Sunday, November 17, 2013

The Meaning of a Word

I have been involved in a comment thread in another blog ( Some of the discussion revolves around whether barter economies ever existed and whether barter is used in some areas. One side of the discussion emphatically says that barter economies don't exist and that barter occurs very infrequently if at all. The other side says that of course barter exists as we have many examples societies which don't use money yet exchange goods or examples today where goods are exchanged without the use of money. As in many discussions, I found that both sides are right. The problem is that they define the term "barter" differently.

One group uses barter to mean "the exchange of goods without the use of money". The other group defines barter as "The immediate exchange of goods without the use of money". The difference is that the second definition requires that the barter exchange happen immediately while the first allows delayed delivery of a good.

Thus, if two kids eating lunch at school agree to trade one kid's cookies for the other's apple, that is barter. But if they agree to trade one kid's cookies today for the other kid's brownie in tomorrow's lunch, that is not barter (because the second half of the exchange happens the next day).

I've observed the same thing with other terms. Economics has the concept of "commodity money", meaning money which is based on the value of some commodity. Gold coins are commodity money if the value of the coin is based on the value of its gold content. Cigarettes are used as an example of commodity money in POW camps or prisons, where they are exchanged for goods.

Again, there are people who claim commodity money doesn't exist. They point out that the value of a coin is generally not exactly the value of the gold or silver in the coin (since gold and silver values can vary). They similarly argue that as soon as the commodity (e.g. cigarettes) start being used as a unit of value (e.g. IOUs are written stating how many cigarettes you owe somebody) then they are no longer commodity money but instead become an accounting unit. So this group uses a very narrow definition of commodity money -- the value must be based solely on the commodity content and all transactions must be made using the physical commodity.

Others use a more relaxed definition of commodity money, considering commodity money to be anything which is primarily based on the value of the underlying commodity, even if the value of a gold coin is not exactly the value of the underlying metal or the commodity turns into an accounting unit. After all, many monetary terms originated as units of weight, from the shekel to the pound sterling.

So why the differing definitions? One reason is to facilitate arguments against some past work. Adam Smith argued that societies first engaged in barter, then

So why the controversy? In the case of barter and commodity money, it is because there are two basic schools for how money originated. One says that people first traded using barter and that certain intermediate items (e.g. a specific weight of gold or silver) became accepted as a standard unit of value, with other goods gaining a value or price based on this standard. Numerous materials have been used as this standard unit of value (e.g. cowrie shells through much of Africa and south Asia) but eventually gold and silver coins became the standard.

The other theory for the origin of money is based on the "credit theory of money". This says that money first arose as an accounting technique, with trade done in some standard unit of value. Money has never been based on quantities of some commodity (e.g. a weight of gold) but instead is defined in terms of credit and debt.

The problem I see is that both schools of thought are correct. Any time trade exists there needs to be a method of measuring value. There is good evidence that certain commodities became used as a standard of value. There is also good evidence that this standard of value was used as an accounting unit, specifying a debt between two people.

Thursday, April 18, 2013

The Sequester and Economic Disaster

This note reflects a few quick comments on the US economy and where it is going. No formal analysis, no formal theory, just my own impression based on a few economic events.

Historically, I did anticipate the tech bubble (companies with strong buy ratings and P/E ratios of 30,000 tell me something is wrong). I also anticipated upcoming credit problems in 2007 or so (bank offers for gold credit cards to people with $350/month social security income indicate something is wrong). So with that “stellar” record, here goes:

The Sequester: I don’t see The Sequester as a disaster. I’m guessing with The Sequester in effect the economy is either going to grow faster or show little response.

Jobs: Many lamented the “poor” March jobs report of only 85000 odd new jobs. I suggest the opposite. The Sequester gloom and doom predictions said we should have seen a drop in total employment and jump in unemployment. Instead we’re seeing continued (slow) growth. And the early April unemployment numbers (when layoffs are supposed to be happening) indicate that disaster isn’t around the corner.

Interest rates, QE, etc: I think one of the problems in the economy is that interest rates aren’t doing what they are supposed to. The Fed is giving us near zero interest rates to try to increase growth. I think instead that we need higher rates.

Interest rates today provide rather perverse incentives. Savings accounts pay essentially zero. I have one savings account that did pay 0.00% for a few months. In this environment, why save? Part of the problem with the Financial Crisis was the search for high, safe returns by large investors (thus jumping on AAA rated high yield mortgage bonds). Today under the mattress gives as good a return as a safe bank account, so either spend it or put it someplace risky.

I can’t give a formal reason, but I think that near zero interest rates are a recipe for a stagnant economy. We have seen this in Japan, which has had 1% or lower central bank rates for about 20 years along with a stagnant economy. Now the United States is seeing interest rates of almost zero and a stagnant economy. If the Fed pushed rates up to a more traditional few percent, and bank savings rates got back to a few percent, I think we’d see increased growth in the economy.