Monday, June 30, 2008

Barter in the Economy

Don't ask why I was searching for articles about barter, but in the course of my search I ran across this AP news article (link no longer available) from the beginning of June. The subject is the rise of bartering among consumers (and businesses) in a slow economy.

I found myself asking "why would an economic slowdown increase barter?" Generally, an advanced economy reverts to barter when the money used for commerce begins to fail in one of the three purposes: medium of exchange, store of value, measure of value. On the surface, the dollar doesn't appear to be failing these tests. It remains a well-accepted medium of exchange. Inflation, while higher by some measures than we've been used to recently, is not at the high rates one usually associates with a failed currency. Many would also say because inflation is not particularly high, the dollar retains its ability to measure value.

Feel free to argue those points. I'm setting up a straw man argument to knock down. For the purposes of this post, I'm going to argue that the issue is the opportunity cost of time. If business is slow, we have more time to seek alternate channels to move product. To the extent that we use the slow period to find someone who has what we want and wants what we have (double coincidence of wants is not always that common), barter may make sense. It allows us to move product and to satisfy wants. However, in better times, the benefit may not equal or surpass the cost of time.

Add to that, the fact that money is relatively "scarce" (to borrow a characteristic theme) in a slowdown, barter may offer some opportunities for trade that don't exist when our monetary income is constrained.

I look forward to your comments.


Anonymous said...

One reason barter might be on the increase is that with falling incomes in a recession, people have a greater desire to avoid paying taxes. Barter transactions avoid a paper trail, and are easier to conceal from tax authorities. You paint my house and in exchange I'll give you my antique gun collection....

James River Trade Exchange said...

Anonymous (above) may be accurate for small personal and direct exchange of services, but don't forget there is a billion dollar industry around the world, used by businesses legitimately bartering through professional trade exchanges that do record and report taxes. So why do businesses barter this way? Simply put, b/c they get to network, save cash, and increase their spending power.

Leif @ BizX said...

Tim, bartering obviously becomes more popular during economic slowdowns as individuals and organizations start looking for more creative ways to get by, but that is not its only purpose.

Organized barter through a professional barter exchange is a smart way for any business with excess inventory or downtime to increase their sales, expand their market share and improve their cash flow. Members of the exchange buy within the network before spending cash, so as a member you are more likely to get business than your non-bartering competition. It doesn't matter what the economic climate is, if you have inventory or employees just sitting around, why not monetize those resources?

Once you've traded through the exchange you use the new income to purchase needed products and services from other exchange members, without spending cash.

Barter exchanges also eliminate the need for the "double coincidence of wants" that you mentioned because exchange members earn trade credits which they can use anywhere in the exchange.

A barter exchange is a micro-economy and as such, it is only as valuable as the businesses who are members and the way the network is managed. Businesses interested in joining an exchange should make sure they have plenty of opportunities to both buy and sell within the network.

BizXchange is a well-respected exchange serving the Puget Sound, Washington and San Francisco Bay Area, California markets. You can find other exchanges throughout the country and around the world at the International Reciprocal Trade Association.

Tim Schilling said...

The commenters speaking to the idea of barter for business have very valid points.

However, I think my purpose was to ask why consumers are increasing their use of barter. Given that, the idea was to provide teachers with some additional ways to discuss concepts.

Nevertheless, barter can be an alternative way to trade. I will also point out that IRS rules about trade are quite clear about reporting and setting value.

Smart Bareter said...

I think bartering is a great idea in times of economic struggle. You can even build a more trusted and friendly relationship with bartering.

With economic slowdowns you have reallocate financial resources, Bartering can help in this process, especially if you are a start-up.

Bartering has many uses to the savvy entrepreneur. Feel free to view

Anonymous said...

When a business buys supplies or equipment, they have no reason to think the money they spend will be coming back to them. With barter the expenditure comes immediately back because they pay with their own product. With every barter "purchase" they immediately move inventory, just as in a "sale". When sales are slow, this can be important.

I don't see how consumers barter with businesses--unless they are trading labor for goods and services. Consumers might barter with each other--as in swap meets.

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