Barter and Exchange-Based Currencies
Our current economic system is flawed because it does not preserve the principle of barter.
One of the main points I have been trying to make in this series of articles is that there are two paradigms through which you can view an economy. Our current economy and its structures, such as the banking system, the currency system, and taxation, all developed based on the viewpoint of the purchasing paradigm. The purchasing paradigm posits that the basic interaction within an economy is the exchange of resources, goods, or services for money. However, I have suggested that there is an alternative viewpoint, called the bartering paradigm, which is the correct view of the interactions within an economy. In the bartering paradigm, the basic interaction is the exchange of resources, goods, or services for other resources, goods, or services. This is the true essence of the free market, i.e., exchanges of goods and services between consenting parties. Note that I say parties rather than individuals. This allows for exchanges between individuals, organisations, towns, cities, and even countries. Barter can be generalised to be between any two parties in the economy and I will expatiate on that in my next article.
Starting Over
I believe that we need a reset of our economy in order to rebuild it based on the bartering paradigm. Since our current economy derives from the purchasing paradigm, no one has seen an economy based on the bartering paradigm and you might be hesitant about the idea of such a major change. My aim here is to begin to show what this new economy looks like. That means we must forget about the structures we currently have and go back to the beginning of an economy, i.e., barter, and construct an economy based on the bartering paradigm with entirely new and possibly very different structures compared to our current economy. Why go back and reexamine barter? Because I believe the problems with our economy are systemic. This is not a functional system that got broken. The system is fundamentally flawed, and the flaw originates at the transition from barter to a money-driven economy. We can’t just patch the system with solutions like a return to the gold standard, free banking, Modern Monetary Theory, or Universal Basic Income. The fix is to go back and reexamine barter and take a different path towards a resource-driven economy.
The purchasing paradigm only sees one half of the exchange and is, therefore, an incomplete view. The bartering paradigm, on the other hand, sees the complete exchange of goods and services…
Background on Purchasing Paradigm
It is important to first understand how we came to build an economy within the framework of the purchasing paradigm. It is generally believed that the economy began with barter. Specifically, it began with what I call raw barter. In raw barter, exchanges take place between two individuals, each of whom has goods or services that the other wants. Suppose P has a good that Q wants and Q has a good that P wants. Each of P and Q values the good that they currently have less than the good that they want. In that scenario, they may meet and execute an exchange. But it is clear that in general, P and Q finding each other in the market would be an arduous task. Not only must they have goods needed by each other, but they must both want these goods at the same time, and they must want these goods in quantities such that they can make a fair exchange. Raw barter is therefore incredibly inefficient and in practice does not last not as an economic system.
The path from raw barter to the purchasing paradigm is explained by Carl Menger’s theory of the origin of money. Some of the goods in the market emerge very quickly as money to make the exchange process more efficient. As people exchange goods and services, they would find that some goods are more easily exchanged than others. These goods may have properties that make them desirable not just for their use but also for their perceived value. It would be a good idea for each person to have a supply of such a good so that they can exchange it for whatever they want at any time. Thus P and Q do not have to wait until the conditions are just right for an exchange. If P needs a good or service from Q, it is not necessary for Q to want goods or services from P at the same time. P can purchase the goods he needs from Q using money, which is generally acceptable to the parties in the economy, including Q. In the future, Q can use this money to purchase goods from P or any other party in the economy. Finding another person who accepts this money is much easier than finding someone who wants the particular good or service that you provide, so it is much easier for exchanges to take place. This kind of money is known as specie or commodity money. It is money evolving from the idea that exchanges must be completed immediately or near immediately. Precious metals such as gold and silver emerged as commodity money in a lot of societies, but there are other examples. This kind of money has shaped the way our economic structures developed. For example, the problem with the portability of gold and silver led to the development of banking. This then evolved further to the banking and currency systems we have now. We have evolved from commodity money to an unbacked fiat currency system which I view as the evolutionary endpoint of commodity-based currency, but even though we no longer have commodity-based currency, we still cling to the economic structures that developed from it.
Enhanced Barter and the Bartering Paradigm
As discussed before, there is an alternative to raw barter which I call enhanced barter. Raw barter insists that exchanges be completed immediately, so each party in the exchange must provide something of value to the other party. The result is that efficiency is obtained through the use of commodity money, which results in a transition away from the principle of barter. Enhanced barter takes a different approach, and efficiency is found by using a different kind of currency which I call exchange-based currency. Exchange-based currencies arise from a simple idea. Each exchange is in two parts: in the first part Q provides P with a good or service, and in the second part P reciprocates by providing a good or service in return to Q. Instead of requiring that the exchange be completed immediately, we can allow the duration between the two halves of the exchange to take on an arbitrary length. You gain efficiency just as with commodity money but using a different approach. Once again if P requires a good or service from Q, it is not necessary for Q to want something from P at the same time. Instead, Q provides P with the good he wants, and during the time interval between the two halves of the exchange, we say that there is a contract between P and Q which stipulates that P will provide Q with reciprocal goods in the future. This contract is divisible and transferable, and can serve as currency in the economy if P is trustworthy. This is the kind of money that is prevalent under the bartering paradigm. Thus while raw barter leads to the purchasing paradigm, enhanced barter results in the bartering paradigm. In a complex and large economy, enhanced barter may not look like barter at all since people will be using these contracts as money and using them to purchase goods and services from others. But it is important to understand that while it may not look like it superficially, the fundamental interaction taking place is still enhanced barter.
It is believed that money in our economy evolved from the process of raw barter leading to commodity money. However, as we have just seen, enhanced barter offers an alternative to how money could evolve. If paper, writing, and legal structures had already been invented before barter, then enhanced barter would have had a chance to develop, leading us down a different path to a different kind of currency system. We would have used contracts between parties in the economy as money. This, of course, requires some kind of record-keeping, hence the need for paper and writing. Note that in the spirit of a truly free market we cannot rule out the solution offered by raw barter, i.e., commodity money. It is likely that both commodity money and exchange-based currencies would circulate at the same time. Another feature of the free market is that people should be free to use whatever currency they want, so multiple competing currencies in the same economy are to be expected.
Exchange-Based Currencies
Exchange-based currencies as I have said are contracts between two parties who are exchanging goods and services. They become currency when the party who is to provide the reciprocal goods is trustworthy. Then a third party may choose to accept that contract as payment for goods or services she provides. The contract is not just any contract between two people, but the contract that arises after one party provides the other with a good or service. Then the receiving party is bound by that contract to provide reciprocal goods. I call this an exchange contract. That contract is a link between the two halves of the exchange, and it is divisible and transferable. There are two kinds of exchange contracts. In this article, I will cover the familiar one, while the other will be covered later because it deserves its own article. The first type of exchange contract comes from the concept of “I Owe You”, abbreviated IOU. If P receives a good or service from Q, and Q is not to provide him with a reciprocal good immediately, then P may issue an IOU to Q which can be used to redeem goods or services from P in the future. The IOU is a contract which basically says: “I, P, owe goods of value X to Q”. Q can use this IOU to redeem goods from P in the future in the second half of the exchange. Notice that if the duration between the two halves of the exchange is short enough, the IOU does not need to be a tangible item, or even verbal, and the transaction reduces to just a raw barter transaction. This is in contrast to a transaction using commodity money which does not reduce to barter. When using commodity money, the exchange is viewed as complete when money is paid for the good or service, because the money is itself a commodity, so it is always an exchange of goods or services for money. With IOUs, the exchange is only half complete when the IOU is issued and is complete when the IOU is redeemed, so it reduces to an exchange of goods and services for other goods and services when the time interval is minuscule. Thus the IOU concept of money and the bartering paradigm preserve the essence of the exchanges taking place in the market while commodity money and the purchasing paradigm transform the exchanges from barter to purchases. Exchange-based currencies open up opportunities to better achieve the goals of the market process because they preserve the principle of (enhanced) barter.
An IOU may be issued to a particular person as in the example above. However, for it to be transferable, the contract must be specified in a way that allows anyone to use it. This way it can become a currency. For example, with the IOU specified above, P can instead write the contract to say: “I, P, owe goods of value X to the bearer”, instead of specifying Q in the contract. That way if P is trustworthy, then Q can use the IOU to purchase goods or services from a third party, R, who may accept it because she knows P is trustworthy and she may desire goods from P in the future. R can use the IOU to redeem goods from P, but she may also use it to purchase goods from Q since P’s IOUs are acceptable to Q. Thus the IOU can circulate between the parties as currency. Note that whenever Q or R use an IOU issued by P to redeem goods from P, P is now in possession of the IOU. When Q (or R) possesses the IOU, the contract effectively says “I, P, owe goods of value X to Q (or R)” which is why they can use it to purchase goods from another person. When P holds the IOU after it has been redeemed however, the contract effectively says “I, P, owe goods of value X to myself”. The IOU is thus redundant. Generally, it is preferable that P issue a fresh IOU whenever he makes a new purchase, instead of reusing old IOUs. This way the IOUs act as a record-keeping system and each IOU can be tracked against specific goods or services provided to P. So whenever an IOU is redeemed with the issuer, (P), he must destroy it.
Exchange-based currencies are created as a side effect of the exchange of goods and services between two parties, i.e, some economic activity must take place for the currency to be created. Commodity currency is not exchange-based and can be created without any economic activity taking place. Thus increase or decrease in the supply of the currency does not reflect economic growth. You can get rich, money-wise, by just digging for gold, or in a more modern example, by mining for a crypto-currency. Commodity currency can be debased by government or banks, unlike exchange-based currency which requires a good or service to be first provided. We started off with raw barter and went along the easier path indicated by the purchasing paradigm. That is where everything started to go wrong as we developed an economy based on commodity currency. As the economy has evolved, we have lost sight of what we are actually trying to accomplish on the market because we took the view of the purchasing paradigm, and have ended up with a regressive currency system that transfers wealth from the poor to the rich resulting in a widening wealth gap, and policies such as taxation. We should understand that we don’t want money for the sake of it. We want money so that we can purchase other goods and services, i.e., we want it so that we can complete the exchange. The purchasing paradigm only sees one half of the exchange and is, therefore, an incomplete view. The bartering paradigm, on the other hand, sees the complete exchange of goods and services even when there is money involved.
The fundamental interaction that takes place in the free market economy is the exchange of goods and services for other goods and services. In its most basic form, this is known as barter. However, this exchange can be made more sophisticated, while preserving the principle, by using exchange-based currencies instead of commodity-based currency. Exchange-based currencies allow enhanced barter between any two parties. Imagine, for instance, an enhanced barter exchange between the government and the general public. This is not possible with commodity money but can be achieved by the use of an exchange-based currency. This particular barter exchange between government and the public results in an entirely different structure for the provision of public services, which means that taxation and the structures that go with it are not needed in an economy based on the bartering paradigm. We don’t want to replace the fundamental barter interaction with the viewpoint of purchases. We want to scale it up and make it more efficient. In the next article, I will generalise the concept of barter, specifically enhanced barter, to allow it to scale to parties of more than one person.
