Thursday, 19 February 2009

A Glorified Cafe Coupon Economy

Back in College, cash-strapped students could get around the fact that they were running down their reserves of money by signing up for 'Cafe coupons', little bits of yellow paper that were worth 5 bucks each and could be redeemed at the Cafe, with the price of each wad of coupons put onto their term bills for their parents to pay off. I wasn't much of a fan of the concept, mainly because I wasn't all that fond of the limited Cafe fare (and really except for the scrambled eggs and the mince, pretty much everything else you could get better and cheaper at the D-school canteen). Far better, then, to get my hands on some real cash (usually through quiz winnings), and spend it as I wished. 
Local currencies, in many ways, remind me of those cafe coupons. To quote from Wikipedia, "a local currency, in its common usage, is a currency not backed by a national government (and not necessarily legal tender), and intended to trade only in a small area." While these currencies may differ from each other on certain characteristics, they all usually have at least one thing in common - there's a fixed exchange rate between a local currency and the national one, manipulated by the issuer of the scrip. Their supporters defend them mainly on the following grounds: that they help to boost local purchasing power and hence aggregate demand in the community, encourage local businesses and, since they restrict the transactions to being within the local community, are, supposedly, environment-friendly.
If you think about it though, these aims are either specious, or can be achieved better through just using the usual currency instead. For starters, consider the cafe coupon economy: while the coupons may have allowed students to spend more at the cafe, it did cause them to substitute away from other places that they could have been frequenting - the D-school canteen or Chhung town, for instance, choices that would be available to them if they had cash instead. Further, since man does not live on bread, or even toast and chai alone, they would be limited in their ability to procure other supplies since stores outside of college would not accept the coupons. Thus while the coupons push up demand for the cafe, they don't really help any other businesses in the area, while restricting the consumers' choice. Of course, this is touted as an advantage of a local currency - the fact that it restricts purchasing power to only a smaller set of establishments. 
In the case of cafe coupons, since the students aren't directly paying for the coupons, there's a jump in aggregate demand within the campus economy with their increased expenditure, although it's actually due to a transfer of funds from their parents outside the system rather than an increase in the students wealth through productive enterprise. Similarly, in some cases where the community is facing a recession, the local currency, it s is claimed, may stimulate aggregate demand. The Worgl experiment is touted as one such successful case. However, this too may have been partly because it allowed for an additional infusion of funds through the fractional reserve banking system, which boosted aggregate demand. While getting banks to lend is a crucial element to sustaining demand, it is not predicated on having a local currency.
For most situations, though, rather than an infusion of funds, it is usually a case of people converting their actual currency, which they would have spent anyway, to the local scrip at a given exchange rate and then spending it, which basically seems more like a redistribution of demand rather an actual increase in it. Now, the exchange rate can be set in such a way that using the local scrip would provide the customer with a discount. While this is an improvement for the customer, it's a hit that the merchant establishments have to take, hoping to make up in volumes what they lose in price. But then if you really like a local shop, say because your friends work there, then to encourage their business you should be paying in actual currency rather than the scrip so they get full value for their product, right? On the other hand, if they do want to offer a discount, making it clearer in terms of actual currency might make the benefit clearer to the customer, which might stimulate demand further (which would work better - "5% discount on everything", or "Berkshares  accepted"?). 
Setting the exchange rate the other way around, though, can make matters better for the merchant while making them worse for their employees and/or consumers. By paying employees in a scrip with an inflated exchange rate and then getting them to spend it only at the company store, employers can easily make super-normal profits at their employees' expense (Look up the concept of company stores/the truck system on Wikipedia for more). Strangely enough, this has been quoted as an advantage of the local scrip model - it helps a struggling company get back on its feet by fleecing its workers! Yay!
The ecological angle is a new one. Apparently by spending at a local store rather than a large departmental store, you cut emissions, since the latter would spend a lot on transporting goods. But that's not necessarily true, since your local store would also most probably have sourced its product or raw materials from elsewhere, and it may well be that their transportation logistics are less efficient than the large retailer. Besides, in cases where the local store is more environmentally efficient, paying them full-price in cash would encourage them more, wouldn't it? 
Now such coupons aren't always a waste of time. Sodexho coupons, for example, are a better way for employers to subsidize employees' lunches than subsidized cafeterias alone, since the latter option in effect discriminates against anyone who carries their lunch to office. Of course, offering cash would be even more preferable. Similarly, vouchers may be a good idea if you want to restrict customers' choice - school vouchers may be better than giving cash, for example, if you think that people may end up blowing up the cash on things other than their kids' education.As Tim Harford pointed out in an article a while ago, local currencies work better as community-building measures rather than as economically-sound propositions. Otherwise, straight cash trumps cafe coupons pretty much every time.


  1. I think these objection are valid from an economic (or rather, an economist's) standpoint, but economics has for too long ignored such things as community-building. Further, measures like these could be dress-rehearsals for major economic collapses in the future.

    The cafe coupon analogy is somewhat misleading, because it was only for a single business. If it was usable in the mess, the phone booth, the xerox shop etc it might have worked like a currency. (I liked it -- gave me a way to avoid leaving the campus!)

    I like seeing communities try out their own thing -- these are just little ways to get back some control over their own area. And given the current economic crisis, the phrase "economically-sound" seems poorly understood, even by the "smartest" businessmen and politicians.

  2. Yes, cafe coupons aren't exactly a local currency. I used the analogy to show that even in a situation where you have a 1:1 exchange rate between your scrip and cash and you don't have to worry about employees being short-changed, a scrip would still be less useful than just getting cash. Even if the coupons were accepted across the phone booth etc, that still ties your choice only to that particular phone booth or photocopy shop. If you prefer the convenience of staying on campus, you still get that from paying cash. On the other hand, cash also allows you to a greater set of options - use the Gwyer Hall canteen and phone booth, for example. Of course, once you bring in the situation where employees are paid in the scrip or the exchange rate is being manipulated, you mostly end up with less preferable outcomes.

    I presume you meant that these measures are dress-rehearsals for dealing with economic collapses. Fair enough - having a medium of exchange in a doomsday scenario is useful. In the kind of situation, for example, where your needs are anyway restricted to the bare minimum supplied by your local community, a medium of exchange is better than barter. In most other situations where your needs are broader in nature - if you are sufficiently well-off to want internet access or cheap Chinese-made electronics, say, community currency may not get you too far because it may not be acceptable to whoever provides that good or service.

    Exactly what do you mean by 'get back control over their own area'? I can understand that sort of a sentiment if you're talking about, say, tribal communities that have been booted off their ancestral lands. Otherwise, the communities that you're talking about have basically flourished under the auspices of the government (elected by themselves, if you're talking about the US) and the rule of law, right? Who are they taking control back from, anyway?

    As for being economically sound, I would think that a situation where people have more choice with regards to where they can spend, where the benefits of wealth and trade are spread across the wider populace rather than a smaller community, and where people don't get gypped out of their salary by being paid inflated IOUs by their employer would be a preferable one, crisis or no crisis. Of course, I may be wrong there.

  3. You hit the nail on the head, when there is no cash the local currency fills in.


  4. Hi Mark, welcome to my blog.
    Thanks for adding to the conversation.

  5. Sorry I came back so late!

    I guess you're right about choice, but I have this vague sense that when money/wealth is allowed to flow freely, it flows towards "sinks" of capital. Perhaps my physics brain just can't get around commerce, but it seems like profits from something made far away are not injected back into a community in any obvious way. I'm being a bit vague I guess.

  6. Ideally, the wealth/capital would flow towards 'sinks' because they are deemed to make the most efficient use of it - they provide the sort of risk-reward combination that the owners of that wealth want. While putting in restrictions on capital flows can lend a certain amount of stability to the economy, it really makes more sense to do that at a larger scale (like a country) than a small local community. Further, while the profits from something made outside it may not flow directly into the community, if those products are cheaper than equivalent products made within it, the local community can still benefit from a lower cost of living. Besides, where local currencies involve exchanging the scrip for cash (eg BerkShares), the wealth does flow anyway, since whoever issued the scrip now has hard cash, and there's no restriction on what they can do with it, right?
    Consider the cafe coupon system: if you had cash, would you justify spending it only at the cafe and never at the D-School canteen because the cafe is on your campus and needs to be supported, while the D-school canteen is on the wrong side of the road? Firstly, you would be denying the people working at the D-school canteen a chance to compete for your money so they can earn their living. Secondly, people who eat at the cheaper place would be able to spend the money they save on something else that they want, like say, cigarettes from Tirath Ram, so they would be better off.

  7. Yeah I suppose you're right. But I have a basic problem with the notion of growth and efficiency. Why does growth need to be exponential for things to run smoothly? And what's the hurry with growth? Why can't we at least slow down the movement of capital?

    And efficiency is misleading...agriculture companies charge more for their fancy seeds, kill of local cultivars, and then force farmers into deals with them that keep them oscillating around starvation. It's probably efficient for the accountant in New York, but should be rejected out of hand by anyone with a conscience.

  8. On the growth part - you would need some level of economic growth at the very least to keep pace with the growth in the population. Otherwise it's basically the same pie being sliced up amongst more people - and those with a larger share of it are not necessarily going to part with that share voluntarily. Of course growth doesn't guarantee that their slice of the pie won't get bigger, but it will mean that there's more to go around as well.
    Restricting capital flows can be useful in terms of controlling speculation, though as I said, it's not necessary that local currencies aid in that.
    At the same time, of course, the economy does not (or should not) operate in a vacuum. It's important to balance ethical considerations with the profit motive. And that's irrespective of whether the investment is being made in your local community or abroad. After all if you were putting your money into a crystal-meth lab that sells to local high-schoolers, would that be preferable because it provides employment locally?

  9. Wanted to say this earlier: I like the new theme! Very neat.

  10. Thanks. Got a lot of the code bits from, although I tweaked it around a fair bit.