Thursday, January 24, 2013

Debt: The First Two Billion Years

What  is debt?   The word is only one syllable, only four letters, but it packs an entire world of  significance and complexity that few other words do.  In the modern world debt is synonymous  with money. But if we stop at money, we are not doing the concept of debt justice, for it goes far deeper than money in both human and evolutionary history.

I think we need to look at debt as a more universal concept that includes all of life.  I see debt as an ever-changing balance between the present and the future.  If too much of what is present is consumed then debt grows too high and the  future is undermined.  If not enough of the present is taken  then we die before we even start.  There must be a balance.

OK, forget the metaphor.  What is it really? Debt is an obligation owed by the "debtor" to the "creditor".  It is an agreement, a contract, that rests on  legal  definitions of property and human rights. This  presupposes human society, governments, associations, and markets,  language, memory, and human intentions, and the ability of legal institutions to enforce those rights.  Debt exists over time periods that are bound by human events. In these time periods debts can be paid down, renegotiated, forgiven, kept in perpetuity, processed into derivatives, and  can even create a global financial meltdown.

The growth of debt and money are not subject to physical laws but to conceptual laws, ie, mathematics because symbolic concepts are what humans use to communicate and make agreements.  Since debt is not tied to physical laws it can, in theory, grow exponentially.

If humans went extinct there would be no debt, the debt would be paid, so to speak. So debt is ultimately bound by human mortality.  There are limits to the growth of debt therefore.  And human action depends on the existence of the Sun, the Earth and earth, as in dirt and rocks.  These are all finite although Economics treats them as virtually infinite as if they were contained within the human economy.  This is a fatal error, meaning the science of Economics needs to pull a 180.

Why do humans have debt, while other critters don't?   Maybe debt is a biological subject too.   What is the Darwinian explanation?  Let's go back to the metaphor - "an ever-changing  balance between the present and the future"  Every critter has some form of it:  Invest energy now to keep predators at bay in order to survive and pass on descendants; Consume too much and die back;  Exist in symbiosis with the eco-systems and maintain descendants;   Grow too big, too fast and run out of resources; Migrate to other continents, but eventually run out of eco-systems to destroy, then go terminal.

What I'm getting at is that while debt is a purely human invention, it's meaning and  history have a "biological" continuity.  We use debt in human society to finance investments that we expect to pay off in the future and to help pay for emergencies  All living things sometimes borrow from the future to keep from starving and being eaten.  As long as they succeed in balancing the present and the future they can keep on going, if not, not.   There are a lot of dumb ways to die.
Humans are known for being smart and problem solving.   Humans evolved the capacity to cooperate and share information.  That's what made language, technology and the economic system of trade and markets possible.

There is an ancient association of debt to morality.  The code of Hammarabi stated:  " an eye for an eye, tooth for a tooth."  This is moral reciprocity:  if I struck out your eye you could strike out my eye in retaliation.  The concept of punishment derives from this moral sense -  You do something wrong, and you have incurred a debt which gets repaid by a punishment.  When something goes wrong it has to be righted.  There is a balance.  the goddess of Justice with her scales exemplifies this moral sense of debt.

This derives from the need, in human society to  balance  individuals and groups.  Groups are what makes humans superior to other animals, but individuals are the source of variation.  Without individual variations populations cannot adapt to environmental changes and they go extinct.  But individuals can take advantage of group sharing and cooperation by free-riding without contributing to the group.

 Moral rules and religion are ways that groups control individuals, so that individuals are, for the most part, prevented from taking advantage of the group as a whole. If this were not the case, then groups would have fragmented long ago and humans would have lost out to other primates.

Primate societies operate on dominance relations.  One's ability to reproduce is reflected by one's social dominance.  This creates a social order but it leaves a lot of potential unrealized.  In human societies people are infinitely more cooperative.  Compared  to all other animals, only humans care for dependents for extended lengths of time.  The idea that  we owe a debt to our parents or to society has been around for a long time.  It reflects the time we have spent being fed and cared for before we are ready to strike out on our own.

Only humans have marriage, which is an agreement between two families that many ways resembles  a debt because it is the recognition of a mutual obligation.    There are countless wedding ceremonies and customs which in some way symbolize the transfer of debt from old to new, such as the customs of dowries and bride price. The exchange of rings symbolizes a down payment, and the marriage ceremony itself is a mutual contract. The object of marriage has traditionally been for procreation, thus the wedding can be seen as the loan of resources that are required to start a new family.  This may well be the original form of debt.

 Thus, in inventing and using the  concept of debt we recognize that our very existence derives from a give and take between generations and between humanity and nature. 

Unfortunately there is one difference between what the concept of debt means in the human economy and what it means in the bigger economy of nature.  In Nature's economy  we can't re-negotiate ourselves out of extinction by filing for bankruptcy.     Can humans negotiate with Climate Change?  In this sense I don't think the huge debts in non-renewable resources that we are piling up will ever be  forgiven.  I think we are in for a rude awakening.
The creativity with which we use the concept of debt today should not blind us to the fact that we need to understand the physical limits of human action and energy use.  In other words, we need to know how the human economy can exist and sustain itself within the Earth's Economy.  Let's use our brains and knowledge to manage all kinds of  debt wisely so that we can continue to have a future.