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 elastic demand. 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 market. 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 site copyright 2008 by G. Economou