Unemployment, Recessions and Barter: A Test

by on March 21, 2011 at 7:13 am in Data Source, Economics, History, Law | Permalink

Nick Rowe explains that the essence of New Keynesian/Monetarist theories of recessions is the excess demand for money (Paul Krugman’s classic babysitting coop story has the same lesson). Here’s Rowe:

The unemployed hairdresser wants her nails done. The unemployed manicurist wants a massage. The unemployed masseuse wants a haircut. If a 3-way barter deal were easy to arrange, they would do it, and would not be unemployed. There is a mutually advantageous exchange that is not happening. Keynesian unemployment assumes a short-run equilibrium with haircuts, massages, and manicures lying on the sidewalk going to waste. Why don’t they pick them up? It’s not that the unemployed don’t know where to buy what they want to buy.

If barter were easy, this couldn’t happen. All three would agree to the mutually-improving 3-way barter deal. Even sticky prices couldn’t stop this happening. If all three women have set their prices 10% too high, their relative prices are still exactly right for the barter deal. Each sells her overpriced services in exchange for the other’s overpriced services….

The unemployed hairdresser is more than willing to give up her labour in exchange for a manicure, at the set prices, but is not willing to give up her money in exchange for a manicure. Same for the other two unemployed women. That’s why they are unemployed. They won’t spend their money.

Keynesian unemployment makes sense in a monetary exchange economy…it makes no sense whatsoever in a barter economy, or where money is inessential.

Rowe’s explanation put me in mind of a test. Barter is a solution to Keynesian unemployment but not to “RBC unemployment” which, since it is based on real factors, would also occur in a barter economy. So does barter increase during recessions?

There was a huge increase in barter and exchange associations during the Great Depression with hundreds of spontaneously formed groups across the country such as California’s Unemployed Exchange Association (U.X.A.). These barter groups covered perhaps as many as a million workers at their peak.

In addition, I include with barter the growth of alternative currencies or local currencies such as Ithaca Hours or LETS systems. The monetization of non-traditional assets can alleviate demand shocks which is one reason why it’s good to have flexibility in the definition of and free entry into the field of money (a theme taken up by Cowen and Kroszner in Explorations in New Monetary Economics and also in the free banking literature.)

During the Great Depression there was a marked increase in alternative currencies or scrip, now called depression scrip. In fact, Irving Fisher wrote a now forgotten book called Stamp Scrip. Consider this passage and note how similar it is to Nick’s explanation:

If proof were needed that overproduction is not the cause of the depression, barter is the proof – or some of the proof. It shows goods not over-produced but dead-locked for want of a circulating transfer-belt called “money.”

Many a dealer sits down in puzzled exasperation, as he sees about him a market wanting his goods, and well stocked with other goods which he wants and with able-bodied and willing workers, but without work and therefore without buying power. Says A, “I could use some of B’s goods; but I have no cash to pay for them until someone with cash walks in here!” Says B, “I could buy some of C’s goods, but I’ve no cash to do it with till someone with cash walks in here.” Says the job hunter, “I’d gladly take my wages in trade if I could work them out with A and B and C who among them sell the entire range of what my family must eat and wear and burn for fuel – but neither A nor B nor C has need of me – much less could the three of them divide me up.” Then D comes on the scene, and says, “I could use that man! – if he’d really take his pay in trade; but he says he can’t play a trombone and that’s all I’ve got for him.”

“Very well,” cries Chic or Marie, “A’s boy is looking for a trombone and that solves the whole problem, and solves it without the use of a dollar.

In the real life of the twentieth century, the handicaps to barter on a large scale are practically insurmountable….

Therefore Chic or somebody organizes an Exchange Association… in the real life of this depression, and culminating apparently in 1933, precisely what I have just described has been taking place.

What about today? Unfortunately, the IRS doesn’t keep statistics on barter (although barterers are supposed to report the value of barter exchanges).  Google Trends shows an increase in searches for barter in 2008-2009 but the increase is small. Some reports say that barter is up but these are isolated, I don’t see the systematic increase we saw during the Great Depression. I find this somewhat surprising as the internet and barter algorithms have made barter easier.

In terms of alternative currencies, the best data that I can find shows that the growth of alternative currencies in the United States is small, sporadic and not obviously increasing with the recession. (Alternative currencies are better known in Germany and Argentina perhaps because of the lingering influence of Heinrich Rittershausen and Silvio Gesell).

In sum, the increase in barter and scrip during the Great Depression is supportive of the excess demand for cash explanation of that recession, even if these movements didn’t grow large enough, fast enough to solve the Great Depression. Today there seems to be less interest in barter and alternative currencies than expected, or at least than I expected, given an AD shock and the size of this recession. I don’t draw strong conclusions from this but look forward to further research on unemployment, recessions and barter.

1 John Thacker March 21, 2011 at 7:18 am

Ithaca Hours are one of those things that you hear more about from people who don’t live in Ithaca than you hear about when you live there for five years.

2 Ryan Vann March 21, 2011 at 10:19 am

Right, I think people should be focused more on legit B2B currencies like the WIR. Bernard Lietaer is a pretty decent source on complementary currencies, if anyone is interested.

3 Doc Merlin March 21, 2011 at 7:22 am

Incidentally barter is also a way people use to avoid regulatory and tax burdens. This suggests that an RBC recession if caused by the state, can also result in increased barter.

4 Josh March 21, 2011 at 7:55 am

As you involve more players than just A and B, the problem of coordination increases exponentially. But this doesn’t sound like something the Internet can’t solve somewhere in between craigslist and social media. If something like this doesn’t already exist I’m seriously going to think about providing the supply.

5 Nick Rowe March 21, 2011 at 8:01 am

Alex: Great!

Here is my own old not very good attempt at the same question:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/01/is-barter-countercyclical.html

I had never heard of that Irving Fisher book anywhere. But he is indeed making exactly the same point.

My commenter Pablo added this nugget of data: “Did you know about the emergence of “clubes de trueque” (barter exchanges) in Argentina during the 2000/2001 crisis? At some point they claimed to have something like 10 million regulars (out of a population of less than 40 million) changing goods and services on a weekly basis. The post-2002 economic recovery killed them (plus some mismanagement in the emission of their own privately-issued currency. Yes, they grew so much that at some point they realized they could use their own money rather than the official peso).”

6 David March 21, 2011 at 8:05 am

The founder of the “Liberty Dollar” alternative currency was recently convicted of counterfeiting even though from what I’ve heard, the “Liberty Dollar” bill/certificates and coins did not look like US dollars. Apparently starting up or using an alternative currency is now a good way to get sent to prison.

7 Dean Sayers March 21, 2011 at 10:28 am

Wow! That was at my local middle school – he kicked my brother out of his class because my brother wouldn’t agree not to ask political questions when George Allen (I think it was) came to help promote the bill.

8 Dean Sayers March 21, 2011 at 10:29 am

Nevermind, wrong guy, same name for their projects.

9 Nick Rowe March 21, 2011 at 8:18 am

My guess is that barter would increase in proportion to the depth of the recession *squared*. The gap between the demand price and supply price would measure the incentive to barter, and the output gap would measure the amount of goods bartered if the incentive were big enough to motivate barter. Just like the area of the deadweight loss triangle increases with the square of the tax rate.

10 jibs March 21, 2011 at 8:19 am

Here’s a completely speculative cultural reason: things like barter and alternative currencies sound “nuts”. Here’s it’s quite useless for a great many things where there is no local connection to the seller. Is Verizon going to let me pay for my phone subscription with barrels of pickles? Can I convince my landlord to let me rent for a coop full of chickens? Can I pay my web hosting bill by offering to juggle? Will FreshDirect accept car mechanic service? Can I pay for cancer treatment in peanuts? Come on.

For your examples of hairdressing and such, sure, maybe that could work, but for real expenses? Many people have never even spoken to (or even met) anyone from their phone service company (necessary), hosting provider (necessary for anyone running a web business), health insurance company (no comment), or their landlord (duh). In a remotely-serviced, highly-anonymized service world, these things sound ridiculous.

11 Dan Dostal March 21, 2011 at 7:42 pm

I’m thinking that no one is suggesting that bartering could replace currency exchange. You should probably not use the term “real expenses” either, that’s just going to cause yourself problems.

12 Will H March 22, 2011 at 12:21 am

Agreed completely and great point & examples. It is unrealistic to barter for almost everything these days & people but such a high value on the dollar that i doubt any american would consider bartering.

13 Kasara April 9, 2011 at 4:35 pm

RgWEkx Stands back from the keyboard in amazement! Thanks!

14 q March 21, 2011 at 8:45 am

i have a good salary and want long-term financial security. real estate is still too expensive for my comfort where i live. how the heck is barter going to help me address my wishes?

15 John March 21, 2011 at 10:16 am

Clearly then you are not experiencing a recession and so have no need for an alternative economy.

16 Mr. E March 21, 2011 at 8:47 am

There has been massive increases in barter. Ask any website designer, like my wife.

She got paid an semi-expensive ($1500) gold ring plus cash for a website in 2009.

My friends just got 15-20K of legal work in barter.

In my business, I just got a huge (60-70%) discount on some advertising by loading backing % payout. This is a form of shared risk that would not have been possible a few years back.

17 Nick Rowe March 21, 2011 at 10:56 am

In the absence of hard data, the personal experiences of people like Mr E become really important. Thanks Mr E.

Anyone else got similar confirming or disconfirming stories? Did barter increase or decrease in the recession?

18 Simon K March 21, 2011 at 4:04 pm

Certainly my employer has done a number of trade credit deals, where we agreed to postpone payment or accept equity and PR in lieu of payment. Its not quite barter, but since we’re a non-bank and essentially creating credit, the effect is similar. We didn’t do this before the recession.

19 IVV March 21, 2011 at 4:11 pm

I don’t remember any increases or decreases in barter, but back in 2008 there was a huge surge in nickel-and-diming. Fuel surcharges appeared everywhere, even when shipping was calculated separately. Everyone started demanding extra money for thousands of extra services, and tried to supply the service before you were aware it existed, much less incurred a cost.

It calmed down once everyone realized it wasn’t helping, but we still have the checked-bag charges to live with.

20 IVV March 21, 2011 at 5:32 pm

Incidentally, I’d consider nickel-and-diming to be a form of anti-barter, as the effort is placed into extracting more money. Instead of valuing the possible services available, the value is placed more on the money for the money’s sake.

21 DanC March 21, 2011 at 8:54 am

Increased specialization in workers and very low transaction costs in modern markets leave little incentive for barter. Increased specialization means that the services we offer may be more specific to an industry or specific employer (think autoworkers). The unemployed autoworker who wanted to work in construction would lack the skills to compete with skilled construction workers. With increased information and lower transaction costs, a person seeking to higher a worker can easily find a skilled construction worker.

It also appears that barter requires more trust and interaction between parties. Amish seem to barter but that is based in large part on social relationships. Street gangs engage in barter but they have means to enforce contracts and have social relationships. Prisons have a lot of bartering (and shadow currencies.) Perhaps today we just don’t interact with each other as much.

22 Jim Nazium March 21, 2011 at 9:16 am

It’s not clear to me that barter makes sticky prices irrelevant. If the hairdresser wants 2 manicures in exchange for a haircut, and the manicurist wants 2 haircuts in exchange for a manicure, aren’t they still at an impasse? Aren’t they still both unemployed?

23 Scott B. March 21, 2011 at 9:22 am

Intuitively, I would think that bartering depends not just on the output gap but on some measure that takes into account “desperation” due to lack of the basic necessities from job loss (food, shelter, etc.)–so output gap with respect to some baseline, perhaps, like the poverty level. Thanks to unemployment insurance, we’ve probably taken some wind out of desperation as a cause for bartering, but now that we surely don’t expect any further extensions in UI, I would expect people’s needs to grow with their inability to provide for basic necessities.

24 Nick Rowe March 21, 2011 at 9:23 am

Jim: barter *can* make sticky *money* prices irrelevant (provided all are equally sticky).

If the hairdresser wants 10% too many dollars for a haircut, and the manicurist wants the same 10% too many dollars for a manicure, the relative price is still correct for barter.

25 Bill N March 21, 2011 at 5:41 pm

That sounds like a rather large *if*. What of the framing carpenter? And surely a sufficiently large shock will affect demand for necessities and luxuries differently, those framing carpenters will not be seeking hair dressing, nail finishes, or massages, leading to an excess service capacity.

26 Andrew March 21, 2011 at 9:33 am

Or, the same demand for money but less money. But velocity could just go down due to a lower demand for churn or a shift away from conspicuous consumption. I’m not sure how to ‘prove’ anything.

27 Rahul March 21, 2011 at 9:33 am

Looking at the number of google searches for the word “barter” seems simplistic. The fact that there were relatively more anecdotes of bartering in the great depression cannot directly be taken as evidence for anything much. Those times were totally different and the economy was structured quite differently. It is easy to bater your eggs for the neighbors wheat. These commodities are mostly on a subsistence level and the trust required to judge quality etc. isn’t mmuch. The modern economy is highly globalized and complex which makes such barters difficult. There are trust issues, quality assurance is difficult, transport adds an inefficiency. And luckily due to more government safety nets hardly anyone has been reduced to a subsistence level due to the recession.

On the other hand, at a local level bartering has definitely increased. Just recently I saw plastered in Madison, WI posters for a local barter service. The resurgence in “use local” has also provided a boost to the barter concept.

28 Mark March 21, 2011 at 9:37 am

One issue is that people don’t use the word ‘barter’ in common language.

Go to any internet site (Craigslist, redflagdeals etc) and it’s ‘Buy Sell Trade’. Devising some way to discern the pattern of exchange on these sites might help.

29 Ryan Vann March 21, 2011 at 1:44 pm

Indeed.

30 Mark March 21, 2011 at 3:23 pm

http://www.google.com/insights/search/#cat=5&q=trade&geo=US&cmpt=q

comparing the results for the word ‘trade’ in the tech category against the broad category…click on “Growth relative to the Computers & Electronics category”

look where the divergence happens.

31 Ironman March 21, 2011 at 9:43 am

What if today’s barter has indeed increased, but is hidden because a large portion of the “currency” supporting the trade is the buyer assuming the “transportation and shipping” costs of the trade, which would otherwise be visible as expenses incurred by the seller. It might be interesting to check into the growth of “free” or low-cost Craigslist transactions over time in addition to outright barter-enabling sites like Freestyle.

32 E. Barandiaran March 21, 2011 at 10:09 am

Alex, your attempt to explain the macroeconomics of a barter economy makes me laugh and cry. I laugh at the idea of reviewing R. A. Radford’s classic paper:
http://www.albany.edu/~mirer/eco110/pow.html#
from a macro viewpoint. His paper makes clear why Irving Fisher was wrong when he wrote
“In the real life of the twentieth century, the handicaps to barter on a large scale are practically insurmountable….”
The handicaps to barter on a large scale have ALWAYS been insurmountable– before, during, and after the twentieth century. At best, barter is a tool for economists to use at the beginning of Econ 101.
Once you understand the economics of a P.O.W. camp, you are faced with the challenge of explaining the different payments systems that have emerged to expand trade and therefore production in the past 5,000 years. The failures to separate the function of payments from other functions of modern banking systems and to account for payments systems in macroeconomic theory (particularly in Keynesian macro theory) are still a major obstacle to understand breakdowns in payments systems (a point I made a few days ago in relation to S. Sumner’s surprise about the strengthening of the yen in the week after the earthquake).
Indeed, during the Great Depression, the Great Recession, and many other economic crises, sudden changes in transaction patterns have led to breakdowns in payments systems which in turn aggravated the declines in trade and production. More important, in some crises the breakdowns in payments systems have been caused by “suppliers” and the breakdowns have been a major cause of the declines in trade and production. Thus, in monetary systems of payments, the supplier of currency may have reduced its quantity or failed to increase it pari passu with the transaction demand for it. In accounting systems of payments, the suppliers (that is, the banks that manage the systems) may run into problems of their own because they provide other services, in particular financial services, perhaps to the point of becoming bankrupt if they have taken excessive risks in the provision of these other services. Indeed macroeconomics have little or nothing to say about all these possible causes of breakdowns in the payments systems (ex post macroeconomists disguise as historians to explain what happened but their explanations are based loosely on theoretical models).
I cry at the waste of time in discussing theories that can hardly provide any guidance to public policy, in particular to policies that can resolve the serious fiscal crises at all levels of government in your country. You can expect strong competition from people willing to push ideas that will hardly make any sense. Macroeconomists will regard them as charlatans but before doing that they should look at the failures of their theories. For example, just for fun, I’d like to know your reaction and Tyler’s to these two proposals:
http://online.wsj.com/article/SB10001424052748703560404576189011586690944.html
http://www.newsobserver.com/2011/03/17/1059132/legislator-says-the-state-needs.html

33 Andrew March 21, 2011 at 10:34 am

If just one of the people in the chain in the thought experiment decide not to continue the roundabout for any reason you get the same observed effect.

34 Joe Smith March 21, 2011 at 10:44 am

There are a slew of new computer software applications available on the marketplace that can help your small business. For more information check out http://onpointbizbuzz.com/

35 Lee Kelly March 21, 2011 at 10:56 am

Another way of saying the same thing: the U.S. dollar is behaving less like a medium of exchange than it used to.

It would be interesting to research other nations that often use the U.S. dollar as money, because their people have more readily available close substitutes than U.S. residents. For example, with the global U.S. dollar shortage, have people in these nations shifted toward using their own money? If the Great Recession really was the by product of an excess demand for money, then I suspect this to be true. To the extent that people have fewer close substitutes for U.S. dollars, barter should become more prevalent.

36 Andrew March 21, 2011 at 10:58 am

The roundabout model sounds more like what Kling calls the pattern of specialization and trade, and the same effect would happen if gas prices went up, so I’m not sure why it would preclude an RBC theory.

37 Mark Little March 21, 2011 at 11:13 am

It looks like Explorations in the New Monetary Economics is now out of print. (Amazon shows only a few used copies available.) Would you consider reissuing it as a $.99 Kindle edition?

38 E. Barandiaran March 21, 2011 at 11:18 am

Nick Rowe,
I’m Argentine and old enough to know the details of what happened in my country since 1951. I’d like to know the source of your information about the “clubes de trueque” in the last crisis because it’s the first time I heard about such a large number of people participating in barter transactions. Anyway, you’re ignoring the most important fact that precipitated the events of December 2001. For some time the government had had problems to finance the deficit and re-finance debt payments and in early December the Minister of Finance (Ph.D. Economics, Harvard University) closed the banks (in Spanish it was called “el corralito”) so the government can use all the funds in the system. In other words, the government destroyed the banking system, including the payments system. Later in December the government collapsed and a new government got rid of the convertibility (the peso was devalued) and defaulted on most of the public debt. In the first quarter of 2002 there was a large breakdown of the payments system and a result of it some stories were told about barter transactions. By mid 2002 the payments system had been restored and the stories about barter transactions were at best a footnote of what had happened.
BTW, that Minister of Finance was judged by his Harvard peers and found fit to perform as professor at Harvard University.

39 Nick Rowe March 21, 2011 at 11:51 am
40 Nick Rowe March 21, 2011 at 2:44 pm

My comment in reply is stuck in moderation, because of 2 long links. But if you go to my blog post, you see Pablo’s comment, plus a little lower down a link from JP Koning.

41 E. Barandiaran March 21, 2011 at 6:58 pm

Thanks for your reply. I checked the research work on which Pablo based his comment and it confirms first that regardless of the name it was not barter but a case of secondary currency, and second that it was an experience of minor significance –very limited in time and in place. Indeed it was a footnote to the severe crisis of 2002 –as much as the long lines at stores during the hyperinflation episodes of the 1980s (BTW, the same Minister of Finance I mentioned in my earlier comment was responsible for the first hyperinflation episode in the second half of 1982).

42 DK March 21, 2011 at 8:34 pm

BTW, that Minister of Finance was judged by his Harvard peers and found fit to perform as professor at Harvard University.

Another data point on how economics is a science, I suppose.

43 chris March 21, 2011 at 11:27 am

The unemployed hairdresser wants her nails done. The unemployed manicurist wants a massage. The unemployed masseuse wants a haircut. If a 3-way barter deal were easy to arrange, they would do it, and would not be unemployed.

But all three of them want to eat and pay the rent more than they want each others’ services, and they need cash for that. The landlord can’t possibly accept 60 haircuts per month in lieu of rent, even if they wanted to.

More importantly, the reason they are unemployed in the first place may be that the rest of their customer base *also* wants to eat and pay the rent more than they want manicures, massages or even professional haircuts. Three purveyors of luxury services are perhaps a poor choice of example for why their services are “mysteriously” left on the table in a recession.

Even if they did exchange their services with each other they’d still be evicted and starving.

P.S. And of course those are unusually low-capital-required occupations (although still not zero). The unemployed mechanic might or might not own his own hand tools, but he probably doesn’t own his own lift, let alone a convenient way of storing and ordering spare parts (which also can’t be paid for in haircuts), etc. And that’s even after handwaving away his ability to find potential customers and compete with the garages that are still in business.

44 Nick Rowe March 21, 2011 at 12:07 pm

Sure. Many mutually-improving barter deals will require a lot more than 2 or 3 people. They need to bring in the landlord and garage owner too, and all the people that they want to buy stuff from. Barter is hard. That’s why we see so little barter. And that’s why we have recessions. But, the incentive to try to do barter will be much bigger in recessions. And so some barters will be done — those which aren’t quite so hard to arrange.

45 chris March 21, 2011 at 5:26 pm

But, the incentive to try to do barter will be much bigger in recessions.

Whose incentive? The landlord has no incentive to be brought into a barter scheme while *any* potential renter still has cash. The recession would have to be so big it leaves a substantial fraction of his units unrented for him to even consider accepting some kind of barter unit from *some* tenants (and even then, no more than he has a use for the barter units).

The employed, in general, have cash and would prefer not to barter (the transaction costs are horrible, plus they don’t have as much time away from their job to do work-for-barter anyway). So unemployment might have to reach truly massive levels, like 20%+, before you have a critical mass of barter-favoring people.

46 Cliff March 21, 2011 at 12:12 pm

Just about every mechanic has his own tools and jack stand and can do the majority of repairs from anywhere.

47 Rich Berger March 21, 2011 at 11:27 am

An interesting post inasmuch as Nick Rowe attempts to examine what is happening at the micro level. I understand that the Neo-Keynesian synthesis is supposed to integrate micro and macro and save Keynesian theory, but from what I can determine, it seems incomplete and analysis like Rowe’s is likely to be helpful. Besides using deliberately confusing terminology, Keynes seem to operate at too high a level of aggregation (no pun intended) and abstraction. If I were a cynic, I might believe that Keynes explained his theory in a way that made it difficult to spot the errors.

48 Paul Johnson March 21, 2011 at 11:31 am

Axel Leijonhufvud redux. Friedman/Schwartz/Keynes/Bernanke on the same team. Brad D. and Paul K. object to Friedman’s pro-capitalism stance and unfortunately let it color their reaction to his macroeconomics.

49 David Blackburn March 21, 2011 at 11:34 am

The Argentine experience was studied in a recent JME article (Colacelli and Blackburn, 2009), utilizing survey data from participants and neighborhoods where the “barter clubs” were located:

http://ideas.repec.org/a/eee/moneco/v56y2009i3p295-308.html

The paper finds that there was a non-trivial increase in *real* economic output as a result of the growth of these clubs.

50 E. Barandiaran March 21, 2011 at 12:12 pm

David, thanks for the link. I had seen a draft of this paper a few years ago. It’s not about barter but about the emergence of a secondary currency. They analyze the emergence of what is called a local currency, one that is used by low-income people for low-amounts transactions within a neighborhood of a local community. Although they refer that 7% of the population were involved, they rely on samples taken in two cities (Tucuman and Buenos Aires) and in the 2003 survey they relied on what people remembered they had done in 2002. It’s important to understand that the crisis of late 2001 implied a large decline in domestic output and incomes in 2002 and in many poor neighborhoods people struggle to survive.

FYI, in Argentina there has been a long experience with secondary currencies, some issued by the national government (in the second half of 1962 they were called Bonos 9 de Julio), provincial governments (several times, including 2001 when the state of Buenos Aires issued the Patacon), and cooperatives and other local organizations. In addition, the US dolar has been used many times for large transactions

51 Ryan Vann March 21, 2011 at 1:50 pm

Great comments Brandiaran,

I think this thread somewhat got hijacked by a preoccupation with barter. Alternative/competing currencies (or secondary currencies as you call them) seem like a plausible counter cyclical solution to the demand problem identified in the original post, from what I’ve seen. Is there anymore you could share about your experience with them in Argentina?

52 E. Barandiaran March 21, 2011 at 6:44 pm

Ryan Vann,
Yes, all these secondary currencies are aspirins to alleviate pain while you wait for a cure (that is, for policies to resolve a financial and/or fiscal crisis). Economists familiar with their history don’t waste time with them. Indeed, I’m surprised that Alex has written a post about barter and secondary currencies as if they were relevant to the understanding of modern economies.

53 E. Barandiaran March 21, 2011 at 7:55 pm

Ryan Vann, for your entertainment let me share with you something that is going on in Argentina today. The government claims that inflation is well below 10% per year but professional economists estimate that in the past 12 months inflation was around 30% and that it will be close to 40% during 2011. To close the debate the government is imposing fines on economists that do not agree with the official estimate of inflation and it has called the IMF to provide guidelines for a new methodology to estimate inflation. There is a presidential election in October 2011 and you can bet that official inflation will increase sharply after the election, regardless of who wins it. Those government actions will be a footnote to the great inflation of 2011-12. Today the interesting story in Argentina and all countries that produce commodities is how they are spending the windfall gain.

54 Silas Barta March 22, 2011 at 6:06 pm

It’s a good thing the government doesn’t lie with official inflation statistics here in the USA!

55 David King March 21, 2011 at 11:48 am

There is a publicly traded company called ITEX that facilitates barter trade among businesses. Here is their stock page on Google: http://www.google.com/finance?q=OTC:ITEX
and their webpage:
http://www.itex.com/

They have been around for a couple of decades. Their stock price, revenues and membership may be a reasonable proxy for the strength of the barter economy.

56 gmc March 21, 2011 at 11:56 am

One potential reason why there is less attention to alternatives these days than in the Great Depression (apart from the obvious – that the 2008-2011 downturn is an order of magnitude less severe) is that now you can be prosecuted for providing such an alternative.

http://en.wikipedia.org/wiki/Liberty_Dollar

Merely as an example.

57 Richard Gregory March 21, 2011 at 12:13 pm

Barter is often used as a synonym for haggling. You do see a trend when you use bartering, which is usually reserved in common usage for the exchange of goods and services without currency:http://documentingthewreckage.blogspot.com/2011/03/bartering-in-depressed-economy.html

58 Andrew March 21, 2011 at 12:16 pm

“P.S. And of course those are unusually low-capital-required occupations (although still not zero).”

That was my thought, how much labor has to be emphasized over capital for the model to work.

59 Nick Rowe March 21, 2011 at 1:12 pm

You can barter capital services as well as labour (and land). But the whole point of the argument is that barter is costly. Just that it’s not always prohibitively costly.

60 Andrew March 21, 2011 at 1:55 pm

Thanks. think I was talking more about the initial model than the barter-tweak, but I’m talking out of my asset class here.

61 Chris March 21, 2011 at 1:01 pm

As has been pointed out a few times in the thread, the real problem in a modern recession is not to find work for hairdressers but to find work for chip designers. The reason our economy is so productive is the reason barter doesn’t work. Barter works great in a 10000 BC economy and I suspect a little less (with a few fits and starts) each t moving forward.

62 E. Barandiaran March 21, 2011 at 1:11 pm

Alex, your attempt to explain the macroeconomics of a barter economy makes me laugh and cry. I laugh at the idea of reviewing R. A. Radford’s classic paper:

http://www.albany.edu/~mirer/eco110/pow.html#


from a macro viewpoint. His paper makes clear why Irving Fisher was wrong when he wrote
“In the real life of the twentieth century, the handicaps to barter on a large scale are practically insurmountable….”
The handicaps to barter on a large scale have ALWAYS been insurmountable– before, during, and after the twentieth century. At best, barter is a tool for economists to use at the beginning of Econ 101.


Once you understand the economics of a P.O.W. camp, you are faced with the challenge of explaining the different payments systems that have emerged to expand trade and therefore production in the past 5,000 years. The failures to separate the function of payments from other functions of modern banking systems and to account for payments systems in macroeconomic theory (particularly in Keynesian macro theory) are still a major obstacle to understand breakdowns in payments systems (a point I made a few days ago in relation to S. Sumner’s surprise about the strengthening of the yen in the week after the earthquake).
Indeed, during the Great Depression, the Great Recession, and many other economic crises, sudden changes in transaction patterns have led to breakdowns in payments systems which in turn aggravated the declines in trade and production. More important, in some crises the breakdowns in payments systems have been caused by “suppliers” and the breakdowns have been a major cause of the declines in trade and production. Thus, in monetary systems of payments, the supplier of currency may have reduced its quantity or failed to increase it pari passu with the transaction demand for it. In accounting systems of payments, the suppliers (that is, the banks that manage the systems) may run into problems of their own because they provide other services, in particular financial services, perhaps to the point of becoming bankrupt if they have taken excessive risks in the provision of these other services. Indeed macroeconomics have little or nothing to say about all these possible causes of breakdowns in the payments systems (ex post macroeconomists disguise as historians to explain what happened but their explanations are based loosely on theoretical models).


I cry at the waste of time in discussing theories that can hardly provide any guidance to public policy, in particular to policies that can resolve the serious fiscal crises at all levels of government in your country. You can expect strong competition from people willing to push ideas that will hardly make any sense. Macroeconomists will regard them as charlatans but before doing that they should look at the failures of their theories. For example, just for fun, I’d like to know your reaction and Tyler’s to these two proposals:
http://online.wsj.com/article/SB10001424052748703560404576189011586690944.html
http://www.newsobserver.com/2011/03/17/1059132/legislator-says-the-state-needs.html

63 Thomas DeMeo March 21, 2011 at 1:18 pm

The underlying problem is the damage caused by the past economic activity between the hairdresser, the masseuse and the manicurist. They have made various past deals among one another. Mistakes were made, and they now have trouble figuring out a reasonable way to untangle them in a fair way, so going forward trade can continue. Money is just a way of keeping score. The same thing could happen in a barter system. The demand for money is driven by the need to disentangle.

The medium of exchange is only interesting in that barter can be a way to create a deal which might be done outside of this entanglement.

64 Andrew March 21, 2011 at 1:59 pm

Very interesting way of thinking about it. I find it interesting that when we need a competing currency or a barter alternative that’s when the state cranks up the transaction costs of these.

65 Right Wing-nut March 21, 2011 at 4:21 pm

Monopoly & monopoly money, dontcha know…

66 Bill Benzon March 21, 2011 at 2:43 pm

Here’s little post about local currency in the small UK town of Totnes. And here’s a site about Berkshares, local currencey in the Berkshires of Western Massachusetts.

67 MPS17 March 21, 2011 at 2:56 pm

I can think of one reason right away why the effect could be much smaller now than in the past. The wealthier a nation becomes, the more goods derive from a large amount of coordination. This makes it very hard to arrange for bartering services.

For instance, a person who works on an assembly line putting together cars, after being laid off, can’t really barter her services; they have no value outside the context of a factory with the rest of the assembly-line workers with materials in hand making cars. I would presume there are more such jobs now than in the past, because I think wealth creation comes largely from innovation, an important (the most important?) component of which is organizational innovation which coordinates the efforts of specialists.

68 Meg March 21, 2011 at 3:06 pm

I wonder how open source software, blogging and other “free” forms of trade would fit into this framework. Though it is clearly a small demographic, there may be a cultural norm of sharing rather than direct barter that has filled some of the unfulfilled demand and used some of the unused supply of labor.

For example, I chose 3 older languages (so they are less likely to be affected by fads or changes in area focus) and looked at Ohloh.net, which can produce graphs of open source activity. http://www.ohloh.net/languages/compare?commit=Update&l0=cpp&l1=java&l2=css&l3=-1&measure=projects All three languages saw activity rise during the recent recession and decline since the beginning of the recovery. I can’t find equivalent numbers for usage, but I would expect to seem similar dynamics.

Interestingly, focusing on goods with near-zero distribution cost may reduce one side of the inefficiency of barter. While people may still spend time on inefficient goods, it is not the case that only people with something to directly barter back can use them. Once a project is up on sourceforge, anyone, freeloader or no, can use it. Thus, modern barter may be in goods that are more efficient to create outside of the monetary economy, rather than less.

One other limited recent example: used video games, which are often purchasable by trading in old games rose during the recent recession as a percentage of all games sold. http://hothardware.com/News/Used-Game-Sales-Soar-During-Recession/ It may be that the internet is changing how people barter by, for example, reducing the impulse to barter locally because of a lower tolerance for transactional costs, rather than reducing barter all together. It is probably easier to move spending on material goods to Walmart and substitute entertainment and informational goods instead. The google trends for “torrent” for example, that is something for nothing, clearly followed the shape of the recession: http://www.google.com/trends?q=torrent&ctab=0&geo=all&date=all&sort=0

69 Bob Montgomery March 21, 2011 at 3:19 pm

In my experience, you’re much more likely to see the term “for trade” in online ads than the term “barter.”

For example, here’s some guy looking to unload his video game collection:

my entire collection is for sale. i can either sell all at once or one piece at a time. id like to get 2700 for the entire collection. im located in thorpe wa, im open to offers and possibly trades. im not looking to trade for any more games. im trying to downsize.

http://seattle.craigslist.org/oly/vgm/2277503139.html

Google trends shows a steady increase for that term from a low point of mid-2006 to a high in about mid-2009, where it has been steady since.
http://www.google.com/trends?q=for+trade%2C+barter&ctab=0&geo=us&geor=all&date=all&sort=0

70 Will March 21, 2011 at 4:40 pm

One simple explanation is that large systematic barter organizations only make sense in a recession of very long duration, due to startup costs. This recession will probably not be very long, and hasn’t been long so far.

71 themusicgod1 March 21, 2011 at 11:44 pm

Anything to come out of this discussion will be incomplete without some mention of
Ripple — the p2p monetary system. Example

* It may be used to connect LETS’s
* It may be used as this ‘scrip’ .. personally I’ve created quite a bit of value – made transactions happen between trusted parties that *couldn’t* have happened of we had used more illiquid cash

72 Will H March 22, 2011 at 12:24 am

Bartering would not increase during a recession now because there are many more specialized businesses with different niches. For example, if worker A wants something worker B sells but worker B does not want what worker A sells bartering can not work because worker B will only except money in exchange for his good or service. There was more bartering during the great depression because there were significantly less goods and services to be exchanged so people wanted just about the same thing. Also, with all big business, people are not allowed to pay by way of barter and most people rely of big business for there most basic needs and wants (Ex: Verizon Wireless, Time Warner cable, most technology in general). Lastly, bartering is only a short-term cure for lack of money because you are not making any money to save and spend later. Bartering does not give the chance for someone to stretch there dollar further either.

73 Hendrik Rood March 22, 2011 at 9:37 am

The discussion here does not reflect on one point:
Exchanging gold / silver coins for other goods is effectively engaging in barter.
In a similar fashion those who start chasing commodities in response of a financial crisis, show a propensity to trust barter more than the monetary system.

Most of the barter discussions above seem to focus more on the “service economy” examples, which is quite visible for the kind of occupations described:
– Krugman’s babysitting co-op
– The unemployed hairdresser wants her nails done. The unemployed manicurist wants a massage. The unemployed masseuse wants a haircut.

So aren’t you missing the bigger picture and aren’t you looking mainly at the poor man’s options to barter by focussing on the co-ops in the 1930s?

74 thinker March 22, 2011 at 1:43 pm

I once heard that the US economy has evolved into a “service based” economy, we don’t make things anymore, we provide services (education, cleaning, haircuts, tax prep), so it does seem strange that bartering hasn’t taken off. But then again, services like “call center support”, “programmer” don’t really lend themselves to bartering… Someone should make a website “I need a…” and have some search engine form a link/chain of bartering, like a dating site. But then again, it would probably just reduce into a prostitution ring….I guess we’re stuck in this recession for a while!

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76 Noah Yetter March 23, 2011 at 5:59 pm

The leap from “no one has any cash” to “there is an excess demand for money” is a bridge too far. I just don’t see the connection between the Depression-era anecdotes you quoted, and current events. To me, “excess money demand” translates as “refraining from trading money for goods now because its option value is high”, rather than “everyone wants to trade goods for money but no one has any money so no trades occur”. I see how the second is technically correct given the definitions of these terms, it just seems irrelevant.

Furthermore it seems only to be the proximal, rather than root cause. “Excess money demand,” if it even exists, is not the cause of the drop in economic activity, it is merely a symptom of it. Economic activity is in decline because new information is causing perceptions of value to change and realign. Cf. Tyler’s ZMP story: you are out of work because what you produced is no longer valuable.

77 Lark April 9, 2011 at 4:13 pm

zpCzyO With the bases loaded you struck us out with that answer!

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