Tag: exchange

Going Beyond Exchange

Traditional economics reveals the dynamics of exchange. But is that all there is? Late economist Kenneth Boulding recommends that we look further. Once we consider that some transactions only go one way, we can see the economy in a different light.

If you’re a high school student and you’re hungry for lunch, you may go out and buy yourself a sandwich. You give the deli guy five bucks, and he gives you a BLT. That’s exchange! But where did your five dollars come from? If you’re lucky, your parents gave it to you. Just like they gave you breakfast, your clothes, and a home to live in. And what did you give them? Probably your dirty laundry.

Modern-day, Western world parenting is an example of a one-way exchange. Parents provide for their children because the market doesn’t. And they do so without expecting much in return. Upon reaching adulthood, none of us receive an invoice detailing the costs we incurred. If we did, we’d probably be quite disturbed. In some cultures, children “pay back” by supporting their parents when they are older. But in the West, retirement plans, social security, and old-age homes have largely removed that expectation too.

Economist Kenneth Boulding advocated for such one-way exchanges, or “grants”, to be included in our study of the economy. Grants make up a big part of our distribution of resources, he argues, but economists have limited themselves to the study of exchange. To construct a more holistic framework in which both systems are fully represented, Boulding introduces “Grants Economics,” which adds to our understanding of the economy both at the micro-level (grants within the household) as well as at the macro-level (grants from the government*).

Boulding distinguishes grants by their motivating force. In the example of parental care, the motivating force is one of love. Parents provide for their children because they care about them. Charity, scholarships, and much of government transfers fall into the same category. But each economy also contains grants based on threat. If you’re about to buy your deli sandwich, and an armed robber comes in, you may hand over your money because you’re scared of getting hurt. That’s a grant as well.

Every system, he explains, contains elements of exchange, love-based grants, and threat-based grants. But their respective shares in the total economy vary. To visualize this, Boulding presents a triangle, the corners of which represent a pure exchange-system, a pure love-based grant system, and a pure threat-based grant system. All the points inside the triangle represent different proportions in which the three systems can be combined. Where in the triangle we are, and where we are going, is the question.

At times, Boulding adds, the love-based grants economy may grow to compensate for failure in the exchange economy. If, for example, a hurricane strikes, we recognize the exchange system cannot support the situation, and make donations (grants) to fill the gap. But if we feel the efficiency of our grants is inadequate, the grants economy may shrink again. Only if perceive our grant to be able to be more useful in the hands of the grantee than in our own, do we want to provide it.

Since the 1970s, Boulding’s work has largely been forgotten. Perhaps because his definition of a grant, and the distinction between love and fear can be fuzzy at times, or because the scope of the theory is so vast. Nevertheless, the framework deserves credit for its potential to open our eyes to all the different ways in which resources are distributed. It can get us to think about the nature of our transactions.

Today, it may look like our current economy is increasingly based on exchange. Whereas we used to call a friend to help us assemble a new IKEA couch, many people may now use Handy to book an hour of paid-labor from someone they never met. Later that day, they may log in to TaskRabbit to hire someone for an errand. With the help of modern technology, Interactions that we would otherwise do without asking much in return are becoming two-way transfers.

At the same time, exchange continues to fail us, making large numbers of people rely on grants. In 2016, one in seven Americans received food stamps. That’s 43 million people for whom exchange is not bringing enough food on the table. On the other end of the income distribution, it may seem like things are different. But half of young adults (many with families of a high socio-economic status) rely on financial help from their parents. That’s a grant–typically with less of a stigma than food stamps–but a grant nonetheless.

These trends, and our potential path in the triangle raise various questions. How equal is our access to grants? Should we supply more grants (even a basic income?) or should we boost exchange (perhaps with a job guarantee?) Do we think we’re moving more towards a system based on love, in which care for one another dominates? Or are we finding it tough to get grants out of people unless we threaten them into providing them? Is there an ideal point in the triangle? Can we get there? Ponder on it. Boulding did so too, and being the only economist to sprinkle his books with poetry, he put his thoughts as follows:

 

Four things that give mankind a shove
Are threats, exchange, persuasion, love

But taken in the wrong proportions
These give us cultural abortions

For threats bring manifold abuses
In games where everybody loses

Exchange enriches every nation
But leads to dangerous alienation

Persuaders organize their brothers
But fool themselves as well as others

And love, with longer pull than hate
Is slow indeed to propagate

                                – Boulding, 1963

*Sometimes, of course, the lines between exchanges and grants are blurry. If we use taxes toward social security, and cash in at old age, that might be better described as a deferred exchange. If we, however, find ourselves on unemployment benefits, food stamps, rent support that we receive without having made an equal contribution, we can speak of a grant.

Community Currencies: A Ray of Light in the Rust Belt

In times of severe recession, cash can be hard to come by. To somewhat maintain their standard of living and avoid being further driven into poverty, some communities developed their own alternative currencies. These community currencies are parallel systems of exchange. They are growing in popularity in countries such as Greece, which is currently battling the failures of modern capitalism, and could also be implemented in parts of the United States. The Rust Belt states could benefit from the implementation of similar initiatives. We take a quick look at how:

Community Currencies in Europe: Volos

The existence of community currencies as parallel monetary systems is justified by ecological economics, a branch of research that focusses on the interdependence of human economics with the natural environment. The aim is to promote sustainable development through the revival of vital aspects of the socio-economic fabric that have taken a backseat with the rise of capitalism: rebuilding social capital, replacing material consumption and bringing back value to labor to mean more than just as a mere factor of production. In short, it brings the market and its dynamics back to the grassroots level where it is simply an arena for the facilitation of provisioning survival rather than primarily for capital gains and growth.

The way community currencies work is best explained through a real-life example. Take, for instance, the story of Volos, a fishing village located in central Greece. Volos has experienced hard times since the Greek debt crisis began several years ago. Now, barter forms the basis of their system of exchange. The underlying currency is a local alternative unit of account called the TEM.

The TEM acts as a temporary IOU that allows for a more immediate exchange of goods and services the villagers in Volos require to maintain their daily living standards. People can exchange ironing service for language lessons, or potatoes for fish, and so on. The exchanges are supported by an online platform where ads for community members’ needs are posted. The system has come into existence to resolve villagers’ limited access to cash. It’s helped to maintain demand and prevent an economic standstill.


Community Currencies in the US: Time Banks

The most popular form of community currency initiated in the US has been the Time Banking system. Time banks were originally set up to create a social support system within neighborhoods, allowing group members to trade goods and services without money. Each hour of community work is exchanged at the bank for a unit of time-based local credit that can be redeemed for other goods and services. In this way, the labor is valued based on time, not market prices.

The positive impact Time Banking leaves on a community extends well beyond just the ability for low-income groups to access goods and services that might otherwise be unaffordable. It also helps alleviate to some extent the systemic problems of inequality that are often not factored into its cost. Although such systems have sprouted around the United States, they have gained much recognition. Participation rates at Time Banks have remained very low, and it remains unclear why.


Can Community Currencies be used more extensively?

So if Community Currencies can improve economic well-being among low-income groups, why is it not more popular? First, the systems have not been studied sufficiently. A lack of research on Community Currencies and their benefits has limited our understanding of their potential, and their growth in popularity.

Second, there are inherent geographic constraints that community currencies have yet to overcome. Under the current format, payment in community currencies is only accepted within small areas. As such, they can only be used for the exchange of goods and services that were arbitrarily made available within those areas. In order to make the system more successful, the geographic reach should be extended, allowing for more goods and services to be taken up in the system.

State intervention could make this happen. A local government could offer tax incentives to private healthcare facilities within the geographic sector of the community currency. In exchange, the health-care facility would accept payment from uninsured low-income clients in the alternative currency. If more necessary goods and services can be included in the range of products made available there would be more sustainable.

Therefore, Community Currencies require the strong and continued support from their local government to remain successful. In Greece, a first step was made several years ago, when parliament passed a law that allowed barter groups to be classified as non-profit organizations. The local government in Volos was appreciative of the change, given that it allows for some semblance of normal everyday life to continue in a time of austerity.

One reason why government might be reluctant to endorse more of these programs is that it challenges the conventional payment system. However, a community currency as a limited IOU need not pose a threat and can be of significant help in keeping up demand. This allows for more stable incomes for a larger proportion of people in the economy and the capacity to generate more tax revenues in the long run. This is especially relevant in an economic environment that is highly dependent on bank credit to remain functional.

As such, the potential of community currencies should not go unrecognized. Governments should step in to help broaden the system, and allow for their participants to reap the full benefits. This way, community currencies can be an invaluable source of demand in times of crisis.

The Case for Community Currencies in the ‘Rust Belt’

The Rust Belt comprises the set of states bordering the Great Lakes, which were once famous for being the heart of manufacturing and industry in the US. This changed with the economic decline brought about by the recessions of the late 1970’s and early 80’s, which continued to worsen with the further decline of US manufacturing.

Entire towns and villages in this region have disappeared along with the core industry that once sustained them. Some towns were able to salvage their economies by capitalizing on tourism or education, but this is not a strategy that can be extended to the entire region. States such as Michigan and Ohio also cope with an aging population, male joblessness, and rising opiate addiction. There is a dire need for the region’s underprivileged to become active and positive contributors to society again.

If aided by the state, community currencies could be the starting point for the Rust Belt states to begin their journey back to being the productive contributors to the US economy that they once were. Just like in Volos, it could boost economic activity and allow members to contribute to the rebuilding of their community.

The economic benefits of State regulated Community Currencies could include incentives for sharing skill sets to allow more unskilled workers to become employed. There would be less dependence on welfare as the marginalized begin to seek more socially and individually meaningful ways of sustaining themselves. This would also offer a much-needed boost to local economies that would be limited to purchasing goods and services within the community

The success of such initiatives often depends on communities coming together and organizing to collectively achieve economic wellbeing, setting aside social and class differences. The effective implementation of community currencies in places like Volos was ultimately determined by the way such systems are maintained and nurtured by the entire community under the appropriate community leadership. Whether such social dynamics also exist to the required extent in the communities of the Rust Belt is still something to be discovered. If so, then there may well be a light on the horizon to guide them out from under the burden of years of poverty.

Written by Athulya Gopi
Athulya is originally Indian, born and brought up in the United Arab Emirates. She joined the Levy Masters Program in 2016 after leading a successful career in credit insurance over the last 8 years. She has a few more years of worldly wisdom than her fellow classmates! The choice to swap her role as the head of commercial underwriting with that of a full-time student came after being inspired to see how Economics works in the real world.