Bartering is an exchange system where participants in a transaction directly exchange goods or services for other goods or services without using a medium, such as money. Bartering is an economic system that has been successfully used in many societies throughout the world.
Adam Smith, the father of modern economics, demonstrates that barter markets pre-existed the state, and hence should be free of government regulation. In his view, the marketplace emerged out of the division of labour. When individuals began to specialize in specific crafts they had to depend on others for goods which they specialized in; these goods were first exchanged by barter. Specialization depended on trade, but was hindered by the “double coincidence of wants” which barter requires, meaning, for the exchange to occur, each participant must want what the other has. With this theory of the marketplace, Smith believes that craftsmen would stockpile one particular good, be it salt or metal, that they thought no one would refuse; this is the origin of money according to Smith. Money, as a universally desired medium of exchange, allows each half of the transaction to be separated instead of requiring stockpiling.
Other anthropologists have argued, in contrast, “that when something resembling barter does occur in stateless societies it is almost always between strangers.” Barter occurred between strangers, not fellow villagers, and hence cannot be used to explain the origin of money without the state. Since most people engaged in trade knew each other, exchange was fostered through the extension of credit. Marcel Mauss, author of ‘The Gift’, argued that the first economic contracts were to not act in one’s economic self-interest, and that before money, exchange was fostered through the processes of reciprocity and redistribution, not barter. In these societies, exchange happens as a generalized reciprocity, or a familial “communism” where each takes according to their needs, and gives as they have
The limitations of barter are often explained in terms of its inefficiencies in facilitating exchange in comparison to money. It is said that barter is ‘inefficient’ because:
1. There needs to be a ‘double coincidence of wants’
For barter to occur, both parties need to have what the other wants.
2. There is no common measure of value
In a monetary economy, money plays the role of a measure of value of all goods and services. This role may be absent in a barter economy.
3. Indivisibility of certain goods
If a person wants to buy a certain amount of another’s goods, but only has for payment one indivisible unit of another good which is worth more than what the person wants to obtain, a barter transaction cannot occur.
4. Lack of standards for deferred payments
This is related to the absence of a common measure of value, although if the debt is denominated in units of the good that will eventually be used in payment, it is not a problem.
5. Difficulty in storing wealth
If a society relies exclusively on perishable goods, storing wealth for the future may be impractical. However, some barter economies rely on durable goods like sheep or cattle for this purpose.
It has also been questioned whether barter is typically between “total” strangers. A form of barter known as “silent trade” is a method by which traders who cannot speak each other’s language can trade without talking. However, Benjamin Orlove has shown that while barter occurs through “silent trade” (between strangers), it occurs in commercial markets as well. “Because barter is a difficult way of conducting trade, it will occur only where there are strong institutional constraints on the use of money or where the barter symbolically denotes a special social relationship and is used in well-defined conditions. To sum up, multipurpose money in markets is like lubrication for machines – necessary for the most efficient function, but not necessary for the existence of the market itself.”
Economic historian Karl Polanyi has argued that where barter is widespread, and cash supplies limited, barter is still aided by the use of credit, brokerage, and money as a unit of account (used to price items). All of these strategies are found in ancient economies including Ptolemaic Egypt. They are also the basis for more recent barter exchange systems. While one-to-one bartering is practiced between individuals and businesses on an informal basis, organized barter exchanges have developed to conduct third party bartering which helps overcome some of the limitations of barter. A barter exchange operates as a broker and bank in which each participating member has an account that is debited when purchases are made, and credited when sales are made.
Throughout the 18th century, retailers began to abandon the barter system. Retailers operating out of the Palais complex in Paris, France were among the first in Europe to abandon the bartering, and adopt fixed-prices. The Palais retailers stocked luxury goods that appealed to the wealthy elite and upper middle classes, stores were fitted with long glass exterior windows which allowed the emerging middle-classes to window shop and indulge in fantasies. Thus, the Palais-Royal became one of the first examples of a new style of shopping, which adopted the trappings of a sophisticated, modern shopping complex and also changed pricing structures.
In the 1830’s the Owenite socialists in Britain and the United States were the first to attempt to organize barter exchanges. Owenism developed a “theory of equitable exchange” as a critique of the exploitative wage relationship between capitalist and labourer, by which all profit accrued to the capitalist. To counteract the uneven playing field between employers and employed, they proposed “schemes of labour notes based on labour time, thus institutionalizing Owen’s demand that human labour, not money, be made the standard of value.” This alternate currency eliminated price variability between markets, as well as the role of merchants who bought low and sold high. The system arose in a period where paper currency was an innovation. Paper currency was an I.O.U. circulated by a bank (a promise to pay, not a payment in itself). Both merchants and an unstable paper currency created difficulties for direct producers.
Modern barter and trade has evolved considerably to become an effective method of increasing sales, conserving cash, moving inventory, and making use of excess production capacity for businesses around the world. Businesses in a barter earn trade credits (instead of cash) that are deposited into their account. They then have the ability to purchase goods and services from other members utilizing their trade credits – they are not obligated to purchase from those whom they sold to, and vice versa. The exchange plays an important role because they provide the record-keeping, brokering expertise and monthly statements to each member. Commercial exchanges make money by charging a commission on each transaction either all on the buy side, all on the sell side, or a combination of both. Transaction fees typically run between 8 and 15%.
Bartering has come a long way from a a generalized reciprocity, or a familial “communism” to a highly monitored and regulated system. A system that works well alongside the monetary system most of us exist within on a day-to-day basis.