Is Barter Countercyclical?

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.

Comments

[Rogue]

2 cases where someone said "I will only sell you my goods if you agree to sell me yours"

1. 2 collectors trading rare collectibles
2. after the 1898 opium war, when UK got Hong Kong and China got reprieve from UK opium trade (not eaxctly a goods exhange, but you get the idea)

[Nick Rowe]

Rogue: lovely cases (for me) because they are exceptions that prove the rule.
The rare collectible is in fixed supply (vertical supply curve), so the marginal cost of producing one more rare collectible (the supply price) is undefined (vertical MC curve). So the elasticity of the demand curve doesn't matter (as long as it's greater than one). The monopolistically competitive equilibrium is the same as the perfectly competitive equilibrium, in that rare case.

And, in 1898, China (the trading partner in the meta-exchange) did not want it's people buying opium, right?

[Jplewicke]

From Google Trends:

http://www.google.com/trends?q=barter
http://www.google.com/trends?q=barter+exchange&ctab=0&geo=all&date=all&sort=0
http://www.google.com/trends?q=bartering&ctab=0&geo=all&date=all&sort=0

One could also try to get some stats from Craigslist about the popularity of their bartering subsection, but at a first pass it looks like you might be right.

[Rogue]

Nick, I'm not sure how to put the China example really. I originally thought about the example of 2 hostage negotiators who decide to exchange hostages.

I think what I'm trying to come around here is that examples of "I will only sell you my goods if you agree to sell me yours" happen when both parties have something more valuable than money.

I would think it can happen a lot in hyperinflation, so barter can also be countercyclical in booms.

[Just visiting from macleans]

In the oil patch, especially in startup junior companies when cash flow is tight (say the price of gas is low and/or they don't yet have productive wells) it is not unheard of for a geologist, for example, offering his key expertise in exchange for a working interest in a well.

[Jim Rootham]

I'm not sure that is barter as is currently being investigated. It's more than common in software startups.

[Neil]

I think part of the answer lies in excess capacity. My company, for instance, can produce more engineering designs than we can sell at our current rates during the winter months. If we drop our rates to sell more, we actually make less money because all of our clients expect to pay the new, low rates. The extra business doesn't make up the drop in revenue from current business.

But if we exchange some of that excess capacity for non-monetary goods or (more commonly) services, the numbers become much less meaningful. It's a way of dropping our rates only for the additional work, without creating a lower rate schedule that other clients would expect to take advantage of. Even the same client would expect to pay the normal rate schedule on cash business, despite getting a better deal on barter.

[bork]

Try searching sales fora, Craigslist, etc. for "FSOT" vs "FS" vs "FT" - for sale, for trade, for sale or trade.

[Just visiting from macleans]

Jim, maybe not - though in the case of a software company, the programmer has an ongoing interest in maintaining and supporting the software.

The geologist, on the otherhand, can turn around and walk away and sell his interest once his work is complete.

[tjfxh]

Duh. When there is a shortage of money, as curtailed NAD, an output gap, and higher unemployment indicate, then people will naturally turn more to barter (trading assets) in addition to selling assets, in order to make up for insufficient income and dwindling savings.

"I will only sell you my goods if you agree to sell me yours" is what barter involves. IRS includes barter in its purview. IN their view, barter is a purchase and sale. So this exchange has to be accounted for as a transaction on the books for tax purposes, even if no actual money changes hands, in that money is the unit of account for tax purposes even if it does not serve as the medium of exchange in the transaction. People who overlook this can be in big trouble with the eagle if discovered, and the IRS is looking for this, as barter club members know.

[Nick Rowe]

Neil: "I think part of the answer lies in excess capacity. My company, for instance, can produce more engineering designs than we can sell at our current rates during the winter months. If we drop our rates to sell more, we actually make less money because all of our clients expect to pay the new, low rates. The extra business doesn't make up the drop in revenue from current business."

BINGO! I feel like I hit a bullseye! What you are describing there is classic monopolistic competition: the excess capacity theorem (why marginal cost is less than average cost); and why marginal revenue is less than price because the firm faces a downward-sloping demand curve, and can't price-discriminate. If I repeated your statement, and added "Discuss", I would expect my brighter first year economics students to recognise that you are describing exactly what I taught them in class about monopolistic competition, and draw a diagram to illustrate it.

Your explanation of barter is the same as mine. Mine would just add that the other firm or person with whom you are doing the deal is in exactly the same sort of situation; they too have excess capacity, and don't want to cut their price either, for the same reason you don't want to cut yours. It takes two to tango (or barter, in this case), so we need to explain both sides' motivation. I feel like I just got a field report that perfectly fit my theory.

Jplewicke and bork: thanks. I should have thought of that. But if all activity on Google, or Craigslist, is growing over time, is there a way to "adjust for inflation", so to speak? And does that data go back far enough, so we have at least a couple of recessions? (Though I expect if you saw a big spike up last year, it would look plausible that it was the recession that caused it.)

Rogue: yes. In an exchange, each person gives up something he wants for something else he wants more. A barter if sort of like a double monetary exchange. In a recession, neither side wants to give up his money, by buying something, but is willing to do so because he wants to sell something even more. In a hyperinflation, where prices haven't quite caught up, so we really do have the rare case of an excess demand for goods, then I could see that we might get barter the other way around: "I'll sell you something if you sell me something".

[Nick Rowe]

tjfxh: Don't you see the difference between these two offers?

1. "I am happy to sell you my apples. But I won't buy your bananas unless you buy my apples in return".

2. "I am happy to buy your bananas. But I won't sell you my apples unless you sell me your bananas in return"

Both are barter. Both are the same for income tax purposes. But the first expresses at excess supply of goods, and the second expresses an excess demand for goods. The first is MUCH more common.

[Just visiting from macleans]

"Discuss"

OK, assume I'm not one of your bright first year economics students. But, I have been involved with companies that provide engineering services (not monopolistic in any fashion - but depends what line of business Neil is in).

So, if he is receiving "non-monetary goods or (more commonly) services" where do these go? Do they dispace his normal suppliers of non-monetary goods or services?

Say someone pays me off in toilet paper. Now I've got a glut in the janitor's room, and it lasts me the next year. So, I cut back purchases the remaining 11 months from my normal supplier. How about someone does the the cleaning and vaccuuming for me. Does that mean my normal work crew goes on a forced vacation?

Since payment is not monetary, are there impacts not readily apparent? Or does it matter? My diagram may have more lines than others. In the examples I'm highlighting, what you are essentially doing is converting your idle time to someone else's (your normal suppliers).

[Rogue]

Just visiting, your examples will work if your arrangement with your suppliers is what Nick calls monopolistic competition. You will only accept toilet paper currency from your normal supplier, and you will only accept vacuuming barter from your normal cleaning work crew.

[Doc Merlin]

A significant portion of barter in the labor market isn't measured as barter and is pro-cyclical. For example: people being paid in stocks and options and benefits given to employees.

In the US at least, a significant portion of one's salary is in benefits which is bartering medical care for work, because it is untaxed, whereas money payments for work are taxed.

Many very high end workers (such as warren buffet) receive the majority of their salary as barter and end up paying much lower capital gains tax, instead of income tax.

[Just visiting from macleans]

Rogue,

I'm not sure I quite follow your point, but let me put it to you in a different way. I've worked in seasonal engineering firms - the Canadian oil patch is a good example. In the Spring they have what's called break-up, when the snow melts, the road bans go in, and in many areas, the end of the drilling/pipelining season. So, it's a slow period, and people sit idle, or not as busy.

So, if everyone is on salary, and I don't do seasonal layoffs, then these are fixed costs. I pay them irrespective of the workload.

At the end of the year, I review my income statement - Revenue, Cost of good solds sold, profit. And on my balance sheet - assets and liabilities.

Now, irrespective of the state of the economy, I can do a few things with my employees during slow periods. Status quo, work for barter, or have them themselves do some painting and yardwork that I wouldn't do normally (not a great morale booster so let's drop that one).

If I barter for services that I don't need or don't normally pay for, then my profit doesn't change - I have the same fixed costs, and my cost of goods aren't affected(ok, paper and ink for the drawings, maybe).

If I barter for goods/services normally provided by others, then my cost of goods sold goes down (because I need not buy them anymore - two examples given) and my fixed costs remain, so my profit goes up. So, I've shifted the problem to my normal suppliers - they will need to make up the difference by finding a new customer, or eat the loss in sales.

If they pay me with something totally unrelated to my work (say their '55 Chevy) then it goes on my balance sheet - to be sold at some later time - so I am ahead of the game.

That's why I asked if it was important if it mattered where the goods and services went? I presume the bolded example (the one I would suggest to be the more likely) is what you describe as "monopolistic competition".

[westslope]

I dunno. To me, a working interest in an uncertain asset along with stocks and options are all forms of contingency-based income. The company may or may not be liquidity constrained. There is no barter as such. Risk is shared.

Now if geophysicists were paid in barrels of oil, would that would be output sharing or barter?

Here on the wet, warm coast of decadence, the police and newspapers love to entertain us with stories of Colombian cocaine and British Columbian marijuana being bartered across the Canada-USA border. I always guessed that the stories were mostly hyperbole. I'm assuming that it is much easier to transfer cash over the border than narcotics. That and the fact that markets overlap but are not the same, and one market--marijuana--is much larger than the other--cocaine. All these factors could render barter unattractive.

[Just visiting from macleans]

To me, a working interest in an uncertain asset along with stocks and options are all forms of contingency-based income.

Stock and options (referred by some as golden handcuffs) are usually not exerciseable until a prescribed period of time (say two years) - so, again, you have a vested interest in staying with the company and contributing to its bottom line.

The situation I described is when the transaction would not occur if not for barter. The geologist accepts risk (dry hole - nada, paydirt - upside) and the junior gives up working interest because it has no money. Sure, there are lots of arrangements where juniors get shares in the overall company - this was a specific piece of work for a finite asset. I think it's different.

[tjfxh]

NIck:

1. "I am happy to sell you my apples. But I won't buy your bananas unless you buy my apples in return".
2. "I am happy to buy your bananas. But I won't sell you my apples unless you sell me your bananas in return"
Both are barter. Both are the same for income tax purposes. But the first expresses at excess supply of goods, and the second expresses an excess demand for goods. The first is MUCH more common.

NIck, in my experience, this just isn't how it works. People let it be known that they have something to trade. Other people that have something to trade then met up and they negotiate a deal if they can. A barter transaction happens when two people with similar wants can get together on a transaction. There is no mention of "buy" and "sell" at all in a trade. Who is the "buyer" and who is the "seller" here? It's hard to say, other than arbitrarily. I think you are trying to construct something that just doesn't reflect how a great deal of barter actually works.

What makes this complicated is that typically, traders don't initially barter for what they want anyway. They barter for advantage, figuring to take what they get and barter it further, increasing advantage at each iteration. I agree that a trader can get a leg up if the counterparty is looking to liquidate an asset, and is that sense the "seller." It is actually a pretty sophisticated marketplace. and many small business people use it to trade commercial assets for something they want personally or to pay under the table, and then they try to hide this by not disclosing it as personal income, employee wage disbursement or liquidation of a payable. Lots of them get caught because the IRS is up on this scheme.

Let me give you another common example. Gem dealers are generally traders seeking advantage. They regularly trade with each other, to realign inventory, for example. There is also the challenge of taking advantage of another traders ignorance of quality, lack of negotiating skill, etc. Most Westerners learn this in foreign markets, the hard way. Right now, money is tight in retail and wholesale gem and jewelry markets, so the dealers will be spending more time trading for advantage in order to upgrade their inventory in preparation for the next cycle. In this trading game, dealers don't necessarily look at this as a supply matter, i.e., reducing excess inventory, as much as trading for advantage. I may trade my best item if the deals is sweet enough, which is has to be to make me sell an item I'd just as soon have. The other guy just has to want it more than I do, or make a mistake in my advantage.

[Leigh Caldwell]

We may not have economy-wide data for recessions, but it seems fairly clear that there is more barter within lower-income communities. This could be due to a shortage of the medium of exchange, but I suspect there's also another factor - it is a mechanism for price discrimination.

Say I'm a plumber selling 20 hours a week to wealthy clients at $100/hr, but unable to sell the other 20 hours. And say you're a car mechanic in the same situation.

Having a lower income than the plumber's usual clients, the mechanic may only value plumbing services at $50/hr; and similarly, the plumber values car repair at only $50/hr. Therefore neither will buy the services of the other at $100/hr.

But if they can strike a deal at $50/hr through barter, this protects their $100/hr standard pricing while allowing them to use some time which would otherwise go unsold.

If other methods of price discrimination are not available, this may be an efficient way to prevent richer clients from taking advantage of the $50/hr rate.

This behaviour is certainly related to the monopolistic competition hypothesis (since the $100/hr standard rate is not being competed away), but does not require any shortage of cash.

[Rogue]

Just visiting, I'm not surprised I got you confused. I also think I confused my point and only realized when I posted. What I meant to say was, you will only barter your service with someone willing to barter his service for yours. Over time, you will only continue bartering with those who continue to barter their service with you. That's where monopolistic competition arises. You cannot sell your service to all toilet papermakers and always get paid in kind,but only to those who continually need your service and barter with you.

You're right, in a way, you shift your problem to your suppliers, but then they will only accept more of your goods than they need if they know they can trade it with other people afterwards. You will only accept more Chevys than you need if you know you can trade them with something else later. Was that coherent?

[Doc Merlin]

@ Leigh Caldwell
"We may not have economy-wide data for recessions, but it seems fairly clear that there is more barter within lower-income communities. "

I completely disagree here, in my experience its the higher end communities that have the most barter (in terms of possible trade value for money). Options, benefits packages, revenue sharing, and many types of derivatives function as barter.

[Just visiting from macleans]

Rogue, you are describing something that I think Leigh touched on. And perhaps Neil did as well. I'll use different words to describe the same thing.

You are attempting to create two tiers of pricing for a product or service that is indistinguishable. So, you're using barter as a means of hiding the lower tier price from your existing customer base so as not to cannibalize the more profitable sector.

Say I was JollyGreen Giant and I sold premium niblets corn through SafeWay and Loblaws, ho-ho-ho and all that. Now the recession hits, and a lot of my existing customers become price sensitive. I don't want to drop the price for all to increase volume because a good portion (not all) are not price sensitive. They would become "free riders". So, instead, I introduce the same product, but with a no-name yellow bland label and price it at half the other, and then put the No Name and JollyGreen Giant side by side on the shelf . The people who aren't price sensitive still buy JollyGreen Giant, and the price sensitive ones don't, they go for the No Name .

The plumber example of Leigh's, and your ongoing barter with someone forever is basically addressing the same problem/opportunity - the only difference is you can't call yourself "Joe the Plumber" to the rich Republicans, and then drive to the other end of town and call yourself "Acme discount pipe and toilet cleaners" to the other segment without creating problems. So, you continue to call yourself "Joe the Plumber" and barter your services to the other group because word will get out otherwise, and you'll lose votes, I mean customers.

[Phil Koop]

I agree with tjfxh; I think your question about selling versus buying in a barter market is ill-posed because in reality neither proposition is ever made in the forms you give. Bartering may occur because money is too scarce or too copious (hyperinflation), but a participant in a barter market starts with the premise that he is operating in such a market and says "I've got apples; what have you got to trade?", or "I'm looking for bananas; what'll you take?" It is not possible to infer monetary preferences from these propositions; the approach taken is as likely to depend on psychological factors as any immediate need.

Or to put it another way: some commodities, such as electricity or natural gas, occasionally clear at negative prices. You would not infer from this a money-fleeing preference in the seller! The buyer is clearly being bribed with money to accept the commodity rather than the other way around.

[Nick Rowe]

I've had a look at the Google trends data to which Jplewicke kindly linked.

My worries about needing to adjust this data for "inflation" in the total number of Google searches were clearly overblown. If I understand this data correctly, then searches for "barter" spiked up strongly in early 2009, then fell again, while news items on "barter" rose more steadily as the recession worsened. Makes sense. The news reports the amount of barter, with perhaps a short lag, while searches represent the growth rate of barter?

tjfx and Phil Koop: sure, in pure barter economies, there is no distinction between buying and selling. But in a monetary exchange economy, the two goods that are exchanged through barter are usually also offered for sale in exchange for money. And the typical barter of two goods is where each of the two people is willing to sell for money, but neither wants to buy for money. So they do a barter instead. But we can contrast that case with a second, where each is willing to buy for money but neither wants to sell, so they do barter instead. Why is the first case more common than the second? Because money is short.

I've been thinking about Doc Merlin's example of executive compensation. I would say that the barter happens when they join the firm, and the compensation package is negotiated. If I join the firm in 2005, and get a stock option, which I cash out in 2006, I would say that the barter happened in 2005. So I don't think barter is procyclical just because the value when cashed out is higher in booms than in recessions.

So Leigh has an alternative theory, that barter exists as a form of price discrimination. If Leigh's theory is correct, the elasticity of demand for those customers willing to barter must be higher than for those unwilling (or unable) to barter. Interesting. Not sure if it's right, but it makes logical sense. Of course, both his and my theories could be true.

[Nick Rowe]

Too much Fed: Sorry, but I have removed 5 of your comments. They were off-topic. This is a post about barter, not an opportunity to post anything you feel like. It makes it harder for the rest of us to follow the discussion, and risks hijacking the discussion onto other topics you have raised time and again.

[Ritwik]

Nick: Excess demand and excess supply, and the corresponding deficiencies of goods and money can both happen. Excess demand for goods may lead to inflation (demand pull inflation) as commonly observed in commodity and energy markets (or in food prices in India after a deficient monsoon), or more commonly, trade deficits. Excess demand is also what one would expect in a country with a well functioning central bank and open financial system but numerous product market regulations (like India). Excess supply is the more commonly observed phenomenon, but mostly in finished goods markets in developed countries. Excess supply of money is also not an uncommonly observed phenomenon - like you mentioned in a previous post hyper-inflations are more commonly observed than deflationary death spirals, and not all of them are demand pull inflations.

Also, non-monetary disequilibrium need not simply be a real disequilibrium, but be a financial disequilibrium. In this crisis, for example, there was excessive demand for t-bills and excessive supply of risky assets. This wouldn't be any sort of challenge to your theory if t-bills and money were similar and risky assets and goods markets were similar. But AD macro would rather lump risky assets with t-bills than with goods.

[Just visiting from macleans]

On a related matter, I'm curious what some economists would suggest would happen to barter in the home reno market as a result of tax incentives, soon to expire (Jan 31st).

Canada for the past year has had the Home Renovation Tax Credit, applied to the first $10,000 of any home improvements (15% credit, the first $1,000 deductible, max $1,350 refund). In addition, Ont and BC will be introducing HST in July I think- extending provincial sales tax onto labour - a major component of any total reno project.

Part of the impact of the tax incentives would be to move the untaxed under the table work above ground - forcing the renovator to provide a tax receipt and GST number to the homeowner to qualify for the rebate claim.

But, what happens to the barter economy that, if you accept one point of view, is more prominent at the lower economic end of the scale? Does it flourish due to less competition from the cash contractors who are doing the bigger jobs are rushing to complete all projects within the deadlines? Does it shrink due to demand for receipts? What happens after the incentives run out? Lower or higher demand for barter?

Just wondering how you might account for that.

[JP Koning]

Interesting stuff, still trying to process.

If we Canadians live and work in markets with tendencies to excess supplies of goods & services and money being short, shouldn't the general price level (the dollar's value) have been stable, maybe even rising a bit? But the record of the dollar for decades has been the opposite; a steady depreciation versus goods. If c-dollars are short, why does their price over time seem to indicate that no one wants them? What am I missing here?

[Phil Koop]

Of course it is reasonable to assume that goods offered for barter are available for money. But if I ask you how you know this, and your answer is "because money is tight - everyone wants money", you cannot turn around and point to the presence of barter as evidence of a shortage of money.

The trouble is that by interpreting every barter as a virtual monetary transaction, and asserting that "I will only buy" is familiar whereas "I will only sell" is strange, you have assumed the conclusion. In fact, neither statement is familiar; the offer for cash sale is only implicit, and what is it implied by? Tight money. Not the other way around.

"Of course, both [price discrimination] and [monetary causes] could be true." I do think they are both true. And that is another reason that you cannot work backwards from the observation of barter to monetary conditions.

[Nick Rowe]

Ritwick: I did a couple of previous posts:

http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/01/ad-as-y-output-gaps-cuba-monopolistic-competition-and-recalculation.html

http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/01/macroeconomics-with-monopolistic-competition-in-pictures.html

arguing that there are really two Long Run Aggregate Supply curves under monopolistic competition. The first one, at Y*, tells us where the economy will settle when prices have fully adjusted. The second one, at a higher level of output Y^, tells us how much output firms would like to sell if their prices were held fixed. (In perfect competition, Y*=Y^, so you only get one LRAS curve.) I think that explains why, even though the economy is on average at Y*, we still nearly always have excess supply of output, in some sense.

"Also, non-monetary disequilibrium need not simply be a real disequilibrium, but be a financial disequilibrium. In this crisis, for example, there was excessive demand for t-bills and excessive supply of risky assets. This wouldn't be any sort of challenge to your theory if t-bills and money were similar and risky assets and goods markets were similar. But AD macro would rather lump risky assets with t-bills than with goods."

I half agree with you. And one of the main problems with macro, in the current context, is that we lump everything from Tbills to the riskiest illiquid assets all together. But I still think there is a qualitative and crucial distinction between those assets that are media of exchange and all the rest. An excess demand for the latter may spillover into an excess demand for the former, but only when it does so do we see a recession. (I did a number of past posts on this theme, Say's Law, etc.)

(By the way, I enjoyed your series of posts: a brave attempt to try to classify macroeconomists' approaches.)

JP: this goes back to my point above, about the two LRAS curves in macro with monopolistic competition. There can be excess supply of goods (in one sense), even when prices are stable.

Phil: what I have in mind is where a car dealer has a used car on the lot, with a price tag on it. Then a contracter does some work for the dealer, in exchange for the car.

I agree that if there is more than one theory of barter, then observing barter doesn't confirm my theory. But if barter were countercyclical, and my theory of barter predicts it should be, and other theories of barter don't have this prediction, then I think that is evidence in favour of my theory, no? I'm not sure if I have addressed your point properly.

Just visiting: my guess was that the home reno tax credit was deliberately designed to try and discourage contracters doing stuff for either cash or barter, but not reporting it as income. But I don't really know.

[Min]

"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"?"

Because we have forgotten how it was when we were children. Barter among children occurs when one child wants something another has. The other child says, "I will give it to you" (sell it to you), "if you will give me X" (sell me X). As adults we plan ahead, aiming to accumulate money so that we can buy things later. Thus we are looking for buyers for what we have to sell. Sell now, buy later. Delayed gratification.

[Doc Merlin]

Thats really interesting, Min.

Also on an odd note:
Marriage can be thought of as a form of barter for services, and a bartering to create a risk pool. Also, weddings are counter cyclical.

@Nick
"I've been thinking about Doc Merlin's example of executive compensation. I would say that the barter happens when they join the firm, and the compensation package is negotiated. If I join the firm in 2005, and get a stock option, which I cash out in 2006, I would say that the barter happened in 2005. So I don't think barter is procyclical just because the value when cashed out is higher in booms than in recessions."

Yes, but I would expect more executives are hired with bigger options packages during booms than during busts.

[Frances Woolley]

DM - Historically, anyways, weddings aren't counter cyclical - the age of first marriage soared, and marriage rates plummeted, during the great depression. I think that's because demand for weddings and demand for children are highly correlated, and who wants kids if you can't feed them or have no hope for their futures?

What does tend to be countercyclical is cohabitation more generally - when the economy tanks people move into their parents'/children's/sibling's basements.

[Doc Merlin]

Maybe it is a modern thing then, Frances?

[Too Much Fed]

About barter, try paying your taxes that way.

[Nick Rowe]

Too much Fed: well, there are cases where people bequeath art, historical houses, parkland etc. to the government, in lieu of taxes (especially death duties, or capital gains tax). Historically there has been corvee labour, and military conscription, which can be avoided by paying money.