Social Trade Organisation

A bigger bang for your buck

Optimal spending from the point of view of the income generating effects of the flows of purchasing power. This text introduces a new way to look at optimal spending, by introducing the incomeeffects of the flows of purchasing power into the analysis. In short there is a bigger chance that your expenditure at some point in time will return to you or the company you work for as purchasing power (and thus as income) buying one of your products if the money would be spent locally, then it would if the same expenditure was done outside your community. In the first case the money will continue to create supply and demand in the local context, while in the second one the link between that money and the local economy is lost. From this point of view, companies and consumers find themselves in a prisoners dilemma, every time they choose between local spending and global spending: when money is spend globally, possibly cheaper products are bought, thereby creating a short-term advantage (low costs). At the same time, the outflow of this purchasing power creates a liquidity leak in the community that can have the longer term effects of diminishing local circulation, and thereby tempering the market. This is especially true in the cases of poor areas that have a net deficit in import/export relations and/or know less creation of money. If everyone in the above example would choose for his short-term individual interest, the total sum of individual choices can create an overall negative impact. A well-known and broadly accepted method to realize a more optimal outcome of this kind of prisoners dilemma, is that the choice is taken from the individuals to governments in order to create the optimal outcome for everybody. Investments in the common goods, such as roads, are a good example. For other dilemmas such solutions are not found, with economical loss for the community as a whole as a result, creating an interesting field for economists to contribute through finding new solutions. In this article we discuss the dilemma that is created by imperfect information of individual consumers on the effect of their expenditures in terms of income-generating effects towards them in the future. Governments trying to diminish imports by introducing trade-barriers, are a typical exponent of one specific answer to this dilemma. The STRO-group however takes another approach, one inside the market, and introduces innovative market-dynamics that automatically result in optimum results. In this case, the goal is to take the responsibility for optimal choices in spending back to the market.
http://www.socialtrade.org

Social Trade Organisation

The central question of this article therefore is: Can a private initiative help consumers to solve the prisoners dilemma of the imperfect information on the income-generating effect of their expenditures when buying products? Most of the time consumers living in poor areas are buying or investing (through their savings) in other regions, because of cheaper prices and higher yields. Individually, this is the best choice for everybody. However, the collective outcome is not beneficial at all. If everybody brings savings and purchasing power to rich areas, the accumulated result of the behaviour of all these individual actors will be low values of their local assets and little economic activities locally. Their investments in faraway metropolises or even foreign countries leave the local producers unattended. It is not the problem that the purchasing power leaves the region, but it is that it leaves without first functioning properly as a stimulus for economic purchasing power and means of transaction for the local economic activity. As a result there will be less income generating opportunities for all individuals living in these deprived areas and continuance of the conditions of deprivation. The outcome of positive results for the individuals is more then outweighed and the sum ends in a negative collective outcome. A new light on protectionist policies It is easy to understand that if everybody would consume locally, the local economy would benefit from the local demand and liquidity. This is the logic behind such strategies as protectionism, mercantilism, and subsidies. Historical data show, of course, not only positive effects of these approaches but also negative aspects of protection such as lack of competition caused by the missing discipline that outside markets would force on the local producers, governmental paternalism etc. It is strange, however, that economic discussion seems to stop at this point: nowadays most often it is taken for granted that it is impossible to have the positive effects of protecting local markets without introducing the negative ones. However, economists that listen to the plea of Kofi Anan to start rethinking development theory could try to look for approaches within another paradigm, that focuses on the positive motivations for protecting the local markets, without introducing the negative side-effects. STRO suggests to re-open the debate on questions like: Would an import tax on specific products that can be produced locally allow deprived regions to grow step by step towards entering the world market on equal terms, gradually offering the possibility to reduce the percentage? Could the negative effects for consumers of a deprived region if they would have to buy for a period low-quality or more expensive local products be

http://www.socialtrade.org

Social Trade Organisation

offset by the impact on economic development, and therefore in the longer run to higher quality or lower costs for the same products? Would this kind of measures not create a lot of people trying to ciromvent the measures and thus adding instability and moral erosion? Game-theory approach. The prisoners dilemma, in this case the one that makes consumers buy for cheapest prices even if this minimizes the future income generating effect of their purchasing power, can be very well described by game-theory. Since economy is made up out of a total sum of individual short-term decisions, poor areas end up trapped in the outcome of this prisoners dilemma: all individuals will continue to buy externally, therefore diminishing local demand, and thus the stimulus on local entrepreneurship. Hereby, the region becomes eternally dependent on external goods and aid. In this example, we introduce a short (and obviously extremely simplified) example on how to analyse this dilemma through a game-situation, while at the same time suggesting an innovative solution. A little game that shows the dilemma Lets say 10 players are getting a text that gives them information on their identity: You are a Brazilian farmer and you need to buy a tractor. You need the tractor, but you can hardly afford it, and are looking after your own interests. You have a choice between buying a tractor produced in your own region or a imported tractor of the same quality, lets say from China. The Chinese one costs R$ 300,000 including importation, whilst the Brazilian one is slightly more expensive at R$ 320,000 From the 300,000 spent in Brazil by you or anyone else, you will get, at some time in the future, an additional income of R$ 6,000. The cause of this is that the money that you or others spend in your own country, will circulate there as purchasing power, thus resulting directly or indirectly in demand for your products. Please take a little piece of paper and write down which tractor you are going to buy. The answers of the players are used to make an inventory of the choices being made. The outcome will not be surprising: most, if not all, farmers will decide to buy the Chinese tractor. The result of these individual choices is well known: leaking away of circulating liquidity from local circulation and pressure on national currency. Our target in this game is to find an optimal mix in specific choices for both individual short term interests for best prize and quality as well as collective long term interests of a living local economy that provide

http://www.socialtrade.org

Social Trade Organisation

better income (through locally circulating liquidity), while at the same time improving constantly the quality/prize-relation of the local production. How can the individual choice be influenced? The game continues with a second round. Now all farmers, but one, are instructed: Maybe you did not realize that not only your own expenditures result in more local circulation and demand, but also that of others. If you ALL would buy a Brazilian tractor, everyone will have additional income of 10 times 6,000 = 60,000. This extra income compensates more than the 20,000 extra costs. If you all buy local tractors, you all will, in the end, have a net cost of 260,000 instead of 300,000! Please take a little piece of paper and write down which tractor you are going to buy. However one player gets a different instruction: Everybody has been instructed to buy locally so that you all will have additional income of 10 times 6,000 = 60,000. If you alone buy the Chinese tractor, you can have the advantage of the 9 times 6,000= 54,000 plus the 20,000 that you economize because your tractor is cheaper. So you can expect to have a net result of 246,000! Please take a little piece of paper and write down which tractor you are going to buy. The expectation is now that there are 9 pieces of papers expressing the intention to buy a local tractor, and 1 buying an imported one. The players that bought a local tractor expecting 60,000 in return from local circulation and demand, get now only 54,000. The 10th one is actually a free-rider. Probably the 9 farmers who bought local tractors are discontent and looking to each other to discover who is the fraud. In the next round people do not get any more instructions and they just fill in their new choice on a piece of paper. The expectation is that there is a race to the bottom: slowly or quickly, players stop buying the more expensive local tractors in order to cause more local circulation, because the others who do not do that, are cheaper off. Some will stick for some time to buying the Brazilian tractor, but most will switch quickly. In the end, everybody is paying 300,000 again for the imported tractor, without having any return from local circulation and demand. In a subsequent round players are given the chance to discuss their behavior and organize collective action. Expectations are that people start to discuss how they can avoid the loose-loose outcome.

http://www.socialtrade.org

Social Trade Organisation

The game shows a potential solution for this dilemma In most of the trials that were held, the players came to the conclusion that they need to organize themselves, in order to be able to make the collective choice for the local tractor, thereby creating a long-term gain, while opting for a short-term individual loss: the more expensive tractor. And this is the issue that is at stake if we talk about developing deprived local economies through better functioning of the markets: how can the long term collective interest of buying local be realized, when there is a short term individual interest of buying global? Often, the players of the game chose for a solution wherein everybody agreed to bring together everybodys 320,000 and do the purchase collectively. This kind of solution would be comparable to a centralized governmental solution, in which the state takes over the decision from the individual level. However, if it were the state to do the purchasing, this could imply the loss of the effectiveness of the market component, while introducing side effects such as bureaucracy, and opportunities for corruption, inefficiency and reduced freedom of the individual. This outcome can also be compared to consumer cooperatives, which realize collective purchases, taking over the market risks from the individuals. Apart from positive effects on prices (through whole-sale negotiations), negative aspects are that specialised market decisions on product-specificities, now have to be optimised through one channel. This is not possible for all kinds of products or services. What we are looking for, is a solution that both creates the win-win solution of optimizing local consumption, while at the same time giving consumers all freedom to make their own evaluation of what suits them best, and decide concordantly. For the individual consumer to choose for this solution, the essence is to anticipate the future benefits of collective local consumption towards the short-term individual decision-taking moment. In a following round the players are offered: You get an interest-free credit of 20,000 if you buy the Brazilian tractor. Of course, the players are happy to go along to this offer. They can buy the Brazilian tractor for the same price as the Chinese one and know that in the longer run it will also lead to a 60,000 additional income, with which they can pay back the 20,000.

http://www.socialtrade.org

Social Trade Organisation

Now where does the offer of the 200,000 in interest-free credit come from? If the offer to provide the 20,000 would have come from the government, it could try to charge tax on the extra local circulation in order to earn back the 200,000 invested. A private enterprise that would like to offer the interest-free credit should also be able to lay its hand on a part of the extra gains that would be generated in the local economy as a result of the extra economic activity caused by the purchases of the tractors. The solution STRO developed for this is called C3 (Consumer and Commerce Circuit), which can be described as an Exchange Network, owned by its participants, that is capable to administer the extra economic activities created. The 300,000 is used as the guarantee fund that in the end makes sure that all holders of claims within the network are rewarded properly. Basically it is prepared to pay the 20,000 as a Bonus for those who buy the Brazilian tractor as long as the tractor company is willing to accept a claim in the network on future goods and services of other members as a payment. Since the international circulation is taxed (with a Liquidity Tax, calculated over time), the Bonus is earned back. Of course, it is essential that the tractor company can pay its suppliers and costs with the claim he holds. So the 20,000 paid to the ones that brought into the network their purchasing power of 300,000 can be seen as an upfront Bonus for spending within the Network, and thus creating extra local demand. From then on, the money is available in exchange for the internal claims to any member that has the claims, providing this member is willing to pay the percentage that has been offered as Bonus, in this case 2/30. STROs experiments show that in reality this is not so easily done: The weaker the local economy is, the faster the claims will hoard at some company that really is not capable to spend it with other members. If this company will not become a member and would not accept the claims on other members, the tractor factory will not accept it in the first place. At some point the Liquidity Tax will create some income, so maybe the reduction could be 1/30. If the network is capable to grow or to link up to another network at some point the internal taxation will make up for all the reduction. From that moment on this private initiative can indeed solve the consumers prisoners dilemma. How big the initial investment will be is hard to tell in general. The Social Trade Organisation has started C3 initiatives in Brazil, Uruguay and El Salvador. Several other Latin-American countries are interested to start C3s in their countries.

http://www.socialtrade.org