Knut Wicksell - Wikipedia — Knut Wicksell (1851-1926)

“Money is a machine whose function is to do quickly and conveniently what would be done, though less quickly and conveniently, without it” — J.S Mill

♥ An Introduction to an Ignored Problem:

It is quite common that in undergraduate economics course, particularly in Money and Banking, students are taught that money is adequately defined as a means of general exchange between economic agents and that it is an institution created for the purpose of eliminating the inconveniences of barter.

However, the student rarely asks himself the reason for this, much less observes that the logic given to him is wrong. What does it ultimately mean for currency to be a general medium of exchange? And why is barter a less desirable option than indirect exchange using money?

When justifying their argument about the superiority of monetary transactions over barter, professors usually talk about a problem called “double coincidence of wants”. This problem supposedly inherent to barter develops as follows: In an economy without money, people would have to transact goods of equal value. I produce apples and you produce oranges, so if I want your oranges I simply exchange with you an equivalent of apples for an equivalent of oranges. The problem arises when, due to variations in subjective valuations, you interpret that my number of apples is not worth your number of oranges. A divergence occurs between my desire for your oranges and your desire for my apples. In this case, I would not be able to transact with you and I would not get the goods I want, creating an inefficient situation from a Paretian point of view^[1].

With money this problem would be solved, as it is a good accepted by all market agents in exchange for their production. Thus, it is a general mean of exchange (valued) by all market agents. With it, I can exchange my apple production for a money equivalent and then exchange my currency equivalent for its orange production. The trade-offs are satisfied and we then have a Pareto-efficient situation.

However, the economic logic is much more complex when looked at in depth.

The “double coincidence of wants” argument was originally introduced by the English economist William S. Jevons (1835 - 1882) in his 1875 treatise “Money and the Mechanism of Exchange”. Jevons noted that in a barter economy not only could a divergence between agents' preference...

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