THE SUPERIORITY OF MONETARY OVER BARTER EXCHANGE: EXPERIMENTAL RESULTS AND POLICY IMPLICATIONS
| Author | Tobias F. Rötheli |
| Date | 01 September 2011 |
| Published date | 01 September 2011 |
| DOI | http://doi.org/10.1111/j.1467-9485.2011.00554.x |
THE SUPERIORITY OF MONETARY
OVER BARTER EXCHANGE:
EXPERIMENTAL RESULTS AND POLICY
IMPLICATIONS
Tobias F. Ro
¨theli
n
Abstract
William Stanley Jevons suggested that monetary exchange is socially superior to
barter exchange because agents’ optimization is simplified by the use of money. We
experimentally study how subjects perform under monetary and barter exchange
and find that a majority of subjects achieve a higher utility level in the monetized
economy. The individual choices are statistically analyzed in order to track
important elements of suboptimal decision making like the tendency to under- or
over-react to price signals. Our laboratory findings indicate that, at a minimum,
government may have a role in promoting a common unit of account.
I Intro ductio n
A central topic in economics concerns the question why exchanges of goods are
typically conducted for money and not for other goods. Microeconomic theory
to a large extent sees no role for money as Banerjee and Maskin (1996, p. 5)
pointedly state it:
‘Money has always been something of an embarrassment to economic theory.
Everyone agrees that it is important; indeed, much of macroeconomic policy
discussion makes no sense without reference to money. Yet, for the most part
theory fails to provide a good account for it. Indeed, in the best developed
model of a competitive economy – the Arrow-Debreu framework – there is
no role for money at all.’
For certain issues of economic theory such as resource allocation and income
distribution it may (as a simplifying assumption) be reasonable to abstract from
the existence of money. For other topics in economics – notably the issue of
inflation and its social costs as well as the question of how money affects output
– it is impossible to assume away the presence of money. So why is it that most
trades involve money?
n
University of Erfurt
Scottish Journal of Political Economy, Vol. 58, No. 4, September 2011
r2011 The Author. Scottish Journal of Political Economy r2011 Scottish Economic Society. Published by Blackwell
Publishing Ltd, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
437
Over the years economists have proposed a number of answers to this
question that rely on some sort of transactions costs which tend to favor some
good (or goods) over others as a medium of transactions (see, e.g., Niehans,
1971; Ostroy, 1973; Jones, 1976; Norman, 1987; Kiyotaki and Wright, 1989). In
a series of recent contributions Starr (2003, 2007) has worked out sufficient
conditions for a common medium of exchange to be the outcome of an
economic general equilibrium: the existence of transaction costs and market
segmentation in terms of trading posts (i.e., a budget constraint on each
transaction not just on net trade). Starr shows that scale economies in the
transaction technology lead to uniqueness of the medium of exchange which is a
fiat money when the government accepts it for tax payment. This article retains
the two assumptions of segmented markets and absence of transaction costs. We
investigate experimentally how agents perform under monetized trade and
barter exchange in this version of the frictionless Walrasian economy. The
laboratory findings show that a majority of subjects finds it easier to optimize
when they are confronted with monetary exchange rather than with barter
exchange.
1
Our results relate to the well known notion that monetary exchange
is superior to barter trade because in the former arrangement agents have to
consider a much smaller set of prices compared with the latter. Here is what
Jevons (1875, pp. 5–6) has to say on the subject:
‘In a state of barter the price-current list would be a most complicated
document, for each commodity would have to be quoted in terms of every
other commodity, or else complicated rule-of-three sums would become
necessary.’ [and further down] ‘such trouble is avoided if any one commodity
be chosen, and its ratio of exchange with each other commodity be quoted.
Knowing how much corn is to be bought for a pound of silver, and also how
much flax for the same quantity of silver, we learn without further trouble
how much corn exchanges for so much flax. The chosen commodity becomes
a common denominator or common measure of value, in terms of which we
estimate the values of all other goods, so that their values become capable of
the most easy comparison.’
1
The experimental analysis of monetary issues has brought forth a substantial literature (see,
e.g. Duffy, 1998, for a survey). However, the issue of relative efficiency of barter and monetary
trade has not been studied to date (e.g. Levy and Bergen, 1993, do not test any hypotheses in
their exploratory study). The study of Duffy and Ochs (1999) comes closest to this subject but
these authors do not experimentally explore the emergence of money but rather provide an
account of subjects failing to learn to adopt the same goods as media of exchange that a model
(i.e. the Kiyotaki and Wright model) based on rationality would predict. One experimentally
well documented aspect of monetary exchange and potential source of friction is money illusion
(see Shafir et al., 1997; Fehr and Tyran, 2001). Money illusion has no role in our experiment
because we ensure a stationary price level in the case of monetary exchange. The study (and
comparison) of money and barter is not restricted to economic theory and experiment. Barnes
and Barnes (1989) and Humphrey and Hugh-Jones (1992) are interesting examples of relevant
anthropological analyses. Historical research has investigated recent uses of money and barter
(see the papers in Seabright, 2000, on post-Soviet societies) and variants of exchange in ancient
times (see Thakur, 1972 on ancient India). Recent psychological research with children (see
Leiser and Halachmi, 2006) suggests that children do not find barter any easier to understand
than monetary exchange.
T. F. RO
¨THELI438
Scottish Journal of Political Economy
r2011 The Author. Scottish Journal of Political Economy r2011 Scottish Economic Society
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