Financial Markets Are the Real Barter Economy

As (mis)conceived by most economists, money (which they confute here with currency) emerged as a solution to the time problem of barter economies: my spinach is ready now, but your apples won’t be ripe for months. How can we trade? Answer: you give me money for my spinach, and I give it back to you later for your apples.

That armchair-sourced fairy tale has been resoundingly debunked — that’s not how money (or even currency) emerged, and the Adam Smithian butcher/baker barter-exchange economy has never existed. Credit money — first embodied in tally marks on clay tablets — emerged and was in widespread use a couple of thousand years before coinage was invented (the latter largely to pay soldiers, whose itinerancy makes other methods problematic).

But the notion of barter economies lives on.

The whole system of national accounts (the NIPAs), in fact, was constructed by Simon Kuznets and company in the 30s as if we lived in a barter economy — with money being merely a time-shifting convenience, and with no accounting for financial assets at all. That accounting was only added a decade or so later, with publication of the Fed Flow of Funds accounts.

I’d like to suggest that this barter model for the real economy results in a great deal of confusion — including (especially?) among economists — largely because the NIPAs don’t usefully model the distinction between saving wheat (which can be consumed) and “saving” money (which can’t). By “useful” I mean “conceptually tractable, subject to consideration without logical error.”

I’m asserting that the barter model of the real economy results in lots of confusion and logical error. Viz: careful economic thinkers like Nick Rowe, Scott Sumner, and Andy Harless feeling the need/inclination to write lengthy think-pieces on that nature of “S.” Or the widespread misconception that “saving” (by whatever definition) “creates” “loanable funds.”

I’d even go so far as to say that those barter-model-induced logical errors pervade most thinking about economies and economics, both among economists and among the laity.

However: If you want to see a market that does operate as a barter economy, look no further than the market for financial assets. In this market, you trade your checking-account or money-market deposits for shares of Apple stock. Somebody else makes the opposite trade. The transaction is mutual and (effectively) instantaneous and simultaneous. It’s a barter.

In a very real and very counterintuitive sense, there is no money exchange in the financial markets. There are just barter swaps of financial assets.

A proleptic response to inevitable objections, and a definition of terms:

1. By “financial asset” I mean something that has exchange value — somebody will give you something in exchange for it — but that cannot be consumed (directly or through use or time/natural decay/obsolescence), providing actual human value — “utility” — in the process. (Things that can be so consumed, and do provide human utility — and derive their perceived value from that utility — are real goods/assets.)

2. “Money,” then, would be that exchange value as embodied (or metaphorically “stored”) in financial assets. Money cannot, in fact, even exist except as it is so embodied. Financial assets are money’s sines qua non — the things without which it does not exist.

Those financial assets (and the money they embody) can be tallied — represented — on clay tablets or in electronic accounting systems, in mental accounting ledgers (“You owe me”), or in physically exchangeable representations of those ledger tallies, such as dollar bills or stock certificates.

By this definition, a dollar bill or a deposit in a checking account is a financial asset, just as much as a share of stock or a government bond is. Which means that all exchanges of financial assets are swaps. Trades. Barters.

Exchanges for real goods, however, are different. When you buy or sell a real good, money (embodied in a financial asset) moves from one account to another, and — this is key — doesn’t disappear. It keeps getting passed on, exchanged. Real goods move the other way, and do disappear. You’re trading something that only has exchange value for something that can — will — be consumed. Conceptually: Financial assets travel in circles. Real goods travel in one direction only: from birth to death, production to consumption.

A physical metaphor may help: think of the financial system (including physical currency transactions) as a giant wheel, pushing along a conveyor belt of real goods.

But economists try to think about/model these very different situations as identical — as if “money” were being exchanged for bonds (and implicitly, as if those bonds will eventually be “consumed”). Since (mental) models for barter economies must be structured very differently from models for monetary economies,* modeling both of these as the same is problematic, confusing, and productive of logical errors — and perhaps even just plain wrong.

The gist of this thinking is not new — much of it reflects ideas floated long ago by circuitists, chartalists, modern monetary theorists, and other such (g)ists. But I’m hoping the formulation as presented here may be useful to others, as it is to me, in 1. forming mental/conceptual models of how economies work, and 2. evaluating the models bruited by others — notably the inherent validity of their underlying and often unstated assumptions.

I would point out in particular that as with my discussion here, the accounting-based modeling approach of Wynne Godley (and his predecessors, successors, collaborators, and parallel travelers) begins not where Kuznets did — with the interchange of real goods and services — but with the nuts and bolts of financial accounting. This approach imposes logical constraints on economists’ reasoning, constraints that seem sadly lacking in much barter-economy thinking.

As Godley says in the conclusion to his seminal paper:

In contrast to the standard textbook methodology, which starts by making very strong behavioural assumptions based on no empirical evidence at all (for example regarding the shape and role of an aggregate neo-classical production function), [this methodology suggests that] a different paradigm is indicated in which knowledge is gradually built up by empirical study, within the formidable constraints imposed by double entry accounting.

I’m not saying it’s impossible to think logically and coherently using the NIPA/Flow of Funds economic model, with the (confusing) barter and savings models embodied in the NIPAs. I’m saying it’s very difficult — especially since economists aren’t trained in financial accounting — and that as a result logical failures are widespread.

* Nick Rowe quoting Clower: “Hang on. In a Walrasian economy there is one big market where all n goods are exchanged; in a barter economy there are (n-1)n/2 markets where 2 goods are exchanged; and in a monetary economy there are (n-1) markets where 2 goods are exchanged, one of which is money.”

Cross-posted at Angry Bear.






11 responses to “Financial Markets Are the Real Barter Economy”

  1. Becky Hargrove Avatar
    Becky Hargrove

    Here’s why I had questions about distinguishing between transitory and non-transitory consumption. You said, (to Nick? I had trouble with the edit function at Angry Bear) “The apple stock remains, and continues to move between accounts in future periods”. With money we purchase a temporary good, and yet the apple tree remains and continues to produce apples for a future period. In other words, it seems as though the temporary consumption element may be more substantial (especially in terms of velocity) than the supposed investment which sometimes ends up as a passive ‘thing’ somewhere in a storage unit waiting to have life breathed into it.

  2. Ramanan Avatar

    I am really not sure where you are headed


    “When you buy or sell a real good, money (embodied in a financial asset) moves from one account to another, and — this is key — doesn’t disappear. It keeps getting passed on, exchanged.”

    Of course firms can and do reduce their indebtedness to the banking system on receipt of sales. Etc.

    Anyways fyi …

    Godley used to run national accounts for the UK Treasury and it was then he discovered the sectoral balances and thought it was a “great revelation”

  3. Asymptosis Avatar

    “Of course firms can and do reduce their indebtedness to the banking system on receipt of sales. Etc.”

    Right of course. But that doesn’t happen in the course of the sale itself.

  4. Asymptosis Avatar

    @Becky Hargrove “yet the apple tree remains”

    Like other “fixed assets,” drill presses and such, it also is eventually consumed through use/time/decay/senescence/obsolescence (throwing off utility/production along the way through that use).

    In the NIPAs it’s handled thus:

    Gross Investment – Capital Consumption = Net Investment

  5. Ramanan Avatar


    Two things.

    First, debts can be cancelled as in there is a reduction of indebtedness as well. So there is disappearance in that sense. Also, there are defaults 🙂

    Second I know what you mean regarding the immediacy but I think modern banks do that. Will ask someone in the payments processing on this – as long as firms receive payments, instead of increasing deposits, they – banks – make changes so as to reduce indebtedness.

    There is one place where it is immediate. Take the case of a bank in a daylight overdraft at the Federal Reserve. As soon as the bank receives incoming payments, the Fed’s payments systems will reduce the daylight overdraft in its systems – with immediate effect – rather than increase the deposits of the depository institution – bank – which is receiving the payment. In this sense there is a disappearance.

  6. beowulf Avatar

    Kuzents, eh. Among the first consumers of national income accounting data were the Air Force and the OSS.

    Economists with that agency planned the daily bombing of Nazi territory on the basis of an analysis
    of which targets, if destroyed, would most damage war-making capacity…

    Wealth that can be destroyed by a B-17 raid is an investment. Wealth that can’t be firebombed is savings.
    As Georgist economics would point out, land is a unique factor of production that exists in the physical world but can neither be created or destroyed.

    I await JKH coming up with all kinds of exceptions to that general rule. :o)

  7. beowulf Avatar

    Kuznets, sorry.
    I think this point made by Godley and Lavoie is rather interesting.

    outside financial markets there is neither need nor place for equilibrium conditions to bring supply into equivalence with demand. It will almost always be quantities rather than prices which give the signals which keep the economy on track.

  8. Ramanan Avatar


    Coincidentally I saw the second line recently in another old paper by WG!

    The neoclassical supply curve makes no sense whatsoever. Imagine a company like Dell. It doesn’t start “supplying” more computers in the market because the prices of computers have risen. It’s a chimerical description of Dell as a company. Rather Dell starts producing more in response to demand. In this case – it’s very obvious because it takes orders but in general one can say other things – such as it increasing its capacity in response to demand etc.

    You must have seen this criticism:

    The more I read it (have the original article too) the more it makes sense!

    “…constitutes the primal scene – the primitive imaginary vision of the world – out of which the whole of mainstream macroeconomics now flows… “

  9. beowulf Avatar

    Ramanan, that’s a great link. This section is awesome—

    “I have reached a point when I am prepared to make a declaration. I want to say of neoclassical macroeconomics what I have sometimes said of certain kinds of fiction; I know that the world is not like that and I have no need to imagine that it is. In particular, I do not believe that there exists a market in which goods in aggregate and labour in aggregate can be exchanged for one another provided only that the price of each is right in relation to some given stock of ‘money.’” — Wynne Godley