Prepping Economics Part 3 : Why Bartering Is Not A Useful Way of Trading
This is the third of our six part series about prepping economics. An index listing the other sections is at the bottom of this article, and if you’ve arrived here directly by following a link, you might want to consider starting at the beginning and then working your way through the articles in sequence.
Most preppers will agree with the first two parts in this series, where we look at how present forms of money (ie US currency in both physical and electronic form) will cease to be useful after TEOTWAWKI.
Now for the big question. What will replace it? This is where people’s views diverge. What will replace the current dollar currency, and how/when will that transition occur? Two common answers are either ‘barter’ and/or ‘gold, silver, and other precious metals’. So let’s now consider the benefits and challenges associated with bartering as a means of trading.
An important issue, which we’ve not looked at sufficiently in past articles on the general topic of economic issues after TEOTWAWKI, has been to appreciate that a post-WTSHTF economy will have two distinct parts to it. The first is what we term a transitional period, the second is a more stable scenario moving forward from that. We’ve considered the more stable future in earlier articles, but the period of transition is of great importance to us all, because that is where the greatest difficulties lie.
At the end of the previous article, we reached a point where a person has no money to buy the things which other people have to sell. You’ve got a keen buyer and a willing seller, but no money to allow the transaction to occur and for value to be exchanged – for the buyer to give an appropriate thing of matching value to the seller.
How Bartering Should Work in Theory
This is where the concept of bartering arises. ‘I’ll exchange my pound of meat for two pounds of your vegetables’. Or ‘I’ll paint your house if you’ll repair my car’. Or whatever else.
Examples such as the two above, showing how bartering works, makes it seem like a positive and very clearly understood proposition. It is a direct exchange of goods and/or services between two willing participants, and there’s no dependence on any external factors such as money or anything else.
As such, bartering seems ideally suited for a ‘post-disaster’ type economy, because it is independent and does not require any external forces or factors. So yes, in some situations, bartering can be an excellent way to conduct business. But only in some situations, and as we’ll now see, these situations are probably very rare.
The Five Problems of Bartering in Reality
Unfortunately, bartering theory doesn’t translate well to the real world, and quickly you’ll discover there are limitations and problems with bartering.
Problems start when what you want to trade isn’t what the guy you want to trade with wants. If you have eggs to trade and he has milk, that’s fine if he wants eggs. But if he wants meat, and you don’t have meat, you’ll not be able to trade, even though he wants to sell milk, and you want to sell eggs.
There are five major categories of problems when it comes to real-world bartering.
1. The (Double) Coincidence of Wants
This is the term economists use to describe the situation we just described. You and the other person need to, by happy coincidence, each want the thing the other person wishes to trade. If you don’t, then you can’t barter directly. You need to invite a third person into the transaction, and hope that the three of you can now create a circular barter. Maybe you need to add a fourth person, too.
Needless to say, the more people in the transaction, the massively more complicated it becomes. And these more complex transactions lead to many of the subsequent problems becoming apparent, too. Let’s next consider :
2. Lack of a Common Measure of Value
Maybe, most of the time, you with your eggs and your neighbor with his milk can swap one product for the other, and you’ve worked out an agreed value that each quart of milk is worth a dozen eggs. Each time you meet, you hand over your dozen eggs, and he hands over his quart of milk, and there’s no need for any extended or additional bargaining. You both also have some predictability – you know how much milk your eggs can be traded for.
But what happens if your neighbor says ‘Hey, Bill, I’ve still got your eggs from last week, but if you get me a pound of meat, I’ll swap that for the quart of milk you want’?
Your first problem is to decide if a quart of milk fairly equates to a pound of meat. Your second problem is now finding a person with meat to sell, and having him agree that a pound of meat equates to a dozen eggs. Maybe the meat guy doesn’t much like eggs, and says ‘I’ll only give you half a pound of meat for a dozen eggs’. You go back to your neighbor and say ‘Hey, the meat guy would only give me half a pound of meat for my eggs, so here’s the half pound, can I have my quart of milk’. But your neighbor says ‘No way – when I trade directly with the meat guy, I always get a full pound of meat for my quart of milk.
This problem is expressed as a lack of a common measure of value. You’ll end up having to keep a huge table in a spreadsheet program (assuming you have a computer that still works!) which lists all the different trade items in your community and their respective value in terms of all the other trade items.
If you do that, you’ll find many anomalies such as the example we just walked through. In the modern world, such anomalies are often described as ‘arbitrage’ – the ability to buy something cheaply somewhere and then sell it for more money somewhere else without having added any value in the middle. In an ‘efficient’ market where all buyers and sellers understand the respective value of all things, such anomalies are unlikely to occur, but bartering is not an efficient market and you’ll end up with crazy seeming situations such as the eggs/milk/meat example.
The unpredictability of costs and values makes it very hard to make appropriate buying and selling decisions and harms everyone involved.
3. Trades of Unequal Value
Maybe you keep pigs and your neighbor keeps cows, and you decide to swap some pigs for some cows. You want a cow to get some milk, and your neighbor wants to start raising pigs.
In the past, it seems that generally two cows are being traded for five pigs. But you only want one cow. How do you give your neighbor two and a half pigs? You can’t – you either have to give him two or three. You can’t swap five pigs for two cows, because you only have four pigs in total (and don’t want/need two cows either).
This is because the pigs and cows are indivisible (assuming they are alive), and that is the third of the problems with bartering. If you’re trading grain for milk, it is easy, because both milk and grain are easily divisible into small quantities, but if the things being exchanged can not be split into small amounts, how do you handle that?
4. Problems Storing Wealth
Let’s go back to the example of you trading eggs for other things. Maybe you want to save up for a new tire for your tractor, and maybe that will cost you 2,000 eggs. Okay, you can do that, but perhaps it will take you 25 weeks to accumulate that many eggs to then trade for a tire. No problem – you have to patiently wait half a year to have the eggs sufficient to pay for the tire, right?
Wrong. Because after only a couple of weeks, the eggs start spoiling. You can’t accumulate and store wealth using a perishable product.
Another example of the difficulty of accumulating wealth would be if the product you are selling is your personal skill, expertise, and labor. If you haven’t sold each day of potential work, there’s no way you can save it up and sell it the next day.
Even if you do have a problem that has some longevity associated with it, perhaps it is bulky or requires special (expensive) storage.
The difficulty of storing wealth is the fourth of the big five problems with bartering.
5. Problems Transporting Wealth
Today, we all have credit and debit cards in our wallet that probably at any time can support purchases of some thousands of dollars. Maybe we also carry a checkbook with us, and maybe our wallet is bulging with $100 bills, too.
Transporting wealth is easy in the present world.
How will this work in a future barter driven economy? If you are a farmer selling cows, you have to take your cows to the market, and any you don’t sell, you have to take home again. Clearly you can only go to local markets.
At least the cows can walk. What say you are selling eggs or milk – how will you take this to trade with (remembering the milk needs to be kept cool, and the eggs treated gently)?
For a more extreme example, maybe you are going to sell the manure from your farm animals. How do you transport that?
Of course, you always have to transport the goods you are selling, but it is one thing to take whatever it is you are selling on a one way journey to the person who has purchased the goods (and/or maybe he even collects them from you), but what say you are just going to the local store to buy some miscellaneous items. Today, you’d have cash and plastic. But in the future, do you always have to have half a dozen animals traveling with you, just in case you decide to buy something unexpected?
Addressing the Limitations of a Bartering System
Don’t get us wrong. When you and your neighbor can conveniently swap eggs for milk across your shared fenceline, bartering is great. We’ve all swapped things in the past, and it sometimes works well.
But these are infrequent exceptions. Most of the time, for most transactions and requirements to buy and sell, bartering is nothing less than a full-out disaster that interferes with every aspect of what should be a smooth and productive, predictable transaction.
Inevitably, sooner or later, your community will start to address some of the limitations of a bartering system, and equally inevitably, out of this process, little by little, will evolve a common and convenient ‘medium of exchange’ – what we know of as money.
Implications for Preppers
We don’t know how long an interim period of bartering may last in a Level 2 or Level 3 situation.
Because all transactions necessarily involve a willing buyer, a willing seller, and a mutual agreement, you can’t unilaterally insist that instead of a barter transaction, the other person accept your valuation of what his goods equate to in bullion or any other abstract thing, and it will probably take time for a consensus about the appropriate values of precious metals to settle.
If you have any flexibility in considering both the types of things you will stockpile to use as trading goods in the future and also the type of ongoing ‘value creation’ you will conduct (ie what you’ll grow or raise, the types of services you’ll offer) we suggest you consider the implications of how readily such things can be bartered.
You should choose items that are not only desirable to buyers, but also ones which can be divided into small amounts and which can be readily transported (ie high value per pound/cubic foot) and which can be stored for a long time. These will be better barter goods than items with opposite characteristics.
A definite opportunity will exist in your community to provide what would first be little more than a market – a meeting place for people to barter and exchange things, and which could then evolve to offer additional added value. You could perhaps create the first form of local currency – market credits that could be used by buyers and sellers to transport value from one transaction to the next. These would start off as little more than IOUs which you could consolidate, so that if a person wanted something, they could see what IOUs were already out there.
You could also either provide a published set of ‘cross-trade’ rates to help buyers and sellers minimize some of the contradictions that would appear (see our example of this in problem 2 above), and/or you could profit by exploiting such discrepancies yourself.
Becoming the community’s new banker – if done fairly – would win you the appreciation of everyone involved, because you’d be helping everyone to trade more efficiently and effectively.
Article Series Continues….
This was the third part of our six part series on prepper economics. Please do read on through the balance of the series :
Part 0 : Introduction – Why Economics is Practical and Important to Preppers
Part 1 : International Reasons Why the Dollar Will Fail
Part 2 : Domestic Reasons Why the Dollar Will Fail
Part 3 : Why Bartering Is Not A Useful Way of Trading
Part 4 : The Unavoidable Need for Money
Part 5 : A Probable Currency Evolution Post TEOTWAWKI
Part 6 : How to Prepare for the Future Economy