The Wall Street Journal (H/T Peter Gordon) says that barter is countercyclical. Barter increases in recessions, like now, and decreases in booms. Can anyone confirm this? Because that fact (if it is a fact) is really important in understanding the nature of business cycles and recessions. Countercyclical barter is exactly what one would predict from a monetary (deficient aggregate demand) theory of recessions. It makes no sense from a real business cycle or recalculation theory of recessions. And the very existence of barter, even in normal times and booms, is evidence in favour of doing macroeconomics with monopolistic competition.
We use monetary exchange rather than direct barter because transactions costs are generally lower. I want to sell apples and buy bananas, so I search the population for a trading partner. If I find someone who wants to buy apples, that would be a coincidence. If I find someone who wants to sell bananas, that would be a coincidence. If I find someone who wants to buy apples and sell bananas (who is in the intersection of those two subsets of the population) that would be a double coincidence. Because such a double coincidence of wants is so rare, and therefore costly to find, we normally use monetary exchange. First I sell my apples for the medium of exchange to someone in the first subset, then I buy bananas with that same medium of exchange from someone in that second subset.
Even if I did get really lucky and find someone in the intersection of the two sets, there seems little to be gained by barter, when the added transactions costs of two, monetary exchanges is so low. I could just sell him my apples for money, then buy his bananas for money. Why would we ever link those two exchanges? Why would I ever say to him (or he to me) "I will only buy your bananas (apples) if you agree to buy my apples (bananas)"?
Even more importantly, why don't we link the two exchanges the other way around? Why do we never hear anyone say "I will only sell you my apples (bananas) if you agree to sell me your bananas (apples)"?
The vulgar answer to both these questions is immediate and obvious. And it's correct. "Because people are short of money, that's why!".
And the vulgar answer to why barter is countercyclical is equally as immediate, obvious, and correct. "Because people are really short of money in recessions!"
And you really do need a PhD in economics to be so obtuse as to want to question those vulgar answers.
In the vulgate, "money" is often synonymous with "wealth". Just for once, it isn't. Here, "money" really does mean "medium of exchange". To help you understand the (implicit) theory behind the vulgar answers, consider the following thought-experiment.
Start with a perfectly competitive monetary exchange economy in full market-clearing equilibrium. Taking market prices as exogenous to the individual, every individual is both buying and selling exactly that quantity of every good that he wants to buy and sell at those prices. Now hold all prices fixed by draconian law, then halve every individual's stock of money (by vacuum cleaner operation, confused tooth-fairy, whatever).
Every individual tries to rebuild his stock of money by buying less goods and selling more. Quantity of goods exchanged equals whichever is less: quantity supplied or quantity demanded. In this case, quantity demanded is less. So the quantity of goods exchanged contracts. Unable to sell as many goods as before, people decide to buy even fewer goods. There is a cumulative contraction in trade. Trade only stops contracting when it gets low enough that people no longer try to accumulate money by buying less than they sell. If the income elasticity of the demand for money is one, then halving the stock of money, all prices fixed, causes a halving of the volume of trade.
That means massive unexploited potential gains from trade. Yet there is no way that individuals can exploit those opportunities through monetary exchange. Each individual can buy as much as he likes, but doesn't want to reduce his stock of money any further. And he can't get more money by selling more goods, because nobody will buy more.
Barter provides a way out. By linking two monetary exchanges ("I will only buy your bananas if you agree to buy my apples") even at the legally fixed money prices, both sides are better off, since any money spent gets immediately returned to the same person who spent it. That's why people would barter when they can, even if it is more difficult to find a trading partner, and even if his bananas weren't exactly what you most wanted to buy with the money.
Here's a second thought-experiment: same as the first, only now double each individual's stock of money (by helicopter, or sensible tooth-fairy). Again keep prices fixed by law. Now we get an excess demand for goods and excess supply of money, instead of vice-versa. People want to get rid of the excess stock of money by buying more goods and selling less. Again the volume of trade contracts, but this time because exchanges are supply-constrained. And again there is a cumulative decline in trade (Barro and Grossman's 1971 repressed inflation supply-side multiplier). People are less willing to sell goods, because they cannot buy extra goods with the money they get in return.
In this second thought experiment, there are again unexploited potential gains from trade, that cannot be exploited by monetary exchange, but can be exploited by barter. Only now, the deal has to be: "I will only sell you my apples if you agree to sell me your bananas".
Now, here's the puzzle:
Why does this sound familiar: "I will only buy your bananas if you agree to buy my apples"?
Yet this sounds so strange: "I will only sell you my apples if you agree to sell me your bananas"?
Why is a shortage of money so familiar, yet a shortage of goods so strange? Why do we commonly see an excess supply of goods, and so rarely see an excess demand for goods?
I've already answered this question in a previous post. It's because the economy is monopolistically competitive rather than perfectly competitive. Even in long-run equilibrium, prices are above marginal costs. Excess supply of goods, in the sense that people/firms want to sell more at existing prices if they could find a willing buyer, is the normal condition for a market economy. We only hit the supply constraint in a very big (and rare) boom. Money prices are almost always "too high", even if relative prices are roughly correct.
Suppose a monopolistically competitive seller of apples just happened to meeet a monopolistically competitive seller of bananas, and each wanted to buy what the other wanted to sell. Suppose, in other words, the double coincidence of wants just happened. A "meta exchange", where they exchange promises to exchange goods for money, can make both better off, even at existing money prices. Both can gain by agreeing to buy more of the other's goods than he would otherwise want to buy, in exchange for the other's agreeing to buy more of his goods in return. That's because price (and hence marginal benefit to the buyer) is above the seller's marginal cost.
So, can anyone reading this confirm that barter is more common in recessions than in booms? Even anecdotal evidence would help. You can see why it matters (to an economist). It confirms the theory that recessions are a monetary exchange phenomenon, due to an excess demand for the medium of exchange. It would disconfirm real business cycle theories, or variants like recalculation theories. It's a shortage of (monetary) aggregate demand that causes recessions, not a fall in supply of goods.
And, has anyone ever seen or heard of a case where someone said "I will only sell you my goods if you agree to sell me yours"? Give me details.