Chapter 3 Three Modes of Exchange December 29, 2021 by Dalisay Value transfers between people in 5 ways, which we call the 5 modes of exchange which matches the 5 layers of reality: Mode Layer Mode of Value 1 Aether Inspiration (Useful ideas or energy that come from nowhere) 2 Spacetime Luck (being at the right place at the right time) 3 Radiant Donation, Gift, or Investments that Lose Value 4 Radioactive Barter or Investments that Earn Value 5 Material Money or Currency These come in a ratio to make up 100% value for society. For example, the invention of an car or automobile might require: Inspiration (Mode 1) for an idea of inventing a car Bumping into an investor (Mode 2) while going out to lunch Him giving a grant (Mode 3) for you to make a prototype, and then him investing (Mode 4) money (Mode 5) to build a shop to produce a car All these modes lead to the production of a car for society. title: “7 Barter Disadvantages Addressed” heading: “Why Barter is Advantageous in Certain Conditions” description : “We address the 7 disadvantages of barter arising from popular misconceptions” The following are the common disadvantages of barter: 1. Lack of Double Coincidence of Wants Persons must have matching requirements for barter to work Our Response This is only true for bilateral barter or trade involving two persons. Smith’s system is multilateral wherein trade is circular and not direct. The following workmen are necessary to make the shears used to clip the wool to make the coat: The miner, builder of the furnace for smelting the ore, The feller of the timber, The burner of the charcoal used in the smelting-house, The brick-maker and the brick-layer, The workers who attend the furnace The mill-wright, forger, and smith. All of them must join their different works to produce the shears. Wealth of Nations Book 1, Chapter 1 2. Lack of any common unit of measure If A has rice, and B has wheat, then how much of rice will exchange for how much of wheat? If there are 500 goods, we will have to work out 124,750 possible ratios of exchange which is an enormously difficult task Our Response Such objective valuation is true only for commercial transactions which require a fixed price. Smith’s system is not commercial as it does not rely of fixed nominal values or even any equilibrium theory, but instead relies on real value or the Effort Theory of Value, facilitated by fellow-feeling, natural to all humans. The goal of trades is not profit, but for “carrying on..life.” Thus, if A and B agree to trade their rice and wheat at a ratio of 1:1, then the price of 1 rice will be 1 wheat. In other words, the price of a commodity will be the other commodity. In exchanging the produce of different sorts of labour, some allowance is commonly made for both hardship and ingenuity. It is adjusted by the higgling and bargaining of the market, according to a rough equality sufficient for carrying on the business of common life. Wealth of Nations Book 1, Chapter 5 But the colonies sell their own produce chiefly to purchase European goods. The more they pay for the European goods, the less they get for their own produce. The dearness of the European goods is the same thing with the cheapness of their own produce. Wealth of Nations Book 4, Chapter 7 3. Lack of Means of Subdivision One coffee mug cannot be exchanged for half a shirt Our Response Our system pegs the value of everything to the common grain of the country. So the coffee mug will be priced in rice, let’s say 1 mug: 2 kg rice and 1 kg rice : $1. If the shirt is $8, then it is worth also 8 kgs of rice. The coffee mug seller will get the full shirt in exchange for the mug, but owe 6 kg of rice. In case the shirt seller does not want the 6 kg rice credit, he can ask for $6 from the mug seller. The advantage of this is that the coffee mug seller was able to save $2 by giving his mug (something that he can supply easily) instead of money. This reduces his reliance on the expensive monetary system and shifts his reliance towards his own products and services. Grains, like metals, can be subdivided yet computed objectively. This system can be done online or offline with resource credits representing rice. The man who wanted to buy salt and had nothing but cattle must have been obliged to buy salt to the value of a whole ox. He could seldom buy less than this because his cattle could not be divided. If he wanted more salt, he must buy more oxen. If he had metals, he could easily proportion the quantity of the metal as he needed. Wealth of Nations Book 1, Chapter 4 4. Lack of Way for Future Payments There is no way to write contracts for future payments. Our Response Future contracts have the same dynamics as trade contracts administered by the Clearing Authority. This implies that the Clearing Authority has some quasi-legal power to enforce the fulfillment of future contracts. I can borrow your pen and give it back next week by signing a contract that reminds both of us. Give me that which I want, and you shall have this which you want, is the meaning of every such offer. In this way, we get most of what we need. Wealth of Nations 1, Chapter 2 5. Lack of Way to Store Purchasing Power and the Perishable Nature of Some Goods Money can be stored but not all goods, such as eggs, can be kept until one retires. Our Response Supply chain barter is meant to circulate both raw materials and finished products to maintain production to sustain economies. It is not for investment. Thus, a company will trade for eggs only when it needs it, such as restaurants which follow “just in time” production. A child can receive a credit of 10 eggs to be claimed from a farm 50 years later at adulthood. There are some cases such as in technological products where time is essential. For example, if I received a credit of one Nokia 3310 mobile phone in 1999 (when the phone was very useful and hi-tech) and claim it in 2018 (when the same phone is almost useless and obsolete), then it would be a clear injustice to me. This problem can be solved by finding the equivalent product in the current time. In our example, the new version of the Nokia 3310 can be claimed. So a child in 1998 can receive a credit of Nokia 3310, to be claimed 50 years later as whatever would be the equivalent of a Nokia 3310 by then. The returns of the fixed capital employed by land improvers are much slower than the returns of the circulating capital. Such undertakers or projectors may, with great propriety, carry on most of their projects with borrowed money. Wealth of Nations Book 2, Chapter 2 6. Possible big difference in delivery times and costs for items involved Company A might trade a single expensive item for many of Company B’s cheap items to be delivered many times, exposing Company A to more risk than Company B. Our Response Normally, cheap raw materials are not exchanged for expensive finished goods in a multilateral barter. Iron ore is not directly sent to a laptop factory to be converted to a laptop. Instead, ore is sent to a steel mill, which will send metals to a chipmaker, which will then send chips to the laptop factory. The value of a truckload of microchips is closer to value of a truckload of laptops, than a truckload of iron ore. The labourer’s coarse woollen coat is the produce of the joint labour of many workmen: The shepherd, wool-sorter, wool-comber or carder, dyer, scribbler, spinner, weaver, fuller, dresser, and many others must all join to complete the coat. Merchants and carriers must be employed to transport those materials from far away! Many ship-builders, sailors, sail-makers, rope-makers, must be employed to bring the drugs of the dyer coming from the remotest corners of the world! Wealth of Nations 1, Chapter 1 7. Global Price Fluctuations Prices can fluctuate in the world market very quickly. Our Response Supply chain barter relies on real prices and not on nominal prices. Any sudden reduction or increase in real prices in the external market is either absorbed or enjoyed by the trade partners. From a global societal perspective, the losses of the losers will be offset by the gains of the gainers, having little impact on the global economy. A public mourning raises the price of black cloth and increases the profits of the merchants who have black cloth. It has no effect on the wages of the weavers [regular workers] because the market is under-stocked with black cloth, not with long-term labour. It raises the wages of journeymen taylors [contractual workers] because the market is under-stocked with short-term labour. The mourning creates an effective demand for more short-term labour. Wealth of Nations Book 1, Chapter 7 The Consequence of a Money-only system By neglecting barter, economic systems lead to a rapid accumulation of fake nominal value which leads to frequent crashes. The next post will explain such a phenomenon as the Skyscraper curse Back to The Fallacy of Liquidity Preference Next The 3 Problems with Money