The Myth of Barter

A Commonly-Believed Economic Origin Story

This essay is part of a series comparing the twilights of (1) Rome's slave-based economic system and (2) the Middle Ages' feudal system to (3) today's capitalist economic system. In addition to the broad life cycles of these economic systems, we'll note similarities between infectious diseases and changes in communication technologies common to all three eras. Finally, we'll see how belief systems rise and fall in tandem with these broad economic systems. When these systems seize up and stop functioning, people begin questioning authority. And that, in turn, leads to collapses of bedrock conceptions of reality itself.

---

Introduction

Every society weaves myths to explain its origins, and these stories shape the way we understand the world. Modern economics is no exception. Our economic origin story traces the evolution of trade from barter to money to debt. This story, immortalized by Adam Smith, paints a picture of markets as natural, self-organizing systems emerging independently of state influence. Yet, as David Graeber's groundbreaking work reveals, this tale is more fiction than fact…

Our Origin Myth

Modern culture tells us an economic origin story that goes like this: once upon a time—before the invention of money—humans traded with each other using a barter system. But bartering was cumbersome and inefficient. A hungry spear-maker, for example, was not enough to initiate a barter transaction; a trading partner who was short on spears but with a surplus of meat was also needed. Barter transactions could only occur when there was a “double coincidence of wants” similar to this.

Adam Smith laid this out in his foundational 1776 book The Wealth of Nations. “In order to avoid the inconveniency of such situations,” wrote Smith, “every prudent man in every period of society, after the first establishment of the division of labour, must naturally have…at alltimes by him…a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange.”

Smith is talking about money, a commodity that spares us from the difficulty of finding trading partners who have what we want AND want what we have. Adam Smith tells us that money was invented as an intermediary to solve that double coincidence of wants problem. It works because both spearmakers and hunters always want money.

The rest of this origin story virtually tells itself. Money was invented to replace the barter system. Then, borrowing and lending money became common practice. Finally, these debt instruments grew in complexity until we arrived at our modern era with its credit default swaps and collateralized debt obligations. However, like any good creation myth, this story is completely untrue.

David Graeber

We lost David Graeber in 2020, at the height of the COVID-19 pandemic. He played a leading role in the Occupy Wall Street movement and was one of the world’s foremost anthropologists. This essay is dedicated to his memory.

Graeber’s 2011 book Debt: The First 5,000 Years is a brilliant look back at the history of debt. He used his expertise in anthropology to point out that barter exists exclusively in economies that have somehow lost access to their money. According to Graeber, there’s no evidence of any bartering whatsoever in pre-money societies.

That key observation explodes Adam Smith’s Myth of Barter. But, if bartering came after money and not before, how did pre-money societies conduct trade? The answer is so simple that it exposes the incredible level to which we’ve all been brainwashed…

The Nature of Debt

If your neighbor asks you to borrow a cup of sugar, you don’t insist on immediately taking something of equal value from their house. Instead, your neighbor “owes you one”. Owing someone a favor—or having someone owe us one—is a universal human experience. One which long predates the advent of money.

“The point is so obvious,” wrote David Graeber in Debt, “that it's amazing that it hasn't been made more often. The only classical economist I'm aware of who appears to have considered the possibility that deferred payments might have made barter unnecessary is Ralph Hawtrey. All others simply assume, for no reason, that all exchanges even between neighbors must have necessarily been what economists like to call ‘spot trades’.”

Graeber’s ingenious insight was that people could simply owe each other. As he put it, there was no need for every transaction to be a “spot trade”. Therefore, the double coincidence of wants was never the issue Adam Smith assumed it to be. Graeber observed that human social groups don’t operate by demanding immediate or precise reciprocity. Rather, they operate according to informal senses of obligation. He suggested that early human society worked exactly this way—not on the barter system.

The Nature of Belief

Beliefs are useful little models of reality that we carry around inside our heads. Usually, these beliefs are useful to the person whose head they occupy. But sometimes, they’re useful only to the intellectual authorities who perpetuate them in the minds of the credulous.

Since Adam Smith's time, we’ve believed that the division of labor led to bartering, which spurred the invention of money, and the concept of debt arose from that invention.

By showing that bartering was nonexistent in pre-monetary societies, David Graeber turned our economic origin myth on its head. In reality, debt came first, and money was invented later to quantify that debt precisely.

But who could possibly benefit from perpetuating the Myth of Barter? Why hasn’t every economics textbook printed over the past 15 years trumpeted Graeber’s remarkable findings?

The Nature of Markets

The answer is simple: certain well-heeled factions within our society want the rest of us to believe that markets occur naturally, independent of the state. But in reality, markets must be created and maintained by the state.

“We are used to thinking of such bureaucratic interventions—particularly the monopolies and regulations—as state restriction on ‘the market’,” wrote Graeber, “owing to the prevailing prejudice that sees markets as quasi-natural phenomena that emerge by themselves, and governments as having no role other than to squelch or siphon from them.”

Markets function only when there is competition between buyers and sellers. When there is only one or a few sellers, monopoly conditions prevail. For instance, many residences and businesses still have only one internet service provider in their region. In the absence of competition, those ISPs have no incentive to price their services competitively. In fact, they have the opposite incentive. Seeking a monopoly is a common strategy for maximizing wealth extraction by avoiding competition.

To preserve markets, monopoly enforcement must come from outside them. America once had a robust appetite for “trust-busting”. In 1901, President Theodore Roosevelt called on lawmakers to curb monopoly power in his State of the Union address. “Great corporations exist only because they are created and safeguarded by our institutions,” the president declared. Therefore, he added, it is “our right and our duty to see that they work in harmony with these institutions.” Roosevelt went on to break up the railroad and oil monopolies that were common to that era.

A famous Oxfam chart shows that what appears to be hundreds of US food brands are actually controlled by only a handful of companies

But in the 21st century, the American economy is once again rife with monopolies. Ticketmaster and Google are just two examples. Our food production and distribution system covers its tracks with a dizzying array of brand names. But in reality, a small cartel of companies controls every aspect of that system.

The Myth of Barter is still perpetuated today because it gives us the impression that markets are distinct from the state. However, in reality, markets are wholly inseparable from the state; the state must police monopolies to keep markets healthy and sustainable.

Conclusion

Every culture has its origin stories, but mythology is never regarded as such in the times and places where it is believed. Only with the passage of time are mythological beliefs eventually recognized as such. The Myth of Barter—as articulated by the late David Graeber—is a prime example. As an anthropologist, Graeber was in a unique position to observe that no evidence of barter economies existed prior to the advent of money. This observation should have destroyed our cultural myth about the origin of markets. But because that myth obscures the true nature of markets in a way that favors society’s wealthy elite, Graeber’s brilliant work goes chronically unrecognized.

---

Further Materials

But when the division of labour first began to take place, this power of exchanging must frequently have been very much clogged and embarrassed in its operations. One man, we shall suppose, has more of a certain commodity than he himself has occasion for, while another has less. The former consequently would be glad to dispose of, and the latter to purchase, a part of this superfluity. But if this latter should chance to have nothing that the former stands in need of, no exchange can be made between them. The butcher has more meat in his shop than he himself can consume, and the brewer and the baker would each of them be willing to purchase a part of it. But they have nothing to offer in exchange, except the different productions of their respective trades, and the butcher is already provided with all the bread and beer which he has immediate occasion for. No exchange can, in this case, be made between them. He cannot be their merchant, nor they his customers; and they are all of them thus mutually less serviceable to one another. In order to avoid the inconveniency of such situations, every prudent man in every period of society, after the first establishment of the division of labour, must naturally have endeavoured to manage his affairs in such a manner as to have at alltimes by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry.
Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776, Book I, Chapter 2

In fact, there is good reason to believe that barter is not a particularly ancient phenomenon at all, but has only really become widespread in modern times. Certainly in most of the cases we know about, it takes place between people who are familiar with the use of money but, for one reason or another, don't have a lot of it around. Elaborate barter systems often crop up in the wake of the collapse of national economies: most recently in Russia in the '90s and in Argentina around 2002, when rubles in the first case, and dollars in the second, effectively disappeared. Occasionally one can even find some kind of currency beginning to develop: for instance, in POW camps and many prisons, inmates have indeed been known to use cigarettes as a kind of currency, much to the delight and excitement of professional economists. But here too we are talking about people who grew up using money and now have to make do without it—exactly the situation "imagined" by the economics textbooks with which I began.
The more frequent solution is to adopt some sort of credit system. When much of Europe "reverted to barter" after the collapse of the Roman Empire, and then again after the Carolingian Empire likewise fell apart, this seems to be what happened. People continued keeping accounts in the old imperial currency, even if they were no longer using coins.
David Graeber, Debt: The First 5000 Years, 2011, Page 56

We are used to thinking of such bureaucratic interventions—particularly the monopolies and regulations—as state restriction on “the market”—owing to the prevailing prejudice that sees markets as quasi-natural phenomena that emerge by themselves, and governments as having no role other than to squelch or siphon from them. I have repeatedly pointed out how mistaken this is, but China provides a particularly striking example. The Confucian state may have been the world’s greatest and most enduring bureaucracy, but it actively promoted markets, and as a result, commercial life in China soon became far more sophisticated, and markets more developed, than anywhere else in the world.
This despite the fact that Confucian orthodoxy was overtly hostile to merchants and even the profit motive itself. Commercial profit was seen as legitimate only as compensation for the labor that merchants expended in transporting goods from one place to another, but never as fruits of speculation. What this meant in practice was that they were pro-market but anti-capitalist.
Again, this seems bizarre, since we’re used to assuming that capitalism and markets are the same thing, but, as the great French historian Fernand Braudel pointed out, in many ways they could equally well be conceived as opposites. While markets are ways of exchanging goods through the medium of money—historically, ways for those with a surplus of grain to acquire candles and vice versa (in economic shorthand, C-M-C’, for commodity-money-other commodity)—capitalism for Braudel is first and foremost the art of using money to get more money (M-C-M’). Normally, the easiest way to do this is by establishing some kind of formal or de facto monopoly. For this reason, capitalists, whether merchant princes, financiers, or industrialists, invariably try to ally themselves with political authorities to limit the freedom of the market, so as to make it easier for them to do so. From this perspective, China was for most of its history the ultimate anti-capitalist market state. Unlike later European princes, Chinese rulers systematically refused to team up with would-be Chinese capitalists (who always existed). Instead, like their officials, they saw them as destructive parasites—though, unlike the usurers, ones whose fundamentally selfish and antisocial motivations could still be put to use in certain ways. In Confucian terms, merchants were like soldiers. Those drawn to a career in the military were assumed to be driven largely by a love of violence. As individuals, they were not good people, but they were also necessary to defend the frontiers. Similarly, merchants were driven by greed and basically immoral; yet if kept under careful administrative supervision, they could be made to serve the public good. Whatever one might think of the principles, the results are hard to deny. For most of its history, China maintained the highest standard of living in the world—even England only really overtook it in perhaps the 1820s, well past the time of the Industrial Revolution.
David Graeber, Debt: The First 5000 Years, 2011, Page 356