A General Theory of Barter

Barter can be scaled up to be between groups of arbitrary size by using currency as a helper object.

Photo by Erik Mclean on Unsplash

Barter as we have known it up until now, takes place between two individuals and occurs when the two individuals meet and exchange goods immediately. Previously, I have referred to this kind of barter as raw barter. The modern economy that we have today evolved from raw barter with the exchange of goods for other goods, evolving to become the exchange of goods for commodity money, and eventually the exchange of goods for unbacked fiat currency. This is the evolutionary path that an economy takes when the actors in the economy take the viewpoint of the purchasing paradigm. There is a second path, offered by the bartering paradigm, which I believe is superior to that offered by the purchasing paradigm. Exchange-based currencies offer a path that preserves the principle of barter. In this alternative path, we replace raw barter with enhanced barter where the exchange between two people is split into two halves with an exchange contract linking them. Thus you start with enhanced barter but with very short intervals between the two halves of the exchange so that it just looks like exchanging goods for other goods, then that evolves to allow longer intervals between the two halves so that each half superficially looks like an exchange in and of itself, i.e., an exchange of goods for currency. The exchange contracts start to circulate as currency, and if you only take a cursory look at what is happening you might think that there is no difference between exchange of goods for unbacked fiat currency in the purchasing paradigm and exchange of goods for an exchange-based currency in the bartering paradigm. The difference is that in the former case the exchange is complete, while in the latter case the exchange is half of the complete barter transaction.

Why a New Currency System?

I want to make it clear that I am not calling for a return to a barter system. I am advocating a switch to a currency system that preserves the principle of barter. Understanding how this alternative currency system arises is only possible by reexamining barter and looking for alternative evolutionary paths for the currency system. Preserving the principle of barter leads to an economy that has very different structures from ours, and I believe that those differences are for the better. For example, there is no need for taxation, there is a system of competing currencies which means there is no currency monopoly, money does not have to be based on debt (in fact the national currency in the new system would be based on credit), and you don’t have the public facing a growing debt to the banks and financial institutions which results in a transfer of wealth and growing wealth inequality.

It might seem daunting to consider a switch to a completely new currency system but there are a lot of similarities to our current system. For the average person, apart from the use of multiple currencies which gives you options of which currency to save in, spend in, or borrow in, and the fact that there will be no more taxes, there isn’t much difference. What will change are the structures that make up the monetary and fiscal systems. You might wonder how the principle of barter is preserved if there isn’t much difference for the average person. Exchange-based currencies such as IOUs enforce a requirement that each exchange is one half of an enhanced barter exchange. This requirement is enforced at all scales including the point at which the currency is created and injected into the economy. This is not true for the unbacked fiat currency we currently have. Even though it acts as an IOU in most cases, the way it is created and injected goes against the principle of barter, and also the principles of the free market, and is a major part of the reason for the widening wealth gap.

It is important to note that raw barter cannot be generalised. It can only be transformed into an exchange of goods or services for money. This is the principal reason our economy took the path that it did. Note however that once raw barter has evolved to the kind of currency we have now, it begins to show some similarities to exchange-based currencies, and you can observe complex barter interactions in the economy just as you will have in an economy using exchange-based currencies.

Multi-person Barter

Enhanced barter can be generalised in two ways. The first is to allow multiple people to engage in a single barter transaction. This can be done without all parties having information about each other’s needs, by using tokens to keep track of the exchanges. Any kind of token can be applied in this case, so the generalisation of barter to multiple people can be seen not only in an economy using exchange-based currencies but also in an economy using commodity money or fiat currency. Such barter exchanges are taking place in our economy all the time though we are not aware. Here is an example of a barter exchange involving multiple people. Suppose you have a twenty dollar note and you use it to purchase groceries at the supermarket. Before you use it you make a mark on it so that you can recognise that particular note. Some months later someone, let’s call her R, pays you for your services with this same note. Taking a look at the history of this note, there will be a chain of exchanges starting with you receiving groceries from the supermarket, and ending with you providing your services to R. This chain of exchanges is a multi-person barter exchange. At the end of it, you have the twenty dollar note back, and goods and services have been exchanged by several people. The twenty dollar note just served as a token to keep track of the exchanges. If these exchanges were the only ones in the economy, you could just have used any random object to keep track. However in a complex economy, during this chain of exchanges, the twenty dollar note may be bundled with other notes and exchanged for goods of value greater than twenty dollars. In this way, this chain of exchanges may be connected to, and interact with, other barter chains. Regardless of the interactions with other barter chains, when you receive that twenty dollar note back, it closes the loop of exchanges and everyone in that loop will have provided real goods or services to another person in the loop, and furthermore everyone in the loop will have received real goods or services from another person in the loop. This is an example of multi-person barter. It is not exclusive to exchange-based currencies but it illustrates the point that what we are doing in the economy at a very fundamental level is barter, and we need to recognise that and implement a currency system that reflects this. There are hundreds of millions of such barter chains in our economy. Some are closed chains as in the example above while some are open and may or may not be eventually closed. We don’t need to be explicitly aware of each and every chain. We just need to understand that these chains exist and that our complex market economy comprises of such barter chains which are constantly growing in length and interacting with each other. Even though we don’t do much two-person barter anymore, we are still doing multi-person barter represented by these chains. This is why I have said that the bartering paradigm rather than the purchasing paradigm is the correct viewpoint for understanding the nature of the fundamental interactions taking place in the economy.

Barter Between Arbitrary Groups

Taxation is a hack to solve the problem of compensating public service providers.

The second way to generalise enhanced barter is to allow exchanges to be between arbitrary parties. This means exchanges don’t have to be between two individuals but can be between groups of individuals. This allows for a barter exchange between the government and the general public for example, which is a very important exchange because it generates the national currency under the bartering paradigm. In the most general case, therefore, you can have parties of an arbitrary number of people engaging in multi-party exchanges. Multi-party exchanges are just a chain of two-party exchanges as described above so without loss of generality we can just treat two-party exchanges. There are four kinds of two-party exchanges.

1. The first kind of enhanced barter exchange is the straightforward exchange between two individuals. This transaction is simple: P provides Q with a good and Q promises to provide reciprocal goods to P at some point later. Q’s promise is a contract that P can use to redeem the goods from Q in the future. That exchange contract is used to make the transaction more efficient by allowing the length of time between the two halves of the exchange to be longer so that Q does not have to provide P with the reciprocal goods immediately but can do so at some point in the relatively distant future.
2. The second type of exchange occurs between a group of people and an individual. There are two ways this can go and in this paragraph I will specifically consider when a group of people provides a good or service to the individual in the first half of the exchange, and then the individual is to provide goods or services to the group of people in the second half. It is important to note that the individual is not going to request goods or services from an arbitrary group of people since such a group is not structured to provide a service to others. The group must be in some way organised such as in a company. So I will classify this type of exchange as an exchange between an organisation and an individual. The organisation is mentioned first to indicate that they provide the goods or services in the first half of the exchange. Let’s call the organisation P, and the individual with whom they are exchanging will be denoted by Q. The bold font indicates that P is a group of people, i.e., P = (P1, P2,…, PN) where the Pi are the individual members of the organisation P. Members of P make varying contributions to the provision of the good or service to Q. Upon receiving the good or service, Q then makes a promise to provide goods or services to the members of P. Since P is a group of people, there are two kinds of goods or services that Q can provide to them. There are public goods, which would be provided to the organisation as a whole, and there are private goods which would be provided to individuals within P. If Q is to provide a public good, then the exchange is trivial and is just like the exchange between two individuals. Q will issue an IOU to an agent or representative of P, who will use that IOU to redeem the public good from P at some point in the future. If Q is to provide private goods to the members of P, then the total value of the private goods to be provided needs to be divided among the members of P. Q can once again issue IOUs to the agent/representative of P but this time the agent has to distribute the IOUs among the members of P. Since P is an organised group rather than just a collection of individuals, the agent of P should know the contribution of each of the members of P towards the provision of the good or service to Q, and he can distribute the IOUs among the members of P based on their contributions. This effectively means using the IOUs to pay them for their work done. The IOUs are distributed among the individual members of P but their total value matches the value of the goods promised by Q to the entirety of P. In their own time the members of P can then redeem the IOUs for their private goods from Q. When all members of P have redeemed their IOUs, the exchange is complete.
3. The third type of exchange is also an exchange between a group of people and an individual. This time, however, the individual provides a good or service in the first half of the exchange and the group provides the reciprocal good or service in the second half. Following the convention from before, this type of exchange would be classified as an exchange between an individual and a group of people. The group of people does not have to be organised as in the previous point. We will denote the individual here by P, and the group of people that constitute the other party in this exchange by Q, where Q = (Q1, Q2,…, QM) and the Qi are the individual members of the group Q. In this case, note that in the first half of the transaction, P must provide public goods to Q. If he provides private goods to the individual members of Q then that would be just an exchange between individuals and would trivially reduce to multiple instances of the first type of exchange. When P provides a public good to the entirety of Q though, Q must somehow provide him with private goods in return. If Q is an organisation, then an agent of Q may have information about how much each member of Q benefited from the public goods provided by P to Q, thereby allowing him to calculate the value of goods each member of Q owes P. If Q is just a collection of individuals, such as the general public, then this calculation is impossible. Either way, it is clear that there is a problem in terms of how to ensure that each member of Q contributes fairly to pay for the public goods provided by P. You can’t have each member of Q providing goods of some calculated value to P because the goods produced by any given member of Q may not be of use to P. The quest for an elegant solution to this problem is central to the thesis of this series of articles. If Q is an organisation, then after calculating what each member of Q owes P, the agent of Q can collect money from them, possibly in the form of IOUs, and give that to P as payment. P can then use that money to purchase goods that he actually needs from the members of Q. In the more general case where Q is just a collection of individuals such as the general public, it is not practical to try and figure out what each member of Q should contribute to P and IOUs do not help. It should be obvious to the reader that this is essentially the problem that our economy tries to solve using taxation except that P is an individual here instead of the government. Each member of Q is taxed a certain amount, which may vary for different members of the group, and the collected tax is given as payment to the individual, P, who provided the public goods in the first half of the exchange. P can then use the money to purchase goods or services that he actually needs from members of Q. You can see now that what actually happens with taxation is that Q is being treated as if it is an organisation even though it is not. The general public is not an organisation. It is just a collection of individuals. Trying to determine the tax burden of members of the general public is therefore cumbersome and resource-intensive due to the fact that we have to treat a loose collection of individuals as if it were an organisation. Wouldn’t it be better if we could treat the general public as what it really is, and still manage to ensure all members of the public contribute their fair share? In other words is there a general solution to this problem that does not require that Q be treated as an organisation? The answer is yes. The second exchange-based currency, which I have hinted at previously, provides the solution. I will introduce it in my next article.
4. The final type of exchange is the most general. It is an exchange of goods and services between two groups and combines the principles of the second and third types of exchange. In the first half of the exchange, one group, P, provides goods or services to the other group, Q. As before P = (P1, P2,…, PN) where the Pi are the individual members of the P. As in the second type of exchange, P is an organisation since Q cannot request services from an arbitrary collection of individuals. Furthermore, Q = (Q1, Q2,…, QM) and the Qi are the individual members of the group Q. Q can be an arbitrary collection of individuals and not necessarily an organisation. Thus this exchange can be classified as an exchange between an organisation and a group of people. Note that the members of P and Q can overlap. The argument does not change because of that. The goods or services provided by P to Q in the first half of the exchange have to be public goods or services. If P provided private goods to individual members of Q then that would reduce to multiple instances of the second type of exchange. Q has the same problem as in the third type of exchange. It must find a way of compensating the members of P. This is exactly the scenario you have between public service providers (represented by the government) and the general public. In the current paradigm, Q taxes its members and uses that money to compensate P. Since P is an organisation, it is straightforward for them to figure out what each member of P contributed to the goods and services provided to Q and distribute the compensation appropriately. In this example, P is the public service provider (or government) and Q is the general public. Notice that all members of the government are also members of the general public and so there is an overlap but that is fine as mentioned before. The government is the organisation that provides the public goods to the general public but it is also the agent or representative of the general public that figures out what each member of the public owes in taxes. A similar approach could be used in the bartering paradigm, i.e., collect taxes, but it is inefficient and in this case, would actually result in double taxation as members of the public pay taxes firstly in money, and secondly in real goods and services. The correct solution as mentioned before is a second exchange-based currency. This particular exchange-based currency is particularly suited for exchanges between groups of people, in contrast to IOUs which are suited for exchanges between individuals.

The concept of barter can be scaled up beyond just an exchange between individuals. This is done using currency, and even though we have an economy using money for most exchanges, complex barter exchanges are still taking place at a fundamental level. Enhanced barter can scale to allow two-party exchanges between parties of arbitrary number of people, and to allow multi-party exchanges where the number of parties is greater than two. IOUs can be used to solve some of the problems when scaling up barter. However, when considering the provision of public goods and services to an arbitrary group, neither our current fiat currency system nor IOUs offers a robust and fair solution. They both suggest that we use a hack, namely taxation where we treat an arbitrary group of individuals as if they were an organisation, to compensate the organisation that provides the public goods and services. In my next article, I will look at exchange-based currencies in general and introduce the second exchange-based currency which offers a different and elegant solution to the question of how a group of people, on receiving a public good, can compensate the public service provider.