7 Barter Disadvantages AddressedJanuary 1, 2015
The following are the common disadvantages of barter:
1. Lack of Double Coincidence of Wants
Persons must have matching requirements for barter to work
This is only true for bilateral barter or trade involving two persons. Smith’s system is multilateral wherein trade is circular and not direct.
2. Lack of any common unit of measure
If A has rice, and B has wheat, then how much of rice will exchange for how much of wheat? If there are 500 goods, we will have to work out 124,750 possible ratios of exchange which is an enormously difficult task
Such objective valuation is true only for commercial transactions which require a fixed price. Smith’s system is not commercial as it does not rely of fixed nominal values or even any equilibrium theory, but instead relies on real value or the Effort Theory of Value, facilitated by fellow-feeling, natural to all humans. The goal of trades is not profit, but for “carrying on..life.”
Thus, if A and B agree to trade their rice and wheat at a ratio of 1:1, then the price of 1 rice will be 1 wheat. In other words, the price of a commodity will be the other commodity.
3. Lack of Means of Subdivision
One coffee mug cannot be exchanged for half a shirt
Our system pegs the value of everything to the common grain of the country. So the coffee mug will be priced in rice, let’s say 1 mug: 2 kg rice and 1 kg rice : $1. If the shirt is $8, then it is worth also 8 kgs of rice. The coffee mug seller will get the full shirt in exchange for the mug, but owe 6 kg of rice. In case the shirt seller does not want the 6 kg rice credit, he can ask for $6 from the mug seller.
The advantage of this is that the coffee mug seller was able to save $2 by giving his mug (something that he can supply easily) instead of money. This reduces his reliance on the expensive monetary system and shifts his reliance towards his own products and services. Grains, like metals, can be subdivided yet computed objectively.
This system can be done online or offline with resource credits representing rice.
4. Lack of Way for Future Payments
There is no way to write contracts for future payments.
Future contracts have the same dynamics as trade contracts administered by the Clearing Authority. This implies that the Clearing Authority has some quasi-legal power to enforce the fulfillment of future contracts.
I can borrow your pen and give it back next week by signing a contract that reminds both of us.
5. Lack of Way to Store Purchasing Power and the Perishable Nature of Some Goods
Money can be stored but not all goods, such as eggs, can be kept until one retires.
Supply chain barter is meant to circulate both raw materials and finished products to maintain production to sustain economies. It is not for investment. Thus, a company will trade for eggs only when it needs it, such as restaurants which follow “just in time” production. A child can receive a credit of 10 eggs to be claimed from a farm 50 years later at adulthood.
There are some cases such as in technological products where time is essential. For example, if I received a credit of one Nokia 3310 mobile phone in 1999 (when the phone was very useful and hi-tech) and claim it in 2018 (when the same phone is almost useless and obsolete), then it would be a clear injustice to me. This problem can be solved by finding the equivalent product in the current time. In our example, the new version of the Nokia 3310 can be claimed. So a child in 1998 can receive a credit of Nokia 3310, to be claimed 50 years later as whatever would be the equivalent of a Nokia 3310 by then.
6. Possible big difference in delivery times and costs for items involved
Company A might trade a single expensive item for many of Company B’s cheap items to be delivered many times, exposing Company A to more risk than Company B.
Normally, cheap raw materials are not exchanged for expensive finished goods in a multilateral barter. Iron ore is not directly sent to a laptop factory to be converted to a laptop. Instead, ore is sent to a steel mill, which will send metals to a chipmaker, which will then send chips to the laptop factory. The value of a truckload of microchips is closer to value of a truckload of laptops, than a truckload of iron ore.
7. Global Price Fluctuations
Prices can fluctuate in the world market very quickly.
Supply chain barter relies on real prices and not on nominal prices. Any sudden reduction or increase in real prices in the external market is either absorbed or enjoyed by the trade partners. From a global societal perspective, the losses of the losers will be offset by the gains of the gainers, having little impact on the global economy.
The Consequence of a Money-only system
By neglecting barter, economic systems lead to a rapid accumulation of fake nominal value which leads to frequent crashes. The next post will explain such a phenomenon as the Skyscraper curse