic Reality (7 page)

Today we still enjoy vestiges of the gift economy, notably in the family. We don’t keep close tabs on how much we are spending on our three-year-old child in an effort to make sure that accounts are settled at some later date; instead, we provide food, shelter, education and more as free gifts, out of love. Yes, parents enjoy psychological rewards, but (at least in the case of mentally healthy parents) there is no conscious process of bargaining, in which we tell the child, “I will give you food and shelter if you repay me with goods and services of equivalent or greater value.”

For humans in simple societies, the community was essentially like a family. Freeloading was occasionally a problem, and when it became a drag on the rest of the group it was punished by subtle or not-so-subtle social signals — ultimately, ostracism. But otherwise no one kept score of who owed whom what; to do so would have been considered very bad manners.

We know this from the accounts of 20th-century anthropologists who visited surviving hunter-gatherer societies. Often they reported on the amazing generosity of people who seemed eager to share everything they owned despite having almost no material possessions and being officially listed by aid agencies as among the poorest people on the planet.
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In some instances anthropologists felt embarrassed by this generosity, and, after being gifted some prized food or a painstakingly hand-made basket, immediately offered a factory-made knife or ornament in return. The anthropologist assumed that natives would be happy to receive the trinkets, but the recipients instead appeared insulted. What had happened? The natives’ initial gifts were a way of saying, “You are part of the family; welcome!” But the immediate offering of a gift in return smacked of trade — something only done with strangers. The anthropologist was understood as having said, “No, thanks. I do not wish to be considered part of your family; I want to remain a stranger to you.”

By the way, this brief foray into cultural anthropology shouldn’t be interpreted as an argument that the hunting-gathering existence represents some ideal of perfection. Partly because simpler societies lacked police and jails, they tended to feature very high levels of interpersonal violence. Accidents were common and average lifespan was short. The gift economy, with both its advantages and limits, was simply a strategy that worked in a certain context, honed by tens of millennia of trial and error.

Here is economic history compressed into one sentence: As societies have grown more complex, larger, more far-flung, and diverse, the tribe-based gift economy has shrunk in importance, while the trade economy has grown to dominate most aspects of people’s lives, and has expanded in scope to encompass the entire planet. Is this progress or a process of moral decline? Philosophers have debated the question for centuries. Approve or disapprove, it is what we have done.

With more and more of our daily human interactions based on exchange rather than gifting, we have developed polite ways of being around each other on a daily basis while maintaining an exchange-mediated social distance. This is particularly the case in large cities, where anonymity is fostered also by the practical formalities and psychological impacts that go along with the need to interact with large numbers of strangers, day in and day out. In the best instances, we still take care of one another — often through government programs and private charities. We still enjoy some of the benefits of the old gift economy in our families and churches. But increasingly, the market rules our lives. Our apparent destination in this relentless trajectory toward expansion of trade is a world in which everything is for sale, and all human activities are measured by and for their monetary value.

Humanity has benefited in many obvious ways from this economic evolution: the gift economy really only worked when we lived in small bands and had almost no possessions to speak of. So letting go of the gift economy was a trade-off for houses, cities, cars, iPhones, and all the rest. Still, saying goodbye to community-as-family was painful, and there have been various attempts throughout history to try to revisit it. Communism was one such attempt. However, trying to institutionalize a gift economy at the scale of the nation state introduces all kinds of problems, including those of how to reward initiative and punish laziness in ways that everyone finds acceptable, and how to deter corruption among those whose job it is to collect, count, and reapportion the wealth.

But back to our tour of economic history. Along the road from the gift economy to the trade economy there were several important landmarks. Of these, the invention of money was clearly the most important. Money is a tool used to facilitate trade. People invented it because they needed a medium of exchange to make trading easier, simpler, and more flexible. Once money came into use, the exchange process was freed to grow and to insert itself into aspects of life where it had never been permitted previously. Money simultaneously began to serve other functions as well — principally, as a measure and store of value.

Today we take money for granted. But until fairly recent times it was an oddity, something only merchants used on a daily basis. Some complex societies, including the Inca civilization, managed to do almost completely without it; even in the US, until the mid-20th century, many rural families used money only for occasional trips into town to buy nails, boots, glass, or other items they couldn’t grow or make for themselves on the farm.

In his marvelous book
The Structures of Everyday Life: Civilization
& Capitalism 15th–18th Century
, historian Fernand Braudel wrote of the gradual insinuation of the money economy into the lives of medieval peasants: “What did it actually bring? Sharp variations in prices of essential foodstuffs; incomprehensible relationships in which man no longer recognized either himself, his customs or his ancient values. His work became a commodity, himself a ‘thing.’”
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While early forms of money consisted of anything from sheep to shells, coins made of gold and silver gradually emerged as the most practical, universally accepted means of exchange, measure of value, and store of value.

Money’s ease of storage enabled industrious individuals to accumulate substantial amounts of wealth. But this concentrated wealth also presented a target for thieves. Thievery was especially a problem for traders: while the portability of money enabled travel over long distances for the purchase of rare fabrics and spices, highwaymen often lurked along the way, ready to snatch a purse at knife-point. These problems led to the invention of banking — a practice in which metal-smiths who routinely dealt with large amounts of gold and silver (and who were accustomed to keeping it in secure, well-guarded vaults) agreed to store other people’s coins, offering storage receipts in return. Storage receipts could then be traded as money, thus making trade easier and safer.
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Eventually, by the Middle Ages, goldsmith-bankers realized that they could issue these tradable receipts for more gold than they had in their vaults, without anyone being the wiser. They did this by making loans of the receipts, for which they charged a fee amounting to a percentage of the loan.

Initially the church regarded the practice of profiting from loans as a sin — known as
usury
— but the bankers found a loophole in religious doctrine: it was permitted to charge for reimbursement of expenses incurred in making the loan. This was termed
interest
. Gradually bankers widened the definition of “interest” to include what had formerly been called “usury.”

The practice of loaning out receipts for gold that didn’t really exist worked fine, unless many receipt-holders wanted to redeem paper notes for gold or silver all at once. Fortunately for the bankers, this happened so rarely that eventually the writing of receipts for more money than was on deposit became a perfectly respectable practice known as fractional reserve banking.

It turned out that having increasing amounts of money in circulation was a benefit to traders and industrialists during the historical period when all of this was happening — a time when unprecedented amounts of new wealth were being created, first through colonialism and slavery, but then by harnessing the enormous energies of fossil fuels.

The last impediment to money’s ability to act as a lubricant for transactions was its remaining tie to precious metals. As long as paper notes were redeemable for gold or silver, the amounts of these substances existing in vaults put at least a theoretical restraint on the process of money creation. Paper currencies not backed by metal had sprung up from time to time, starting as early as the 13th century ce in China; by the late 20th century, they were the near-universal norm.

Along with more abstract forms of currency, the past century has also seen the appearance and growth of ever more sophisticated investment instruments. Stocks, bonds, options, futures, long- and short-selling, credit default swaps, and more now enable investors to make (or lose) money on the movement of prices of real or imaginary properties and commodities, and to insure their bets — even their bets on other investors’ bets.

Probably the most infamous investment scheme of all time was created by Charles Ponzi, an Italian immigrant to the US who, in 1919, began promising investors he could double their money within 90 days. Ponzi told clients the profits would come from buying discounted postal reply coupons in other countries and redeeming them at face value in the United States — a technically legal practice that could yield up to a 400 percent profit on each coupon redeemed due to differences in currency values. What he didn’t tell them was that each coup0n had to be redeemed individually, so the red tape involved would entail prohibitive costs if large numbers of the coupons (which were only worth a few pennies) were bought and redeemed. In reality, Ponzi was merely paying early investors returns from the principal amounts contributed by later investors. It was a way of shifting wealth from the many to the few, with Ponzi skimming off a lavish income as the money passed through his hands. At the height of the scheme, Ponzi was raking in $250,000 a day, millions in today’s dollars. Thousands of people lost their savings, in some cases having mortgaged or sold their houses in order to invest.

A few critics (primarily advocates of gold-backed currency) have called fractional reserve banking a kind of Ponzi scheme, and there is some truth to the claim.
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As long as the real economy of goods and services within a nation is growing, an expanding money supply seems justifiable, arguably necessary. However, units of currency are essentially claims on labor and natural resources — and as those claims multiply (with the growth of the money supply), and as resources deplete, eventually the remaining resources will be insufficient to satisfy all of the existing monetary claims. Those claims will lose value, perhaps dramatically and suddenly. When this happens, paper and electronic currency systems based on money creation through fractional reserve banking will produce results somewhat similar to those of a collapsing Ponzi scheme: the vast majority of those involved will lose much or all of what they thought they had.

Economics for the Hurried

We have just surveyed the history of
economies
— the systems by which humans create and distribute wealth.
Economics
, in contrast, is a set of philosophies, ideas, equations, and assumptions that describe how all of this does, or should, work.
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This story begins much more recently. While the first economists were ancient Greek and Indian philosophers, among them Aristotle (382– 322 bce) — who discussed the “art” of wealth acquisition and questioned whether property should best be owned privately or by government acting on behalf of the people — little of real substance was added to the discussion during the next two thousand years.

It’s in the 18th century that economic thinking really gets going. “Classical” economic philosophers such as Adam Smith (1723–1790), Thomas Robert Malthus (1766–1834), and David Ricardo (1772–1823) introduced basic concepts such as supply and demand, division of labor, and the balance of international trade. As happens in so many disciplines, early practitioners were presented with plenty of uncharted territory and proceeded to formulate general maps of their subject that future experts would labor to refine in ever more trivial ways.

These pioneers set out to discover natural laws in the day-to-day workings of economies. They were striving, that is, to make of economics a science on a par with the emerging disciplines of physics and astronomy.