Open Science Repository Economics

doi: 10.7392/OpenScienceRepository.Economics.2012.06131923

An Independent Global Price Unit as a Solution for the World Economy

Francisco Oliveira

São Paulo, Brazil

Abstract

This paper puts forward the idea of a global price unit or scale that stands apart from currency units, as a route to stabilizing the world economy. Its starting point is the argument that prices need not be stated in currency units, and that this conventional practice is flawed: it distorts choices about investment and disinvestment and pushes economies toward crisis. Instead of expressing prices in currencies, the paper suggests an abstract price unit or scale, comparable to other scientific abstract scales such as the Kelvin scale, together with variable conversion rates that link that abstract unit to currencies. Under such a new global price system, made up of an independent price unit and conversion rates, markets can reduce the monetary influence on prices and see real relative price movements more clearly, enabling sound decisions on investment or disinvestment and thereby stabilizing the world economy. Because this proposal could have a very large impact on the global economy, further discussion and experimental testing remain necessary.

Keywords: economics, economic crisis, monetary reform, price theory, price system, price unit, currency reform, poverty solution, economic stabilization.

Proposed theory

Separating currency scales from the price scale, by introducing an abstract price unit, offers a way to secure long-term stabilization of the world economy and avert economic crises.

Theoretical background

The unit used to state how much money exists, say 1000 dollars, is the very same unit used to state prices, as when an item called X costs 1000 dollars. Is that necessary, or even helpful? This is the key question, and answering it requires the theoretical steps set out below.

Economic stabilization is not about endless economic growth. Unbounded growth would bring overproduction and flood the world with industrial goods, sharply lowering the marginal utility of things. Stabilization is instead about keeping supply and demand in balance.

For any product, rising demand calls for more supply and falling demand calls for less. To balance the economy, meaning to balance supply and demand, economic agents must raise or lower output in step with rises or falls in demand.

What happens when this interplay of supply around demand is poorly executed? (The discussion below deliberately avoids the concept of prices; that concept is introduced later.)

Consider an initial balanced economy.

When an increase in demand for a product is not matched by an increase in its supply, the gap between demand and supply widens. Undersupply raises the product's marginal utility. Consumers are likely to compete for the scarce supply, so some obtain only a small share of the output while others obtain more. A larger share of their purchasing power goes into that competition, while other products see demand fall because less purchasing power is directed at them. The whole economy is thus pushed into a supply-and-demand state for every product that is conditioned (sustained) by the initial imbalance in that first product. Other products then become unbalanced too, and the spiral grows, producing an unbalanced economy.

When a decrease in demand is not matched by a decrease in supply (in other words, when supply is raised without a proportional prior rise in demand), a gap between supply and demand again appears: oversupply. Oversupply lowers the product's marginal utility. Consumers redirect their purchasing power to other products, and the whole economy is pushed into a supply-and-demand state for every product conditioned by the oversupply of that first product. Other products then become unbalanced too, and the spiral grows, producing an unbalanced economy.

More background: increases or decreases in supply stem from decisions to invest or disinvest, and economic agents are the ones making those decisions.

In a persistently unbalanced economy, where the risk of oversupply and resulting debt is high, economic agents will be reluctant to invest, and the economy will likely slide into recession or depression: crisis.

How can the economy achieve an efficient balance of supply and demand? How do economic agents know when demand for their products is consistently rising or falling? One of this article's central theses is that economic agents learn whether demand for their particular products is consistently rising or falling by observing changes in those products' relative prices.

Now the concept of relative price is introduced in the analysis.

Here, relative price means the amount of other products exchanged for one unit of a product at a given time and in a given market.

The most important function of relative prices is to convey information about a product's levels of supply and demand. A rising relative price signals agents to increase that product's supply; a falling relative price signals them to decrease it.

If prices are consistent, meaning they are affected only by real economic factors such as market conditions, economic agents know when to invest or disinvest. Economic decisions then rest on a sound basis, and supply will track demand without creating harmful gaps (underproduction or overproduction).

Economies must therefore have a consistent price system.

Our inconsistent price system

The great problem, however, is that prices are not consistent, because of a long-standing error that all economies make: expressing prices in quantities of money.

The quantity of money is controlled by monetary authorities and by other agents such as banks. These agents can change the quantity of money at their own discretion, and in practice they do so constantly.

When the quantity of money rises, prices stated in monetary units rise as well; when it falls, those prices fall. A change in a product's price level caused by a change in the amount of circulating money is not a real change in its relative price. Prices then lose their informational role regarding changes in real relative prices and in real supply and demand.

Economic agents, however, read monetary inflation or deflation the way they are wired to read real inflation or deflation: they use the signal to decide whether to invest or disinvest in production. The signal reaches some sectors before others.

In that situation, underproduction or overproduction is likely, because prices are not conveying information about actual relative price changes, which is essential for correct investment or disinvestment decisions. Instead they convey information about monetary manipulation and mislead economic decisions. Crisis always lies ahead in that scenario.

The solution

This article proposes a way to restore the price system's original and fundamental informative function: reporting changes in the relative prices of products.

A simple yet far-reaching solution: create a wholly abstract global price unit or scale, so that the scale or unit in which prices are stated is separated from the scales in which amounts of currencies are stated.

Under this solution, an abstract price scale or unit would be tied to currencies through conversion rates. The process is in fact the same one used to convert foreign currencies into local prices in markets where vendors accept foreign money (for example, in Argentina, where the Brazilian Real is informally accepted). Sellers tell buyers which exchange rate they are applying.

Prices stated in such independent price units would be tied to accepted currencies through variable conversion rates. For instance, at a given time in a given market, a sandwich might be labeled 10 price units and a glass of water 1 price unit, with a conversion rate of 2 currency units (dollars, say) to 1 price unit. Because markets can vary those conversion rates freely, at another time in the same market the ratio might be, for example, 3:1. If other currencies are accepted in that market, each accepted currency would have its own conversion rate at a given time.

It is important to stress that this solution does not mean abolishing currencies. Currencies would continue to exist as they do today and would remain very useful for facilitating commerce. The difference is that prices would no longer be stated in the same unit as currencies; instead, they would be linked to currencies through variable conversion rates.

By creating and using an independent price unit or scale and linking it to currencies through variable conversion rates, the new price system would consist of real relative prices stated in independent price units, plus conversion rates that tie those independent prices to currencies.

This is a genuinely significant change, because markets gain a new way to absorb changes in the amount of circulating money: they can adjust conversion rates instead of adjusting prices. So if, in the example above, circulating money doubles, the market can simply set the conversion rate at 4 currency units to 1 price unit (4:1). The sandwich's labeled independent price would stay at 10 price units, and the glass of water's price would stay at 1 price unit.

In the other scenario: if, for some real reason, demand for water rises while demand for sandwiches stays the same, a real relative change in prices would occur. A glass of water might then be labeled, for example, 2 price units, while the sandwich's price stays at 10 price units. Since the amount of circulating money is unchanged, conversion rates would not move; only relative prices would change.

The conversion rates between prices and currencies act as a buffer, much like pH buffers in chemistry, reducing the impact of monetary manipulation on relative prices. Prices stated in an independent price unit or scale can then retain their original informative function of signaling to markets the real relative changes in supply and demand, giving economic agents a reliable basis for investment or disinvestment decisions. This is a consistent path toward stabilizing the world economy.

Reasons to consider investigating this proposal further

Creating an abstract, independent price unit or scale appears feasible, just as other abstract scales such as the Kelvin scale, or even the metric scale, proved to be. As with those scales, of course, a starting point is needed.

A conversion process similar to the one described above for a new price system already takes place in markets where sellers formally or informally accept foreign currencies. They use exchange rates to relate prices stated in local currency to foreign currencies. In such markets, from a foreigner's perspective, prices stated in an amount of local currency behave like the entirely abstract price proposed here.

The buffering effect of conversion rates would reduce the enormous economic power that monetary agents hold today. Monetary devaluation (in terms of conversion rates), on the other hand, would be counteracted by sellers competing to offer attractive conversion rates.

A global price unit or scale would make global trade easier, since relative prices would be more transparent.

This proposal is a genuine alternative to proposals for a single global currency or for currency baskets. Currencies would remain diverse and would be issued just as they are now.

This is an ambitious proposal. If implemented, it could transform the entire global economic environment, which is also why it calls for further discussion and scientific testing, such as empirical tests in closed experimental markets.

Cite this paper

APA

Oliveira, F. (2012). A global price unit independent from currency units as a solution for the world economy. Open Science Repository Economics, Online(open-access), e06131923. doi:10.7392/OpenScienceRepository.Economics.2012.06131923

MLA

Oliveira, Francisco. “A Global Price Unit Independent from Currency Units as a Solution for the World Economy.” Open Science Repository Economics Online.open-access (2012): e06131923. Web. 2 Sept. 2012.

Chicago

Oliveira, Francisco. “A Global Price Unit Independent from Currency Units as a Solution for the World Economy.” Open Science Repository Economics Online, no. open-access: e06131923. http://www.open-science-repository.com/a-global-price-unit-independent-from-currency-units-as-a-solution-for-the-economy.html.

Harvard

Oliveira, F., 2012. A global price unit independent from currency units as a solution for the world economy. Open Science Repository Economics, Online(open-access), p.e06131923. Available at: http://www.open-science-repository.com/a-global-price-unit-independent-from-currency-units-as-a-solution-for-the-economy.html.

Science

1. F. Oliveira, A global price unit independent from currency units as a solution for the world economy, Open Science Repository Economics Online, e06131923 (2012).

Nature

1. Oliveira, F. A global price unit independent from currency units as a solution for the world economy. Open Science Repository Economics Online, e06131923 (2012).

doi

Research registered in the DOI resolution system as: 10.7392/OpenScienceRepository.Economics.2012.06131923

This work is licensed under a Creative Commons Attribution 3.0 Unported License.