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 to relate 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) 1
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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 be directed 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 or false? 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 2
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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: drvitor@gmail.com

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