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

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Chapter 3. The Pattern of Indirect Exchange

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1. The Limitations of Direct Exchange

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We have seen in the previous chapter how exchange benefits each participant

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and how the division of labor on a market increases productivity.

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The only exchange so far discussed, however, has been direct exchange,

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or BARTER, the exchange of one useful good for another, each for purposes of direct use

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by the party to the exchange.

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Although a treatment of direct exchange is important for economic analysis, the scope

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for direct exchange in society is extremely limited.

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In a very primitive society, for example, Crusoe could employ Jackson to labor on his

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The Theory of Money and Credit

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In a regime of direct exchange, how would it be possible to pay these men?

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He could not give pieces of the house to each of the laborers.

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He would have to try to sell the house for precisely that combination of useful goods

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that each of the laborers and each of the sellers of raw material would accept.

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It is obvious that production could not be carried on and that the difficulties would

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be insuperable.

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This problem of the lack of coincidence of wants holds even for the simple direct exchange

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of consumers' goods, in addition to the insoluble problem of production.

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Thus, suppose that A with a supply of eggs for sale wants a pair of shoes in exchange.

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B has shoes but does not want eggs.

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There is no way for the two to get together.

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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.

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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.

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Furthermore, someone with a less divisible commodity, such as a plow, is in worse straits.

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Suppose that D, with a plow, would like to exchange it for eggs, butter, shoes and various

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other commodities.

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Obviously he cannot divide his plow into several pieces and then exchange the various pieces

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for eggs, butter, etc.

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The value of each piece to the others would be practically nil.

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Under a system of direct exchange, a plow would have almost no marketability in exchange,

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and few, if any, would be produced.

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In addition to all these difficulties, which render a regime of direct exchange practically

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impossible, such a society could not solve the various problems of estimation, which,

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as was seen in Chapter 1, even Crusoe had to face.

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Since there would be no common denominator of units, there could be no way of estimating

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which line of production various factors should enter.

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Is it better to produce automobiles or tractors or houses or steel?

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Is it more productive to employ fewer men and more land on a certain product, or less

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land and more men?

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Is the capital structure being maintained or consumed?

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None of these questions could be answered, since, in the stages beyond immediate consumption,

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there would be no way of comparing the usefulness or the productivity of the different factors

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or products.

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The conclusion is evident that no sort of civilized society can be built on the basis

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of direct exchange, and that direct exchange, as well as Crusoe-like isolation, could yield

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is only an economy of the most primitive type.