Origins: Economics & The Barter System
Greetings!
No matter who you are — a student dreaming of working for J.P. Morgan, someone who wants to learn market fundamentals after reading a Tweet about what a great time it is to invest, a curious polymath (or even an economist who enjoys pointing out flaws) — welcome to A Saturday Affair!
While necessity may be the mother of all invention, boredom is the father. Inspired to start this blog by the solitude of lockdown, I solemnly swear to keep you entertained and informed.
The fact is, nobody really understands economics. Economics has always been more art than science. All economists do, and have ever done, is make predictions and hope to God that they are right (or wrong). The ones that hit the mark go down in history books as one of the greats and the rest live to fight again another day.
However, fear not, it’s not exactly like shooting in the dark. All of economics is based on certain specific founding principles and factors, exploring which is the very purpose of our blog. We will travel far and wide, from ancient Greece and Mesopotamia to modern America and China, exploring everything from the humble barter system of yesteryear to the complex financial instruments of today. All we want is for everyone, you and us, to emerge just a little more aware, with a deeper perspective on today’s ever-evolving economy.
While it may not be perfect, I do hope you enjoy my below article — the first in a series to come.
Checkpoint #1: The Barter System
The term “Economics” is derived from the amalgamation of two Greek words — ‘oikos’ meaning family or household and ‘nomia’ meaning management or distribution — resulting in a term that literally meant ‘the management and workings of a household’. Now, of course, it has come to mean ‘the management and workings of a country’ — the American ‘economy’, the Chinese ‘economy’, the Indian ‘economy’ etc.
But to really understand economics, we need to start at the very top, before the existence of currency (a pretty old invention in itself), and what better place to start than the legendary barter system that most of us are familiar with.
For those of you that are unfamiliar with barter, let me explain.
You simply exchange something that you have but don’t really need for something that you don’t have but really need.
And that’s barter. However (there’s always a but), the gentleman above has had it easy. He managed to find someone who had a lot of wheat and also needed meat, and therein lie a couple of the challenges of the barter system.
A fellow looking to barter (basically a fancy word for exchange) his stuff for something else has to consider two things:
- He has to find someone who has exactly what he wants
- He has to find someone who wants exactly what he has
Overcoming hassle no. 1 wasn’t that hard, but it is to overcome hassle no. 2 that we humans invented something that we can never have enough of, something that nobody can say no to. We invented a common medium of exchange, also known as money or, more specifically, currency.
And the world has never been the same since. Or at least that’s how the story goes.
The truth is, nobody has ever seen hard evidence of an economy of the past operating entirely through barter. Money, in some form or the other, always seemed to have existed.
The ‘great thinkers’ of ancient Greece and Scotland like Aristotle and Adam Smith had simply assumed that barter would have existed purely through deductive logic. They had, in effect, reverse engineered a theory based on the current existence of money. They figured that because the concept of money exists, there was probably a time when it did not, and hence humans would have acquired stuff they did not have through barter
But these fellows were not the ‘great thinkers’ for nothing. To look at why they theorised the existence of the barter system, we will have to travel further back in time, to our cavemen days.
Back in our cavemen days, every family was self-sufficient. However, like the age old saying — ‘Strength in numbers’, humans soon started to realise that survival was way easier and more probable as a larger group or community.
The advent of community living (a group of families, say 20 or 30), aside from increasing the chances of survival also exposed family units to new stuff they didn’t have (stuff that other family units had).
It is often said that the mere existence of a product (a new model of the iPhone, for instance) creates a need for it. And that is precisely (probably) what happened in the community. As families saw all the ‘new stuff’, they wanted it, and the only way they could get this ‘new stuff’, you guessed it, was through barter.
But as communities grew to hold populations of 100’s and 1000’s, many challenges started coming to light:
- The value of something in terms of something else — how many sheep are 50 apples worth?
- If 1 sheep is worth 100 apples, cutting the sheep in half to exchange it for 50 apples is, well, stupid. The sheep loses all its value
- You could give up the entire sheep in exchange for 50 apples now and 50 apples after a month, but it’s not like you can blindly trust the guy to keep his word
- Say you exchange the sheep for a 100 apples, you might not be in a position to safely store so many apples due to the presence of some unruly creatures that have been ravaging your home
The invention of currency helped solve almost all these challenges.
Barter system existed in a time of no currency. And despite the several drawbacks we’ve seen, even today when currency fails, we resort to this system. For instance, during the hyperinflation crisis of Venezuela, barter became the norm because currency lost its value to the point of worthlessness that there was no point in holding onto it.
Do keep in mind that the theory of the origin of the barter system is just that, a theory. I don’t know if it’s right or wrong, but it does seem to make sense. If you disagree, feel free to write to me with your own theories of barter’s origin. I do love a good discussion.
P.S. My knowledge is an amalgamation of content from my work experience, exam curriculums, various books, articles, newspaper reports and discussions.I combine this with my own unique perspectives and theories to produce weekly blog posts here. You can write to me at barterstreetblog@gmail.com — any feedback, suggestions, criticisms (and praise) are most welcome! Stay tuned!
