double coincidence of wants

[afterzir]

I don't quite understand DCOW (double coincidence of wants).

Austrians say that before money there were barter economies, and for these barter economies to work well, they had the extremely difficult task of repeatedly fulfilling DCOWs. Here are two examples I think reduce the need for DCOW:

a) [credit scenario] a doctor wants carrots, but the farmer isn't sick --> so the farmer gives the doctor the carrots and the doctor agrees to heal the farmer if he gets sick (since it is likely the farmer will get sick in the future)

b) [weak transferability scenario] a doctor's friend, who is a carpenter, is getting married, so the doctor agrees to heal a rancher if the rancher provides food for the carpenter's wedding (note: the rancher doesn't need any carpentry services)

Any thoughts?

[AynRand]

I'm sorry I am no expert in this field of economics, but in your weak transferability scenario did the doctor want the carpenter's services and that started the chain reaction of trade?

I think these would be great scenario's if we didn't have a system of currency, but I would see far more benefits if we remove the DCOW by adding commodity money to the economy. 

[Tom P]

I think you are over complicating this.

 

 

Peter has apples, he'd like to have some pears.

 

Mark has lots of pears, he'd like to have some apples.

 

Peter and Mark can easily trade because they have a double coincidence of wants.

 

 

But what would happen if Peter wanted bananas?

 

John has bananas. He'd be willing to trade for pears but doesn't want any apples. In order for Peter to get some bananas he'd have to trade with Mark first to get pears and THEN trade his pears for the bananas. This is why direct barter is inefficeint and people sought a common medium that everyone wanted to have, such as gold.

[Alan C.]

Coincidence of wants

 

The primary problem with barter economies is that they impose transaction costs (eg. time, coordination, transport, storage, seasonal). Money (ie. a widely recognized and accepted exchange medium) minimizes this problem.

[afterzir]

I agree that money is better and more efficient (I just wanted to point out that although the DCOW argument defeats the barter system, it isn't as devastating as some people think)

[luxfelix]

Coincidence of wants

 

The primary problem with barter economies is that they impose transaction costs (eg. time, coordination, transport, storage, seasonal). Money (ie. a widely recognized and accepted exchange medium) minimizes this problem.

 

And I imagine it makes investment easier too. 

[Alan C.]

I agree that money is better and more efficient (I just wanted to point out that although the DCOW argument defeats the barter system, it isn't as devastating as some people think)

 

It's not simply a matter of efficiency. Economic calculation requires prices, and prices require money. The absence of money prices severely limits a society's productivity and ability to grow, because prices allow coordination on a vast scale.

[Pepin]

It isn't as though bartering can't be useful or can't work decently, it is rather that a medium of exchange will almost always come into being due to market forces, and that a medium of exchange will be preferred over bartering in most instances. Historically, this is rather true. The DCOF is one reason why medium of exchanges are preferred over barter.

 

 

I think an issue with many Austrian economists is that they tend to spend some time arguing against a barter economy, which I think what is confusing you. They do this because of some Marxist idea of eliminating money and reverting back to a barter economy. I believe the Marxist reasoning for a barter economy not causing exploitation has something to do with the metaphysical exchange between real goods are always equal due to the objective value being ingrained in the item, while currency is fictitious in that its value is subjective, which makes it liable for unequal exchanges on two parts with one party making an unhonest profit.

[WorBlux]

  Sounds about right. Historically humans didn't operate as individual economic units of even as individual familial units.  Intergroup trade would have been direct (barter), but you internally better described as a gift economy with where reputation, credit, and status played big roles in the distribution of resources. The Austrian line on the subject better describes why a group would prefer indirect exchange rather than a specific historical transition. Often the Austrian account is mistaken when it wonders beyond it's core competence. Here is a critical discussion that offers a glimpse of the history of indirect exchange in full-color

 
Even if you came up with a cheap and easy way set up clearing houses to practically eliminate the coase costs of barter. (coase costs being the cost to the seller of finding a buyer plus the cost of a buyer to find a seller) Those engages in production of consumer goods from higher-order goods would have a very difficult time of calculation without a mediate measure of how one thing trades in terms of another. Without money prices a producer would be tasked with determining weather the basket of outputs could be traded for the basket of inputs plus some more good to show the endeavour was worthwhile.