Regular readers of this blog will be familiar with the inefficiencies of socialist production, which generated chronic shortages of consumer goods. Less well known is that these inefficiencies were not confined to the production side. Allocating what little was produced added a further layer of waste. Crude rationing never succeeded in getting goods to the people who valued them most, so informal markets emerged to correct the initial misallocation. Mises argued that black markets are precisely what keeps a centrally planned economy from seizing up altogether, smuggling in the price signals the planner has abolished. However, when all exchanges are carried out through barter, the search costs of finding a counterparty with the right goods, in the right quantity, at the right time become prohibitive. What we saw throughout the Eastern Bloc was an informal sector that mitigated the planner’s failures, but at high transaction costs and, in a quieter way, high social and human costs.
So then, how many pairs of shoes go into a birthday cake? What about packs of Marlboros?
Most people never have to think about baking in these terms. But for many grandmothers (mine included) the process of making a dessert started long before she cracked an egg. It began with questions about which items in her household were precious enough to barter for ingredients.
In Romania, back in its Eastern Bloc days, money technically existed. It was called the leu, the same name it bears today. The central bank printed it. You could hold it, count it and occasionally even exchange it for vegetables at a state-owned shop. But in any meaningful sense, the leu wasn’t ‘money.’
The state used it as a unit of account to track quotas, and officials stamped it onto rationed goods, displaying the state-mandated prices. However, money failed as a store of value, because fixed prices were so low, no one was ever ‘cash-poor’ and chronic shortages left people without goods and services to spend said money on. Saving physical currency was also a futile exercise. The real economy, the one that actually brought butter to the birthday cakes, ran on bartering.
So how is a grandmother to acquire ingredients for a birthday cake?
The queue and the shadow economy
To make things even more complicated, Romania ran a system of aggressive food rationing. Under a program euphemistically titled ‘Rational Eating,’ certain basic foods were only made available to the population in fixed monthly allowances. For example, an individual was usually entitled to 300 grams of bread a day and a single litre of cooking oil a month. ‘Hoarding’ more than a month’s supply was a crime punishable by prison.
The shops were mostly empty, and empty by design. Central planners set output targets that ignored public demand, and the regime exported the best of the little that was produced to extract hard foreign currency.
Because official prices were fixed, they stopped carrying information about scarcity. A kilogram of meat might cost a few lei, but that price was irrelevant if the meat didn’t exist. Real price discovery happened on the black market, where foreign cigarettes (especially Kent and Marlboro) became a parallel currency. In 1987, two pounds of beef could cost abouy four packs of Kents. Cigarettes worked because they were portable, divisible and almost universally desired. But even then, much of the informal economy operated through pure barter.
From shoes to butter
If your grandmother needed to make a cake, she couldn’t buy any butter at the shop, as butter was one of the strictly rationed ‘basic goods.’ An individual was allocated approximately 100g of butter per month. No more, no less. If your grandparents lived alone (which they often did), then 200 grams per month was scarcely enough to make a birthday cake, when you took into account that butter cannot be indefinitely preserved (it’s hard to save monthly rations over the course of multiple months) and butter comes with competing uses (cakes are not the only thing butter is useful for).
The next best thing is buying part of some neighbours’ rations until she could get the quantity she needed. But she couldn’t just offer money to a neighbour, because the neighbour didn’t need money. What followed was a chain of exchanges that required more effort than any modern consumer could imagine.
In this one particular instance, she started by swapping a pair of shoes for cigarettes. Then, she swapped the cigarettes for tergal, a synthetic fabric used for making dresses (it was the fashion at the time). The tergal was then traded for rapeseed oil. Finally, the rapeseed oil was exchanged for butter, not because the butter-owner wanted to grill, but because they needed the oil as a second-rate lubricant in their metal workshop.
Four transactions, five different goods and a lifetime of social networking, all for a single cake.
Finding someone with the right goods to barter is what economists call the ‘double coincidence of wants.’ Coined by William Stanley Jevons in 1875, it stipulates that for an exchange to happen, two people must want exactly what the other has, at the exact same time, in the exact quantity they are prepared to offer.
A double coincidence is a statistical miracle. My grandmother didn’t find one person who wanted shoes and had butter. That person did not exist in her village. That person may not have existed in the entire country, and even if they did finding them would be prohibitively expensive. Instead, she had to find a sequence of smaller coincidences, each a link in a fragile chain. Each step required its own negotiation, its own expenditure of time and the risk that the whole thing would collapse before she reached the butter. After all, the one thing worse than being unable to swap shoes for butter, is giving away good shoes and remaining stuck with bottles of rapeseed oil you never plan to use for cooking.
The numbers add up (to a lot)
The double coincidence problem is both annoying and mathematically intractable. As an economy grows, the number of markets needed to facilitate barter explodes.
In this example with five goods (shoes, cigarettes, tergal, rapeseed oil and butter), you need ten distinct markets, one for each pair of goods: shoes for cigarettes, cigarettes for tergal, and so on. With 10 goods, you need 45 separate markets. With 100, you need 4,950. With a million, you need close to 500 billion. In a modern economy with millions of goods and services, writing out all the zeros gets a bit scary.
What money does is make things simple. You only need one market for every good (the good in exchange money). But even these numbers understate the difficulty. Computer scientists have shown that finding a chain of exchanges to clear a barter market is NP-hard (‘non-deterministic polynomial time hard’). In layman’s terms, it is almost certainly unsolvable in a reasonable time. A barter economy involving just a few hundred people and a handful of goods would overwhelm the world’s most powerful supercomputers. The time required to calculate an optimal outcome would exceed the age of the universe, even on hardware far beyond anything we can build at this current point in time.
Commodifying human relationships
The mathematics only confirms what those who lived through it knew in their bones. Barter is ruinously expensive. And it comes with a cost that isn’t measured in time or shoes but in the erosion of human relationships.
A monetary economy, for all its perceived ‘coldness,’ actually protects our social lives. When you buy bread from a baker, you pay and leave. You don’t need to know anything about the baker’s personal circumstances, their family’s needs or their list of suppliers. Money is ‘crystallized trust.’ It allows strangers to trade, which in turn allows friends to just be friends, without the need for constant, transactional calculation.
Barter makes every human interaction turn into a potential deal. Most Romanians before 1989 maintained mental ledgers of everyone they knew: who had access to the shoe factory, whose brother-in-law could procure export-only goods, who owed someone else a favour, who smoked the most/the least, etc.
In this world, social networks aren’t organic communities. Every relationship carries questions. What can this person provide? Is this gift a gesture of love, or a strategic deposit for a future trade? Trust becomes deeply personal and very fragile. If a friend fails to deliver the cigarettes they promised for your shoes, you have no recourse. No contract, no court, no receipt. You simply lose the shoes and perhaps the friendship, too.
We can bake the cake and eat it too
My grandmother baked many cakes for her daughters over the years. But she paid for those ingredients many times over. Unlike her counterparts on the other side of the Iron Curtain, her ordinary domestic life required the skills of a commodities trader and drained her time in ways that are hard to imagine or forgive.
We are lucky enough to live in a world where we never have to calculate the exchange rate between shoes and butter. And no one should ever have to.
Money is what separates community from society. It fully exhausts transactions and it fully depersonalises them. Money gives us the freedom to pay and walk out of a shop without owing anything else to anyone. It allows us to build human relationships based on shared purposes rather than calculated exchanges.
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Wonderful article on the relative goodness of capitalism. Thank you.