This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 1. Advantage of trade. § 2. Barter. § 3. Some trading terms defined. § 4. The problem of price in simple barter. § 5. Demand. § 6. Supply. § 7. Limits of advantage in isolated barter.
§ 1. Advantage of trade.1 Whenever two persons having valuable goods meet, there is a chance that their valuations of goods at that time will not be the same. One person may have more food than he needs at the time but be lacking in clothing. If each gives to the other some of the good which to him has smaller value, and receives some of the other good, in an amount which to him is more valuable, each of the two parties will be the gainer. This mutual giving is trade. Trade increases the range of choice open to men. Each good that can be traded takes on a new importance, that of procuring other things in trade. In addition to its own power to gratify a desire, it gains a representative quality and appeals to desires with the power of all the other objects for which it can be traded. It draws its value from two or more sources, one source being its own direct uses, the other sources being the uses of each thing for which it may be traded. This led men to speak of value-in-use and value-in-exchange. But it must not be thought that an object has to any one person two values at once; for as each good had before but one value at a time to any one person tho it had many uses, so when it gets the trading use, it continues to have but one value at a time, as determined at the margin of least urgent desire.2
1 Definition of trade. Of several meanings that the word trade has had, two are still usual: (1) a regular occupation, more especially a handicraft, as the carpenter's trade, to learn a trade, used thus in reference to labor problems, the trade union, etc.; (2) an exchange of goods. In the latter sense it may have a general meaning, (a) an exchange of goods whether made by the use of money, or otherwise, when there are several traders present or only two; or (b) exchange between two traders, without the use of money. Usually it has this meaning in such expressions as "a horse trade," a "knife trade," etc. Used verbally, to trade has as synonyms: (a) to exchange, to traffic, and (b) to barter, to truck, to swap, or swop, used colloquially in England and Scotland as well as in the United States. We shall use "trade" in the broader sense (2a) of exchange by whatever means, and shall employ the word barter in the special sense (2b) of trade without the use of money, while we may call cash trading, or monetary buying and selling, the case of trade where money is used.
Readiness to trade shows a man's desire to redistribute his goods in accordance with the principle of substitution. He virtually says: "Part of what I have I am ready to give for part of what you have." The relative strength of his desire for the other good is expressed in part by the amount of his offer. When he makes this comparison and this offer, he enters into the social, economic relation of trade with his fellows.
§ 2. Barter. Trade without the use of money or even the form of the money-expression, is rarely seen by the city boy to-day. Yet it has played a great part in economic history. In early societies the differing natural products of different localities were the most usual objects of trade. Salt, so essential to life, is on the whole plentiful, but it is found in comparatively few places, in rare springs, and in the salt seas, and was eagerly brought from great distances. Copper, when it took the place of stone as the material for weapons of defense or of the chase, was sought far and wide. Rare shells, feathers, jewels, and the precious metals appealed in early times to a universal desire for ornament. Products like these were in early times the objects of a rude sort of trade, which took the form of gift-making or of barter, accompanied by much higgling, in the simple efforts to adjust possessions better to desires. In the Middle Ages, outside the cities, which were very small compared with those of to-day, almost universally a "barter economy" prevailed or, as it has been called, a "natural economy" (a term taken from the German "Naturalien," which means natural products, enjoyable things, as opposed to money). Natural economy, therefore, means that condition of society in which things are exchanged "in kind." In the Middle Ages land was the chief form of wealth. Even princes were dependent on the products of land for their incomes. The peasants were "paid" (as we think of it) for their work by the grant of the use of land. The income of the landlords was in the form of "Naturalien" (wheat, chickens, eggs, etc., as well as labor), the kind and amount of which were fixed by contract or by immemorial usage. The use of money has greatly changed these conditions in Europe and America, but barter still is used in outlying districts, and in backward countries. It occurs more frequently than one is likely to think, in trade between savages and civilized traders, in rural districts, on the school grounds, between neighbors in horse trades and house trades, in multitudes of trades made by the help of want advertisements, and in many other cases.
2 See ch. 4, sec. 9.
The extent of the use of barter to-day does not, however, measure the importance to the economic student of understanding it. The true measure is the fact that without comprehending the process of barter it is impossible to comprehend much beyond the superficial aspects of developed markets and prices. The zoologist studies the simpler forms of life, unicellular or little organized, as the best way to understand the higher organisms; so we must analyze the simplest forms of trade as a means to the comprehension of the most complex. Barter contains within it the elements from which develop all the forms of commerce.
§ 3. Some trading terms defined. Buyer and seller are the two parties to the transaction, the two traders; the buyer being the one acquiring a good not in his possession, the seller the one giving up the possession of that good in return for something else. Either of the goods may be taken as the point of departure in thought, and either party to the trade may be then looked upon as buyer or as seller.
Price is the good given by a buyer in a trade. In barter either good may be looked upon as the price of the other. At present one of the two goods is most often money of some particular kind expressly mentioned, or clearly implied. When money is used in a trade, its quantity is looked upon as the price, and the other good is looked upon as sold for, and bought with money. Price may be per piece of a conventional size, as per quart, bushel, yard, pound, or for the entire group of objects or amount bought, as the price of a farm, of an entire stock of goods, etc., as is likewise usually shown by the context. The other good, that for which a price is paid, may be called the sale-good.