Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Credit, money and sociopaths

Early in my career, I read Homer and Sylla’s A History of Interest Rates and learned that credit predates money and probably predates barter. As a finance professor I was thrilled to read a top notch economic historian like Richard Sylla say that finance predates economics: barter is economics, even money is economics, but credit is quintessential finance. No wonder that decades later I still love this book. In a blog post last year, I recommended Homer and Sylla as the one book on financial history that we should all read.

Of course, I did worry whether Homer and Sylla were right or were merely making a casual remark, but the other books that I read (for example, Polanyi, Trade and Markets in the Early Empires) confirmed the primacy of credit over money and barter. In the anthropological and sociological literature, there appeared to be a consensus on this issue.

So long as this account was confined to obscure books read only by a technical audience, there was no great controversy about it. But then, David Graeber wrote a book entitled Debt: The First 5,000 Years and more importantly talked about it in the widely followed economics blog Naked Capitalism. Austrian economists in particular were very upset with him and criticized him only to climb down subsequently. In his latest post at Naked Capitalism, Graeber provides a detailed description of how credit was transformed into money.

The post is worth reading in full especially the passage where Graeber writes that “Homo Oeconomicus … is … an almost impossibly boring person—basically, a monomaniacal sociopath who can wander through an orgy thinking only about marginal rates of return”. I entirely agree with this but in a way very different from what Graeber intends. The only way to succeed in finance is to assume that the other person is a monomaniacal sociopath; and that is true whether you are doing high frequency trading or negotiating with the people who borrowed your money years ago but are unwilling to repay it now. As for orgies, anybody who has seen a trading room (or read about it in books like Liar’s Poker) knows that such minor distractions do not impede the true sociopath’s ability to concentrate on making as much money as possible off the other person.

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3 responses to “Credit, money and sociopaths

  1. Gopal Balakrishnan September 14, 2011 at 8:26 pm

    hello sir,
    The only way to succeed in finance is to assume that the other person is a monomaniacal sociopath

    but isnt assuming that the other person is a monomaniacal sociopath put the thinker in the same bucket?

    And if so and if all participants are trying to make money off each other and even if there aren’t any naive ones around isn’t any market at best a zero sum game? What am I missing here sir?

    • Jayanth Varma September 16, 2011 at 10:47 am

      “isnt assuming that the other person is a monomaniacal sociopath put the thinker in the same bucket?”.

      No! It just means that as a consumer, one adopts a healthy sceptical and alert attitude. It means assuming that you are the only person looking after your interests – nobody else can be relied upon to do that on your behalf.

      “if there aren’t any naive ones around isn’t any market at best a zero sum game?”

      Yes. It is true that no market survives for long if it consists only of professional operators. Every successful market relies on a balance of consumers (for whom the market serves a genuine need for hedging, liquidity, investment or something else and are therefore willing to pay for the service) and professionals who make money by providing this service to the consumers. If the consumers are alert and careful, they may end up paying a reasonable cost for these services; otherwise, they will get ripped off. But the important point is that you cannot assume that a person who looks like a genuine consumer is not actually a professional disguising himself as a consumer to rip you off more easily.

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