7 Barter Disadvantages Addressed

by Juan

April 18, 2020 6 minutes • 1169 words

Table of contents

1. Lack of Double Coincidence of Wants
2. Lack of any common unit of measure
3. Lack of Means of Subdivision
4. Lack of Way for Future Payments
5. Lack of Way to Store Purchasing Power and the Perishable Nature of Some Goods
6. Possible big difference in delivery times and costs for items involved
7. Global Price Fluctuations

The following are the common disadvantages of barter:

1. Lack of Double Coincidence of Wants

Persons must have matching requirements for barter to work

Our Response: This is only true for bilateral barter or trade involving two persons. The barter trade proposed by Adam Smith and EF Schumacher is multilateral wherein trade is circular and not direct.

Adam-Smith

The following workmen are necessary to make the shears used to clip the wool to make the coat: The miner, builder of the furnace for smelting the ore, The feller of the timber, The burner of the charcoal used in the smelting-house, The brick-maker and the brick-layer, The workers who attend the furnace The mill-wright, forger, and smith. All of them must join their different works to produce the shears.

Wealth of Nations Book 1, Chapter 1

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

Our Response: We use barter credits which is pegged to the value of 1 kilogram of rice. The ratios are known by each exchanger and are arrived at by natural negotiation or trial and error. For example, if a haircut is $3 when rice is $1 per kilo in normal times, then haircuts have a normal ratio of 1 : 3. This leads to less inflation and more price stability.

Adam-Smith

In exchanging the produce of different sorts of labour, some allowance is commonly made for both hardship and ingenuity. It is adjusted by the higgling and bargaining of the market, according to a rough equality sufficient for carrying on the business of common life. Wealth of Nations Book 1, Chapter 5

Adam-Smith

The colonies sell their own produce chiefly to purchase European goods. The more they pay for the European goods, the less they get for their own produce. The dearness of the European goods is the same thing with the cheapness of their own produce. Wealth of Nations Book 4, Chapter 7

3. Lack of Means of Subdivision

One coffee mug cannot be exchanged for half a shirt.

Our Response: This is exactly why we use barter credits. Assuming a mug is $2, a shirt is $4, and a kilo of rice is $1. Then the shirt supplier has to buy 2 mugs to exchange a shirt as a 2:1 ratio. The value is pegged to rice where rice is 1 point. The mug seller can give 1 mug today (as a 1 point credit) and another mug after 6 months (leading to 2 points credit) and get the shirt (to claim his credit). Alternatively, he can get the shirt now in exchange for a mug (the 1 point credit going to the shirt seller), and give the second mug after 6 months (to extinguish that 1 point credit). This system is inflation-resistant.

Adam-Smith

The man who wanted to buy salt and had nothing but cattle must have been obliged to buy salt to the value of a whole ox. He could seldom buy less than this because his cattle could not be divided. If he wanted more salt, he must buy more oxen. If he had metals, he could easily proportion the quantity of the metal as he needed. Wealth of Nations Book 1, Chapter 4

4. Lack of Way for Future Payments

There is no way to write contracts for future payments.

Our Response: The points credits stay recorded indefinitely since they represent the value of rice which everyone needs as long as humanity exists. Having 1 point credit receivable from Martha means Martha owes you anything worth the current market price of 1 kilogram of rice.

Adam-Smith

Give me that which I want, and you shall have this which you want, is the meaning of every such offer. In this way, we get most of what we need. Wealth of Nations 1, Chapter 2

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.

Our Response: The barter credits can last indefinitely. Goods do not need to be stored up to pay them. Everything is a ratio. These ratios do not change drastically through time unless new technologies are discovered. For example, oil was not so important before the invention of the combustion engine. Rather, the combustion engine benefitted the ratios for oil, but reduced the ratios for coal.

Adam-Smith

The returns of the fixed capital employed by land improvers are much slower than the returns of the circulating capital. Such undertakers or projectors may, with great propriety, carry on most of their projects with borrowed money. Wealth of Nations Book 2, Chapter 2

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.

Our Response: The ratios of expensive finished products and luxuries might fluctuate more than the ratios of basic commodities and necessities. But the exchangers are free to negotiate the exchange terms and timelines for maximum fairness. Usually, this is done by trial and error just like a money transaction.

Adam-Smith

The labourer’s coarse woollen coat is the produce of the joint labour of many workmen: The shepherd, wool-sorter, wool-comber or carder, dyer, scribbler, spinner, weaver, fuller, dresser, and many others must all join to complete the coat. Merchants and carriers must be employed to transport those materials from far away! Many ship-builders, sailors, sail-makers, rope-makers, must be employed to bring the drugs of the dyer coming from the remotest corners of the world! Wealth of Nations 1, Chapter 1

7. Global Price Fluctuations

Prices can fluctuate in the world market very quickly.

Our Response: Barter credits focus on the ratio of the value of goods to each other, not on the nominal money price. In case of hyperinflation, the system can switch to ratios with slight adjustments. For example, during the 2022 typhoon season, market price of rice in the Philippines rose from 35 pesos per kilo to 50 pesos. Yet the government imposed a price cap of 41 pesos. So it follows that each point equals to 41 pesos and not 50. So the system is a free market, but not liberal.

Adam-Smith

A public mourning raises the price of black cloth and increases the profits of the merchants who have black cloth. It has no effect on the wages of the weavers [regular workers] because the market is under-stocked with black cloth, not with long-term labour. It raises the wages of journeymen taylors [contractual workers] because the market is under-stocked with short-term labour. The mourning creates an effective demand for more short-term labour. Wealth of Nations Book 1, Chapter 7