Choice: Cooperation, Enterprise, and Human Action by Robert Murphy

Author:Robert Murphy [Murphy, Robert]
Language: eng
Format: epub
Publisher: Independent Institute
Published: 0101-01-01T00:00:00+00:00

Direct versus Indirect Exchange

Although it is common to contrast a monetary economy with a barter economy, Austrian theory requires the more precise concepts of direct exchange versus indirect exchange. In a direct exchange, the two parties to a trade both intend on directly using the item obtained. For example, if Sally trades her bologna sandwich for Jim's peanut butter sandwich at lunch, the two children have engaged in a direct exchange.

Note that a direct exchange can include a producer good, not just a consumer good. For example, suppose Farmer Anderson trades his ax in order to receive a bull from Farmer Brown. Neither farmer will consume these new goods but instead will use them to produce other items that they value: Anderson will use his new bull to father new calves, while Brown will use his new ax to acquire firewood for the winter. Yet even though there's a sense in which these goods will provide only indirect benefits to their new owners, our hypothetical exchange of Anderson's ax for Brown's bull would still be classified as a direct exchange because each farmer plans on directly using the newly acquired good.

In contrast, an indirect exchange occurs when at least one party to the transaction acquires a good with the intention of trading it away again. Thus, the person views the newly acquired good not as a potential consumer good or even producer good but rather as a medium of exchange. (Just as air or water can serve as the medium through which sound waves travel, so too can a particular good serve as the medium through which multi-person exchanges occur.)

We can tweak our previous example to illustrate the concept of indirect exchange. Suppose Farmer Anderson starts with an ax, which he values less than Farmer Brown's bull; Anderson would therefore like to trade his ax in order to receive the bull. However, in this new scenario, suppose that Brown does not value the ax more than his bull. If these were the only two individuals involved, there would be no gains from trade.

However, suppose there is a third farmer, Chambers, who has some chickens that he would gladly give up in exchange for an ax. Even if Anderson has little direct use for the chickens—he would prefer to keep his ax rather than trade it to acquire the chickens for his personal use—he would go through with the trade if he knew that Brown would be willing to give up his bull in exchange for the chickens. In this case, there would be two rounds of exchange, so that by the end, Anderson ended up with the bull, Brown ended up with the chickens, and Chambers ended up with the ax. (See Figure 11.1.)

If the ordinal preferences of each farmer were as depicted in Figure 11.1, there would be no gains from direct exchange. However, indirect exchange opens up new possibilities. Farmer Anderson approaches Farmer Chambers, offering his ax for the chickens. Chambers agrees, as he would personally prefer to the ax to the chickens.

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