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Money-Bargaining

Summary
Money-bargaining theory offers a more realistic account of monetary exchange than neoclassical economic theory. It is the monetary counterpart of support-bargaining.

The basic proposition of money-bargaining is that we select by reference to situation. Consumers, for example, buy with reference to their situation, rather than in accordance with the law of diminishing utility, as proposed in neoclassical theory.

This means that consumer choice is confined to a range of products and services relevant or fitting to consumer situation, rather than the universal markets of economic theory. Consumers living in a certain location will be limited to suppliers near to that location for most of their purchases. Consumers owning a certain car will want spare parts manufactured by the same company. Shoes must be of a size that fit the foot that is to wear them. Situation is the determinant of choice.

Origins and development of the theory of money-bargaining
The theory of money-bargaining has been developed alongside the theory of support-bargaining. ‘A Theory of Support and Money Bargaining’ (TSMB) was published in 1984 following research at the London Business School. This book develops the idea of situation related consumer choice as a derivative of the idea of paradigm related understanding used by Thomas Kuhn in his theory of scientific revolutions.

A more developed version of the theory of support- and money-bargaining was published in 2004 as ‘Getting It Right: Economics and the Security of Support’ (GIR). This book contrasts situation-related consumer selection with marginal theory and suggests that economic theory is an outcome of intellectual support-bargaining. In 2008 ‘Support-Bargaining: The Mechanics of Democracy Revealed’ (SB) was published. This book has substantial economic content, showing that neoclassical theory pursues many concepts in defiance of common observation to establish the value of individual enterprise and minimal regulation. A new account of foreign trade is provided and contrasted with the neoclassical trade theory of David Ricardo and the joint theory of Eli Heckscher and Bertil Ohlin.

Situation-related selection
Money-bargaining theory differs most essentially from neoclassical economic theory in that consumer choice is dictated by situation, rather than by diminishing marginal utility. Purchases are selected to fit situations. Houses, furnishings, vehicles, employment, location, friends and relations all constitute elements of situation. The importance of group formation through support-bargaining gives friends, relations and wider communities their importance as references for consumer selection. We buy what we anticipate will be approved of by our circle of friends or more widely in the community. We may, for example, be concerned to demonstrate our support for environmental protection. Time is normally of significant situational importance, since many of our purchases must fit in with time schedules relating to work or other commitments. Situation dictates what is useful or desirable, and what is not.

Situation-related selection means that consumers are concerned with features of products as much as with products themselves. A certain colour scheme of furnishings means that a new piece of furniture must have a colour feature that fits with the existing scheme. If there are seven children in a family, a car with many seats is required.

Consumer situations include their budgets. A budget reconciles the disparities in time between receipt of revenues and outlay of expenditures. Most consumers obtain revenues for their budgets through employment. All requirements based on non-budgetary situation have to accord with budgetary situation before acquisition can proceed.

Markets as bargaining sets
Situation governs the choice open to a consumer. The range of options fitting to a consumer situation is understood as a ‘bargaining set’. People in similar situations will require similar features, so companies will develop products with similar features for sale across different locations. This understanding of ‘markets’ is held to be closer to what is commonly understood by the word than the neoclassical concept of universal markets in homogeneous products. When people say they will ‘see what’s on the market’, they mean they will check the shops in their vicinity for products with the features they require, rather than rush round the world to check all possible manifestations of a particular product.

Companies as money-bargaining agencies
In neoclassical economic theory a firm produces a homogeneous product up to the point where the marginal cost of production is equal to the market price. The market price is determined by aggregate supply and demand, independent of any particular firm. Joseph Schumpeter notes that companies have their own markets. He sees the capitalist process as ‘creative destruction’, involving the incessant rise and fall of companies, rather than a matter of marginal adjustments. He understands capitalism largely in terms of ‘big business’ and emphasises the importance of technological innovation as integral to the rise of companies.

Money-bargaining theory extends the Schumpeterian understanding of companies. Companies are conceived as specialist money-bargaining agencies. The condition for viability of a company is that Revenues exceed Costs, or:


 * Sales x Price > Production x Unit Cost

These four variables are inter-dependent. Sales depend on price, which is dependent on unit cost, which is in turn dependent on the level and type of production. Unit costs depend also on the technology used in production. Price is determined by reference to unit cost and the companies bargaining position – essentially the distinguishing features of its product. To be viable, a company must establish a production level with a unit cost of production that permits a sale price at which the level of production can be sold. A company must adopt a format from the start that meets the viability condition, or that can be readily adapted to viability. Technology plays a major role in the establishment of viable formats, both through the creation of new products and the facilitation of production.

Locational format
Viable format for virtually all companies (the exceptions being mostly online companies) is dependent in part on locational format. To keep down unit costs it is necessary to keep transport costs to a minimum, subject to overall viability of format. To get the required volume of sales, it is necessary to ensure that the sales point is accessible to buyers. The concentration of economic activity in urban settlements is attributed to the requirements of viable format. Particularly for those businesses which depend on the customer going to the point of sale (i.e. retailing, personal services) it is easier to achieve viable format in an area of population concentration than in an area of low population density.

Considerations of locational format give transport a major role in money-bargaining theory, in contrast to neoclassical theory, where locational issues are difficult to accommodate and largely ignored. The expansion of transport infrastructure in the form of roads, airports, ports, etc. is seen as extending the bargaining sets of an economic system. The introduction of new technology by road, air and sea transport companies reduces transport costs and facilitates the format of viable businesses.

Resources in a money-bargaining system
The basic concept of neoclassical economic theory is the efficient allocation of homogeneous resources of land, labour and capital. Resources in economic theory are selected and defined in a way that fits them to the economic model. In money-bargaining resources of many different kinds, with different features, are drawn in to the bargaining system as required. Some resources, such as wind, waves and sunlight, are freely available.

People are understood more as agents of bargaining systems rather than as resources. They engage with the bargaining system as employees, consumers and businessmen and women.

The finite supply of resources, their fundamental nature, and their widespread use are important not only because they limit the size of a bargaining system, but because these characteristics provide opportunities for strong bargaining positions. Whole societies in many parts of the world have been based on the ownership of land, because ownership of land confers strong bargaining positions. The idea that capital gave its owners the power to exploit workers was a source of major confrontations in the twentieth century.

Money-bargaining and governance
Money-bargaining and support-bargaining systems are inter-dependent. Money is essential to governance firstly to pay the costs of government administration and such services as are designated for provision through the support-bargaining process, and secondly to finance political parties.

Money for the former purpose is raised through taxation and other means. Few constitutions provide for the raising of money for political parties. Parties acquire funds mainly from private donors. Democratic theory does not recognise the need for political parties, and consequently is unaware of any problem of financing them. The finance of political parties has brought great controversy in many countries.

Private companies format on the basis of sales to agents with budgets. This means selling mainly to individuals or other companies. Companies cannot accommodate communal interests unless they are budgeted through some agency. For the most part, communal interests are budgeted through the state, nationally and locally. In the period following the Second World War states in Western Europe engaged extensively in the provision of goods and services on grounds of communal interest and social justice. Later, there was a reaction involving the privatisation of state enterprises and provision of various utilities through private companies within a framework of state regulation. The choices made are understood in money-bargaining as attempts to harness the effectiveness of private companies in minimising unit costs while maintaining opportunity for the state to protect and advance communal interest.

Interaction between money-bargaining and support-bargaining systems includes the use of money to pervert outcomes of support-bargaining.

Foreign trade in a money-bargaining system
The ‘viable format’ account of companies focuses attention on unit costs. Unit costs are the primary influence on prices, and hence on sales. Companies with global options for location will locate where their unit costs are lowest. Where there is competition for resources the company that has most to gain in its favoured location will outbid rivals for resources in that location. Relative advantage is apparent in the ratio of unit costs.

In money-bargaining it is the ratio of unit costs that is critical to locational advantage, rather than, as in economic theory, the ratio of labour productivities in different locations (Ricardo) or the ratio of resource costs (Heckschler-Ohlin).

The emphasis on company formats in money-bargaining means that the automatic adjustments of neoclassical theory are no longer operative. The effectiveness of a nation in international trade depends on the effectiveness of its entrepreneurs in establishing viable business formats. It is argued that the growth of international trade is mainly a consequence of people learning the skills of formatting businesses, and reductions in transport costs that have facilitated format of viable businesses, rather than the deregulation of trade. The advantages of deregulation have largely accrued to the companies of developed trading nations that can effectively negotiate access to markets on a reciprocal basis, rather than to all countries through the ‘Most Favoured Nation’ principle of the GATT treaty, latterly incorporated in the WTO.