Wednesday, March 4, 2009

Barter and the Functions of Money

This post relates to the following Keystone Economic Principles:
4. Economic systems influence choices.
6. Do what you do best; trade for the rest.

8. Quantity and quality of available resources impact living standards.
9. Prices are determined by the market forces of supply and demand…and are constantly changing.

There was an article in the March 1, 2008 edition of The Richmond Times-Dispatch that was recommended to me. The article is about the rising incidence of barter in the current economy. I posted on this phenomenon a couple of times last year, and there have been other articles on the topic in other publications.

But there was something in Sunday's article that was different and started me thinking. That something different was an insert that provided advice when making a trade. The hints listed were helpful, but to me they provided examples of why money functions better in an economic system. Specifically, I was reminded of the three basic functions of money: medium of exchange, measure of value and store of value. Allow me to explain.

The first guideline was to "be clear on the details." This would be important in a barter situation, and a monetary situation. The relevant money function might be "medium of exchange." Whether barter or money is used, there needs to be an understanding of what is received. However, when money is used, what is given is automatically clear. When bartering, we need to be more specific about what is given and what is received.

The second hint was to "carefully explain what you want and supervise the work. In my opinion, this is essentially a restatement of the first guideline, but it also made me think about the money function "measure of value." Since money provides a common language - a common measure of value - for goods and services, it is easy to determine whether something is properly priced for our needs. If the money price is low enough, we enter the trade voluntarily, believing that the value received is greater than the value given. In a barter situation, that needs to be monitored more closely.

The third guideline in the article was "don't assume anything." Again, the money function of measuring value came to mind. The article spoke about expectations, etc. and even suggested a written contract. While written contracts are the norm for large value items, for smaller value items, we depend on price to convey much of the necessary information because money provides a measure of value. What is received for that which is given?

The fourth idea mentioned is "know who will supply needed materials." Again, this would be standard in many contracts, but absent a contract the money price would serve as a measure of the value. A money price would convey much information (although it may not specify); and by acting as a medium of exchange, would provide a mechanism for purchase of materials.

The last thing mentioned is "paying taxes." Here I will defer to the function medium of exchange. To my knowledge, the Internal Revenue Service doesn't accept bartered goods or service for settlement.

I welcome your thoughts and comments.

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