Wednesday, September 14, 2011

Mo Money

Andrew Sullivan finds a gem in David Graeber's Debt. Graeber is talking about why the Smith-Menger myth of the origin of money matters:

It seems to me because it goes back precisely to this notion of rationality that Adam Smith too embraced: that human beings are rational, calculating exchangers seeking material advantage, and that therefore it is possible to construct a scientific field that studies such behavior. The problem is that the real world seems to contradict this assumption at every turn. Thus we find that in actual villages, rather than thinking only about getting the best deal in swapping one material good for another with their neighbors, people are much more interested in who they love, who they hate, who they want to bail out of difficulties, who they want to embarrass and humiliate, etc.—not to mention the need to head off feuds.

This sort of insight strikes at the heart of much classical liberal economics and rational expectations. It not only explains why those models tend to break but also explains how they conflict with human nature. Humans aren't (only) profit maximizing individuals, they are fundamentally social creatures with powerful cooperative and collective instincts.