Thursday, January 21, 2010

No unemployment in barter economies?

There is a widespread view that unemployment cannot occur in barter economies. E.g. see the quote from Prof Paul Davidson at the top of this site. Plus see here. And see here (12th para – starting “MMT tells us....”.)

Barter economies certainly cannot suffer from the “paradox of thrift” cause of unemployment. But they could still experience unemployment if the relative price of different products was not flexible enough. Here is whey.

Consider what Robinson Crusoe does on arriving on a desert island where there are about five families and a barter economy. And let’s assume just three products: fish to eat, grass skirts to wear and mud huts to live in.

Crusoe is good at fishing, so he goes fishing and offers fish in exchange for a hut and a skirt. The additional supply of fish provided by Crusoe won’t be a problem as long as the price of fish falls in terms of huts and skirts. However if there is NOT price flexibility, Crusoe will not be able to sell his fish. He will be unemployed (or someone else who specialises in fishing will be unemployed).

Exactly the same problem occurs in money using economies: wages are “sticky downwards” as Keynes pointed out. That is, given an excess supply of a particular type of labour, the price of that type of labour will not fall, or at least will fall far too slowly to avoid unemployment for some members of the type of labour concerned. (Arguably Keynes was not referring in his “sticky downwards” point to SPECIFIC types of labour, but rather to labour in the aggregate, but never mind.)

The relative price of different types of labour is probably MORE flexible in barter economies than in money economies, but it is unlikely that prices are PERFECTLY flexible in barter economies.

To summarise, on purely theoretical grounds, barter economies seem to have significant advantages over money economies when it comes to unemployment. But unemployment is not impossible in barter economies.

Afterthought (25th Jan):

Thanks to an idea put by Tim Hickey (see below), I would now like to state the “Musgrave/Hickey General Theory of Unemployment In Barter Economies”, which is thus.

1. In ultra simple economies, that is where there is no specialisation or “division of labour” as economists call it, unemployment is almost impossible. The only possible cause would be a severe shortage of natural resources. E.g. in a drought people might not be able to grow food.

2. Given division of labour, a possible cause of unemployment arises, namely insufficient flexibility in the relative price of different types of labour and products.

3. When an economy gets even more “sophisticated” and introduces money, another possible cause of unemployment arises: the well known “paradox of thrift”.

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