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Economists baffled by UK snowstorm

Following the fateful conjoining of Atlantic Storm Emma and The Beast from the East on Thursday, people have once again been behaving in a manner wholly inconsistent with the models used by politicians and central bankers to determine economic policy.

In Newport, for example, as temperatures plummeted on Wednesday night, two nightclubs opened their doors to homeless people who might otherwise have dies from hypothermia.  In Manchester on Thursday night, volunteers turned out to provide food and hot drinks to motorists stranded on the M62 motorway.  Across the UK, owners of 4×4 vehicles took to social media to offer to transport medical staff to hospitals that might otherwise have to close.  Others volunteered to check up on elderly and vulnerable neighbours, while some delivered essential items like prescription medicines.

As normal and altruistic as this behaviour is, it simply doesn’t figure in mainstream economics.  We are, according to most economists, meant to behave like the rational and narrowly self-centred homo economicus around whom their models are constructed.  For mainstream economics, the kind of behaviour that we have seen in response to the bad weather would only make sense if those offering to help were going to present the recipient with an invoice for the cost of the service rendered.  Without financial gain, people would be better off leaving the 4×4 in the garage and enjoying the time off work.

This takes us to the heart of one of the greatest errors in economics – economists do not understand where money comes from.  Starting with Adam Smith, generations of economists have assumed something for which there is no evidence – that money originated out of barter.  Adam Smith simply made this up as a plausible – but entirely wrong – explanation for how traders and consumers arrive at an acceptable price for goods and services.

In my book, The Consciousness of Sheep I set out the fairytale:

“We find ourselves in a typical English village in the year 1090.  It is market day.  The people who work in the fields around the village have come together to trade their wares.

We observe a villager who has a chicken that he wants to exchange for some apples.  But there is a problem.  The only villager who has apples to exchange is not interested in chickens.  Instead, he wants some grain seeds to sew for next year’s crop.  So our chicken toting villager must try to find someone who is prepared to swap grain seeds for a chicken.  But – wouldn’t you guess – the person who has grain seeds wants cheese.  So our villager sets off to find someone who wants to swap a chicken for some cheese.  Unfortunately, the only villager with cheese is looking for flour.  So off our villager goes to find someone who has flour to swap.  And so it goes on…

“It takes our intrepid chicken-swapping villager all day to work out a chain of barter trades that will ultimately result in his coming away with the apples that he wanted.

And if you think that is bad, let us look at the haggling process that has to occur to work out exactly how much cheese, flour, grain seed and apples would make up the equivalent worth or “value” of a chicken.  Size wouldn’t work because some highly valued goods (such as spices) come in small quantities.  Nor would weight, colour, taste, or a whole host of possible measures.  In practice, what mattered to people in an eleventh century English village was the time it took to grow, rear or create the item offered for trade together with the skill level required to create it and cost of the fodder, seeds, tools, and raw materials needed for its manufacture.  Let us remember too that it is not just our villager who has to undertake this complex process of bartering.  Every other villager is doing the same thing!  Each must calculate a complicated exchange chain to get him from the item that he has to the item that he wants.  And at each link in the complicated chain he must spend time haggling with the other person in the trade to get sufficient amounts of the goods on offer to make the next exchange.

“This bartering process is not about the trading of luxury items.  This is about obtaining sufficient food to stay alive; especially during the long hard winter months when there is little fresh food to be found.  No wonder these early feudal villages struggled to prevent collapse!

“Fortunately one morning a Norman knight rides into the village to save the day.  For the knight comes bearing items so radical that they will truly revolutionise the way these villages operate.  It is these – almost magical items – that will put these people on a direct historical line, through mercantilism, imperialism and an industrial revolution, to our modern civilisation.  The knight comes bearing money!  Coins made of a standard weight of precious gold, silver and bronze; coins that bear the image of the king as a stamp of quality and value.  From this day forth, the villagers are able to exchange their goods for coins which can, in turn, be used to buy the goods they require.  Instead of having to spend the day bartering, they are now free either to produce more goods or to enjoy some recreation.

“This, in essence, is the fairy story that Adam Smith invented to try to explain the origins of money as a basis for his ‘Labour Theory of Value.’  It is the tale that most economics students are taught.  It is a story so deeply embedded in our culture that almost everyone believes it.  And, of course, it is complete and utter nonsense!”

Subsistence economies simply cannot operate on this basis.  In Debt: The first 5,000 years, anthropologist David Graeber sets out the historical, archaeological and anthropological evidence for how people trade with one another, and it is completely at odds with the barter-based system that Adam Smith plucked out of the air like phlogiston.  Barter assumes that the purpose of trade is to exchange goods and services of equal value – something that is enshrined in modern economic models.  What the evidence tells us, however, is that the purpose of human trade is to exchange goods and services of unequal value.

This sounds wrong to the modern ear.  But it gives us a much better understanding of the altruistic behaviours that people display in bad weather events and disasters.  This is because the true currency of trade is not money, but obligation.  That is, in small scale and relatively poor communities, it is in our interest that other people owe us favours.  If my counterpart in Norman England wanted apples, he did not need to barter, he only needed to ask.  Of course, woe betide anyone foolish enough not to return a favour when it came time to pay up; to be cast out from one’s community risked freezing or starving to death.

It turns out that the only places where we find barter-trading is in modern economies that have crashed – like Germany in 1923/4 and Zimbabwe in the 1990s.  That is, barter comes after money trading, not before.

Whether obligation fully explains the behaviours displayed by large numbers of Britons in helping others is questionable.  Social status and duty may also play a part.  But the fact remains that an economics based around a history of trading for obligation would be far closer to what actually happens in the real world, than does any modelling based around the mythical “economic man.”

There is, however, a place where you can see homo economicus in all of his splendour… your local zoo!  Or to be more precise, the chimpanzee enclosure.  It turns out that our distant relatives display exactly the kind of calculating and narrowly self-interested behaviour modelled by the economists… which tells us where we have been going wrong all these years – economists are ideally fitted to running a primate house… not a central bank.

As you made it to the end…

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