11. Types of Exchangeable Goods
For the sake of clarity, the examples of exchangeable goods in this chapter have mainly been taken
from tangible commodities, such as horses, fish, eggs, etc. Such commodities are not
the only type of goods subject to exchange, however. A may exchange his personal services
for the Commodity of B. Thus, for example, A may give his labor services to Farmer B
in exchange for farm produce. Furthermore, A may give personal services that function
directly as consumers' goods in exchange for another good. An individual may thus exchange
his medical advice or his musical performance for food or clothing. These services are as
as legitimately consumers' goods as those goods that are embodied in tangible physical commodities.
Similarly, individual labor services are as much producers' goods as are tangible capital goods.
As a matter of fact, tangible goods are valued not so much for their physical content as for their services to the user,
whether he is a consumer or a producer.
The actor values the bread for its services in providing nourishment, the house for its
services in providing shelter, the machine for its service in producing a lower order
good.
In the last analysis, tangible commodities are also valued for their services, and are
thus on the same plane as intangible personal services.
Economics, therefore, is not a science that deals particularly with material goods or material welfare.
It deals in general with the action of men to satisfy their desires, and specifically with the process of exchange of goods
as a means for each individual to produce satisfactions for his desires.
These goods may be tangible commodities, or they may be intangible personal services.
The principles of supply and demand, of price determination, are exactly the same for any good,
whether it is in one category or the other. The foregoing analysis is applicable to all goods.
Thus, the following types of possible exchanges have been covered by our analysis.
A. A commodity for a commodity, such as horses for fish.
B. A commodity for a personal service, such as medical advice for butter or farm labor for food.
C. A personal service for a personal service, such as mutual log rolling by two settlers,
or medical advice for gardening labor, or teaching for a musical performance.
In cases where there are several competing homogeneous units, supply and demand schedules can be added.
In cases where one or both parties are isolated, or are the only ones exchanging,
the zone of price determination will be established as indicated previously.
Thus, if one arithmetic teacher is bargaining with one violinist for an exchange of services,
Services, their respective utility rankings will set the zone of price determination.
If several arithmetic teachers and several violinists who provide homogeneous services
form a market for their two goods, the market price will be formed with the addition and
intersection of supply and demand schedules.
If the services of the different individuals are not considered as of equal quality by
by the Demanders, they will be evaluated separately, and each service will be priced separately.
This is not to deny, of course, that the existence of several violinists of different quality
will affect the consumer's evaluations of each one.
One evident reason for the confusion of exchange with a mere trade of material objects is the
The fact that much intangible property cannot, by its very nature, be exchanged.
A violinist may own his musicianly ability and exchange units of it in the form of service
for the services of a physician, but other personal attributes which cannot be exchanged
may be desired as goods.
Thus, Brown might have a desired end, to gain the genuine approval of Smith.
This is a particular consumer's good, which he cannot purchase with any other good.
For what he wants is the genuine approval, rather than a show of approval that might
be purchased.
In this case, the consumer's good is a property of Smith's that cannot be exchanged.
It might be acquired in some way, but not by exchange.
In relation to exchange, this intangible good is an inalienable property of Smith's.
That is, it cannot be given up.
Another example is that a man cannot permanently transfer his will, even though he may transfer
much of his services and his property.
As mentioned above, a man may not agree to permanent bondage by contracting to work for
another man for the rest of his life.
He might change his mind at a later date, and then he cannot, in a free market, be
compelled to continue working thereafter.
Because a man's self-ownership over his will is inalienable, he cannot, on the unhampered
market, be compelled to continue an arrangement whereby he submits his will to the orders
of another, even though he might have agreed to this arrangement previously.
If he has taken the property of another by means of such an agreement, he will, on the
free market, have to return the property.
Thus, if A has agreed to work for life for B in exchange for 10,000 grams of gold, he
will have to return the proportionate amount of property if he terminates the arrangement
and ceases the work.
In other words, he cannot make enforceable contracts binding his future personal actions.
This applies also to marriage contracts.
Since human self-ownership cannot be alienated, a man or a woman on a free market could not
be compelled to continue in marriage if he or she no longer desired to do so.
This is regardless of any previous agreement, thus a marriage contract, like an individual
labor contract, is on an unhampered market, terminable at the will of either one of the
parties.
On the other hand, when property that can be alienated is transferred, it of course
becomes the property, under the sole and exclusive jurisdiction of the person who has received
in Exchange, and no later regret by the original owner can establish any claim to the property.
Thus, exchange may occur with alienable goods. They may be consumers' goods of varying degrees of durability,
or they may be producers' goods. They may be tangible commodities or intangible personal services.
There are other types of exchangeable items which are based on these alienable goods.
For example, suppose that Jones deposits a good, say 1,000 bushels of wheat, in a warehouse
for safekeeping.
He retains ownership of the good, but transfers its physical possession to the warehouse owner,
Green, for safekeeping.
Green gives Jones a warehouse receipt for the wheat, certifying that the wheat is there
for Safekeeping and Giving the Owner of the Receipt a Claim to Receive the Wheat Whenever
He Presents the Receipt to the Warehouse.
In Exchange for this Service as a Guardian of the Wheat, Jones pays him a certain agreed
amount of some other Good, say Emeralds.
Thus the Claim originates from an Exchange of a Commodity for a Service, Emeralds for
and the price of this exchange is determined according to the principles of the foregoing analysis.
Now, however, the warehouse receipt has come into existence as a claim to the wheat.
On an unhampered market, the claim would be regarded as absolutely secure and certain to be honored,
and therefore Jones would be able to exchange the claim as a substitute for actual physical exchange of the wheat.
He might find another party, Robinson, who wishes to purchase the wheat in exchange for horses.
They agree on a price, and then Robinson accepts the claim on the warehouse as a perfectly good substitute for actual transfer of the wheat.
He knows that when he wants to use the wheat, he will be able to redeem the claim at the warehouse.
The claim therefore functions here as a goods substitute.
In this case, the claim is to a present good, since the good can be redeemed at any time that the owner desires.
Here, the nature and function of the claim is simple.
The claim is a secure evidence of ownership of the good.
Even simpler is a case where ownership of property, say a farm, is transferred from A to B
by Transferring Written Title or Evidence of Ownership, which may be considered a claim.
The situation becomes more complicated, however, when ownership is divided into pieces and
these pieces are transferred from person to person.
Thus, suppose that Harrison is the owner of an iron mine.
He decides to divide up the ownership and sell the various divided pieces or shares
of the Good to Other Individuals. Assume that he creates 100 tickets, with the total constituting
the full ownership of the mine, and then sells all but 10 tickets to numerous other individuals.
The owner of two shares then becomes a 2% owner of the mine. Since there is very little
practical scope for such activity in a regime of direct exchange, analysis of this situation
will be reserved for later chapters.
It is clear, however, that the 2% owner is entitled to his proportionate share of direction
and control of, and revenue from, the jointly owned property.
In other words, the share is evidence of part ownership, or a claim to part ownership of
a good.
This property right and a proportionate share of the use of a good can also be sold or bought
in exchange.
A third type of claim arises from a credit exchange or credit transaction.
Up to this point we have been discussing exchanges of one present good for another, that is,
The good can be used at present or at any desired time by each receiver in the exchange.
In a credit transaction, a present good is exchanged for a future good, or rather a claim
on a future good.
Suppose for example that Jackson desires to acquire 100 pounds of cotton at once.
He makes the following exchange with Peters.
Peters to give Jackson 100 pounds of cotton now, a present good.
And in return, Jackson gives Peters a claim on 110 pounds of cotton one year from now.
This is a claim on a future good, 110 pounds of cotton one year from now.
The price of the present good in terms of the future good is 1.1 pounds of future cotton
one year from now per pound of present cotton.
Prices in such exchanges are determined by value scales and the meeting of supply and
demand schedules, just as in the case of exchanges of present goods.
Further analysis of the pricing of credit transactions must be left for later chapters.
Here it may be pointed out that as explained in the previous chapter, every man will evaluate
a homogeneous good more highly the earlier in time is his prospect of attaining it.
A present good, a good consisting of units capable of rendering equivalent satisfaction,
will always be valued more highly than the same good in the future, in accordance with
the individual's rate of time preference.
It is evident that the various rates of time preference, ultimately determined by relative
positions on individual value scales, will act to set the price of credit exchanges.
Moreover, the receiver of the present good, the debtor, will always have to repay a greater
amount of the good in the future to the creditor, the man who receives the claim, since the
The same number of units is worth more as a present good than as a future good.
The creditor is rendering the debtor the service of using a good in the present, while the
debtor pays for this service by repaying a greater amount of the good in the future.
At the date when the claim finally falls due, the creditor redeems the claim and acquires
In the meantime, however, the claim is in existence, and it can be bought and sold in exchange for other goods.
Thus, Peters, the creditor, might decide to sell the claim, or promissory note, to Williams, in exchange for a wagon.
The price of this exchange will again be determined by supply and demand schedules.
Demand for the note will be based on its security as a claim to the cotton.
Thus, William's demand for the note, or Peter's demand to hold in terms of wagons, will be
based on a.) the direct utility and exchange value of the wagon, and b.) the marginal utility
of the added units of cotton discounted by him on two possible grounds, one, the length
When a claim is thus transferred in exchange for some other good or claim, this in itself
is not a credit transaction.
A credit exchange sets up an unfinished payment on the part of the debtor.
In this case, Peters pays Williams the claim in return for the other good, and the transaction
is finished.
Jackson, on the other hand, remains the debtor as a result of the original transaction, which
remains unfinished until he makes his agreed-upon payment to the creditor on the date of maturity.
In a credit transaction, it is not necessary for the present and the future goods exchanged
to be the same commodity.
Thus, a man can sell wheat now in exchange for a certain amount of corn at a future date.
The example in the text, however, highlights the importance of time preference and is also
more likely to occur in practice.
The several types of claims, therefore, are, on present goods, by such means as warehouse
receipts or shares of joint ownership in a good, and on future goods, arising from credit
transactions.
These are evidences of ownership, or, as in the latter case, objects that will become
evidence of ownership at a later date.
Thus, in addition to the three types of exchanges mentioned earlier, there are three other types,
whose terms and principles are included in the preceding analysis of this chapter.
D. A commodity for a claim. Examples of this are
1. The deposit of a commodity for a warehouse receipt.
The claim to a present good. 2. A credit transaction with a commodity
Commodity exchanged for a claim to a future commodity 3.
The purchase of shares of stock in a commodity by exchanging another type of commodity for
them 4.
The purchase of promissory notes on a debtor by exchanging a commodity
All four of these cases have been described E.
A claim for a service An example is personal service being exchanged
for a Promissory Note or Warehouse Receipt or Stock F. A Claim for a Claim. Examples
would be exchange of a promissory note for another one, of stock shares for a note, of
one type of stock share for another, of a warehouse receipt for any of the other types
of claims.
With all goods analyzable into categories of tangible commodities, services or claims
to goods, goods substitutes, all six possible types of exchanges are covered by the utility
and supply demand analysis of this chapter.
In each case, different concrete considerations enter into the formation of the value scales,
such as time preference in the case of credit exchanges, and this permits more to be said
about the various specific types of exchanges.
The level of analysis presented in this chapter, however, encompasses all possible exchanges
of goods.
In later chapters, when indirect exchange has been introduced, the present analysis
will apply also, but further analysis will be made of production and exchange problems
is involved in credit exchanges, time preference, in exchanges for capital goods and consumer
goods, and in exchanges for labor services, wages.