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Organized Barter and Redistribution of Surplus

In chapter 14 of the Permaculture Designers’ Manual, Bill Mollison gives an interesting example of a restaurant (Zoo Zoo’s) that needed money for renovation but came up with a creative alternative to borrowing it at interest from a bank: they sold dated vouchers at a discount — e.g. an “a meal worth $10, redeemable in July” voucher for $8 — and thus raised money via a subscription system. (Vouchers were dated to prevent the problem of everybody showing up at the same time.) An interesting and maybe un-intended side effect of this was that these vouchers started to become “money” in the sense that people who had them but where short of cash started using them to pay one another for entirely unrelated economic activities (think piano lessons, hedge trimming, etc.). Evidently, these vouchers had a clearly visible value, and hence could be used to meet obligations between people who shared the belief in the value of these vouchers.

But was this actually a good deal for the restaurant? Superficially, they seem to have paid an effective 25% interest on the loan — for every $8 received, they paid $10 — a quarter of the sum extra. Surely if they just had talked to the bank instead, they would have gotten a better interest rate, wouldn’t they? Actually, it may well have been a very good deal for both the restaurant and its customers, but it is a bit tricky to see why. A key observation is that some businesses such as restaurants, hotels, radio stations, etc. have considerable surplus capacity outside peak times — a large share of the income they need to pay for their fixed and variable costs is generated in times of extremely high activity, but at other times, they still have to continue paying their staff, the rent, etc. while they easily could take more customers. If they had more customers during off-peak times, they could easily generate an extra dollar of income at very low extra cost — say, food and fuel may cost a restaurant 30 cents per extra dollar of meals sold.

In such a situation, one would expect a market-driven response in the form of a more differentiated pricing structure, i.e. having the price of a meal vary according to some schedule. Many pubs do do this to some extent e.g. in the form of “happy hours” — times when certain drinks can be had for half the listed price. But, by and large, there are good reasons against going too far in that direction. For example, it’s not advisable to have a restaurant menu that’s as difficult to read as a bus timetable. So, this leaves us with a situation where selling surplus capacity would be extremely lucrative even at a large discount. Usually, this happens with businesses that (a) have to buffer a lot of fluctuation and (b) have higher staff than materials costs. This, then, also is the background situation for many “club card” rebate schemes such as the “London Phantom Card” to name just one. There are all sorts of creative games that can be played in such a situation, and one of the reasons why this matters a lot for permaculture (and why designers should be aware of this) is that clever application of the right “redistribution of surplus” strategies may well make some capital investments towards more resilient and less energy- and materials-hungry operations appear economically more attractive than they otherwise would.

Considerable inspiration for such opportunities can be obtained by studying what “trade exchanges” do — plus, it may make a lot of sense for permaculture organizations (especially charities!) to actually join a trade exchange.

Trade exchanges are professional business-to-business facilitators that take cash commissions (usually around 10%) on deals that involve swaps of surplus capacity. Ballpark figures are that a typical trade exchange can sustain itself in a region of at least 250,000 inhabitants with at least about 200 participating businesses. While they are fairly widespread in North America and Australia (cities such as Toronto may have about a dozen active trade exchanges), the very idea seems to be mostly unknown at present in e.g. Europe (where the term “barter” seems almost exclusively associated with individuals wanting to trade pots for pans). Rather than facilitating only direct swaps, trade exchanges run an economy of tradeable surplus in which participating businesses spend and receive credit in the form of dollar-equivalents, usually named “trade dollars”. So, while it may be lucrative for a cinema to pair up with a radio station and swap excess seats for excess advertising air time, the trade exchange makes it possible for the cinema to sell its excess capacity to the trade exchange and receive trade dollars, which it could also spend e.g. on surplus capacity of a company doing refurbishments. The trade exchange will constantly try to find appropriate opportunities that allow members with a strongly positive trade dollar balance to purchase goods and services from members with a balance in the negative.

The reason why trade exchanges work is that there are marked differences in the nature of various products of nominally equal economic value. The difference between petrol worth $1000 and car wash services worth $1000 is that the car wash business may sometimes be able to create an extra $1000 of product for very low cost — maybe as low as $200. Hence, in trade exchange parlance, petrol is called a “hard good”, while car wash services are a “soft good”. Let us subsequently denote “trade dollar currency” with the symbol T$ and cash with the symbol C$. If a car wash needs signs worth $1000, and both the car wash and the signs enterprise have surplus capacity and are members of a trade exchange, it may make a lot of sense to them if rather than having C$1000 change hands, the car wash paid the signmakers T$1000 (redeemable through car washes; cash cost C$200 + C$100 commission for the trade exchange, so C$300 in total). On the side of the signmakers, the cash costs of the extra T$1000 earned may be, say, C$300, which they then can spend on T$1000 of services from other business members of the trade exchange — maybe they have some equipment in need of repair.

How about taxation? This may superficially all sound a lot like some sort of black market economy, after all. Soon after trade exchanges mushroomed in the U.S. in the late 70s and 80s, laws got passed that made trade dollar income stand on a par with cash dollar income — i.e. if a business has to pay C$200 in tax on C$1000 earned, it will also have to pay C$200 on T$1000 earned. So, having a high trade dollar income may taxation-wise become a serious problem for a business that is short on cash. However, one has to remember here that everything works in both ways, and taxes may indeed be a very good reason for a business to strategically use trade dollars. If an enterprise purchases a refurbished photocopying machine for T$2000, this counts as a business expense that can be written off as if it were a C$2000 expense. Now, any situation in which a nominal C$2000 expense can be generated from, say, as small a cash investment as C$400 deserves very close attention: if this reduced taxes by just 20% of the nominal $2000, a break-even point is reached, so buying refurbished equipment on trade dollars may be an excellent way to earn extra money by reducing tax load. (Besides, as this clearly helps the recycling industry, it comes with a number of other benefits.) A number of other creative games can be played with this, particularly when it comes to tax-exempt donations to charity. Suppose you are a member of a trade exchange and run a small cinema that is chronically short of customers. How about generating extra publicity and saving money at the same time by donating T$10000 in cinema tickets (maybe dated) to an educational charity such as your favourite gardening (permaculture?) school? In all, this donation might have cost you C$1000, so if you save more than C$1000 in taxes from a T$10000 donation, you effectively make money. What would the charity do with these cinema tickets? It could of course just hand them out to people — but it would be well advised to think of something better, such as using them for a fundraising event. Many people may well turn out to be much more willing to give cash to charity by buying something that is of actual value to them rather than just donating money without receiving anything in return. Note that in this case the cinema benefits and the charity benefits. Does the state benefit as well — since they have received less taxes after all? That all depends on whether the value to society of the charity’s use of the money it has gained exceeds the value to society the state would produce from the corresponding lost tax income. That should not be overly difficult, in particular for a permaculture charity. Similar analysis may well apply in situations where there are government grants for reforestation or other environmental rehabilitation. With a bit of leverage, which a trade exchange (or even just some cleverly arranged direct swap of surplus) can provide, these can be made far more attractive than they normally are.

As mentioned earlier, trade exchanges seem to hold considerable under-utilized potential to do good — both in Europe where they appear to be mostly unknown, as well as in places where they already exist but are not used by charities to the extent they perhaps should be. In addition to benefiting from receiving trade dollar donations, they also benefit in the same way as any other member of a trade exchange — through the extra free advertisement this brings. However, people eager to rush off and set up a trade exchange where one doesn’t yet exist should be forewarned: there are a number of quite non-obvious pitfalls. First and foremost, you might easily be misled into believing that trade exchanges would work best as web-based services. However, there are a number of aspects where human judgment is very important, such as: What members should be allowed to let their trade accounts accumulate how much debt? What attractive opportunities are there for members with a strongly positive account balance to spend them on goods and services of other members who are in the negative, etc. In addition to this “don’t think just a web database could do the job” issue, there are other problems. Getting started is slightly tricky, for the decision for a business to join a trade exchange is strongly influenced by what options there are to spend trade dollars on — i.e. who else is already a member. This clearly is a chicken-and-egg problem. The opposite problem — shutting down a trade exchange — is even trickier, for this can only be done if the trade balance of all members is systematically and gradually reduced to practically zero. But the biggest problem is perhaps that it can be very seductive under some circumstances to generate extra trade volume by running the trade exchange badly — which means: by accumulating bad debt inside the system. This, of course, is a problem of every economy, and one may well argue that our present-day financial institutions seem to have quite some experience in how to accumulate bad debt. In this sense, ensuring that certain ethical standards credibly and verifiably frame the rules for the trade exchange seems to be of paramount importance. It may well be that the most appropriate legal tool to ensure this is the combination of a trust and a company that was set up specifically for the sole purpose of acting as a corporate trustee.

Organized Barter adds another dimension of creative opportunities for permaculture related economic activities. Hence, designers should be aware of its existence and what one can do with it.

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4 Comments

  1. It’s worth looking at successful mutual credit systems like the WIR etc. too,

    https://www.lietaer.com/2010/03/businesscasestudies/

    there is a lot of research, and useful working examples of alternative currency on this site…

    https://www.lietaer.com/ (look down the rh sidebar)

    I’m trying to encourage everyone in our small community to use a kind of informal time-bank, and think about easy barters between each other. e.g. a local shop is a florist & pet shop, we supply the flowering tops of asparagus (which would otherwise be composted) “pussy” willow fronds, anything that pops up I think they can use, in return they vet clients and recommend our canine behaviour services, and trade for dog snacks – a small bag of pigs ears for a bouquet of asparagus type thing.

    A lady here takes in washing in return for kindling, logs, and boat maintenance. I rent a parking space in return for a bag of kindling each week.

    They can’t tax a direct barter can they?

  2. Yes, the “WIR” kind-of started the whole thing back in the 30s(!) and is quite popular.

    Concerning the taxation of direct barter, you are mistaken however. Assuming you live in the U.S., the IRS clearly states that “The fair market value of goods and services received in exchange for goods or services you provide must be included in income in the year received.”: https://www.irs.gov/taxtopics/tc420.html – see also https://www.irs.gov/publications/p525/ar02.html#en_US_2010_publink1000229343

    There are a number of rules concerning what constitutes taxable income and what does not – not every favour you exchange via direct barter is taxable, but if it can be regarded as an income-earning activity, it certainly is. I suppose the state’s perspective on all this is that it provides a stable environment in which business can be done, and in order to pay for this, there’s taxation. But that also means that if someone breaks a contract, you can take them to court.

    This is an extremely important point: barter is *not* a clever scheme for tax avoidance (which is legal). Not declaring barter income is just another form of tax evasion (clearly illegal). Barter is an important and powerful tool – however, please don’t mis-represent it for something it isn’t (a way to eschew taxes). Doing so may easily leave scorched earth by giving the barter economy a bad name.

  3. Thanks for answering my question Thomas. Indeed here in the UK businesses should also account for the VAT element.

    The point I was making was really about getting people used to the idea of alternative trading systems as a way of introducing these ideas, so they are more likely to accept a LETS scheme of some sort.

    We should all be asking ourselves, before we instinctively reach for our wallets, is there a way I can do this trade without using national currency (after you’ve asked weather you really need to do this trade). The value of your goods or service cannot be eroded by inflation, besides the more you can do without money, the less you have to earn (after taxes). And the less “profit” leaves your local community, the more real wealth stays in it.

    I wonder if the TAX man was interested in Mark Boyle (author: moneyless man) https://www.justfortheloveofit.org/blog

    Barter will become much more common by the end of this global deflationary period IMO. LETS schemes could save local communities when the global financial system fails too, and it is when, not if.

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