Greece, barter, and the gap-cubed law of new exchange systems

In the past, I have argued for the theory that recessions are always and everywhere a monetary (medium of exchange) phenomenon. How to test that theory?

Non-monetary exchange (barter) is usually very costly, so people use money instead. But in a recession, if my view of recessions is correct, the benefits of resorting to barter rise, and may sometimes exceed the costs, as I argued here. This allows us to test the theory, by seeing if the use of barter does in fact increase during a recession. Alex Tabarrok did a much better job than I did in presenting empirical evidence to test and support the theory.

I now have one new bit of evidence in support of the theory, from Greece via The Guardian (H/T Freakonomics). Greeks are finding ways to exchange goods (including their own labour) without using Euros.

There are non-monetary theories of business cycles. These include, obviously, Real Business Cycle Theory. But they also include that subset of "Keynesian" theories that focus exclusively on saving and investment and ignore monetary exchange. (No true Keynesian would ever believe such a thing, IMHO, but let that pass). Non-monetary theories of business cycles simply cannot explain such facts. If the recession in Greece were due to real, structural problems, rather than an excess demand for the medium of exchange, there would be no reason to expect Greeks to stop using Euros to exchange goods. (Which is certainly not to deny that Greece has real, structural problems that need to be fixed.)

What the Greeks are doing, according to the Guardian article, is not strictly barter (though they are using barter too, as in this BBC video). They are creating new monetary systems of exchange. But it does the same job, only better. It lets people get around the coordination failure caused by an excess demand for the existing medium of exchange.

So, I'm arguing that we should expect to see increasing use of barter, and new monetary systems, in a recession. And that's what we actually see. But I want to say something a little more precise about the relationship. Here's an attempt to sketch out a "gap-cubed law" of that relationship.

Suppose first that a fixed percentage of trades that would normally be done in Euros can instead be done in barter, if a recession prevents them being done in Euros. In that case, the volume of barter would be proportional to the output gap.

But that's not a reasonable assumption. There are presumably fixed costs of engaging in barter, and the foregone gains from monetary trade must be big enough to exceed those fixed costs. Those foregone gains from trade are the area of a triangle, that increases with the square of the output gap. In that case, the volume of barter would be proportional to the square of the output gap.

But when we are talking about people introducing and using a new monetary system, and not just resorting to barter, there are network externalities too. The more people who use the new money, the bigger my incentive to use the new money, because there will be more people I can buy from and sell to using that new money. So maybe the volume of trade in the new monetary systems will be proportional to the cube of the output gap?

Which, if I'm right about the gap-cubed law, would explain why we only see a lot of trade using these new monetary systems in a really bad recession, like in Greece.

Hmmm. I've always been thinking about the Euro collapsing due to governments using another money. Maybe I'm wrong. Maybe the danger to the Euro is (or is also) from people using another money.

Hmmm. I have no idea what monetary chartalists would make of these new exchange systems. I don't think they let you pay your taxes in "funny money", but some people still use it.

Comments

[Frances Woolley]

Nick, interesting. As a public finance person, I understand this in terms of deadweight loss triangles, substituting "tax" for "output gap." The deadweight loss arising from taxation is a function, as you note, of the square of the tax rate, but also depends upon the elasticity of demand.

In the example you describe, I'm thinking that, for a given output gap, the lower the elasticity of demand, the greater the potential gains from barter (the base of the triangle, the gap, is the same, but the height is higher when demand is inelastic.) At the same time, however, if demand is inelastic, the output gap tends to be small to begin with.

Which way do you think elasticities of supply/demand figure into this?

[Ron Rinson]

I've just started studying this stuff so forgive me if I am off base.

However it seems to me that saying "recessions are always and everywhere a monetary (medium of exchange) phenomenon." is wrong. The cause of recessions seems rather to be confidence. Fearing that their income may be reduced in the future people decide to cut back on spending (both consumption and investment) in the present. Their expenditure is other people's income so overall income falls. If that fall in economic activity can be defined as a recession then this is nothing to do with money and everything to do with people consumption and investment decisions based on their expectation of the future. I think one could get this kind of recession even in a barter economy.

Where I think money does become involved is when people try to escape the recession. Seeing their own income fall people will want to reduce their prices. If money prices are sticky then this will not be possible and that escape route is cut off.

Given sticky prices then I really like your analysis - people will turn to barter or alternative monies that can better reflect true exchange values.

Does this mean that competitive currencies rather than CB policy is the way to minimize the effect of recessions ?

[genauer]

this "barter" is simple tax cheating, not only VAT, but profit, income, contributions to the social system, retirement, health.

Greece suffers from paying 3k for a 1k job, promising a 2k pension for only 0.8k paid into the system, average stupid people frustrated by broken promises. What a surprise.
If 20 % of the people cheat their contributions, payable pension will be a social minimum of 0.3k, and 0.7k for the job. Everybody with a complete body and an IQ beyond 90 will leave.

The consequences are clear. Greece will become a Somalia on the Piraeus. Border closed, a huge moat dug around and sharks in it.

Every tax cheating (and beyond that economically/mechanically very inefficient) venue like this is another nail in the Greek coffin. Financially for a 100 Greece bond, people got back 15 from the EU and the rest is valued at 6.5, meaning a de facto 93.5% bankruptcy. Argentine is a poster boy against that. And we already talk about the next "rescue package". The real rescue package means realizing that Greece is not part of the western civilization and kick them out completely.

[anon]

If the "point" of new exchange systems is tax avoidance (per genauer), why do they tend to emerge coincidentaly with severe recessions? (see e.g. usage of scrip during the Great Depression in the U.S.) Wouldn't it make more sense to use them during booms, when productivity and trade activity are at their highest? I think Nick is right, it's about scarcity of money.

[marris]

Why do we think that there is a greater incentive to cheat when the economy is doing well? It seems that if you are having a harder time getting essentials, then the opportunity cost of cheating is lower (you give up a starving condition). In contrast, when things are going well, you risk a lot more by cheating.

Anyway, I think the tax avoidance incentive is really interesting. Is it a real problem or a money problem? The cheaters are saying that they would be willing to trade if they could keep a larger fraction of the cash flows. Isn't a relative price problem more of an RBC thing than a general glut/excess money demand thing?

[genauer]

anon,

hmm, because in deep structural break downs (this not just a simple depression), as in Greece now, tax rates and execution of them in general go up, because the same tax rate hurts a lot more at half the income, because in hard times, at first at least,
the willingness to open (collective) criminal behaviour goes up, like "penny auctions",
Al Capone and "Bonnie and Clyde" admiration in the US.

Add to this the eternal Greek problem as a torn country (see Huntington), not even having accepted the latin alphabet, as even Turkey did, since more than 2000 years (Graeculi) completely delusional about former alleged national greatness, 2500 years ago.

This barter stuff is just more evidence, that Greece goes completely bollocks. And this is contagious, unfortunately.

Beyond that, I think it was a german finance minister (Waigel ??), a quarter century ago, who said, there is no better way to lure people into unprofitable investments, but promising them some tax benefits.

[Jacques René Giguère]

We had an excellent ( in a scientific way, not for the farmers involved) controlled experiment in the 1930's Alberta. Money obtained through normal trade channel as the drought and the Depression destroyed money income. The answer was the issuance of script ,justified by the theory of Social Credit.

[Determinant]

Oh, my tin cup is needed again.
*bang* *bang*

There are two forms of economic downturns: Recessions, which are a demand-side monetary problem, and contractions, which are a supply side problem.

If prices rise and cause a slump, you have a contraction. If they are steady or fall, you have a recession.

Shall I dust off my soap box?

[Ron Ronson]

"Maybe the danger to the Euro is (or is also) from people using another money"

Would it be possible fora private currency issuing business to emerge that were able to credibly guarantee the purchasing stability of its money ? It would need enough capital to make its promise viable and would earn a profit by taking a small % of all transactions carried out.

Users of the currency would benefit from knowing its purchasing power was guaranteed. It would also tend to stabilize thee economy as if ever confidence waned and the number of transactions fell (causing downward price pressure) it would need to increase its own purchases to stabilize the price level and boost economic activity in the process.

[Mandos]

hmm, because in deep structural break downs (this not just a simple depression), as in Greece now, tax rates and execution of them in general go up, because the same tax rate hurts a lot more at half the income, because in hard times, at first at least, the willingness to open (collective) criminal behaviour goes up, like "penny auctions", Al Capone and "Bonnie and Clyde" admiration in the US.

Um, Greece would be in a much better state if the Eurozone has a whole were run in a manner beneficial to it, as opposed to entirely counter to it. That is the source of the structural breakdown Then we would hardly be likely to see this emerge. Just sayin'...

By your standard, almost none of Europe belongs to "Western civilization".

There is no solution to this crisis that does not involve inflation in Germany at some point.

[Terry Brandfass]

Organized barter has been in existence since 1960 when Mac McConnell first opened his doors in the LA, CA area. He owned a Savings & Thrift bank, as well as an advertising agency. He often had an excess of "stuff" to barter from merchants that wanted to trade, to some extent, for advertising. From combining the mechanics of how the banking system works, and the one-on-one trading, he came up with a system that allowed people to bank barter credits and then purchase from the merchant that offered something that they were in need of and pay from their banked credits in their account. Thus the limited one-on-one problems were eliminated, and a new commerce was born.

I am not sure why you would think that bartering is "expensive" to the buyer or the seller. I have been in the industry for almost 32 years, and still have clients that started with me at my kick-off event. Their children, like mine, learned at an early age to seek out what they wanted through the bartering system...they were more likely to get it if they could barter for it. One of my client's daughters learned so well, and from an early age, that she and her husband spent a couple months on their honeymoon traveling through Europe. She traded for her flight, many hotels, rail passes, some food and some entertainment. She grew up in a country club setting 4,000 sq ft home that her father purchase with a large percentage down in barter, he put the swimming pool in and paid barter, he remodeled the interior of the home with barter...painting, window coverings, floor coverings, some furnishings and more! He would have never been able to make this happen for cash for many years in the future. I have many success stories such as this.

The downside…it isn't always as easy as spending cash, but it is new business in your door that you probably would never receive, and one can off-set cash expenditures using the barter credits. A smart business owner set goals, and list all of the areas in their business and home that they can substitute a cash expenditure with a barter credit purchase. As an example pest control for the home and the business, printing, an accountant, dining out, vacations, dental, business and home maintenance, lighting, sales contest items and so much more. A business owner can also offer employee benefits and use their barter to pay for dental, vacations, entertainment etc.

One is only limited by one's own limitations and the lack of education on how to utilize the barter systems available in their local area...which could be independent local barter organizations, or networked systems such as ITEX or IMS that have offices and/or franchises across the US and Canada.

[Lucas]

This hypothesis fits well into Argentina's recent experience. In the recession/depression of 1998-2002 [1] it was easy to see the scarcity of money: there was an explosion of alternative currencies [2] and barter [3, 4] while the CPI was going down [5] in a country that had recently emerged from hyperinflation.

1- http://en.wikipedia.org/wiki/Argentine_economic_crisis_%281999%E2%80%932002%29
2- http://en.wikipedia.org/wiki/LECOP
3- http://en.wikipedia.org/wiki/Cr%C3%A9dito
4- http://www.time.com/time/world/article/0,8599,199474,00.html
5- http://www.indexmundi.com/argentina/inflation_rate_%28consumer_prices%29.html

[genauer]

@Jacques,
do you have a good link / book recommendation on this script / social credit thing?
I am interested.

@Determinant
I think the main point is, that at some point with enough knowledge of details, one realizes, that what happens in Greece now, has very little to do with "real business cycle". ISLM models, Fleming Mundell, price elasticities, all this has no meaning there.

@Ron
you describe the situation before central banks were invented. We have been there, already.

and @mandos
People signed up to the Maastricht treaty, with clear rules. It became clear that habitual criminals, like greek Politicians do not care about whatever they are signing. Venizelos brought in the law for immunity for politicians crimes, the orthodox church is engaged in real estate crime against the state about billions, the whole political landscape is organized around families of supposed ware heros: papandreou, karamanlis.
Yanis Varoufakis is an economist who heads the Department of Economic Policy at the University of Athens, the by far biggest in Greece. His economic policies just consist of getting ever more money from the rest of Europe ("Modest proposal" , not the slighest idea of how economics works, or what should be changed in
Greece) His newest book "Minotaurus" is just an assembly of elementary wrong claims (e.g. long term German current account surplus) greek myth and the usual conspiracy theories (CIA, Nazis, Wall street)
His followers phantazise about oil in the Aegan see, breaking up Germany into pieces

@Terry,

where in your description does the word "tax" appear? VAT, tax on labor, tax on profits ? European countries promises services, which are paid with 50 % total tax (20 % retirement, 15 % health, 4 % unemployment, 3 % disability & care), 20 % VAT.

If a significant portion of the population drops out of that, the honest people suffer, be it through moonlighting or through barter. barter is absolutely ok, if you say: no government services.

But you cant have both, generous social services AND wide areas of tax avoidance.

[Mandos]

How is the German current account surplus claim wrong? It's been running one for 10 years.

Austerity is never necessary. If someone proposes austerity, then there must be something nefarious going on somewhere

The Maastricht treaty remains a ridiculous idea. It's broken by everyone including Germany. Why is it so hard to understand that "clear rules" that are impossible in real life will obviously be broken, because they are impossible? Like I said, there's no exit: every possible outcome involves someone, somewhere printing money, and very likely Germany will be caught up in it whether it likes it or not.

[genauer]

Mandos,

the German Current account was effectively zero for most of the time, a tiny little plus before 1990, a little minus until 2003, accumulated even negative until 2005.
Compare this to "long term, strategic surplus".

All northern / western social states: sweden, finland, denmark, dutch, canadian, and also Germany have gone through periods of austerity. Norway with its oil riches is an exception, otherwise it is pretty precisely the protestant europe mainland. Nothing wrong with it, just a sense for reality. It is only nefarious for people who don't know the facts.

The Maastricht treaty is the law, and not some idea. It enshrines the politics of all successful social states, mentioned above. It is the time proven recipe for a successful and social community.

In the end it is the willingness of the people to faithfully pay their taxes and other duties, like draft, stand by their word and contracts, which makes a fatherland, with the full faith and credit backing a currency, which is now certainly not the case for Greece anymore, and the rest of the GIPSIs questionable.

Barter is just the return to times before civilization.

[Nick Rowe]

Terry Brandfass: It's great to hear directly from someone like you with long first-hand experience of barter networks. Please tell me: from your personal experience can you say that the amount of barter increases when the rest of the economy is in recession? And tends to decline when the rest of the economy is booming?

[Mandos]

Bwuh? The current account surplus in Germany has been positive for most of 10 years according to that chart and (more importantly) has had certainly a strong upward trend since before that. What are you using?

All northern / western social states: sweden, finland, denmark, dutch, canadian, and also Germany have gone through periods of austerity. Norway with its oil riches is an exception, otherwise it is pretty precisely the protestant europe mainland. Nothing wrong with it, just a sense for reality. It is only nefarious for people who don't know the facts.

And? Those were crimes. I was/am well aware of Canadian austerity, and oppose(d) every minute of it as a crime. There was never any need for it except as a way of "shearing the sheep". Similarly, German wage controls are a form of cheating.

Barter is just the return to times before civilization.

You missed the whole Graeber/debt discussion. Barter at a large scale didn't exist before civilization...

[Mandos]

People's well being matters more than these agreements. If these agreements negatively affect the people's well being, then the legislature must abide by its most fundamental agreement---which is with the people---and violate or abrogate these agreements where the consequences are less bad than keeping them.

[Nick Rowe]

Frances: yes, there is a direct parallel to the deadweight cost triangle of a tax. But if the tax rate is the base of the triangle (when the triangle is turned through 90 degrees from the standard Supply and Demand diagram) the output gap is like the height of the triangle. It's like the distance between the Q with zero tax, and the Q with the tax.

There is no easy answer to your elasticity question. Very roughly speaking, if we think of labour as the only ultimate input, it's like the elasticity of the labour supply curve. That's good enough for a first stab at the answer, but it's not really good enough.

[Nick Rowe]

Ron Rinson: "Fearing that their income may be reduced in the future people decide to cut back on spending (both consumption and investment) in the present. Their expenditure is other people's income so overall income falls. If that fall in economic activity can be defined as a recession then this is nothing to do with money and everything to do with people consumption and investment decisions based on their expectation of the future. I think one could get this kind of recession even in a barter economy."

In a barter economy, what is the difference between an individual's income and expenditure? What does "spending" mean? How can I sell something, without buying something else at the same time?

[Jacques René Giguère]

@genauer: There are some rather good articles in Wikipedia
http://en.wikipedia.org/wiki/Social_credit
http://en.wikipedia.org/wiki/Prosperity_certificates
You can take it from ther but help will be gladly provided.
Today's Social credit is reduced to few monetrary cranks cum religious oddballs.

[Scott Berg]

The art of Barter can provide far more benefits than cash in any economy whether in good times or bad. When used properly for business, Barter can effectively transform excess or distressed inventory into cash at a much higher value than what the cash economy can bear. Using a Barter system to facilitate this takes the hassle out of having to find a direct fit. You can check online and find hundreds and possibly thousands of sites geared towards Barter deals. The main problem is that most people are trying to "get rid" of something that most people either don't need or want. By using a professional Barter Company they can help you source goods and services you would normally pay cash for. This is then paid for with your excess capacity (most businesses are not running at full capacity in this tough economy) or excess and distressed inventory. It essentially allows them to pay for goods and services at their wholesale cost. Our system in Vancouver, Canada (which has not been as affected by this downturn as much as most) has seen an increase in activity. Our clients see the value of using us to top up their earnings and offset their cash costs because of the leverage of "additional" business received with little or no effort.
People should also learn to Barter on their own. It takes some effort but the benefits can be extraordinary.
Scott Berg
Managing Partner
Trade Exchange Canada

[Nick Rowe]

Scott Berg: I would like to ask you the same question: as someone who works in the business, do you think that barter tends to increase during recessions and decline during booms? For example, did your business increase in 2009?

[Ron Ronson]

"In a barter economy, what is the difference between an individual's income and expenditure? What does "spending" mean? How can I sell something, without buying something else at the same time?"

I think I had in mind a more sophisticated barter economy where some indirect exchange takes place. For example a worker barters labor for apples from an apple farmer. He then barters those apples for bread, cloth etc.

The worker (fearing a future reduction in apple "income") decides to store apples rather than bartering them for other goods. He has reduced his "expenditure". If everyone does the same thing then the demand for apples falls and the apple farmer decides he needs less labor (and the original fear proves to be self-fulfilling prophecy !)

Is this not a recession caused by people cutting back on consumption in a barter economy? (One could construct a similar example where the apple farmer cuts back on "investment" by saving apples that we was previously bartering for new apple trees).

[Phil Koop]

Improvised local currencies were common in depression-era America, were they not? (Sorry, my feeble memory is not up to supplying references and Google turns up only this article on "stamp script" in Iowa: http://trustcurrency.blogspot.ca/2010/10/stamp-scrip-in-great-depression-lessons.html.) If homemade money was the solution, does that not suggest that its lack was the problem?

Tangentially: it occurs to me that Say's law does not in fact apply to real-life barter economies. That is because real goods can be bartered for undefined promises of future consideration - the proverbial "player to be named later." It is helpful but unnecessary for such promises to be reified in monetary form. Even money-as-a-unit-of-account is not required.

[genauer]

@Jacques
thanks for the links. This is good enough.
Unfortunately it is always the same, like the Gsell guy.

Some idea to implement money with huge inflation (here 52%), hurting primarily one non-majority group, here the shop owners.
And surprise, it doesnt take of, as long as you cant force it down their throat.

And then we go to the next step, killing ballot box votes.

"C.H. Douglas defined democracy as the “will of the people”, not rule by the majority,[28] suggesting that Social Credit could be implemented by any political party supported by effective public demand. Once implemented to achieve a realistic integration of means and ends, party politics would cease to exist. Traditional ballot box democracy is incompatible with Social Credit, which assumes the right of individuals to choose freely one thing at a time, and to contract out of unsatisfactory associations. Douglas advocated what he called the “responsible vote”, where anonymity in the voting process would no longer exist. "The individual voter must be made individually responsible, not collectively taxable, for his vote."

It is always the same, if you cant win the vote, the bolchevik minority looks for ways to terrorize the silent majority in public votes.
if that doesnt help, naked military violence is the next step.

Of course they dont like ideas like "balanced budget", property rights, law, contract.

Look, folks can try this as long as they want, as long as they dont force it on me.
And the majority will not take their funny money either.

These experiments always end up with the need to steal the property of other people, of course clad into fancy names like "national dividend".

@mandos,
your graph about currency accounts shows exactly, what I have said in words before.

"wage controls" in Germany, in what world are you living ?

You made it abundantly clear, that you dont care about treaties, law, other peoples property rights. Just think a little bit, why I should respect any of your rights, if you violate mine ?
That investors assumed, and now know the same about countries like Greece, made them stop giving credit. That they now want to live permanently off the german taxpayer, is exactly the reason the latter want to see them ejected.

To call social democratic budget balancing a crime, is exactly the position of hardened communist criminals. Go, get a majority, until then: the democratic government has the guns.

[Dan Kervick]

I suppose this is true of at least a large number of recessions, and so long as we we are including in the category of money all manner of credit or IOUs.

People make most payments by either exchanging IOUs already in their possession, or by issuing more IOU's. And there are usually more IOUs in existence than there are the foundational means to pay them all concurrently. When large numbers of people begin to doubt the soundness of the IOU's in their possession, they become less likely to issue more IOUs, and more likely to demand payment for, or liquidate, the IOU's already in their possession. This means many IOUs become less acceptable to others as payment.

But I think there is a kind of recession that could occur, in principle, even in a barter economy: a general decline in production due to the sudden loss or shortage of key foundational factors of production.

[Nick Rowe]

Ron: "Is this not a recession caused by people cutting back on consumption in a barter economy? (One could construct a similar example where the apple farmer cuts back on "investment" by saving apples that we was previously bartering for new apple trees)."

In your first example (where they stop trading the apples for consumption goods because they decide to save them instead) that's a switch from consumption of apples to investment in apples. In your second example, that's a switch from one form of investment (apple trees) to a second form of investment (stored apples). Neither looks like a recession, where the apples lie rotting on the ground because nobody will buy them.

Dan: "But I think there is a kind of recession that could occur, in principle, even in a barter economy: a general decline in production due to the sudden loss or shortage of key foundational factors of production."

Agreed. A natural disaster, for example, could cause production to drop. But would that look like the sort of recession we observe, where production falls because it's hard to sell stuff, not because it is hard to produce stuff? Would we even call it a "recession"? I agree this is partly a semantic question, but there does seem to be a genuine difference between those sorts of "recessions" and the ones we actually observe, so maybe we ought to call them something else.

"I suppose this is true of at least a large number of recessions, and so long as we we are including in the category of money all manner of credit or IOUs."

I think the important feature is this: if we are talking about something that genuinely serves as a medium of exchange, that circulates, and so both enters our pockets and leaves our pockets, there are two ways to get more of that medium of exchange: 1. buy more of it (by selling more other stuff); sell less of it (by buying less other stuff). You need a willing trading partner to do 1. You don't need a willing trading partner to do 2, you just do it. If everyone is trying to do 1, they can't. If everyone is trying to do 2, the amount of stuff bought falls, and there is a recessions.

[Anon1]

Nick,

Do you see this mention: http://monetaryrealism.com/we-create-money-like-instruments-all-the-time/

[Ron Ronson]

"Neither looks like a recession, where the apples lie rotting on the ground because nobody will buy them"

Does a recession need goods to actually decay and be wasted to be a true recession ? Could not a lowering of economic activity due to increased savings as a result of a lack of confidence also count as a recession? The collective desire to save leads to an unwanted decline in income that will certainly be seen as a recession by those who experience it.

I agree though that it is lack of price flexibility that makes it hard to recover from a recession that comes about in this way and that such inflexibility would be unlikely (though not impossible) to happen in a barter economy where there is no "money illusion". I'm guessing that is what is meant by the statement about recession always being monetary phenomenon ?

[Nick Rowe]

Anon1: yes thanks, I saw that. I'm still trying to think up a useful way to engage the MMR guys. They view "money" a little differently from me. I'm thinking "medium of exchange", and I think they're thinking "Net Financial assets".

Ron: "Does a recession need goods to actually decay and be wasted to be a true recession ?"

Not literally. Firms normally stop producing goods that they know cannot be sold, so few goods actually decay in unsold inventories. But the unsold wasted labour is very much like apples rotting on the ground.

"Could not a lowering of economic activity due to increased savings..."

What would an increase in (desired) saving look like in a barter economy? Could it be different from an increase in desired investment?

[Ron Ronson]

What would an increase in (desired) saving look like in a barter economy? Could it be different from an increase in desired investment?

Its only when you introduce money that these terms have overlapping meanings. In a barter economy investment can be defined as goods used for productive purposes and savings goods stored for later. An increase in savings (thus defined) due to uncertainty about future demand can lead to a slowdown in trade, which will lead to a slowdown in production - and to total labor-hours worked - which will lead to "wasted" labor just as much as in a money economy.

Taking my thoughts further: Could not a central "bank" in a barter system prevent such a dip in trade by promising to buy up assets until trade turned to previous levels ? It could target a total volume sold of a commonly traded good like apples and commit to buy a bundle of the most commonly bought goods. If its commitment was credible confidence would never have a reason to wane (at least for demand-side reason) and trade-slowdowns could be avoided.

[Ron Ronson]

Re last post: The CB would have to have a stock of goods at hand to barter, or be able offer IOUs, if its commitment to stabilize trade is to be credible.

[Jacques René Giguère]

Ron Ronson: as soon as you are writing IOU, you're leaving barter and enter a money economy...

[Ron Ronson]

Probably. This is really just a thought experiment to see how consistently one could argue that recession are possible under barter, and even how a CB-like institution (with lots of spare resources that it could use for bartering if it had to) could stabilize AD and prevent these recessions by some sort of transaction-targetting.

[Alex Godofsky]

A lot of the examples of a recession in a barter economy seem to really say "look, in a notionally barter economy people invent commodity money or quasi-money anyway".

I think the key thing here is actually sticky prices, not money per se. A monetary economy without sticky nominal prices won't have recessions; a barter economy with sticky real prices should have recessions.

[Ritwik]

Nick,

Completely off topic, but this is your latest post, so. I've been trying to parse this Steve Williamson paper that basically seems to imply that correct response to a financial crisis is to increase the stock of government debt relative to currency, without a need to increase the stock of either in the absolute. So what is traditionally understood as a contractionary open market operation. I'm not yet able to figure out the crucial insight/assumption that's driving his result. Have you seen it before?

http://www.artsci.wustl.edu/~swilliam/papers/web%20page%20paper.pdf

[Alex Plante]

I'm so angry at what the banks are doing to Greece. The Greek government needs to declare bankruptcy, get out of the Euro Zone, go back to the Drachma, follow a cheap Drachma policy (do whatever it takes to achieve a current account surplus), and pay the interest on their foreign debt up to an amount corresponding to their current account surplus. This is not something they should negotiate, they should just simply grow a pair and *do* it. They have no reason to be beholden to the banks. To paraphrase Mussolini, how many tanks do the banks have?