Barter

From the earliest days of human society, people have traded things. Perhaps one man chopped too much firewood one year and exchanged his excess to his neighbor for some of their excess home-canned garden veggies. John has extra firewood, and Joseph has surplus green beans. Simple exchange and both benefit. This simple direct exchange of goods is called barter. Unfortunately, barter works only when two people each have precisely what the other needs. Otherwise, something is necessary as an interim commodity, something everyone wants.

 

Money

     Suppose James visits John and, during his visit, happens to sample some of Joseph's beans and decides he wants some. So he offers to trade some of his surplus potatoes for some of Joseph's beans that John has. Thus, the beans that Joseph bartered to John and which John now swaps to James constitute a "medium of exchange," in short, the beans temporarily became money.

     This precise process is how commerce developed—sometimes with beans and other produce, but it most significantly did so with tobacco. For many years tobacco was literally money. A good crop of tobacco was money in the bank, a medium of exchange that could buy any good or service. It was also a store of value, in that one could store it away and keep it for a time and trust it would not lose value. Tobacco is superior to, say, potatoes in this regard, as it is less perishable and thus more storable.

     An ancient folk saying states that money does not grow on trees, but this is often wrong. In some cases, it indeed does, though admittedly, a tobacco plant is not a tree. Today, we sometimes see a similar behavior using marijuana and durable manufactured goods such as ammunition.

     A man would labor on behalf of others and thereby receive a medium of exchange which he could then use to purchase anything he needed. The nature of that medium of exchange is irrelevant. Whether gold, silver, tobacco, beans, or bits, as long as all agree that it is acceptable as a medium of exchange, it is money. It is money, even if it is merely a piece of paper or digital bits stored in a blockchain with no intrinsic value of its own.

     Food products as money have the practical advantage of potentially eating instead of spending them if need be, something that one cannot do with gold, silver, or other forms of money. This practical value is called Intrinsic Value. Anything that has value beyond purely monetary is said to have intrinsic value.

     Precious stones, rare minerals, and more have all been considered money at various times. A store of value requires two properties—scarcity and immutability. Some forms of money, such as gold, make an excellent store of value. Yet, even gold somewhat lacks adequate scarcity. Gold is mined, especially when the price is high; thus, new supplies continuously enter the market. New supplies drive the value of gold down, affecting its use as a store of value. Gold also has intrinsic value as a component of electronics, and jewelry, which decreases supplies, somewhat offsetting the influx of new supplies due to mining. Thus gold is relatively stable as a store of value.

     Though used as money for centuries, gold as money is not perfect. A perfect store of value should have a fixed, unchanging supply, and an ideal medium of exchange should be easy to carry around and easy to trade. Unfortunately, gold is heavy, hard to spend in small amounts, and in general, painful in everyday use. As a medium of exchange, it is cumbersome, and the changing supply impacts its use as a store of value. Despite these imperfections, gold is, dare we say, the “Gold Standard” for physical money.

     Because of these flaws, various alternatives to physical forms of money have arisen. The form most used today is called fiat money. Fiat money is a government-issued currency that is not backed by a commodity such as gold. It has value simply because the government and the bankers say it does, hence the term fiat. Fiat money gives central banks tremendous control over the economy because they can control how much money is printed. Fiat currencies also enable invisible taxation by inflation. The constantly shrinking dollar relative to gold and other value stores reflects this hidden tax. When governments fail to control inflation, their fiat currencies ultimately fall to zero. Most modern currencies, such as the U.S. dollar, are fiat currencies.

     Another form of money is called representative money. Representative money is representative of something else, e.g., a check is representative of fiat money in a bank account. Credit cards represent the owner’s future ability to pay. There is far more representative money in circulation than fiat or gold.

     New forms of money have emerged in recent years, built upon a technology called blockchain, and designed to solve the inherent problems of previous types of money. Although these show promise, none has yet emerged as a clear alternative for everyday use.

 

Shopkeepers

     As skilled trades emerged, shopkeepers began to appear, offering their skills to the public. Someone talented with needle and thread might become a tailor or seamstress, offering their services to the general public in exchange for money. Small businesses based on the skills of an individual or a family emerged. Tailors, cabinet makers, clockmakers, and so on were small, typically family-run enterprises. When two tailors appeared in a community, they would naturally compete for the coin of their neighbors. When they gave precisely the same service, competition forced them to provide the customer with ever-lower prices and better quality work. The consumer benefited from this. Patrons in a community with but one tailor must pay whatever that tailor felt his work was worth, but when a second shop opens and offers a lower price for the same suit or shirt, the customer benefits. The original shop must match the new price or risk losing all their customers. This is called competition.

 

The C's of Capitalism

     Walter's Tailor Shoppe, as the only tailor shop in town, holds a monopoly. Walter can set any price he wishes for his work, and Customers must pay it. The high prices Walter charges creates a natural opportunity for another tailor to locate nearby and benefit from Walter's prices. Any new shop need only undercut Walter's prices a tiny amount to recruit customers. Initially, there is plenty of business to go around, and two shops expand the market. Perhaps Walter was overworked, unable to meet the demand, and welcomes a competitor to share the market. With more availability, new customers come from neighboring towns, attracted by the greater variety of goods that two shops can offer. Free competition on a level playing field is the essence of capitalism, lowering prices and expanding the customer base to benefit all.

     The Competition will naturally benefit the customer and businessman alike. When Walter begins to suffer from decreased business due to competition, he might respond in several ways. First, of course, he can simply lower prices to match or even beat his competitor's prices. But, unfortunately, one can only lower prices so much. Competing too aggressively on this level institutes a "race to the bottom" wherein all vendors are ultimately going broke because they sell their goods at or below cost. Avoiding this result and staying in business requires a more imaginative approach than a simple "tit-for-tat" price war.

     A better approach is to expand the market. Perhaps Walter noticed that some new customers came to town from the neighboring community, attracted by the greater variety offered by two shops. Capitalizing on this trend, Walter prints up some signs and handbills and posts them in neighboring communities, thus bringing even more new customers. Walter and his competitor both benefit. Walter has spent his time and money advertising his services to a new audience, benefitting his business while also benefitting his competitor. That may be an acceptable trade-off, at least initially. The total number of customers increase, and both are doing well. Possibly, the two tailors will even agree to share the marketing efforts and expenses, as they both benefit.

     Another way to attract customers is to compete in a different product space. If, until now, Walter and his competitor both had mainly produced fine men's suits, perhaps branching out to make women's fashions, children's clothes, or even haberdashery would represent a new product that his competitor does not have. For a time, Walter will have a new monopoly on the latest goods until his competitor notices and catches up with his latest innovation. Again, Capitalism and Competition benefit Customers.

 

Balance and the Level Playing Field

     As long as both businessmen are competing fairly on a level playing field, the business will improve, and customers will benefit. Unfortunately, this represents a delicate balance that is all too easily perturbed. Any factor that hands one party or the other a significant advantage can unbalance the competitive environment with disastrous results.

     For example, suppose Walter's competitor suddenly inherits a lot of money from the passing of a wealthy uncle. No longer constrained by the need to earn a living from the shop, he is now free to cut prices below cost, something Walter cannot hope to match. His competitor can afford to lose money on every transaction, but Walter cannot. Either he will take all of Walter's customers, driving Walter out of business, or else if Walter tries to play that game, Walter will go bankrupt and likewise go out of business. So Walter must find another way to compete or lose out to his competitor. There are two paths before him. Innovate, or die.

     If he cannot come up with new approaches to the business, new ways to compete, he faces extinction. One solution might be to sell his equipment and stock to his competitor and leave the industry entirely. Another might be to pick up and move to a new location. Innovation is the best solution, if possible. Instead of competing on the same items, Walter might launch a new line of high-fashion designs.

Those who distrust capitalism insist that government oversight is necessary and that laws are passed prohibiting selling below cost. This can be a slippery slope, although it does sometimes have merit in international trade. Tariffs can level the playing field against foreign competitors who aren’t playing fair but can also quickly spiral out of control and become abusively protectionist.

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Monopoly

     When one competitor ousts all of their competition and stands alone in the market, that competitor has a monopoly. With no competition, few constraints exist to limit prices. With Walter out of business, the lone tailor in town can charge whatever he wants for his goods. Rising prices will naturally force some customers out of the market, but with more and more profit from each item sold, selling fewer items still results in more profit. It might seem as if this were an ideal circumstance for the businessman. There is even a popular board game engineered around the very idea. But the real world is a different thing.

     When there is a monopoly and high prices, there is an incentive to enter the market. Invariably, someone else will emerge and compete in ways that Walter could not. Nature abhors a vacuum, and capitalism abhors a monopoly.

 

Government and Capitalism

     There are many roles for government in a capitalistic society. When a business person innovates, copyrights and patents block competitors from stealing their work and give the creator the exclusive right of use. It also creates "Intellectual Property," which has value and can be sold. If Walter had developed a novel design and patents or copyrights it, he effectively creates a monopoly for himself for that design. If still forced to liquidate his business in the face of competition, that patent is something he can sell as an asset of his business. He can also license his patent, generating an income stream from his creativity.

     The government has a role in enforcing the laws fairly across all players. For example, from tax laws to intellectual property laws, it is the role of a responsible government to ensure that no player has any undue advantage.

     All too often, the government takes a less savory role in business. Sometimes the government will grant a particular class of monopoly power to a single company on some pretext. Thus, a service is declared a "Natural Monopoly" and given unnatural protection from the forces of Capitalism. In some cases, one can be tempted to consider the service as necessary, but a closer examination quickly reveals the fallacy.

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Telephone Monopolies

In the late 19th and early 20th centuries, telephony arose. From the first Bell Telephone company's launch in 1878, the company of Alexander Graham Bell dominated the Telephone Industry, thanks to Bell's patents. Competitors arose, using various pretexts to skirt Bell's patents, or even in some cases, licensing Bell's intellectual property to compete. In 1893 Bell's original patents expired. By the end of 1894, more than 80 competitors had emerged, and by 1907, Bell's competitors had garnered over 51% of the telephone market, and telephone service prices were rapidly driven down.

     Bell fought back, not by competing fairly and not by out-innovating their competitors. Instead, Bell resorted to greasing the palms of cooperative and corrupt legislators. These pet lawmakers then denounced competition as "duplicative," "destructive," and "wasteful," and various economists were paid to prostitute their trade by testifying before Congress that telephony was a "Natural Monopoly." "There is nothing to be gained by competition in the local telephone business," one congressional hearing concluded, a laughable prospect to any economist. Laughable or not, this script succeeded wildly and has since been followed by other industries. Water, power, television, and Internet services have all attempted with varying success to follow the Bell model.

     In 1913, the Bell system became a "Protected Monopoly." In 1918, the government nationalized the entire system. The Postmaster General was given oversight with AT&T to run the network. Competitive phone services were prohibited by law. The justification was that it was "in the public interest." Under this system, AT&T became a massive behemoth, a hugely profitable company, guaranteed a profit no matter how poorly and inefficiently they ran the business. This situation obtained until the 1968 Carterfone lawsuit pried open the door, and the 1982 Judge Green ruling in United States V. AT&T finally broke the back of the AT&T Monopoly. Even so, the telephone landscape is not a strongly competitive one.

 

The Rise of Marx

     The British Mercantile system arose in the 1500s, and under the drive of the monarch, British companies were encouraged to produce without regard to whatever abuses might occur. By the mid-1800s, the system was a brutal affair of monopolistic companies where workers were treated worse than slaves, working in harsh conditions, living a short and miserable life.

     German philosopher Friedrich Engels began writing about these abuses as he observed life under Queen Victoria, starting with the monumental "The Condition of the Working Class in England" in 1845. In 1848 he would collaborate with Karl Marx to author another landmark volume, "The Communist Manifesto," and then contribute to Marx’s "Das Kapital," ultimately finishing the 4th volume of that massive work himself after Marx’s death. The writings of Engels and Marx correctly identified the flaws and problems of the British Mercantile system. However, they failed to recognize it as a failure of government; instead, they blamed the problems on Capitalism.

     In the case of the Bell System, we saw corrupt government officials selling out to industry, supposedly in the public interest. Students of Marx and Engels will undoubtedly point to the "greedy capitalists," i.e., Bell, throwing their money around the halls of Congress as the villain, and condemn all Capitalism. However, the simple reality is that Congress was manifestly for sale to the highest bidder. It was then and remains so today. Had Bell not bought himself a protected monopoly, someone else would have.

     The fault here lies not with the nature of Capitalism. Capitalism is nothing but a mirror for the human soul, and until we build a better class of humans, it will always be so. Instead, the fault lies with a political system that does not account for human nature.

     The proper role of government is to ensure the level playing field, the fairness and even enforcement of laws, the respect of copyright and patents, and see that the players in the business world adhere to the rules. When these things are attended to, the government should largely stay out of the way. When natural inequities arise, they are quickly self-correcting, but when government meddles in misguided attempts to "fix problems," it invariably worsens things.

     When we allow legislators to enrich themselves at the public trough and enable them to sell their services to the highest bidder without fear of retribution, this sort of thing will always happen. The American founders' incorporated checks and balances designed to prevent such abuses, but, unfortunately, crafty politicians have systematically overturned many of the founder's provisions.

     Today's avowed Marxists are bent on tearing down the capitalist system and replacing it with a Marxist utopia. But, unfortunately, Marxist utopias fall prey to the same failings of humanity in an even more dramatic fashion than Capitalism. Marxism always degenerates into imprisonment, assassination, and mass murder. Marxists are so bloody that the term democide was coined to describe the willful murder of citizens by their government.

     We must take various steps to curb the abuses of today's crony capitalism, but throwing out Capitalism for Marxism is not one of them. Instead, we can begin by prosecuting government officials for Corruption when caught and limiting terms to prevent the mass accumulation of power. Term limits and aggressive prosecution of corruption will do far more to eliminate abuses than any communist revolution.