Adam Smith sought to demonstrate that markets (and economies) pre-existed the state. He argued that money was not the creation of governments. Markets emerged, in his view, out of the division of labour, by which individuals began to specialize in specific crafts and hence had to depend on others for subsistence goods. These goods were first exchanged by barter. Specialization depended on trade but was hindered by the “double coincidence of wants” which barter requires, i.e., for the exchange to occur, each participant must want what the other has. To complete this hypothetical history, craftsmen would stockpile one particular good, be it salt or metal, that they thought no one would refuse. This is the origin of money according to Smith. Money, as a universally desired medium of exchange, allows each half of the transaction to be separated.^[3]

Barter is characterized in Adam Smith’s “The Wealth of Nations” by a disparaging vocabulary: “haggling, swapping, dickering”. It has also been characterized as negative reciprocity, or “selfish profiteering”.^[4]

Anthropologists such as David Graeber have argued, in contrast, “that when something resembling barter does occur in stateless societies it is almost always between strangers.”^[5] Barter occurred between strangers, not fellow villagers, and hence cannot be used to naturalistically explain the origin of money without the state. Since most people who engaged in trade knew each other, exchange was fostered through the extension of credit.^[6][7] Marcel Mauss, author of ‘The Gift‘, argued that the first economic contracts were not to act in one’s economic self-interest, and that before money, exchange was fostered through the processes of reciprocity and redistribution, not barter.^[8] Everyday exchange relations in such societies are characterized by generalized reciprocity, or a non-calculative familial “communism” where each takes according to their needs, and gives as they have.^[9]

Often the following features are associated with barter transactions:

There is a demand for things of a different kind.

Most often, parties trade goods and services for goods or services that differ from what they are willing to forego.

The parties of the barter transaction are both equal and free.

Neither party has advantage over the other, and both are free to leave the trade at any point in time.

The transaction happens simultaneously.

The goods are normally traded at the same point in time. Nonetheless delayed barter in goods may rarely occur as well.^[10] In the case of services being traded however, the two parts of the trade may be separated.

The transaction is transformative.

A barter transaction “moves objects between the regimes of value”, meaning that a good or service that is being traded may take up a new meaning or value under its recipient than that of its original owner.^[11]

There is no criterion of value.

There is no real way to value each side of the trade. There is bargaining taking place, not to do with the value of each party’s good or service, but because each player in the transaction wants what is offered by the other.^[11]

Since direct barter does not require payment in money, it can be utilized when money is in short supply, when there is little information about the credit worthiness of trade partners, or when there is a lack of trust between those trading.

Barter is an option for those who cannot afford to store their small supply of wealth in money, especially in hyperinflation situations where money devalues quickly.^[12]

Barter economies are usually free from interest and usury. The German-Argentine economist Silvio Gesell created a Robinson Crusoe economy thought experiment in Part V of The Natural Economic Order which showed that interest rates are a purely monetary phenomenon that tends to be absent from barter economies.^[13]

The limitations of barter are often explained in terms of its inefficiencies in facilitating exchange in comparison to money.

It is said that barter is ‘inefficient’ because:

There needs to be a ‘double coincidence of wants’

For barter to occur between two parties, both parties need to have what the other wants.

There is no common measure of value/ No Standard Unit of Account

In a monetary economy, money plays the role of a measure of the value of all goods, so their values can be assessed against each other; this role may be absent in a barter economy.

Indivisibility of certain goods

If a person wants to buy a certain amount of another’s goods, but only has for payment one indivisible unit of another good which is worth more than what the person wants to obtain, a barter transaction cannot occur.

Lack of standards for deferred payments

This is related to the absence of a common measure of value, although if the debt is denominated in units of the good that will eventually be used in payment, it is not a problem.

Difficulty in storing wealth

If a society relies exclusively on perishable goods, storing wealth for the future may be impractical. However, some barter economies rely on durable goods like sheep or cattle for this purpose.^[14]