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  • Print publication year: 2003
  • Online publication date: July 2010

2 - The Exchange Economy

from Markets

Summary

Markets range in size and sophistication from neighbourhood flea markets to global currency markets, but every market exists for the same reason. Some exchanges of goods and services between two or more people are mutually beneficial, in the sense that they would raise the well-being of every party to the exchange. Markets are a mechanism through which people identify these trades and carry them out.

The simplest mutually beneficial trades involve only two people, for example, a dairy farmer and a poultry farmer who trade cheese for eggs. Underlying these trades is a double coincidence of wants: each person wants the goods that the other person is willing to give up. Double coincidences are relatively rare, and a mortician or divorce lawyer who relied upon them to furnish his table would not eat well.

The benefits from trade generally rise with the number of people who are potentially involved in each trade, for two reasons:

Multilateral trade – trade involving more than two people – might be possible even when bilateral trade cannot occur. For example, if the poultry farmer does not want cheese, there can be no trade involving only the dairy farmer and the poultry farmer because there is no double coincidence of wants. A multilateral trade in which the dairy farmer gives his cheese to the barber, who cuts the hair of the poultry farmer, who provides eggs to the dairy farmer, might nevertheless be possible.

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