Indirect Exchange: Summary of “Man, Economy and State,” Chp. 3

This is part three of my summary of Murray Rothbard’s Man, Economy and State. You can read part two here.

In my summary of chapter two, I talked about direct exchange, which takes place when a person exchanges a good for another good, that he plans to use.

A barter economy, one consisting only of direct exchanges, is very limited. In this type of economy, if I am interested in something that you own, I must find something that I own, that you are interested in, so we can make a trade. What if you do want to get rid of something that I want but I don’t have anything that you want? In this case, a trade cannot occur.

Money

Money came to be because of this limitation. Individuals started to realize that they could get something in a trade that they didn’t really have any use for directly, but that they could use in another trade, to get the good that they could use. This is essentially what money is: a good that is used primarily for indirect exchanges.

Many different goods have been used as money in the past, and the good chosen is done so spontaneously, meaning that historically, there is no one person or government that decides which good everyone will use.

For a good to be considered a good candidate for money, it must contain some characteristics, some of which, I list below:

  • It must be durable. You want to be able to store the money without it losing its value due to deterioration.
  • It must be divisible into smaller units so that you can make small purchases.
  • It must be something of value. This is obvious because a worthless good would never be chosen by the people as a medium of exchange.

Gold and silver, because of their characteristics, have been the goods chosen by the people, for thousands of years.

Having one common money (e.g., the dollar) also helps businesses calculate profits and losses because they only have to worry about one good that they are losing or gaining. Imagine how difficult it would be to calculate how much profit you have made if instead of trading your products or services for money, you were trading for different things every time, like hats, notebooks, TVs, etc. You wouldn’t have a single number that would indicate exactly how much profit you have actually made in terms of purchasing power.

Making Money vs Leisure

Although not always the case, let’s assume that the more you work, the more money you make. Why would you ever stop working? Other than for sleeping and eating, why wouldn’t most people choose to work 100% of the time? Again, this goes back to the law of Marginal Utility. The more you work, the more the marginal utility of the leisure that you are giving up–which is also a good–goes up. The more money you make, the more the marginal utility of money goes down for you. A person will stop making money when the marginal utility of the next unit of money that could be earned is no longer higher than the marginal utility of the next unit of leisure that a person wishes to enjoy.

Summary of Chapter 4: Prices and Consumption >>

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