Barter

Money vastly facilitates the exchange of goods and services, that is, economic activity. Before money, goods and services were exchanged by barter. Barter is the exchange of goods and services for other goods and services, and it goes back to the earliest people.

Much evidence that barter took place is found in archaeological sites around the world. In the many sites goods have been unearthed that do not occur naturally in the area. Examples: amber from the Baltic has been found in Austria and France; shells and shell jewellery from the Atlantic coast were unearthed in Switzerland.

Barter has obvious disadvantages. Firstly, the exchange of goods and services between two parties takes place only if there is a matching of opposing wants.

If there is no or a partial matching of wants, barter is inconvenient. Jevons in his work of 187521 provides a fine example of a lack of matching of opposing wants. A French opera singer, Mademoiselle Zelie, after a performance in the Society Islands during a world tour, was paid one-third of the take, which equaled three pigs, twenty-three turkeys, forty-four chickens, five thousand cocoa-nuts and many bananas, lemons and oranges. She could only consume a small portion of these perishable goods, and fed the livestock with the remainder.

Mlle Zelie was obliged to donate what she had left before departing. She had provided the audience with a wanted service, but received in return goods that did not match her wants. Jevons suggests that the goods received "might have brought four thousand francs, which would have been good remuneration for five songs", but the absence of a medium of exchange meant that the performer could not be properly remunerated.

Jevons also refers to the existence of a London company in 1875 called The African Barter Company Limited which carried on a barter trade with west coast African countries. The goods bartered were European "manufactures for palm oil, gold dust, ivory, cotton, coffee, gum, and other raw produce." So, barter was alive and well in 1875 and, as we will see later, this was still the case in the first half of the twentieth century is some countries.

Cabbage

Sheep

Chicken

Pumpkin

Cabbage

x

reciprocal

reciprocal

reciprocal

Sheep

yes

x

reciprocal

reciprocal

Chicken

yes

yes

x

reciprocal

Pumpkin

yes

yes

yes

x

Table 1: Number of prices with four products

The second disadvantage is equally obvious: the absence of a common standard of values, that is, a price system where all goods have a rate of exchange (i.e. a price) in terms of a common something. When a small number of goods are to be exchanged pricing is not a big problem. To demonstrate, assume that there are four products as indicated in Table 1. If there are n products (= 4) there are n2 combinations of prices (4 x 4 = 16). If we eliminate the price of each product with itself (= 4) we have 12 prices (n2 - n). If we eliminate the reciprocal prices, we divide this number by 2 [(n2 - n) / 2] and arrive at a number of 6. This can be handled easily.

It should be evident that in a barter economy the number of prices increases exponentially as the number of products increases. For example, if there are 10 products there are 45 prices; if there are 50 000 products, there are 1 249 975 000 different prices. A large airliner has 3 million parts = 4 499 998 500 000 prices.

It is obvious that no modern economic system can operate under a barter system. As stated by Newlyn23: "The complications of.. .barter arrangements clearly restrict the opportunity for exchange so severely that little progress could have been made towards a complex exchange economy without the introduction of a common medium of exchange."

The other disadvantage of the barter system is that it is difficult and costly to store value. For example, you can store value in a block of rare wood, but you will need to have a storage place; and you have the added risk of a nest of woodborers adopting the block of wood as a home and pantry.

What happens to the number of prices if one of the products is used as a medium of exchange? Answer: the number of prices reduces to n - 1. In the example of four products above, if chicken was used as a medium of exchange, there would be just three prices (compared with six). If there are 50 000 products the number of prices will be 49 999, compared with 1 249 975 000.

 
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