Exchange Media are Inefficient

Exchange media are inefficient because they drive people into making Value Contracts that they never would have made were the exchange medium not being used as a mode of expressing the buying of a need. Consider this:

A company hires an actor to do a job. The company's Value Contract specifies that the potential expended by the actor, supplemented by the facilities offered by the company, will yield facilities greater in cost than the combination of the potential cost of hiring an actor and the cost of facilities needed. All these costs are looked at in terms of the exchange medium. However, an actor has much less use for the exchange medium than a company does. The exchange medium as a facility makes Value Contracts easier to manage for a company, because a company doesn't have any practical needs. An actor, however, always has practical needs as a biological organism.

For instance, an actor (unless he lives in the Tropics), likely needs shelter. In order to buy this shelter, he must expend some of his potential in the form of the exchange medium. The company with which the actor makes the Value Contract to buy his housing need must always adhere to the basic Value Contract of businesses: that any facility sold to an actor must yield a higher rate of return than the combination of the costs of facilitation and facilities expended toward the acquisition of potential. In other words, any company must be profitable in order to function.

But here's the rub: if an actor's employer were willing to accommodate the actual needs of that actor rather than the tautological "need for money," the actor would ultimately get a better deal on his need versus the amount of potential expended. To put it in practical terms, a company could buy an apartment complex or even a subdivision and offer a decreased wage or salary in combination with the right to live in the offered housing. Ultimately, the cash cost of such a set-up would be lower than the cash cost of the current typical compensation structure, because the company is able to leverage itself toward cost-optimizing the building of the housing, as well as divesting itself from a profit-interest in the housing. The employee in such a situation receives a lower cash wage, but the proportion by which the cash wage is lower is smaller than if that same amount of cash were to be spent on rent. The company receives the benefit of increased liquidity, and the employees ultimately receives the same benefit, because the exchange medium is inefficient.

Please understand that this ought to be a completely optional sort of compensation structure. Also understand that there are a lot of people who would jump at such a Value Contract, because ultimately they end up using less of their net potential for the same need.

B-Ran wrote:But here's the rub: if an actor's employer were willing to accommodate the actual needs of that actor rather than the tautological "need for money," the actor would ultimately get a better deal on his need versus the amount of potential expended. To put it in practical terms, a company could buy an apartment complex or even a subdivision and offer a decreased wage or salary in combination with the right to live in the offered housing. Ultimately, the cash cost of such a set-up would be lower than the cash cost of the current typical compensation structure, because the company is able to leverage itself toward cost-optimizing the building of the housing, as well as divesting itself from a profit-interest in the housing. The employee in such a situation receives a lower cash wage, but the proportion by which the cash wage is lower is smaller than if that same amount of cash were to be spent on rent. The company receives the benefit of increased liquidity, and the employees ultimately receives the same benefit, because the exchange medium is inefficient.

Please understand that this ought to be a completely optional sort of compensation structure. Also understand that there are a lot of people who would jump at such a Value Contract, because ultimately they end up using less of their net potential for the same need.

I agree that options like paying someone by giving them goods or services should be allowed. In fact, in many cases, it is allowed currently. Just look at health benefits being offered by employers.

The reason that this does not happen more often, is not because the medium of exchange is inefficient. What inefficiencies does a stable currency cause?

The real reasons that this does not happen more often, is because in most situations it is not mutually beneficial. Some factors to consider:

- Candy bar manufacturers are not traditionally homebuilding companies. Usually a company that specializes in a particular area can out perform a company that does not do business in that sector.

- Workers like to pick where they live. They also like to pick the color of their house, the number of bedrooms, the number of bathrooms, the flooring, etc. People value choice in housing. This would offer less choice.

- The company would actually have less liquidity. If they spend their capital on housing for their employees, that requires a large upfront investment (whether it be financed or paid in cash). This limits the liquidity of the company's assets.

It seems that you are advocating for barter instead of exchange via money. I am in favor of that being legal. However, there are definite limitations to barter that are overcome by money.

- Indirect exchange is enabled. With a barter system, me buying corn from BRan, who wants steak from BrainTrain, who wants milk from Gattaca, who wants chicken from me, involves arranging some sort of a simultaneous exchange agreement. With an exchange medium, indirect exchange is simplified.

- Calculations of profitability become possible. Without a price system, it is nearly impossible to make calculations of profitability for a company or an individual. If you have 8 chickens and you trade them for a goat, have you profited? If you sell the chickens for $150 and buy the goat for $130, you have made a $20 profit. Without the exchange medium, profitability is much more difficult to calculate.

So, while barter is sometimes profitable in comparison with a transaction involving a medium of exchange, it is most often not.

A more hybridized system would allow more flexibility in compensation structures and ultimately more efficiency in the long run. Though a candy bar company doesn't specialize in building houses, it also doesn't specialize in making candy bar-making equipment. In the long run, a candy bar company investing in housing for its employees (just as an example; it could be any such good or service) will end up more profitable for it for just the same reason they end up more profitable when they invest in candy bar-making equipment: the initial capital outlay gives them access to a facility with a greater degree of long-term utility.

You bring up an interesting point when you say that workers like to pick where they live, the color of their house, etc. That might be true for some or even most workers, but it is not true for other workers. The utility of having a living space that one does not have to qualify to live in and that ends up being "cheaper" (in the cash sense) will trump the choice utility of that living space, depending on the actor involved.

And as far as the company having less liquidity, in the short term that would be true. But over time, the owned property would begin to absorb the wage burden that it represents, until it is essentially "paid for" and then becomes utility-neutral to the company except as a means of compensation. Added to that idea is the fact that the property as a living-space doesn't need to be "profitable;" it just needs to represent enough utility to the worker that they are willing to forgo the utility of cash wages. Since the company doesn't expect to profit from the property, they can "charge" less for the worker to be able to live there.

Let's create a scenario here:

Worker Enron works at traditionally wage-structured company "A Inc" that pays him $2000/per month net. He lives in an apartment owned by "B Inc" who charges him $500/month to live in its building. Of that $500/month, $100 is profit, the rest going to pay expenses. At the end of the month, minus the cost of his apartment, Enron makes $1500 and "A Inc" has paid out $2000

Worker B-Ran works at a hybrid company "C Inc" that pays him $1550 plus the right to live in an apartment in every way identical to Enron's. The total costs to operate that apartment building are $400/month, just like the apartments operated by "B Inc." At the end of the day, B-Ran makes $1550 with $50 extra that Enron doesn't take home and "C Inc" has paid out $1950 in cash and saved $50, with no net loss of utility on either side.

Enron wrote:It seems that you are advocating for barter instead of exchange via money. I am in favor of that being legal. However, there are definite limitations to barter that are overcome by money.

- Indirect exchange is enabled. With a barter system, me buying corn from BRan, who wants steak from BrainTrain, who wants milk from Gattaca, who wants chicken from me, involves arranging some sort of a simultaneous exchange agreement. With an exchange medium, indirect exchange is simplified.

- Calculations of profitability become possible. Without a price system, it is nearly impossible to make calculations of profitability for a company or an individual. If you have 8 chickens and you trade them for a goat, have you profited? If you sell the chickens for $150 and buy the goat for $130, you have made a $20 profit. Without the exchange medium, profitability is much more difficult to calculate.

So, while barter is sometimes profitable in comparison with a transaction involving a medium of exchange, it is most often not.

Your assumptions about the utility of the exchange media are essentially true, however this goes to the artificial utility of money. A few things to consider:

Though indirect exchange is necessary (in an exchange-medium economy) in order for everyone to be able to acquire the goods and services they need, it is not 100% efficienct due to the subjective nature of utility and the compounding of pricing differences down the line. We can look at commodities for a good example of how this works. We've used logs in the past, so let's reintroduce logs as an example. Let's assume that the going price for logs is $100/log. In other words, on average, the market is willing to pay $100 for a log. That's the break-even point for the log-man, where he makes a profit he considers reasonable at the same time that he is able to sell his logs. Now, some people might be willing to pay up to $125 for a log, but they won't pay the premium if they don't have to. So, already, the log-man has missed out on some utility by pricing his logs lower than some people might be able to buy them. It could be assumed that the log-man has factored this into his pricing, but that's a theoretical point since, in reality, he has under-priced his logs for at least some potential buyers. At the same time, there are some people who would only ever be willing to pay $75 for a log. In that case, those people will go without logs.

Now, this has all to do with the artificial utility of money, since were the log-man buying his needs with his logs rather than buying money with his logs and then buying his needs with money, his log-buyers would be able to offer him his needs for the price of his logs. But that's a digression.

Now, assuming that the price of logs is $100, anyone who wants to use logs to make anything has to factor the cost of logs into whatever they are making. At that point, their base price is going to be at least $100, plus whatever amount of money the buyer of logs (lets say a furniture maker) feels he must make back to justify the expenditure of his potential. Let's say our furniture maker is able to make one log into one chair, and that he feels he must price his chair at at least $125 to make a profit he is comfortable with. Now, there might be buyers out there who would be willing to buy that chair for up to $150, and others who would only ever buy that chair for $100. Of course, no one will buy a chair for $150 that they could just as easily buy for $125, everything else being equal. Even so, there are buyers who would be inclined to do so were that the price, so the furniture-maker is missing out on that utility.

Now, let's say a retailer wants to sell the furniture-maker's chairs and decides that $150 is the right price. Now, those people who would buy that chair for $150 will still buy it for that, but those who would buy it for $125 are left out in the cold, even though that's the same price that the furniture-maker would ask for.

Now, way back to the log-man. Why does he want to sell his logs? He doesn't want money. He wants what he can buy with money. In other words, if he were allowed to choose between selling logs for money and selling logs for his needs, he would and likely should choose logs for his needs. Do things get complex when people who sell things the log-man want don't themselves want logs? Yes. And that's where the exchange medium comes in. But its perceived necessity doesn't make it the best way to work.

Going back to the original log-making example: Value (or utility) is subjective, but pricing of goods is not ideally matched to the value people assign to things. The more hands a good passes through, the more radically this objective price is mismatched to its subjective value. That is the inefficiency of the exchange medium in action.

The only possible solution to this inefficiency would be to design a system of exchange independent of the exchange medium. In the past, this would have been impossible; we simply didn't have the information-processing technology we do now. I'd be willing to bet that with our information technology nowadays, a program could be designed that offered everyone the absolute best price on anything they wanted to buy or sell. That's something of a flight of fancy, and maybe I'll expand on it on another thread.

B-Ran wrote:Your assumptions about the utility of the exchange media are essentially true, however this goes to the artificial utility of money. A few things to consider:

Though indirect exchange is necessary (in an exchange-medium economy) in order for everyone to be able to acquire the goods and services they need, it is not 100% efficienct due to the subjective nature of utility and the compounding of pricing differences down the line. We can look at commodities for a good example of how this works. We've used logs in the past, so let's reintroduce logs as an example. Let's assume that the going price for logs is $100/log. In other words, on average, the market is willing to pay $100 for a log. That's the break-even point for the log-man, where he makes a profit he considers reasonable at the same time that he is able to sell his logs. Now, some people might be willing to pay up to $125 for a log, but they won't pay the premium if they don't have to. So, already, the log-man has missed out on some utility by pricing his logs lower than some people might be able to buy them. It could be assumed that the log-man has factored this into his pricing, but that's a theoretical point since, in reality, he has under-priced his logs for at least some potential buyers. At the same time, there are some people who would only ever be willing to pay $75 for a log. In that case, those people will go without logs.

I agree that when selecting a method of determining a price, you should consider what people are willing to pay for your good or service. People will be willing to exchange when they perceive the value of what they are receiving to be greater than the price they will pay. Naturally, some people will value logs more and some people will value them less. This is not anything that is dependent on whether or not money is involved. Some people will be willing to buy or trade for what you produce and some will not.

B-Ran wrote:Now, this has all to do with the artificial utility of money, since were the log-man buying his needs with his logs rather than buying money with his logs and then buying his needs with money, his log-buyers would be able to offer him his needs for the price of his logs. But that's a digression.

Making a big purchase with your logs would be difficult. Think of buying a house. In order to buy a house, you would need to find someone who wants thousands of logs. This would be much more of an obstacle without money.

B-Ran wrote:Now, assuming that the price of logs is $100, anyone who wants to use logs to make anything has to factor the cost of logs into whatever they are making. At that point, their base price is going to be at least $100, plus whatever amount of money the buyer of logs (lets say a furniture maker) feels he must make back to justify the expenditure of his potential. Let's say our furniture maker is able to make one log into one chair, and that he feels he must price his chair at at least $125 to make a profit he is comfortable with. Now, there might be buyers out there who would be willing to buy that chair for up to $150, and others who would only ever buy that chair for $100. Of course, no one will buy a chair for $150 that they could just as easily buy for $125, everything else being equal. Even so, there are buyers who would be inclined to do so were that the price, so the furniture-maker is missing out on that utility.

These sort of calculations (which are essential to entrepreneurship) are much, much more complicated without a medium of exchange.

B-Ran wrote:Now, let's say a retailer wants to sell the furniture-maker's chairs and decides that $150 is the right price. Now, those people who would buy that chair for $150 will still buy it for that, but those who would buy it for $125 are left out in the cold, even though that's the same price that the furniture-maker would ask for.

I don't think you were saying that this is a monetary phenomena... right? This is the price of distribution. If the furniture-maker found it beneficial to sell direct, they could do so with a barter system or in a society that uses money. If they do not have the scale or the means to do so, they might select to wholesale their furniture.

B-Ran wrote:Now, way back to the log-man. Why does he want to sell his logs? He doesn't want money. He wants what he can buy with money. In other words, if he were allowed to choose between selling logs for money and selling logs for his needs, he would and likely should choose logs for his needs. Do things get complex when people who sell things the log-man want don't themselves want logs? Yes. And that's where the exchange medium comes in. But its perceived necessity doesn't make it the best way to work.

This is a good point: He doesn't want money for the sake of having money. Instead, he wants what money can buy. Luckily for him, money offers him many more options than trading with his customers. Since he can order a Dell laptop (which is what he wants), even though none of his customers make Dell laptops or sell laptops, he can buy the laptop he wants in a money based economy. In a trade only economy, this would not be possible, except for vendors that Dell buys from.

B-Ran wrote:Going back to the original log-making example: Value (or utility) is subjective, but pricing of goods is not ideally matched to the value people assign to things. The more hands a good passes through, the more radically this objective price is mismatched to its subjective value. That is the inefficiency of the exchange medium in action.

If you buy something, you are paying a price that is less than what you value the bought item.

Distribution, even though it doesn't change the value of the physical item (most of the time), will change where you can buy the item. Distribution is not free. Some companies are simply distributors or wholesalers as an entire business. The value that they provide might not be something that physically changes the composition of the product, but instead makes the product available to more people in more places. Again, this wouldn't necessarily change if our system was strictly trade only.

B-Ran wrote:The only possible solution to this inefficiency would be to design a system of exchange independent of the exchange medium. In the past, this would have been impossible; we simply didn't have the information-processing technology we do now. I'd be willing to bet that with our information technology nowadays, a program could be designed that offered everyone the absolute best price on anything they wanted to buy or sell. That's something of a flight of fancy, and maybe I'll expand on it on another thread.

As we can see, the medium of exchange does not lead to the higher prices. The inefficiencies that you are describing are the price increases due to wholesaling and distribution. In fact, these services deliver goods and/or market goods. Since distribution, wholesaling, retailing, are optional, a company will be a better competitor and ultimately more profitable if they analyze their options and choose the most efficient method of distribution and sale of their product. This incentive is at work in the economy and would ultimately be hindered by the elimination of a medium for exchange.

The exchange medium forces objective prices on things which ideally would be subjectively valued. That's the main problem with the exchange medium. Those discrepancies build up over time, causing price distortion that the consumer cannot readily overcome.

I will admit that my example with the logs did stray a little wide of the mark. Yes, distribution is a service, and yes, that has a lot to do with the price increase. It's a difficult thing, demonstrating price distortion in terms of dollars because of the reference point dollars represent. Suffice it to say, the exchange medium creates a "false consciousness" (forgive any vaguely Marxist connotations there) that makes us think in terms of dollars instead of in terms of subjective value. Dollars, which are only useful to buy things, which are in fact the medium of exchange, somehow acquire their own status as a commodity of sorts, even though dollars are no such thing. Once that happens, people start thinking in terms of absolute value instead of subjective value, and then all the sudden you're a Keynesian and you don't even know how you ended up there.

We would be much better off if it weren't for the amount of and emphasis on cash we have in this country.

B-Ran wrote:The exchange medium forces objective prices on things which ideally would be subjectively valued. That's the main problem with the exchange medium. Those discrepancies build up over time, causing price distortion that the consumer cannot readily overcome.

I will admit that my example with the logs did stray a little wide of the mark. Yes, distribution is a service, and yes, that has a lot to do with the price increase. It's a difficult thing, demonstrating price distortion in terms of dollars because of the reference point dollars represent. Suffice it to say, the exchange medium creates a "false consciousness" (forgive any vaguely Marxist connotations there) that makes us think in terms of dollars instead of in terms of subjective value. Dollars, which are only useful to buy things, which are in fact the medium of exchange, somehow acquire their own status as a commodity of sorts, even though dollars are no such thing. Once that happens, people start thinking in terms of absolute value instead of subjective value, and then all the sudden you're a Keynesian and you don't even know how you ended up there.

We would be much better off if it weren't for the amount of and emphasis on cash we have in this country.

Ultimately, the consumer has one choice to make when looking at an item to purchase. If the consumer is deciding whether or not to buy a good, they have a choice to make: either give up the money and what it could have bought you, or give up on buying the good. Prices actually make this decision easier and allow for each person to have more choices with their money and to make those choices with more clarity.

I would argue that people in this country do not have enough emphasis on cash. We are a country of people up to their eyeballs in debt. This has to do with the inflationary monetary policy that the Fed has pushed. That is a story for another thread.

I definitely don't disagree that the consumer must have the choice to buy things. I still have a problem with exchange media because of the capacity that they have to effect the price of goods without effecting the essential value. I have a feeling (and I would likely be able to figure out how) that an unstable currency exacerbates the existing tendency toward price distortion. That's something I know we agree on.

B-Ran wrote:I definitely don't disagree that the consumer must have the choice to buy things. I still have a problem with exchange media because of the capacity that they have to effect the price of goods without effecting the essential value. I have a feeling (and I would likely be able to figure out how) that an unstable currency exacerbates the existing tendency toward price distortion. That's something I know we agree on.

Definitely. An unstable money is hurtful because people make choices that are dependent on what they believe they can buy with their money. With unstable money, that makes those calculations more difficult. That is one of many downfalls of a money that is not stable. We can for sure agree on this much.

B-Ran wrote:I definitely don't disagree that the consumer must have the choice to buy things. I still have a problem with exchange media because of the capacity that they have to effect the price of goods without effecting the essential value. I have a feeling (and I would likely be able to figure out how) that an unstable currency exacerbates the existing tendency toward price distortion. That's something I know we agree on.

The fact is, an exchange medium is beneficial to people and without it, we would be much worse off. The exchange medium is not the inefficiency in any of the situations that you have mentioned.