All government - indeed every human benefit and enjoyment, every virtue, and every prudent act - is founded on compromise and barter. ~ Edmund Burke
It doesn't take an economist of Nobel Prize-winning potential to understand the basic aspects of barter system. This is a system of commercial exchange where goods and services are offered by one party to another interested party in return for other goods and services which are to be offered by the latter to the former. In other words, no medium of exchange exists for a barter deal and goods or services are directly exchanged for other goods or services. In such a deal, each party acts as the buyer as well as the seller as, while receiving the necessary goods, he also provides the other party with the goods that the latter requires.
By now, it must have become clear that for a barter deal to be successful, each of the involved parties should have something that the other is looking for. This phenomenon is known as double coincidence of wants and a barter deal cannot be struck in its absence, especially, where a standardized medium of exchange (money, to be precise) does not exist. Now, the absence of a medium of exchange can be a bane as well as a boon for a commercial deal. Let's find out how.
Advantages of Barter System
- Strange as it may sound, the best thing about a barter deal is the non-involvement of money. Let's take, for instance, Mr. X, who is running short of cash. Now, if X wants to get rid of a writing-desk and buy a bookshelf instead, he can seek out someone (let's call him Mr. Y) who is willing to get rid of a bookshelf and wants to get himself a writing-desk. Once X and Y come together and each expresses interest in the other's offer, they can directly barter their goods with each other. This way, both get what they want and get rid of what they do not want, especially, when either or both are running short of cash!
- Barter system can be beneficial for fostering symbiotic business relations. When two parties require each other's goods and services on a regular basis, barter system is a great way to establish goodwill between both parties by fostering confidence in each other's goods, services, integrity and business conduct.
- Good quality of products and services are assured when two parties have been commercially dealing with each other over a significant amount of time. A complementary form of business relationship, where each requires the goods/services of the other, develops interdependence and such interdependence builds reliability. Who would want to ruin such a good and tension-free business relation by delivering low-value or bad quality deals?
Disadvantages of Barter System
Despite the above-mentioned advantages, barter system could not handle the volume of commercial intricacies brought about by complex economic activities of advanced civilizations. This is what caused the concept of a standard medium of exchange to take form by way of money. Now, let us take a quick look at the major drawbacks of barter system.
- The chief drawback of this system of exchange is the difficulty in making double coincidence of wants happen! Imagine the amount of trouble a person wanting to sell a cow and buy two goats has to go through to track down another person who wants to buy a cow and sell two goats! Then again, the breed and type of the cow and goats would add to the difficulty.
- Where a standard medium of exchange is absent, it becomes really difficult to measure the value of the goods/services exchanged. Even if double coincidence of wants is established, there is not objective way to ensure that the exchange of value (of the goods/services involved) is fair. Also, storing value in the absence of money becomes difficult too as mere goods can deteriorate in quality over time and a service has no value unless it is actually rendered!
- In the absence of a standard medium to measure value, either or both barterers can get suspicious about the quality of the goods bartered. Where even one party feels that the deal he offered was of higher or better value than what he received, there can be no goodwill and the likelihood of future exchange deals between these two parties becomes negative.
- To exist smoothly, an advanced civilization or society requires some standard form of governance and a government. Such a government must earn revenues in the form of taxes in order to implement various welfare plans and undertake all necessary legislative, social and economic activities. Now, I leave it to the reader's imagination to visualize the magnitude of chaos and disorganization that is likely to happen if people are to pay their taxes in kind instead of cash. It is also difficult, if not impossible, to maintain proper accounts under the barter system of trade and commerce.
It all boils down to the measure and storage of VALUE. No economic activity can do without the involvement of value and the genesis of standard money as a medium of exchange took place solely to overcome these two obstacles. While barter system may have been the best solution in ancient times when wants were few and basic and means to fulfill them were even fewer, it was no longer a feasible way of economic exchange as civilizations became more advanced and human wants became multiple and more complex. Although barter system deals can still be seen to occur in very rare instances in the modern world, it is no longer the chief economic mode of exchange.