What do barter exchanges imply about depressions and recessions?

by on September 13, 2012 at 3:31 am in Economics, Uncategorized | Permalink

As was the case during the Great Depression, parallel currencies and barter exchanges are springing up around Spain and some other parts of Europe.  Here is one account:

Psychologist Angels Corcoles recently taught a seminar about self-empowerment for women, and when she finished the organizers handed her a check with her fee. The amount was in hours, not euros.

But Corcoles didn’t mind. Through a citywide credit network that allows people to trade services without money, the 10 hours Corcoles earned could be used to pay for a haircut, yoga classes or even carpentry work.

At a time when the future of the euro is in doubt and millions are unemployed or underemployed with little cash to spare, a parallel economy is springing up in parts of Spain, allowing people to live outside the single currency.

In the city of Malaga, on the country’s southern Mediterranean coast just 80 miles from Africa, residents have set up an online site that allows them to earn money and buy products using a virtual currency. The Catalonian fishing town of Vilanova i la Geltru has launched a similar experiment but with a paper credit card of sorts. It implements a new currency worth slightly more than the euro when it is used at local stores.

You can find another series of accounts here.

One interesting feature of these enterprises is that they push a bit of emphasis away from sticky wage and price theories of depressions.  In essence the sellers participating in these exchanges are price discriminating, by trying to sell more of their output — for lower prices — through credit or barter mechanisms.  Getting back credits in return really is like receiving a lower price or wage.  So these exchanges show that at least some people are wildly willing to cut prices, wages, and returns, if only to sell more.

(Please, no need for a lecture here on Keynes and downward price spirals; the ECB is keeping a price floor at the very least.)

So which factors behind depressions receive marginal support from the prevalence of these practices?  First, these exchanges are a substitute for dysfunctional credit markets.  Second, these exchanges attempt to solve the buyer-seller-buyer coordination problems analyzed by Clower, Leijonhufvud, and others.

Addendum: Here is Alex’s earlier post on barter and recessions.  And Scott Sumner comments.

prior_approval September 13, 2012 at 4:17 am

‘At a time when the future of the euro is in doubt and millions are unemployed or underemployed with little cash to spare’

Well, two points -

1. The future of the euro is bit less in doubt after yesterday’s Verfassungsgericht decision in Germany, and the sweeping rejection of anti-euro parties in yesterday’s Dutch elections (the right wing anti-euro party got slapped down particularly hard, at least according to the party leader, who called it the equivalent of being knocked off his chair.)

2. From wikipedia – ‘Previously, one of the most prominent systems was LETS, local exchange trading system, a trading network supported by its own internal currency. Originally started in Vancouver, Canada, there are presently more than 30 LETS systems operating in Canada and over 400 in the United Kingdom. Australia, France, New Zealand, and Switzerland have similar systems. Time Dollars, Ithaca Hours, and PEN exchange are among the most successful systems in the USA.’ http://en.wikipedia.org/wiki/Local_currency Strangely, only one of those countries uses the euro, which makes the spread of local currency idea a bit harder to peg on the euro’s future. For those interested in a slightly broader

And really, this is not ‘barter’ – for more information about the system above, this is not a bad link – http://en.wikipedia.org/wiki/Local_exchange_trading_system

‘So these exchanges show that at least some people are wildly willing to cut prices, wages, and returns, if only to sell more.’
Let me introduce you to the concept of GPL software – or indeed, any activity humans can engage in without thinking that their time is reduced to an economic equation, or the need to ‘maximize’ it. But then, people don’t really need that much of an introduction any more, do they? It is just the people seemingly unable to grasp that humans do things out of the pleasure of doing them, and not because they see everything as a transaction in terms of buying and selling. On this note, let me introduce wfmu.org – a fantastic station interested, apparently, in playing music.

Cliff September 13, 2012 at 8:59 am

Oh okay, so it’s entirely unrelated to the Euro crisis and they don’t want to get paid anyway, they are actually doing their work just for the fun of it. Got it, thanks for the clarification.

Bernard Guerrero September 13, 2012 at 12:12 pm

Non sequitur. The last para talks about people doing stuff “for pleasure”, but all of the rest of it is discussing systems that exist precisely _because_ people want something in exchange for their time, that is, to be paid or receive goods in exchange. If I wish to fly a kite, I do not need to join a barter system, I can simply go fly a kite.

John S. September 13, 2012 at 7:49 pm

If I had a euro for every article I’ve read in the past few years saying that the results of the previous day’s meeting (or referendum, or decision, etc.) finally solves the euro crisis, I could corner the market. Go to the NY Times site and do a search on “deal to save the euro”.

the commentariette September 13, 2012 at 4:37 am

Apart from media attention, are any of these operations of actual economic significance?

Trading a lecture on self-empowerment for a yoga class (whether or not it’s via a private currency) would seem to represent a negligibly small fragment of even an upper-middle class economy.

There’s nothing wrong with such a system. If it keeps an un-/under-employed people better attached to the community, the benefit is probably larger than hypothetical loss of tax revenue – especially since the exchange would most likely never have taken place on cash basis.

But are there documented cases of a local economy using such a system for trading any significant portion of daily necessities (housing, food, clothing, transport, utilities)?

RPLong September 13, 2012 at 9:03 am

They are certainly of significance to the individuals engaging is these operations.

the commentariette September 13, 2012 at 11:33 am

But are they? I see the value in the context of connection to the community and the workforce or allowing the community to give a hand to people who might feel ashamed to accept charity.

But trading a motivational lecture for a yoga class seems to be pretty far up on the scale of discretionary luxury services…

dearieme September 13, 2012 at 4:59 am

Aren’t such stunts a way of avoiding income tax?

prior_approval September 13, 2012 at 5:53 am

The tax authorities most certainly view them that way, which is why very few of these experiments tend to expand beyond the extremely local scale.

However, an interesting exception is demonstrated by copyleft software, where different programmers ‘barter’ their talents and skills to create something which they can each use – for example, the LAMP stack which the Internet pretty much runs on. Till now, no tax authority has attempted to tax someone like Torvalds for the software he created.

dearieme September 13, 2012 at 5:56 am

Come to think of it, in the EU it’s also a way of avoiding Value Added Tax.

Gunnar Tveiten September 13, 2012 at 9:00 am

There’s a rather significant difference. Torvalds does not, in return for his effort, receive anything that is exclusive to him alone. It’s true that he may use all of the software that others have developed under free licenses, but that is true for the rest of us too.

He *does* receive an increase in respect, and as such he can demand a higher market-price when he does sell his skills. But if that should be taxable, then reading a textbook should also be taxable since after you do, your skills may have a (slightly) higher market-value.

Chris R September 13, 2012 at 5:14 am

I’d say, this is evidence in favor of some sort of coordination friction, perhaps with thick-market effects.

My great grandfather was a dentist during the Depression, and he accepted things like chickens or house-painting as payment. The guy ate a LOT of chicken as a result.

Doc Merlin September 13, 2012 at 5:18 am

No Chris, if that was true, there would be no exchange at all. Barter exchanges have more friction than non-barter exchanges.

Merijn Knibbe September 13, 2012 at 8:45 am

Barter exchanges are typically ritualized (like many money exchanges, by the way, think of the cash rgister at the supermarket – you only can pay there) which is more important to get transaction costs down than the existence of money. Money by the way has huuuuuuuuge transactions costs. Think of all the accountants, the IRS, the Central Banks, the banks and whatever – all of them in the end part of the transaction costs of a monetary society.

rpl September 13, 2012 at 9:37 am

Paying at the register is not a ritual; it’s a practical consequence of the fact that in order to perform any exchange you have to give the thing you’re trading to the person you’re trading with or his representative. That’s a lot easier to do if that representative is easy to find, such as when he’s standing by the box where he puts the money next to the door that you were going to exit by anyhow. By contrast, the defining characteristic of a ritual is that it is performed primarily for its symbolic, not practical, value. Where’s the symbolism of the cash register? None that I can see. The closest thing I can think of to a ritual in a money economy is the token payment of a dollar for property that is actually being given away, but that sort of transaction is pretty rare.

Also, none of the things you mention are examples of transaction costs because they don’t scale with the number of transactions. The reason transaction costs are important is that because they attach to each transaction, you can’t amortize them away with volume. Furthermore, things like accountants and tax collectors are largely independent of whether your economy is monetary or not. A barter society in which the state wants to collect taxes in kind will need both of those things, and a monetary economy with a weak to nonexistent state will have no tax collectors, and very little in the way of accountancy.

Chris R September 13, 2012 at 11:15 am

I think that we’ve misunderstood each other somehow. I was trying to make the same point. My great-grandfather would have rather had cash, and the unemployed townsfolk would have rather paid cash, but unemployed townsfolk didn’t have cash, so they had to barter instead. Some major friction in “regular” markets was causing people to do barter instead.

Doc Merlin September 14, 2012 at 4:18 am

Ah, thanks.

Ritwik September 13, 2012 at 5:19 am

Parallel currencies seem to be more about preventing knife-edge equilibria of prices in a deflationary currency crisis and overcoming high variance rather than implementing wage flexibility. To pay/ be paid in hours is to be paid in purely real terms, presumably because the real value of the nominal payment is under doubt.

The experiment with a wage-time unit of account/ means of payment is interesting but what if the hours start being hoarded? Hours are, after all, generic wealth,not expressions of specific purchase decisions. The inter-temporal coordination problem still exists. The Clower-Warburton-Yeager problem has been solved but the Clower-Leijonhufvud-Keynes problem remains.

mpowell September 13, 2012 at 3:19 pm

I don’t think it has anything to do with real versus nominal payment terms. But you second point is very interesting. In some ways, I think this exchange works better because the medium is imperfect. Hoarding hours is a bad idea because you have a severe inflation risk and you don’t get paid interest. It’s like having a very aggressively loose monetary policy. And you are jump starting a currency system where nobody is carrying any debt. So it has a lot of positive features compared to the prevailing currency in the Euro region.

Ritwik September 13, 2012 at 8:50 pm

Oh but hours are inflation protected (unless productivity falls)! Hours are 0% real interest rate wealth. At current levels of nominal rates and expected inflation, the move actually raises real rates. If the Austro-Swedish-Keynesian inter-temporal co-ordination tradition has any merit, this move is unlikely to get anyone out of a recession. If it does help overcome the recession, score a point for the alternative monetarist/ atemporal exchange tradition.

GW September 13, 2012 at 5:26 am

This illustrates David Graeber’s observation that barter, rather than being a precursor state to a currency, emerges when a currency and the state issuing the currency is in crisis.

Alex K. September 13, 2012 at 8:27 am

Accepting payments in hour credits is not barter — it is trade in weird currency.

David Graeber is probably correct that true barter was a historically insignificant phenomenon, but his style of argument is not particularly convincing.

He claims that there is no evidence for such barter and that historical examples of barter come only after various forms of money circulated. Yet, Cabeza De Vaca, in his memories of the first crossing of North America, mentions that at one point he was used as a “traveling salesman” by one tribe that protected/enslaved him, using him to trade various goods with tribes that were otherwise hostile to the tribe “employing” him.

Also, societies which used barter were unlikely to keep the barter system, flourish and preserve the evidence of barter practices — at some point they would very likely evolve to money based trading. Hence, in this case, the silence of the evidence is not an extremely convincing argument.

Merijn Knibbe September 13, 2012 at 8:49 am

Well, not all things considered by some to be ‘primitive money’ were in fact money. Wampums, for instance, were used as money by white settlers and SUBSEQUENTLY also, to an extent, by native americans. Up to that time, they were as much money to these native americans as olympic medals are money to us.

Alex K. September 13, 2012 at 9:39 am

I’m not sure I get your point.

When Cabeza De Vaca was a lonely European in a virgin part North America it is unlikely that he influenced the behavior of several tribes. And those tribes did in fact trade red ochre for say, arrow heads (I can check the text for the exact items traded).

And I don’t think that Graeber argues that Native Americans did not use money — he argues that they did not use barter.

Zephyrus September 13, 2012 at 11:40 am

My recollection of the Graeber book doesn’t have him saying that barter never happened. Where it happened is when dealing with outsiders. But the predominant way of economic interaction within a given tribe or village did not involve barter, which doesn’t conflict with your point.

nickMR September 14, 2012 at 11:58 am

The idea that native Americans and other Neolithic and hunter-gatherer peoples did not use shell jewelry for monetary purposes before the white man came is a modern mythology.

Doc Merlin September 13, 2012 at 5:27 am

That you have a shortage (in the microeconomic meaning of the word) of available money? This means that there is something driving a wedge between demand and supply. Also, because the barter transaction is happening, still, its not a traditional market failure.

These things can cause that:
1) taxes are too high, (Traditionally barter is a way of avoiding taxes.)

2) regulation is to onerous, (During the Great Depression, there was government floors on numerous goods, so barter became common.)

3) there are high and new artificial barriers to entry somewhere in the market thats keeping segments without any currency. (This was common in elementary school when I was growing up. We didn’t have any currency at school so we bartered food items in our lunches, instead of selling/buying them.) This also happens in jails for short periods of time (like right after cigarets were banned), but quickly a new currency develops.

4) There isn’t small enough currency for some transactions (Don’t laugh, this actually happened in England during certain periods. Plenty of money, but a lack of copper coins.)

Doc Merlin September 13, 2012 at 5:27 am

Bah, please ignore the grammar and spelling mistakes in that. I should have read it over before posting.

Selina Markham September 13, 2012 at 5:34 am

Barter exchanges are NOT a mechanism to avoid taxation. Whoever stated this is ignorant of how taxes and barter exchanges work. Barter transactions must be recorded in the same way that you record your cash sales and purchases.

A business barter exchange barter account is very similar to a bank statement.

Every time you make a sale your account balance increases in barter dollars. Every time you make a purchase your account decreases. You record barter transactions very much like normal purchases and sales.

Whenever you receive a payment for a sale in Barter you record the value into that account. Every time you use barter dollars to make a purchase you deduct barter dollars from that account and allocate it towards the appropriate expense.

It is important to remember that business expenses come directly off your bottom-line. By balancing out your sales with an equivalent amount of purchases the tax-effect should be minimal. At the end of the year, provided that your sales and purchases are roughly the same there should be no “profit” in barter dollars and therefor no negative tax position.

Almost all tax authorities have rules about barter:

South African Revenue Service: ““Barter transactions are treated as normal taxable activities and should be recorded
accordingly.””

Australian Government Taxation Office: “Businesses involved with bartering need to be aware that barter transactions are assessable and deductible for income tax purposes to the same extent as other cash or credit transactions. When a business makes a barter transaction, there is a liability for tax, including goods an services tax (GST). A recipient of goods in a barter transaction may be entitled to an input tax credit.”

Canada Revenue Agency: “Barter transactions are within the purview of the Income Tax Act. Such transactions can therefore result in income or expense.”

(UK) HM Revenue & Customs: “If you supply services or goods (new or second-hand) and receive other goods or services in payment you must record VAT, and note income and expenses, on your tax as though the transactions had been paid for with money.”

Internal Revenue Service (USA): “The fair market value of goods and services received in exchange for goods or services you provide must be included in income in the year received. If you are in a business or trade, you may be able to deduct certain costs you incurred to perform the work that was bartered”

For more information on barter exchanges there was a recent UK Government Report published by ZYEN and the City of London Corporation which can be found here: http://www.cityoflondon.gov.uk/business/economic-research-and-information/research-publications/Pages/Capacity-Trade-and-Credit.aspx

The largest barter exchange networks in the world are the Ormita Commerce Network Barter Exchange http://www.ormita.com and http://www.ormitacommerce.com and the Swiss WIR (http://www.wir.ch) and conduct billions of dollars in trades per annum; while small organisations such as the International Reciprocal Trade Association (IRTA) cater for local b2b small to medium sized enterprise networks of a few hundred members.

Do your research – using a barter exchange can help stimulate the local economy, offset a businesses expenses by reducing cash costs and cash outlay and maximising the value of unsold inventory, deprectiating inventory and/or excess capacity or time.

Doc Merlin September 13, 2012 at 5:46 am

“barter exchanges” may not be a mechanism to avoid transactions. Barter on the other hand often is.

rpl September 13, 2012 at 9:43 am

Not really. Failing to report barter income is no different than taking cash under the table. It has nothing to do with the mode of payment; it just depends on a person’s willingness (or lack thereof) to comply with tax regulations.

derek September 13, 2012 at 9:51 am

You are talking about how it is supposed to be done, not how it is done. Marijuana cultivation and sale is illegal where I live but is estimated to be the largest industry. Golly gee, how could that be, back to the textbooks.

rpl September 13, 2012 at 11:21 am

No, I’m not. I’m saying that you can dodge taxes just as readily with cash transactions as you can with barter transactions; therefore, it is not the case that barter “is often a mechanism to dodge taxes.” If all you wanted to do is to dodge taxes, it would be far easier to do it by taking cash under the table than by bartering. In other words, barter must provide something to its users beyond mere tax evasion; otherwise they’d never put up with its drawbacks because there are easier ways to evade taxes.

Anthony September 13, 2012 at 8:03 pm

It does have something to do with the mode of payment, because it’s easier for the tax authority to see under-the-table cash transactions than unreported barter transactions, particularly if those transactions involve services. While under-the-table cash is convenient, if it’s not kept carefully separated from the reported cash transactions, the tax man will eventually see it.

Doc Merlin September 13, 2012 at 5:53 am

If you are looking for an alternative to a dysfunctional credit system, something like Ripple is very interesting.
One of its side-effects is that it globally minimises debt load.

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

Ram September 13, 2012 at 6:52 am

I am curious about the tourism potential where this parallel economy meets the Euro economy. Imagine the potential for windfall gains if a person with a seafront property hoarded these ‘hours’ of yoga/massage/other spa treatments and monetized it through a tourist package that undercuts the competition. Keep an eye out for a Groupon deal to Spain!

T. R. September 13, 2012 at 6:58 am

Barter, LETS, etc. is a kind a libertarianism. That is why it works.

In many countries you can avoid taxes using barter currencies unless you do your professional work.

Moreover, your welfare benefits are not reduced.

Moreover, you don’t have to care of minimum wages, working regulations, other regulations, etc.

These three are the main reasons for unemployment.

Nor Luap September 13, 2012 at 9:23 am

I guess there is full employment in Somalia :)

Doc Merlin September 14, 2012 at 4:20 am

Most very poor third world countries have full employment, except right after major catastrophes.

Benny Lava September 13, 2012 at 8:39 am

This is merely a time bank, not a new concept: http://en.m.wikipedia.org/wiki/Time_banking

I predict this will go nowhere.

Merijn Knibbe September 13, 2012 at 8:57 am

Over time, the Greek government will figure out that they can levy a new (land)tax denominated in a new currency. This currency will be used to pay a part of the expenses of the government and replace the Euro, to an extent, and the Euro-deficit of the government will dwindle. It will probably also have to be used by households to pay part of the services of the government, like garbage collection. As people are desperately short of money, in Greece, it will in all probability be accepted as a general means of exchange and it will lead to an increase in aggregate (sorry, Tyler) expenditure.

By the way – according to a documentary on Dutch television, Spanish people are working for 600,– a month in Morocco, at the moment. The real problem is lack of demand.

Bill September 13, 2012 at 8:55 am

What does this say about economists who give away free online courses and who do not even barter?

As you said: “In essence the sellers participating in these exchanges are price discriminating, by trying to sell more of their output — for lower prices — through credit or barter mechanisms. Getting back credits in return really is like receiving a lower price or wage.”

Selling for free gets you the lowest wage you can receive.

prior_approval September 13, 2012 at 9:43 am

‘What does this say about economists who give away free online courses and who do not even barter?’
That Koch giving remains generous, and they expect value for their money?

sort_of_knowledgable September 13, 2012 at 11:27 am

Or maybe even economists will do something for pleasure and not do everything in terms of buying or selling.

Andrew' September 13, 2012 at 11:42 am

It means a lot of people don’t understand what being a professor is about.

RPLong September 13, 2012 at 9:09 am

No need to over-think this.

If I lived in Spain and I was unemployed, what would I do? I wouldn’t just sit around, starving to death, waiting for a good 9-5 job with 3 weeks’ vacation to drop into my lap. Such jobs don’t currently exist in Spain in the quantities required.

So what would I do? I’d figure out what work needs to be done by whom and offer to do it either under-the-table or in direct exchange for goods. Both represents a significant price decrease to the buyer of labor, and for me, it gets me working without having to try to bribe, schmooze, or grift my way into the rapidly shrinking workforce.

I think it’s just the logical result of a bad situation. Just because there is a currency crisis doesn’t mean there isn’t work to be done. Maybe I’m the only one who still reads Garet Garrett…

mpowell September 13, 2012 at 3:21 pm

Fundamentally the question is why someone would be willing to pay you for your work in some other currency instead of euros, however, since that is the basic problem that needs to be solved. It does strongly imply that there is a problem with the management of the Euro, but TC has apparently decided that we can’t discuss that in this post.

Arthur September 13, 2012 at 9:34 am

The first thing that came through my mind was: “Impressive, prices are so sticky in euros that they need another currency”

The more I thought about it, the more it made sense. They’d rather accept credit that can’t be widely used than lower their prices.

It’s not that some people are wildly willing to cut prices. If they were, they would. They didn’t. They’ve keep prices in place and started to accept new money.

Prakash September 13, 2012 at 11:44 am

I agree. Alternative currencies seem to be used more in depressions than in Hyper Inflations. That is another pointer to your hypothesis.

prior_approval September 13, 2012 at 9:41 am

‘I wouldn’t just sit around, starving to death’
Spain does not let people starve to death – it is one of those places which feels that starving to death reflects the failure of a society.

‘waiting for a good 9-5 job’
Not in Spain – they don’t follow your idea of a work schedule.

‘with 3 weeks’ vacation to drop into my lap’
A job with 21 days vacation would be illegal, as the minimum is this – ’22 work days, not including 14 public holidays’ http://en.wikipedia.org/wiki/List_of_statutory_minimum_employment_leave_by_country

Maybe other countries are different places? And maybe, just maybe, the official reporting doesn’t much reflect reality? Lots of young people are working jobs in Spain who are officially unemployed – it is a long running practice.

RPLong September 13, 2012 at 9:53 am

Two things:

1 – It is possible to get the gist of what I’m saying without nitpicking minutia. 21 vs. 22 days, well done Columbo.

2 – It is possible to disagree with the thrust of what I’m saying without being caustic.

rpl September 13, 2012 at 9:56 am

And maybe, just maybe, nothing you said was actually relevant to what was said in the post you were replying to. The point being made was that when the formal employment market becomes dysfunctional, people turn to informal arrangements. When you wrote that response, did you honestly think that the hours for the standard work day in Spain or the exact amount of vacation they receive has any bearing on that observation?

Seriously, I’m genuinely curious here. What response were you hoping to get when you posted your non sequitur? And were you genuinely unable to recognize phrases like “9 to 5″ and “starving to death” as idiomatic metaphors for “a real job” and “stuck in poverty,” respectively? What you wrote seems like an awful lot of typing and looking up on wikipedia to produce something that is likely to elicit a response of, “Wow, that guy really missed the point,” in everyone who reads it. What gives?

prior_approval September 13, 2012 at 11:14 am

It took me about 30 seconds to look up – ‘spain legal minimum vacation’ and then the nice wikipedia page where ctrl+f ‘Spain’ found the information (a wikipedia article that is quite fascinating – the U.S. tends to be a very interesting outlier).

And the point is, with examples, why is ignorance so prized in discussions here? Spain is not the U.S. – and that is both glaringly obvious, and yet seemingly impossible for some people to even begin to grasp.

But I’m sure that MR University’s five minute videos will introduce people to a bigger world – as compared to actually getting a passport and then travelling to a foreign country for a few weeks, which is so old fashioned.

rpl September 13, 2012 at 11:34 am

So, your contention is that you really were unable to recognize “9 to 5″ and the like as idiomatic usages, and you were genuinely confused into thinking that the other poster had, out of ignorance, assumed that Spanish working hours, vacation allowances, etc. were the same as they are in the US. Is that about right? Why am I having trouble believing that? I think it rather more likely that, having nothing to contribute to the matter being actually talked about, you decided to pettifog over irrelevant details. After all, even negative attention is better than no attention at all, right?

prior_approval September 13, 2012 at 11:23 am

‘When you wrote that response, did you honestly think that the hours for the standard work day in Spain or the exact amount of vacation they receive has any bearing on that observation?’
To respond in a bit of detail – a crappy, crappy job in Spain comes with 22 paid vacation days (plus 14 national holidays not included, though some are on Sunday, I’m sure – like Easter) and health care.

What the poster was describing as being extremely desirable is not even the legal minimum for full time employment in Spain – or essentially any EU country, for that matter.

The gap in standards between the U.S. and the EU really are that large – the original poster thought he was talking about extremely privilged work terms, when even his imagination of luxurious employment doesn’t square with the legal minimum of someone working for Lidl in Spain.

RPLong September 13, 2012 at 11:26 am

Uh, no.

I was saying there is no need to over-intellectualize the occurance of barter in Spain, since it seems like a pretty logical consequence of a failing labor market. Scott Sumner made the same point on his blog not long after I did. All I’m saying is that it makes sense and doesn’t require a fancy theory to understand. I don’t know what you’re going on about, but clearly I did a bad job of keeping my comment sufficiently simple.

rpl September 13, 2012 at 11:36 am

…clearly I did a bad job of keeping my comment sufficiently simple.

Well, you know what they say: “Nothing is truly `foolproof’ because fools are so ingenious.”

Monetary economist September 13, 2012 at 10:03 am

Getting back credits in return really is like receiving a lower price or wage. So these exchanges show that at least some people are wildly willing to cut prices, wages, and returns, if only to sell more.

This story shows that, at least within a certain population, there is not a great deal of wage rigidity on the side of the individual workers. But this has never been the main source of wage rigidity. Haven’t you seen Curtis Simon’s article about situations-wanted ads in the Great Depression? Many of the unemployed were willing to work for a wage far lower than the prevailing one. Yet for some reason, presumably some combination of pressure by the government, unions, and incumbent workers, employers were unwilling to take advantage of these offers. (It’s also revealing that wages did fall massively during the Depression in the agricultural sector, where labor markets more closely resembled spot markets.)

Truman Bewley’s book on wage rigidity also concluded that the primary source of wage rigidity was the companies themselves (mainly trying to avoid morale problems among existing workers), not the unemployed.

Of course, in Spain, we don’t even need to consider the more subtle explanations, since wages are set nationwide by a collective bargaining process. Talk about really sticky wages…

Claudia September 13, 2012 at 10:25 am

You don’t need to go to Spain or discard regular currencies to find evidence against individuals as passive price-takers. I saw an interesting paper presented yesterday “The Cyclicality of Sales, Regular and Effective Prices: Business Cycle and Policy Implications” http://emlab.berkeley.edu/~ygorodni/CGH_store_switching.pdf The first two authors are friends from grad school so I may be biased, but I found the argument (and their empirical evidence) that in downturns consumers substitute across stores and brands to lower their effective prices quite plausible. All of this including the barter discussion does raise questions about how households smooth through shocks and how to measure their real consumption bundles.

Todd Ramsey September 13, 2012 at 10:39 am

Aside from the obvious avoidance of VAT and income tax (which in reality happens whether or not legal), barter allows people receiving unemployment compensation to supplement their incomes. The blossom of the barter economy is overwhelmingly due to micro, not macro, effects.

John September 13, 2012 at 11:45 am

First, these exchanges are a substitute for dysfunctional credit markets.

Three points:

1. I see your post after 45 comments. Not one mentions or talks about this fundamental truth or asks for any further discussion or observation. Instead, just blah blah blah about taxes and which came first, blah blah blah. What is the point of this meaningless libertarianism you have taught too many?

2. Not being familiar with local banking, etc., in Spain, I would appreciate your describing in depth where money used to come from and why has it disappeared, beyond the obvious: 25% unemployment means lots of lost cash income. IOW implicit in your statement is that lenders who used to lend have stopped because their borrowers cannot repay their loans because customers have no cash, for so many are unemployed. Who were these lenders? How were loans structured and secured? What has happened to asset values (have housing prices collapsed 50%, laws forbid home equity loans, what?)

3. What conditions need to return before normal lending returns? And, how do you see Spain getting there?

mrkmyr September 13, 2012 at 12:19 pm

These types of alternative currencies emphasize the importance of sticky prices. Nominal prices have so much psychological power that people have gone through significant trouble to create a currency.
.
Signaling is important as well. Taking a local currency shows your values of community and taking an “hours” currency shows you value equality. For professionals, taking these currencies could be like pro bono work or loss leaders.

doctorpat September 13, 2012 at 11:59 pm

Good point. Nobody has mentioned it up till now, but implicit in the idea of “hours” is the ideology that one hour’s work for a brain surgeon is worth one hour’s work for an unskilled street sweeper.

I can’t see people who’ve developed special skills staying with such a system for long.

CC September 13, 2012 at 1:06 pm

Tyler,

Scott Sumner says you’re wrong. Therefore, you’re wrong.

Good day to you sir.

Lord September 14, 2012 at 12:56 pm

Credit is a part of this, but many are over indebted and would not want more credit even if offered. More important I think is income and this is a sign of the desperation of unemployment. They have little objection to spending what they earn, but if not earning, they do not want to spend. They are trading for each others employment, but this also indicates the limitation in that only so much services are wanted and frequently either manual or specialized ones, though manual ones can often be done by themselves. Often physical products are wanted and many of these are hard to barter for and require cash. One advantage is it is hot money since no one wants to be left holding it when it is no longer desired. It is a fairly basic form of earmarking, allowing people to spend what they earn but no more. It is the earning of it that is difficult, and this represents a way to lessen the issues with job search.

Carl Mullan September 14, 2012 at 4:59 pm

Wow there is a lot of discussion from people who have never used any of these complementary currency systems. I work with Matthew Slater who has set up some of these systems in Spain and other countries. http://communityforge.net/ We are also doing several now here in Portland, OR. There are several things you must know about this type of alternative payments or complementary currency systems.
(1) If there is a shortage of money, people still need to buy and sell stuff. A LETS system works because it matches unmet needs in the community with unused resources. Michael Linton the guy who invented LETS in Canada during the 1980s said something to this effect, we have skilled people who want to work and we have work to be done, a LETS creates a mutual credit that can be used as currency to match these needs with goods and services. IT IS NOT A REPLACEMENT FOR MONEY. If you have money, you really don’t need or want to use LETS.
(2) This type of mutual credit unit may be denominated in anything the group decides on….Time, hugs, national currency units, leaves…whatever. Most groups pick a unit name and peg that to the national currency of their area. Generally speaking if you peg a unit to hours, that unit is (generally speaking) worth one hour of local wages in your community. Some in the US are 1hour = $10, so when you go to buy something a spending a 1/4 hour means you bought something worth about $2.50. This makes pricing and wages pretty easy to figure out. http://www.pdxlets.com calls a unit a Point, and one Point is valued at $1 dollar. That’s easiest to understand.
(3) Finally, each of these type of systems (a)Time Banks (b)LETS local exchange trading systems (c)HOURS paper currency (d) Local backed paper currency (as in http://www.berkshares.org) addresses specific issues and targets a specific group of users. In TimeBanks, and hour of time is equal for all users. Yes, if you are a brain surgeon or a homeless person, your time, one hour is equal HOWEVER, if you are employed-educated and practicing as a doctor….you’re NOT going to be involved with a TimeBank. Timebanks attract the unemployed, the underemployed and the local people in your neighborhood that want to help others utilizing their free time and skills. If you have a great job, house, sexy wife and you are driving a Ferrari…you are not going to be spending extra time cutting your neighbors grass, you would hire someone. Employed doctors are not the target group of users an hours program addresses and that hypothetical situation is silly. Learn something about these systems before condemning them. The IRS passed a ruling years ago that provides for Timebanks which are properly operated to be tax free because that hour is considered a donation. Mutual credits, or LETS, is taxable just like any other type of income/barter income etc. However, you should also understand that a LETS is a local group, you are gaining points by helping and trading with friends, neighbors and like minded folks. Any income that may be realized in trading may not be in your line of work or profession. If you are full time painter and you have your grass cut each week that is NOT your profession and may not be regular taxable income. LETS are NOT barter systems where you may be selling off 10k worth of excess inventory to someone who has a business three states away. LETS are very very local and personal. Some of the systems in Spain are LETS, some are more like Timebanks.
Carl
carl@pdxcurrency.org

Floccina September 14, 2012 at 6:41 pm

Seems like are doing a little free banking.

Floccina September 14, 2012 at 7:31 pm

Seems like they are doing a little free banking.

Comments on this entry are closed.

Previous post:

Next post: