Re: Barter -- Why Bother?

From: Eliezer S. Yudkowsky (
Date: Thu Mar 09 2000 - 13:27:53 MST

Dan Fabulich wrote:
> Why Trade is Good
> Imagine, if you will, a society consisting of people which has agreed that
> the enforcement of private property is morally legitimate. Imagine also a
> wide variety of different goods being held by these persons, and that
> people have different, independent ideas of the value of these goods.
> Barter becomes an obvious means by which people can maximize the value of
> their goods: if Alice has got Apples and Bob has got Bananas, and Alice
> values Bananas more than she values Apples, and Bob values Apples more
> than he values Bananas, they can efficiently trade to acquire more of what
> they value. Call this a "direct" trade.

This is *not* why trade is good.

I realize, of course, that Dan Fabulich has correctly stated the
accepted contemporary theory of trade. I take exception to that theory,
and that's one of the reasons I advocate complex barter.

The reason I disagree with this theory is that it's static. Alice
already has the Apples and Bob already has the Bananas. The theory
doesn't talk about production, or about where the Apples and Bananas
come from. The static analysis presents a clear "potential energy
surface" in which a set of local quantitative valuations is enough to
easily compute the space of beneficial global transactions, and it's
likewise easy to navigate to a point in that space using a set of global
quantitative valuations determined by supply and demand. There's no
point in complex analysis because the utility of Apples or Bananas is
simply the joy experienced by the person consuming that Apple or Banana,
and there's no functional difference between valuing that joy in Cattle
or valuing it in Diamonds.

The utility of trade is *specialization*. A smith can produce iron
weapons more cheaply than a hunter, and an experienced hunter can
produce meat more cheaply than a smith. The *reason* that Alice has
Apples is that she's an Apple-Farmer. Alice, however, requires a
certain number of Bananas in order to survive; in fact, the more Bananas
she eats, the more efficient she is at Apple-Farming. And the
symmetrical situation holds for Bob the Banana-Farmer. If Alice eats 6
Bananas instead of 3 Bananas, she can produce 10 Apples instead of 5
Apples. And if Bob eats 4 Apples instead of 2 Apples, he can produce 7
Bananas instead of 3 Bananas.

The sensible thing to do is for Alice to give 2 Apples to Bob, and Bob
to give 3 Bananas to Alice. This way, Alice produces another 5 Apples
and Bob produces another 4 Bananas, they both win. Alice can give 2 of
those Apples to Bob next year, leaving her with an extra 3 Apples, and
Bob can give 3 Bananas to Alice, leaving him with an extra 1 Banana.
The dynamic increase in wealth - not just utility, but actual wealth -
is 3 Apples and 1 Banana. Of course, Alice clearly profits more from
this transaction than Bob, which raises questions of fairness, which is
a whole big bag of worms that I'm not going to open right now.

In a sense, though, even this simple two-person interaction is enough to
demonstrate the reason for complex barter. What is the utility of a
Banana to Alice? Does it equal 2 Apples? Does it equal 3 Bananas,
which she can get if she gives Bob the 2 Apples? Does it equal 5
Apples, which she can produce if she eats the 3 Bananas she can get if
she gives Bob the 2 Apples she can produce if she eats the Banana?
Actually, this is carrying things too far; the simple paradox, the
reason that static analysis is inadequate, should be clear the instant
we ask whether the utility of 1 Banana equals 3 Bananas.

I realize that this reasoning can be duplicated using a single currency,
but what I'm trying to convey is the *intuitive* reason behind complex
barter. There's a *physical* interaction between Apples and Bananas,
and therefore a reason to compute the value of Apples in Bananas instead
of computing it in Diamonds. Any analysis of utility functions that
leaves out the genuine physical interaction is going to leave out the
raison d'etre of complex barter.

The way that a single-currency system handles the dynamic problem is to
talk about interest rates; the utility of the Banana to Alice is 2
Apples now, or 5 Apples in one year. But that assumes that Alice and
Bob have already computed the barter; the currency valuation simply
labels it, *it doesn't produce the transaction*. If Alice and Bob are
in the Marketplace, trying to buy things with Diamonds, they might
starve to death where a complex-barter system would keep them alive.

Let's say that Drexler and Eric have mysterious boxes that produce
Apples and Bananas for 1 Diamond apiece, while Alice's and Bob's cost is
2 Diamonds apiece. Nobody, not even Bob, would buy an Apple from Alice
for 2 Diamonds; nobody, not even Alice, would buy a Banana from Bob for
2 Diamonds. Therefore, neither Alice nor Bob receive any Diamonds at
all, neither can buy Bananas or Apples, and both starve. (And God help
this marketplace when Drexler and Eric start producing Diamonds from
their box... but that's another issue.)

And yes, in this particular scenario, you can always ask why they don't
sell their existing Apples or Bananas at the reduced price and use them
to buy Bananas or Apples from Eric or Drexler. But that's just an
artifact of the way this particular scenario happens to work. The
problem, in essence, is that Alice, Bob, and Carol's Carrots have been
priced out of the Marketplace. They are not interacting with any other
participant in the Marketplace, and therefore the prices set by the
Marketplace are irrelevant. The single-currency scenario can
computationally solve the three-way-inequality problem, as Fabulich
points out, but it can't solve the problem where the Alice-Bob-Carol
production cycle values Carrots more than Apples but the Marketplace
values Apples more than Carrots. Unless Alice, Bob, and Carol expend
the computational power to compute relative values based on their local
virtuous-cycle trade instead of global values, they won't be able to see
the virtuous cycle and consequently won't be able to engage in production.

Likewise, the conventional Libertarian answer - "Okay, Alice, Bob, and
Carol starve or go to work for Drexler and Eric" - is again taking the
scenario too literally. The point I'm trying to make is that a single
currency creates all kinds of shocks that get transmitted where they
shouldn't be, and the false concept of a unified valuation causes Alice,
Bob, and Carol to overlook beneficial transaction structures because
local components are "unfair" with respect to a transaction carried on
by Drexler and Eric a hundred miles away.

Of course, none of this deals with the *real* advantage of complex
barter: Complex barter futures, which protect virtuous cycles from
pricing shocks. In the current system, if Alice has 5 Apples (supply)
and Bob and Carol each want 3 Apples, then Bob and Carol will bid
against each other until they wind up paying 50 Diamonds an Apple; if
Drexler comes along and produces 2 more Apples, then Alice and Drexler
will bid against each other until they sell at 1 Diamond per apple, even
if that's a loss. As the Diamond pricing implies, you can get some of
the benefit of complex barter futures from ordinary currency-transaction
ubiquitous minifutures, but ordinary minifutures, considered in
isolation, always involve the possibility of taking a loss on the
transaction. If you can take an entire virtuous cycle and protect it,
then you can't possibly take a loss on the transaction; you can only
make less of a gain than you would have otherwise.

Again, the static analysis does not suffice to show the utility of
complex barter futures. Complex barter and complex barter futures have
benefits that are only visible when you use production analysis, which
takes into account physical interactions between products.

--      Eliezer S. Yudkowsky

                 Member, Extropy Institute
           Senior Associate, Foresight Institute

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