Introduction to Exchange
How actions and subjective values lead to exchanges.
In previous newsletters, I have pointed out that, everywhere and always, only individuals determine economic value, and all individuals always act with purpose. We cannot objectively determine people’s value judgments and the causes of specific actions. We do not need to know these factors to make definitive statements about free market activities.
We only need to observe the exchanges that result from actions based on subjective value to see the objective results of human action guided by subjective value.
If, from afar, we observe two individuals meet, one with a bicycle and the other with a skateboard, and we observe them trade the bicycle for the skateboard, we do not need more information to make definitive statements about that transaction. We can describe the action. We can define the relative values. And, we can state the prices of the items in the exchange.
Action
We can objectively measure action quite easily. By doing anything, these individuals act. Even when they don’t move, they take action.
Values
What then can we say about the values judged by the actors?
If the two converse briefly and walk away, we can conclude with certainty that at least one does not value what the other has.
However, if we see them exchange the bicycle for the skateboard, we know that each values what they got more than what they gave up. If that were not true, no exchange would have occurred. Also, since that relative valuation does exist, the actors must make the trade. Not making the trade refutes any contention that they value the other party’s property more.
We have no way to measure relative values other than the terms “more” and “less.”
Prices
A price consists of the ratio of the good given to the good received. That ratio differs with the perspective of the actor. In the example, one actor will express price as one bicycle for one skateboard; the other actor will express price as one skateboard for one bicycle.
When the “market” consists of only two actors and two products, stating the price provides little useful information. Having a clear understanding of the meaning of price sets the stage for discussing indirect exchange, which I will deal with in a newsletter in the near future.
Conclusion
Exchanges provide a basis for the study of all market (or economic) activity. I argue that we should define economics as the study of exchanges.
I will expand further on the subject of exchange when I address the two main types of exchange: direct and indirect.
I have not defined “economics as the study of exchanges.” It seems to fit all decisions I can think of, even whether to get up or to stay in bed each morning. I like this definition!