The world economy is not a tribute system

by Henry on February 22, 2012

In a blogpost in July of last year, David Graeber talked about why he wrote Debt.

But in a way, Keith had it exactly right. The aim of the book was, indeed, to write the sort of book people don’t write any more: a big book, asking big questions, meant to be read widely and spark public debate, but at the same time, without any sacrifice of scholarly rigor. History will judge whether it’s still possible to pull this sort of thing off (let alone whether I’m the person who will be able to do it.)

He further advised that writers of such books should:

back up your statements with extensive, detailed references that actually do say what you think they say. Good scholarship is more appreciated by popular audiences than academic ones. This is a bit scandalous but I have found it to be true. I have about 100 pages of notes and bibliography in the book and non-academics commenting on the book rarely fail to note, approvingly, that I don’t ask anyone to take my word for what I say, but back up all my claims with numerous references. Some show signs of actually having checked a few to make sure I was on the level. It’s an interesting comment on academia that we almost never do this.

There’s a lot to like about Debt, but I don’t think that it delivers on this promise (or, at least, not on the scholarly rigor bit). Much of the specific historical discussion in the book is beyond my pay grade – while I’m interested in the discussion, and enjoyed Graeber’s reconceptualization, I can’t say that much about it. Hence, this response will focus on the stuff that I do know a little more about – today’s international political economy, and the relationship between money and military force within it.


The chapter that I like most in the book is the second chapter, which talks about how economists’ theories blind them to the realities of interactions in non-market economies. This chapter takes an epigraph from Mencken:

For every subtle and complicated question, there is a perfectly simple and straightforward answer, which is wrong.

and goes on to show how economists’ theories about truck and barter don’t describe the kinds of relationships that predominate in non-market economies, largely because economists haven’t bothered to familiarize themselves with how these societies work. Why is this relevant? Graeber himself uses an equally ‘simple and straightforward’ theory to explain the workings of the modern economy – the international debt economy depends on the willingness of the US military to strike fear and terror into the hearts of anyone impudent enough to try to repudiate their debts, or to challenge US seignorage through creating their own challenger reserve currency. The problem is that I don’t think that this theory is supported by the evidence, any more than economists’ beliefs about the ubiquity of barter is.

First though, more about the stuff I like. Chapter Two is a very nice statement of the substantivist position on how economies work, which has a lot in common (although the differences develop as the book continues) with the work of people like Karl Polanyi and Marshall Sahlins. This tradition of argument has both an empirical and a moral dimension. Empirically, it points to the viability of non-market forms of economic interaction. For long periods of history, the primary forms of economic exchange within societies have taken place via what Graeber calls communism (more or less diffuse reciprocity) or hierarchy. Morally, it suggests that something may go wrong when the third means of interaction, exchange, becomes dominant. Unlike communistic forms of exchange (which are embedded in complex social relations of reciprocity and mutual interaction and dependence), it can get out of control, becoming something that is strange, alien and quite unnatural. According to the substantivist account, we live in just such an unnatural world.

However, Graeber tells us, economists are systematically unable to discern this. They cannot see that there could be any form of economic life other than exchange. Hence, they project theories of exchange, with market-based rationalizing actors backwards into non-monetary economies. They believe (or affect to believe, anyway) that these societies work through some sort of truck and barter system, where I want e.g. a sack of potatoes for which I am prepared to swap a pair of shoes. This implies that such societies are horribly inefficient – one needs to find someone whose demand and offer are complementary to one’s own, or else put up with a lot of awkwardness, inconvenience and partial satisfaction. However, as Graeber argues, this is a projection, pure and simple. Bartering does not characterize how people in most non-market societies deal with each other (although it may play a limited role, especially in transactions between different societies). Instead, such societies have recourse to reciprocity, more or less diffuse, on the local level. People are willing to look after others’ needs, in the broad expectation that their own needs will be looked after in turn. Society runs on interlocking favors, which are not specific so that for every jot I give to x, I expect a corresponding tittle from her, but are generalized so that I do not expect exact equivalence, either from x or from someone else. None of this makes it into the econ textbooks.

Graeber’s statement of this case is not entirely original (as he says, he is summarizing a general state of knowledge within anthropology), but that is emphatically not a problem. Even if others have said similar things (at least at this level of generality), it hasn’t diffused into general consciousness. Each year, when I teach Polanyi to my graduate students in international relations, the most difficult thing for them to get is why he is so down on market interactions. Understanding this requires just the kind of background knowledge on anthropological debates that Graeber imparts. I do have some quibbles. Not all economists are ignorant of these debates (indeed, one could make a plausible case that one major strand of the new institutional economics is motivated by a desire to respond to substantivists and reframe their arguments in terms of economic efficiency). Nor is the fit between economic rationality and markets as mutually defining as Graeber presents it as being – just this morning, I got an automated alert about a new paper modeling the Kula ring as a game theoretic equilibrium. But these are quibbles – the Econ 101 view of the world, which is what Graeber is really interested in, and what influences the wider discourse of public debate, systematically fails to engage with these ideas.

Unfortunately, the closing chapter seems to me to be a reverse image of Chapter Two, exemplifying rather than correcting the theoretical faults that Graeber finds among economists. Here, my critique has a lot in common with Gabriel Rossman’s, but was arrived at independently – I suspect that a number of other readers will have had similar reactions. When Graeber starts talking about modern markets, he does so in terms that are startingly reminiscent of the economists whom he rightly disparages in Chapter Two. He takes a very simple theory of how things work – explaining the modern economy nearly entirely in terms of debt and monetary relations – and how these relations in turn rest on a mixture of propaganda and direct coercion. He then applies this theory in ways that not only don’t really come to terms with the existing literature, but don’t fit very well with the available evidence either. The standards of scholarly literature and backing up everything with substantial detailed references take second place to a sweeping narrative that looks to me to be full of holes.

This starts with Graeber’s particular take on the power relations underlying money and debt. Graeber is at pains throughout the book to stress the ways in which state coercion and market exchange fit together. This presumably has a lot to do with his anarchism. For Polanyi, the villain is long distance trading relations, while for Graeber it is the state (in a formulation which is somewhat reminiscent of Althusser’s Ideological State Apparatus and Repressive State Apparatus), which is the actor that keeps the corrupt system going through its ideological and coercive resources.

In fact, it could well be said that the last thirty years have seen the construction of a vast bureaucratic apparatus for the creation and maintenance of hopelessness, a giant machine designed, first and foremost, to destroy any sense of possible alternative futures. at its root is a veritable obsession on the part of the rulers of the world – in response to the upheavals of the 1960s and 1970s – with ensuring that social movements cannot be seen to grow, flourish or propose alternatives; that those who challenge existing power arrangements can never, under any circumstances, be perceived to win. To do so requires creating a vast apparatus of armies, prisons, police, various forms of private security firms and police and military intelligence apparatus, and propaganda engines of every conceivable variety, most of which do not attack alternatives directly so much as create a pervasive climate of fear, jingoistic conformity, and simple despair that renders any thought of changing the world seem an idle fantasy.

On the one hand, this identifies something real. There is a narrow consensus, which sharply defines the things that can or cannot be spoken of by Serious People. Coercion is of course, an important element of how the system survives. But the language here suggests a seamlessness, and a level of shared intention and planning on the part of the “rulers of the world” who have “constructed” and “designed” this system that seems to me implausible. Many of the most important features of modern capitalism have less to do with conscious coordination than with unconscious synchrony. Graeber, it seems to me, radically overestimates the extent to which monetary systems and debt arrangements are the product of conscious design. Furthermore, his apparent contention that the system rests on people’s fears, despair, and desire for conformity systematically ignores the possibility that many people like monetized relations, and that sometimes they have good reason to prefer them over the more embedded forms of interaction that Graeber thinks are preferable. A vignette from Lou Brown’s chapter on trust relations in a Malagasy village in Distrust (Russell Sage: 2004) helps illustrate the point:

Children are expected to host a big feast in honor of their deceased parent four or five years after the death. … When preparing for such a feast, it is important that the children contribute in roughly equal amounts. … There is some sense in which the siblings involved are not so sure their interests converge. The siblings’ desire to have their transactions with one another be explicitly monetarized is interesting. Why did they not simply have Belalahy buy the steer, since he had the cash, and then exchange the steer for the land. To answer this question, it helps to note that Belalahy has the upper hand in this relationship because he has the cash. The siblings … would like to control as much as possible the amount he can extract from them. Though no one ever said this to me, they might fear that if they let him buy the steer first, he would buy a more expensive one than the others could afford. They will then still be obliged to compensate him for the purchase. Why might he do this? One reason might be a desire to gain personal control of more of the family rice fields. … Belalahy also has reasons to prefer that the exchange take place in cash. Aware of the greater power he holds in his relationship with his brothers and sisters, Belalahy might want to avoid the opportunity for any doubt to be cast on his integrity. … Most villagers believe that the type of transaction undertaken by Belalahy and his brothers and sisters is the best way for any type of exchange to occur. They all have more confidence in money than in any other medium of exchange. Of course, this would not seem especially noteworthy if this discussion were not about exchange among family members. …. Under [moral accounts of trust] exchange are conceived as open ended, or, in anthropological terms, characterized by generalized reciprocity. Family members are generally expected to give freely to their kin and trust that they will be treated similarly …. In Tanambao and Ambatobe, the interesting fact is that villagers do not want to leave the exchange relationship unclosed between family members.

What this suggests is that people may sometimes find disembedded relations to be more attractive than embedded ones, precisely because they are disembedded. This is arguably one of the reasons why monetarized economies have succeeded and become ubiquitous – not merelybecause they have been imposed, along with all of the paraphernalia of debt relations that go with them, or because people have been anaesthestized by propaganda and despair, but because (some) people genuinely prefer them (some) of the time, and would continue to do so even if their eyes were opened and the forces of repression magically vanished in a puff of acrid smoke. None of this explains why debt has become moralized so that, in effect, it carries many of the disadvantages of obligation that favors do without the compensations of reciprocity – but it does mean that these forms don’t just persist because of state power.

This state-focused account is then generalized into a very skewed account of international relations. Graeber’s view of how the international economy runs is straightforward. The United States is an imperial power, which uses its military might to command ‘tribute’ from everyone else.

One element, however, tends to go flagrantly missing in even the most vivid conspiracy theories about the banking system, let alone in official accounts: that is, the role of war and military power There’s a reason why the wizard has such a strange capacity to create money out of nothing. Behind him, there’s a man with a gun.

and

The essence of U.S. military predominance in the world is, ultimately, the fact that it can, at will, drop bombs, with only a few hours’ notice, at absolutely any point on the surface of the planet. No other government has ever had anything remotely like this sort of capability. In fact, a case could well be made that it is this very power that holds the entire world military system, organized around the dollar, together.

Graeber is a little bit too pessimistic about the ability of conspiracy theorists with vivid imaginations to talk about this stuff – there is a thriving sub-literature on the Iranian bourse strategy and the like, none of which seems (to my doubtless limited reading on the topic) to make very much sense. But as he says, this is a big, bold claim that he’s making, one which is flagrantly missing in current discussions. What kind of evidence does he have to support it?

Unfortunately, not much. He relies on timing, suggesting that the US desire to maintain dollar supremacy may explain the first Gulf War.

When Saddam Hussein made the bold move of singlehandedly switching from the dollar to the euro in 2000, followed by Iran in 2001, this was quickly followed by American bombing and military occupation. How much Hussein’s decision to buck the dollar really weighed into the U.S. decision to depose him is impossible to know, but no country in a position to make a similar switch can ignore the possibility. The result, among policymakers particularly in the global South, is widespread terror.

He does provide two footnotes to support these claims, but they don’t provide the kind of evidentiary backup one might have hoped for. One footnote says that the three countries that switched to the euro – Iraq, Iran and North Korea – were exactly those countries singled out as the Axis of Evil, but acknowledges in qualification that “we can argue about cause and effect.” Indeed we can – although there is a lot of evidence out there to support the contention that these countries abandoned the dollar because they and the US heartily detested each other, and none (at least that I am aware of) to support the contention that the US came to detest them because they had abandoned the dollar. I’d have expected Graeber to provide at least a little evidence to support his suggestion that the bombing and occupation were a result of the decision to move away from the dollar. After all, if the intention was to inspire terror in the global South at the very thought of moving away from the dollar, you’d have expected that the US would have hinted at this threat in public pronouncements. But no such evidence is provided. Graeber goes on to claim that it is significant that the core-euro using states – France and Germany – opposed the war, while the U.K., a euro skeptic did not. This not only ignores countries such as Italy, but also begs the rather obvious question of why the US permitted (and indeed effectively assented to) the creation of the euro in the first place, given that the new currency was specifically intended to challenge the US dollar’s reserve currency status. This directly contradicts Graeber’s account of what global monetary politics involves. The US had plenty of levers, up to and including bases in Germany and elsewhere, with quite a lot of troops, aircraft and the like. It didn’t use them. Why?

The sentence on how the Iraq war inspired ‘widespread terror’ among policy-makers in the Global South gets its own footnote – but this footnote does not provide any specific discussion whatsoever of the evidence supporting Graeber’s contention. Instead, it cites to a few “representative takes on the relation of the dollar and empire” without any specifics to support the claim. It could well be that there is evidence somewhere within those takes supporting Graeber’s claims. I couldn’t lay my hands on the Marxist source that he recommends. His suggested ‘neoclassical’ source for further reading is Niall Ferguson in full pith-helmet pontificator mode, and while I’ll do anything for a CT seminar, I won’t do that. Finally, he points us towards Michael Hudson, who (unless I misunderstand him badly) is interested in the opposite causal relationship to Graeber’s – Hudson is interested in how US financial privilege facilitates foreign policy adventurism, rather than how foreign policy adventurism scares people into continuing to cleave to the Mighty Dollar. In other words, if there is any evidence, it is buried somewhere in the sources rather than highlighted in the footnotes. I strongly suspect that there isn’t any very good evidence – this may be, of course, because I think that Graeber’s overall argument about the relationship between military force, seignorage, debt and tribute is flat out wrong, at least in the modern era.

A couple of pages later, Graeber brings the one important recent case of default – Argentina – into his story. But again, his claims seem based on nothing very much in the way of solid facts.

By 2000, East Asian countries had begun a systematic boycott of the IMF. In 2002, Argentina committed the ultimate sin: they defaulted – and got away with it. Subsequent U.S. military adventures were clearly meant to terrify and overawe, but they do not appear to have been very successful: partly because, to finance them, the United States had to turn not just to its military clients, but increasingly, to China, its chief remaining military rival.

This theory of the reasons behind U.S. military adventurism from 2002 on – that it was all intended to scare the bejasus out of debtor countries in case anyone else was inclined to pull an Argentina – has the virtue of originality. But that’s about all the virtue it has. It certainly doesn’t have any obvious evidence to support it. Graeber doesn’t even give us with a footnote here – his extraordinary assertion is supported only by its own, admittedly magnificent grandiosity. And there are lots, and lots and lots of other plausible reasons why the US went to war in Iraq that do not have very much to do with the politics of seignorage and debt repudiation. I’m not even going to get into the ways that he shoehorns the China-US relationship into his framework, since Gabriel’s post talks to this, but suffice to say that it is not any more satisfactory (a longue duree theory about how China has traditionally dealt with the barbarians through cleverly using tribute as a means of civilizing them, which is very long on assertion, and very short on facts).

In short – if there is evidence to support Graeber’s rather sweeping claims about the nature of the global economic system, he doesn’t provide it to the reader. Perhaps this evidence is buried in his sources somewhere. Perhaps not. But when one self-consciously makes grand claims that everyone else is wrong, one should have good evidence, and be prepared to produce it up front. Graeber, unless he’s keeping it very close to his chest indeed, has no strong evidence at all. This doesn’t seem to me to live up to the (admittedly high) standard that Graeber sets for himself.

So how does this relate to the second chapter, the one that I really liked? It seems to me that what Graeber has done in his concluding chapter is precisely to recapitulate the economists’ error that he rightly tossed scorn upon at the beginning of the book. He has let his own pet theory get in the way of the evidence. Graeber comes up with a theory which (like economists’) starts from a very simple claims – that behind the ubiquitous relationship of creditor to debtor lies the coercive power of the state. Unfortunately this theory, again just like the economists, doesn’t work very well outside the context where it was developed. It doesn’t explain state motivations – the evidence suggests that the US is motivated by many factors other than its desire to maintain the predominance of the dollar. It doesn’t explain the relevant relationships – seignorage, contra Graeber is not really a form of tribute, and thinking of it as same doesn’t really get us very far. Finally, and most crucially, it doesn’t explain the kinds of coercion that both the US and market actors can exert. Greece is not suffering today because the US will invade it if it defaults, or even because Panzers are going to start rolling towards the Aegean. It’s suffering because of a combination of more subtle forms of coercion, including the usual anodyne formulation of ‘market forces’ (which are not, contra Graeber, conditioned on the military might of powerful states such as the US, but exercise an influence all of their own).

I’d genuinely like to see Graeber tackle these more subtle questions, and come up with a better account of the role of debt and money in the international economy. It’s an important set of issues, and even if I doubt I’d agree with him much, I think he would have a lot of interesting things to say. I don’t think that he says them in this book in any very satisfactory way. Doing this right that so doing would require the kind of good scholarship that Graeber commends in his blogpost – perhaps a better engagement with the very extensive literature on these subjects, both from traditional sources (some of the more historically minded mainstream economists have interesting things to say) and non-traditional ones (I was surprised that James Buchan’s extraordinary and beautiful book on the history of money, Frozen Desire, isn’t in the bibliography – it is quite as harsh as Graeber, but written by someone with a much clearer understanding of the world economy). This would make for a pretty good book, if he were up to it – but it would also require a lot of new work in rethinking, and, where necessary, tossing out, old ideas that don’t really explain what he thinks they explain.

{ 168 comments }

1

Alex 02.22.12 at 12:56 pm

One footnote says that the three countries that switched to the euro – Iraq, Iran and North Korea

Er, there are some other countries that switched to the euro…

2

ajay 02.22.12 at 1:28 pm

In 2002, Argentina committed the ultimate sin: they defaulted – and got away with it. Subsequent U.S. military adventures were clearly meant to terrify and overawe, but they do not appear to have been very successful

The thought occurs that if you want to do something military in order to terrify anyone else away from following Argentina’s lead, you should probably be doing it to Argentina rather than to Iraq, a country on the other side of the world that had not actually defaulted on its debt or threatened to do so.

Though that doesn’t actually make less sense than the stated reason for fighting Iraq, which was “we are fighting a campaign against a terrorist organisation based in Afghanistan, backed by Gulf Arabs, led by a Saudi exile and whose ASUs are predominantly either Saudi, Egyptian or Yemeni. Naturally, Iraq is the central front”.

3

Barry 02.22.12 at 2:10 pm

Worse: ‘Naturally, a state whose leader is highly opposed to Wahhabi Suniism (sp?) is the central front in the war against a Wahhabi terrorist movement.’

4

mpowell 02.22.12 at 2:42 pm

His argument about debt and reserve currencies is insane. People don’t default because they need foreign investment. And actually some places default quite frequently anyhow. And nobody else has a reserve currency because the US has a stable currency (for a very long time) and is the biggest economy in the world. The Euro looked like it could be a challenger, but only an idiot would think that now. Until the Euro gets its political issues worked out, there’s no chance you’re going to buy Euros as the safest possible investment.

5

paul 02.22.12 at 2:43 pm

As a work of scholarship or popular science, it doesn’t seem to be very carefully put together.
http://delong.typepad.com/sdj/2012/02/gabriel-rosser-on-david-graebers-debt-the-first-5000-years.html

We think newspapers get it right until they report on something we know about, then you wonder how much of the rest of it is wrong. If an exhaustively-documented and even mythologized story like the founding of Apple is muffed (5-6 errors of fact in one sentence would be hard to do on purpose), how do I rely on the book when it gets into areas I don’t know?

6

johnston 02.22.12 at 3:03 pm

@paul – That Apple computer stuff is silly – he clearly mistook Apple for Next, Steve Jobs’s second computer company, which he started on his own with investment from the (then) Republican Ross Perot, who started his career at IBM. It’s a minor error.

7

LFC 02.22.12 at 3:25 pm

Re Graeber on the second (not the first, as the OP says) Gulf War: “When Saddam Hussein made the bold move of singlehandedly switching from the dollar to the euro in 2000, followed by Iran in 2001, this was quickly followed by American bombing and military occupation.” (emphasis added)

So: Saddam switched to the euro in 2000 (I didn’t know that but I’ll assume it’s correct). The US-led invasion occurred in March 2003. Why the time lag, on Graeber’s theory? Doesn’t seem like “quickly” to me. The idea that the US/UK/etc invaded Iraq over the dollar/euro is bizarre.

8

straightwood 02.22.12 at 3:36 pm

The true triumph of stealth technology has been in the conduct of political affairs. The masking of motives is a perfected art, and the instruments of propaganda and manipulation of public opinion are highly refined. Add to this a public willing to be deceived and elites who have betrayed their trust, and anything goes. Nobody is guilty of anything, because there is always a plausible reason to point to someone else.

The relevant concept is societal decadence. When the whole body is diseased, there is no point in searching for a faulty organ. American academics, journalists, businessmen, and politicians have all failed conspicuously in their public duties. The result is endless war and economic decay.

9

LFC 02.22.12 at 4:37 pm

Straightwood @8
What does this set of pronouncements have to do with the issues at hand?

10

Sebastian H 02.22.12 at 4:39 pm

“Society runs on interlocking favors, which are not specific so that for every jot I give to x, I expect a corresponding tittle from her, but are generalized so that I do not expect exact equivalence, either from x or from someone else. None of this makes it into the econ textbooks.”

This isn’t my area of expertise, and it may just be because it has been in trouble so much recently, but the first semi-advanced country I thought of where this is still a major factor is Greece! Which if true might speak to the question of whether or not such an arrangement is efficient.

“None of this explains why debt has become moralized so that, in effect, it carries many of the disadvantages of obligation that favors do without the compensations of reciprocity – but it does mean that these forms don’t just persist because of state power.”

This isn’t a question I’ve thought about at all before this, but the way you framed it makes the amswer seem intuitive. New systems draw on older systems. We like how money *reduces* the strict tribal/moral component of interlocking obligations, but we fear that a completely ammoral approach to it is dangerous in some way (though the particular thing we fear is probably different depending on your point of view).

11

LFC 02.22.12 at 4:40 pm

Moreover, if you simply want to repeat things you have said many times before, why not (to borrow a suggestion from JQ) start your own blog rather than using the CT threads as a soapbox?

12

LFC 02.22.12 at 4:41 pm

My 11 is directed to Straightwood.

13

robotslave 02.22.12 at 4:46 pm

@6

I agree that we should ignore very minor errors of fact, and focus instead on the larger point being made. Unfortunately, there’s a whopper of an error there, too.

Graeber cites Apple as an example of a successful firm grounded in non-hierarchical collective enterprise, when in fact Apple, from its founding, has had a rigidly hierarchical top-down management structure. This isn’t exactly an obscure bit of biz-school history, and it’s quite often cited as a primary reason for the firm’s success.

Perhaps instead of mistaking Apple for NeXT, he mistook Steve Jobs for Linus Torvalds?

14

Henry 02.22.12 at 4:50 pm

@6, we have some sort of a trail on where the Apple misconceptions came from – it wasn’t NeXT.

15

robotslave 02.22.12 at 5:17 pm

Thanks, Henry, that’s interesting.

Still, I feel that if one were doing research in the mid-aughts, one’s carrel would have to be a long, long way from the nearest window if a Marxist economist’s graduate student’s characterization of Apple as a triumph of collectivism seemed like a good thing to put in one’s manuscript.

16

straightwood 02.22.12 at 5:36 pm

What does this set of pronouncements have to do with the issues at hand?

The issue at hand is the search for a few imaginary needles of bad policy in a haystack of stinking corruption. The notion that everything is basically OK, except for one or two pernicious policies is bogus. There is no stable framework within which we can conduct an orderly search for bad policy. The entire system is corrupt. The comical side of this corruption can be viewed in the Republican primary farce. The more dignified side can be seen in the media outlets, think tanks, and academics funded by crooked corporations and cranky billionaires. The problem isn’t that Larry Summers and Robert Rubin don’t have the right answers. The problem is that Larry Summers and Robert Rubin are twisted pillars of a corrupt establishment.

Like Soviet-era psychiatrists, academic commentators have normalized the dysfunction of the current environment and shifted the burden of difficulty to the puzzling failure of localized theories to explain widespread problems.

“Look with all your eyes, look.”
― Jules Verne

17

ajay 02.22.12 at 6:12 pm

Shorter 16: Hexapodia is the key insight.

18

Adrian Kelleher 02.22.12 at 6:17 pm

(To paraphrase the OP, so that someone can point out if I’ve picked it up incorrectly)

Graeber in his anthropological work identifies systems of reciprocity instead of exchange as such. Things are not given not in expectation of direct or even equal compensation but for intangible benefits associated with social cohesion.

(Comment)

Such behaviour defies the economic assumption of rationality and must result from cognitive biases. Rationality amounts to an assumption that all cognitive biases are just errors. Behavioural economics addresses cognitive biases directly but still interprets them simply as mistakes (expert criticism welcome here).

What are called cognitive biases in humans are called behavioural biases in animals, and biology provides further examples of such supposed irrationality. Richard Dawkins (etc.) examined a string of such biases[1], however what was discovered was that the animals’ supposedly wasteful behaviour resulted from evolutionarily stable strategies. The economically anomalous behaviour turned out to be optimised rather than erroneous.

Economics is a science without many applications once these facts are taken into account; the radically simplifying assumption of rationality is the only thing permitting useful progress. Yet what is plain is that rather than being a solid if basic approximation, the assumption is instead fundamentally and provably incorrect in multiple ways.

Obviously rationality is at the core of all economic thinking, and economic thinking and economic models are how our political leaders interpret the world. Since the possibility does not exist of analysing the human world with the same rigour the simple circumstances of physics or chemistry permit in those disciplines, such models are substituted instead. Many of the most critical and pervasive elements of our world are interpreted using these metaphors.

This might be tolerable if deviations from rationality were random or incidental, or if they were solely the result of perceptual anomalies, but in many cases it is obvious that this is not the case. Rationality is therefore systematically misleading in addition to being politically loaded.

Libertarian and neoliberal thought are the political incarnations of economic rationality. Unsurprisingly, descriptions of the world founded on an inherently political idea are themselves inherently political.

If someone were to study institutions, say, solely through public choice theory then it would be unsurprising if he or she were to arrive at a particular and cynical interpretation of employees’ behaviour. Likewise, when the economic world is interpreted by the very serious people solely through the lens of rationality, as embedded unobtrusively within so many models, it is unsurprising that the result is politically and morally skewed. Far from being hypotheses testable against reality, they have become the core framework about which political reality itself is constructed in the minds of the people who matter.

But no substitutes exist for these models at the present time, and the very serious people will be loath to give them up even though their merit may be less than nothing.

[1. Often borrowing terminology if not methods straight from economics, e.g. here. The concorde fallacy is not so fallacious for Sphex Ichneumoneus.]

19

Colin Danby 02.22.12 at 6:37 pm

The Iraq-euro thing was a widely-disseminated conspiracy theory in leftish circles some years back. You get the same weird monetary fixations among Ron Paul’s followers.

When you point out that the actual record of U.S. use of force bears no relation to any conceivable economic rationality, you find a series of further defenses, as noted above, which make it clear that this interpretation of international politics is not ultimately based on evidence: for those who believe it, it’s an axiomatic assertion to which random anecdotes and factoids adhere like lint. The problem is not so much bad economics as simplistic history and international politics.

I haven’t figures out the design of this whole seminar, but is there a way to separate these issues? I think there’s a lot to be done in linking the economic anthro stuff, where Graeber is very strong, to other areas. I have a long-standing interest in its latent ties to Post Keynesian theory, which also starts from credit rather than exchange. But I’m worried that the global conspiracy buffs, not to mention other windy generalizers, will crowd that out.

20

Paul Davis 02.22.12 at 7:12 pm

Society runs on interlocking favors, which are not specific so that for every jot I give to x, I expect a corresponding tittle from her, but are generalized so that I do not expect exact equivalence, either from x or from someone else. None of this makes it into the econ textbooks.

Assuming this to be true, its still easy to see how one can substitute barter into this and get the same barter-replaced-by-money origin story. The central difficulty with the social arrangement outlined above is that if I expect (read “want”) a rather different set of mutual obligations between myself and “x” than “x” does, it can potentially be very difficult to negotiate it. Suppose I want to never participate in any duties except for contemplation of the cosmos and absolving people of evil? How do I negotiate this with “x” and the rest of my community? One can imagine some arrangements, which may or not actually have existed. But I think its also clear that the presence of money as a means of exchange makes this particular bargain very much easier to arrange. I can opt out of many of the pre-existing interlocking set of favors as long as I do something that generates enough tradable value (“money”) that I can get whatever I deem essential. The partial breakdown of the social contract in this way allows an expansion of the sorts of activities that become part of its own future.

21

yabonn 02.22.12 at 8:28 pm

“economists […] believe (or affect to believe, anyway) that these societies work […]”

I sometimes get the impression that they do both, at the same time (maybe to much economisty blogs, instead of the real thing).

At the beginning, they don’t believe, P is an assumption, often implicit. In the end, P has silently morphed into something one can base -say- policy recommendations on : “Is he saying this as an economist believing P, or does he _really_ believe it”?

22

John Quiggin 02.22.12 at 8:55 pm

I’m pretty sure Watson is backdating a claim about the Raj, usually attributed to “an old havildar” or similar.

23

Brett 02.22.12 at 10:08 pm

The Iraq War claim doesn’t surprise me, since I’ve heard that from from some far left people I converse with. It’s nonsense, of course – we’ve had multiple accounts from people with insider access to the decision-making that was going on, and “punishing Iraq for going off the dollar” was not one of the reasons.

More generally, I wonder if it actually makes some people uncomfortable to learn that the leadership is not nearly as competent and calculating as they think it is. It’s easier to imagine The Man as an all-seeing, all-reaching octopus.

24

js. 02.22.12 at 10:15 pm

So first, I completely agree with you that the last chapter in Debt id deeply disappointing for the sorts of reasons you mention (in fact, I found the last 3-4 four chapters to be fairly weak, at least relative to what went before), and I totally agree that the postulated causes of the Iraq war are bogus to the point of being borderline kooky.

That said, I thought that there was a more general point that Graeber wanted to argue for—one that, at least to me is not obviously false. This general thesis I thought was along these lines: According to their defenders, capitalism and the free market (I realize these are not necessarily the same, but to their defenders they are often internally related) are just by themselves a sort of irresistible force. Through the benefits they provide, or through some other mechanism still internal to economics, they necessarily (or almost always) win out over non-capitalist or non-market based societies. And I thought part of Graeber’s point was that the triumph of market capitalism over non-market based societies always, often, or maybe just sometimes requires the threat or reality of actual—decidedly non-economic—force. Now this might still be false, but at least to me, it’s not obviously so. At least if we take the “sometimes” option above. Mike Davis makes a similar argument in Late Victorian Holocausts, e.g. And at least some of his (Davis’) arguments to the effect that market mechanisms were often forcibly imposed on predominantly non-market based societies are I think far from obviously false.

25

Salient 02.22.12 at 11:00 pm

I feel about Debt the way (I hear that) rank and file Republican college students felt while watching Nixon in debates — ohdeargod, way to turn statements I’m constitutionally predisposed-to into sanctimonious pronouncements that just make me look bad for agreeing with (most of) them.

Wage-earning Americans seek dollars, and accept them as currency, because we can pay our debts to our government with them. The government asserts, by fiat, that this is the only way one may pay one’s taxes. This relationship between working citizens and the state apparatus that governs over them defines the value of our currency.
(I’m wrapping U.S.-state and U.S.-federal into one package, and I’m temporarily defining ‘working citizens’ as folks who don’t have enough {capital, goods, whatever} to safely and comfortably tough out a very long period of unemployment.)

Even if a local community decided to print and use a CincinnatiBucks currency, everyone in that community still needs to acquire dollars to pay taxes. (State property taxes, if nothing else. I suspect there would be a way to coerce income taxes too, but that’s far less clear.)

If we don’t pay our taxes, yes, we can get locked up. That’s the core of the coercive apparatus that keeps us seeking dollars, regardless of whether or not our local community is willing to adopt an alternative economic relationship. The government promises to accept dollars as taxes, specifies the quantity of dollars expected from each citizen, and punishes noncompliance. If you want to pay employees in euros or CincinnatiBucks, you could probably get away with it, but bestoflucktoyou paying your payroll tax in anything other than dollars.

It is (1) deeply weird and (2) deeply crazy to propose military dominance has a damn bit to do with this particular coercive apparatus. We don’t demand taxes from citizens of foreign countries.^1^ Our dollar has incredible value because there are about three hundred million citizens who need them to pay public debts. Everything else that further supports the reasonably-stable global value of the dollar –commercial loan transactions, foreign aid, countries purchasing dollar-denominated bonds–would collapse in fairly short order if the U.S. government decided for some reason to make it impossible to pay one’s U.S. taxes in dollars.

So where does the military even enter into this? It’s like Graeber heard the word ‘coerce’ at a conference somewhere and didn’t take the time to distinguish between the forms it takes. For gods’ sake, we have jailed precisely zero Iraqis for tax evasion.

^1^Objecting that some noncitizens live and work here would be technically true but awfully boring. Swap out citizens for whatever word you prefer.

26

Salient 02.22.12 at 11:07 pm

Adding — (1) I crash-skimmed the book while my students took their algebra exam, so the above may prove to be poorly founded after a close reading, and (2) the above sounds quite a lot harsher than I’d intended.

27

More Dogs, Less Crime 02.22.12 at 11:56 pm

Supposedly Doug Feith’s response to 9/11 was to urge the bombing of the tri-border region in South America. Maybe that was a plot to scare Argentina.

28

john c. halasz 02.22.12 at 11:57 pm

As for getting the reason for the Iraq War wrong, that seems a rather trivial objection, since I think no one has presented a coherent account of the reason(s) for that war: sheer ideological delirium on the part of the Busheviks seems as good an explanation as any. And, yes, the U.S. is not a tributary empire in the manner of ancient Rome, so any such analogy is anachronistic. But if the counter-claim is being made that U.S. military might and its pursuit of “full spectrum dominance” has nothing to do with the global promotion of Wall St. hi-fi and MNC commercial activity, even if explicit “gunboat diplomacy” is no longer quite acceptable as a means of ensuring extractions, then the OP is even more broadly erroneous than the nitpicking on Graeber’s errors suggests.

29

bob mcmanus 02.23.12 at 12:33 am

Maybe the “tribute” is in maintaining the global relative wage/price system, by OPEC not jacking oil up to $300 or the Far East deciding they might get 10 ten times the price for computer chips or screens. Or China handing its SWF to the factory workers, thereby bumping wages and prices.

Look, that monster world-historical military machine is there for a reason, and has consequences and benefits. And I think it is very important to see exactly how the hegemony and Empire actually are working, rather than deny they exist.

30

js. 02.23.12 at 12:36 am

jch@28:

But if the counter-claim is being made that U.S. military might and its pursuit of “full spectrum dominance” has nothing to do with the global promotion of Wall St. hi-fi and MNC commercial activity, even if explicit “gunboat diplomacy” is no longer quite acceptable as a means of ensuring extractions, then the OP is even more broadly erroneous than the nitpicking on Graeber’s errors suggests.

Exactly. This is what I was trying to say at 24, but this is much a much clearer statement.

31

Sam Tobin-Hochstadt 02.23.12 at 1:14 am

ajay at 17 wins the net for today.

32

robotslave 02.23.12 at 1:21 am

@28

The second military not-war of Iraq was launched by a rather panicked USA coaching staff in order to destroy the shadow-enemy’s nucleoterrorist gas troopers massing on Freedomerica’s sandward flank.

This was not a good reason. It is not a reason that “makes a goddamned bit of sense.” But it is the historically accurate reason, according to all contemporaneous and subsequent evidence.

A coherent reason for bloodying Iraq, you see, is categorically an inaccurate reason. While painfully obvious to many, this will be a very difficult truth to swallow indeed, for the sort of person who wants to understand history and geopolitics as the mechanical result of a vast, dark clockwork, the workings of which can be seen and comprehended by the elect few who have fully absorbed the True Conceptual Framework.

And that, rather than merely “getting the reason wrong,” is the problem with Graeber’s explanation of the stupid, stupid, horrible war.

33

Henry 02.23.12 at 1:25 am

js – I think I did mention this in the original post.

bq. On the one hand, this identifies something real. There is a narrow consensus, which sharply defines the things that can or cannot be spoken of by Serious People. Coercion is of course, an important element of how the system survives.

So I have no problem whatsoever in stipulating that force is an important factor in the spread of markets. Indeed, I think that this is a fairly anodyne claim – it’s one that is repeatedly emphasized e.g. by O’Rourke and Finlay’s history of trade (which is not by any stretch of the imagination a leftwing tract). The issue I had is with the specifics of his claims that the US military threat is what explains the continuation of seignorage etc. And if John C. Halasz thinks that this is ‘nitpicking,’ he really needs to read the final chapter of the book carefully – it is the major organizing claim. My problem with this chapter is not that it is too left wing – it is that it is completely unsupported by any evidence, and, I think, provides a misconceived theory of the persistence of global capitalism and the _actual_ mechanisms through which economic power is exercised (as exemplified by Greece). Actually figuring out how this thing works is important to changing it – and I don’t think that Graeber has things figured out nearly as well as he thinks he has, in large part because of his theory of tribute-via-seignorage-and-buying-T-bills is wrong.

To put it another way – it is of course absolutely fine to argue that US military force and US economic dominance have something to do with each other – you certainly won’t find disagreement from me on this. But there are many ways in which you could theorize their relationship. Some of these theories are going to be more or less wrong. Some of these theories are going to be more or less right. Figuring out which theories are wrong, and which theories are right requires careful consideration of evidence, alternative theories etc, just as with any theory. Graeber doesn’t really produce any evidence to support his (particular) theory of this relationship, let alone look carefully at other possible explanations; hence my dissatisfaction with this chapter.

34

geo 02.23.12 at 2:19 am

Colin @19: The Iraq-euro thing was a widely-disseminated conspiracy theory in leftish circles some years back

In what sense was/is it a “conspiracy theory”? Or is that just a way of saying “foolish,” “unsupported,” etc?

35

geo 02.23.12 at 2:26 am

Henry @OP: ‘market forces’ … are not … conditioned on the military might of powerful states such as the US, but exercise an influence all of their own

What forms does that influence take? Are they altogether independent of (ie, “not conditioned by”) the global balance of military power?

36

Henry Farrell 02.23.12 at 3:08 am

geo – I think for the purposes of any reasonable analysis, yes. The ever increasing interdependence of economies, especially the advanced industrial economies, offer all sorts of ways to exercise pressure that do not depend on military power. Take Greece as an example. It is unlikely in the extreme that military power will be used by the US or for that matter by Germany against Greece to make it implement economic changes that the Greek government and Greek people do not like. Yet because they are dependent on inflows and outflows of resources, on access to financial networks, and in particular on the ability to refinance their debt, they can be subjected to formidable forms of coercion, with the underlying threat being the cessation of these relationships. Of course, you can still say that force underlies this in the final analysis – but this is quite different from arguing that the threat of force is the immediate cause, as Graeber does.

37

Substance McGravitas 02.23.12 at 3:14 am

Graeber, it seems to me, radically overestimates the extent to which monetary systems and debt arrangements are the product of conscious design.

Not quite there yet – my reading time is intermittent. It’s odd, though, given that I’ve just passed the bits about Cortés, in which Graeber seems to go out of his way to stress the importance of debt itself to the predations of the Conquistadors. That is, not that the conquistadors were fine gentlemen led astray, but that these awful people were helped in their motivations by the need to get out from under creditors (which was apparently true of Cortés and then the rest of his party as Cortés ran the company store in turn).

38

Substance McGravitas 02.23.12 at 3:18 am

I guess what I mean to say is that if Graeber can allow Cortés – a god walking the Earth in his greatest and most hideous successes – to be a puppet of runaway financial machinery then surely there are other puppets at high levels.

39

Mark 02.23.12 at 4:29 am

“In what sense was/is it a “conspiracy theory”? Or is that just a way of saying “foolish,” “unsupported,” etc?” [on the Iraq-euro theory]

It is a conspiracy theory because there is an enormous amount of material available about the sorts of arguments being made for war at the time, internal administration memos and intelligence reports have been leaked, and many decision-makers have given interviews on- and off-the record on the decisions being made at the time. So the Iraq-euro theory is not just unsupported by any evidence but is rather premised on the idea that everyone in a position to know who has spoken on the subject is either lying or else is being duped and manipulated by some unnamed individual or group of individuals.

This is the classic substance of conspiracy theories. Individual government officials can and do lie, of course, but this posits a truly impressive conspiracy to suppress any mention of reserve currencies in all the sources we have on the motives for war.

40

geo 02.23.12 at 5:56 am

Henry: I’ve only darted into the book at a few points, but I gather that Graeber’s larger point is that if the global military balance were to change, and in particular were American to lose its military supremacy, then the status and perceived priority of a great many international economic obligations would alter, and in that sense, it’s not quite true that they are “not conditioned by the military might of powerful states such as the US.” This seems to be something different from the “anodyne” (as you rightly put it) claim that all markets presuppose someone to enforce contracts. But I confess I haven’t read enough of the book to know whether he makes anything of that larger argument.

41

john c. halasz 02.23.12 at 6:53 am

@33:

O.K. I haven’t as yet read the book, just a couple of dozen reviews and interviews. (It’s less the lack of time than the lack of pocket change that’s at issue). So I have no way to evaluate whether he makes a “major organizing claim” in the last chapter. But you don’t have to share Graeber’s anarchism,- (I don’t),- and one might think it leads to a short-circuiting of his account of the state to realize that he’s not doing IR theory and some imprecision in such claims might be allowable, given his broader points. (It might be it’s more his economics here on this specific point that’s off rather than his sense of international relations: seigniorage is trivial, but FX arbitrage and securing “resources” and investment “opportunities” for Mr. Market are not). And it’s certainly not a stretch to suppose that the maintenance of military hegemony and international economic hegemony go together, are not coincidental, even if there is no isomorphic correspondence between military policies and economic ones, (or even if military policies are incoherently, adventitiously, or counter-productively implemented).

But, yes, there is something nitpicking or pedantic about you approach in the OP. Ah ha! Graeber is claiming to obey the highest scholarly standards in providing source notes and evidence, but I’ve caught him out in a basic mistake or imprecision, which, ergo, vitiates his entire approach! And then you leave it to your bog-standard liberal commentariat to infer that Graeber is just another one of those kooky, marginal lefty “conspiracy theorists”. (Something similar has been done with a mistake he made about Apple Computer: if he’s got one fact wrong, he can’t be trusted on any facts, since everybody “knows” that facts determine all general conceptions, rather than the latter serving to organize the former). But that tack just amounts to a repressive denial of the issues raised. If you want to take issue with Graeber’s imprecision about contemporary international relations, (rather than leaving the impression that the threat of violent force doesn’t play a significant, perhaps large role, in maintaining international “markets”), then shouldn’t it be incumbent on you to offer a more extended and “positive” corrective account of such difficult issues? (In the old jargon, the distinction was between “abstract negation”, which ends up willy-nilly reproducing what it opposes, and “determinate negation”, which transforms the issue by finding the precise point of weakness and intervention in what it opposes).

42

geo 02.23.12 at 7:25 am

That’s poppycock, Mark. Nowhere in those gazillion memos and interviews does anyone say “We’re going in to make sure we have a stranglehold over oil supplies in case China gets stroppy” or “We’re going in to turn the damn country into an investor’s paradise, with some special goodies for Dick’s oil buddies” or “We’re going in because we have this colossally expensive military machine and we have to do something impressive with it every once in a while to keep the rubes forking over taxes to pay for it” or even “We’re going in to calm Israel down, since they have all those goddamn nukes and a big Samson complex.” But that doesn’t prove that none of those purposes played a part in causing the invasion, or that anyone who suggests they did is a “conspiracy theorist.”

43

Phil 02.23.12 at 8:11 am

I haven’t read that Project for a New American Century document in a while, but I’m pretty sure it did actually contain more sedately-worded versions of #1 and #2, as well as some stuff about asserting US dominance over the Entire World!!1!! Don’t think there was anything about the dollar area, though.

44

ajay 02.23.12 at 9:50 am

43: agreed. PNAC was telling Clinton to occupy Iraq in 1998, and the argument they gave (in their publicly released letter!) was that “if we continue along the present course, the safety of American troops in the region, of our friends and allies like Israel and the moderate Arab states, and a significant portion of the world’s supply of oil will all be put at hazard”.
So that’s your reasons 1 and 4.
As for reason 3, I don’t think that would apply. The US public has generally been quite willing to keep paying for the military, even bits of it that don’t get used.
This is the flaw in people saying “oh, well, the Military-Industrial Complex wants wars”. It doesn’t. It wants military procurement spending. And sometimes that goes up in time of war, but sometimes it doesn’t; a lot of very expensive, very shiny military projects were cancelled or cut back as a result of the wars in Afghanistan and Iraq, because the military needed to spend money on the less shiny and less profitable business of actually fighting a war.
If there had not been a 9/11, the US Army would still have Crusader and Comanche.

45

Alex 02.23.12 at 11:25 am

Also, there’s nothing about holding dollars that means you have to invest them in the United States. The United States, at the absolute zenith of its power and prestige, learnt this lesson rather expensively in the 1960s with the emergence of the eurodollar market, which meant it couldn’t control the dollar exchange rate.

46

Anderson 02.23.12 at 3:12 pm

Supposedly Doug Feith’s response to 9/11 was to urge the bombing of the tri-border region in South America. Maybe that was a plot to scare Argentina.

See the 9/11 Commission Report, n.75 to ch. 10.

47

Henry 02.23.12 at 3:32 pm

George – you need to look at the last chapter in particular for his argument on this. And it is quite specific. The broader point about the ways in which the US has shaped an international economic system that works to its advantage is not in dispute as far as I am concerned. But he makes a very specific set of claims about the ways in which it works, a very specific set of claims which as far as I can see have no good evidentiary basis. And John C. Halasz – this isn’t nitpicking (if I were to nitpick, I’d be going after other more trivial inaccuracies). It is a major claim – indeed the major claim of his concluding chapter, which is supposed to wrap his argument up and tell us how his ideas apply to the current economic system. Graeber claims that the global economy is a tribute system, and that the tributes are given via seignorage and buying of T-Bills, because other states have good reason to fear that they will be bombed into oblivion if they do not comply. He goes to considerable lengths to make this case. Unfortunately, as already noted, he doesn’t have the evidence he needs to make this case stick (and for good reason – he’s wrong). This doesn’t invalidate his arguments about the weird ways in which debt has come to assume a moral weight, which I found interesting and useful. Nor does it invalidate his historical case, which I am not the right person to judge. Equally, it is not a trivial point which is fundamentally irrelevant to his main argument. It suggests that his macro-level analysis of the current global system is flawed, and needs to be reworked substantially. I think that you could do a very interesting and potentially useful analysis of the world economic system, building from some of his earlier arguments about debt. But I don’t think that he has done it, for the reasons I outline above.

As for my positive argument about how coercion over debt works, see my discussion of the leveraging of interdependence in #36. Also John – please note that I’m assuming that you are arguing in good faith here. It would be nice if you made the same assumption in return, rather than suggesting that I am nitpicking so that I can then “leave” it to my “bog-standard liberal commenters” to do the rest of the job of taking Graeber down.

48

LFC 02.23.12 at 3:59 pm

Re John C Halasz
I for one never suggested that Graeber was a kook, conspiracy theorist etc. I made one specific comment re his Iraq/euro connection. I rather resent your insulting reference to a bog-standard liberal commentariat. You are happy to indulge in (bog-standard?) Hegelian or whatever it is jargon about abstract vs determinate negation but then you turn around and name-call and impugn people’s motives. You do not have the slightest — not the slightest — idea what my politics are and I would thank you not to arrogantly presume that you do.

49

ajay 02.23.12 at 4:26 pm

(Something similar has been done with a mistake he made about Apple Computer: if he’s got one fact wrong, he can’t be trusted on any facts, since everybody “knows” that facts determine all general conceptions, rather than the latter serving to organize the former).

A very telling sentence.

50

LFC 02.23.12 at 4:28 pm

if he’s got one fact wrong, he can’t be trusted on any facts, since everybody “knows” that facts determine all general conceptions, rather than the latter serving to organize the former

Of course theoretical frameworks (‘general conceptions’) organize facts. Duh. Who has said that “if he’s got one fact wrong, he can’t be trusted on any facts”? I certainly didn’t. As for “everybody ‘knows’ that facts determine all general conceptions,” these “everybodys” exist mainly in your imagination and maybe in the history of a certain branch of empiricism, which is totally irrelevant to the discussion afaict.

51

Doctor Slack 02.23.12 at 5:22 pm

I don’t think the criticisms of the post as nit-pickingly pedantic are convincing. Although US military and imperial power is obvious a huge, huge, huge part of the story of the dollar — especially of the origin of the greenback’s rise to supremacy — there is also the matter that, once it achieved that dominance, elites across the globe have had a stake in keeping it going. Hence why China has spent so much time propping up the currency; although China isn’t under any illusions that it can militarily challenge the US as far as I know, its relationship to the greenback is one of self-interest more than one of tribute. I think it’s quite right to say that against the backdrop and history of coercion, self-interest plays a big role in the behaviour of both macro- and micro-actors, like the Malagasy villagers of the extract from Distrust. Which is fascinating, BTW.

I admit that I’m a little confused by this (I’m not going to tsk, tsk over the preceding misuse of “begs [the] question” except elliptically, in passive-aggressive parentheses):

why the US permitted (and indeed effectively assented to) the creation of the euro in the first place, given that the new currency was specifically intended to challenge the US dollar’s reserve currency status.

I didn’t know the Euro had been “specifically intended” to take on the champ, as it were. I was rather under the impression that its creation was the European apotheosis of a specific subset of globalist ideology (so-called “managed globalism”), that its creation happened with tacit American assent because American economists were convinced that it couldn’t last or would never be strong enough to challenge the dollar if it did, and that its eventual ability to challenge for the top reserve currency status was a side-effect of unanticipated weakness in the greenback. Is this wrong?

As to what Graeber says to prompt this reply:

But the language here suggests a seamlessness, and a level of shared intention and planning on the part of the “rulers of the world” who have “constructed” and “designed” this system that seems to me implausible. Many of the most important features of modern capitalism have less to do with conscious coordination than with unconscious synchrony.

You say earlier that he’s describing something real, and I think you’re right: the Very Serious consensus you refer to is the globalist ideology that dominates high finance and has increasingly captured government in the West during the period he’s talking about. There is an extreme degree of self-consciousness, coordination (I don’t think he’s implying “seamlessness”), and desire to cut off and discredit alternatives among holders of this ideology, and it’s those things that have driven the design of the macro-system of treaties and currencies that bear down on all the micro-interactions that escape conscious design. He sounds like he’s equating “the rulers of the world” with “the rulers of the West,” and so the major problem here isn’t that he seems to be claiming that every little interaction in modern capitalism is a result of conscious design, but rather that his account looks (from what’s quoted) to leave out China, which by this day and age one cannot justify doing.

Thanks for an interesting post.

52

js. 02.23.12 at 5:41 pm

Henry@33:

Thanks for the response. Pretty much completely in agreement. I guess when I first read this:

On the one hand, this identifies something real. There is a narrow consensus, which sharply defines the things that can or cannot be spoken of by Serious People. Coercion is of course, an important element of how the system survives.

I saw “coercion” right after a mention of what’s acceptable in discourse and I didn’t think you had in mind the threat or use of actual means of violence. In any case, the last paragraph (in 33) strikes me as entirely right.

Also, thanks to CT generally for doing this. I found Graeber’s book fascinating but also a little bewildering at points, and this has been helpful.

53

Henry 02.23.12 at 7:19 pm

bq. I didn’t know the Euro had been “specifically intended” to take on the champ, as it were. I was rather under the impression that its creation was the European apotheosis of a specific subset of globalist ideology (so-called “managed globalism”), that its creation happened with tacit American assent because American economists were convinced that it couldn’t last or would never be strong enough to challenge the dollar if it did, and that its eventual ability to challenge for the top reserve currency status was a side-effect of unanticipated weakness in the greenback. Is this wrong?

David Marsh’s history of the euro is good on this – unhappiness with the US exorbitant privilege goes back to De Gaulle in the 1960s, and the misuses of US economic power under John Connally provided an important impetus for European monetary cooperation. There are lots of speeches out there from European officials making it clear that this was an important ambition – see e.g. this. My impression of the debate among US economists, which is at best glancing, is that they were skeptical that reserve status was all that important – see e.g. this Krugman piece from the period.

54

Henry 02.23.12 at 7:20 pm

And thanks for pushing me to look at Marsh’s book again – found a very juicy quote that I hadn’t spotted before from Helmut Schmidt about how the euro was intended to recreate the gold standard, and wasn’t this teh awesome.

55

Doctor Slack 02.23.12 at 11:11 pm

Thanks!

56

john c. halasz 02.24.12 at 12:54 am

Henry @47:

One last go-round, then I leave off.

I actually agree that getting the diagnosis right is important, for the sake of the prognosis and the course of treatment, assuming that there is a cure and that the patient isn’t terminal. But, of course, that is metaphorical. And, at least on the evidence of your post, it seems that Graeber might have a somewhat short-circuited understanding the the current dynamics of “international political economy”. Yes, it’s not just a simple matter of U.S. dollar hegemony, backed by military might, (though earlier on, with the likes of White, Kennan, and Nitze, such thinking was not far off the mark). It’s much more a matter of a $ recycling hegemony and it’s not a matter of “tribute”, but rather of the extraction of financialized rents. (As Paul Volcker, the official in charge when Nixon scuttled Bretton Woods, remarked at the time, “we’re just going to outrun them”.) But then since those are basically unproductive, it’s not amiss to suggest that coercive means are require to ensure their extraction, (whether it’s a mafia thug or a vast armada). Calling that “tribute” is metaphorical, not literal, even if Graeber has done previously good spade-work in excavating past tributary empires, (in which case, he might be accused of reifying his own metaphor or of committing a “genetic fallacy”). And, indeed, puzzling out the exact relations between globalized finance and the maintenance of a vast international military network might not be obvious and might not benefit from simplistic reductions. Perhaps it doesn’t actually operate in U.S. national interests, but rather in multi-national ones. Or perhaps the U.S. is a declining hegemon and its policies are increasingly incoherent and dysfunctional. (In which case George W. Bush gets to play the parodic role of the Hegelian anti-hero). But even if Graeber gets some facts wrong or postulate to simplistic and direct connections, it’s by no means stretching credulity to think that the extensive system of globalized finance is backed by an international system of coercive force, which is essential to keep the system running, if only latently. To think otherwise would be credulous.

Capitalism didn’t invent primitive accumulation. Plunder and the brutal exploitation of labor are ages-old. What was new was its capacity to recirculate such extracted surpluses into their ever-expanded reproduction and the relative efficiency of the forms of organization by which it did so. And it would be a wonderous thing, indeed, if the “spirit” of capitalism had long since sublimated such coercive forms of organization. Even if it is nonsense to claim that capitalism is a totalitarian system, such a performative paradox does serve to bring out the elements of totalizing domination by which it operates, especially in the light of claims that markets are the bastion of human liberty and the veritable Eden of the rights of man.

So you cite this piece of Graeber’s rhetoric:

“In fact, it could well be said that the last thirty years have seen the construction of a vast bureaucratic apparatus for the creation and maintenance of hopelessness, a giant machine designed, first and foremost, to destroy any sense of possible alternative futures. at its root is a veritable obsession on the part of the rulers of the world – in response to the upheavals of the 1960s and 1970s – with ensuring that social movements cannot be seen to grow, flourish or propose alternatives; that those who challenge existing power arrangements can never, under any circumstances, be perceived to win. To do so requires creating a vast apparatus of armies, prisons, police, various forms of private security firms and police and military intelligence apparatus, and propaganda engines of every conceivable variety, most of which do not attack alternatives directly so much as create a pervasive climate of fear, jingoistic conformity, and simple despair that renders any thought of changing the world seem an idle fantasy.”

And then you comment:

“Coercion is of course, an important element of how the system survives. But the language here suggests a seamlessness, and a level of shared intention and planning on the part of the “rulers of the world” who have “constructed” and “designed” this system that seems to me implausible. Many of the most important features of modern capitalism have less to do with conscious coordination than with unconscious synchrony.”

Of course, it is already a philosophical/social “scientific” mistake to appeal to “consciousness” and thereby to some central intentionality. But it’s equally a mistake to oppose “conscious coordination” to “unconscious synchrony”, since coordinated intentions and planning are extensive throughout the system and central to its “design” and operation, (including by academic policy pros). There is no such thing as a capitalist-in-general, (except in the representative agent of DSGE models, in which Mr. Market plays the role of a Gosplan superhero), but there is an underlying reproduction scheme, which will make its “imperatives” felt. All you’ve done is substitute your ideological predilections for Graeber’s, and, in this instance, I find Graeber’s more plausible. (I could add other instances from the OP, but this one will do).

I have no objection to fact-checking and to pointing out factual errors. And if there are too many factual errors in a work or the organization and selection of facts exhibit a large angle of distortion, that, indeed, is a vitiating criticism of a work. But Graeber has deliberately written a “big picture” book, 5000 years of debt, and necessarily must proceed by offering synoptic accounts and conceptions. Single factual errors are not a knockdown argument or even much of a counter-argument at all. (And, of course, he’s an anthropologist professionally, which dictates his manner of approach and the “literature” he’s most familiar with). That he’s got one fact wrong doesn’t imply that all his facts and notes are suspect. And hoisting him on his own petard, with his claim to scholarly rigor, because of single errors strikes me as an operation of denial, to maintain more “modest” disciplinary boundaries and conventions. (It rather, er, DeLongish). And claiming that you can only “judge” specific issues in your area of expertise neglects the fact that you have had to judge all sorts of things in reading the book, whether you are “qualified” or not to do so. Certainly Graeber can and should be check on his factual and broader claims by scholars in various disciplines, but that’s not an ideologically neutral operation.

So am I arguing in “good faith”? I’m specifically commenting on, questioning, criticizing the manner of approach you took in your post/review: not just what you argue, but how you go about it. You can assume some sort of pure theoretical intentionality, in which you are merely expositing clearly the order of concepts and the facts and evidence that support them. That’s bog-standard for an academic. But it also relies on idealizations and blindspots, among which the “purity” and mastery of one’s own intentions, (else self-righteous umbrage is taken). But I would hold to a basic praxiological thesis: all forms of theory bear a reflexive relation to underlying social practices and the practical “interests”, projects, intentions that emerge therefrom, (which is very much the point of having theories at all). So I think I can claim some warrant for reading your claims about Graeber’s claims at cross-grain, in terms of the counter-claims that you’re implying without really fully arguing.

The prevailing doxa among CT principals is a liberalistic, notionally social-democratic compromise with “market-based” capitalism. (And the battle heroically against the fact that neo-liberalism has largely liquidated such an historical compromise). The median commenter is similarly inclined, and a poster can reasonably expect a fair amount of re-enforcement from commenters, who often snarkily will belabor the status quo obvious. (Yes, I looking at you “LFC”). There are, of course, deviant commenters to the left and to the right, often the usual suspects. But I don’t think it’s punching below the belt to note that posters often “play” to expectations from commenters. And if that impolite, so be it.

One last nitpick of my own:

“For Polanyi, the villain is long distance trading relations, while for Graeber it is the state “

Is that really the case that Polanyi makes, that the problems with market relations are rooted in long-distance trade? (It’s been a long time since I read the book and you apparently teach it regularly). IIRC Polanyi’s book was partly an extended polemic against Austrian school economics and makes, as a key contention, the claim that market relations are not simply a “spontaneous order”, but with their underlying basis in the 3 “fictitious commodities”, land, labor and capital, require a good deal of political and juridical intervention to be artificially imposed or extended.

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Peter Erwin 02.24.12 at 2:17 pm

Supposedly Doug Feith’s response to 9/11 was to urge the bombing of the tri-border region in South America.

Well, there’s probably a reason why Gen. Tommy Franks called Feith “the dumbest fucking guy on the planet”…

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Shadrach 02.24.12 at 2:46 pm

“this may be, of course, because I think that Graeber’s overall argument about the relationship between military force, seignorage, debt and tribute is flat out wrong, at least in the modern era”

Henry, you make this assertion multiple times although you do not provide an alternative interpretation or any sources that disprove Graeber’s claim. The “flight to safety” into US bonds in the post 2008 world would seem to strongly bolster Graeber’s argument. The Krugman’s speculation piece that you point to in the comments does not seem to me to provide much evidence, and is even somewhat contradicted by Krugman’s current comments. Krugman writes:

” It just isn’t true that America’s ability to import more than it exports is unique. Since 1980 the U.S. current- account deficit (which includes services and investment income as well as goods) has averaged 1.5% of GDP. That’s about the same as Britain’s average, less than Canada’s 2.2%, and nothing like Australia’s 4.2%. These countries paid for their excess imports the same way we did: by selling foreigners stocks, bonds, real estate, and so on”

The question that presents itself here is why do foreigners choose to invest their holdings–which are very often dollar denominated, particularly from resource rich regimes–in the Anglo countries in the first place? Foreign investors perceive investment in these countries as safe, i.e. heir investment will hold their value. In all four countries Krugman cites their safety is assured by their strong position within the US military umbrella. If the whole system collapses then the men with the guns will still be able to pay their bills. It helps that oil, and most other commodities are paid in dollars. The US dollar is the internationally accepted liquid store of value. That value is backed by our military dominance, heavily subsided by foreign investment in the form of the world’s lowest interest rates.
Now here I would disagree with Graeber’s interpretation that this is an imperial tribute system, rather I would argue that this is a result of continued American military hegemony protecting and enforcing the rules of our international economic system. As our military might shrinks vis a vis the rest of the world, so too will the seignoriage advantages accrued to the reserve currency (e.g. the history of the English Pound). However acceptance of the rules of our international system will also decline. Strong entities (both nation states and likely independent firms) will be able to renegotiate–or even ignore–the rules as they see fit. For the US this will mean a diminished perception of safety, and therefore much higher interest rates. Graeber’s basic point that the man with the gun backs the whole system up seems quite valid to me. But then I tend to subscribe to Occam’s razor, as you do not offer any alternative explanation I’ll stick with the simplest and most logical one.

Additionally Krugman today points to countries that have maintained control over their currencies (Iceland vs. Ireland or Estonia; Britain) as being in a much better position to regulate their economy then those without this power. This is because they not only have monetary power but also control the terms of their debt. They can simply choose to devalue or inflate their way out of debt. The US, as the safest liquid store of value, can not only do that, but do it largely without inflation in times of international crisis.

P.S. I largely agree with Halsaz above, although I would agree with your take on Polayni. I do note that Polayni wrote “the new national unit and the new national currency were inseparable. It was currency which provided national and international systems with their mechanics and introduced those features which resulted in the abruptness of their break”.
I will confess that I sometimes worry that this historical assessment may prove to be a prescient one. So I hope that you can point to some evidence that might allay this concern.

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straightwood 02.24.12 at 3:04 pm

How is it necessary that convergent forces need to be centrally organized and perfectly coordinated for them to achieve common goals? Using the “conspiracy theory” refutation of any argument for aligned interests is just shoddy reasoning.

Right wing holy rollers and plutocrats don’t develop carefully integrated plans at Dr. Evil’s headquarters. They simply join forces politically as it suits their respective agendas. Similarly, the military and defense contractors don’t need to coordinate their pro-defense activities in a formal manner. Their independent motivations (more toys for boys and bucks for big shots) are sufficiently aligned to make their efforts mutually reinforcing.

The entrenchment of crony capitalism requires no intricate conspiracy theory. It is the product of many convergent motivational pieces, loosely joined. Thus, it may be said that the people are the victims of convergent, not conspiratorial mischief. Appropriate remedies must be directed at the component malefactors, not imaginary conspirators.

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LFC 02.24.12 at 4:01 pm

jch:
it’s by no means stretching credulity to think that the extensive system of globalized finance is backed by an international system of coercive force, which is essential to keep the system running, if only latently

Suppose the US were to cut its defense budget by two-thirds, cancel all new weapons systems, junk all its aircraft carriers, close virtually all its overseas military bases, withdraw all of its troops from Europe, Japan, S Korea, stop all ops associated with what used to be called the ‘war on terror’, immediately withdraw from Afghanistan, etc. What would happen to “the extensive system of globalized finance”?

Yes, it’s not just a simple matter of U.S. dollar hegemony, backed by military might (though earlier on, with the likes of White, Kennan, and Nitze, such thinking was not far off the mark).

Putting aside White and Nitze for the moment, what evidence is there that Kennan cared about, or even thought about, ‘US dollar hegemony’?

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straightwood 02.24.12 at 4:12 pm

Suppose the US were to cut its defense budget

As long as the CIA had enough resources to intimidate and kill, the crony capitalist machine wouldn’t miss a beat. There is considerable evidence that the CIA was the enforcement arm of Wall Street here
Curiously, the original edition of this book vanished from the Library of Congress. Although I don’t believe in a grand unified conspiracy theory, many more modest schemes have been arranged to do America’s dirty work.

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LFC 02.24.12 at 4:15 pm

commenters, who often snarkily will belabor the status quo obvious. (Yes, I looking at you “LFC”).

That’s not how I view my comments, obviously. If my aim was to defend a “notionally social-democratic compromise with ‘market-based’ capitalism,” I can assure you I wouldn’t be doing it by commenting on CT. (That said, I think such a ‘compromise’, however inadequate it is, would be better than what exists now.)

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bob mcmanus 02.24.12 at 4:51 pm

Putting aside White and Nitze for the moment, what evidence is there that Kennan cared about, or even thought about, ‘US dollar hegemony’?

He didn’t have to. What is the meaning or implications of the reserve currency or “safe-harbor” for savers and investors?

Last economy or polity standing, however weakened, after the deluge, and the degree of private and public commitment to pay the costs, moral/amoral economic of prevailing.

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Sebastian 02.24.12 at 4:54 pm

“They simply join forces politically as it suits their respective agendas. “

It is fascinating which times those on the left suddenly decide to believe in the invisible hand. ;)

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LFC 02.24.12 at 5:07 pm

P.s. to 61 (to John C. Halasz): LFC are my real initials; there’s no need to surround them with snarky quotation marks.

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William Timberman 02.24.12 at 5:36 pm

JCH @ 56:

The prevailing doxa among CT principals is a liberalistic, notionally social-democratic compromise with “market-based” capitalism. (And the battle heroically against the fact that neo-liberalism has largely liquidated such an historical compromise).

Not an entirely fair judgment, perhaps, but I also fear that the good Social Democrats here and elsewhere really don’t understand how thoroughly recent history has undone them, or why at this point anyone of good will would question not only their their political acumen, but even the very ground of their analyses.

Tony Judt might roll over in his grave at the idea that a new wave of radicals is about lose its patience with the arbiters of stable progress, but I honestly don’t see at this point how Brad Delong, Paul Krugman, John Quiggin, et al, can really expect to stuff all the evil genies back in their bottles. Insulting Graeber is no doubt gratifying, but in the context of our present crisis, it looks to me like just one more finger in a collapsing dike.

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Henry 02.24.12 at 6:16 pm

bq. Insulting Graeber is no doubt gratifying, but in the context of our present crisis, it looks to me like just one more finger in a collapsing dike.

If you want to get into a ‘my dreams of socialism are more realistic than yours’ fight, I’d really suggest that you do it somewhere else – especially if you want to start it off by suggesting that people here are “insulting” Graeber (when Graeber describes me as an ‘angry illiterate,’ I think that is reasonably described as an insult – when I say that I believe that Graeber is wrong, I think it is reasonably described as argument). People should feel free to engage in argument on specifics – but I’ll thank them to refrain from generic invocations of tribal identity in the internecine battles of the left. I’d like to maintain this as a space where people can argue with each other with at least a modicum of mutual respect.

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Gaspard 02.24.12 at 6:33 pm

“when Graeber describes me as an ‘angry illiterate,’”

Did he? Where was that?

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Henry 02.24.12 at 6:37 pm

teh Twitter.

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Henry 02.24.12 at 6:39 pm

And to be clear – I have no particular interest in reiterating the specifics of the dispute with Graeber in CT comments. If he wants to respond to my post in detail, in a wrap up post or otherwise, I’ll reply further then, but would prefer not to get into a heated-back and forth by proxy or otherwise at the moment – it seems to me unlikely to be helpful or constructive.

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William Timberman 02.24.12 at 7:33 pm

Henry, I have no dreams of socialism to bring to market here or elsewhere, and as far as I’m concerned, Graeber can defend his own thesis without any help from me. I just don’t think we’ll get where we want to go without questioning premises which already have far too many ardent and interested defenders from both ends of the current political spectrum.

The drains are blocked. We can look about for a new plunger, or start building an ark, or we can set out for high ground, any of which some expert or other already knows how to do. Whether any of these efforts will bear fruit, I don’t know, but in all the plunging, hammering, and collecting of trail mix, I think we’re missing something. Maybe Graeber knows what it is, and maybe he doesn’t, but you’re certainly right about one thing: anyone wanting to think along these lines should go do his thinking somewhere else. Mea culpa.

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Henry 02.24.12 at 7:43 pm

William – I am very happy for you to do your thinking here – but I think that it would be better to frame it in terms of specific criticisms or specific proposals rather than a general ‘plague on foolish social democrats,’ which seemed to me to be a significant part of your post. If you have specific questions to pose to challenge the premises of social democrats or others, that is not only OK, but welcome.

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roger 02.24.12 at 9:14 pm

The paragraph in Debt about Saddam Hussein irrating the U.S. into war by switching the currency in which he valued petroleum from the dollar to the euro seems to get the significance of it wrong – it was more like Jay-Z’s video showing the rapper enjoying euros rather than money.
On the other hand, the voices for war after 2000 were unabashed about merging military goals and the goal of spreading free enterprise. It became such a cliche that it was hard to listen to. Here’s Michael Mandelbaum in Foreign Affairs, September 2002, going on and on about American power and how to use it:

“The contemporary world is dominated by three major ideas’ peace as the preferred basis for relations among countries, democracy as the optimal way to organize political life within them, and the free market as the indispensable vehicle for producing wealth…. From these new circumstances follow the central purpose of the United States in the twenty-first century and the principal use for American power: to defend, maintain, and expand peace, democracy, and free markets. Achieving this goal, however, involves two separate tasks, and for these American power, great though it is, is not necessarily sufficient.

The first task is to sustain the international institutions and practices, concerning both security and economics, within which these three ideas can flourish. The second is to strengthen peaceful foreign policies, democratic politics, and free markets where they are not securely rooted above all, in Russia and China and install them where they do not exist at all, notably in the Arab world.”

I think these statements can be found all over the news of the 2001-2004 period. Certainly Colin Powell, when defending the invasion of Iraq, highlighted the possibility of free enterprise being emplanted there. And in the aftermath of the disaster, one of the persistantly fingered reasons that the American occupation went awry is the way Americans went around tearing up the state controlled economy and closing state factories under the impression, as NYT reporter Steve Glanz put it, of ” an insistence by the initial American occupation authority that once they closed, vibrant free markets would spring into existence to fill the void.”

I think surely no one reason was the reason for the invasion and occupation, but surely the idea that military might and capitalism were in synergy was big in the early 2000s.

As for tribute – if we are to speak of tribute, perhaps we should speak of Saudi Arabia. Here I think Graeber misses possible shots. Surely the oil system is, to a great extent, inflected by the tribute system. According to Edward Morse and James Richard (2002, Foreign Affairs), “Saudi Aramco, the state oil company, earns about $1 a barrel less on sales to the United States than on sales to the countries of Europe and East Asia. That discount translates into a subsidy to U.S. consumers of $620 billion per year.” If this isn’t tribute, I don’t know what is.

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john c. halasz 02.24.12 at 9:30 pm

LFC @ 60:

In one of his famous memos, Kennan noted that the U.S. accounted for 50% of global output with just 5% of global population, and remarked something to the effect that, while we can’t expect other countries to agree to that, we aim to keep it that way. Any economist would recognize that comment as illiterate, (since it was a temporary status and ignores the issue of relative growth rates and mutual benefit), but still, it speaks to a mindset…

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straightwood 02.24.12 at 9:52 pm

Naomi Klein’s “Shock Doctrine” devotes considerable space to the depiction of the Iraq Occupation as a free-fire zone for unfettered capitalism. This argument is summarized in her 2004 Harper’s Magazine article, Baghdad Year Zero.

In one place on Earth, the theory would finally be put into practice in its most perfect and uncompromised form. A country of 25 million would not be rebuilt as it was before the war; it would be erased, disappeared. In its place would spring forth a gleaming showroom for laissez-faire economics, a utopia such as the world had never seen. Every policy that liberates multinational corporations to pursue their quest for profit would be put into place: a shrunken state, a flexible workforce, open borders, minimal taxes, no tariffs, no ownership restrictions. The people of Iraq would, of course, have to endure some short-term pain: assets, previously owned by the state, would have to be given up to create new opportunities for growth and investment. Jobs would have to be lost and, as foreign products flooded across the border, local businesses and family farms would, unfortunately, be unable to compete. But to the authors of this plan, these would be small prices to pay for the economic boom that would surely explode once the proper conditions were in place, a boom so powerful the country would practically rebuild itself.

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Henry 02.24.12 at 10:08 pm

John – US dollar hegemony is not the same thing as US hegemony. If there is anyone here who doesn’t think that the US has used _both_ its military and its economic power to craft a system that systematically benefits it, frequently at the expense of other countries, then they are being very quiet. The topic that people disagree on is whether or not this hegemony is manifested through a specific set of tributary relationships in which other countries avoid the possibility of US invasion by declining to challenge US retention of seignorage, and also prop up the US through having their central banks purchase T-bills. That is Graeber’s claim. It isn’t a metaphorical one, but an empirical one – and again, it seems to be wrong (there is no very good evidence in its favor, more powerful alternative theories etc). Similarly Shadrach – the ‘flight to safety’ is not what Graeber’s theory predicts – Graeber is not arguing that US military superiority makes it a safer place to invest, but rather that the US is able to frighten other countries into making ‘investments’ that are in the long term worthless. It’s a quite different theory to your one, and a rather less subtle one. As I’ve said a couple of times above, I have no quarrel with the claim that the man with the gun is important – rather, I disagree with the _specific_ arguments that Graeber makes about how this translates into a global system of tribute-or-else.

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geo 02.24.12 at 10:56 pm

Henry: I have no quarrel with the claim that the man with the gun is important

Can you say how, specifically? Above @33 you say: “it is of course absolutely fine to argue that US military force and US economic dominance have something to do with each other – you certainly won’t find disagreement from me on this.” What is that “something”? It may be difficult for political scientists to prove that specific economic benefits flow from demonstrated willingness to use military power, just as it’s difficult to prove that specific legislative votes flow from campaign contributions, lobbying efforts, and the prospects of post-electoral employment in private industry. But they’re both such intuitively plausible notions that us non-political scientists are left wondering whether political scientists just haven’t tried hard enough.

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Matt 02.24.12 at 11:39 pm

As for tribute – if we are to speak of tribute, perhaps we should speak of Saudi Arabia. Here I think Graeber misses possible shots. Surely the oil system is, to a great extent, inflected by the tribute system. According to Edward Morse and James Richard (2002, Foreign Affairs), “Saudi Aramco, the state oil company, earns about $1 a barrel less on sales to the United States than on sales to the countries of Europe and East Asia. That discount translates into a subsidy to U.S. consumers of $620 billion per year.” If this isn’t tribute, I don’t know what is.

Somebody made a factor-of-1000 arithmetic error. In December 2002 the US imported 56 million barrels of oil from Saudi Arabia. Assuming a $1 per barrel subsidy is correct that is $672 million annually, a bit more than $2 per American consumer per year.

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LFC 02.24.12 at 11:46 pm

jch @74
thank you for the Kennan ref.

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Henry Farrell 02.25.12 at 1:38 am

George – I think that you can make an excellent case that the threat of military intervention plays a substantial role in structuring oil markets. The US made it clear during the early 1970s that e.g. oil embargoes would be treated as threats to national security. Here, you have evidence both of threats being made, and of countries genuinely fearing intervention by the US. But there is _no_ evidence that I am aware of (or that Graeber seems willing to produce, at least as of yet) that bears upon the possible benefits of seignorage. If there were a colorable case, I would expect, at the least, evidence that the US had made implicit threats against countries that threatened to disrupt seignorage, or evidence from statements by target countries that they thought that intervention in support of seignorage was a live issue (whether expression of submission, blustering arguments that they would never give in or whatever). I don’t see that. In other words, not only do we not have evidence of the systematic kind that political scientists would like to see, we don’t have any circumstantial evidence that I know of either. It used to be, up to the beginning of the twentieth century, that powerful countries _did_ intervene militarily in weaker ones to force them to pay national debts. But this changed – my colleague, Marty Finnemore talks about this in chapter two of her book, _The Purpose of Intervention_ talks about the processes through which this happened. Again, this is not to say that coercion and debt have magically become disentangled from each other. They have not, as Greece demonstrates. But there are important differences between a world where defaulting nations are invaded, and one where they are not (albeit subjected to other nasty forms of ‘market discipline’ and compulsion.

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shah8 02.25.12 at 2:26 am

This is pretty stupid. While the US policy circles probably do act to manage use of the currency for optimal, in various vectors, returns, the US has *never* had a strong allegiance to the idea of currency==power. If that were the case, Paris would have been nuked a few times over. The Saddam/Euro story is just another silly leftist story, like the MIHOP folks.

What the US does do aggression, is in the change of networks. Everything from revolutionary governments to switching out from international institutions that favor US aims to those that do not. Fort Benning, not Fort Knox. This is also fought with weapons sales and pipeline agreements. When it comes to currencies, it’s typically about malign neglect as traders get to *really* speculate on your currency/national assets. Of course, most countries have learned well from that little playbook, and have large bankrolls saved up for use against, essentially, privateers in Armanis.

Take Iran, for example. We have Iran War scares roughly every two years or so. Why? Regional political power would settle into Iran’s orbit based on general gravity. Either Iraq or Iran, and postwar calculations have always been about playing the two natural powers off of each other rather than allowing them to consolidate regional supremacy to their own domestic advantage (we having incorporated Turkey into our NATO framework). Iran does not have any natural hostile borders anymore, given what has happened in Iraq, out of GWB’s harebrained scheme, so we use the whole nuclear thing in order to keep Iran in its cage and unable to use it’s oil resources to further regional aims, while KSA can. Except this is obviously weak sauce. Fanatics actually do want to bomb Iran, and pragmatics just want to knock oil out of Iran cheap and lower global prices a bit. But the long song short, the overall path is about negotiating just how much power Iran will be allowed to have in the current world system. Of course, the longer Iran holds out, the better their cards are, as the world economy crumbles. Hence the war scares.

And…uh, oh yeah, the US does not run a tribute system. Waaaaay more like the US runs a gambling casino, and takes a vig. From League of Nations on, it’s been about controlling institutions and making money off of the players, indirectly.

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Sebastian 02.25.12 at 2:57 am

In principle, Graeber should have an easy case if he can get past one explanatory hurdle: explain why the US would invade Iraq over converting to the use of the euro when it didn’t bother to invade France or any other European country over converting to the euro.

Of course getting past that hurdle might be difficult in practice.

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geo 02.25.12 at 5:14 am

Henry: But what about the secular pattern of US military intervention/subversion since WW II? Leaving aside overt US intervention, the US actively partnered with domestic security forces in virtually every non-Communist Third World country, teaching them hostility to any civilian political forces that threatened to limit the prerogatives of foreign capital. Scores of times those security forces intervened in domestic politics at the national level, on many occasions under the active guidance of the CIA and on all occasions with at least the tacit support of the Pentagon and State Department. US economic warfare against small non-capitalist states like Cuba, Nicaragua, and Communist Vietnam was draconian, and supplemented where possible by assassination and other dirty tricks. Although the US population, and above all the US mainstream media, scarcely noticed, the rest of the developing world was always extremely conscious of the price in internal subversion and external harassment liable to be incurred by insisting too much on economic independence from the US-led global economic system.

There was, in other words, intense, subtle, continuous, and largely successful pressure, in effect coercion, to adopt investor-friendly policies; most American media commentators and scholars were too benighted to notice or too intimidated to protest it; but American and foreign leftists were very well aware of it. (I suppose that awareness virtually defined leftism.)

Of course things have changed since the end of the Cold War (though, significantly, the size of the US military hasn’t) and the disappearance of even the marginal support against US dominance that the Soviet bloc offered a potentially unruly developing country. Most important, US economic dominance is waning. All this may mean drastic new constraints on US foreign policy, and far less coercive capability. But just because we can’t afford to be the big bully (or hegemon, if you like) any more, doesn’t mean we haven’t been the big bully up to now.

I know, I know, all this is fairly general, and you’re objecting to some fairly specific causal assertions by Graeber. It really is irresponsible of me not to have read his final chapter by now. I can only plead time pressure, plus the fact that I find trotting out the above bromides so easy and exhilarating.

84

robotslave 02.25.12 at 12:29 pm

“…things have changed since the end of the Cold War (though, significantly, the size of the US military hasn’t)”

(actually, it has.)

And then there’s the problem of causation. If American economic dominance is in significant part the product of American military dominance, then after the collapse of the American military’s only serious competition, American economic dominance must surely increase, or at least firm up; instead, it’s been steadily waning, and not in the absence of further military adventure, either.

You seem to have visited all these facts without touching the most obvious conclusion, no?

I would agree that historically, military dominance has been made possible by economic dominance. The other way round, I don’t think works quite as well; in fact, I believe there are at least a few cases where bloated armies have bankrupted nations.

While the two do admittedly get rather tangled up, I suspect that attributing America’s economic hegemony to its military might is putting the cart before the horse somewhat.

85

Henri Vieuxtemps 02.25.12 at 1:11 pm

@83 If American economic dominance is in significant part the product of American military dominance, then after the collapse of the American military’s only serious competition, American economic dominance must surely increase, or at least firm up; instead, it’s been steadily waning, and not in the absence of further military adventure, either.

The claim, as I understand it, is not of American economic domination, but of a (more or less) straightforward imperial domination.

Here’s what happened right after the collapse of the American military’s only serious competition:
“The US has a new credibility. What we say goes.” — George Bush, 2 February 1991, US military base.

And here’s a quote from John Perkins’ famous book, found in wikipedia:

Economic hit men (EHMs) are highly-paid professionals who cheat countries around the globe out of trillions of dollars. They funnel money from the World Bank, the U.S. Agency for International Development (USAID), and other foreign “aid” organizations into the coffers of huge corporations and the pockets of a few wealthy families who control the planet’s natural resources. Their tools included fraudulent financial reports, rigged elections, payoffs, extortion, sex, and murder. They play a game as old as empire, but one that has taken on new and terrifying dimensions during this time of globalization.

86

robotslave 02.25.12 at 1:37 pm

That’s a nice quote from George Bush, Henri, but how did that work out for him?

87

Henri Vieuxtemps 02.25.12 at 1:57 pm

Well, it worked out fine, I guess, as expected: military bases in Kuwait, and, more importantly, in Saudi Arabia. Until the new competition forced them to withdraw in 2003.

88

robotslave 02.25.12 at 2:03 pm

That seems to me to fall rather short of “What we say goes,” but apparently it does provide you with all the evidence you need. Carry on.

89

Henri Vieuxtemps 02.25.12 at 2:19 pm

But of course this provides me with important evidence: the state of mind of the guy controlling the most powerful military machine in world’s history. What other evidence do you require?

90

robotslave 02.25.12 at 2:34 pm

“What other evidence do you require?”

Quite. Carry on.

91

geo 02.25.12 at 6:13 pm

robotslave @83: If American economic dominance is in significant part the product of American military dominance, then after the collapse of the American military’s only serious competition, American economic dominance must surely increase, or at least firm up; instead, it’s been steadily waning, and not in the absence of further military adventure, either

Yes, nice thrust, but you’ve missed a couple of things. For one, I was careful to limit the (tentative and general) outline of causal dynamics to “developing countries.” Developed countries were already tightly integrated into the global economy, at least since the US defeated the post-World War II left in Europe and Japan with a combination of Marshall Plan aid and CIA subversion. The European and Japanese capitalist elites (very much including the social democratic parties) are firmly entrenched, and if their legitimacy is ever challenged by socialist revolution, they have their own militaries — and in that case, the US military bases in Europe and Japan would come in very handy, wouldn’t they?

For another thing, “product of” is your phrase, not mine. Military dominance does not produce economic dominance any more than poverty produces crime, but the one conditions (supports, influences, facilitates, affects — help me find the term) the other. I’m saying that many developing countries would have very likely chosen a different path than they did if not for the constraints represented by their US-supplied and -trained national security forces and also by the abundant record of US military intervention in and economic warfare against uppity developing countries.

Finally, you rightly point out (as I also did) that American economic dominance has waned since the Cold War. But the point of all the American military pressure I’ve pointed to was not to produce American economic dominance, precisely, but rather to insure developing countries integration into a global economic system then dominated by the US. They have most certainly been even more successfully integrated into the global economic system because of the collapse of America’s main military and political rival — there are now no rival models or great power allies. But American superiority within the global economy has waned for other reasons, chiefly the hollowing out of the American economy by financialization, as well as the natural effects of inter-capitalist competition. US economic dominance had a long and very profitable run, made possible in significant part by US military dominance, very clevery and ruthlessly deployed.

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shah8 02.25.12 at 7:38 pm

You know, *geo*, it’s a pity my comment’s stuck in moderation hell.

Word.

93

geo 02.25.12 at 8:09 pm

Sorry too, shah, but I’m sure CT moderation software caught you in some flagrant offense or other. If the comment doesn’t emerge in short order, and you’d like to send it to me directly, please feel free. My email address is on my website — just click my CT user name.

94

roger 02.25.12 at 8:24 pm

Matt at 79 – you are right. I imagine that you are right about how million was converted to billion in the article. But still, what is this, a tip? The Saudis just find Americans irresistably cute? I call it tribute. But just as the Romans also paid tribute to border tribes, so does the U.S. – the billions given to Pakistan during the Bush years were obviously tribute. Tributary nations – for instance, Egypt under the Roman Republic – also attempted to bribe and influence Roman rule, making the tributary relationship a bit more complicated than unilateral subordination. In fact, the way the first Gulf War was paid for was very Roman – costs were shouldered by American allies in the Middle East to an amazing extent, actually hurting their economies. It was very much like the alliances formed between Rome and the minor kingdoms in Asia minor which eventually forced those kingdoms into bankruptcy, all for ‘protection” from King Mithridates.

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robotslave 02.25.12 at 8:56 pm

” (supports, influences, facilitates, affects—help me find the term)”

The term I would use is “in significant part produces.”

That really does seem to be the argument you’re making, if we accept that your proximate reasoning applies only to “every non-Communist Third World country,” and that the militarily acquired economic dominance thereof extends to the communist and developed parts of the global economy by simple induction.

96

Matt 02.25.12 at 11:52 pm

Roger at 94 — I’m not sure what I should call the $620 million in discounts to the US from a dollar-per-barrel differential on Saudi oil. It’s so small a sum in terms of national economies, and spread so thinly over a high-volume commodity, that it doesn’t seem to be a smoking gun for anything in particular.

97

roger 02.26.12 at 10:27 am

96, you think it is just a whim?
You should read up on tribute. The classic source is the tribute list that Herodotus gives for Persia in his History in book 3. Here’s the beginning of it:
“The Ionians, Magnesians of Asia, Aeolians, Carians, Lycians, Milyans, and Pamphylians, on whom Darius laid one joint tribute, paid a revenue of four hundred talents of silver. This was established as his first province. The Mysians, Lydians, Lasonians, Cabalians, and Hytennians paid five hundred talents; this was the second province. [2] The third comprised the Hellespontians on the right of the entrance of the straits, the Phrygians, Thracians of Asia, Paphlagonians, Mariandynians, and Syrians; these paid three hundred and sixty talents of tribute. [3] The fourth province was Cilicia. This rendered three hundred and sixty white horses, one for each day in the year, and five hundred talents of silver.”
Why the horses? They were symbolic. But symbolism here is not something unreal. It is a very real expression of a power relationship. Darius, as it happens, did not tax Persia – according to Herodotus – because he relied on tribute. Graeber is asking if there aren’t other forms that tribute can take. For instance, an ally can break a boycott of a needed primary product, like petroleum, or, if there is trouble – say citizens of an ally hijack three planes and crash into the pentagon and the World Trade Center – the ally can avoid trouble by lowering the price of petroleum, making investments to insure that the ally’s economic system avoids a hit, or can call upon past and deep relationships. In the case of the Saudis, we have gone through an amazing time that surely calls for some explanation that I haven’t seen, for it is, on the face of it, an incredible moment: the U.S., hit by renegade Saudi paramilitaries, decides to attack – a completely different, third party that had nothing to do with the attack on the U.S. Give me a parallel for such a bizarre turn of events.
An explanation that involves a long tributary relationship does have the advantage that it helps explain the way US – Middle Eastern history have gone in the last decade. Other factors, of course, also count. But I see no reason to discount a system of tribute that operates in many different ways, one of which concerns the price and availability of oil.

Myself, I like your style, and I’m thinking that perhaps, as this conversation is going so well, you could find it in your heart to send me fifty bucks. It is not a huge amount in this crazy, crazy world, but it would be well appreciated.

98

Sebastian h 02.26.12 at 10:40 am

The horses were symbolic? You don’t know as much about tribute as you think if you believe that. What were the horses used for?

99

Henry 02.26.12 at 12:21 pm

bq. Graeber is asking if there aren’t other forms that tribute can take. For instance, an ally can break a boycott of a needed primary product, like petroleum, or, if there is trouble – say citizens of an ally hijack three planes and crash into the pentagon and the World Trade Center – the ally can avoid trouble by lowering the price of petroleum, making investments to insure that the ally’s economic system avoids a hit, or can call upon past and deep relationships.

Except that he isn’t, actually. He very possibly may think this, but these aren’t the specific arguments he is making in the book, which (I know I’m repeating myself here, but I think I need to), have to do with seignorage and central bank purchases of T-Bills – much more specific phenomena, which unfortunately are not, _contra_ Graeber, tribute. Roger, have you read the chapter in question? The actual arguments he makes (rather than the ideal arguments that he might make) are important.

100

LFC 02.26.12 at 2:36 pm

roger @94
But just as the Romans also paid tribute to border tribes, so does the U.S. – the billions given to Pakistan during the [G.W.] Bush years were obviously tribute.

The U.S. is still giving Pakistan billions, except that some military aid has been suspended recently and the Kerry-Lugar-Berman legislation shifted a bit of the total aid package in a civilian direction. But not a huge change, I think, from the Bush years in this respect. The question is whether this is usefully thought of as tribute and I think the answer is probably no. The U.S. is giving aid and getting certain things in return (though it increasingly appears to be a bad bargain for the U.S. given the Pakistanis’ sheltering of Haqqani network etc etc), but U.S. aid often works that way. Why call every package of military aid or official development assistance or whatever ‘tribute’ — it doesn’t get you anywhere analytically. (And btw, al Qaeda are not “renegade Saudi paramilitaries” but that’s another issue.)

101

Henri Vieuxtemps 02.26.12 at 3:08 pm

The U.S. is still giving Pakistan billions

I think it’d be useful to separate a county from its government/military. The US is giving money to Pakistani military. The US was also giving money to the Contras in Nicaragua, so what. Running an empire is a complicated business. Of course Pakistan is a nuclear power, so this is a special case anyway.

102

LFC 02.26.12 at 3:17 pm

HV @101:

When I wrote “the U.S. is still giving Pakistan billions” I was using the word “Pakistan” as a convenient — though not strictly accurate — shorthand for “the Pakistani government and military.” I assumed that was obvious. In the sense that most of the aid is not benefiting the mass of Pakistanis (at least not directly), I take the point. It’s not really analogous to aiding the contras in Nicaragua, however, for fairly obvious reasons which I don’t think I need to go into.

103

robotslave 02.26.12 at 4:04 pm

I think it’d be useful to separate a country from its government/military.

Well then, let’s go right ahead and do that, for the rest of your sentences:

The US taxpayer/country is giving money to Pakistani government/military. The US taxpayer/country was also giving money to the Contras in Nicaragua, so what. Running an empire government/military, or a country, is a complicated business. Of course Pakistan‘s government/military is a nuclear power, so this is a special case anyway.

104

anon/portly 02.27.12 at 4:26 am

“But still, what is this, a tip? The Saudis just find Americans irresistably cute?”

Over a long period of time, hasn’t US energy/oil policy seemingly been oriented towards keeping the Saudis as wealthy as possible? Maybe it is just a tip, really. A small discount for one’s best and most foolish customer is not unusual, nor necessarily bad business practice.

105

ajay 02.27.12 at 9:44 am

According to Edward Morse and James Richard (2002, Foreign Affairs), “Saudi Aramco, the state oil company, earns about $1 a barrel less on sales to the United States than on sales to the countries of Europe and East Asia. That discount translates into a subsidy to U.S. consumers of $620 million [corrected] per year.” If this isn’t tribute, I don’t know what is.

$620 million a year is not a huge amount to pay for the privilege of having XVIII Airborne Corps and the Sixth Fleet on speed dial to protect your oil fields when your neighbour to the north starts misbehaving.

106

ajay 02.27.12 at 9:47 am

A small discount for one’s best and most foolish customer is not unusual, nor necessarily bad business practice.

Surely everyone knows by now that most Saudi oil doesn’t go to the US? The US gets most of its oil from Canada, Mexico and its own fields. In fact, it gets about as much oil from Saudi as it does from Venezuela; you’ll notice a distinct lack of love in the US-Venezuela relationship.

107

Roger 02.27.12 at 12:56 pm

105 -time to refresh your memory. The whole of the gulf war 1 was paid for by the saudis and the arabian kingdoms. That was no small cost, and in fact in the 90s they all suffered ecomiically for the war. Such was american hubris that Wolfowitz, in2003, assured the war happy congress that the cost of the coming invasion would be borne by the liberated iraqis. In this sense , the americans overestimated the strenghth of the tribute system. And so does Graeber. It is unravelling.

108

ajay 02.28.12 at 10:06 am

107: that doesn’t actually undermine my point as much as you seem to think. The US military is not a taxi; it’s not automatically available to any customer with the means to pay. Even if you end up paying the cost of the intervention yourself, it’s still valuable to have the kind of relationship that means you know it’s going to happen.

109

ajay 02.28.12 at 10:08 am

Nor, for that matter, is it true that “The whole of the gulf war 1 was paid for by the saudis and the arabian kingdoms”.

110

roger 02.28.12 at 6:08 pm

Ajay, no, the Arab kingdoms – Kuwait, Saudi Arabia and Qatar – contributed 71 billion dollars towards the cost of the first Gulf War. Germany and Japan contributed the other third of the cost.
The result of this cost was large.

“The fiscal impacts of Desert Storm upon the well-being of Saudi Arabia were as monumental as their geopolitical counterparts. Its costs in military operations, operations reimbursements, and regional aid commitments are estimated at $64 billion, in an economy whose 1991 GDP was just over $100 billion. To put those sums into perspective, had the United States acquired an equivalent war debt relative to its GDP, the total would approach $5 trillion, an amount equal to America’s current aggregate national debt acquired over decades.”
http://fmso.leavenworth.army.mil/documents/saudi/saudi.htm

Officially, the cost borne by the arab states was only 2/3 of the military cost, but Rachel Bronson in her history of American Saudi relation counts 60 billion.

111

Peter Erwin 02.28.12 at 7:23 pm

roger @ 110:
I wonder if there’s some confusion concerning how much money Saudi Arabia provided to the US, versus how much money Saudi Arabia ended up spending overall?

The impression I get from this page (and Appendix P of the Conduct of the Persian Gulf War, The Final Report to the US Congress by the US Department of Defense on which it’s based), is that Saudi Arabia’s provided the US with about $17 billion in cash and services to help cover US military costs. Other contributions included Kuwait ($16 billion), Japan ($10 billion), Germany ($6.5 billion), and UAE ($4 billion); the total was something like $54 billion, out of a total cost to the US of $61 billion. So Saudi Arabia paid for about 28% of the US expenses.

Is it possible that the “$64 billion” in the report you linked to is the total cost of war-related expenses to Saudi Arabia, including their own military operations, reimbursements to other countries (e.g., the UK, France, and Egypt), and things like their share of the $14 billion or so distributed to developing countries via the Gulf Crisis Financial Coordination Group? (That’s kind of what “military operations, operations reimbursements, and regional aid commitments ” sounds like…)

112

Peter Erwin 02.28.12 at 7:43 pm

roger @ 94:
But just as the Romans also paid tribute to border tribes, so does the U.S. – the billions given to Pakistan during the Bush years were obviously tribute.

To amplify what LFC @ 100 said: Well, no, unless you want to redefine tribute as “any monetary transfer whatsoever.” The key characteristic of tribute (as opposed to subsidies, bribes, or “gifts”) is that it is an acknowledgment that the tribute-payer is subordinate to, and respectful of, the recipient. Saying that the US giving money to Pakistan was “tribute” amounts to claiming that the US was formally acknowledging Pakistan as its superior, which I don’t really think was the case. (Similarly for the Romans — or the British in India — and “border tribes”.)

113

Alex K. 02.28.12 at 7:47 pm

I just got to reading the book.

In some twitter exchange, David Graeber denies that he makes the claim that US sells T-bills at gunpoint — which is claim the OP is criticizing.

How can Graeber deny that he makes such claims, when in the first chapter he writes:

“And there’s something more fundamental going on here, a philosophical
question, even, that we might do well to contemplate. What
is the difference between a gangster pulling out a gun and demanding
you give him a thousand dollars of “protection money,” and that
same gangster pulling out a gun and demanding you provide him with
a thousand-dollar “loan”? In most ways, obviously, nothing. But in
certain ways there is a difference. As in the case of the U.S. debt to
Korea or Japan, were the balance of power at any point to shift, were
America to lose its military supremacy, were the gangster to lose his
henchmen, that “loan” might start being treated very differently. It
might become a genuine liability. But the crucial element would still
seem to be the gun.”

114

roger 02.29.12 at 12:16 pm

Peter, see this NYT story about the amount of money that the U.S. spent on Desert Storm:
http://www.nytimes.com/1991/08/16/business/economic-scene-the-broad-impact-of-the-gulf-war.html

“Total pledges from coalition partners to the United States came to $54 billion. Thus far, the amount received has been $46.6 billion, of which $41.8 billion was in cash and $5.4 billion in kind, especially fuel. The Office of Management and Budget expects that by the end of this year, cash contributions will reach $48.2 billion, bringing the combined cash-and-kind grants to the $54 billion pledged.

The Congressional Budget Office estimates that United States incremental costs for Operations Desert Shield and Desert Storm came to $15 billion. Hence, with cash receipts expected to total $48 billion this year, it says the United States will have received $33 billion more than the incremental costs of the war this year.

However, Richard G. Darman, director of O.M.B., has testified that the total costs to the United States of stopping Iraq were $61 billion, implying that American outlays exceeded foreign contributions by at least $7 billion. But the Darman figure includes transfers from already budgeted military outlays to the gulf operations plus estimated future costs of replacing equipment lost in the war.”

As for your distinction between tribute and bribe or gift, obviously, this depends on the situation of the speaker. I call it a bribe, while the bribed person calls it a tribute. In the case of Pakistan, the entire invasion of Afghanistan, up to and including the miracle escape of Osama bin Laden and the Taliban leadership (and, in the airlift from Kunduz, the escape of the ISI people that the Americans well knew were fighting with the Taliban, ordered as a “courtesy” to Musharref), was full of odd moments of deference. Contrary to your notion that a bribe and tribute are poles apart, I take it that a bribe allows you to do something, while tribute allows you to not suffer something – and in the case of Pakistan, I’d claim that the billions were given for both reasons – on the one hand, we got Pakistan to keep the Taliban and Al Qaeda on “reservations” so to speak, so that the American leadership could use them as a threat when needed, but at the same time, the U.S. was paying not to suffer certain things, like a war between Pakistan and India, and enough peace in Afghanistan to establish a puppet government.

The situation with the U.S. is summed up in this passage from Gibbon, concerning Gallus payment of tribute to the German tribes:

“In the age of the Scipios, the most opulent kings of the earth, who courted the protection of the victorious commonwealth, were gratified with such trifling presents as could only derive a value from the hand that bestowed them; an ivory chair, a coarse garment of purple, an inconsiderable piece of plate, or a quantity of copper coin. After the wealth of nations had centred in Rome, the emperors displayed their greatness, and even their policy, by the regular exercise of a steady and moderate liberality towards the allies of the state. They relieved the poverty of the barbarians, honoured their merit, and recompensed their fidelity. These voluntary marks of bounty were understood to flow not from the fears, but merely from the generosity or the gratitude of the Romans and whilst presents and subsidies were liberally distributed among friends and suppliants, they were sternly refused to such as claimed them as a debt. But this stipulation of an annual payment to a victorious enemy appeared without disguise in the light of an ignominious tribute; the minds of the Romans were not yet accustomed to accept such unequal laws from a tribe of barbarians; and the prince [Gallus] who by a necessary concession had probably saved his country, became the object of the general contempt and aversion. The death of Hostilianus, though it happened in the midst of a raging pestilence, was interpreted as the personal crime of Gallus; and even the defeat of the late emperor was ascribed by the voice of suspicion to the perfidious counsels of his hated successor. The tranquillity which the empire enjoyed during the first year of his administration served rather to inflame than to appease the public discontent; and, as soon as the apprehensions of war were removed, the infamy of the peace was more deeply and more sensibly felt.

115

ajay 02.29.12 at 12:41 pm

As in the case of the U.S. debt to
Korea or Japan, were the balance of power at any point to shift, were
America to lose its military supremacy, were the gangster to lose his
henchmen, that “loan” might start being treated very differently. It
might become a genuine liability. But the crucial element would still
seem to be the gun.”

This seems a bit misguided. He seems to be arguing that the US gets to run up very large debts easily (or rather cheaply, which comes to the same thing) by using some sort of tacit threat to get people to keep lending.
The evidence for this would have to take the form of showing that countries which don’t have the same ability to threaten lenders get worse terms on their debt- that there is a sort of otherwise inexplicable hegemonic premium on T-bills compared to the debt of other large industrial economies like Germany or Japan. Is this the case? Not obviously.

116

hartal 02.29.12 at 6:30 pm

I haven’t checked the comments yet, and I need to reread the blog entry. But I am in a rush. Yet it seems that there has been no discussion of David E. Spiro (Robert Gilpin’s student) and Carla Norloff. Works by both these authors provide some support for the idea that military force has been a crucial factor in the dollar’s role as a reserve currency and the associated benefits of seigniorage Spiro tries to show that the US State ‘exchanged’ security services for Saudi pledges to purchase T-bills in the 1970s; Norloff argues that military power played a crucial role in the ascendance of the dollar.
Henry, have you read these books? Would love to hear your opinion

117

Tim Wilkinson 02.29.12 at 11:59 pm

OK so there’s this Euro theory (quite entertainingly and hardly at all irritatingly propounded by Rob Newman here) – that an important motive force behind the Iraq war was to prevent a widespread shift away from the petrodollar.

Presumably this is envisaged (as envisaged) as involving something like a domino effect, with initial success encouraging others directly as well as by strengthening the Euro. Iraq, Iran (which did go ahead with it, suffered only a cut internet cable), Venezuela (closer to the US, with recent memory of US military regime-change attempt, didn’t go ahead). Gadaffi would probably have been up for it at that time, and then who knows how much more of OPEC, as well as Euroland, Russia, who knows, Scandinavia? I dunno, and neither in 2000 would US strategists have supposed they knew.

None of this is far-fetched. But perhaps the suggestion that powerful US interests might have feared such an outcome enough to want war (or to pick out Iraq as victim) is. I don’t know. It’s one of those theories whose strongest recommendation is the hopelessly inadequate response.

Since I don’t think anyone is suggesting that US strategists imagined or invented such a threat, one easy refutation could be had by establishing that there wasn’t one. But I have never seen this done.

So is it the case that, say, half the world’s oil trade could have switched to the Euro without causing a major crisis in the US?

118

Tim Wilkinson 03.01.12 at 12:01 am

Or a substantial risk of a major crisis

119

Henry 03.01.12 at 12:22 am

hartal – Carla was a colleague (and next door neighbour) of mine in Toronto, but I haven’t read her book. My very rough sense of it (which could be wrong – happy to be corrected) is that it focuses on how US allies which benefit from its military strength have an increased incentive to back the dollar. This sounds a little like the Spiro argument, as you describe it (I’m not familiar with his work). It’s rather different of course from Graeber’s argument, which is that states pay tribute because they are terrified of the threat of being bombed if they don’t. FWIW, I am much more sympathetic to the Michael Hudson argument which Graeber cites to, without really developing , which is that if it weren’t for the US’s privileged position in the world economy, it would have a much tougher time borrowing the money that it needs to engage in large scale military adventurism. But this is about how US economic dominance supports military nastiness, rather than vice versa, and I think that the evidence is a fair bit stronger. Thanks for the refs.

120

Sebastian 03.01.12 at 1:34 am

“So is it the case that, say, half the world’s oil trade could have switched to the Euro without causing a major crisis in the US?”

Yes. Because the way prices work, we already have to deal with the fact that the euro and dollar compete with each other for buying oil.

121

Dan Hardie 03.01.12 at 1:59 am

Before I read Graeber’s twitter feed, I thought of him as an interesting and well-intentioned guy who’d written a book

122

Dan Hardie 03.01.12 at 2:05 am

Sorry- should read:
Before I read Graeber’s twitter feed, I thought of him as an interesting and well-intentioned guy who’d written a book I disagreed with. But unless he’s having a bad day on Twitter, he seems to be a genuinely nasty, and hysterical, character.

Pretty much his first moves with anyone who disagrees with him are to assume bad faith and demand an apology for the insults (non-existent, I would say) to which he has been subjected. His current hate figure appears to be Doug Henwood, who is not exactly a running dog of the plutocrats.

123

Tim Wilkinson 03.01.12 at 2:17 am

Sebastian @120:

“So is it the case that, say, half the world’s oil trade could have switched to the Euro without causing a major crisis in the US?”

Yes. Because the way prices work, we already have to deal with the fact that the euro and dollar compete with each other for buying oil.

I don’t understand what this means, particularly in relation to the specific issue of which currency oil sales were denominated in, i.e. petrodollars.

The Wiki entry for ‘petrodollar recycling’ has to be considered a bit suspect because of its very relevance to this theory, but I note in passing it has a reference to The hidden hand of American hegemony : petrodollar recycling and international markets, Cornell University Press, 1999 by the David E. Spiro hartal mentions above.

124

Tim Wilkinson 03.01.12 at 1:10 pm

Someone must know enough about this stuff to give a clear answer, backed either by credentials or a logos (or preferably both) here – I at any rate would like very much to know whether this lazy-algorithm refutation can be applied, or whether the theory merits further consideration.

So can anyone give a convincing confirmation that half, say, of the world’s oil trade could have switched to the Euro without giving rise to the substantial risk of a major crisis in the US?

125

Henri Vieuxtemps 03.01.12 at 2:18 pm

I don’t get this petrodollar thing. So, oil is priced in dollars, fine, but if I want to pay euros for it, I’m sure I can pay the equivalent in euros, no? And if I am forced to convert it to dollars, no one prevents Saudi Aramco to immediately convert them back to euros. So, what’s the issue?

126

ajay 03.01.12 at 2:38 pm

It doesn’t really matter directly what currency oil is priced in. But it does have an indirect effect to do with national FX reserves.

–Why do central banks have FX reserves?
–So they can spend them to prop up their home currency when it starts to fall.

–Why are a lot of these reserves in US dollars?
–Because if your currency falls against the US dollar, you’ll need to spend US dollars to prop it up again.

–But why is it particularly important to prop up your currency against the dollar, rather than, say, the naira?
–Because you probably have a lot of outgoings in dollars. All your imports from the US will be paid for in dollars. All your oil imports as well. And a lot of your debt repayments. If your currency falls against the dollar, all of these things will become more expensive. You probably don’t import quite so much that has to be paid for in naira, so you don’t have to worry so much about the naira climbing against your currency.
All this means that you’ll keep a lot of US dollars in your reserve. If oil starts being sold in euros, countries may rebalance their reserves away from the dollar and towards the euro, because it’ll become more important to protect their currency against a fall vs. the euro than it was before. Of course, if they still have lots of dollar debts and lots of other dollar imports, they’ll still need to keep a lot of dollar reserves – it’s not like they’ll desert the dollar completely.

–I see. So if countries started holding less dollars and more euros in their FX reserves, that would be really bad for the US?
–Good question. Opinion is divided on that. McKinsey reckons it’s pretty much a wash – http://www.mckinsey.com/Insights/MGI/In_the_news/Dollar_as_reserve_currency- the US benefits from seignorage on printing dollars for foreigners, and it’s nice to have everyone wanting to buy your T-bills, but then again having a high dollar means that US exports are more expensive to foreigners.

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cjcjc 03.01.12 at 2:38 pm

I assume the question boils down to whether there are “excess” holdings of US dollars simply because oil (NB oil is 15% of world trade, it’s big but it’s not that big) is conventionally traded and denominated in dollars and purchasers wish to hedge against adverse currency movements.
And if so what size they are.
Clearly the recipients of those dollars, the oil sellers, can switch their proceeds into whatever currency they wish.
Indeed it might be argued that they might wish to underweight dollars in their own currency reserves to hedge themselves against an unfavourable move in the other direction.

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cjcjc 03.01.12 at 2:40 pm

Sorry – I see ajay has given a similar but better answer.
FWIW I would agree with the McKinsey analysis.

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Henri Vieuxtemps 03.01.12 at 3:09 pm

Ajay 126, this sounds kind of naive, though. Granted, if you’re a banana republic with marxist rebels in the mountains, then yes, you’d probably want to have some reserves; not necessarily in dollars, but in some stable currency, or valuable commodity. Otherwise, assuming the FX prices are formed correctly, with everything factored in, the dollar is just as likely to raise against your currency as it is likely to fall. And so, it appears that is no good reason to stash dollars.

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ajay 03.01.12 at 3:23 pm

if you’re a banana republic with marxist rebels in the mountains, then yes, you’d probably want to have some reserves; not necessarily in dollars, but in some stable currency, or valuable commodity.

“You” in your example, though, is the government. You’re presumably thinking “if you suddenly stop being able to collect taxes because the rebels are shooting your tax collectors, or you need to buy more BAe Hawks and cattle prods, and no one is willing to lend you any money, then you might need a contingency fund”? – and you’re right.

But what I’m talking about is central bank FX reserves, which are different, and used for managing the exchange rate. You’re right of course that in theory the dollar is just as likely to rise as fall against your currency. And either way could be bad – the dollar rises and suddenly all your dollar imports become unaffordable, as I mentioned; the dollar falls and suddenly you can’t export to the US because they can’t afford to buy your stuff.

But if your currency is rising against the dollar, your central bank can cure that very easily – it just prints more of your currency and uses it to buy dollars. (It can print as much of your currency as it likes – it’s a central bank!) It’s only if your currency is falling against the dollar that the central bank is in trouble, because of course it can’t print dollars at will. It needs to have a stockpile of dollars that it can use.

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Henri Vieuxtemps 03.01.12 at 3:44 pm

This still doesn’t explain the magical power of the dollars in particular. You could, as well, stuff your vaults with Yens, for example. Or gold, for that matter. Anything of stable value.

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ajay 03.01.12 at 4:00 pm

This still doesn’t explain the magical power of the dollars in particular. You could, as well, stuff your vaults with Yens, for example. Or gold, for that matter. Anything of stable value.

Well, can you see that if your currency is falling against the dollar, the best and most direct way to reverse that is to go out and spend your dollars on buying lots of your currency?
If you go out there and buy up lots of your currency using yen instead, then your currency will rise against yen but it might still keep falling against the dollar – could be that all you achieve is to make the yen fall against the dollar too. Just because a currency is going up against one other currency, doesn’t mean it’s going up against them all.
Same holds for gold, for that matter.

Also, “stable in value” only has meaning when you have an answer to the question “value in what terms?” The dollar is entirely stable in value compared to other dollars. The yen and especially gold are not stable at all compared to dollars. Gold’s gone from $300 to $1800 over the last ten years or so. The yen’s gone up almost 50% in the last five.

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Tim Wilkinson 03.01.12 at 4:19 pm

(that link sans accidentally appended hyphen: http://www.mckinsey.com/Insights/MGI/In_the_news/Dollar_as_reserve_currency )

Thanks ajay, so not clear either way then, unless we might suppose those involved to be concerned predominantly with only one of those two aspects, e.g. not much bothered about exports (except poss oil exports).

My understanding of these arguments though is that it’s not just a matter of excess dollar holdings – there is the decision of e.g. Saud to recycle the petrodollars by buying US debt. I’m not quite clear on that either, but for this to support the Iraq theory would require that those who currently do this might stop doing so as a side-effect of switching to EUR (rather than for some other reason, even if that reason might in turn lead them to switch to the Euro).

If that is adequately clear.

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ajay 03.01.12 at 4:31 pm

Whoops, sorry about the link.

The Saudi US debt holdings may be related to the fact that the riyal is pegged to the dollar. Which makes sense for a country which is so dependent on a dollar-denominated export. If Saudi switched to selling oil for euros, it would presumably switch to a euro peg. I am really out of my depth here and so will appeal for help…

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Sebastian 03.01.12 at 5:22 pm

I’m still not understanding the underpinnings of the theory you’re trying to ask about. I suspect it is because the theory is ridiculous, but I suppose I could just not be getting it.

The fact that oil prices are denominated in dollars isn’t particularly demonstrative of anything at this point. They have to be denominated in someone’s currency or else you can’t name a price. You don’t want to use an unstable currency like the Zimbabwe dollar, because you’re trying to name a relatively fixed price. You need to use a fairly large currency, because there are going to be lots of the bits of money being exchanged. That would for example rule out using the Dutch guilder back before Holland used the euro.

So those basic needs argued strongly for the dollar, before the creation of the euro. After the creation of the euro, you could switch with one time costs hitting one side or the other of the transaction depending on currency rates at the time. The main problem with switching that I can see is that at or near the time of an announced switch, currency traders would try to take advantage of a temporary change in currency flows which would change the price in unpredictable ways for a short time (which violates the principle of trying to fix a price on the oil).

But for MOST of your wants, dollars and euros are interchangeable, so it doesn’t matter what you fix them in. The only major purchase I can think of that isn’t, would be if you were buying American military equipment. You probably need large numbers of dollars for that, but even then the dollars should be available in exchange for euros is you had euros.

You might also choose dollars if you felt they were going to be less volatile than euros, and if you were worried that dollars and euros might suddenly have a change in exchange rate because of that. But that worry is for your protection, not for the benefit of the US.

Oil is important to the story of Iraq. But in much more mundane ways, like the fear that a war with Iran or Kuwait or Saudi Arabia could disrupt the flow of oil, again.

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Henri Vieuxtemps 03.01.12 at 5:24 pm

Ajay. If your goal in life is to keep your currency strong vs the dollar, then yes, you need dollars. Still, if in 2002 you knew the future, you’d certainly be better off stockpiling gold, to exchange it for dollars, if/when you need them.

In any case, you probably don’t care about dollars that much; what you really want is to be able to buy oil and other stuff from abroad. As we already established, oil, while priced in dollars, can be purchased with any currency. Same is true, I’m sure, for all the other stuff. So, at any given time it would be logical for you to analyze world politics/economics, and stockpile whatever currency/commodity is likely to perform best. No? It seems logical.

The dollar has been losing value against most other currencies and commodities for about 10 years now. In the last few years trillions of new dollars have been printed. I find it hard to believe that your reasoning alone explains the practice of accumulating dollar-denominated paper in foreign central banks.

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ajay 03.01.12 at 5:36 pm

what you really want is to be able to buy oil and other stuff from abroad. As we already established, oil, while priced in dollars, can be purchased with any currency. Same is true, I’m sure, for all the other stuff. So, at any given time it would be logical for you to analyze world politics/economics, and stockpile whatever currency/commodity is likely to perform best. No?

A few points on this:

1) I think you’re still switching back and forwards (unintentionally) on what you mean by “you”. The entity that holds these reserves is the central bank – and central banks don’t consume oil. If you’re the central bank, therefore, you don’t really want to be able to buy oil and other stuff from abroad. You want to keep the currency at a level that will allow the citizens of your country and its government to buy oil from abroad, pay their debts, export profitably etc.

2) It’s not really true that oil etc can be purchased with dollars or any other currency. Oil can only be purchased with dollars. Dollars can be purchased with any other currency. The distinction is important because of what happens when exchange rates shift, as I say.

3) It definitely wouldn’t be logical for a central bank to try to pick winners in the FX and commodity markets as you suggest. Yes, “if in 2002 you knew the future, you’d certainly be better off stockpiling gold” – but no one knew the future. And you can’t beat the market, on average.
Also, you’re missing the point about what these reserves are for. They’re not sovereign wealth funds: governments aren’t holding lots of dollars becuase they reckon the dollar is going to rise, like an investor buying shares. The central banks are holding lots of dollars simply because they want lots of dollars on hand, for the stabilising reasons I described.

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Henri Vieuxtemps 03.01.12 at 6:02 pm

I don’t suggest that central banks should act as currency speculators. What I do suggest is that it’s hard to explain, along your lines, dollar’s magical powers. In fact, giving high preference to the dollar does sound like an attempt to beat the market.

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js. 03.01.12 at 6:31 pm

Ajay, thanks for these last set of posts; they’re quite helpful.

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Sebastian 03.01.12 at 6:32 pm

“In fact, giving high preference to the dollar does sound like an attempt to beat the market.”

On the contrary, for various reasons (my best guess is the fact it is one of the very few large modern currencies to have lasted as long as it has gives huge weight) giving a high preference to the dollar is exactly what the market does, so anything else is an attempt to beat the market.

You can argue that the market ought not give high preference to the dollar, but you can’t simultaneously argue that doing so is trying to beat the market.

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Henri Vieuxtemps 03.01.12 at 6:43 pm

You can argue that the market ought not give high preference to the dollar, but you can’t simultaneously argue that doing so is trying to beat the market.

Well, good, and this takes us back to Graeber’s thesis: is it really a some sort of neutral market that gives high preference to the dollar, or is it a man with a gun behind the dollar?

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john c. halasz 03.02.12 at 3:49 am

I thought it was generally agreed above that Graeber’s apparent account in terms of $ hegemony and militarily enforced “tribute” wasn’t literally correct. He’d gotten the melody wrong, even if not the overtones. The U.S. is/has been running a $ recycling operation, borrowing long and cheap from foreigners the $ it’s already exported, while its MNCs and hi-fi outfits invest at much higher returns abroad, especially by arbitraging the perennial discrepancy in ppp terms between developed and “developing” economies’ FX values. It’s by no means a far stretch from there to recognizing the U.S. military hegemony is partly motivated by the need to maintain the security of foreign investments and access to markets and resources abroad, ( even if the military-industrial complex might be also a “special interest” with a “logic” of its own with its perennial threat inflation of actual, potential or imaginary enemies, and even if the exercise of U.S. military power might be adventitious, erratic, self-stultifying or counter-productive), without claiming that military means are the sole implement for exercizing economic hegemony and enforcing debt-collection. Where Farrell goes “wrong” in his criticism of Graeber is in his apparent refusal to acknowledge that U.S. military might does generate a general atmosphere of “terror” for any regime that might think to actively challenge or oppose such an international economic order, (called the “Washington consensus” for good reason), and thus does indirectly relate to the ways in which debt contracts are enforced, and in his missing the point of Graeber’s calling kited $ “worthless”, since, indeed, their continued minting and kiting does imply U.S. $ devaluation eventually. And unless foreign $ holders agree to by U.S. exports, the only eventual use of their $ would be to buy U.S. “assets”, land, mines, companies, banks, etc. , which is precisely the outcome to be averted by further doubling down on the basic scheme.

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Cass 03.02.12 at 10:58 am

Fortunately (or unfortunately) Graeber’s thesis is about to be tested.

If he’s right, the US is heading for war with China – see today’s FT

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Tim Wilkinson 03.02.12 at 11:46 am

It’s by no means a far stretch from there to recognizing the U.S. military hegemony is partly motivated by the need to maintain the security of foreign investments and access to markets and resources abroad

But there’s no need to take any kind of stretch to get to that proposition, is there?

On the question of why – if they really do have any option in technical financial terms – the Arabians choose to recycle their petrodollars buying US debt: somewhere in that story is how the US rescued Kuwait from Saddam; and it may be worth recalling that the cock-up theory of how the US ‘accidentally’ gave S the green light for invasion rests solely on the implausibility of US perfidy (a rather flimsy foundation, I should say).

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cjcjc 03.02.12 at 12:06 pm

“It’s by no means a far stretch from there to recognizing the U.S. military hegemony is partly motivated by the need to maintain the security of foreign investments and access to markets and resources abroad.”

Absolutely.
Isn’t it obvious that China, Japan, Germany etc., which run large trade surpluses with the US, are forced to do so at the point of a gun.

(NB as a side note the US is closer than ever to energy self-sufficiency http://www.bloomberg.com/news/2012-02-07/americans-gaining-energy-independence-with-u-s-as-top-producer.html)

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Alex 03.02.12 at 12:40 pm

So, oil is priced in dollars, fine, but if I want to pay euros for it, I’m sure I can pay the equivalent in euros, no? And if I am forced to convert it to dollars, no one prevents Saudi Aramco to immediately convert them back to euros.

Yes. So the impact of changing the numeraire depends on the composition of oil-exporters’ imports. If Oilyland exports one good, oil, and receives dollars, obviously it does something with them. Let’s say it imports two goods, F-16s and Mercs, one of which is sold in dollar and one in euro terms. Obviously, it has to swap dollars for euros in order to cover the bill from Daimler-Benz. How much of its dollar income gets sold into the market for foreign exchange therefore depends on the import mix.

If we change this, so Oilyland receives euros, the net buy or sell of dollars resulting from this would be determined by the import mix. If it imported more F-16s than Mercs, it would have to be a bigger net seller of euros/buyer of dollars and the change would increase the demand for dollars. If it imported more Mercs, vice versa. (It’s probably worth noting that one of the biggest dollar-zone commodities is food, and Saudi Arabia imports masses of it. On the other hand, they’re hardly known for abstaining from euro- or yen-denominated manufactured goods or services.)

This is why the whole issue of “recycling” is important. The trade surplus on oil is very big compared to these countries’ economies, so they couldn’t practically spend it all on imports. That is to say, they export capital, or in a sense, they import foreign investments.

The original use of the word “petrodollar” referred not to the US paying for oil, but to oil exporters holding big dollar balances outside the US (i.e. like “eurodollars” a few years before that, the accumulated dollar surpluses of West European exporters held in London).

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Henri Vieuxtemps 03.02.12 at 2:30 pm

oil exporters holding big dollar balances

But, again, why should oil exporters hold big dollar balances? It takes 1 millisecond and has a close to zero transaction cost to convert your dollars into euros or yens or francs. Why do they choose to hold dollar balances; to buy, overwhelmingly, US T-bills; that’s the question.

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ajay 03.02.12 at 2:54 pm

What I do suggest is that it’s hard to explain, along your lines, dollar’s magical powers.

It doesn’t have magical powers. If I am the central bank of a country that doesn’t have much in the way of dollar-denominated imports, then I don’t really give a damn about what happens to the dollar. But most countries aren’t in this position. The dollar is a really widely used currency for international trade – in particular for oil – so you generally do need to worry about keeping your currency stable against the dollar. The dollar’s magical power is simply that lots of stuff is bought and sold in dollars.

It takes 1 millisecond and has a close to zero transaction cost to convert your dollars into euros or yens or francs. Why do they choose to hold dollar balances; to buy, overwhelmingly, US T-bills; that’s the question.

This is true at the small scale – the scale that all of us operate at – but not at the kind of scale that central banks operate at. We’re talking about tens or hundreds of billions of dollars here. That’s a significant share of total daily FX trading volume. You can’t make that kind of move without transaction costs and (more importantly) without moving the markets substantially.

Don’t forget, the problem this is all aimed at solving is “the dollar is too high against my currency”. You want to have a pile of dollars and use them to buy your own currency, in order to bring your currency up and the dollar down.
If your first step to solving this is to go into the market with your hoard of non-dollar currencies and try to convert them into dollars, you’re just going to drive the dollar higher!
Alex also makes the good point that this is more complicated and involves things like the balance between dollar imports and dollar exports, a point which I didn’t mention.

Why do they buy T-bills rather than other dollar-denominated assets? Because T-bills are the safest dollar asset available.

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cjcjc 03.02.12 at 2:58 pm

“Why do they choose to hold dollar balances; to buy, overwhelmingly, US T-bills; that’s the question.”

Part habit.
Part what is available in size – there are lots of US treasuries to buy!
And until relatively recently there wasn’t a rival ‘reserve’ candidate.
Not that it looks like the euro is one any more, if it ever was.
Nonetheless they are diversifying, as is everyone else.

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cjcjc 03.02.12 at 2:59 pm

Whatever the reason it isn’t / wasn’t fear of US military attack.

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Henri Vieuxtemps 03.02.12 at 3:06 pm

The oil sheiks, I think they do buy other assets, invest in businesses. To the tune of a trillion bucks, just for the Saudis, IIRC. And that gives them a stake in the government enterprise as well.

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ajay 03.02.12 at 3:07 pm

his apparent refusal to acknowledge that U.S. military might does generate a general atmosphere of “terror” for any regime that might think to actively challenge or oppose such an international economic order, (called the “Washington consensus” for good reason), and thus does indirectly relate to the ways in which debt contracts are enforced

The problem here is that it’s difficult to point to a recent case where a government has threatened to default on its debts and been met with US military action. Ecuador defaulted a few years ago, but not a single Marine has landed. Greece is defaulting right now and the Sixth Fleet is idle. Invasion wasn’t even part of the conversation in either case. Meanwhile, the US military potters around threatening and invading countries that either don’t really have significant debts to the US or weren’t threatening to default on them, like Iraq and Afghanistan and Grenada and Iran and Panama.

Now, things used to be different – invading people in order to force them to pay their debts was a popular pastime back in the 19th century. But it doesn’t really happen nowadays – debt is a means, rather than an end, in foreign policy, as Anthony Eden could tell you.

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Henri Vieuxtemps 03.02.12 at 3:09 pm

Whatever the reason it isn’t / wasn’t fear of US military attack.

Could be the fear of Israel’s military attack. Or maybe, in some places, the attack (military or CIA) had already happened, puppet government has been installed, and now it’s just a question of maintenance.

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ajay 03.02.12 at 3:09 pm

The oil sheiks, I think they do buy other assets, invest in businesses. To the tune of a trillion bucks, just for the Saudis, IIRC. And that gives them a stake in the government enterprise as well.

OK, I think that when you say “Saudis” you are conflating the Saudi central bank, the Saudi government and its SWFs, and the Saudi people. Same confusion as earlier (#137). The Saudi central bank isn’t putting $1 trillion into business investments.

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ajay 03.02.12 at 3:11 pm

Could be the fear of Israel’s military attack

No, it isn’t. Dubai is supposed to be worried about being attacked by Israel if it doesn’t put lots of money into T-bills? That’s not even remotely plausible.

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Henri Vieuxtemps 03.02.12 at 4:04 pm

Meh, I don’t think Saudi central bank is that much firewalled from Saudi oligarchs. Or, for that matter, any central bank from its national oligarchs.

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Alex 03.02.12 at 4:26 pm

But, again, why should oil exporters hold big dollar balances?

It’s worth remembering that the whole issue didn’t emerge five minutes ago. In 1970, you couldn’t do a multizillion forex trade in milliseconds. So, if you received USD from your customers, you had little choice but to run a substantial float of dollars. Up until the late sixties, dollar liquidity tended to end up back in the US as a matter of course. After that, you had a market for dollar investments outside the US (the eurodollar market), and this rapidly growing pool of dollars outside the US Treasury or the Fed’s control became an important factor in the globalisation of finance.

But this wasn’t because the US had gained *more* control over the financial system. We went from $35=1 oz of gold and everyone else on a crawling peg linked to that, pretty obviously a system of undoubted US final control of monetary policy, to an all-floating system.

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ajay 03.02.12 at 4:32 pm

Meh, I don’t think Saudi central bank is that much firewalled from Saudi oligarchs. Or, for that matter, any central bank from its national oligarchs.

If you mean firewalled in terms of influence, sure. But stopping runaway movements in exchange rates is pretty much what those oligarchs want the central bank to do. It’s what central banks are for and it’s why they need dollar reserves. If the oligarchs want to invest in US bonds, either because they think it’s a good risk/return proposal or because they want to demonstrate submissiveness to the Mighty Hegemon or whatever, they do it through central banks.

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ajay 03.02.12 at 4:34 pm

DON’T do it through central banks, sorry

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Phil 03.02.12 at 5:02 pm

Damn, they got ajay! Between two comments, too.

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Henri Vieuxtemps 03.02.12 at 5:10 pm

Alright, I now officially declare it not a tribute system. Over and done. …but I still have my doubts.

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ajay 03.02.12 at 5:14 pm

Well, not so fast Henri. I think one could make some very good points about how US military power turns into economic power in a tribute kind of way. I just think that CB FX reserves aren’t a good example of that – they’re an example of economic dominance affecting other countries’ behaviour (possibly) to the benefit of the dominant power.

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Henri Vieuxtemps 03.02.12 at 5:35 pm

Well, I think a pretty good empirical case against the thesis is that Russia is up there, next to the Saudis:
http://en.wikipedia.org/wiki/Foreign-exchange_reserves#List_of_countries_by_foreign_exchange_reserves

The Russians really shouldn’t have any extraordinary incentive to stockpile it, or at least I can’t imagine what it would be.

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Henri Vieuxtemps 03.02.12 at 5:38 pm

…oh, actually, I take it back: those are not dollar-denominated reserves, just reserves. Damn, the doubts remain…

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Neville Morley 03.02.12 at 6:15 pm

I want a ‘Like this Comment’ button for #160.

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geo 03.02.12 at 6:34 pm

ajay@162: I think one could make some very good points about how US military power turns into economic power in a tribute kind of way.

Would you make them, for the benefit of those of us who are always looking for things to blame America for?

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Henri Vieuxtemps 03.02.12 at 7:24 pm

Here’s the table, if anyone cares:
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

Belgium got 135 billion, the Netherlands 19, what’s the deal with that?

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Henri Vieuxtemps 03.02.12 at 7:31 pm

…but of course Belgium and the Netherlands can’t leverage their currency, so this must be something else.

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