WEBVTT NOTE 2.11. Types of Exchangeable Goods 1 00:00:00.000 --> 00:00:04.760 11. Types of Exchangeable Goods 2 00:00:04.760 --> 00:00:10.600 For the sake of clarity, the examples of exchangeable goods in this chapter have mainly been taken 3 00:00:10.600 --> 00:00:18.100 from tangible commodities, such as horses, fish, eggs, etc. Such commodities are not 4 00:00:18.100 --> 00:00:25.160 the only type of goods subject to exchange, however. A may exchange his personal services 5 00:00:25.160 --> 00:00:32.400 for the Commodity of B. Thus, for example, A may give his labor services to Farmer B 6 00:00:32.400 --> 00:00:38.600 in exchange for farm produce. Furthermore, A may give personal services that function 7 00:00:38.600 --> 00:00:46.080 directly as consumers' goods in exchange for another good. An individual may thus exchange 8 00:00:46.080 --> 00:00:52.600 his medical advice or his musical performance for food or clothing. These services are as 9 00:00:52.600 --> 00:00:59.400 as legitimately consumers' goods as those goods that are embodied in tangible physical commodities. 10 00:00:59.400 --> 00:01:06.600 Similarly, individual labor services are as much producers' goods as are tangible capital goods. 11 00:01:06.600 --> 00:01:15.600 As a matter of fact, tangible goods are valued not so much for their physical content as for their services to the user, 12 00:01:15.600 --> 00:01:18.600 whether he is a consumer or a producer. 13 00:01:18.600 --> 00:01:24.840 The actor values the bread for its services in providing nourishment, the house for its 14 00:01:24.840 --> 00:01:30.680 services in providing shelter, the machine for its service in producing a lower order 15 00:01:30.680 --> 00:01:31.880 good. 16 00:01:31.880 --> 00:01:37.960 In the last analysis, tangible commodities are also valued for their services, and are 17 00:01:37.960 --> 00:01:42.840 thus on the same plane as intangible personal services. 18 00:01:42.840 --> 00:01:50.840 Economics, therefore, is not a science that deals particularly with material goods or material welfare. 19 00:01:50.840 --> 00:02:00.840 It deals in general with the action of men to satisfy their desires, and specifically with the process of exchange of goods 20 00:02:00.840 --> 00:02:06.840 as a means for each individual to produce satisfactions for his desires. 21 00:02:06.840 --> 00:02:13.840 These goods may be tangible commodities, or they may be intangible personal services. 22 00:02:13.840 --> 00:02:20.840 The principles of supply and demand, of price determination, are exactly the same for any good, 23 00:02:20.840 --> 00:02:28.840 whether it is in one category or the other. The foregoing analysis is applicable to all goods. 24 00:02:28.840 --> 00:02:34.840 Thus, the following types of possible exchanges have been covered by our analysis. 25 00:02:34.840 --> 00:02:40.840 A. A commodity for a commodity, such as horses for fish. 26 00:02:40.840 --> 00:02:48.840 B. A commodity for a personal service, such as medical advice for butter or farm labor for food. 27 00:02:48.840 --> 00:02:56.840 C. A personal service for a personal service, such as mutual log rolling by two settlers, 28 00:02:56.840 --> 00:03:02.840 or medical advice for gardening labor, or teaching for a musical performance. 29 00:03:02.840 --> 00:03:11.840 In cases where there are several competing homogeneous units, supply and demand schedules can be added. 30 00:03:11.840 --> 00:03:17.840 In cases where one or both parties are isolated, or are the only ones exchanging, 31 00:03:17.840 --> 00:03:22.840 the zone of price determination will be established as indicated previously. 32 00:03:22.840 --> 00:03:29.840 Thus, if one arithmetic teacher is bargaining with one violinist for an exchange of services, 33 00:03:29.840 --> 00:03:36.200 Services, their respective utility rankings will set the zone of price determination. 34 00:03:36.200 --> 00:03:42.000 If several arithmetic teachers and several violinists who provide homogeneous services 35 00:03:42.000 --> 00:03:47.680 form a market for their two goods, the market price will be formed with the addition and 36 00:03:47.680 --> 00:03:51.420 intersection of supply and demand schedules. 37 00:03:51.420 --> 00:03:56.600 If the services of the different individuals are not considered as of equal quality by 38 00:03:56.600 --> 00:04:04.040 by the Demanders, they will be evaluated separately, and each service will be priced separately. 39 00:04:04.040 --> 00:04:10.080 This is not to deny, of course, that the existence of several violinists of different quality 40 00:04:10.080 --> 00:04:14.840 will affect the consumer's evaluations of each one. 41 00:04:14.840 --> 00:04:21.340 One evident reason for the confusion of exchange with a mere trade of material objects is the 42 00:04:21.340 --> 00:04:28.140 The fact that much intangible property cannot, by its very nature, be exchanged. 43 00:04:28.140 --> 00:04:35.580 A violinist may own his musicianly ability and exchange units of it in the form of service 44 00:04:35.580 --> 00:04:41.860 for the services of a physician, but other personal attributes which cannot be exchanged 45 00:04:41.860 --> 00:04:44.300 may be desired as goods. 46 00:04:44.300 --> 00:04:51.080 Thus, Brown might have a desired end, to gain the genuine approval of Smith. 47 00:04:51.080 --> 00:04:57.080 This is a particular consumer's good, which he cannot purchase with any other good. 48 00:04:57.080 --> 00:05:02.880 For what he wants is the genuine approval, rather than a show of approval that might 49 00:05:02.880 --> 00:05:04.420 be purchased. 50 00:05:04.420 --> 00:05:10.600 In this case, the consumer's good is a property of Smith's that cannot be exchanged. 51 00:05:10.600 --> 00:05:15.480 It might be acquired in some way, but not by exchange. 52 00:05:15.480 --> 00:05:22.280 In relation to exchange, this intangible good is an inalienable property of Smith's. 53 00:05:22.280 --> 00:05:25.520 That is, it cannot be given up. 54 00:05:25.520 --> 00:05:31.660 Another example is that a man cannot permanently transfer his will, even though he may transfer 55 00:05:31.660 --> 00:05:34.840 much of his services and his property. 56 00:05:34.840 --> 00:05:40.920 As mentioned above, a man may not agree to permanent bondage by contracting to work for 57 00:05:40.920 --> 00:05:43.680 another man for the rest of his life. 58 00:05:43.680 --> 00:05:49.520 He might change his mind at a later date, and then he cannot, in a free market, be 59 00:05:49.520 --> 00:05:53.440 compelled to continue working thereafter. 60 00:05:53.440 --> 00:06:00.120 Because a man's self-ownership over his will is inalienable, he cannot, on the unhampered 61 00:06:00.120 --> 00:06:06.480 market, be compelled to continue an arrangement whereby he submits his will to the orders 62 00:06:06.480 --> 00:06:11.880 of another, even though he might have agreed to this arrangement previously. 63 00:06:11.880 --> 00:06:16.800 If he has taken the property of another by means of such an agreement, he will, on the 64 00:06:16.800 --> 00:06:19.520 free market, have to return the property. 65 00:06:19.520 --> 00:06:27.160 Thus, if A has agreed to work for life for B in exchange for 10,000 grams of gold, he 66 00:06:27.160 --> 00:06:32.680 will have to return the proportionate amount of property if he terminates the arrangement 67 00:06:32.680 --> 00:06:34.680 and ceases the work. 68 00:06:34.680 --> 00:06:42.100 In other words, he cannot make enforceable contracts binding his future personal actions. 69 00:06:42.100 --> 00:06:45.180 This applies also to marriage contracts. 70 00:06:45.180 --> 00:06:51.940 Since human self-ownership cannot be alienated, a man or a woman on a free market could not 71 00:06:51.940 --> 00:06:58.660 be compelled to continue in marriage if he or she no longer desired to do so. 72 00:06:58.660 --> 00:07:04.760 This is regardless of any previous agreement, thus a marriage contract, like an individual 73 00:07:04.760 --> 00:07:12.240 labor contract, is on an unhampered market, terminable at the will of either one of the 74 00:07:12.240 --> 00:07:13.240 parties. 75 00:07:13.240 --> 00:07:18.900 On the other hand, when property that can be alienated is transferred, it of course 76 00:07:18.900 --> 00:07:25.080 becomes the property, under the sole and exclusive jurisdiction of the person who has received 77 00:07:25.080 --> 00:07:33.080 in Exchange, and no later regret by the original owner can establish any claim to the property. 78 00:07:33.080 --> 00:07:42.080 Thus, exchange may occur with alienable goods. They may be consumers' goods of varying degrees of durability, 79 00:07:42.080 --> 00:07:50.080 or they may be producers' goods. They may be tangible commodities or intangible personal services. 80 00:07:50.080 --> 00:07:56.060 There are other types of exchangeable items which are based on these alienable goods. 81 00:07:56.060 --> 00:08:02.940 For example, suppose that Jones deposits a good, say 1,000 bushels of wheat, in a warehouse 82 00:08:02.940 --> 00:08:04.660 for safekeeping. 83 00:08:04.660 --> 00:08:11.380 He retains ownership of the good, but transfers its physical possession to the warehouse owner, 84 00:08:11.380 --> 00:08:13.620 Green, for safekeeping. 85 00:08:13.620 --> 00:08:19.660 Green gives Jones a warehouse receipt for the wheat, certifying that the wheat is there 86 00:08:19.660 --> 00:08:25.960 for Safekeeping and Giving the Owner of the Receipt a Claim to Receive the Wheat Whenever 87 00:08:25.960 --> 00:08:29.140 He Presents the Receipt to the Warehouse. 88 00:08:29.140 --> 00:08:35.060 In Exchange for this Service as a Guardian of the Wheat, Jones pays him a certain agreed 89 00:08:35.060 --> 00:08:39.100 amount of some other Good, say Emeralds. 90 00:08:39.100 --> 00:08:45.780 Thus the Claim originates from an Exchange of a Commodity for a Service, Emeralds for 91 00:08:45.780 --> 00:08:52.780 and the price of this exchange is determined according to the principles of the foregoing analysis. 92 00:08:52.780 --> 00:08:58.780 Now, however, the warehouse receipt has come into existence as a claim to the wheat. 93 00:08:58.780 --> 00:09:05.780 On an unhampered market, the claim would be regarded as absolutely secure and certain to be honored, 94 00:09:05.780 --> 00:09:14.780 and therefore Jones would be able to exchange the claim as a substitute for actual physical exchange of the wheat. 95 00:09:14.780 --> 00:09:21.280 He might find another party, Robinson, who wishes to purchase the wheat in exchange for horses. 96 00:09:21.280 --> 00:09:32.280 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. 97 00:09:32.280 --> 00:09:38.780 He knows that when he wants to use the wheat, he will be able to redeem the claim at the warehouse. 98 00:09:38.780 --> 00:09:43.280 The claim therefore functions here as a goods substitute. 99 00:09:43.280 --> 00:09:52.680 In this case, the claim is to a present good, since the good can be redeemed at any time that the owner desires. 100 00:09:52.680 --> 00:09:56.780 Here, the nature and function of the claim is simple. 101 00:09:56.780 --> 00:10:01.580 The claim is a secure evidence of ownership of the good. 102 00:10:01.580 --> 00:10:08.680 Even simpler is a case where ownership of property, say a farm, is transferred from A to B 103 00:10:08.680 --> 00:10:16.080 by Transferring Written Title or Evidence of Ownership, which may be considered a claim. 104 00:10:16.080 --> 00:10:22.240 The situation becomes more complicated, however, when ownership is divided into pieces and 105 00:10:22.240 --> 00:10:25.880 these pieces are transferred from person to person. 106 00:10:25.880 --> 00:10:30.120 Thus, suppose that Harrison is the owner of an iron mine. 107 00:10:30.120 --> 00:10:36.360 He decides to divide up the ownership and sell the various divided pieces or shares 108 00:10:36.360 --> 00:10:44.000 of the Good to Other Individuals. Assume that he creates 100 tickets, with the total constituting 109 00:10:44.000 --> 00:10:51.360 the full ownership of the mine, and then sells all but 10 tickets to numerous other individuals. 110 00:10:51.360 --> 00:10:57.960 The owner of two shares then becomes a 2% owner of the mine. Since there is very little 111 00:10:57.960 --> 00:11:05.200 practical scope for such activity in a regime of direct exchange, analysis of this situation 112 00:11:05.200 --> 00:11:07.800 will be reserved for later chapters. 113 00:11:07.800 --> 00:11:14.280 It is clear, however, that the 2% owner is entitled to his proportionate share of direction 114 00:11:14.280 --> 00:11:20.600 and control of, and revenue from, the jointly owned property. 115 00:11:20.600 --> 00:11:28.000 In other words, the share is evidence of part ownership, or a claim to part ownership of 116 00:11:28.000 --> 00:11:29.200 a good. 117 00:11:29.200 --> 00:11:35.920 This property right and a proportionate share of the use of a good can also be sold or bought 118 00:11:35.920 --> 00:11:38.120 in exchange. 119 00:11:38.120 --> 00:11:44.780 A third type of claim arises from a credit exchange or credit transaction. 120 00:11:44.780 --> 00:11:51.800 Up to this point we have been discussing exchanges of one present good for another, that is, 121 00:11:51.800 --> 00:12:00.000 The good can be used at present or at any desired time by each receiver in the exchange. 122 00:12:00.000 --> 00:12:07.600 In a credit transaction, a present good is exchanged for a future good, or rather a claim 123 00:12:07.600 --> 00:12:09.940 on a future good. 124 00:12:09.940 --> 00:12:16.040 Suppose for example that Jackson desires to acquire 100 pounds of cotton at once. 125 00:12:16.040 --> 00:12:19.160 He makes the following exchange with Peters. 126 00:12:19.160 --> 00:12:25.260 Peters to give Jackson 100 pounds of cotton now, a present good. 127 00:12:25.260 --> 00:12:33.600 And in return, Jackson gives Peters a claim on 110 pounds of cotton one year from now. 128 00:12:33.600 --> 00:12:40.720 This is a claim on a future good, 110 pounds of cotton one year from now. 129 00:12:40.720 --> 00:12:47.760 The price of the present good in terms of the future good is 1.1 pounds of future cotton 130 00:12:47.760 --> 00:12:52.640 one year from now per pound of present cotton. 131 00:12:52.640 --> 00:12:58.120 Prices in such exchanges are determined by value scales and the meeting of supply and 132 00:12:58.120 --> 00:13:03.640 demand schedules, just as in the case of exchanges of present goods. 133 00:13:03.640 --> 00:13:09.760 Further analysis of the pricing of credit transactions must be left for later chapters. 134 00:13:09.760 --> 00:13:15.920 Here it may be pointed out that as explained in the previous chapter, every man will evaluate 135 00:13:15.920 --> 00:13:23.040 a homogeneous good more highly the earlier in time is his prospect of attaining it. 136 00:13:23.040 --> 00:13:30.080 A present good, a good consisting of units capable of rendering equivalent satisfaction, 137 00:13:30.080 --> 00:13:35.960 will always be valued more highly than the same good in the future, in accordance with 138 00:13:35.960 --> 00:13:39.080 the individual's rate of time preference. 139 00:13:39.080 --> 00:13:44.640 It is evident that the various rates of time preference, ultimately determined by relative 140 00:13:44.640 --> 00:13:51.280 positions on individual value scales, will act to set the price of credit exchanges. 141 00:13:51.280 --> 00:13:58.700 Moreover, the receiver of the present good, the debtor, will always have to repay a greater 142 00:13:58.700 --> 00:14:05.640 amount of the good in the future to the creditor, the man who receives the claim, since the 143 00:14:05.640 --> 00:14:11.840 The same number of units is worth more as a present good than as a future good. 144 00:14:11.840 --> 00:14:17.760 The creditor is rendering the debtor the service of using a good in the present, while the 145 00:14:17.760 --> 00:14:25.320 debtor pays for this service by repaying a greater amount of the good in the future. 146 00:14:25.320 --> 00:14:31.400 At the date when the claim finally falls due, the creditor redeems the claim and acquires 147 00:14:31.400 --> 00:14:44.400 In the meantime, however, the claim is in existence, and it can be bought and sold in exchange for other goods. 148 00:14:44.400 --> 00:14:53.400 Thus, Peters, the creditor, might decide to sell the claim, or promissory note, to Williams, in exchange for a wagon. 149 00:14:53.400 --> 00:14:59.400 The price of this exchange will again be determined by supply and demand schedules. 150 00:14:59.400 --> 00:15:04.400 Demand for the note will be based on its security as a claim to the cotton. 151 00:15:04.400 --> 00:15:11.700 Thus, William's demand for the note, or Peter's demand to hold in terms of wagons, will be 152 00:15:11.700 --> 00:15:20.120 based on a.) the direct utility and exchange value of the wagon, and b.) the marginal utility 153 00:15:20.120 --> 00:15:27.780 of the added units of cotton discounted by him on two possible grounds, one, the length 154 00:15:57.780 --> 00:16:20.740 When a claim is thus transferred in exchange for some other good or claim, this in itself 155 00:16:20.740 --> 00:16:23.900 is not a credit transaction. 156 00:16:23.900 --> 00:16:29.520 A credit exchange sets up an unfinished payment on the part of the debtor. 157 00:16:29.520 --> 00:16:35.800 In this case, Peters pays Williams the claim in return for the other good, and the transaction 158 00:16:35.800 --> 00:16:36.800 is finished. 159 00:16:36.800 --> 00:16:43.480 Jackson, on the other hand, remains the debtor as a result of the original transaction, which 160 00:16:43.480 --> 00:16:51.940 remains unfinished until he makes his agreed-upon payment to the creditor on the date of maturity. 161 00:16:51.940 --> 00:16:57.940 In a credit transaction, it is not necessary for the present and the future goods exchanged 162 00:16:57.940 --> 00:16:59.820 to be the same commodity. 163 00:16:59.820 --> 00:17:06.900 Thus, a man can sell wheat now in exchange for a certain amount of corn at a future date. 164 00:17:06.900 --> 00:17:12.660 The example in the text, however, highlights the importance of time preference and is also 165 00:17:12.660 --> 00:17:16.380 more likely to occur in practice. 166 00:17:16.380 --> 00:17:22.980 The several types of claims, therefore, are, on present goods, by such means as warehouse 167 00:17:22.980 --> 00:17:29.380 receipts or shares of joint ownership in a good, and on future goods, arising from credit 168 00:17:29.380 --> 00:17:31.220 transactions. 169 00:17:31.220 --> 00:17:37.500 These are evidences of ownership, or, as in the latter case, objects that will become 170 00:17:37.500 --> 00:17:40.620 evidence of ownership at a later date. 171 00:17:40.620 --> 00:17:47.580 Thus, in addition to the three types of exchanges mentioned earlier, there are three other types, 172 00:17:47.580 --> 00:17:53.420 whose terms and principles are included in the preceding analysis of this chapter. 173 00:17:53.420 --> 00:17:59.020 D. A commodity for a claim. Examples of this are 174 00:17:59.020 --> 00:18:04.100 1. The deposit of a commodity for a warehouse receipt. 175 00:18:04.100 --> 00:18:09.480 The claim to a present good. 2. A credit transaction with a commodity 176 00:18:09.480 --> 00:18:14.360 Commodity exchanged for a claim to a future commodity 3. 177 00:18:14.360 --> 00:18:20.680 The purchase of shares of stock in a commodity by exchanging another type of commodity for 178 00:18:20.680 --> 00:18:22.400 them 4. 179 00:18:22.400 --> 00:18:27.920 The purchase of promissory notes on a debtor by exchanging a commodity 180 00:18:27.920 --> 00:18:32.680 All four of these cases have been described E. 181 00:18:32.680 --> 00:18:38.700 A claim for a service An example is personal service being exchanged 182 00:18:38.700 --> 00:18:49.000 for a Promissory Note or Warehouse Receipt or Stock F. A Claim for a Claim. Examples 183 00:18:49.000 --> 00:18:56.260 would be exchange of a promissory note for another one, of stock shares for a note, of 184 00:18:56.260 --> 00:19:02.940 one type of stock share for another, of a warehouse receipt for any of the other types 185 00:19:02.940 --> 00:19:05.140 of claims. 186 00:19:05.140 --> 00:19:11.860 With all goods analyzable into categories of tangible commodities, services or claims 187 00:19:11.860 --> 00:19:19.400 to goods, goods substitutes, all six possible types of exchanges are covered by the utility 188 00:19:19.400 --> 00:19:23.620 and supply demand analysis of this chapter. 189 00:19:23.620 --> 00:19:30.440 In each case, different concrete considerations enter into the formation of the value scales, 190 00:19:30.440 --> 00:19:36.600 such as time preference in the case of credit exchanges, and this permits more to be said 191 00:19:36.600 --> 00:19:40.560 about the various specific types of exchanges. 192 00:19:40.560 --> 00:19:46.920 The level of analysis presented in this chapter, however, encompasses all possible exchanges 193 00:19:46.920 --> 00:19:48.420 of goods. 194 00:19:48.420 --> 00:19:53.940 In later chapters, when indirect exchange has been introduced, the present analysis 195 00:19:53.940 --> 00:20:00.320 will apply also, but further analysis will be made of production and exchange problems 196 00:20:00.320 --> 00:20:07.320 is involved in credit exchanges, time preference, in exchanges for capital goods and consumer 197 00:20:07.320 --> 00:20:12.320 goods, and in exchanges for labor services, wages.