Fungibility

In economics, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable.[1]

For example, since one kilogram of pure gold is equivalent to any other kilogram of pure gold, whether in the form of coins, ingots, or in other states, gold is fungible. Other fungible commodities include sweet crude oil, company shares, bonds, other precious metals, and currencies. Fungibility refers only to the equivalence of each unit of a commodity with other units of the same commodity and not to the exchange of one commodity for another, which is barter.

Etymology

The word fungibility comes from the Latin fungibilis, from the verb fungī, meaning "to perform", related to words such as "function" and "defunct".[2] It is unrelated to the Latin and English noun fungus or its plural, "fungi". 

Usage

In finance

Fungibility is different from liquidity. A good is said to be liquid if it can be easily exchanged for money or another good. A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place.

Notably, money is fungible: one US$10 banknote is interchangeable with any other genuine banknote like it.[3] It is also interchangeable with two $5s, ten $1s, or any other combination of banknotes and coins adding up to $10. Similarly, different issues of a government bond, which may have been issued at different times, are fungible with one another if they carry precisely the same rights and any of them is equally acceptable in settlement of a trade.

On the other hand, diamonds and other gems are not perfectly fungible because their varying cuts, colors, grades, and sizes make it difficult to find several diamonds expected to have the same value. Packaged products on a retail shelf may be considered fungible if they are of the same type and equivalent in function and form. Customers and clerks can interchange packages freely until purchase, and sometimes afterward. After one opens the package and uses the product, however, it is usually considered unique and no longer interchangeable with unopened packages outside of exceptional circumstances, such as a return or exchange. Even then, the customer might consider a swap with someone who owns the same product.

Fungibility does not imply liquidity, and vice versa. Diamonds, for example, can be readily bought and sold, as the trade is liquid, but individual diamonds, being unique, are not interchangeable. Therefore, diamonds are not fungible. Indian rupee banknotes, on the other hand, are mutually interchangeable, and therefore fungible, in London, but they are not easily traded there because they cannot be spent in London except at currency exchange services. In contrast to diamonds, gold coins of the same grade and weight are fungible as well as liquid.

In tasks

Fungibility has been used to describe certain types of tasks that can be broken down into interchangeable pieces that are easily parallelized and are not interdependent on the other pieces. For example: If a worker can hand dig 1 meter of ditch in a day, and a 10-meter ditch needs to be dug, either that worker can be given 10 days to complete the entire project, or 9 additional workers can be hired for the project to be completed in a single day. Each worker can complete his piece of the project without interfering with the other workers, and more importantly, each worker is not dependent on the results of any of the other workers to complete his share of the total project (this would contrast with the digging of a 10-meter-deep hole). On the other hand, non-fungible tasks tend to be highly serial in nature and require the completion of earlier steps before later steps can even be started. As an example of a serial task that is not fungible: Suppose there was a group of nine newly pregnant women. After one month, these women would have experienced a total of nine months of pregnancy, but a complete baby would not have been formed.

In his 2005 book, The World Is Flat, Thomas Friedman discusses the fungibility of jobs that involve digitizable information that can be off-shored to another country.

In quantum physics

Oxford theoretical physicist David Deutsch has adopted the economic term fungible to describe the physical nature of quantum particles and universes within the quantum multiverse, where, by virtue of being identical in all respects, different particles chaotically divide or combine as a result of physical interactions from a common fungible fund in superposition.[4]

In programming

In some software engineering circles, fungibility is used to refer to the ability of an engineer to apply their skills to different problem sets. It is used as an antonym to specialization.

In law

United States

In legal disputes in the United States, when one party is compelled to remedy another party as the result of a ruling or adjudication, the appropriate legal remedy may depend on the fungibility of the underlying right, obligation or property interest that is intended to be restored.[5] Depending on whether the interests of the aggrieved party are fungible, a determination made by the trier of fact, the appropriate remedy may change. For example, a court may require specific performance (an equitable remedy) as a remedy for breach of contract, instead of the more favored remedy of monetary damages.[6]

Fungibility is also important within the context of product liability. If a plaintiff is injured by a fungible product but is unable through no fault of his own to identify the manufacturer of the product that actually injured him, jurisdictions that follow the doctrine of market share liability can shift the burden of disproving liability to all manufacturers of that product. If the defendants fail to rebut the presumption of liability, they will be liable pro rata based on their market share during the relevant period.

European Union

Belgium

Belgium has adopted fungibility for its domestic central securities depository, CIK, which was set up in 1967–1968. According to royal decree No. 62, issued on 10 November 1967, depositors of fungible securities have the rights of co-ownership. This change was fundamental to the development of Euroclear, by then beginning to process Eurobonds and build systems.[7]

See also

References

  1. ↑ Merriam-Webster. "Fungible (adjective)". Merriam-Webster Online Dictionary and Thesaurus. Merriam-Webster, Incorporated. Retrieved 22 August 2014.
  2. ↑ Etymonline.com. "fungible (adj.)". Online Etymology Dictionary. Retrieved 12 August 2017.
  3. ↑ Milton, Adam (15 February 2017). "Fungible, Trading Term Definition". The Balance. Retrieved 15 November 2015.
  4. ↑ "The flawed multiverse – Physics World". Physics World. 2011-09-22. Retrieved 2018-09-27.
  5. ↑ S. Williston, The Law of Contracts § 1338 (1920); Farnsworth, E. Allan (1970). "Legal Remedies for Breach of Contract". Columbia Law Review. 70 (7): 1145–1216. doi:10.2307/1121184. JSTOR 1121184.
  6. ↑ Bunge Corp. v. Recker, U.S. Ct. of App., 8th Cir., 1975; Restatement (Second) of Contracts Ch 16. introductory note (1981)
  7. ↑ Norman, Peter (February 2008), Plumbers and Visionaries, Chichester: John Wiley & Sons, p. 12, ISBN 978-0-470-72425-5

Further reading

  1. Bartram, Söhnke M.; Fehle, Frank R. (March 2007). "Competition without Fungibility: Evidence from Alternative Market Structures for Derivatives". Journal of Banking and Finance. 31 (3): 659–677. doi:10.1016/j.jbankfin.2006.02.004. SSRN 311880.
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