Anthropology's Big Find: Credit Predates Money
In the same way that if you go deep enough into some rabbit holes of philosophy, philosophy turns into math, if you go deep enough into some rabbit holes of economics, economics turns into anthropology.
You'll want to keep digging when you get there, because stopping short of anthropology may leave you with some fundamental misconceptions about money.
You'd be in good company: In The Wealth of Nations, the great economist Adam Smith perpetuated a myth about Native Americans, holding them up as an example of how pre-money economies naturally functioned on a barter system.
Anthropologists like David Graeber and Indiana Jones have subsequently corrected him.
(Or is Indiana Jones archeology? I get those two mixed up.)
Smith, the economist, had no first-hand knowledge of Native Americans (They didn't make it to Scotland much.)
So, he relied on intuition to imagine how their economy must have operated: With no money to trade for things, it stands to reason they must have simply traded things for things — an archery bow for a hunting knife, say.
But exercising just a little more intuition demonstrates how impractical this would be: What if a hunting knife is worth one and a half archery bows? How would you make change?
And what if the bow maker wants to trade for something to eat, but the local farmer doesn't want to trade for bows?
You can see how quickly that becomes impractical — which, according to economic textbooks, is why money was invented.
But somehow, Native American economies operated for thousands of years without it.
That's not because Native Americans were unusually skilled at haggling. Instead, their economies operated on the same basis as every other pre-money economy: credit.
And that's where anthropologists corrected the great economist: credit predates money.
That, too, seems counterintuitive: How can you have debits and credits without money to measure them?
But debits and credits are simply promises: A promise to do something later in return for something done now.
And money is simply what makes those promises fungible.
Uncollateralized favors
You may be thinking this is all very chicken-and-egg. You may be thinking that as long as you can buy chicken and eggs with either money or credit, you don't care which came first.
But we're here to think big, right?
And with the long-term viability of traditional finance coming into question of late, crypto natives are ready to think big about decentralized finance as the obvious alternative.
But the standard DeFi solution amounts to thinking smaller, not bigger.
As it exists, DeFi is a precision financial system of overcollateralized lending where every debt is extinguished before it can turn into a loss for the lender.
That sounds appealing relative to an increasingly fragile TradFi system based on fractional reserve banking.
But is precise, over-collateralized lending really what we want?
As evidenced by both pre-money economies and everyday interactions with your neighbors, imprecise, uncollateralized lending is what makes a community.
If your neighbor brings a bottle of wine to dinner at your place, you don't ask them what it cost in order to bring a bottle of the exact same value when you're invited to dinner at their place — you just bring something similarly nice.
And if a friend gives you a ride to the airport, you don't then owe them a future ride to that same airport.
Instead, you owe them some other favor whenever they happen to need it.
The favor you do in return might be worth more or less than the favor being repaid — it'll be hard to say because it's imprecise.
And that's the upside: Without knowing the exact balance of payments, you'll each feel in debt to one another.
The advent of money allowed debts such as these to be precisely measured and exactly paid: Instead of owing your friend a favor, you could pay them the cost of an Uber.
But that wouldn't make you much of a friend.
The purpose of making promises and doing favors is not to come out exactly even in the end — it's to deepen relationships, create goodwill, and build a community.
Paying off debts with money does the opposite: When you extinguish a debt, you extinguish a relationship.
A community where every debt is exactly paid in full is no community at all.
Scaling community
This does not scale, of course: There's no point establishing a relationship with someone you'll never see again. Which is why money (in various forms) was first developed to facilitate trade over long distances between people who were unlikely to ever again cross paths.
And now, because the world is too big and interconnected to run on personal promises, we use money for everything.
But maybe there's another way?
With uncollateralized lending based on on-chain identity, decentralized finance could infinitely scale communities.
The conventional critique of DeFi is that it's unscalable without a central bank.
But that may be because we're thinking too much about money and not enough about credit: Instead of relying on a central bank to create more money, perhaps we could rely on ourselves to create more credit.
Could DeFi enable David Graeber's competitive market for scarce trust?
I think it could.
Maybe.
But I wouldn't blame you for thinking that, somewhere in between the rabbit holes of economics and anthropology, I've taken a wrong turn into a dead-end rabbit hole of my own invention.
So in tomorrow's newsletter, I'll try to burrow back to safety and think more conventionally about the implications of anthropology's findings on finance.
All you'll have to remember from today is in the title: credit predates money.
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