Tuesday, April 30, 2013

#27 Markets; Red, Black and Grey

Black Markets are always the Real Markets

E. C. Riegel made mention of “black markets, so called.” Why did he qualify it? What did Riegel recognize that we all need to understand? Whether some good or service is proscribed by a government or religion (are they not something alike?), it cannot be denied that where there is a demand there will be a supply, perhaps not at prices allowing many people to buy, but that somewhere at a given price, anything may be had that is demanded, whether illegal, immoral, expensive or fattening. We habitually describe a black market as where anything can be traded, even that which is obscene.

What characterizes black markets, other than that they can be anywhere? First and foremost, they run in the black (are without debt), to the advantage of both buyer and seller; there are no guarantees of anything once the transaction has been completed. One is never guaranteed of quality, quantity, workmanship, dependability, or soundness, because a black market always runs in the black; all deals are final, there are no returns, there are no credit terms, all trades are settled and final: black markets all run in the black.

Besides the caveat of “buyer beware,” what else happens in black markets? Certain operators and certain locations get reputations. Those with better reputations for fair dealing see their wares sell out far faster than those who are newcomers yet to prove their “good faith” or those who have established poor reputations for quality.

All markets are places for the exchange of goods or services. At one time these were organized to operate in open spaces, open fields, places where sellers could move in their goods or services for sale and where buyers could come and shop and buy. Originally they were set up as whole barter affairs, until money allowed split-barter. Sometimes the money was exchanged by market organizers for goods offered for sale by sellers and so that these sellers could then become buyers of whatever anyone else had for sale. At the end of such markets, usually operating over a matter of a few days, all the money was exchanged back to the market organizers for goods that would be removed to the abodes of buyers and sellers. Trading for furs using wampum during pow wows was common in the early 19th century when certain animal pelts were fashionable materials for hats and garments in other parts of the world. Trade in slaves, rum and gunpowder was organized as whole barter and later split barter at the various places this trade took place, for yet other goods or for money.

States have often been dragooned into supporting the claims of one set of merchants over others; the busting up of competing markets, so that monopolies or other advantages would result. Regulation is such a form of state FORCE. These efforts usually ultimately backfire, but for those whose morality lacks any philosophical backing (pragmatists), who view winning the moment as superior to any probable future, such tactics are as acceptable as those of common school yard bullies. A wiser consumer might make of certain of these practices as more lurid, preventing their hoped for effects.

Red and Grey Markets

Anything other than a completely free market, a black market, where anything imaginable can be traded, is a controlled market, where only “approved” products are offered for sale and which allows for other mechanisms than paid in full, settled transactions. These, the markets that control a large share of all trade, are the red markets. Since they allow credit in exchange for goods or services, they employ the means to extend the payments out to some determined point in time, where the buyer is receiving value, while the seller agrees to wait to be paid in full, eventually receiving a higher than market price, because the buyer didn't have all that was required for settled payment at the time of the sale.

Any markets where a state or government is involved also imply a degree of redness, because the market is operating as a tax agent and hence all prices are affected by the imposition of additional value required in any trade to cover taxes.

A “grey market” is a term used to describe a situation where you know you might be buying shoddy goods but are willing to accept this risk if the price is low enough to justify it. Some will take delivery of sub standard appliances, tools, etc. if they think that the lower price justifies the exchange, or if they believe that they can take inexpensive actions to more than make up for whatever deficiencies these goods may have possessed. There are all kinds of reasons for selling “seconds” and there is a market for them, though it probably will not be “legitimate” or regulated.

It has often been asked, to what degree is market regulation helpful or even necessary. We maintain that few buyers ever know what they are really buying nor know the ramifications of what they buy, even in regulated markets, so we encourage all buyers to beware of whatever they are doing since, by casting their vote with their money, they are determining what will and will not be acceptable business practices; over time shoddy merchandisers (and manufacturers) should acquire a reputation for producing poor quality products, while those who make better should likewise acquire a reputation for quality and hence higher market prices. There's actually little mystery in this.

The Role of Money

E. C. Riegel said that exchange created money, but it is also true that money creates exchange. Right now we have situations where local entrepreneurs (and their local customers) are strapped for cash in the ordinary political monetary system sense of dollars, euros, yen, etc. To them, a local currency, represented as extensions of or "complementary" to political currencies, allows some to begin to “make money” or “become profitable.” At present, there are essentially two forms of this complementary money; the local monetary unit, often at this time represented as a "man hour" at a fixed price in the political currency, or as a discount on trade for those who use the complementary currency. The Ithica hours is an example of the former, Berkshares, is an example of the latter.  Both are convertible into dollars; one may purchase them and redeem them for dollars.

We're going to make a few statements regarding the importance of these complementary currencies in the direction of trade and other matters moving forward:

1) All complementary currencies (complementary money), regardless of whether they offer discounts for users (Berkshares model) or not, must be tied directly to the purchasing power of a political currency, in all US cases, to the US dollar.

2) All complementary currencies are intended to help generate or promote local businesses and are generally not recognized outside their communities.

3) Complementary currencies arise by actions of groups of local merchants or others who already operate going concerns, rather than allowing ordinary people the natural right of issue.

4) Complementary currencies form no basis for legitimate financing of needful large expenditures, for things like cars, trucks, capital goods, homes or farms.

Taking up each of these concerns one at a time; there may or may not be statutes prohibiting issuance of any currencies that would not be directly negotiable into political monetary units; dollars, euros, yen, etc. These laws are, from our standpoint, illegitimate restrictions on trade and to the extent they are applied represent infringements of inalienable rights. They fit into exactly the same categories as mentioned by Riegel and others who deny the right of ANY government to determine the value of money. We further contend that all government issued money is illegitimate, precisely because it is not backed by anything the government has to sell to us in return. The only legitimate money is that which is backed by a value, especially human labour, but that could in fact include anything put up for sale in any kind of market, whether that be black, red or grey. We prefer black markets to all others, but recognize the positive role of finance to allow greater opportunities of acquisition of real capital goods to more people

To many who want to regress back to partial whole barter using precious metals, where perhaps most of the value in the trade is in the metals proffered, they view laws restrictive of types and kinds of money used for exchange as an unbearable limitation on their freedom, and so do we. What are the differences between someone coming to market with more cash, whether that be in some political monetary units or commodities, be they gold, silver or anthracite coal compared with those who have less than the prices demanded by the sellers? The former usually get a lower price, while the latter may be lucky to be able to buy at all. That represents freedom. Those without must find a way to earn what they need, while those having already more than enough get the chance to purchase whatever, usually at a lower price. In order for this to be so, they must have freedom to sell their labour, which they usually cannot do these days because there are other laws prohibiting free sale of labour in the form of restrictions, licencing and bond requirements, etc.

The second issue, local flow of commerce aided by exchange of a locally generated complementary currency, can benefit small enterprise and even promote it, but after all, much of what we really need, does come from places far from our local communities. What may be fine for keeping a small business afloat locally, has limited power to promote trade for real commodities and finished goods that are produced better and cheaper elsewhere.

The questions that are never asked relate to how big such enterprises must get -what are the real restrictions on size- and what are the consequences directly related to size of operation in terms of real efficiency to scale and responsibility to size. For example, what is the real cost to a community of having many or most of its jobs lost to larger factors of production displacing smaller? Nobody bothers to put such figures, were they available, into any business plan, because they are not considered  directly responsible for these matters, or so it is supposed.

You may read or hear elsewhere (i. e. Rothbard, that great liar) that limited liability corporations are the greatest innovation in business and have brought about such great things for more people than would have been the case had factors of production remained smaller and more competition was involved, etc. We flatly disagree and have the Gulf of Mexico disaster and the Fukushima disaster as proof of our contentions. The bigger they are, the less likely they are to care about local impacts on real people and of course they wouldn't dream of cleaning up their own messes. After all, if sheer size is capable of making markets, and they can and do all the time, then an organization that faces little or no responsibility for anything harmful that they bring about can grow to become “too big to fail” and their operators “too big to jail.”

It is precisely that organizations like WalMart were and are irresponsible for displacing the downtown business districts of virtually every small town or city where they operate, that we maintain our universal call for an end to limited liability corporations, and an end to absentee ownership of all forms of production and commerce. We will simply not allow them in our VEN.

Would this result in rising prices as they always claim? Ask yourself if prices have not already risen during your lifetime on everything and then give the heave ho shove to all comers who promote lower prices for consumers as the bargain for allowing so called “public” corporations into your communities. The basis of all value is human labour and where that value is restricted in terms of free trade, then one has oppression, usually of the lesser for the benefit of the greater.

Among ourselves arose a discussion of whether any IE would like to hold any of these complementary currencies as well as silver and gold bullion and produced some interesting questions. Some wondered whether the first step was to encourage the start up of either an hours based (Ithica) or discount based (Berkshires) complementary currency in as many places as possible and then encourage the exchange of these currencies to promote trade between localities, as a first step toward eventually adopting a fully independent currency as E. C. Riegel proposed. We cannot know what for example Summit County, Colorado, with an hours based system, might wish to trade with Ithica, New York, who has a similar system. Knowledge as well as a means of trade (money) makes markets, so this may be a place where others who have more time or interest might pursue the issues further. But simply put, there is something every community has that it can profitably trade with other communities. This is always ultimately the case. What prevents us from seeing all these possibilities is the framework we inherited from our childhood and those who were running the institutions that gave us our education, perceptions and basic assumptions, none of which may really be as relevant or inflexible as we have come to believe.

Some others in the alternative money interest arena have blithely passed over the real issues involved with savings and finance and to the degree this has been the case, they are insensitive of the importance of wealth formation; all real wealth produces income, and of the formation of capital required so that people such as Professor Greco's young man in Tacoma, who asked when and how complementary currencies would ever buy things people really needed, like shelter, utilities, etc. could be given real answers. In order for that to be possible, there would have to be sufficient interest by those with stacks of the money, of whatever kind, to invest in properties to rent to those who in turn have been able to secure payment for their labour in the same money. In order for that cycle to happen, money hasn't also to circulate, it must be stackable, saveable, useful for the purchase of larger units of value, priced accordingly. This is a matter that will be covered in a future article.

Meanwhile other attempts at an alternative standard are attempted. The model for bit-coin was based on scarcity as a basis for value and therefore very predictably many used it to take bets on the likely inflation of political currencies. Once one does that, the vehicle is no longer legitimate money in E. C. Riegel's sense, but merely just another commodity that could be used in trade, but which could be held as long as it was rising in relative value and sold when it started to lose relative value. Any real alternative would tend to preserve its purchasing power, not just for a decade or two but over many generations; it would hence be worth saving but would not fluctuate in price as dramatically as any commodity.

The core of our concept of money, having to do with preventing inflation, is the community credit clearing function of real money being created at the point of purchase and destroyed when the same buyer takes back the same amount of money created in trade for some good or service he provides. That's a monetary circle.  What if a buyer always buys in this way, but never sells? If it were the government, in order to reduce or eliminate inflation, they would have to tax back every dime they spent. That's not likely or even feasible, so let's accept Riegel's analysis as correct; the government has no business issuing money. But in an E. C. Riegel based VEN, what happens when someone buys, but cannot sell; they have subsistence needs but probably will never be able to earn what they spend? They are what Riegel identified as “red inkers,” but they create what they cannot destroy, the extra money floating around in any VEN will originate with them and become available for all the legitimate profit and finance required by legitimate responsible business.

While it may be true that in a community credit clearing system, all accounts will tend to zero balances, it is a legitimate concern of every kind of legitimate business to have cash stacked up on hand in case of emergencies, in order to keep the business open and functioning. Without the ability to earn profits above expenses and hold the reserves at the ready in case of need, few businesses would be willing or able to stay in business or for that matter adopt a complementary or alternative money. It is this crucial association between the “have nots” creating money and mature businesses requiring surplus pools of liquidity that most commentators on these issues do not bother to discuss. But this connection is real, basic and legitimate. If the have nots are prevented, the businesses that seek to sell to them, and to everyone else, will eventually fail, unless they get hand outs from some government, which we all know is not a legitimate action and for our purposes will lie outside the capabilities of the VEN.

We'd also like to say here that any money withdrawn from a market does not participate in that market; you are not “preserving wealth” by buying precious metals, since all wealth is that which actively produces income. All you are doing is taking your purchasing power out of the market, except of course for the market for precious metals. As we have witnessed over the last few years, one can stack up as much money as one pleases in banks and other corporations, but none of it will be effective of promoting trade because it was not placed into the hands of those who actually need it, but rather was placed into the hands of those who already had too much of it and who would have used that increase to continue their usury based lending practices (rigorously defined here) or their even worse derivatives speculations.

What is really required is for stores of liquidity to be capable of storage, savings, to stack up in local communities where they can go to work buying what local enterprisers want to buy to further their own businesses. If one were operating within the VEN, ones' saved Value Units would not be affected but by what their market would allow; free trade for anything, especially labour, especially locally.

We'll no doubt have far more to say on these subjects in the next few weeks and months.

David Burton


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