Updated Jan 11, 2021 to harmonize with Pool Clearing
In the previous postwe emphasized the use of agreements as the tool of trade in our alternative economic system called Social Resource Allocation (SORA). This solves the following problems in the current money-based (Commercial) economic system:
Inefficiency in running an economy: Before you can buy bread, you need to have money. To have this money, you need to sell something that you have. To sell something, you need to find a market. So to buy anything, humans need three steps.
High expense and unproductive labor in financing the economy or supporting money: The monopoly of money for exchange necessitates an expensive financial system filled with bankers, financiers, tellers, accountants, lawyers, etc. to support it. This adds to the cost of the economy without adding any real value and so Smith calls it unproductive labor and is the most expensive part of the economy.
Lack of responsiveness and slow progress: Since many steps are needed to procuer money, there is a lag in responding to supply-and-demand opportunities. This results in missed opportunities for addressing the needs of society or for progressing technologically as many promising research projects remain unfunded.
Bilateral and Multilateral economic agreements solve these problems
To buy bread, you can barter directly with the baker as one step or do Pool Clearing as two or more steps (more on this later).
The agreements need only be copied and notarized or be witnessed by an impartial third party
The dealing parties are free to put whatever in the contract as long as it is within the law, as quickly as possible. They can rescind bad contracts and make new ones
The question then arises on what will be the measure of value for such economic social contracts. We cannot use money as that will require a financial system which we already left. Adam Smith asked the same question over 200 years ago and came up with metals and grains.
Labour.. is the only universal and the only accurate measure of value, or the only standard by which we can compare the values of different commodities at all times and at all places. We cannot estimate.. the real value of different commodities from century to century by the quantities of silver which were given for them. We cannot estimate it from year to year by the quantities of corn. By the quantities of labour we can, with the greatest accuracy, estimate it both from century to century and from year to year. From century to century, corn is a better measure than silver, because, from century to century, equal quantities of corn will command the same quantity of labour more nearly than equal quantities of silver. From year to year, on the contrary, silver is a better measure than corn, because equal quantities of it will more nearly command the same quantity of labour.
Wealth of Nations
Food-grains will be the ultimate measure of value, especially for assets because grains are stable. The problem with grains is that they are not easily transportable. So for consumer or short-term prices, precious metals like gold bars will be used. Note that such bars are to be treated as commodities and not as money. Both metals and grains are managed by warehouse managers and truckers instead of financiers and bankers. So, the agreements for buying bread will be measured in metals, while those for real estate will be based on either metals or grains.
* Fiat money and cryptocurrencies are based on nothing but the promise of the issuer and so is very unstable and arbitrary. Gold, on the other hand, is a real thing that can be seen and touched by all and does not vanish like an arbitrary promise.
Are Grains Really Stable?
Adam Smith advocated wheat as the universal measure of long-term value because of its stability. The chart below shows that long term prices of grain are more stable than those of oil or gold. Of the major commodities, oil has the highest price extremes while gold has the most volatile prices:
Adam Smith explained that the relative stability of grains over oil and metals is due to the fact that grains can be grown by anyone. The drilling of oil and the prospecting for gold, in contrast, can only be done by people who have the required capital and expertise.
..it may sometimes be of use to compare the different real values of a particular commodity at different times and places... We must in this case compare, not so much the different quantities of silver for which it was commonly sold, as the different quantities of labour which those different quantities of silver could have purchased. But the current prices of labour at distant times and places can scarce ever be known with any degree of exactness. Those of corn, though they have in few places been regularly recorded, are in general better known.. We must generally, therefore, content ourselves with them..
The stability of long term wheat prices is the major reason why Smith advocated land (or at least land rent) to be valued in wheat. Since all economies rely on land, the stability or fairness in the valuation of land will, in turn, lead to more stability in all other commodities, helping to prevent the severity of bubbles and crashes.
Gold Prices after 1971 have greatly fluctuated
Using Pool Clearing to Circulate Goods and Services in an Economy
Now that we have a new tool of trade as agreements and a new measure or store of value as grains and metals, we can now put them together into a new economic system that is scalable yet is more stable than the current one. The next post will explain how it works.
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