A Short Course in Economics
2. Voluntary Exchange
From this point on, we shall
consider only a society based on voluntary action, entirely unhampered by violence or threats of
violence.
Since exchange is a type of
action, it is only done when both parties expect to benefit from the
exchange. If one of them did not expect
to benefit, the trade would not take place.
Therefore a necessary condition for a trade to take place is that the two goods have reverse valuations on the
respective value scales of the two parties to the exchange.
If A has a vase and B has a
typewriter, an exchange will only take place if A values the typewriter more
than the vase and B values the vase more than the typewriter. Additionally, they must know of each other’s
existence and their assets.
When the goods to be
exchanged are available in supplies
of homogeneous units, the law of marginal utility becomes the decisive factor
for whether or not a given trade will be made.
If Jones and Smith have certain quantities of units of goods of X and Y
and in their possession, then in order for Jones to trade one unit of X for one
unit of Y…
- To Jones, the marginal utility of the added unit
of Y must be greater than the marginal utility of the unit of X given up.
- To Smith, the marginal utility of the added unit
of X must be greater than the marginal utility of the unit of Y given up.
The number of units traded
between Smith and Jones will depend on how long these two conditions continue
to be true. Because of the law of
marginal utility, as Jones acquires more and more units of Y, and gives up more
and more units of X, the marginal utility of X will eventually be higher than
the marginal utility of Y, and trading will cease at this point.
Up until this point, goods
have been valued based on their use-value; that is, the value of the end that
they will be used for. But in a society
based on voluntary exchanges, there is also an item’s exchange-value to be considered.
A unit of goods’ exchange-value is the use-value of the goods that could
be available by exchanging the unit in trade.
If a unit of a good is exchanged, then to the actor, the exchange-value
of the unit was higher than the direct use-value of that unit.
In a society of voluntary exchanges, units of goods are valued according to whichever is highest, the direct use-value, or the exchange-value, taking into account the costs of the exchange. This opens up the possibility of producing goods not for direct use-value but for use in exchanges. The pattern of interrelations in a society of voluntary exchanges is known as the market. Goods are said to be produced “for the market”. A market not burdened by the interference of violent action is an unhampered or free market.
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