Wednesday, October 31, 2012

Spot Trades are not Credit Transactions

Consider this eccentric interpretation of spot trades by an Austrian over at Robert Murphy’s blog:
“All ‘spot’ trades are actually credit (i.e. trusting the counter-party to make good on their end of the exchange) exchanges. The only difference is the length of time it takes to finalize an exchange.”

http://consultingbyrpm.com/blog/2012/10/gold-money-apparently-existed-before-the-big-bang.html#comment-48330
This is a deeply flawed understanding of spot trades.

To see why, let us start with sale and purchase contracts. A sale and purchase exchange (what was called emptio venditio or emptio et venditio in Roman law) is a contract by which a seller (vendor) transfers ownership or title to property rights of a good or goods to a buyer (emptor) for a money price. The essence of the exchange is transfer of ownership in exchange for money, and the sale and purchase agreement can be made by parties at a distance: that is, by message, by letter, or by legal agents. The buyer and seller do not stand to one another as a creditor and debtor do.

An absolute sale, for example, is a sale where title to property passes to the buyer simply with the payment of price to the seller and mutual agreement (if transfer of ownership takes place at a future date, there is an “agreement to sell” contract). Transfer of ownership can become effective when a sale and purchase agreement contract is made.

The essential nature of the sale and purchase agreement can be seen when contrasted with a sale on credit: here the property rights to the thing sold only pass to the buyer when he has made the final payment of the price (and hence repayment of his debt). In the latter contract, there really is a credit–debt relationship. In the sale and purchase exchange, there is no such credit–debt relation. In the absence of transfer of ownership, we have no sale or purchase contract, but hire, leasing, or credit/debt exchanges.

Delivery is not even a necessary condition for the title to property to pass from a seller or buyer. It is possible for a buyer to purchase a good and allow the seller to hold it as a bailee. If the seller/bailee does not later deliver the good to the buyer on demand, then the bailee could be guilty of theft (a criminal offence). By contrast, the failure of a debtor to repay debt is not theft, but merely breach of contact (a civil law offence).

Now we come to barter spot trades. Barter spot trades are direct exchange of one commodity for another, in an exchange where the things exchanged are agreed upon and accepted by both parties. The exchange is very much like the sale and purchase contract, except that it is another good that is the exchanged for another, rather than money. The essence of the barter spot trade, when goods exchange for goods, is also transfer of ownership or title to property rights between the parties, but in this case mutual exchange of ownership of goods. The exchange does not create

When a barter spot trade occurs, ownership of the object for which you have exchanged your own good(s) passes to you by agreement. Having no time period between the original agreement and the delivery of the new good you have bartered for is not a defining characteristic of the spot trade: indeed, although two parties could in theory exchange two commodities at the same time, in practice time usually does occur between handing over of one commodity and giving of another. It is perfectly true that there may be 1 second, 10 seconds, 30 seconds, 1 minute, 5 minutes, a few days or even weeks between the spot trade agreement and actual delivery or receipt of the goods or one of the goods. Yet by agreement the two parties have already exchanged property rights or title to property: actual possession of a good is different from ownership. Once ownership or title to property has passed there is no credit/debt relationship.

As we have seen, with money we have sale and purchase agreements, not credit transactions. The time element between purchase of the good and actual delivery is again not the key or defining characteristic of the sale and purchase agreement. Again, it is perfectly true there may be 1 second, 10 seconds, 30 seconds, 1 minute, 5 minutes, a few days or even weeks between the purchase of the good from the vendor and actual deliver or receipt of goods. But that is irrelevant. The crucial concept is ownership. The seller has no debt to the buyer, even if a short time might pass before actual delivery occurs. The time element is nothing but a red herring. The seller merely has a legal obligation to deliver the property, once bought.

A debt/credit relationship, by contrast, is one where a person lends a good (or money) as a mutuum to a debtor. He is obliged to return, not the same good (or money), but a good of equivalent value or quality. This is not a sale-purchase agreement or barter spot transaction where specific goods are sold or exchanged. A debt/credit relation means that the debtor owes an agreed upon price or value to the creditor.

Also, in a debt/credit exchange based on gift exchange, many “creditors” or parties in gift exchange have not even yet decided what they want back from their “debtor.” They will call in their debt at some point in the future, and the debtor may not even know what will be demanded. The debtor does not hold some good already owned (or bought) by a purchaser. He remains merely in debt to the creditor for an agreed upon debt defined as a certain value.

22 comments:

  1. It seems like Murphy is still ticked off that Graeber and other anthropologists have blown Menger's theory of money out of the water using empirical data.

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    1. Julia:

      Except it didn't.

      Everything Greaber found is 100% consistent with Menger's theory of money.

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      LK:

      The buyer and seller do not stand to one another as a creditor and debtor do.

      That's incorrect. Creditor and debtor can be separated by distance as well. It happens everyday in our society.

      An absolute sale, for example, is a sale where title to property passes to the buyer simply with the payment of price to the seller and mutual agreement (if transfer of ownership takes place at a future date, there is an “agreement to sell” contract). Transfer of ownership can become effective when a sale and purchase agreement contract is made.

      Such transactions still take time. The party that sold the good for the money, and the party that sold the money for the good, do not instantaneously at the same time take respective possessions of the goods and money. There is still a component of trust contained in absolute sales.

      This is what is meant by all spot trades really being credit trades. We just use the word "spot" and distinguish it from "credit", to distinguish informal credit from formal credit transactions.

      Most people would call paying cash at a grocery store a spot transaction. But there is still a component of trust and time taken to complete the transaction. The clerk gives you the groceries, and trusts that you will LATER ON pay for the goods by going into your wallet and getting the required amount of cash.

      Just because the credit component took place over a span of a few seconds, and just because that credit component was informal and not documented via some contract that both of the parties sign, it doesn't mean it was not a credit transaction. We just call it "spot" because it is a relatively quick and informal credit trade.

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    2. "Such transactions still take time. The party that sold the good for the money, and the party that sold the money for the good, do not instantaneously at the same time take respective possessions of the goods and money.

      (1) in fact, there is no reason in theory why their transaction cannot happen at the same: they might hand over the goods to each other at the same moment, one to the other.

      (2) but in the end, as argued above, the time element is just an irrelevant red herring.

      This is not what distinguishes the barter spot trade from credit/debt contract.

      As I said, credit/debt is exchange of a good as a mutuum in return for a debt claim/obligation on someone.

      The barter spot trade is mutual exchange of ownership rights to goods swapped. No debt claim ensues.

      Delivery is not even a necessary condition for the title to property to pass from a seller or buyer. It is possible for a buyer to purchase a good and allow the seller to hold it as a bailee.

      If I buy a property overseas, I do not even need to take possession of it: it does not need to be *delivered* to me.

      It might be run by the former owner as my new tenant.

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    3. (1) in fact, there is no reason in theory why their transaction cannot happen at the same: they might hand over the goods to each other at the same moment, one to the other.

      No doubt, but trades are rarely if ever of that form. It would require two people where one person holds a good in the left hand while the other party's right hand is empty, while the other party holds money in their left hand while the first party's right hand is empty, and then, at EXACTLY the same time, they each let go.

      I would be willing to venture that 99.99999999999% of all trades do NOT take that form. And for those that did, there would STILL be a trust component, in the sense that both parties would have to trust the other side to, after letting go, to swipe the good or money right back.

      (2) but in the end, as argued above, the time element is just an irrelevant red herring.

      Actually it isn't. Time is a core factor of credit transactions that is necessary for delineating between what most would call spot and what most would call credit transactions. Trades that are completed in only a few moments are usually considered spot, while those that are completed over a longer period of time, are usually called credit.

      This is not what distinguishes the barter spot trade from credit/debt contract.

      Indeed, and I never said it did serve as the sole distinguishing characteristic.

      As I said, credit/debt is exchange of a good as a mutuum in return for a debt claim/obligation on someone.

      Incorrect. A credit transaction can be non-mutuum as well, such as unique goods that cannot be duplicated. Granted, they are not numerous, but they are possible.

      The barter spot trade is mutual exchange of ownership rights to goods swapped. No debt claim ensues.

      I submit that the debt claim on most spot trades is implicit and informal. A grocery store clerk is trusting the buyer to hand over the money after putting the food in the bags. The presence of trust, and time, are sufficient to making a trade a credit transaction. They don't all have to be formal and documented and signed.

      Delivery is not even a necessary condition for the title to property to pass from a seller or buyer. It is possible for a buyer to purchase a good and allow the seller to hold it as a bailee.

      Of course. In this case, the buyer is trusting the seller to make good on the transfer later on. That is a credit transaction.

      If I buy a property overseas, I do not even need to take possession of it: it does not need to be *delivered* to me.

      Right, I never said possession requires you to have your physical body there. It could be possessed by you indirectly.

      It might be run by the former owner as my new tenant.

      Agreed.

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    4. "It might be run by the former owner as my new tenant.

      Agreed."


      And that destroys your argument.

      "Of course. In this case, the buyer is trusting the seller to make good on the transfer later on. That is a credit transaction."

      No, it is not. It is a bailment handed over to its rightful owner, not a credit transaction.

      It is here that your argument is revealed for the shoddy nonsense it is: if a bailment was really just a credit claim, then all cases of bailment where someone keeps another's property for safekeeping, and where the bailee consumes it or uses it, would not really be theft: it would just be a debtor consuming his rightful mutuum loan.

      I submit that the debt claim on most spot trades is implicit and informal.

      You invent an imaginary "debt claim" that does not exist.

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  2. George/MF

    Thus the obsession with the time element is just another red herring and fundamental misunderstanding of both barter spot trade and sale/purchase exchanges.

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    1. Why are you swearing? Is that you swearing? What?

      The time element is a core component of credit transactions. A trade that is initiated and finalized over a period of 1 second is almost always called a spot transaction, whereas I hold it is still a credit transaction.

      This isn't a red herring, this is a core component of my argument!

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    2. MF = Major_freedom

      "The time element is a core component of credit transactions."

      Yes, but not of barter spot trade and sale/purchase exchanges.

      " A trade that is initiated and finalized over a period of 1 second is almost always called a spot transaction, whereas I hold it is still a credit transaction."

      Time is not the defining element, though certainly one characteristic.

      The defining element is that barter spot trade is mutual exchange of ownership rights to goods swapped. No debt claim ensues.

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    3. Yes, but not of barter spot trade and sale/purchase exchanges.

      I would argue it is, because all trades take time to complete, and in 99.9999999% of all trades there is an implicit trust of one party for the other, who gives but waits to receive, which to me introduces a credit component.

      It's a technical quibble, bordering on semantics, and has no real impact as fact as I can see. Well, it does help in understanding that credit barter does not refute the core of Menger's theory. Maybe it needs to be slightly modified as it is written, so that instead of using spot barter only, credit barter can be used.

      Time is not the defining element, though certainly one characteristic.

      The defining element is that barter spot trade is mutual exchange of ownership rights to goods swapped. No debt claim ensues.

      I argue that there is a tacit debt claim DURING the time that the exchanges are taking place, even if it is informal, unstated, and implicit. People naturally trust each other to make good on their end of the trade, and so what appears to be a spot trade of mutual exchange of ownership rights, is, in practise, a temporary debt claim where one party is literally at the mercy of the other's trustworthiness.

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    4. "I argue that there is a tacit debt claim DURING the time that the exchanges are taking place, even if it is informal, unstated, and implicit."

      If that were true, the good that the buyer buys would be a mutuum until delivered.

      But as we have seen it is not a mutuum: it becomes the buyer's property when he bought it.

      "Well, it does help in understanding that credit barter does not refute the core of Menger's theory. Maybe it needs to be slightly modified as it is written, so that instead of using spot barter only, credit barter can be used."

      That only means the anthropological critique is correct.

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  3. Sergeant Major F-has apparently risen in rank to a George II or III, but his behavior has not improved in same degree, he continue to be a Austrian troll and as such refuse to accept facts,progress and new scientific knowledge. No, I find it hard to see that something good will come out of the remnants of the Austrian school. They continue to embarrass them self with bad behavior and by that discredit them self, since most people are tired to death of their rude and vicouis apperance all over internet.

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    1. I have to ask why it is that austrians don't change their axioms and theories based on newly-discovered facts instead of changing the facts to fit their theories. Absolutely nothing Graeber said is consistent with Menger, unless you butcher language to the point where a word like "barter" becomes so loosely defined that almost everything fits the definition.

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    2. What facts, what progress, what new scientific knowledge are you referring to?

      What bad behavior? What vicious and rude appearance?

      Austrian economics is a logical science, akin to mathematics.

      People who understand Austrian economics won't say what you said. What you said is like someone claiming astrophysicists have discovered something in space that refutes the law of non-contradiction.

      It is precisely Keynesians who immunize themselves from new knowledge, because Keynesianism is based on old refuted mercantilist dogmas, redressed in new verbiage. They have not even adopted the marginalist revolution from the 19th century for crying out loud.

      Plus they are very rude because they want their policies to be implemented at gunpoint. They are not civilized people.

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    3. "They have not even adopted the marginalist revolution from the 19th century for crying out loud."

      Yes, no Keynesians accept that value is subjective. Certainly not the neoclassical Keynesians whose micro comes directly from Walrasian theory.

      You continue to demonstrate your laughable ignorance Major_Freedom, Pete, David, Christof, Pete PetePete, George, etc.

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    4. Lord Keynes and Julia.I think Major Freedom, George, Pete or what ever he calls him self,is one in this audience.
      I think it´s as simple as that.And he deserve no respect as fare i am concerned https://www.youtube.com/watch?v=A0p5mA07c08

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  4. "Austrian economics is a logical science, akin to mathematics."

    Yet economics is always a social science, because it involves people and the real world.

    Austrian Economics always reminds me of 'psychohistory' in Asimov's Foundation series.

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    1. Neil- were you aware that Paul Krugman aspired to be a phycophyisist but chose economics as a close second. By the way, Paul is a self proclaimed Keynsian. IS-LM!

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    2. Freshly Squeezed CynicNovember 3, 2012 at 8:32 AM

      "phycophyisist"

      I'm not exactly sure what this is meant to be. I believe Krugman jokingly said he wanted to be a psychohistorian, but Krugman is a massive sci-fi geek, so I would think this another case of Krugman making a joke and Austrians pretending not to understand it (see the "Krugman is a warmonger" nonsense.)

      "By the way, Paul is a self proclaimed Keynsian."

      Your point, ALima?

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  5. "By the way, Paul is a self proclaimed Keynsian. IS-LM!"

    What has IS-LM got to do with Keynes? It was invented, and rejected as inapplicable, by Hicks.

    Don't tell you're another one of those who was hoping that Hicks interpretation was right because you couldn't understand that 'damn book'?

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  6. I think George might have pursued the wrong course of argument in showing that this in no way contradicts Menger's theory. The point isn't to harp on time (while important, this is really more a meta-economic discussion of the semantics involved in the study, rather than a discussion of the economics themselves), it's to point out that a debt contract [i]is a good itself[/i]. The spot-trade involved in a credit transaction is the purchase of the debt contract by the creditor in exchange for whatever the debtor receives from the creditor.

    Even the most informal of debt contracts, such as owing a favor to a friend who helped you move or something, is a spot transaction where the friend transfers to you some of his time and ability to work as a service performed and he receives a promise that you will assist him in some kind of similarly arduous task in the future.

    I think we might say that debt contracts that become traded as money are a commoditized debt, in the Marxist sense of commodity.

    By the way, LK, I'm curious about something; What's the real purpose of referencing the Latin terms for legal concepts you used at the beginning? Surely they're superfluous tinsel on your wider argument, yes?

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    1. I am not sure that I find the idea of the debt contracts as a good very convincing.

      As to the Latin, these still do have meaning in modern legal technical language/concepts.


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    2. Within the context of a discussion of Menger's theory of the origin of money it ought to be convincing. Menger defined a good as a thing which fulfills these four conditions:

      1. A human need.
      2. Such properties as render the thing capable of being brought
      into a causal connection with the satisfaction of this need.
      3. Human knowledge of this causal connection.
      4. Command of the thing sufficient to direct it to the satisfaction
      of the need.

      In a world of subjectivity as Menger's economic theory lived in, a debt contract can certainly be something which satisfies a need, which can be as simple as a need for more future income, which the contract satisfies as a source of said income.

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