Financial Markets Are the Real Barter Economy
As (mis)conceived by most economists, money (which they confute here with currency) emerged as a solution to the time problem of barter economies: my spinach is ready now, but your apples won’t be ripe for months. How can we trade? Answer: you give me money for my spinach, and I give it back to you later for your apples.
That armchair-sourced fairy tale has been resoundingly debunked — that’s not how money (or even currency) emerged, and the Adam Smithian butcher/baker barter-exchange economy has never existed. Credit money — first embodied in tally marks on clay tablets — emerged and was in widespread use a couple of thousand years before coinage was invented (the latter largely to pay soldiers, whose itinerancy makes other methods problematic).
But the notion of barter economies lives on.
The whole system of national accounts (the NIPAs), in fact, was constructed by Simon Kuznets and company in the 30s as if we lived in a barter economy — with money being merely a time-shifting convenience, and with no accounting for financial assets at all. That accounting was only added a decade or so later, with publication of the Fed Flow of Funds accounts.
I’d like to suggest that this barter model for the real economy results in a great deal of confusion — including (especially?) among economists — largely because the NIPAs don’t usefully model the distinction between saving wheat (which can be consumed) and “saving” money (which can’t). By “useful” I mean “conceptually tractable, subject to consideration without logical error.”
I’m asserting that the barter model of the real economy results in lots of confusion and logical error. Viz: careful economic thinkers like Nick Rowe, Scott Sumner, and Andy Harless feeling the need/inclination to write lengthy think-pieces on that nature of “S.” Or the widespread misconception that “saving” (by whatever definition) “creates” “loanable funds.”
I’d even go so far as to say that those barter-model-induced logical errors pervade most thinking about economies and economics, both among economists and among the laity.
However: If you want to see a market that does operate as a barter economy, look no further than the market for financial assets. In this market, you trade your checking-account or money-market deposits for shares of Apple stock. Somebody else makes the opposite trade. The transaction is mutual and (effectively) instantaneous and simultaneous. It’s a barter.
In a very real and very counterintuitive sense, there is no money exchange in the financial markets. There are just barter swaps of financial assets.
A proleptic response to inevitable objections, and a definition of terms:
1. By “financial asset” I mean something that has exchange value — somebody will give you something in exchange for it — but that cannot be consumed (directly or through use or time/natural decay/obsolescence), providing actual human value — “utility” — in the process. (Things that can be so consumed, and do provide human utility — and derive their perceived value from that utility — are real goods/assets.)
2. “Money,” then, would be that exchange value as embodied (or metaphorically “stored”) in financial assets. Money cannot, in fact, even exist except as it is so embodied. Financial assets are money’s sines qua non – the things without which it does not exist.
Those financial assets (and the money they embody) can be tallied — represented — on clay tablets or in electronic accounting systems, in mental accounting ledgers (“You owe me”), or in physically exchangeable representations of those ledger tallies, such as dollar bills or stock certificates.
By this definition, a dollar bill or a deposit in a checking account is a financial asset, just as much as a share of stock or a government bond is. Which means that all exchanges of financial assets are swaps. Trades. Barters.
Exchanges for real goods, however, are different. When you buy or sell a real good, money (embodied in a financial asset) moves from one account to another, and — this is key — doesn’t disappear. It keeps getting passed on, exchanged. Real goods move the other way, and do disappear. You’re trading something that only has exchange value for something that can — will – be consumed. Conceptually: Financial assets travel in circles. Real goods travel in one direction only: from birth to death, production to consumption.
A physical metaphor may help: think of the financial system (including physical currency transactions) as a giant wheel, pushing along a conveyor belt of real goods.
But economists try to think about/model these very different situations as identical — as if “money” were being exchanged for bonds (and implicitly, as if those bonds will eventually be “consumed”). Since (mental) models for barter economies must be structured very differently from models for monetary economies,* modeling both of these as the same is problematic, confusing, and productive of logical errors — and perhaps even just plain wrong.
The gist of this thinking is not new — much of it reflects ideas floated long ago by circuitists, chartalists, modern monetary theorists, and other such (g)ists. But I’m hoping the formulation as presented here may be useful to others, as it is to me, in 1. forming mental/conceptual models of how economies work, and 2. evaluating the models bruited by others — notably the inherent validity of their underlying and often unstated assumptions.
I would point out in particular that as with my discussion here, the accounting-based modeling approach of Wynne Godley (and his predecessors, successors, collaborators, and parallel travelers) begins not where Kuznets did — with the interchange of real goods and services — but with the nuts and bolts of financial accounting. This approach imposes logical constraints on economists’ reasoning, constraints that seem sadly lacking in much barter-economy thinking.
As Godley says in the conclusion to his seminal paper:
In contrast to the standard textbook methodology, which starts by making very strong behavioural assumptions based on no empirical evidence at all (for example regarding the shape and role of an aggregate neo-classical production function), [this methodology suggests that] a different paradigm is indicated in which knowledge is gradually built up by empirical study, within the formidable constraints imposed by double entry accounting.
I’m not saying it’s impossible to think logically and coherently using the NIPA/Flow of Funds economic model, with the (confusing) barter and savings models embodied in the NIPAs. I’m saying it’s very difficult — especially since economists aren’t trained in financial accounting — and that as a result logical failures are widespread.
* Nick Rowe quoting Clower: “Hang on. In a Walrasian economy there is one big market where all n goods are exchanged; in a barter economy there are (n-1)n/2 markets where 2 goods are exchanged; and in a monetary economy there are (n-1) markets where 2 goods are exchanged, one of which is money.”
Cross-posted at Asymptosis.
Steve: Let me  this quote from you, and let’s see if it makes sense:
‘However: If you want to see a market that does operate as a barter economy, look no further than the market for [fruit]. In this market, you trade your checking-account or money-market deposits for [apples]. Somebody else makes the opposite trade. The transaction is mutual and (effectively) instantaneous and simultaneous. It’s a barter.’
See. I works just as well for apples as for Apple stock. But using my chequing account to buy apples isn’t barter. It’s monetary exchange.
In both cases the checking account deposit still exists after the transaction (just in a different account).
But after the apple transaction, the apples are gone. Vanished. (With some greater or lesser real-world delay; choose your accounting period length.) The Apple stock remains, and continues to move between accounts in future periods.
In a real-good-for-money/financial-asset transaction, you’re trading something eternal for something ephemeral, inevitably introducing the complication of time and periods.
Treating these transactions as barters, and resolving that with the flow of funds for financial assets, required Kuznets and co. to use an accounting model in which capital gains are not household income, profits must be imagined to flow instantaneously to households, and where you need an artificial accounting construct (an “account”) which we call “Saving” as (in JKH’s words) an “intermediate allocation destination” from which flows of funds can be accounted for — extra (and confusing) accounting intermediation that’s required to deal with those simplifications (distortions).
None of those machinations is necessary when modeling the financial asset market as a barter economy, because all the “goods” being traded have (apologies for this…) equivalent temporal hence ontological status.
From this clear conceptual basis you can proceed to “bolt on” a model of real-goods transactions, with its necessary (time-based) complications of expectations and inflation-adjusted (“real”) values — complications that clearly impart this market’s difference from a barter economy.
Notably: Godley’s structure works exactly this way. It neither requires nor employs those simplications, and as a result does not require the confusing and artifical conceptual construct/account that national accountants call “Saving.”
Steve: you lost me a bit there. OK. Forget the apples. Make it an antique chair instead. Or a newly-produced house.
I’m trying to wrap my hear around this, with severly limited success. This might help.
What is actual money, and where can one find it?
I asked this awhile ago. We need a discussion of what is money. I’m pretty sure that Steve and I have different ideas on what money is. (Not saying I’m right, just this post assumes the reader undestand the definition of money being used).
“What is actual money, and where can one find it?”
“Somewhere, over the rainbow.” 🙂
There is no such thing as actual money. All money is relationship.
debt trinkets in any form. all money is loaned into existence…
Sounds to me that what you are presenting is the mechanics of what is called the double economy. That is the economy of those who obtain their money primarily from their labor and are then destined to use it all up sustaining their life from the economy of those who obtain their money from money.
The OWS vs Wall Street shall we say?
Your explanation of the economy would then produce 2 markets. 1 is the market between the seller and the end user of a product and the other is the market between two sellers. As a commentor authored; the labor economy vs the financial economy.
Thus, monetary policy? Just ain’t feeling it in my flower shop.
For the antique chair it would depend on the intent of the purchaser. If I understand Steve correctly, the chair purchased for collective purpose would be a barter and you are correct. If purchased to use as designed, to sit on it will be used up and no more.
As to a house. Kind of unique, but in total would be a barter and maybe the only time the majority can participate in the barter economy. However, it is made up from a collection of consumable items that if money is not perpetually put back into the house, becomes used up. As in parts of Detroit. Or the French Worsted Mill I posted about.
So, the apple can be both. Buy an apple on the futures market, the apple is a barter. Buy it in the store, it’s gone.
Best to think of it as follows: money is a lubricant!
Min is right. Money is a conceptual construct, a credit agreed socially/legally, nothing more. Having money means you have credit which can be exchanged for other things.
Think of it like music. The concept exists on its own, but the thing itself only exists as *embodied* in musical performance. No performance, no music. (I won’t get into the issue of scores; doesn’t help, I think.)
Likewise the concept of money exists (“exchange value”), but money the thing only exists when it’s embodied in financial assets. A Target gift card is a financial asset embodying exchange value — credit.
So talking about exchanging disembodied “money” for financial assets is kind of meaningless. You can’t share money with anyone, any more than you can share music, if its not embodied in some form.
This isn’t exactly true. I have a few old oranges I dried and studded with cloves that I use as Christmas ornaments but my Symbolics and first incarnation Marvel stock are gone. (I have had other losers, but it took serious work to get those two off my books.) One guy I know sold me a promissary note and used the money I spent to buy a restaurant freezer, which is still in operation. Then, he bought the note back from me. The freezer is still around, but the promissary note is gone.
There is a distinction between financial products and real world products, but it isn’t just about barter, except in some particular technical sense, or persistence. The stored value problem is always tricky, especially since there is no such thing as value, only price. It gets even more interesting when you consider that what most people trade with is their time which exists only on a use it or lose it basis.
Therefore, the issues we have to examine here are how common are such crises from a purely historical perspective; to what extent we can identify a common pattern between all crises which would suggest an endogenous process that leads to crises;
Nick: you went straight to the two most troublesome items, which I intentionally avoided with plans for a later post: land and art. (A house is consumed through use/time/decay; antiques as in your earlier discussion constituted a fixed stock that didn’t change)
By my bruited definition, land and your antiques/art are financial assets (they certainly serve that purpose in the real world); they have exchange value but aren’t consumed through use. I might split mineral rights and agricultural capacity off from land, but haven’t sorted that fully.
A related thought: Financial assets provide utility to those who hold them (time-shifting and security), not to those who consume them.
If my definition of money is useful or right (exchange value embodied in financial assets), the notion of exchanging money for financial assets makes no sense. I think that notion, when implemented in an accounting system, is how we ended up with (seemingly?) self-contradictory conceptual constructs like the NIPA’s “Saving.”
The reason gold, diamond and a few other things that are believed to last forever are so important to some people is that it effectvely destroys your argument.
Gold and diamonds pretty much qualify as financial assets under the definition here. They embody exchange value and they can’t be consumed. (Yes, some industrial uses but they’re peripheral to the substances’ market value.)