In response to my coming video ‘Capitalism in One Lesson’, Daniel Sanchez responded that money makes economic calculation "possible", instead of "easier".
I’m wondering if that’s actually the case. Under barter:
There are prices being paid on the market (people have an internal cost structure through opportunity costs, and there is competition),
People can undertake in entrepreneurship because they can estimate how much they’ll consume and use market prices (for costs and for sales),
It’s just that there is multiplicity in which goods are priced (good A is priced in good B, C, D, etc), but it may be more difficult to know about those prices and they may vary more.
Also, if 2% of people don’t accept gold and silver, does that mean there is not a money (because it’s not universal) and economic calculation is impossible?
Also, for a common medium of exchange to come about, there is a logical driving force behind it; people are not randomly messing about. The fact that one common medium of exchange can come about also shows that economic calculation is possible.
So:
Is economic calculation (at an individual level, and as an economy (is that important? what does that mean?) possible before money, or only after money?
And so,
Is market maturity a sliding scale or is it something with a ‘genesis’ before which people are groping in the dark?
Or maybe ‘economic calculation’ has a more specific meaning?
I think the reason Daniel said that was probably because in a direct exchange system, prices are determined by the marginal utility of items in the market on that day only… but in a indirect exchange system, the marginal utility of an item and the demand for an item depends on yesterday’s prices of the items in the market…
indirect exchange makes the economic calculation possible because of the fact that the demand and marginal utility of items depend on yesterday’s prices
Well, under a monetary system, there is indirect exchange. People exchange goods and services for a good (Money), not to consume money but to exchange it for something else. It is indirectly servicable. Under barter, there is direct exchange. People exchange goods for things they directly need.
Because of this, technically without money, there cannot be indirect exchange, and a structure of production cannot develop because goods will only be exchanged for goods that directly satisfy wants. Without a structure of production, there cannot be economic calculation, since indirect exchange never occurs. In order for Economic calucation you need a yardstick (money) in order to calculate the most profitable process of production/indirect exchanges.
Money is a “general” medium of exchange. What qualifies “general” is really subjective. A bunch of kids in the neighborhood may be playing a game and use leaves as money. For them it is money, for most people its garbage :D.
It’s not about prices simply in the sense of previously established exchange ratios, but the expression of these under a common, cardinal denominator. One must first recognise that money costs and revenues are of an entirely different order to opportunity costs and psychic revenues. The latter are based on direct estimations of utility by the individual actor, whereas the latter are a consequence of adaptation of an entire regime of production and exchange towards meeting the ends of others. Hence with a common denominator employed in such an institutional environment, one can engage in capitalist economic planning and compare different projects directly via anticipated profit and loss, with success actuated by successful ability in prediction.
You would lose the ability to objectively appraise and evaluate the worth of one’s capital and income without the institutional conditions of an indirect exchange economy. Instead of having one’s assets comprising $x dollars with an income of $i per anum, denoting how much you could consume without depleting one’s capital, instead you would simply have a complex description of an inventory of capital goods (aA, bB, cC…) useless for action that could be exchanged at an entire plethora of incomparable exchange ratios, yielding different “vectors” at each time. How would you no know whether one was acquiring or depleting one’s capital now? There is furthermore the coincidence of wants problem that is subsidiary but related to this in the sense of having to acquire x chickens, l cows, m carrots etc to pay off one’s workers who all have specific wants in return without a common medium of exchange.
Also @Izzy, the problem has nothing to do with past prices, but calculation based on anticipation of future prices. Even when computing profit and loss based on prior actions, one is still trying in a future oriented way to ascertain the level of one’s resources available for present action. The only price with a real dependence on past prices is the purchasing power of money(Cf Mises’ regression theorem).
I’m with you Nielsio. The whole prices being needed to calculate is overblown - Crusoe can be perfectly rational. The major issue however is the condition under which calculation takes place: competitive or monopolistic. For an excellent article see here
On a related note the distinction between a barter and monetary economy is not absloute. Remember before the existence of a general medium of exchange there has to be a medium of exchange. As such it is inaccurate to characterise non-monetary economies as barter economies in which only direct exchange takes place.
My shortest reply is that economic calculation is possible in barter economy. I believe this quotes from Mises are sufficient premises for this conclusion:
In an occasional act of barter in which men who ordinarily do not resort to trading with other people exchange goods ordinarily not negotiated, the ratio of exchange is determined only within broad margins.
Indirect exchange and its perfection through the use of money divide the transactions into two different parts: sale and purchase. What in the eyes of one party is a sale, is for the other party a purchase. The divisibility of money, unlimited for all practical purposes, makes it possible to determine the exchange ratios with nicety. The exchange ratios are now as a rule money prices. They are determined between extremely narrow margins: the valuations on the one hand of the marginal buyer and those of the marginal offerer who abstains from selling, and the valuations on the other hand of the marginal seller and those of the marginal potential buyer who abstains from buying.
We are talking about economic calculation as such and not about whether or not in the conditions of indirect exchange a more or less roundabout capitalistic mode of production is possible. Economic calculation is the very ex ante act of comparing the expected marginal utility to be gained from the precise quantity of the good to be received with the perceived to be forgone marginal utility of the precise quantity of the good you are giving away. The peculiarity of the indirect exchange are the broader margins which are narrowed when a medium of exchange is introduced, thanks to its divisibility. This helps form the exchange ratios with more nicety, as he writes.
The necessary conditions for the emergence of exchange ratio(s) are:
i) a human individual
ii) more than one scarce good
Of course, was anyone claiming to the contrary? I think it’s important to remember the words general or common are subjective and relative when used to describe media of exchange. The necessary condition is that one’s trading partners are using a common medium of exchange. We haven’t had anything close to an “absolute” general medium of exchange for almost a hundred years, though I hardly think anyone would describe today’s fiat economies, e.g. that of Switzerland, as “barter economies”
I was merely pointing out that you were drawing a too sharp distinction between monetary and non-monetary economies. As Nielsio rightly pointed out ealier the generation of a general medium of exchange presupposes rational calculation prior to its existence. As such money being necessary for rational calculation is invalid.
Well actually Rothbard describes direct exchange as equilvalent to barter.
Indirect exchange is money, and a “general” medium of indirect exchange is the common definition of money.
Technically, since under barter everything is direct exchange, a structure of production can’t exist (or only extremely rudimentary). Nothing would ever be extended past the first stage, and there would be no way for advanced production to occur (individuals can’t determine profitabilies of goods without indirect exchange-money).