Money Changes Everything: How Finance Made Civilization Possible
By William N. Goetzmann, Princeton University Press, 600 pages, $35
“The very rich are different from you and me,” Ernest Hemingway has F. Scott Fitzgerald write in the original version of “The Snows of Kilimanjaro”. “Yes,” comes the response, “they have more money.”
This famous (and wholly fictional) exchange is memorable because it captures so succinctly one of the great fascinations of finance, how it is at one and the same time something so completely mysterious and so utterly banal. It also poses an important question: does having more money than someone constitute a difference only in quantity, or in quality? Does the increase of financial wealth just make for more of the same — or does it change people in a more essential way?
Hemingway was exploring these questions on the level of the individual. William N. Goetzmann, the Edwin J. Beinecke professor of finance and management at Yale, is shooting for bigger game in his new book, “Money Changes Everything: How Finance Made Civilization Possible”. His goal is to explore the consequences of the invention and growth of finance for whole societies. As his title suggests, his conclusion is that they are firmly positive. Financially advanced societies, he argues, are very different from financially primitive ones — and not just in that they have more money.
The idea that dominates this magnificent history of money and finance, and brings order to the erudite survey of modern research that Goetzmann has marshalled, is that finance is a “technology of civilisation” — a way of thinking about and doing things that has been the central facilitator of the material, artistic and cultural accomplishments that we call civilised life. Indeed finance, Goetzmann argues, is a sort of master technology, from which an astonishing range of our most basic habits of mind derives.
It is now generally agreed, for example, that in the West both numeracy and literacy were invented not in the context of scientific or artistic pursuits, but in the service of finance and commerce. The peculiar geography and climate of Mesopotamia led in the early third millennium BC to the formation of the first great agglomerations of people — sprawling cities at a time when the Mediterranean world could boast only glorified villages. The unprecedented scale of such societies required a revolution in the methods of economic organisation.
Autarkic subsistence farming had to be replaced by specialisation, the division of labour and coordination on a massive scale. The innovation developed by the clerical bureaucracies to enable this transition was the invention of financial accounting. And it was only as part of this new financial system that writing and abstract numbers — those epochal inventions that so clearly transformed the subsequent history of humanity in so many other fields — were invented.
If the invention of writing and maths is not surprising enough, Goetzmann also argues convincingly that finance is responsible for our modern conception of time. Pre-monetary society operated on sacred time, with the day divided up by ecclesiastical offices or prayer times, and the year into high days and holy days that reflected the cycle of the seasons or the phases of the moon. Financial reasoning and, in particular, the calculation of compound interest demanded a more regimented scheme arbitrated by objective mathematical rules rather than clerical authority.
“In essence,” as Goetzmann memorably puts it, “financial technology is a time machine” — a set of ideas and practices that enable us to shift economic value backward and forward through time. As a result, we owe to financial innovation conventions as basic as the detachment of the calendar from the astronomical year — the ancient Sumerians introduced a 360-day year in order to make calculating interest easier.
Many more of our most fundamental concepts and institutions turn out to be byproducts of financial innovation. Modern ideas of probability and risk, of ethics and morality, and of appropriate models of commercial and even political organisation — all were forged in the furnaces of finance, Goetzmann argues. Because financial innovations “changed human behaviour”, money really can be said to have made the modern world.
It is a fascinating thesis, brilliantly illuminated by scores of vivid examples, generously illustrated with a wealth of pictures, comprehensive in its geographical and temporal scope, and in my view almost entirely convincing. There is one aspect of it, however, where both historical evidence and contemporary experience make me less comfortable with Goetzmann’s story.
Goetzmann views the progress of financial innovation as an example of humans’ ingenuity in overcoming technical and material challenges. “Like other technologies,” he writes, finance “developed through innovations that improved efficiency. It is not intrinsically good or bad.”
Implicit in this analysis is the conviction that the problems that financial innovations were historically invented to solve are primarily, or even exclusively, technical in nature. They are the problems of how to produce, exchange and consume scarce resources most efficiently. They can be cleanly separated, that is to say, from any political aspect: the eternal dilemma of who should get what, and why.
In Goetzmann’s view, money and other payment technologies, for example, evolved to facilitate exchange, and so a more efficient allocation of goods across space. The institutions of debt and interest, meanwhile, were invented to enable those who had surplus resources now to lend them to others until they needed them at some future time — making more efficient the allocation of resources over time.
It goes without saying that there is a venerable tradition of economic thought that argues that this is not the case. One does not have to be a hard-core Marxist to entertain the idea that finance is not, and did not evolve as, a neutral tool to improve the operation of the free market — itself an ethically colourless state of nature in human relations. This alternative view is in perfect agreement that finance is indeed one of the most powerful tools for the organisation of human activity ever invented. But it holds that it arose historically, and continues to be used today, to codify and enforce relationships built on power and luck as much as to facilitate voluntary and rational decision-making.
In my view, it is important to take this alternative perspective seriously, because it is difficult to explain the history of finance without it. Goetzmann’s masterly overview itself provides many examples of ingenious financial innovations that have notably not succeeded in changing human behaviour, despite being better technical solutions to the problems at hand.
His erstwhile Yale colleague, the mathematician Benoit Mandelbrot, long ago showed that the conventional model of asset pricing systematically underestimates the likelihood of catastrophic volatility — and offered a more realistic alternative. Another, the economist Robert Shiller, won a Nobel Prize for proposing new types of insurance instruments that would enable households to mitigate the impact of economywide recessions and real estate crashes. Perhaps most significantly of all, the American Social Security system is almost universally acknowledged to be unsustainable in its current form — and countless well-reasoned proposals exist for its reform.
Yet banks still use unreliable asset pricing models; households remain at the mercy of aggregate booms and busts; and Social Security continues to glide merrily towards its doom. Seek the reason for the failure of the ingenious financial solutions that have been proposed, and it is difficult not to detect the hand of vested interests, or indeed simply the sheer inertia of a gridlocked congressional system.
“Money Changes Everything” — I agree, but politics changes even money itself.
–New York Times News Service
Felix Martin is a partner at 1167 Capital and the author of “Money: The Unauthorized Biography”.
