A striking feature of modern developed economies is that people are typically specialists in production and generalists in consumption. By this we mean that most of us work at one or at most two jobs, producing (or, more often, helping to produce) a very small number of things— for example, a cattle farmer produces beef, a software designer produces computer code, and a nurse produces health services. However, we all purchase hundreds of goods and services. There is no law that says that we have to buy goods and services using money. An alternative is to trade goods or services directly for one another. This is called barter. We do see some barter in the world. A restaurant may allow its employees free meals at the end of the night, which means that some of the employees’ wages effectively takes the form of food. If a car mechanic and a caterer live next door to each other, they may have an informal arrangement whereby the mechanic repairs the caterer’s truck in exchange for food for a birthday party. Sometimes we know exactly where to buy the goods and services that we want. At other times, we go looking—perhaps walking or driving from store to store, perhaps searching using a phone book or the Internet. We do this because we don’t know which store has the goods we want in stock; in addition, we might not know the prices that different stores are charging, and we want to hunt around for the best deal. To understand the role that money plays in an economy, begin by imagining a world where we must search for the goods and services that we want to buy and there is no money, so all trades take place through barter. Imagine, for example, that you are a web designer, and you want to buy a used car. You must look around for someone who has a car for sale. This search takes time: it has an opportunity cost in that you would prefer to spend that time working or enjoying leisure. Eventually, you find someone who has a car that you are interested in buying. But your problems are not over. He has a car for sale, but what can you give him in exchange? You have to hope that he is interested in obtaining some web design services in exchange for the car. Successful barter requires a coincidence of wants: you must have what the other person wants, and they must have what you want. A world of nothing but barter is hard to imagine. Each time you wanted to buy something from a seller in a store, you would have to exchange some good or service for that good. If you went to a café, you might have to wash the dishes in return for a coffee. Professors of economics wanting a meal would have to go from restaurant to restaurant trying to find a chef who wanted to hear an economics lecture. They would probably go hungry. It is easy to see why all societies find some way of making these transactions easier. If you can carry some kind of money around with you to make purchases like these, life is much easier. You still have to hunt for the goods and services that you want, but you don’t have to worry about whether the other party in the transaction wants the product that you sell. Money, therefore, plays a key role in ensuring that trades occur. Trades, in turn, create value in our economy. People are not forced to buy or sell things; they do so only if the trade leaves them better off than they were prior to trading. Money therefore plays a critical role in value creation. The reason that we rarely see exchange without money is that it is so inefficient. Without money, a coincidence of wants is unlikely, so desirable trades do not occur, and value is not created. With money, transactions are much easier. If you want a meal in a restaurant, the owner will always serve it to you if you have money.
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The Characteristics of Money