Money Versus Barter

Oh, boy. It looks like rain; sure could use an umbrella. Excuse me, sir. I already have a raincoat, so I’ll trade you my umbrella. Have anything to barter for it? Yeah. Um, how about this flashlight? Mmm…no. I already have 10 of those. Oh! This is a really great pipe wrench. Sorry; the landlord does the repairs. Dictionary? I already read that. Barter can work, but only when each participant is willing to trade what they have for what the other is offering. That’s what economists call a coincidence of wants. It’s not working now because she has no use for any of the items he’s showing her; they don’t have a coincidence of wants. I wouldn’t want a flashlight, either—or a pipe wrench. Or binoculars. That’s why barter is so difficult—not to mention you have to physically haul the items to be traded to the other person instead of just carrying a few of these in your wallet. There’s also another big problem with barter. What’s that? It’s difficult to know the price of different items. A pipe wrench could be worth an umbrella to one person but two umbrellas to someone else. Hi, may I help you? Yeah, I’d like a slice of pizza. Um, that one. Sure, that’ll be two dollars. Here you go. Another advantage money has over barter is that it encourages specialization. Without money, running a successful business as specialized as a pizzeria would be difficult, because the owner would have to accept the countless items her customers bring in to trade. Thanks to money, people can produce just one good or service and trade it for money, then they can use that money to buy just the things they want from other people.