A Fin 6250 student sends in some interesting notes on "time-banking." Check it out here.
Here we have an example of people trading, but not using money to do it.
I think this sort of trade is a step up (in terms of efficiency) from barter, and a step down from using money.
I'll try to explain why, but first we need to think about where trade comes from in the first place.
Gains from trade --- that is, an opportunity for parties to trade and both be made better off --- exist any time two individuals have different marginal rates of substitution among two goods.
What’s a “marginal rate of substitution”? My marginal rate of substitution for, say, oranges with apples is how many apples I’d need to be given in order to give up an orange. Suppose I’m indifferent between one orange and two apples. Then I'd be willing to give up an orange as long as I get two or more apples back. Then my MRS for oranges with apples is 2.
Any time your marginal rate of substitution is different from mine, then gains from trade exist. If your MRS for oranges with apples is 1, then you can give me one orange and I’ll give you 1.5 apples, and we’re both better off. If your MRS for oranges with apples is 4, then I can give you an orange and you give me three apples, and again we’re both better off.
So the simplest form of trade is barter. You and I get together to talk. We figure out where our MRS's are different, and we trade. As examples, think about the early fur traders coming to North America and trading European goods for beaver pelts. Native Americans are thinking "We are up to our ears in beaver pelts --- I'd give up to five of them for an iron kettle." The Europeans think "Wow, I can easily get my hands on another iron kettle. I'll give up my kettle for three or more pelts." The parties are both made better off by exchanging four pelts for a kettle.
Barter has some problems, however. One of the big problems with barter is what happens if I don't have anything you want.
Consider, specifically, the following: I am good at plumbing. You are good at cutting hair. You have a plugged sink. I am bald.
Can we trade? I'm not going to give you an hour of plumbing time for nothing back. And you don't have anything I want. So we can't barter.
But what if there's another person out there who needs a haircut and is a chef? And suppose further I'm hungry. Then there's a three-way barter that makes us all better off. The issue, however, is that you're only going to get your plumbing done if we happen to find this chef at exactly the time your sink clogs. And coordinating so that all three of us are present at the same time is going to be tough.
We can overcome this coordination problem by devising a reliable "store of value," and that's what the time bank is. Suppose I do your plumbing. You now owe the time bank an hour of hair cutting. I am owed an hour of something by the time bank. I can then go "spend" my hour on the chef --- and notice that the chef doesn't even have to know where my hour in the bank came from, nor does she have to be present when I do your plumbing. The chef can then take the hour she earns from me, and buy a haircut from you.
Having a store of value facilitates trade, because it alleviates the problem of having to have everybody involved in a three-way barter present at the same time.
So why do we use "money" rather than a "time dollars" as the store of value in our economy?
One problem with time dollars is that the store of value works best when everyone --- and I mean everyone --- agrees on what the store of value is and will be. Specifically, I'm only willing to trade my plumbing time for time dollars if I'm pretty sure that somebody will, in the future, be willing to accept my time dollars in exchange for something I want. The more people who accept time dollars, the more likely that there's someone who will accept time dollars for something I want. Further, if I'm worried that at some point the time dollars system will break down and future people won't accept the time dollars, then I'll be reluctant to accept time dollars today.
Given these issues, we facilitate the most trade by having a single store of value. And that's one socially valuable role of "money."
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2 comments:
Given that money is often a better way to manage markets, would you predict that Time Banks will disappear when the labor market stabilizes? I imagine the risk premium paid by folks who aren't sure their labor will be matched with proper compensation is offset by the transaction cost of finding (or providing) "bona fide" employment.
Yes. I think what's happening right now is that the labor market --- which is the way that we mostly go about turning our time into "store of value" --- is a bit broken right now. It will take some time for the currently unemployed to find suitable employment matches, and in the meantime people will try to trade in other ways, and that's what the time bank reflects.
But it's still not clear why time banking is better than, say, selling your expertise on Craigslist.
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