"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 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?
The goal of William N Goetzmann, professor of finance and management at Yale, in his book is to explore the consequences of the invention and growth of finance. As his title suggests, his conclusion is that they are firmly positive.
The idea that dominates this book is that finance is a "technology of civilization" - 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, Mr 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 that in the West both numeracy and literacy were invented in the service of finance and commerce. The 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 economic organisation. 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 financial accounting.
Mr 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 phases of the moon. Financial reasoning and the calculation of compound interest demanded a more regimented scheme arbitrated by objective mathematical rules. 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.
Because financial innovations "changed human behavior," money really can be said to have made the modern world.
It is a fascinating thesis, brilliantly illuminated by scores of vivid examples, 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 Mr Goetzmann's story.
Mr Goetzmann views the progress of financial innovation as an example of humans' ingenuity in overcoming challenges. "Like other technologies," he writes, finance "developed through innovations that improved efficiency. It is not intrinsically good or bad."
In Mr Goetzmann's view, money, for example, evolved to facilitate exchange. 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.
One does not have to be a Marxist to entertain the idea that finance is not a neutral tool to improve the operation of the free market. This alternative view is in perfect agreement that finance is one of the most powerful tools for the organisation of human activity. But holds that it arose historically, and continues to be used today, to enforce relationships built on power and luck as much as to facilitate voluntary and rational decision-making.
Mr Goetzmann's masterly overview itself provides many examples of ingenious financial innovations that have notably not succeeded in changing human behaviour. 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 economy-wide 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 toward 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.
MONEY CHANGES EVERYTHING
How Finance Made Civilization Possible
William N. Goetzmann
Princeton University Press
584 pages; $35
This famous (and wholly fictional) exchange is memorable because it captures so succinctly one of the great fascinations of finance, how it is at 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?
The goal of William N Goetzmann, professor of finance and management at Yale, in his book is to explore the consequences of the invention and growth of finance. As his title suggests, his conclusion is that they are firmly positive.
The idea that dominates this book is that finance is a "technology of civilization" - 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, Mr 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 that in the West both numeracy and literacy were invented in the service of finance and commerce. The 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 economic organisation. 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 financial accounting.
Mr 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 phases of the moon. Financial reasoning and the calculation of compound interest demanded a more regimented scheme arbitrated by objective mathematical rules. 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.
Because financial innovations "changed human behavior," money really can be said to have made the modern world.
It is a fascinating thesis, brilliantly illuminated by scores of vivid examples, 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 Mr Goetzmann's story.
Mr Goetzmann views the progress of financial innovation as an example of humans' ingenuity in overcoming challenges. "Like other technologies," he writes, finance "developed through innovations that improved efficiency. It is not intrinsically good or bad."
In Mr Goetzmann's view, money, for example, evolved to facilitate exchange. 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.
One does not have to be a Marxist to entertain the idea that finance is not a neutral tool to improve the operation of the free market. This alternative view is in perfect agreement that finance is one of the most powerful tools for the organisation of human activity. But holds that it arose historically, and continues to be used today, to enforce relationships built on power and luck as much as to facilitate voluntary and rational decision-making.
Mr Goetzmann's masterly overview itself provides many examples of ingenious financial innovations that have notably not succeeded in changing human behaviour. 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 economy-wide 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 toward 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.
©2016 The New York Times News Service
MONEY CHANGES EVERYTHING
How Finance Made Civilization Possible
William N. Goetzmann
Princeton University Press
584 pages; $35