The Economic Consequences of Gift Giving

This morning I got curious about why the palace economies of the past worked and why they haven't endured throughout history to today. So naturally I read Wikipedia's Palace Economy page... then the Economic Anthropology page, where I then redirected myself to the Inalienable Possessions page. Essentially, what I learned is that palace economies were the result of monopolistic behavior in societies based on gift exchange.

Of course simply learning how something works has never been enough for me, so I did what I always do: First, I made connections between this information and what I already knew to develop a more fundamental hypothesis of the forces at work. Then, I took this hypothesis and compared it to other contexts to test its validity. And finally, I used this hypothesis to extrapolate upon my existing knowledge and make further comparisons between my new understanding and reality to further test the validity of my hypothesis.

Gift exchange economies work because receiving a gift makes one feel like they are obligated to reciprocate. This sense of obligation occurs because individuals naturally understand that if they don't reciprocate, they will lose future opportunities to benefit from the relationship. Thus gift exchange has value to the gift giver in the value of the relationships that are created or renewed as a result. In effect, the gift giver creates a debt for the gift receiver to repay. If the gift receiver is willing to repay the gift and consequently maintain their relationship, then they accept the gift and attempt to repay it. If the gift receiver is not willing to repay the gift or maintain their relationship, then they either refuse the gift or they accept it and do not attempt to repay it.

Where gift exchange runs into problems is with Nontransferable Property (also known as inalienable goods or immovable property). In a gift exchange economy, ownership of nontransferable property enables the owner to gift the usage or possession of the property for a limited time before their ownership enables them to regain the ability to gift the usage or possession of the property again. In other words, owners of nontransferable property don't gift the property, but rather let others borrow it. This results in power imbalances against those who do not own any nontransferable property and these power imbalances may result in social instability if not countered by those with the power to do so.

The consequences of nontransferable property are what enable the social and economic structures of palace economies. In these, the land and certain other resources were the nontransferable property of the monarch, nobility, or state. As a result of this nontransferable ownership, a majority of what people produced as a result of borrowing these resources was owed to the owner and because of the extent of this inequality, the resources that were produced needed to be redistributed in order to prevent social instability. Whenever something like a natural disaster, administrative mismanagement, or simply the owner's sense of entitlement impacted the redistribution of resources back to the people, social instability ensued and frequently led to socioeconomic collapse.

Since gift exchange is not always simultaneously reciprocal, people have developed the Transaction to avoid being indebted to others. In a transaction each party negotiates and agrees in advance on the gifts to be exchanged. This agreement is usually called a contract. Both parties must agree that these gifts are essentially equal in value, in order to prevent the creation of any debt (the obligation to reciprocate) between the parties. This is the basis of market economies. However, while the invention of the transaction makes market economies more stable, they still suffer from periodic instabilities as the result of other systemic inequalities.

Chief among these is the phenomena of compound interest which is made possible by adding an extra fee called interest onto the obligation of repaying money borrowed. The gift exchange equivalent of charging interest for a loan would be for the gift giver to require the gift receiver to reciprocate them with more gifts than the receiver was initially given. While charging interest is easy to justify in market economies as simply the price that must be payed for the service of borrowing the money, it fundamentally violates the requirement for exchanging gifts of equivalent value which makes a transaction fair to both parties. Not to mention that the purpose of a transaction is to avoid debt, not to owe more than you borrowed.

Furthermore, every religion that developed after palace economies went out of style 2000 years ago condemns those who charge interest for loans because of both this personal unfairness and the inequality and consequent socioeconomic instability that it creates over time. In fact, those who are mathematically disposed may simulate the geometric growth of this inequality over time as interest charges gradually transfer wealth from those that borrow to those that lend. In palace economies the source of inequality was more obvious to the people that suffered from it. It was clear to them that it occurred whenever the fruits of their labor were given to the owner of the nontransferable property, but were not redistributed well enough to sufficiently benefit the people. However, in market economies the growth of inequality happens more slowly and is therefore harder for everyone to detect, except for the oldest people who remember better times.

This process can only be suspended by monetary authorities when they inflate the currency in favor of the borrowers and to the detriment of the lenders; or when net taxes from the lenders (after any payments to them) are higher than net taxes from the borrowers (after any payments to them). So when a government spends $3 trillion on "economic stimulus" and less than $1 trillion goes directly to the people, the government is simply exacerbating and amplifying inequality. It is also worth mentioning that the nontransferable property which created so much instability in palace economies is beginning to make a comeback in market economies in the form of government authorized Perpetual Trusts. These function similarly to the "Titles of Nobility" that eventually converted the Western Roman Empire into Feudal Europe, whose economy of serfs, landed estates, and lords operated similarly to palace economies.