Breaking Barter

Economists love barter. Why? Because it makes you happy. Think I’m joking? Spend a little time digging around in the Austrian school of economics (upon which modern economics was built) and you will probably find a pleasant story that typically runs like this: Susie has an apple and Johnny has a cupcake that each want to unload at lunch time in the kindergarten cafeteria. They end up trading the apple for the cupcake and live happily ever after. And why not, they both got what they wanted out of the deal.

There is a subtle implication to this example worth noting at this point. If Susie had a lot of apples in her lunch box, she would be likely to give Johnny several apples for one cupcake if Johnny did not like the initial offer. Thus we can introduce the notion of scarcity or abundance into the discussion as a second determinate (along side the strength of the pleasure the trade created) in establishing the exchange ratio of two goods (i.e relative price; 5 apples for one cupcake). Modern economic theory takes this idea a step further and seeks to demonstrate an understanding of consumer behavior that ultimately maximizes his or her level of consumption-driven satisfaction (i.e. utility). Such assumptions assume a rational consumer, even if the average car salesman will tell you that a car purchase is an emotional decision. But as I have argued elsewhere, the focus of economic theory should not be the maximization of pleasure, but the minimizing of labor content in order to maximize total industrial output. In other words, the consumer can be plain crazy (an economist’s worst nightmare) and the industrial sectors can handle it by simple output adjustments in a closed economy. Thus utility maximizing is not done by the consumer, but by industry by giving you a plethora of goods beyond your wildest dreams at ridiculous low costs (your cellphone).

In my view, it is the notion of scarcity in economic textbooks which ultimately leads to a logical cul-de-sac and utter disconnect from reality. To see this, keep in mind in our example above, mom gave them the apple and cupcake, so neither had to labor to produce it. So lets make this “pure exchange” example a little more “industrial” and see what impact it might have on their psyche. Say Susie had 10,000 apples and Johnny had 10,000 cupcakes they wanted to unload. And again they exchange their goods 1 to 1. Would they live happily ever after? Maybe. But what if Susie learns that her apples take 3 times as much labor to produce than a cupcake? I don’t know about Susie, but I would be stinking mad, and start making my own cupcakes. Barter breaks.

So how does modern economics attempt to rescue us from such a scenario of “breaking barter”? It does this by clinging to the notion of scarcity or limited supply (i.e. the exchange price of Johnny’s cupcake was high because there was only one). Said differently, the Stone Age model requires increasing demand prices to pull more and more of scarce goods to the market (the reverse of a modern economy). But how do you hammer the square peg of barter into the round hole of modern industrial economy which can produce “unlimited” (non-scarce goods at decreasing costs due to economies of scale)? The answer: You make a flawed assumption about the relationship of capital (machines) to labor, and toss in the Blue Collar Millionaire for good measure.  Let’s break these two ideas down below and see how it plays out.

Imagine ten ditch diggers (fixed labor) with 10 shovels (fixed capital). Now imagine you higher 5 more workers who have to share the 10 shovels with the other 10 workers. Obviously productivity will diminish. Keep hiring more workers without shovels and your labor costs will eventually exceed your revenue (textbook marginalism in action). Eventually, you’ll reach a point where all your new hires are standing around and work stops (nobody is willing to pay the high price for a new ditch). Ditches become “scarce”. That’s all there is too it.

Oddly, this leads us to the strange textbook conclusion know as “perfect competition” where the ditch digging bottleneck is circumvented by the arrival of many small firms that have not hit their marginal ditch digging limit yet.  The really bizarre assumption underlying this model is that the demand for each firm’s output is unlimited.  But think about that for a moment.  This is a complete break down of real world macro logic.  Where can such unlimited purchasing power come from?  If one firms sales increase, it means consumers are spending less money in a different sector.  Total purchasing power of a nation is fixed by total output.  It is not unlimited.

On the labor side of this defective model, we have to follow the chain of logic all the way back to ditch diggers themselves.  Here we encounter what I have previously named the Blue Collar Millionaire.   This is the idea that if wages are not high enough to draw us into the work force, we’ll spend our leisure time eating pizza by the pool all day, unlike those I know who employed at minimum wage have to seek out two jobs.  Again academia builds its logic  completely reversed from reality in order to  hammer the traditional supply and demand curve into the textbook.  In other words, the desired conclusion is reached that if there are too many ditch diggers then ditch digger wages will fall.   This assumption is critical to preserving the mistaken idea of the quantity theory of money (QTM–infinitely and instantly flexible prices and wages) which lies at the heart of economics (free trade theory falls without it).  How exactly the wage structure in terms of dollars finds a baseline is never really discussed.   This is in contrast to the classical school of the 1700 and 1800s which at least had some sense that the labor content of a gold or silver coin played a rule in establishing a wage level.

This is of course is nonsense, because in the grand scheme of things (macro economics), there is no such thing as too many ditch diggers in a closed, non-recessionary economy.  If the consumer is not spending money constructing ditches, he is spending it elsewhere, filling potholes for example.  Thus the unemployed ditch diggers migrate to pot hole employment.   The tricky part of this argument is that it leaves unanswered why an engineer makes a higher wage than a ditch digger.  The answer, I believe, is that wages reflect a quantity of skill sets, not a quantity of workers.  In other words, if the skill level of ditch digging and pot hole filling are similar so will be the wage.  Historically, the degree of unpleasantness of work (e.g. cleaning toilets) has been argued as a factor of wage determination, but this does not seem to be reflected in reality.  There are of course many distorting factors to wage determination such as government job secured by taxes, but here we are considering the general patterns.   And as Keynes so importantly noted, the wage structure results from a comparison process among other wage earners, a point which I believe means healthy wage formation can only take place in a closed economy  (the American steelworker does not consider the wages of 130 other countries when seeking employment).

But if, as in the real world, you buy each new worker a shovel, the cost of ditches remains constant regardless of the level of demand (modern economic theory collapses). There is no scarcity of ditches as a result. Prices of ditches do not have to go up to produce more of them. Why not? Because, if you decide to pay for a ditch you have chosen not to spend your money on a new TV (unemployed TV worker moves to digging ditches so to speak). The essence of this critique is nothing new. Though I’m not a follower of the late economist Sraffa (could not make sense of his commodities from commodities logic; welcome simple clarification), Yaniv Eban in his “The Failure of Marginalism & Neo-Classical Economics :A Logical and Ethical Appraisal” does a very nice job in his discussion of Sraffa to emphasize this point.

The Chinese understand there are no marginal limits to output as they supply literally the whole world. But the Chinese export model is also flawed as I have argued elsewhere. Their approach is mercantilist plantation economics again, because the Chinese worker can not fully consume the produce of his labor (it’s exported).  In contrast, minimizing imports and exports is the core idea behind my new model.  From a monetary perspective in my model, all prices thus arise from the supply and demand of labor skill sets with an arbitrarily set minimum wage serving as the domestic wage unit baseline, and not the supply and demand of money, labor, or goods.

The End of Economics as we know it is coming, because it is built on a defective model of money, saving, and production (does it get anything right)? If a revolution in economic theory doesn’t come, it will be the end of our economy instead. Just as you cannot engineer a high performance engine built on flawed combustion theory, so to can you not engineer a high performance economy built on flawed economic theory.  So it should come as no surprise that an economy whose theoretical logic is built on Stone Age barter is one that will head straight back to  Stone Age subsistence wages.

As always, critique is welcome. See “Just Measures” tab for core theoretical model.

Van Geldstone