One For One Exchange

Imagine two men in a field, each holding something the other needs.  Both men put a reasonable amount of time into acquiring the items.  Eventually they will come to an agreement about them and will exchange the items.  The value placed on each item is called utility, which is a measure of the relative satisfaction one derives from a good or service.  In this particular example, neither men will be exchanging more than just the item, which means no monetary value can be placed on them.  In fact, the reason they are both willing to part with their item, is because of the perception that each of them will increase their utility through the exchange.  If both men believe their utility will increase, then we’ll probably see an even trade where both men will walk away satisfied.  It also may indicate that they are the only two people interested in those items, and that there may be no way to measure a market value based on a currency system.

One For Many Exchange

Let’s give these two characters a name.  We’ll call them Joe and Bill.  In this instance, when Joe and Bill meet, Joe sees that Bill has something that he could really use, which would increase Joe’s utility significantly, but Bill looks at what Joe has and decides that he could use what Joe has, but doesn’t necessarily need it, and isn’t really excited about it.  Bill’s utility isn’t going to increase much.  Something has to give at this point.  This is where negotiation comes in.  It’s likely that Joe is going to have to offer more than just his item to Bill in order to get Bill to make the exchange.  So, Joe gives Bill his item plus a few other things, or perhaps whatever is being used in that day for currency.  Of course, we have to consider that in times when government has failed, people revert to a system of bartering, where goods and services become the currency until a government that the people can trust defines a new monetary system.

In the U.S., we have our American dollar, and we agree that it holds value, but it rests upon nothing.  Not even gold.  If you think about the value of Gold, remind yourself of the last time any civilization traded Gold when the economy failed.  It hasn’t happened for many centuries, and won’t happen in the future.  Dave Ramsey spoke about this in one of his recent podcasts, outlining that the most recent brush with a completely failed economy that we have seen was what happened in New Orleans after the hurricane.  You didn’t see people trading gold, you saw them trading goods and services.  You give me a gallon of water, I give you a gallon of gas, etc.

Many For Many Exchange

The many for many exchange is just a bloated form of the  One for One exchange where it simply takes more items to reach a one to one exchange.  I’ll trade you this, this, and this for that, that, and that.  More volume, but balanced out, just like all of the exchanges.  Again, as long as there is a perceived increase in utility for both parties to the transaction, then the details of the transaction just become pieces on the balancing scale of negotiation.

Borrowing Your Life Away

The three examples above are very basic micro economic facts of life.  There’s one common theme that runs throughout, however, and that’s that the exchanges that took place above assumed that each participant actually had something to trade.  They had worked hard to find what they needed to trade, and when they found someone with which to trade, they succeeded, and walked away from the transaction happy.  Each item was owned by the other.

But what if you were standing in the middle of that field and you wanted something the other person had, yet you had nothing to offer in return, except your word that you would eventually return something to them that may satisfy them?  What would they be thinking?  They might look at this situation and think that there’s a greater opportunity to them increase utility through this transaction than if we simply traded up front.  What happens?  Well, in this case, Joe offers to Bill an item that Bill cannot pay for now, in exchange for a greater payment later, because both are now bound by time.  Bill is now obligated to increase Joe’s utility over a longer period of time, and Joe has to wait to be paid, and may be tempted to skim as much as possible because Bill isn’t going to be able to pay him right away.  Bill may have a percieved increase in utility for the “new car” he just bought, but it’s short term, because Bill has forgotten that he has agreed to pay far more than he believes the item is actually worth to him, all for the sake of having it now, for just a little bit, instead of later, for the full value.

Welcome to debt.  The bible talks about this in Proverbs 22:7 – “The rich rule over the poor, and the borrower is servant to the lender.”  When was the last time you chose to be someone’s slave?  There is a simple solution to debt.  It’s called savings.  The reason you may be in debt is because you are not patient enough to save.  When you borrow money, you pay more than you should pay for something, and you lock yourself into a pattern of slavery until you pay off the debt.