Wednesday, December 12, 2012

What is a non-monetary economy?

The response to the above question will usually be a barter economy. But I want to show you that this is a tougher question than it seems. The answer depends on whether you're starting from a money view of the world or a moneyness view. (See Why Moneyness? in which I explain these ideas).

1. The money view, which is the standard view, begins by classifying all things in an economy into either money (M) or non-money. Any economy that has M in it is a monetary economy. All exchange in a monetary economy is achieved by trading non-money into M and back into a different non-money. When there is no M, then a non-monetary economy is said to exist. In a non-monetary economy, exchange occurs by trading non-money for non-money, our word for this being barter. So a non-monetary economy is a barter economy.

2. Things are different from a moneyness perspective. An isolated household living in a cave values their inventory of goods solely for its use-value—how each good satisfies the household's needs. The household's goods become liquid the moment that it realizes that other people are willing to exchange for them. Their inventory is now worth more to them than before because it provides them with a greater range of options. As once-isolated households trade with each other, goods will be graded according to their relative liquidities. Depending on its ranking, each good earns a smaller or larger premium over use-value. ie. a liquidity premium. Liquidity/moneyness don't exist in a world without trade. We call such a state autarky.

So depending on one's method of classifying the world, a non-monetary economy can be either a barter economy or an autarkic economy.

This conclusion may seem somewhat odd at first. Take what we would typically consider to be a barter economy, say a world in which people barter deer for beaver. This setup is actually monetary in nature, insofar as both deer  and beaver earn a monetary premium for their potential to be bartered. In other words, its possible to start monetary analysis way before we ever exit from so-called barter.


  1. My father and I both enjoy picking pecans in the fall. However he has patience for picking while not so much for shelling and so sells them - hundreds of pounds in a good season. Whereas I enjoy shelling, and as far as I can tell by your definition that keep my pecans in a moneyness state. Some shelled pecans find their way into the freezer for use later in the year, some get used for holiday baking and some are holiday presents. While it might be tempting to "change forms" (or make money) my extremely sore neck after too much picking or shelling keeps me in a moneyness state!

    1. Hi Becky, thanks for stopping by. Much like deposits held at a bank, the pecans you hold in your inventory for future sale are like a medium-of-exchange. The wider the market for pecans ie. the easier you expect to be able to sell them when necessary, the more "moneyness" pecans have.

      The moneyness of your inventory of pecans yields a valuable service, specifically the present comfort that your future self can easily sell the pecans when needed. If your pecans were less liquid, you wouldn't be able to rely on them for immediate sale at some future point in time, which means your present self would feel the uneasiness of uncertainty.

      Having a stock of highly liquid pecans for future sale is like having a fire extinguisher. Even if you're not using it, it still provides you with present ease & comfort.