To barter means to trade goods directly rather than through the medium of money.
Thus a barter economy is one where money does not exist or has ceased to be functional. It means consumers have to gain goods through exchange.
Primitive economies developed through bartering goods. But, this is very inconvenient for a developing and more complex economy. Therefore, money tends to involve as a way to facilitate transactions between two people.
An example of a barter exchange may involve swapping a bag of nuts for some fruit or meat.
Limitations of a Barter Economy
- Becomes difficult to produce specialised goods only wanted by a proportion of the population. Basics of life – food, shelter clothes tend to work as barter goods, as most people will have need for wheat, but for more specialised goods, only some of the population will want them.
- Indivisibility of some goods / services. It is hard to swap a cow because it worth perhaps 10,000 eggs.
- Seasonal. If you are a farmer, most of your crop comes in September, but you may not be able to store it for later in the year.
- No way to store wealth
- May be hard to judge how much goods and services actually are.
Apart from very primitive societies, a pure barter economy is very rare. Even in societies with cash, there is often the concept of debt, paying later or just mutual sharing in a co-operative style societies.
However, even in modern life, barter sometimes takes place.
- It is a way to avoid transaction costs
- It can be emotionally more satisfying to swap physical goods (or for example swap football players)
- Barter may be a way to reduce tax bill because barter exchange may not end up on tax bills. Though in the US, barter exchange has to be registered.
Hyper inflation and Barter Economy
Hyper inflation is extreme examples of inflation where prices skyrocket, and the value of money becomes worthless. In these cases, people often resort to bartering goods directly. For example, in Germany 1922-23 money became worthless.
Alternatives to Barter economy
Some economic anthropologists argue in the real world, communities offered lived through a mixture of barter and ‘gift exchange’ – individuals would perform services – give goods without expectation of immediate payment, but there would be a mutually reinforcing need to give back to the community – when it was required.