Economics for Dummies #1: Agriculture Starts it Off

Yanis Varoufakis explains how the economy operates in a conversational style, as if he were explaining/discussing it with his 16 yo daughter. Hence the title of the book is: Talking to My Daughter About the Economy.

 

A true economy, he says, needs a surplus:

“Surplus is the extra bit that allows for accumulation and future use.”

He points out that a hunter gatherer society cannot produce surpluses, only an agricultural one can. Why is that? Because hunter gatherer items like fish, rabbits and bananas rot quickly and thus cannot be preserved. Whereas agricultural outputs (corn, rice etc) can be stored for long periods.

 

Once surpluses became possible with the advent of agriculture, it set us of on the path to other things that changed mankind forever. Let us elaborate on that. Once enough people have surplus produce, it is efficient to build common granaries. That in turn creates the need for a mechanism to keep records – who stored how much – and thus written records came into existence. These written records often performed the same role as currency – one could swap one’s record of grains stored for some other good or service.

 

Now that there was something valuable being stored (grains), one needed to protect it. Over time, specialized roles (soldiers) began to evolve for just that purpose. Surplus made that possible. How? Since people were producing more than they needed, others could take on new roles! As the setup grew in size and complexity (farmers, granary managers, soldiers), the need for rulers and administrators came up.

 

The rulers soon began to exercise their power to do something they have been doing ever since – “print” money. Rulers could issue records of grain amounts that hadn’t yet been produced and use that to buy things and services. What did they intend to back this newly “minted” currency with? By taking a fraction of the future produce from the farmers – taxes had started.

 

But why would people be willing to use a record that didn’t correspond to any actual grains, just the hope of grains in future? Because they had “faith” that the ruler (state) would come good later – the idea of “debt” had started. Plus, the ruler/state had the power to enforce the acceptability of this currency across the realm – this was (and continues to be) key to any currency.

 

The large unit of people in such a setup now made it possible to create the first “technologies” – from ploughs to irrigation systems. In turn, those inventions set off a cascading effect for related discoveries and inventions.

 

Interesting how the switch to agriculture set off so many other changes that continue to this day.