Part 2 in a series on commerce, the engine that literally feeds us, and a topic area where many Americans are stuck on stupid. (Part 1)

Robert and Anne, proprietors of the R&A Potato Ranch, a growing private enterprise, took a wagonload of potatoes to the market. Wanting to diversify their diet beyond the exquisite Pomme de Terre (“Apple of the Earth” – French for “Potato”), they traded 20 pounds of potatoes for one pound of goat cheese, a product of the J&H Goat Ranch. As we learned in Part 1, through that transaction both parties benefited by acquiring a product that was of higher value to the purchaser than was the product that they transferred in payment to the seller. As a result of the transaction where the value of each item was increased, overall wealth within this society was increased.

Back at the ranch, Robert and Anne have been working on a home remodeling project. They are building an addition to their home, a second room! They have collected many of the required materials from the bountiful land of their ranch, however they have determined that it may be more efficient for them to trade for some of the building materials, particularly the nails.

At the market, Robert and Anne inquire with several blacksmiths (the industry that transforms raw metal into useful things). They find that there are several blacksmiths to choose from, and most of them offer adequate quantities and qualities of nails for the home expansion project. However, Robert and Anne discover that other producers of potatoes have already traded potatoes for metal goods from each of the blacksmith shops.

Robert and Anne engage in conversation with Smithy, one of the blacksmiths, and offer a portion of their potato crop in exchange for some nails. The negotiation proceeds but as they further discuss a possible agreement, Robert and Anne realize that Smithy’s nail offer provides a very low return for their prized potatoes. Eventually, all three individuals throw up their hands and declare, “No Sale!”

Robert and Anne are bummed! They think that they may have to wait for another opportunity to acquire the nails for their home expansion. However, as we noted before (in Part 1), a failure to complete a transaction is not necessarily a failure of commerce. Robert and Anne determined that the quantity of potatoes they offered were more valuable in their own hands than would be the very few nails that Smithy was offering in trade. They further realized that Smithy was less interested in trading for R&A potatoes because he already possessed potatoes from another transaction. The self-informed choice by Robert and Anne was actually a choice of thrift, saving their potatoes for a different, or future transaction that may provide a better return to them and a greater advance in their wealth.

Then, Anne remarks to Robert, “Heck, we might as well go back to them other folks and load up on some more cheese!”

Then Smithy butts in, “Did you say ‘more cheese?’ You have cheese? What else do you have?”

Anne to Smithy, “Over yonder, we traded some potatoes for some goat cheese. Tastes pretty good too!”

“You wanna’ trade that for nails?” asks Smithy.

Robert and Anne are now presented with an opportunity to meet multiple objectives with the trading of their taters. There are perhaps three possible responses to Smithy’s question:

1. “No. It’s our cheese now, and we have plans for it.” – A wrong answer that would throw away an opportunity for them to meet their multiple objectives.

2. “Yes.” – Another wrong answer. A new negotiation must begin.

3. “Depends. How much for how much?” – Ah ha! Another opportunity for commerce.

Being the shrewd player that her parents taught her to be, Anne plays answer #3.

Anne puts an offer on the table, “How about 50 nails for half a pound of this really tasty, fresh, exquisitely-perfect goat cheese?”

Smithy responds, “Well, that cheese looks and sniffs OK, but half pound ain’t much to spread around amongst my youngin’s and I got lots of these nails.”

So Anne sweetens the deal a little bit, “OK. How about 100 nails for the whole one-pound hunk?”

“How is that sweetening the deal?” one might ask. Welcome to the bulk discount. There are certain hidden and sometimes visible costs to any transaction. One of those costs is merely the time expended in the negotiation process. Consider in this case that the transaction cost will be the same whether the transaction is 50, or 100 nails, for half or a whole pound of cheese. If measured per nail, or per amount of cheese, the transaction cost will effectively decrease as the transaction quantities increase. Therefore, if both parties value their gained product in a higher quantity, the value to them gained in the transaction will be greater if completed in the larger quantity.

Now back to the drama —

Robert quietly but firmly mentions to Anne, “But we only have one pound of the cheese, and what about the cheese topping on them scalloped spuds?” (Refer to Part 1)

Anne is way ahead of Robert. She instructs him, “Well, bonehead, why are you still here? Go on and heft another 20 pounds of taters to the cheese heads and get us another pound!”

Robert rushed off with 20 pounds of potatoes and was able to repeat the earlier transaction for one pound of cheese. Anne completed a transaction trading their original pound of cheese for 100 nails… and life is good!

With a portion of their wagonload of potatoes, some interaction within a complex marketplace, some quick thinking, and quick hefting sacks of potato across the market, Robert and Anne were able to meet two objectives. For a moment it appeared that these objectives were in conflict, but with some improvised trading, and an ample supply of the potatoes that they produced, Team R&A was able to accomplish three wealth-increasing transactions.

So, the increase in wealth among the society parley depends on the ability of traders to complete transactions where the buyers value their gained goods more than they value the goods that they trade away. Then it would make sense that if trades could be more quickly, then the wealth of the society might be able to expand more quickly as well.

Perhaps if there were a way to make these trades without hefting taters and cheese back and forth across the market. Hmmmm. Let us think about that for a while.

End Note:

Certainly, it is difficult to imagine using pure barter trading as a way to acquire the wide variety of goods and services that we use in our modern world. However, thinking about barter trading causes us to be able to think differently about the values of things, how those values relate to each other, and the reality that the economic value of any given product is very dependent on the circumstances of the person who is trading it.

To grow in wealth (or to make a basic living), traders must gage the market with some reference to their personal circumstances. For instance, 100 nails offered by smithy are probably worth “more” to someone who is building a home addition than they are to someone who really needs to mend their trousers. Then there is the question of how one might quantify what something is worth. Stay tuned for Part 3.

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