Friday, May 22, 2009

Are They Barter Clubs? Or Merely Flea Markets with a Local Currency?

This week CNN reported that "Barter Clubs" are experiencing a revival in Argentina, largely in response to poor economic times. In the barter clubs, people may bring goods that they want to unload in exchange for goods brought to markets by other members. Barter clubs first popped up during tough times in 2001, and are now experiencing a revival.

According to the report, barter clubs are catching on in Uruguay, Colombia, and Venezuela as well. There's also a growing barter club network in Spain, and one can even find barter-clubbing in Hong Kong.

Now, to "barter," one technically needs to exchange directly goods for goods. And as a consequence, bartering normally is a costly way to make exchanges, since it requires what economists call a "double coincidence of wants." What that means is that--in a barter economy--a person needs to search for and find another person who (1) happens to have exactly what the first person desires, and (2) also happens to desire what the first person is attempting to trade away.

But even that is not quite enough to get the trade accomplished. A final requirement is that each of the two parties needs to be holding enough of each item so that a mutually-beneficial trade can take place.

So if you had to make a trade by bartering, it may prove "costly" to you in the sense that it could require lots of searching for a partner who has what you want, wants what you have, and has enough of what you want to make the trade attractive to you (and vice versa).

The barter clubs are an attempt to reduce such bartering transactions costs by bringing potential trading partners together in the same location, with their wares--new or used--in plain sight where others can see them easily.

But as the two videos (one for Argentina, and one for Hong Kong) from CNN illustrate, the barter clubs are not pure barter markets. That is, if you look closely at the transactions taking place, you will not see goods being exchanged directly for goods. In fact, in each transaction you witness you will see goods being exchanged for pieces of paper--just like the transactions we witness everywhere, everyday.

So though the article and videos make little mention of this element of the "barter" club, what has happened is that the clubs have printed their own unique currencies, to help reduce transactions costs further still. That is, the barter club "economies" are not pure barter economies at all.

The clubs use their own paper money--that's right, money--as the actual medium of exchange. That way the buyer/seller club members are free to sell something in exchange for the local form of money (the special club currency), with the confidence that they can then take that money to "go shopping" elsewhere in the club and spend the club currency on whatever they want.

No "double coincidence of wants" is required. Have vegetable oil to sell and want some jeans? No need to strike a deal to trade oil with the fellow selling jeans; sell your oil for club currency, then spend the club money over at the jeans table.

So view the videos below; the first is for Argentina, and the second for Hong Kong. And if you want to read further details regarding the amazing role money of all kinds plays in reducing transactions costs, etc., I've embedded, below the videos, a PowerPoint presentation summarizing the functions and forms of money.

1 Money & Banking 1 Money & Banking Daniyal

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