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the exchange? In that case, I cannot use the proposed solution to get the apple I want. If I had a copy of the book, I could then exchange it with you for one apple; but, given my dislike for the book, it appears that I cannot obtain one by exchange for an orange. I do like oranges.

1.	See whether you can anticipate the next section. What is	?

wrong with the argument just presented?

INDIRECT EXCHANGE CONTINUED

When I said that I didn’t like the book General Theory, what did I mean? Basically, I mean that I do not value the book for its own sake. I would not give up an orange to get the book, if I had to keep the book.

And there exactly lies the flaw in the argument presented just before. I don’t have to keep the book—I can use it to trade for something else, an apple. If I obtain a copy of General Theory, I can get something I do want to keep. Thus, it is false that the book has less value to me than the orange, even though, just looking at the orange and the book by themselves, I would rather have the orange.

If a good can be used to get other goods that I want, its value to me increases. In this way, other people’s preferences affect my own. Because you want a copy of General Theory and will give an apple to get it, the book becomes more valuable to me than an orange.

1. How does our analysis relate to the distinction that Adam	?
Smith and David Ricardo made between use value and
exchange value?

138 An Introduction to Economic Reasoning

STILL MORE ON INDIRECT EXCHANGE

You can readily see why exchange of this kind is sometimes called “triangular” instead of a direct exchange like this:

orange

A B apple

Figure 11. Direct Exchange

We have two exchanges:

C book

A

orange
[book]		B
	apple
	Figure 12. Two Exchanges

Chapter 8: Money, Part 1 139

(Note that our “triangle” does not require a further exchange between B and C.)

Once given this basic pattern, more and more complicated patterns can be constructed. Suppose no one who has a copy of General Theory wants an orange. Perhaps a book owner wants a waffle iron, and I know someone who will exchange a waffle iron for an orange. I first exchange my orange for a waffle iron; next, I exchange the waffle iron for a copy of the book; and, at last, I exchange the book for the apple.

1.	Construct some chains of exchanges. How complicated a	?
	series do you think could exist in the real world?
2.	Consider the first indirect exchange. Can’t my devious
	scheme to obtain an apple be thwarted by the book

owner? All he has to do is exchange his book with the apple owner. What is wrong with this objection?

LIMITS OF INDIRECT EXCHANGE

You can have a lot of fun making up complicated chains of exchanges. (I don’t think this is much fun; but, who knows? Maybe you do.) But you can readily see that people who try to use the indirect exchange method to get what they want will encounter difficulties.

What are these? First of all, wherever you take a step in the chain, you must find someone who wants what you then have. This is of course a requirement of all exchanges: it is called the problem of “double coincidence of wants.” The more steps in a chain of trade you have to make, the more difficult this problem becomes.

140 An Introduction to Economic Reasoning

Further, at each step in the chain disaster threatens to strike. Suppose I miscalculate: I think, e.g., that if only I can get a statue of a pink hippopotamus, I can then secure a copy of General Theory, enabling me at last to get the apple I want. Unfortunately for me, the owner of General Theory shrinks in horror at the statue; and I am stuck with it. Since I would much rather have an orange than the statue, I have lost out on the deal.

But suppose I have calculated all the steps in the chain correctly— textbook authors, after all, are immune from error. Have I then found a good way to get more of what I want? The matter is not so simple.

Even if I line up a series of trades, making no mistakes in doing so, I cannot count the process one of pure gain. Setting up the procedure takes time and effort. This is called “transactions cost”. Against the gain I hope to achieve at the end of the process must be set the cost of engaging in it.

1.How is the “cost” in “transactions cost” to be assessed?

?2. “Since transactions costs are an economic ‘bad’, our aim, both as individual actors and policymakers, should be to minimize transactions costs.” What’s wrong with this pic-

ture?

THE PROBLEM OF INDIRECT EXCHANGE COMPOUNDED

To reiterate, there are two main “first-level” problems in indirect exchange: the series of exchanges must be coordinated, and errors may leave you with goods you do not want. Even if you can solve these difficulties, your attempt to do so generates a “secondlevel” problem: you are confronted with transactions costs.