Introduction to Direct Exchange
The most fundamental form of exchange.
Exchanges have two fundamental types: direct and indirect. In this letter I will introduce the most widely used type, the direct exchange.
A direct exchange occurs when two people exchange one good for another. In the letter introducing exchange (Introduction to Exchange) I gave an example of a direct exchange: a bicycle for a skateboard. The primary distinction between direct and indirect exchanges (which I will discuss later) consists of the fact that the actors in a direct exchange intend to use what they receive for their own benefit.
Although the simplest form of exchange, direct exchanges account for the majority of exchanges in the market.
Some people might find it difficult to believe that direct exchanges represent the majority of exchanges. Alvin and Heidi Toffler wrote a book (Revolutionary Wealth) about this fact. When you take a friend out to dinner, buy a gift for your child, allow another car into your lane of traffic, hold the door for someone else…you have engaged in a direct exchange. The world would grind to a halt without direct exchanges.
Think of all the interactions you have with people that you can call direct exchanges.
Although direct exchanges do have prices, you may not want to refer to these prices as “market prices.” The direct exchange markets include only two people and a single transaction – a pretty small market.
We need to understand that we can refer to goods involved in direct exchanges as media of exchange. If a farmer takes a load of grain to market with the intent of trading various quantities of grain for shoes, pickles, pants, and an iPhone, that farmer is using grain as a medium of exchange. The recipients of the grain will probably consume the grain themselves. Thus, the farmer will need to produce more grain for the next season.
The need to understand that consumables can act as a media of exchange will become apparent when I discuss indirect exchange and money.
Conclusion
People (and economists) tend to underestimate the importance of direct exchanges. They cannot create meaningful measures of direct exchanges; thus, they tend to ignore them. You cannot understand markets without understanding direct exchanges.
This newsletter simply introduces direct exchange. I will refer to direct exchanges in the future. The important distinction from indirect exchanges consists of the fact that goods exchanged directly will require additional production. Goods used for indirect exchanges need not increase in quantity. More on that point later.