For an analogy, if I just want a loaf of bread and all I have to trade is my car or any other valuable thing.
During the time of barter economy, how were less valuable and more valuable goods exchanged?
$\begingroup$ @user253751 I am just using an analogy :) that's why even expressed "or any other valuable thing". $\endgroup$– Brandon CunnighamNov 23, 2022 at 12:32
$\begingroup$ When was 'the time of the barter economy'? I think some historical details would be useful here. $\endgroup$– afreelunchNov 23, 2022 at 22:02
1$\begingroup$ When thinking about this, you need to remember there is a major difference between real barter economies and textbook barter economies: real barter economies rarely involved single-point-in-time transactions between strangers. Instead, a real barter economy is an ongoing process between you and the other members of your community. $\endgroup$– MarkNov 23, 2022 at 22:47
The problem of a barter economy is exactly that.
It presupposes that an individual who wants to have a particular good, exchanging for this other goods he has in excess with respect to their needs, finds another individual who, at the same time, has the opposite wish.
This is the problem called double coincidence of needs.
With the arrival of monetary exchange, the convention arises to accept a particular good, money, in exchange of any good one wants to offer and vice versa.
Thanks to money, the double coincidence of needs is ‘split’ , and there is no longer the necessity that pairs of individuals with reciprocal intentions meet.
In that case the trade might not occur at all if we would restrict people strictly to use barter. As BakerStreet answer points out this is classic problem with barter.
In pre-historic economies this was a bit of a less of an issue as everyone was more or less equally poor. The difference in value would of course still occur but pre-historic societies were composed of small tribes where everyone knew each other. In such setting barter trade would work in a way where a member of a tribe would not even get goods immediately in exchange for goods provided to the tribe but rather get favors from other members of the tribe back over extended period of time (in fact anthropologists consider this gift giving although economically its more of an barter with social component).
However, obviously this sort of socially enforced barter exchange can only work in small hunter-gatherer communities where everyone knows everyone. Virtually all advanced civilizations used some sort of money, to facilitate exchanges, precisely to get around problems such as the one you describe.
1$\begingroup$ I think that the questions you refer to are very interesting questions of anthropology, and also of economic history. In advanced societies there could be situations in which barter can reappear , when institutional mechanisms, in particular markets, cease to work for some reason, for instance in war periods, because of lack of goods or high inflation. $\endgroup$ Nov 22, 2022 at 14:25
$\begingroup$ @BakerStreet thats a good point although they usually appear just locally and often there will be some quasi currency emerging, e.g. cigarettes in WW2 POW camps, alcohol etc $\endgroup$ Nov 22, 2022 at 14:45
$\begingroup$ Yes, it could be local. I write from Italy, and I've heard stories about the black market and the necessity to go to country from cities to find and exchange food during Second World War. And I think of the period of hyperinflation in Germany after the first World War, the Weimar hyperinflation 1921-23. I suppose that nobody wanted money. $\endgroup$ Nov 22, 2022 at 14:59
It can be resolved through debt.
J. Wellington Wimpy tells Popeye, "I will pay you Tuesday for a hamburger today." (Yeah, they didn't have hamburgers back then, but hey, you mentioned cars, so…) Popeye will remember that Wimpy owes him for one hamburger. Wimpy can pay off his debt when he acquires something worth a hamburger that Popeye wants, or perhaps Popeye will allow Wimpy's debt to grow until Wimpy can trade in something bigger.
Let's say though that Wimpy keeps racking up debt and Popeye gets tired of Wimpy not paying any of it. "Wimpy," says Popeye, "Ya gots ta do somethin'. I've given ya 15 hamburgers now and I gots nuthin' ta show for it."
"Very well," says Wimpy, "but I need to eat, and all I have right now is my car, and we both know my car is worth more than 15 hamburgers. It's worth more like 1000 hamburgers."
"How's about ya gives me yer car and then I owes ya 985 hamburgers?"
"It's a deal!"
So now the debt is flipped around and Popeye owes Wimpy.
What if instead Wimpy left town? Well, where would he go? Societies were small back then, and neighboring tribes were usually at least a little hostile. They probably wouldn't be too eager to welcome someone fleeing from a debt.
Over time, the town grows and Popeye's hamburger business is booming, and he's starting to have trouble keeping track of whom he owes and who owes him and how much. There are two solutions Popeye might find: he could start keeping a transaction journal, thus inventing proto-writing, or he could start issuing tokens for debt.
Let's say Popeye commissions some people to make little silver tokens for him. They can make as many tokens as they have metal for, and they can exchange them for one hamburger each. This goes on for some time until Popeye has accumulated a lot of tokens and distributed many of them to his patrons. Eventually, Popeye receives a token from someone he's sure he's never met before. "Hey, what gives?" Popeye asks. "I don't owes ya a hamburger."
"No," says the patron, "but you owe Olive Oyl one, and she traded her token to me. So if you give me a hamburger, that settles your debt to Olive Oyl, and it settles her debt to me."
"Well, blow me down!" says Popeye. "Makes sense ta me. Here's your hamburger." Soon people are trading the tokens among each other for other goods and services as well, and thus coinage was invented.
I realize I've digressed quite a bit here, but it flowed so naturally that I couldn't resist. My point is that barter systems will lead to debt systems, and debt systems will eventually lead to coinage, thus solving the problem. Of course, it might take a long time for that to happen, especially since coins are not trivial to make, and coins are a lot easier to circulate when you have a big government making them, but the principles are still the same.
$\begingroup$ Tangential: cryptocurrency makes it very easy for Popeye to start issuing Hamburger Tokens $\endgroup$ Nov 23, 2022 at 11:37
$\begingroup$ In the second half of 1970’s in Italy took place the phenomenon of “mini-checks’, a creation of private money to get out from a kind of micro-barter that had arisen in retail trade. In that period there was a dramatic shortage of small change, so that people in commerce gave each other telephone tokens, candies, bandaids, bus tickets, and so on. So, banks issued checks of very little value, say 0,50 euro, and very small size. This mini-checks were used currently as money. It has been estimated that were issued about 200 billions of Liras in mini-checks. $\endgroup$ Nov 24, 2022 at 12:02
There are two types of barter economies in the world: textbook barter economies, and real barter economies.
In a textbook economy, if you have a car and want a loaf of bread, you're stuck. You need to either accept a wildly unfavorable exchange or you need to put together some sort of convoluted scheme to make change for a car.
A real barter economy doesn't work that way. Real barter-economy transactions almost always take place between people who have known each other for decades, and are more akin to a running exchange of favors than a single-transaction purchase.
In a real barter economy, you might make a deal with the village baker to get fresh bread for a week in exchange for a ride at some point in the future. Since this is far from the first time you and the baker have interacted, the baker knows if you can be trusted to make good on your promise. (And you could very well end up with the baker asking you to give someone else a ride instead, to settle some other favor owed.)
Although economics textbooks sometimes claim that pre-modern economies were based on barter, my understanding is that there is actually very little evidence for this claim.
To quote from a 1985 paper, which in turn is quoted in a very nice piece in the Atlantic,
No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money . . . All available ethnography suggests that there never has been such a thing.
Duffy and Puzzello (2014) make the same point using different language:
. . . there is no evidence for quid-pro-quo barter exchange systems as a predecessor to monetary exchange systems in the anthropological record.
As you will see in the Atlantic piece, there is good evidence of societies based on a kind of ‘gift exchange’: you give me something today on the implicit understanding that I will do something for you at a later date. While this resembles the kind of barter described in economics textbooks, and perhaps even could be called 'barter', it is different for at least two reasons:
- In pre-modern economies, favours would not need to be done at the same time. So this is (at best) a form of 'inter-temporal barter'.
- More importantly, my understanding is that people would not usually co-operate at a pre-determined rate of exchange (e.g. if you give me 1 apple, I will give you three bananas later). This also weakens the analogy with simple models of 'barter exchange'.
1$\begingroup$ Actually this is fallacy of equivocation. What anthropologist call gift giving is in economics defined as barter i.e. anthropologist consider even self-interested tit-for-tat exchanges gift giving as long as any social obligation is included. That is simply different terminology then one used in economics. That would be equivalent as saying there is no evidence for cosmic inflation (where in physics inflation means increase in volume of space) because in universe there is no price level (using econ definition of inflation). In fact the gift giving evidence in anthropology is evidence for barte $\endgroup$ Nov 22, 2022 at 18:21
1$\begingroup$ as defined in economics. In addition the definition of gift-giving used there is challenged in anthropology itself (eg see Testart 1998 for discussion). In economics barter covers all quid for pro exchanges and gift giving would be exchange where reciprocation is not explicitly expected. $\endgroup$ Nov 22, 2022 at 18:24
1$\begingroup$ But what you describe still lacks nuance. It wasn’t B may do unspecified favor. It was B must do a favor. Did you even read the sources you are quoting? I don’t mean that terrible Atlantic article I mean the actual books it’s based on? The gifts were literally mandatory. A tribe would expel you and leave you to die if you would not contribute back. If it would be may and there was no obligation - yes that would be gift giving economy - however anthologists have this completely unintuitive idea that even mandatory exchange under potential penalty of death is gift when social ties $\endgroup$ Nov 24, 2022 at 7:30
1$\begingroup$ Are involved. Also in 101 textbooks barter might be immediate but in advanced textbooks you can have delayed barter. Clearly if the favor must be repaid or you are kicked out of tribe and left to live in woods to die it’s not gift as understood by most people and as understood in economics $\endgroup$ Nov 24, 2022 at 7:31
1$\begingroup$ I recommend you read the myth of the myth of barter $\endgroup$– WilliamTNov 24, 2022 at 7:32