Towards the new barter economy
Towards the new barter economy-
a return to direct exchange of goods at the closing of the industrial age
A basic concept we take for granted is that commodities only really trade as
such - that is to say, as infinitely replaceable, infinitely convertible,
abstract quantifications, when their supply or demand are elastic.
Through most of the industrial age, this has been the case with primary
resources, and, excepting the lag to expand production capacity, virtually
any industrial product. One of the defining characteristics of the industrial
age, in both an economic and a cultural respect, is that anything can be
had in any quantity desired. Only capital plant restricted the rate at which
the limitless raw materials could be transformed into finished goods.
In addition to the substitutability of one sample of some good or material
for another of the same, and the consistent currency for the pricing of it,
a final requirement for true commoditization is the substitutability of
one transaction for another in the trade of that item. Buying a pound of
aluminum on one day in one city is like buying a different pound of aluminum
on a different day- and the two trades can even be exchanged for one another,
for both involve substitutable, widely reproducible materials and currencies.
In our time, we have for many generations been accustomed to thinking of
all things not in terms of the materials of their composition, but merely
of the cost of transforming those materials into their desired form. Only
the costs of production and delivery have concerned us. The details of materials
persists merely as some abstract value, expressed entirely in money.
We think of intermediate materials (for example, the fabric that might go into
the making of a suit) as more or less expensive either because of entirely
artificial forces (exclusive licensing, intellectual property, limited
production, prevailing fashion, etc), or because of the real (or perceived)
cost of producing _them_ from raw materials (e.g. silk is more labor-intensive
than cotton to produce, so silk costs more per yard.. and so on)
Because of cheap transportation, no lack of supply, and no shortage of
liquidity in consumers' pockets, essentially every material and product
in the industrial world was directly up against every other material and
product in a commoditized global market. Price is a universal common
denominator for all things, and all things are universally comparable
and convertible through their price. This is what it means for something
to be a commodity. This has been the luxury of the industrial world, that
we have had an economy so great that nothing can escape that reducing
power, that everything can be reproduced at will with a predictable price tag.
We have been able to for the most part effectively mask the fact that there
is no direct conversion between a television set and a locomotive and a steak
dinner. The prerequisites for this effective universal convertibility, for
this systemwide commoditization, are a consumption demand that can expand
to swallow up almost any quantity of goods, and a supply of raw materials
which can be drawn upon without any effective limit. Elastic supply and
In essence, we have managed to approximate much more closely than ever
before a pricing system which determines that relative effort, ultimately
the energy, expended by the economy to produce and deliver a given thing.
This has become so much the case that we actually spend a great deal of
energy enforcing artificial scarcity and control over the flow of goods,
through trademarks and copyrights and tarriffs and taxes and limited
edition products and restricted designer goods.
Against this environment of universal commoditization, we have some
signs that inelasticity is emerging into some of the goods we take
for granted. Not only does this have a habit of creeping along the
chain of production into other parts of the economy, but it also compels
players in the market to make much more complex comparisons of goods and
materials against other goods and materials- universal convertibility through
money becomes a less meaningful way of pricing such things- and it
undermines the ability of the global market to determine the relative
value of things.
It means that the resulting prices no longer reflect the effort cost for
the economy- some goods become too cheap, and some goods become artificially
expensive. The scarcity premium, where market players bid the price of
something beyond the cost of its production and distribution, leaves
corresponding discrepancies elsewhere in the economy's allocation of
capital. When the scarcity is artificial, for example when a cartel
deliberately restricts the availability of some materials, or a manufacturer
specifically produces only a small quantity of some product, the incentive to
introduce greater supplies rises considerably. Cartels seldom last long because
of this force; counterfieters of high-priced fashion items multiply daily.
Artificially inelastic supply seldom yields such de-commoditization as
real inelasticity does.
When the scarcity is real, however, and the demand cannot simply be
reduced, then the relative valuation of perhaps large sectors of the economy
becomes important. The classic scenario is the desperate measures taken
in a famine to secure food- history is full of stories of people exchanging
ordinarily very precious objects, real estate, great amounts of labor, and
any other thing imaginable for food during a significant shortage.
More importantly, the prices becomes widely inconsistent from place to
place and from transaction to transaction.
Competition for such resources experiencing conditions of such elasticity
naturally inspires players to attempt to secure supplies by extraordinary
means, and in an environment where transportation and communication are
relatively cheap and widespread, it means that buyers will tend to try to make
agreements directly with sellers and not wait for goods to come to market.
Under such circumstances, the marketplace undergoes a fragmentation whereby
individual transactions are worked out on increasingly unique terms and
the lack of direct substitutability of one transaction for another reduces
even further the ability to accurately compare prices and costs in some
neutral denomination to establish a market value.
During most of the industrial age, opening up new territory for exploration
and production of raw materials has kept the supply side elastic- there
was always more to be had and the effort to get it was comparable to the
effort required to extract what was already being used. On the demand
side, there was seldom a problem of finding buyers for the potential glut of
goods. Since the inelasticity of demand in some goods, for example foodstuffs,
was not exposed by a corresponding weakness in supply, it was full steam ahead,
and under such conditions, goods and materials 'float' in a commoditizable
This Oil is not Like That Oil :
dealmaking in the energy sector of the last few years shows this trend very
clearly: less of the total energy resources in the world economy are traded on
exchanges now than at any time in decades. It is in the inelastic markets
where such precautions must be most urgently made, and it is no surprise that
we see in the energy sector the most prevalent illustration of this
beginning trend. governments and large corporations are no longer content
to let their future supplies be bought as bulk commodities in the open
markets. Whenever possible, more and more exploration, production, and
supply arrangements are being negotiated directly between major players-
representing resources which will never trade on an open market.
The market still plays a valuable role in setting prices, but more and
more, those goods are being removed from the crucible of supply and demand
which allow a market economy to properly set prices. We're just entering
an age where one needs to consider the price of 'free market' oil versus the
cost of oil in a particular supply agreement made outside of the scope of
the fluidly traded exchanges. The scramble to secure supplies and partners
has led to an erosion of the substitutability of transactions and will
over time fragment the market until insufficient quantities of it are
traded in open commerce to meaningfully determine the price. Energy is
in the process of being de-commoditized right now. In the absence of
a commodity energy market, special arrangements will increasingly dominate
the sector and have far-reaching effects on the rest of the economy.
A nickel for your thoughts:
After writing this, we got another glimpse behind the mask of the commodity
economy in just the past few days with the effective LME default on delivery
of nickel contracts. The disconnect between the paper market and the
tight physical market in nickel culminated in huge naked short positions which
threatened to squeeze the market. Inventories fell to catastrophically low
levels and longs trying to take delivery were turned away. This would have
caused a panic buying on the spot market by shorts and exposed both a true
shortage (or else phenomenal secret hoarding) and of course bankrupted
the shorts miserably. The LME, instead of letting that happen, broke
the meaning of the delivery contract by substituting for it a cash penalty
to be paid by shorts and a cash bonus to be paid to the longs in lieu of metal.
This sends a tremor through the entire economy that industrial buyers need
to secure supplies of critical materials by alternate channels and that
the exchanges are not necessarily as reliable as they thought.
What's really being betrayed here is the reality that the exchange is not
the most relevant place for buyers and sellers of physical materials to
meet and do business anymore. The commodity nature of those materials has
been eroded just a bit more.
The decommoditization of some resource and the special arrangements that
characterize its continuing trade have the effect of further fragmenting
the markets for whatever other goods are exchanged to obtain it- reducing
the price-setting effectiveness of those goods as well. Over time, even in an
environment of otherwise excellent monetary stability, the economy will shift
more and more into a reinstated barter system. In such an environment,
the use of currency becomes more localized and it becomes a token of exchange
only inside isolated bubbles- capital markets between those bubbles
will for the most part be overlapping and inconsistent, reflecting the various
overlapping zones of production and consumption of various bartered goods
and materials and their differing relative valuations according to the terms
of individual transactions. Just as the movement of some resources is being
decommoditized and this process will lead to further decommoditization across
a wider and wider range of goods, so also will this begin to be reflected in a
greater irrelevance of capital transfer from one transaction zone to another.
When the flow of resources through the economy is more fragmented, capital in
one zone has less to buy in another zone- the flows of materials are more
crystallized and there are fewer easy substitutions. Even widely prized,
portable wealth, for example precious metals, if moved from one zone to
another, will not necessarily correspond to a movement of inter-zone
purchasing power. Capital investment from one zone to another then becomes
a much more individualized matter, again with individual transactions taking on
very unique properties as circumstances dictate. Global capital markets
cease to play a relevant role in the allocation of resources across zones
in such an environment.
What is very important about this development is that the current industrial
economy is a globally interdependent system with very little redundancy.
The fragmentation, even partial fragmentation, of some resource markets
which threatens to further spread the contagion of decommoditization of
important, especially primary, resources, also threatens, in its
regionalization and undermining of global capital markets and resource
direction, to split apart a worldwide industrial machine which can no longer
afford that split. The result is the rapid breakdown of industrial activity and
the end of the industrial age.
The primary catalyst for this new trend is the failure to maintain arbitrarily
expandable resource supplies in the face of demand growth (even if exhaustion
of the resource is not an issue). This condition is inevitable, as the
stability of the industrial economy is already dependent on continued growth-
sooner or later, that growth pushes outside of the zone where supplies can
be expanded at will.
This file and all other content on the VAXpower.org site copyright 2008 by G. Economou