by Kabir Sehgal
In Brains We Trust
Thanks to the research of many neuroeconomists, the black box of the brain isn’t so mysterious anymore. We have a better understanding of how the mind processes financial decisions. But the question remains: Will these neurological insights help economists make more accurate forecasts? Neuroeconomists can predict financial choices based on what is happening in the brain. It might follow, then, that the market, which is composed of many minds, could be forecasted in a more accurate manner.
Though neuroeconomics is still in its early stages, some reputable traditional economists have taken notice. Yale economist Robert Shiller says that a “neuroeconomic revolution” will reshape economics. University of Minnesota economist Aldo Rustichini echoes these sentiments: “This new approach, which I consider a revolution, should provide a theory of how people decide in economic and strategic situations. So far, the decision process has been for economists a black box.”85
But few economists have actually incorporated neuroeconomic insights when building their forecasting models. I’ve never seen a Wall Street economist or research analyst account for neurological insights in their predictions. Leading neuroeconomist Colin Camerer explains: “I would say that neuroeconomics is about 90 percent neuroscience and 10 percent economics. We’ve taken a lot of mathematical models from economics to help describe what we see happening in the brain. But economists have been a lot slower to use any of our ideas.”86
In 1947, economist Paul Samuelson published Foundations of Economic Analysis, which served as an intellectual foundation of the efficient or rational market theory. In 2010, neuroeconomist Paul Glimcher published Foundations of Neuroeconomic Analysis, which, he hopes, will prompt economists to include neurological insights in forecasting models. He writes that, indeed, “economics is, in the words of the 19th-century economist Thorstein Veblen, finally becoming an ‘evolutionary science,’ and that science has already shown itself to be a powerful tool for understanding human behavior.”87
Maybe it’s just a matter of time until economists incorporate findings from neuroeconomics. After all, in 2013, Alan Greenspan wrote in his book about his epiphany, which echoes what neuroscientist Jonathan Cohen said ten years before, in 2003, “Most economists don’t base their theories on people’s actual behavior. They study idealized versions of human behavior, which they assume is optimal in achieving gains.”88 However, some economists dismiss the field, arguing that brain scans reveal which neurons are firing and not why, and neuroeconomic studies haven’t been able to predict human behavior writ large.89
But that is changing. The Chronicle of Higher Education highlights a study in which the brain scans of teenagers were used to predict an increase in music sales.90 Researchers found a correlation between activity in the nucleus accumbens of participants and album sales across the country.91 The findings, in the words of the researchers, “suggest that the neural responses to goods are not only predictive of purchase decisions for those individuals actually scanned, but such responses generalize to the population at large and may be used to predict cultural popularity.”92 If neuroeconomists can forecast retail music sales, one day they may be able to predict stock prices, or at least provide more color as to why a market is performing in a particular manner. Glimcher says, “If we had access to that data, when people pick stocks, can these models predict macro-level changes in stock prices from individual-level models of agents picking stocks…? There’s reason to believe it might work.”93 It will take more time for insights from neuroeconomics to be absorbed into economic models. But neuroeconomics has already enriched our understanding of money.
As our brains enlarged, we became aware of the benefits of cooperation, creating tools like money to facilitate it. But money isn’t just the output of reason and logic. We also gained the capacity for complex thoughts, turning tools like money into symbols of value that are imbued with emotional meanings. Without knowing what’s happening in the brain, economists long made assumptions about human behavior, and, implicitly, about how the mind processes money. But with the advent of brain imaging technology, we can look at the mind in the mirror and better understand its ways. We’ve come to learn that the way in which we use money is influenced by a range of factors, including emotions and genetics.
But there are other things that shape how we think about and use money—like social norms, cultural rituals, and societal beliefs. Despite our physiological similarities, humans think of money in different ways. Our quest to understand money, then, must account for this variety, so we will move from studying the brain to surveying the social one, the “super-brain” of society. Without a doubt, the one thing I’ve learned from my research regarding the idea of money is that everyone has their own.
CHAPTER THREE
So in Debt
The anthropology of debt
I don’t do favors. I accumulate debts.
—Sicilian proverb1
The gift is to the giver, and comes back most to him—it cannot fail.
—Walt Whitman2
Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
—Charles Dickens3
A Native American potlatch ceremony in British Columbia.
When I lived in London, there was this guy I knew. Tall, handsome with a faint hint of a unibrow. He joined my buddies and me for drinks after work. One by one, we took turns signaling the bartender and logging an order of four pints of Guinness. After downing a few and feeling slightly wobblier, we were ready for one last round. Everyone gazed in the direction of the only person not to have paid for a round, this guy.
A friend asked him, “Can we get another round?”
“Sure, but I’m not paying for it.”
Awkward silence.
After determining that this guy wasn’t kidding, the same friend concluded, “That’s weak, mate. I’ll get the last round.” And on went the conversation. But this guy had turned into that guy—the one who doesn’t cover a round of drinks for friends.
That guy, I must admit, was me.
I ran this crude social experiment in the friendly confines of a local pub to see what happens when there’s a gross violation of an implicit agreement to pay. Of course I ended up paying for a round of drinks, joking away my previous remark. But for a few moments, I moved from being a stand-up guy in the eyes of my pals, taking part in a social ritual, to being a freeloader, abusing the generosity of others.
There is no law written anywhere that says you must buy the next round of beers. But most of us know what’s expected. My friends and I were engaging in an exchange as primitive as it is modern: accepting a gift and reciprocating the favor; incurring a short-term debt and repaying it later. The use of money, in this case, was governed by the social mores of our little tribe.
Money is interpreted differently across the world, in various parts of the “super-brain.” The ways in which people use money reveal how they conceive of it. Anthropologists have trekked to distant corners to study the uses of money, discovering unusual practices and documenting how money plays an important role from birth to death. In India, money is given to newborn babies and their parents. In Japan, money is gifted to newly married couples.4 In Nigeria, many corpses are buried with money.5 Money marks many important moments of our lives and in countless ways.
Despite the numerous ways in which money is used today, it functions universally as an instrument to settle debts. Printed on the dollar bill is written as much: “This note is legal tender for all debts, private and public.” Dollars are issued by the Federal Reserve, and they show up as a liability on the Fed’s balance sheet. The collateral that backs the bills is found on the asset side of the balance sheet. These assets are mostly securities issued by the US Treasury and federal agencies.6 In other words, dollars are obligations of the US government, and they are backed by the debt of government institutions and
the faith of the government. In the current US monetary system, money and debt cannot be disentangled.
Those little words printed in black ink are also a reminder of money’s alternative past. For centuries, economists have contended that bartering was the precursor to money. But there was actually another financial instrument in wide circulation: debt. Thousands of years before the invention of coinage, there were interest-bearing loans in ancient Mesopotamia. Debt was the forerunner of money. Today we may see money and debt as two different things, but they share a common origin. That the dollar is a liability, an obligation of the Federal Reserve, reveals how fundamental lending and borrowing have been throughout man’s history.
That’s because debt isn’t just a financial obligation, it’s a social one. In this chapter I use an anthropological approach to examine both types of obligations. I examine different spheres of debt exchange: (1) the familial sphere, the basis of the gift economy; and (2) the commercial sphere, or the foundation of the market economy.7 I focus more on the gift economy because it’s more nuanced and open to interpretation. But it ends up shaping our perceptions of money, and even influences how we view our friends and family.
It’s evident that auto loans and mortgages are financial debt instruments with listed prices found in the market economy. It’s less clear how to quantify a social debt or credit brought on by receiving or giving a gift. The practice of gift exchange, enacting a social debt, can be found in most cultures, from the intricate gifting culture of East Asian countries to gifting a friend a beer in East London.
Regardless of which sphere one finds it in, debt brings with it a sense of obligation. For as long as we’ve been around, we have taken on debts, both social and financial, and have been obliged to honor them. And obligations have moral overtones. Not to reciprocate a gift like a beer can be interpreted as breaking an implicit, unspoken social understanding. Not to repay a loan breaks a contractual agreement. Not to honor thy debts is wrong. To reciprocate and repay is to make good. Then again, it’s also wrong to take advantage of people through usury and predatory loans. I save the religious strictures on debt for another chapter, and instead focus on what happens when a social debt is computed as a market one. This can result in the dark side of debt, using money as a bludgeon to control others.
An Alternative Origin
In most introductory economics classes, the history of money goes something like this: Once upon a time, in a land far away, people bartered goods, but sometimes each party didn’t have exactly what the other wanted, so they invented money. You can trace this line of thinking to Aristotle and classical economists like Adam Smith, who contended that a division of labor led to more specialized tools, which necessitated money to facilitate increasingly complex trades. Adam Smith writes in The Wealth of Nations:
The butcher has more meat in his shop than he himself can consume, and the brewer and the baker would each of them be willing to purchase a part of it. But they have nothing to offer in exchange, except the different productions of their respective trades… In order to avoid the inconveniency of such situations, every prudent man in every period of society, after the first establishment of the division of labour, must naturally have… a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry.8
Smith goes on to say that through exchange, commodities such as nails in the Scottish Highlands became early currencies. And over time, these commodities were replaced with small pieces of precious metals. My evolutionary biological investigation into the origin of money even supports this notion that bartering commodities, perhaps food items and hand axes, paved the way to using money. A romanticized, simplistic notion of tit-for-tat bartering seems to be a forerunner to monetary exchange: Here’s three silver coins, and good-bye.
However, writing in the Banking Law Journal in 1913, a British economist questioned this theory. Alfred Mitchell-Innes asserted that there is no historical proof for Smith’s axiom, and that it is, in fact, false. He notes that Smith’s example of nails was even debunked by William Playfair, an editor of The Wealth of Nations. The nail makers were poor. The makers had to rely on suppliers to furnish them with the raw materials to make the nails. The suppliers also provided credits to the makers for bread and cheese while they were making the nails. The nail makers were in debt. When the nails were completed, the nail makers paid back the suppliers with the nails.9 Mitchell-Innes writes, “Adam Smith believes that he discovered a tangible currency, [but] he has, in fact, merely found—credit.”10
His paper received a modicum of attention, though it did receive plaudits from economist John Maynard Keynes. But it was long since forgotten for almost a century. It resurfaced in the twenty-first century, when notable economists like L. Randall Wray and anthropologists such as David Graeber saw its merit. Wray asserts that money and debt may be one and the same—that money is simply a measure of debt.11 In Graeber’s book Debt: The First 5,000 Years, he draws attention to the work of several anthropologists who have studied barter. One of them is Caroline Humphrey of the University of Cambridge, who writes, “No example of 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.”12 Graeber connects the dots, saying that this lack of proof calls into question the conventional theory of how money originated. And it suggests such a foundational theory as to how money developed is a myth.13
However, before dismissing bartering-led-to-money entirely as myth, Graeber provides a bit of nuance. Indeed, many folks have bartered as a means of exchange, swapping one good for another. But it’s usually with strangers—someone you may not ever see again, so the goods must be something of value.14 I once bartered a beer in exchange for someone buying me a ticket to a baseball game. The cashier didn’t accept credit cards, so the guy behind me paid for me with cash, and I promptly went to the first restaurant at the stadium and bought him a cold one with my credit card. To barter with someone you know may suggest a deficit of trust. Why not do a deal on credit? That requires confidence and faith, as the Latin root of credit means “to believe” or “to trust.”
Not trusting your counterparty, not doing a deal on credit, can introduce a competitive aspect to bartering, in which barterers try to seize the upper hand. Graeber mentions the Pukhtun men of Pakistan, who barter with nonrelatives. They swap items in similar categories, like a shirt for a shirt. They also swap items of different categories, like donkeys for a bicycle. Winning a trade, getting the more valuable good, is reason to crow.15 They aren’t following the first step of Tit for Tat. They’ve assumed there won’t be a second iteration of the game and are content to maximize the gain on the first move. In a credit system, the first move requires trust and cooperation.
Graeber, like Mitchell-Innes, asserts that before there was money, there was debt. Interest-bearing loans first appear in ancient Mesopotamia, thousands of years before the invention of coinage in the Kingdom of Lydia. In Mesopotamia, those who worked in temples, palaces, and prominent households calculated loans based on the prices of commodities like silver and barley. It also turns out that putting beers on a bar tab is an age-old practice, common in ancient Mesopotamia as well.16 He ultimately concludes that debt predated or at least developed simultaneously with money. Given the historical importance of debt, it’s necessary to understand its various dimensions.
Debts of a Different Type
In West Africa, it’s forbidden to exchange cloth for yams. In the Solomon Islands, it’s prohibited to trade taro for turmeric.17 These peculiar rules are examples of spheres of exchange, in which items are assigned to a category and can be traded with items of the same category but not those in another group. Several cultures draw distinctions between spheres of nourishment and those of material goods. For instance, Tiv people of Nigeria have three spheres of exchange: (1) food items like grains and vegetables; (2) more
lasting, prestigious items like brass rods and horses; and (3) “dependent persons” like children. The Siane people of New Guinea also have three spheres: (1) food items like bananas and taro; (2) luxury items like tobacco and nuts; and (3) ornaments like seashells and headdresses.18 To mix spheres not only demonstrates ignorance but can also be insulting, as if you’re trying to take advantage of the person with whom you’re trading.
To transact smoothly in any society, it’s important to know what’s exchangeable for what: You don’t exchange a Bentley for a hug (but you might give someone a hug if they give you a Bentley). There are different spheres of debt exchange in contemporary societies. Consider these two exchanges:
1. Miriam invites you over for a home-cooked meal of honey barbecue meat loaf.
2. You agree to a fixed-rate mortgage to finance payment on a new house.
The first exchange is in the familial sphere, with friends and family outside the marketplace. Because of Miriam’s generosity you feel an obligation to reciprocate with a benevolent gesture of your own, like bringing a bottle of Petite Sirah wine, writing her a handwritten thank-you note on embossed stationery, or inviting her to a summer picnic in Central Park sometime in the future. The gift, the transfer of wealth or valuable goods, is only one part of the exchange. Also being exchanged may be respect, thanks, admiration, or a range of other things. This gratitude-induced obligation serves as the basis of what’s known as the gift economy, found in ancient and contemporary societies all over the world.
