Oliveira2012-A New Global Price Unit Independent From Currency Units Proposed as Solution for the...

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Original article

A new global price unit, independent from currency units,

proposed as solution for the world economic crises

Francisco V de Oliveira, Jr., So Paulo, Brazil.

This article proposes the creation of a global price unit/scale independent from currency units as a way to

achieve stabilization of the world economy. It is based on the reasoning that prices do not need to be

expressed in terms of currency units and that such traditional way of expressing prices is wrong and

misguides decisions of investment or disinvestment, leading economies to crises. As an alternative to the

use of currency units to express prices, it is proposed the use of an abstract price unit/scale, similar to

other scientific abstract scales, like the Kevin scale, associated with the use of variable conversion rates torelate the abstract price unit to currency units. With such new global price system composed of an

independent price unit and conversion rates markets can lessen monetary effects upon prices and have a

clearer view of real relative price variation, achieving economically sound decisions of investment or

disinvestment and, thus, stabilization of the world economy. Since this proposal has a great potential

impact on the global economy, further discussions and experimental tests are still necessary. The article is

written with a true or false question after each theoretical item to facilitate evaluation of its entire or

partial merit and correction or improvement of its theoretical foundations where needed.

Key-words: economics, economic crisis, monetary reform, price theory, price system, price unit, currency

reform, poverty solution, economic stabilization.

Proposed theory

Separation of currency scales from the price scale, by means of creation of an abstract price unit, is a solution

to achieve long-term stabilization of the world economy and prevent economic crises. (True or false? 01)

Theoretical background

The same unit with which quantity of money is expressed, for example, 1000 dollars, is also used to express

prices, for example, a thing called X costs 1000 dollars. Is it really necessary or even beneficial? This is the

main question. To answer it the following theoretical steps must be understood.

Economic stabilization is not a matter of continuous economic growth. Indefinite growth will lead to

overproduction and overpopulation of the world with industrial products. Marginal utility of things will

sharply decrease. (True or false? 02)

Economic stabilization is a matter of balanced supply and demand. (True or false? 03)


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Regarding a product, increasing demand pushes for increase of supply and decreasing demand pushes for

decrease of supply. (True or false? 04)

To balance the economy, that is to say to balance supply and demand, economic agents must perform such

movements of increasing or decreasing output accordingly to the increase or decrease of demand. (True or

false? 05)

What happens when such dance of supply around demand is not well performed? Note that the following

discussion is done without citing the concept of prices, further the concept will be introduced. Consider an

initial balanced economy.

When increase in supply of some product does not follow increase in demand, the gap between demand and

supply sharpens. Undersupply increases marginal utility level of the product. Consumers will likely dispute

the low supply and some of them will get a low portion of the product output, while others will get more.

Larger portion of their purchase power will be directed to such dispute and other products will suffer

demand reduction due to less portion of purchase power directed to them. So the entire economy will bedirected to a state of supply and demand for every product conditioned (maintained) by the first unbalance

of supply and demand of that first product discussed. Other products will then have their supply and demand

unbalanced and the spiral grows creating an unbalanced economy. (True or false? 06)

When decrease in supply does not follow a decrease in demand (or, in other words, when supply is increased

but demand has not increased proportionally before), a gap between supply and demand will also be

created, there will be oversupply. Oversupply decreases marginal utility level of the product. Consumers will

direct their purchase power to other products and the entire economy will be directed to a state of supply

and demand of every product conditioned by the oversupply of that first product. Other products will then

have their supply and demand unbalanced and the spiral grows creating an unbalanced economy. (True orfalse? 07)

More background: Decisions of investing/disinvesting are the causes of increase or decrease of supply.

Those decisions are taken by economic agents. (True or false? 08)

Under a continuous unbalanced economy, with high risk of creating oversupply and consequently debt,

economic agents will fear decisions of investment and the economy will probably go into a recession or

depression: crisis. (True or false? 09)

How to solve the need of having an efficient balance of supply and demand in the economy? How economic

agents know when demand of their specific products is consistently increasing or decreasing?

This is one of the most important theses of this article: Economic agents know when demand of their specific

products is consistently increasing or decreasing by looking at changes in the relative prices of the products.

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

By relative price it is meant here the quantity of other products exchanged for one unit of a product in a

given time in a given market.

The more important function of relative prices is information about levels of supply and demand of a

product. When the relative price of some product increases, it is a signal for agents to increase supply of the


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product. When the relative price of some product decreases, it is a signal for agents to decrease supply of the

product. (True or false? 10)

If prices are consistent, which means only affected by real economic factors like market conditions, the

economic agents know when to invest or disinvest. Economic decisions are taken on a sound basis and

supply will flow around demand without creating harmful gaps (underproduction or overproduction). (True

or false? 11)

So, economies must have a consistent price system. (True or false? 12)

Our inconsistent price system

The great problem, however, is that prices are not consistent due to a persistent error all economies undergo

for a very long time: using quantity of money to express prices.

Quantity of money is controlled by monetary authorities and other agents like banks. These agents can vary

the quantity of money at their sole discretion. And they indeed do that. (True or false? 13)

When quantity of money increases, prices, expressed in monetary units, also increase. When quantity of

money decreases, prices, expressed in monetary units, also decrease. (True or false? 14)

Variation of price levels of a given product due to variation of amount of circulating money isnt real variation

of its relative price. (True or false? 15)

Prices then lose their informational function regarding variation of real relative prices and variation of real

supply and demand. (True or false? 16)

The economic agents, however, interpret monetary inflation or deflation like they are set to interpret real

inflation or deflation: they use the signal to decide whether invest or disinvest in production. And the signal

reaches first some sectors. (True or false? 17)

Under or overproduction, is the situation above, is likely to occur, since prices are not giving information of

real relative price variation, fundamental for correct decisions of investment or disinvestment. They are

indeed giving information about monetary manipulation and misguiding economic decisions. (True or false?

18)

Crisis is always ahead that scenario.

The solution

In this article a solution to rehabilitate the original and fundamental informative function of the price system,

which is informing variation of the relative price of products, is proposed.


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A simple yet very impacting solution: Creation of an entire abstract global price unit/scale in order to

separate the scale/unit with which prices are expressed from the scales with which amount of currencies is

expressed.

In this solution, an abstract scale/unit of prices would be related to currencies by conversion rates. The

process is very the same as the one used to convert foreign currencies into local prices in markets where

foreign currencies are accepted by vendors (for example, in Argentina where Brazilian Real is informally

accepted). Sellers tell buyers what are the exchange rate they are considering. (True or false? 19)

Prices expressed in such independent units of price would be related to accepted currencies by variable

conversion rates. For example, in a given time in a given market, a sandwich would have its price labeled 10

units of price, a glass of water 1 unit of price and so on, with a conversion rate of 2 units of currency (dollars,

for example) equals 1 unit of price. Since those conversion rates are freely variable by markets, in another

time in the same market, the relation could be, for example, 3:1. If other currencies are accepted in the same

market, every accepted currency would have its own conversion rate in a given time. (True or false? 20)

It is important to highlight here that this solution does not mean elimination of currencies. Currencies would

exist as they exist today and they would still be very useful to facilitate commerce. The difference, however,

is that prices would not be expressed in the same unit currencies are expressed, moreover, they would be

related to them through variable conversion rates.

By creating and using an independent price unit/scale and relate it to currencies through variable conversion

rates, the new price system will be composed by real relative prices expressed in independent units of prices

and by conversion rates relating such independent prices to currencies.

This a very meaningful change since markets gain a new way of accommodating variation in the amount of

circulating money: they can vary the conversion rates instead of varying prices. (True or false? 21)

So, if in the example above the circulating money increases to a double, the market can simply set the

conversion rate in 4 units of currency to 1 unit of price (4:1). The labeled independent price of the sandwich

would remain the same: 10 units of price. As well as the price of a glass of water would remain 1 unit of

price.

In other scenario: If, for some real reason, demand for water increases and for sandwich stays the same, a

real relative change in prices would occur. The price of a glass of water would be labeled, for example, 2 units

of price while the price of the sandwich would remain 10 units of price. Since amount of circulating money

stays the same, there would be no variation of conversion rates, only real relative prices would change. (True

or false? 22)

The conversion rates between prices and currencies act as a buffer just like pH buffers of Chemistry to reduce

the impact of monetary manipulation upon real relative prices. Prices then expressed in an independent

price unit/scale can keep their original informative function of signaling to markets the real relative variation

in supply and demand, thus, providing the economic agents with a reliable criteria for investment or

disinvestment decisions. This is a consistent way towards stabilization of the world economy. (True or false?

23)


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Reasons to consider investigating this proposal further

Creation of an abstract independent price unit/scale seems to be feasible, just like were other abstract scales

like the Kelvin scale or even the metric scale. Of course, as in those scales, a starting point is necessary. (True

or false? 24)

A conversion process similar to the described above for a new price system already occurs in markets where

foreign currencies are formally or informally accepted by sellers. They use exchange rates to relate prices

expressed in local currency to foreign currencies. In such markets, from the foreigner point of view, prices

expressed in amount of local currency act like the entirely abstract price proposed here. (True or false? 25)

The buffering effect of the conversion rates would lessen the present massive economic power of monetary

agents. Monetary devaluation (in terms of conversion rates), in the other hand, would be counteracted by

sellers who would compete to offer attractive conversion rates. (True or false? 26)

A global price unit/scale would facilitate global trade since relative prices would be more evident. (True or

false? 27)

This proposal is a real alternative to the proposals of a single global currency or even those of currency

baskets. Currencies would still be diverse and issued the same way they are now. (True or false? 28)

This is a very ambitious proposal to be ignored. If implemented, it would possibly change the entire global

economic environment. (True or false? 29) This is also the reason why it needs further discussions and

scientific tests, for example, empirical tests in closed experimental markets.

Author contact:[email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]

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