[Market Economy Guide] The Miracle of Exchange

Did Someone Really Buy a Farmhouse with a Paper Clip?

A dreamlike feat made possible through barter that benefited both sides

Today, we can obtain the things we want relatively easily. As long as we possess equivalent exchange value, there is in fact almost nothing we cannot get. How is this possible? The reason is simple: the development of the exchange economy, in other words, the all-around expansion of transactions in the market.

What happened in 2006

Through the market, we can get what we need and offer to others what we have in excess. This natural system, in which we fill what we lack through others and others fill what they lack through us, is the economy of exchange, and this is the foundation of the market economy.

Long ago, the exchange economy began with barter, and it has value and meaning in that it can benefit all parties to an exchange. Even the same item does not have the same value for everyone. Something unnecessary to one person may be essential to another, and vice versa. That is why people naturally exchange according to their own needs, and through this they satisfy their wants.

The miracle brought about by exchange

The remarkable power of exchange can be seen in the following example. In 2006, Kyle, a male student attending a university in Montreal, bought a farmhouse with a paper clip. Who on earth would trade a trivial paper clip for a farmhouse? At first glance it seems absurd, yet it really happened.

Kyle first traded his paper clip for a fish-shaped pen. The owner of the pen valued the paper clip more than the silly pen he did not use. On the other hand, Kyle valued the pen more than the paper clip, and that is why the exchange could succeed.

After that, Kyle kept trying barter deals, exchanging the fish-shaped pen for a handmade doorknob, and the doorknob for a camping stove, and so on. At one point, he even traded an event ticket that allowed the holder to spend an afternoon with the famous musician Alice Cooper for one year’s rent.

The last thing Kyle traded was the right to appear in a minor role in a Hollywood film. He exchanged that for a farmhouse, bringing the series of trades that had begun with a paper clip to its peak. In the end, it may look like a dramatic exchange between a paper clip and a farmhouse, but viewed step by step, it was a series of transactions that satisfied every participant. No one who bartered with Kyle made a trade that was harmful or unnecessary to them. Each person willingly agreed because they judged what they were receiving to be more valuable than what they were giving up. That is because exchange takes place only when both parties believe it will benefit them. The minor role in a Hollywood film, which was Kyle’s final trade item, had little value to him. For Kyle, a poor student, a farmhouse where he would not have to pay rent was far more valuable. But to the owner of the farmhouse, the film appearance was far more valuable than the house. This is because people assign different values to the same goods and services, and that is precisely the principle that makes exchange possible.

Exchanging value makes us more prosperous

As the example of Kyle’s barter shows, exchange happens only when someone wants what is being offered. At that point, what plays an active role in making the exchange happen is exchange value. Exchange value is relative value; it indicates the extent to which one product can be exchanged for another. In other words, exchange value is value as a means of exchange. We each live by exchanging the values we need according to our own standards, and through this we enjoy material abundance.

In short, exchange has made our lives richer and more comfortable. By allowing us to move beyond self-sufficient living, it has enabled us to enjoy a better life. People in a self-sufficient economy worked to feed and clothe themselves. In other words, they worked for what they themselves needed. But as exchange developed, people came to work for others. Producing goods for others became the very thing that served oneself. Someone physically weak but talented at painting no longer had to farm in order to survive. By painting pictures that others want, that person can obtain food more easily. People no longer need to directly engage in forms of production unsuited to their abilities just to acquire what they need. A life in which one can fully exercise one’s abilities and expertise has become possible.

This is not the only value that exchange has brought to life. Exchange made possible a fundamental change in the way production is organized. As each person came to do what he or she does best, productivity increased and output grew. The variety of products expanded, and quality improved as well. This was the result of concentrating on what one does better. That is because producing goods that others value more highly is precisely what serves oneself. For example, someone who is good at making shoes will put more effort into making shoes that other people will like. If that person makes lighter and more comfortable shoes, people will want to buy more of them. Is that not perfectly obvious? Exchange benefits all parties to a transaction, and production for exchange ultimately produces beneficial results for all of us.

■ Please remember

Exchange made possible a fundamental change in the way production is organized. As each person came to do what he or she does best, productivity increased and output grew. The variety of products expanded, and quality improved as well. This was the result of concentrating on what one does better. That is because producing goods that others value more highly is precisely what serves oneself.

Sung-no Choi

President, Center for Free Enterprise (CFE)

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Original title: [시장경제 길라잡이] 교환이 일으킨 기적

Author: Sung-no Choi

Date: 2020-08-10

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=7&idx=22988