Description of Exchange


The principle of exchange might seem obvious. It gets ignored, however, in many discussions of “buying,” “selling,” “international trade,” and other market activities. These terms all represent internal references. (Left and right are internal references; north and south are external references.)

Accurate discussions of market transactions require using an external reference: “exchange.” A consciousness of the principle of exchange reminds people that all market transactions, as observed by third parties, involve two parties.

When discussing internal references, such as buying and selling, we must always ask about the influence and impact on the other party.

An Example

When an individual encounters a good (A) that he values more than good (B) that he owns he will seek to make an exchange. If the owner of good B values good A more than good B, these two individuals will make an exchange.

The consummation of this transaction proves that each party values what he gets more than what he gives up. If they don’t make the exchange, the original premise about who values what proves false. In other words, an exchange amounts to individual actions based on individual values.

The result of that transaction provides objective evidence of the relative values of the two individuals. Keep in mind it only indicates relative values — in terms of more or less — and never quantifiable values. That evidence of value results in what we refer to as a price.


Remember that every economic transaction consists of an exchange. A tendency exists to view transactions from only one perspective at a time, either as a buyer or a seller; or as a wage earner or a wage payor.

People tend to focus on the flow of money. Sellers want more money (i.e., greed). Workers want more money (i.e., fair pay). Viewing these transactions as exchanges shifts from one to two perspectives.

Sellers want more money for their goods; buyers want more goods for their money. Which is greedy?

Workers want more money for their labor; employers want more labor for their money. What is fair?

Try to get the best deal for yourself, but as an observer, admit that you don’t know what is fair or what is greedy.

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