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One way to deal with these problems is to abandon indirect exchange altogether. But then you are limited to what you can get in direct exchange (or, of course, produce yourself). This is obviously a drastic limitation.

The difficulties of indirect exchange suggest a related problem for direct exchange. If you produce something that many people want, e.g., apples, you will probably find it easy to make an exchange.

But what if you produce something few people want? Suppose you are a violin maker, or a writer of economics textbooks. Then, you may have to search far and wide in order to solve the problem of double coincidence of wants. You may have extensive transactions costs even if you engage only in direct exchange.

1.	What is the problem of double coincidence of wants? (You	?
	should get it right this time.)
2.	Given the problem of double coincidence of wants, why do
	you think people engage in jobs like writing economics

textbooks? (“Because they are stupid” is not a good answer.)

TOWARD A SOLUTION

How do we solve all these problems? You have the material for an answer already to hand. Recall our earlier statement: if you produce goods like apples that many people want, you will find it easy to make an exchange. This should at once suggest a way around all our difficulties.

Suppose you acquire goods that most people want. Then you don’t have to worry about complicated chains of trade, and you have

142 An Introduction to Economic Reasoning

reduced transactions costs. Also, if you produce something few people want, you can solve the double coincidence of wants problem by the same means. Once you trade in your ability to write economics textbooks for apples or oranges, your troubles are over.

?	1.	Evaluate this objection: “The ‘solution’ just suggested
		doesn’t work. Of course, if you have goods other people
		want, you will improve your bargaining position. But why
		will someone with a good in demand surrender what he
		has for something few people want? The problem isn’t
		solved at all.”

IS OUR SOLUTION A PSEUDO-SOLUTION?

I hope you didn’t make the mistake of failing to read the discussion question above. I cunningly put important points in these sections, as well as questions for review and application. This is one instance where I have done this.

The objection raises two valid concerns. First, someone who trades a good more in demand as an instrument for further trade for one less in demand is, other things being equal, suffering a loss. But it does not follow that no such exchanges will take place. Rather, the person with the good more highly in demand earns a premium. If I want to obtain oranges in return for writing an economics textbook, I shall probably have to be satisfied with getting fewer than I would have obtained had more people been ready to take the use of my skill in exchange for what they want.

The second valid concern raised in the objection is this. Someone who has a good not much in demand for further trade cannot conjure double coincidence of wants out of existence. Even

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given our solution, he must still find someone who wants what he has for sale. And that person must have a good more in demand for further trade than his own. But if he can overcome this initial hurdle, he is on his way.

HOW A MEDIUM OF EXCHANGE ARISES

A good like oranges thus has two components that determine its value: (1) its use to consumers and producers—people who want to eat oranges, make virtual pets of them, hang them as wall decorations, use them to make juice, etc. and (2) its use as a medium of exchange.

The second use is a bit complicated, and it will be helpful to go over it again. Because oranges are much in demand for further trade, the value of oranges rises. One of the uses of oranges is that people think they can be used to get other things that people want.

What happens if a good gains value because it is thought by most people to be in general demand of this kind? People will then probably expect that in the future, the good will be even more in demand, increasing its value even further.

Let’s look at this in more detail.

At the start, t1, consumers value oranges for purposes of consumption. Then, at t2, consumers who see that many people trade for oranges will value oranges more highly than they otherwise would have done.

Next, at t3, consumers who see that even more people than before trade for oranges will tend to value oranges still more highly than before. By this, I mean that they value oranges (1) more highly than they would have without considering the exchange value of oranges at all; and (2) more highly than they would have had they added only the exchange value of oranges at t1 to their estimation of oranges’ value.

144 An Introduction to Economic Reasoning

If you found the previous paragraph convoluted, imagine how difficult it was to write it! You don’t really have to worry about the details. What you do need to remember is the basic principle: A good that people think will be accepted readily in exchange will gain in value. Imprint this on your brain.

?	1.	How does the discussion in the previous few pages raise a
		problem for praxeology? Are all of the steps in the rea-
		soning presented strictly deductive?

CONVERGENCE

So far, we know that some goods are more heavily in demand for trade than others. Because of this, these goods find their values enhanced.

We can now go further. What happens when market actors see that some goods are more valued than others, in part because of the expectation that they will be highly valued? It seems likely that the goods in the highly valued class (oranges, apples, ice cream) will not be equally in demand for their use in further exchanges. Some will be more valued for this purpose than others.

What will now happen? When people see that some goods are more highly valued than others, their demand as exchange goods will increase. This will be true even if the goods are only slightly more highly valued for exchange than others. If apples are expected to be even more in general demand than oranges, people will want apples rather than oranges.