Exchange, a simple concept on the surface, has broad and profound implications in economic theory. All economic activity—all market activity—consists of exchanges. People, individually, exchange one condition for another—sleep for wakefulness, food for hunger, uncleanliness for cleanliness, and more. Cooperatively people exchange services for goods, goods for services, services for services, and goods for goods, and these exchanges form a network of interactions we refer to as a market.
Exchanges provide us with the objective information we need to make affirmative statements about market activity and what drives it. We can say what goods actors prefer over other goods. We can identify the breakdown of the division of labor. We get an understanding of comparative advantage. And more….
In spite of the objective information derived from exchanges, we must take care to not misinterpret that information. Prices, for example, provide significant data, but they do not give us a precise measure—or indicator—of value. We can only say definitely that the parties to the exchange valued what they received more than what they gave. So, a price—whether in terms of a money commodity or goods—does not give us a “market value,” as so many would say. Prices only provide an indication of actors’ preferences at a particular point in time. We can only assume that those preferences will not change significantly in the short-term. I should repeat: a price does not measure value.
I also need to make a clear distinction between “buying and selling” and “exchange.” “Buying and selling” make internal references. Whether a person buys or sells depends on their Individual perspective. “Exchange” makes an external reference. It does not matter whether one adopts the perspective of one actor, another, or an outside observer. These relationships are analogous to “left and right” and “north and south.” North and south remain the same regardless of perspective. Left and right, however, depend on the direction a person faces.
I have made the above comments as an introduction to exchange and its importance. I will break down the types of exchange in the next post or two.