Medium of exchange
This article is written like a personal reflection, personal essay, or argumentative essay that states a Wikipedia editor's personal feelings or presents an original argument about a topic. (March 2019) |
Part of a series on |
Economics |
---|
In economics, a medium of exchange is any item that is widely acceptable in exchange for goods and services.[1] In modern economies, the most commonly used medium of exchange is currency. Most forms of money are categorised as mediums of exchange, including commodity money, representative money, cryptocurrency, and most commonly fiat money. Representative and fiat money most widely exist in digital form as well as physical tokens, for example coins and notes.
The origin of "mediums of exchange" in human societies is assumed by economists, such as William Stanley Jevons, to have arisen in antiquity as awareness grew of the limitations of barter. The form of the "medium of exchange" follows that of a token, which has been further refined as money. A "medium of exchange" is considered one of the functions of money.[2][3][4] The exchange acts as an intermediary instrument as the use can be to acquire any good or service and avoids the limitations of barter; where what one wants has to be matched with what the other has to offer.[5][6] However, there is little evidence of a pre-monetary society in which barter is the primary mode of exchange;[7] instead, such societies operated largely along the principles of gift economy and debt.[8][9][10]
Theories on the origin of money
Credit as the origin of money
In his book
Barter as the origin of money
In a barter transaction, one valuable good is exchanged for another of approximately equivalent value. William Stanley Jevons described how a widely accepted medium allows each barter exchange to be split into three difficulties of barter.[19] A medium of exchange is deemed to eliminate the need for a coincidence of wants.
Want of coincidence
A barter exchange requires each party to a transaction to have something the other desires. A medium of exchange removes that requirement, allowing an individual to sell and buy from various parties via an intermediary instrument.
Want of a measure of value
A barter market theoretically requires a value being known of every commodity, which is both impractical to arrange and impractical to maintain. If all exchanges go 'through' an intermediate medium, such as money, then goods can be priced in terms of that one medium. The medium of exchange allows the relative values of items in the marketplace to be set and adjusted with ease. This is a dimension of the modern fiat money system referred to as a "unit of account"[20]
Want of means of subdivision
A barter transaction requires that both objects being bartered be of equivalent value. A medium of exchange is able to be subdivided into small enough units to approximate the value of any good or service.
Transactions over time
A barter transaction typically happens on the spot or over a short period of time. Money, on the other hand, also functions as a store of value, until what is wanted becomes available.
Mutual impedance with store-of-value function
An ideal medium of exchange is spread throughout the marketplace to allow individuals with exchange potential to buy and sell. When money serves the function of a store of value, as fiat money does, there are conflicting drivers of monetary policy. This is because a store of value can become more valuable if it is scarce in the marketplace.[21] When the medium of exchange is scarce, traders will pay to rent it (interest), which acts as an impedance to trade. In stable or deflationary environments, interest is a net transfer of wealth from debtor to creditor with the opposite transfer under inflationary environments.
Medium of exchange and measure of value
Fiat currencies function as money with "no intrinsic value"
- Value common assets
- Common and accessible
- Constant utility
- Low cost of preservation
- Transportability
- Divisibility
- High market value in relation to volume and weight
- Recognisability
- Resistance to counterfeiting
To serve as a measure of value, a medium of exchange requires constant inherent value of its own or must be firmly linked to a definite basket of goods and services. Furthermore, constant intrinsic value[dubious ] and stable purchasing power are needed. Gold was long popular as a medium of exchange[dubious ] and store of value because it was inert, meaning it was convenient to move due to even small amounts of gold having a considerable and constant value[dubious ].
Some critics of the prevailing system of fiat money argue that fiat money is the root cause of the continuum of economic crises, since it leads to the dominance of fraud, corruption, and manipulation, precisely as it does not satisfy the criteria for a medium of exchange cited above. Specifically, prevailing fiat money is free-floating, and depending upon its supply market finds or sets a value to it that continues to change as the supply of money shifts with respect to the economy's demand. Increasing free-floating money supply with respect to needs of the economy reduces the quantity of the basket of the goods and services. It is not a unit or standard measure of wealth and so the manipulation impedes the market mechanism by setting or determining just prices. This leads to a situation where no value-related economic data is just or reliable.[22][23] On the other hand, Chartalists claim that the ability to manipulate the value of fiat money is an advantage, in that fiscal stimulus is more easily available in times of economic crisis.
Because fiat money has "no intrinsic value," when two parties use the same fiat money then the person purchasing the product or service can focus on the time price and ignore the monetary price.[24] For example, if a person makes $5.00 an hour and wants to buy a product that costs $20.00 then the time price will be 4 hours and the actual price in fiat money need not be the focus.
Requisites needed
Although the
Of all functions of money, the medium of exchange function has historically been the most problematic due to
Other functions rely not on recognition of some token or weight of metal in a marketplace, where time to detect any counterfeit is limited and benefits for successful passing-off are high, but on more stable long term
It was once common in the
In the age of
Due to this inherent fragility, which is even more profound with electronic voting, some economists argue that units of account should not ever be abstracted or confused with the nominal units or tokens used in exchange. A medium is simply a medium, and should not be confused for the message.[dubious ]
See also
References
- ^ )
- ISBN 978-0-7167-6213-3.
- ^ Krugman, Paul & Wells, Robin, Economics, Worth Publishers, New York (2006)
- ISBN 0-201-32789-9.
- ^ William Stanley Jevons, 1875. 'Money and the mechanism of exchange' Chapter 1 http://oll.libertyfund.org/titles/jevons-money-and-the-mechanism-of-exchange
- ^ "Medium of Exchange Definition".
- ^ Humphrey, Caroline. 1985. "Barter and Economic Disintegration". Man, New Series 20 (1): 48–72.
- ^ Mauss, Marcel. The Gift: The Form and Reason for Exchange in Archaic Societies. pp. 36–37.
- ^ "What is Debt? – An Interview with Economic Anthropologist David Graeber". Naked Capitalism. 2011-08-26.
- ^ David Graeber: Debt: The First 5000 Years, Melville 2011. Cf. review
- ^ Strauss, Ilana E. (2016-02-26). "The Myth of the Barter Economy". The Atlantic. Archived from the original on 15 February 2021. Retrieved 2020-02-17.
- ISBN 978-1-933633-86-2.
- ^ Graeber, David (26 August 2011). "What is Debt? – An Interview with Economic Anthropologist David Graeber". Archived from the original on 24 September 2017. Retrieved 11 January 2012.
- ^ Innes, A. Mitchell 1913. "What is Money?". The Banking Law Journal (May): 377–408. Reprinted in L. Randall Wray (Ed.) 2004 "Credit and State Theories of Money"
- ^ Humphrey, Caroline. 1985. "Barter and Economic Disintegration". Man, New Series 20 (1): 48–72.
- ^ kanopiadmin (2011-08-30). "Have Anthropologists Overturned Menger?". Mises Institute. Archived from the original on 8 August 2020. Retrieved 2020-02-12.
- ^ "The Myth of the Myth of Barter". Cato Institute. 2016-03-15. Archived from the original on 3 August 2020. Retrieved 2020-02-12.
- ^ "The Myth of the Myth of the Myth of Barter and the Return of the Armchair Ethnologists". Bella Caledonia. 2016-06-08. Archived from the original on 15 March 2020. Retrieved 2020-02-12.
- ^ William Stanley Jevons, 1875. 'Money and the mechanism of exchange' Chapter 4 http://oll.libertyfund.org/titles/jevons-money-and-the-mechanism-of-exchange
- ISSN 0022-2879.
- ISBN 1-890132-37-3
- ^ a b Hifzur Rab (2009) 'Freedom, Justice and Peace Possible Only with Correct wealth measurement with a Unit of Wealth as Currency' HIJSE 26:1, 2010
- ^ Hifzur Rab (2006) 'Economic Justice in Islam' AS Noordeen, Kuala Lumpur, Malaysia.
- ^ Gilder, George. Life After Capitalism: The Meaning of Wealth, the Future of the Economy, and the Time Theory of Money. Simon and Schuster, 2023
- OCLC 48877769.
Bibliography
- Jones, Robert A. "The Origin and Development of Media of Exchange." Journal of Political Economy 84 (Nov. 1976): 757-775.
External links
- Linguistic and Commodity Exchanges-Examines the structural differences between barter and monetary commodity exchanges and oral and written linguistic exchanges.