3.01. The Pattern of Indirect Exchange: The Limitations of Direct Exchange

0:00Chapter 3. The Pattern of Indirect Exchange 1. The Limitations of Direct Exchange We have seen in the previous chapter how exchange benefits each participant and how the division of labor on a market increases productivity. The only exchange so far discussed, however, has been direct exchange, or BARTER, the exchange of one useful good for another, each for purposes of direct use by the party to the exchange. Although a treatment of direct exchange is important for economic analysis, the scope for direct exchange in society is extremely limited.

0:46In a very primitive society, for example, Crusoe could employ Jackson to labor on his The Theory of Money and Credit

1:22In a regime of direct exchange, how would it be possible to pay these men? He could not give pieces of the house to each of the laborers. He would have to try to sell the house for precisely that combination of useful goods that each of the laborers and each of the sellers of raw material would accept. It is obvious that production could not be carried on and that the difficulties would be insuperable. This problem of the lack of coincidence of wants holds even for the simple direct exchange of consumers' goods, in addition to the insoluble problem of production. Thus, suppose that A with a supply of eggs for sale wants a pair of shoes in exchange.

2:10B has shoes but does not want eggs. There is no way for the two to get together. For anyone to sell the simplest commodity, he must find not only one who wants to purchase it, but one who has a commodity for sale that he wants to acquire. The market for anyone's commodities is therefore extremely limited. The extent of the market for any product is very small, and the scope for division of labor is negligible. Furthermore, someone with a less divisible commodity, such as a plow, is in worse straits. Suppose that D, with a plow, would like to exchange it for eggs, butter, shoes and various other commodities.

2:56Obviously he cannot divide his plow into several pieces and then exchange the various pieces for eggs, butter, etc. The value of each piece to the others would be practically nil. Under a system of direct exchange, a plow would have almost no marketability in exchange, and few, if any, would be produced. In addition to all these difficulties, which render a regime of direct exchange practically impossible, such a society could not solve the various problems of estimation, which, as was seen in Chapter 1, even Crusoe had to face. Since there would be no common denominator of units, there could be no way of estimating which line of production various factors should enter.

3:48Is it better to produce automobiles or tractors or houses or steel? Is it more productive to employ fewer men and more land on a certain product, or less land and more men? Is the capital structure being maintained or consumed? None of these questions could be answered, since, in the stages beyond immediate consumption, there would be no way of comparing the usefulness or the productivity of the different factors or products. The conclusion is evident that no sort of civilized society can be built on the basis of direct exchange, and that direct exchange, as well as Crusoe-like isolation, could yield is only an economy of the most primitive type.