In the Economy App developer team, we yesterday had a lively discussion about its economic properties on system scale. We seem to not fully understand the system we’re building here Maybe we can gather some more insights in a discussion starting from these draft thoughts:
Basic property: no scarceness of medium of exchange. In our money-based capitalist system, money is expensive because of interest: it's only handed out if you can promise to bring back more, in the short term. That is, it's only handed out for activities that produce short-term high ROI. While there's a lot of activities that would create ROI on the long term – creating forests, for example. But they take 100 years to grow, and then deliver a "meager" ROI of 1% per year. Now the diminishing economic growth rates, decade after decade, indicate that we hit a limit of short term ROI options (after we've burnt through most of our natural resources, that is ...). A quick "solution" was the virtualization of economy into financial products, creating much of the current mess. In barter however, there's no interest, and also no scarcity of the exchange medium itself. If a deal can happen depends only on peoples offers and demands, not on the added consideration if somebody has cash or credit available to spend. Given that this money scarcity affects esp. the unemployed, barter trade should help here the most: they can start to be economically active again.
Making "gain" is possible. Multi-party barter does not exclude gain: you can set prices according to market dynamics, which allows to set prices of offered goods higher than the efforts you need for producing them, or letting them produce. Which means, because you barter 1:1 in value, that you have some incoming "surplus" effort: your gain, which you can use for whatever you like. Meaningful or nonsense. In this sense, Economy App does not eliminate capitalism; which can be seen as an advantage for its voluntary adoption. We will see that it does away with significant problems of capitalism nonetheless.
Labor in high demand. In current money-based capitalism, there's a striking internal contradiction: to make more gain, businesses try to employ less people; individually, this makes sense, but on system level this leads to large-scale unemployment in coexistence with an economy that can nonetheless produce everything for everybody; but, because of unemployment, far from everybody is able to buy this stuff, limiting the growth or even causing the demise of business.
In barter economy however it’s different: in the example of “making gain” above, the seller has to provide demand for products and services of the same value as the products he wants to sell, or no deal will happen. Which provides compensated work to those interested to buy a product from them.
Big business can still exist. Because of scale effects, industrial scale production is said to be more efficient, which means making lower prices. So it can still exist in barter economy, but it can no longer use a limited individual economic perspective of "just wanting to sell for money" without caring where people's money will come from after they replaced more and more workers with machines. Because there's no money as intermediary storage for value (and, more importantly, no interest based money investment opportunities as self-multiplying storage for value), they have to invest their gain into products and services of others completely and simultaneous to making that gain. A barter deal economy thus should always "go round", not being affected by boom-and-bust cycles.
But price of labor increases. I'm quite sure that it does, because the demand for labor increases to 100% of the value of products and services provided. When demand increases and supply stays the same, price increases. But I can't find the exact meachnism how this would happen in this specific case. In effect though, it should be a liberation of workers from the wage dumping present in late-industrial societies.
Now I’d like to more clearly understand the economics of this system. Better terms, clearer thoughts, connecting to economic concepts …
I admit I find this difficult to chew, probably because I literally dont understand inner workings of the economy. But let me try asking what I hope to be a pertinent question (if not, just ignore it): if one can set prices according to market dynamics, as you say, can dynamics be exploited so the few end up catering to the needs of the network, outbidding others for the same exchanges?
If this repeats itself continuously, could it be that i’d perpetuate inequalities? can one get “rich” by meeting substantially more needs than others and being creative about how they use what they get in return? the assumption in a barter (?) is that you offer in exhange for what you need. and like you mention, money is no use as value storage. but some may start offering things at a competitive rate and end up collecting only to “offer” them forward at better rates. there is wealth accummulation, even if not in money.
Noemi, thanks for the input. That’s exactly the kind of input I’m looking for
Yes, what you propose can happen. People can make gain from their work (which is natural, as it’s the conversion of worktime to something else). And creative, gifted people can make more gain than others. In barter like other trade, gain is difference from cost to price. However, different from trading with money, one member’s success does not drive others out of business. Because to have barter trade customers for their produce, they have to take in the produce of their customers. Means everybody who can work can get business, the wage corresponding to their own efficiency and desirability of their offers. Which is why it is supposed to solve unemployment (the nonsense fact of having time and ability to work, but still being excluded from economic participation).
Also, multi-party barter does not allow financial speculation because there’s no money and no interest. It does however allow to make gain by trading of goods, like import/export. Yet as there’s at least some economic value creation involved in transportation, stock organizing and product catalogue maintenance, I tend to accept this because it’s for real-world goods (similar to Silk Road trading) and not just financial gambling.
But you’re correct to say that multi-party barter is not a socially fair system by itself. It just fixes unemployment, but not the rest. And I’m not happy with the fact that it still allows a socially unfair economy. I welcome ideas how to fix this, esp. to arrive at an economy that supports the Commons. Without needing enforcement of rules by the state, because alternative economy can’t count on that.
I just can’t resist asking the question: how do markets clear in your model? Do they clear at all?
Consider me wanting to trade my widgets for gadgets. What if no one wants widgets? More generally: how many gadgets do I get for each one of my widgets? Can I make my own price? Can somebody who owns gadgets but finds my price too high make me a counterproposal? Is it possibile that our expectations never converge, and each of us ends up (unhappilly) sticking with stuff we don’t want – i.e. “the market does not clear”?
This is only a two-way direct barter, but it is important to start small and address these questions. Then add a third person – now suppose I have widgets and want gadgets: you have gadgets, but don’t want my widgets. However, you could do with some thingies – and it so turns out that my cousing has some, and he would willingly trade for widgets. Now your app has a serious chance to make good on its digital hands. How does it work its magic? It is not sufficient to warn us all, because so far we did not speak about prices: there is no guarantee that, once I traded my widgets with my cousin’s thingies (even assuming we reach an agreement on how many widgets and thingies change hands), I will have enough thingies in my hands to buy off you what I consider my desired amount of gadgets!
In (neo- and) classical economics markets clear. This is guaranteed by price adjustment made by profit/utility maximing agents under flexible prices. Essentially, the person that can’t get enough of what she wants will simply raise her bid; just as the person who can’t make a sell will lower her offer. Eventually, supply and demand meet and the market clears. What do you envision happening here?
“In (neo- and) classical economics markets clear. This is guaranteed by price adjustment made by profit/utility maximing agents under flexible prices.”
Similar here. Just that sale and purchase always happen at once for each participant, so to increase their sales (or purchases) they can tune both sales prices and puchase bids. In practical terms, price negotiations happens like this (in our prototype software at least):
Those who want something look through the offers on the platform and put them on wishlists. Example: I might have a wishlist "mobile phone" and three same or similar phones on it that they would like to have for their respective prices, instructing the software to get them one of them in a barter deal. When an offer price of one of these increases, the item gets deactivated and I can decide again if to activate it again. If I get no or not enough barter deals in reasonable time, I can add more expensive alternatives to my wishlist ("increase my bid") and also tune my offers (lower prices, better products) to attract more people putting them on their wishlists. This increases the possible connections how my deal can be part of a network barter, which means it increases its probability.
Those who offer something list it on the platform, choosing amount and price per unit. If they get not enough trades for it, they can lower their offer prices, attracting more people who put this on their wishlists. They can also register more wants on their wishlists, or more expensive alternatives for what they already want.
Also compare the screenshot of our current software which I added to the post.
Some implications of this (and I’m not 100% sure I got this right …):
I guess the last mechanism (tuning demand side to get more own offers bartered), applied to industrial producers, means this: To produce at capacity of their factories, they can’t rely on customers buying their stuff on credit because there is no credit (so no way to create bursting housing, credit card debt etc. bubbles). Instead, they have to register own non-monetary demand, generating business for their customers as well, to make their desired barter deals happen. Of course this does not mean direct barter, but can go via several intermediate steps. But it means that some highly efficient producer has to accept products from a less efficient supplier to generate enough business for himself. Which means that big and small businesses can coexist pretty well.
Let me see if I get this right. The software keeps track of what people want to buy and sell. If it manages to find a subset of those bids and offers that clears, it warns that subset of people (in a more committal version it forces through the transaction, just as in Amazon auctions once you make a bid you have to honor it, lest you end up with a bad reputation score). Right?
It seems to me that, for a small number of users, perfect clearing is going to be next to impossible. In your mockup, Stanton is close to balance: only 7 euros stand between him and equilibrium. What happens then? Does the software ask him whether he is willing to forego those 7 euro, lose the two phones and receive the camera? Does it have some margin (like “force a deal when my distance from equilibrium is less than 5% of the sum at hand”)?
Or does this happen over time? I see that Stanton has already shipped the Nokia to Mark (shipping in advance has some moral hazard problems, but I guess they are nopt insurmountable).
Another question: why are prices in your screenshot expressed in euro? What does that even mean?
FInally (could be an answer to the previous one): are you framing this as a self-sufficient “uncurrency” or do you see it as something existing alongside €?
You ask the right questions, Alberto. Keep 'em coming, they help me explore the whole idea as well. So:
“The software keeps track of what people want to buy and sell. If it manages to find a subset of those bids and offers that clears, it […] forces through the transaction […]. Right?”
Right. In our software, a clearing transaction is always forced, as people have expressed on their wishlists what they want, and these wishes are committal. (We want to automate as much as possible, avoiding the frustration of being alerted often for deals that don’t happen in the end because somebody vetoes them.) A reputation system like eBay’s indicates if a seller has delivered in previous deals (which she is obliged to even when not receiving). People use the reputation to only list wishes for items “sold” by trustable sellers.
“It seems to me that, for a small number of users, perfect clearing is going to be next to impossible. […] Does it have some margin (like “force a deal when my distance from equilibrium is less than 5% of the sum at hand”)? Or does this happen over time? I see that Stanton has already shipped the Nokia to Mark (shipping in advance has some moral hazard problems, but I guess they are nopt insurmountable).”
Correct, finding perfectly clearing trades has a low probability. We have three approaches to this problem:
Alternatives. As explained in a post above, wishlists can / should contain several alternative items for every wish. This increases the possible combinations of traded items, and thus the probability that one constitutes a validly clearing barter deal. Once participants got one of their several listed alternatives on their list in a barter deal, the other items are inactivated automatically. (Similar to "bid groups" in my favorite eBay sniper.)
Same idea as yours: when the deal finder finds a set of items that fullfills every users configurable acceptable loss, it makes the deal happen; advantage for the user is getting more deals, and it's also one part of our own business model: where possible, the platform operators get items from the collected acceptable loss of others, we "live off the trash of barter" :D With everybody's acceptable loss at 5%, our prototype software has generated barter deals in test data networks of 15 persons, each with 5 offers and 5 wants (rough values, I don't remember exactly).
Trading at least some infinitely dividable goods add a "lubricant" to barter that makes perfect clearing more probable (for example, hours of music lessons, other services, or real estate rent, all of which one would collect continually over multiple deals and use up continually). And, as in your second idea, any item can be infinitely dividable if it's about post-paid payments. When the system has some of these to incorporate into barter deals, it's enough as "lubricant". And some might happen, e.g. for trustable long-term customers whom you'd also let pay on invoice in monetary economy. For the buyers, post-paid is of course very attractive as they can go "shopping" in this system and get stuff delivered right away, not having to wait until a deal can happen. The CMB open source project is completely based on such artificial divisions, also for "pre-paying" with barter. But this also makes it require a dense network of P2P trust to work, so we try to avoid this by letting our algorithm do barter deals with items as a whole normally. Which only requires the buyer to trust delivery by the seller, and avoids credit relationships (as they happen when barter payments are dispersed over several deals). But, it makes our algorithm more complex as well: in CMB all barter deals are circular shaped ("circular multilateral barter"), in our system we need "mesh trades" / "network barter" (terminology is still evolving :D ).
“Another question: why are prices in your screenshot expressed in euro? What does that even mean?”
We rely on one function of Euro: a unit of value (and a unit that Europeans already are trained to use and accustomed to, hopefully easing voluntary adoption issues). Of course no “real” Euros are ever used in barter deals (neither as cash nor credit), all is settled in barter (so, products and services). Also, expressing values in Euro makes the involvement of businesses simpler (essentially, a business can barter without legal implications if it writes an invoice for its sales and gets an invoice for its purchase component of the barter deal; tax has to be paid in legal tender of course, so businesses will have to do some business in Euro alongside to pay the taxman).
“FInally (could be an answer to the previous one): are you framing this as a self-sufficient “uncurrency” or do you see it as something existing alongside €?”
We don’t intend to replace Euro, we intend to replace unemployment Euro will take care of itself. It will have its role, but seemingly fails to be a proper medium of exchange for enabling employment. In my understanding, that’s because commodity and fiat money is necessarily scarce to be valuable – see p. 1 of the Circular Multilateral Barter paper for a more detailed explanation. But I’m not sure this is the real reason for underuse of economic resources (like worktime) in Europe’s current situation. Maybe you as an economist have some insights / pointers for me to dig deeper?
Maybe we can gather some more insights in a discussion starting from these draft thoughts: