Money Velocity & the Gift Economy

Money velocity is a big deal, but only economists talk about it. I’m no economist, but I know what I like. Money velocity measures how many times the average dollar changes hands in a year. The GDP measures all the transactions we do in a year. When we get a dollar, we spend that dollar, which gets measured as a $2 addition to the GDP. If consumers and businesses feel confident, they spend money faster and the GDP goes up and we proclaim ourselves successful, If we hang on to our dollars a little longer, we’re less successful. I don’t know what the current figures are, but I recall money velocity being about 12-14 times a year when I took my single Econ course. (Obviously, you should look elsewhere for your economic insights.) The calculation is made by dividing the money supply (no simple calculation, that) into the GDP.

If money’s zinging around the economy at the rate of 1 move per month (12 per year) and it slows by just a day, the GDP drops by 3%, which is a big deal. It gives us an idea why the consumer confidence rating is so important. It’s safe to assume that money velocity was higher in 1999 than it is now, and that difference may account for the relative weakness in the economy.

The Easy Refunds “Bounce”

A few decades ago, no one but the big catalogue companies did any mail order business. Then it began to catch on and lots of businesses started mail order operations. In those days you had to have a reason to return an item to a store. I remember clerking at Macy’s in high school when you actively resisted returns, unless the goods were obviously defective. The new mail order companies were equally reluctant to accept returns and people started complaining to the Federal Trade Commission. Legislation was passed requiring mail orders to be returnable for thirty days after shipping, at the customer’s whim, no reason required. Naturally the companies bitched and moaned that it would ruin them. You know, like Jack Valenti excoriating video tapes and file exchanging.

What actually happened was unexpected. The mail order business exploded! Released from the fear of getting stuck with the wrong goods, customers came out of the woodwork. This was one of many lessons about large effects from small changes. Although consumption is a double-edged sword (wasting resources and trapping human consciousness on the material plane), if you’re using your economics filter, you like more activity, since it’s the only way we know to raise living standards.

How’d that work again? Oh yeah. If we increase customer’s confidence in purchases, they start to spend just a bit faster, and those dollars end up back in their pockets sooner, go out sooner, yada yada. A righteous cycle.

Caveat Venditor

As Mitch said the other day, Xpertweb inverts the traditional balance of caution in a transaction. Instead of a wary buyer, we let the vendor beware. This shift is analogous to shifting the mail order risk from the buyer to the seller. The Xpertweb mantra is that every vendor and every customer has a grading history and the seller allows the buyer’s grade to affect the price. You can never predict effects, but that is likely to cause people to open their wallets just a little faster and start that righteous money velocity cycle.

Velocity = Generosity

Imagine an economy that’s cooking along with an exuberant P2P model that’s no worse than Xpertweb. Now you’ve got folks spending more freely on stuff, and sellers find it easier to employ more and better people, because they’re rated also. The stage is set for a kind of looseness in the economy that characterized the late 90’s, when people and governments felt they could afford to do more of the right thing. Under this romantic economic model, you start to see a similarity to the gift economy, where people produce freely and put their stuff out there and just assume plenty of gifts will show up real soon.

So maybe the name of the magazine should be Fast Money rather than Fast Company.

11:50:59 PM