Monday, June 11, 2007


A chap at Liberty Forum, calling himself McCayrow, raised a question that I have found asked fairly often, especially in anarchist and punk circles, about the abolition of money and a return to barter. McCayrow asked,

What do you guys think about the Barter system; can it help to resolve Africa's poverty problems? ps:Your answers will be much appreciated.

Clearly his postscript was false, since he did not appreciate my succinct answer:


He responded, "Could you please be more specific?" So I gave him an explainations about why a barter economy is likely to revert to a money economy to overcome obvious deficiencies in the former. I quite pleased with the response:

OK. Suppose we have a barter economy and I grow potatos. Now suppose that you make wooden furniture. If I want furniture and you want potatos, then well and good, we trade. However, there are a number of problems.

a) What happens if I want furniture but you don't want potatos? Or more likely, I have all the furniture I need, but you need potatos? Barter requires a double coincidence of wants.

b) What happens if you don't just want potatos for your chair, but want meat, some beer, to see a film this month, and to take your girlfriend out on the town. You can't get all these things by just trading with me, or with a beer seller, or with a the cinema owner, etc.

c) What happens if I want you chair now and you suspect you will need potatos in the future, but not yet. If we trade, then your potatos could have gone off by the time you need them.

d) You will not be able to get a decent working prices system: You will be able to tell how many potatos a chair will buy, but not how many beers, or how many trips to the cinema, etc. Without a developed price system it would be impossible for producers to plan production rationally because they wouldn't be able to tell if the demand for their goods relative to other ones would be rising or falling. You could tell, if at one stage a chair gets you fewer potatos, that the value of your chair relative to my potatos is falling, and so it would be better to allocate more of your resources to potato farming, but what of other goods?

Adopting money solves all these problems. In order to solve a) it would make sense for you to trade your chair not for something you want, but for something somebody else wants. In short, you trade your chair for my potatos solely for the purpose of using my potatos to get what you want from somebody else. This means that you would be adopting a commodity to use it as a medium of exchange.

In order to solve b) however, it is undesirable to adopt potatos as the commodity you trade for solely to use that commodity to buy things you want. This is because potatos go mouldy. They fail to serve as a store of value. You need, instead, to be able to transfer for something durable. Hence, so, to avoid a) a medium of exchange is likely to be adopted. In order to avoid b) the medium of exchange will be a durable commidity, so as to preserve value over time.

To avoid c) it is likely that you will trade your chair for a commodity to trade for those of others, and this commodity will not only be durable, but it will be easily divisible (potatos may be good for this, actually). This way you can divide the return you get for your chair between different ends. So, to avoid a) a medium of exchange will tend to be adopted; to avoid b) it will tend to be a commodity that is durable; and to avoid c) it will be tend to be a commodity that is easily divisible.

And lastly, by adopting a common medium of exchange, it is easier to tell what the exchange rate for different commodities is. If everybody bought potatos not just to eat but to trade with, you could tell how many beers your chairs would buy by comparing how many potatos your chair would buy with how many potatos a beer would buy.

Gold is a commodity that has use value, as an ornament. It can thus be used to solve a) since you could use your chair to buy gold, and gold to buy things that those who want gold but not chairs make. It can solve b) because gold does not go mouldy or decay, and so preserves value. Another important feature of gold in this regard is that there is not much of it, and it is difficult and costly to increase the amount of it. This makes it hard to flood the market with gold, which would cause all prices measured in gold to shoot up - inflation. Gold is a safeguard against inflation, to a degree, in this respect. (This is not always true - Gold from the Spanish main flooded from America into Europe and was immediately minted, causing hyper-inflation for centuries). Gold avoids c) because it is easily divisible, and because the supply of it is naturally so low, you don't need to carry around huge amounts of it to buy huge amounts with it.

So money makes us better off. It allows a wider division of labour and allows clearer economic co-ordination.


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