Common attributes of sector bubbles

“In a 2016 paper called Bubbles for Fama, economists Robin Greenwood, Andrei Schleifer, and Yang You identified a set of common attributes across 41 different sector bubbles in U.S. stocks going back to 1928. Among the recurring themes: A sharp increase in volatility, a sharp increase in share issuance, a preference among investors for new firms and an accelerating slope of the rally.”

-From Joe’s note in the Bloomberg Open email

Why Economics started in 1776

-Money and trade had been around like, forever, so why did we only get a discipline of Economics in 1776?
-We needed government policy creating markets, like England was doing at the time. Beyond laws and police, they were also implementing monetary policy pegging the value of currency to silver but by only “pegging” and not directly using, they were also greatly increasing the money supply
-That required careful regulation of the banks supplying paper money. France and Sweden had already tried creating state-supported central banks, but they failed because they let the currencies get too speculative. So theorists of Smith’s day felt pegging money to precious metals was the answer

Why do they cling to barter?

-Smith’s goal was to create a Newtonian Physics of economics. Concept of a separate sphere called “The Economy” was relatively new in his day, and he wanted to show that it operated by rules like physics
-Newton was a Deist, believed in a clockmaker god who set the universe in order, Smith wanted to show the same thing. This is the “invisible hand” of the market
-This assumption of a kind of divine providence behind the market depends on a voluntary contract type model of exchange, in which all trades are barter for mutual advantage.
-So basically the fundamental belief of modern economics depends on viewing The Economy as a sphere of mutually beneficial trades orchestrated by a divine invisible hand. Allowing the more human relationships into this model raises questions about the divine perfection of it all.

Real uses of barter: when money fails

-The real uses of barter come when people who were used to money don’t have much of it anymore. Like immediately post-Soviet Russia or Argentina in 2002. Or in POW camps and prisons.
-Early medieval Europe after the collapse of the Roman Empire, and again after Carlingian empire collapsed. People keep accounts in the old imperial currency, even though they no longer have the coins.
-Adam Smith’s examples all come from societies where they did use money as a unit of account, but since it was slightly scarce they would trade in goods until it was more available.

“The law making tobacco legal tender in Virginia seems to have been an attempt by planters to oblige local merchants to accept their products as a credit around harvest time.”

pg 37-8

More real early economics

We’re starting with two imaginary people from an early section. Josh who has shoes but needs potatoes, Henry who has potatoes but needs shoes.
-If they were Iroquois, Henry would tell his wife he needs shoes, his wife would tell the other matrons, and if they approved he’d get some shoes from the community stockpile. To each according to his needs, basically
-If they were in a small, intimate community, Henry would tell Josh his shoes were nice, and Josh would give them to him. The potatoes wouldn’t enter in because both would assume that if Josh ever needed potatoes, Henry would give him some.
–One interesting little aside, particularly nice things thus get passed around a lot, since people compliment them and then are given them. But if you really want to keep something, you say it was a gift.
-Even in a fairly large, impersonal town, Henry’s wife would strategically mention he needs shoes, Josh’s wife would get him to give Henry the shoes, and then Henry owes Josh “one,” which Josh would call in when he needed/wanted something from Henry.

“In any of these scenarios, the problem of ‘double coincidence of wants’ so endlessly invoked in the economics textbooks, simply disappears. Henry might not have something Joshua wants right now. But if the two are neighbors, it’s obviously only a matter of time before he will.

This in turn means that the need to stockpile commonly acceptable items in the way that Smith suggested disappears as well. With it goes the need to develop currency. As with so many actual small communities, everyone simply keeps track of who owes what to whom.”

pg 34-36

The fundamental misconception of economics

“For there to even be a discipline called ‘economics,’ a discipline that concerns itself first and foremost with how individuals seek the most advantageous arrangement for the exchange of shoes for potatoes, or cloth for spears, it must assume that the exchange of such goods need have nothing to do with war, passion, adventure, mystery, sex, or death.”

“Economics assumes a division between different spheres of human behavior that, among people like the Gunwinngu and the Nambikwara, simply does not exist. These divisions in turn are made possible by very specific institutional arrangements– the existence of lawyers, prisons, and police– to ensure that even people who don’t like each other very much, who have no interest in developing any kind of ongoing relationship, but are simply intersted in getting their hands on as much of the others’ possessions as possible, will nonetheless refrain from the most obvious expedient (theft).”

pg 32-33

Real History of Not Bartering

-Six Nations of the Iroqouis: main economic institution was longhouses where goods were stockpiled and alloated by women’s councils. Nobody traded arrowheads for slabs of meat.
-“The definitive anthropological work on barter by Caroline Humphrey, of Cambridge, could not be more definitive in its conclusions: ‘No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing.'”

Smith’s Founding Myth of Economics

“What, he begins, is the basis of economic life, properly speaking?”
-“certain propensity in human nature… the propensity to truck, barter, and exchange one thing for another. Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog.” But humans always swap and compare things. Even logic and conversation are forms of trading, and “humans will always try to seek their own best advantage, to seek the greatest profit they can from the exchange.”
-Drive to exchange creates division of labor and thus civilization
-People naturally specialize into what they’re better at, and then they end up with surpluses. But if the other people in their societies don’t have the right surpluses to trade, everyone’s fucked. “So everyone will inevitably start stockpiling something they figure that everyone else is likely to want.” Which then makes that commodity even more valuable. Yadda yadda yadda, precious metals, yadda yadda yadda, currency.
-This creates the notion of “the economy” as a separate sphere of human life. It’s where trading takes place

pg 25-8

History of Myth of Barter

-Adam Smith used it in 1776 to create discipline of economics as a moral philosophy professor
-Aristotle used it in 330BC, speculating that families must have started by producing everything they needed themselves, then gradually specializing and trading, so money naturally developed to make trade easier
-During age of exploration barter stories disappeared because everyone was discovering old-fashioned tribes and weren’t none of them bartering. “Most sixteenth- and seventeenth- century ravelers in the West Indies or Africa assumed that all societies would necessarily have their own forms of money, since all societies had governments and all governments issued money.”
-Back to Smith: he vigorously objected to idea governments create money. Following in John Locke’s footsteps. Locke thought Govt begins in need to protect private property and operates best when limited to that. Smith added that property, money, and markets were older than political institutions, and were the very foundation of human society. If govts “should play any role in monetary affairs, it should limit itself to guaranteeing the soundness of the currency. It was only by making such an argument that he could insist that economics is itself a field of human inquiry with its own principles and laws– that is, as distinct from, say, ethics or politics.”

pg 24-5

Myth of Barter

“Just about every economics textbook employed today sets out the problem the same way. Historically, they note, we know that there was a time when there was no money. What must it have been like? Well, let us imagine an economy something like today’s, except with no money. That would have been decidedly inconvenient! Surely people must have invented money for the sake of efficiency.

The story of money for economists always begins with a fantasy world of barter. The problem is where to locate this fantasy in time and space”