The following points highlight the six major disadvantages of the barter system. The disadvantages are: 1. Lack of Double Coincidence of Wants 2. Lack of a Common Measure of Value 3. Indivisibility of Certain Goods 4. Difficulty in Storing Value 5. Difficulty in Making Deferred Payments 6. Lack of Specialization.
Disadvantage # 1. Lack of Double Coincidence of Wants:
The functioning of the barter system requires a double coincidence of wants on the part of those who want to exchange goods or services. It is necessary for a person who wishes to trade his good or service to find some other person who is not only willing to buy his good or service, but also possesses that good which the former wants. For example, suppose a person possesses a horse and wants to exchange it for a cow. In the barter system he has to find out a person who not only possesses a cow but also wants a horse.
The existence of such a double coincidence of wants is a remote probability. For, it is a very laborious and time-consuming process to find out person who want each other’s goods. Often the horse-owner would have to carry through a number of intermediary transactions.
He might have to trade his horse for some sheep, sheep for some goats and goats for the cow he wants. To be successful, the barter system involves multilateral transactions which are not possible practically. Consequently, if the double coincidence of wants is not matched exactly, no trade is possible under barter. Thus a barter system is time-consuming and is a great hindrance to the development and expansion of trade.
Disadvantage # 2. Lack of a Common Measure of Value:
Another difficulty under the barter system relates to the lack of a common unit in which the value of goods and services should be measured. Even if the two persons who want each other’s goods meet by coincidence, the problem arises as to the proportion in which the two goods should be exchanged. There being no common measure of value, the rate of exchange will be arbitrarily fixed according to the intensity of demand for each other’s goods. Consequently, one party is at a disadvantage in the terms of trade between the two goods.
Moreover, under the a barter system the value Of each good is required to be stated in as many quantities as there are types and qualities of other goods and services. The exchange rate formula given by Prof. Culbertson is n (n-1)/2. For example, if there are 100 different types of goods in a barter economy, then there would be 4950 exchange rates for it to function smoothly, i.e. 100( 100-l)/2=100×99/2 or 9900/2=4950.
This makes accounting an impossibility because a balance sheet would consist of a long physical inventory of the various types and qualities of goods owned and owed. Similarly, it is difficult to draw and interpret the profit and loss accounts of even a small shop. That is why the existence of the barter system is associated with a small primitive society confined to a local market.
Disadvantage # 3. Indivisibility of Certain Goods:
The barter system is based on the exchange of goods with other goods. It is difficult to fix exchange rates for certain goods which are indivisible. Such indivisible goods pose a real problem, under barter. A person may desire a horse and the other a sheep and both may be willing to trade. The former may demand more than four sheep for a horse but the other is not prepared to give five sheep and thus there is no exchange.
If a sheep had been divisible, a payment of four and a half sheep for a horse might have been mutually satisfactory. Similarly, if the man with the horse wants only two sheep, then how will he exchange his horse for two sheep. As it is not possible to divide his horse, no trade will be possible between the two persons. Thus indivisibility of certain goods makes the barter system inoperative.
Disadvantage # 4. Difficulty in Storing Value:
Under the barter system it is difficult to store value. Anyone wanting to save real capital over a long period would be faced with the difficulty that during the intervening period the stored commodity may become obsolete or deteriorate in value. As people trade in cattle, grains, and other such perishable commodities, it is very expensive and often difficult to store and to prevent their deterioration and loss over the long period.
Disadvantage # 5. Difficulty in Making Deferred Payments:
In a barter economy, it is difficult to make payments in future. As payments are made in goods and services, debt contracts are not possible due to disagreements on the part of the two parties on the following grounds: It would often invite controversy as to the quality of the goods or services to be repaid.
The two parties would often be unable to agree on the specific commodity to be used for repayment. Both parties would run the risk that the commodity to be repaid would increase or decrease seriously in value over the duration of the contract.
For example, wheat might rise markedly in value in terms of other commodities, to the debtor’s regret, or decrease markedly in value, to the creditor’s regret. “Thus it is not possible to make just payments involving future contracts under the barter system.
Disadvantage # 6. Lack of Specialisation:
Another difficulty of the barter system is that it is associated with a production system where each person is a jack-of-all trades. In other words, a high degree of specialisation is difficult to achieve under the barter system.
Specialisation and interdependence in production is only possible in an expanded market system based on the money economy. Thus no economic progress is possible in a barter economy due to lack of specialisation. The abovementioned difficulties of barter have led to the evolution of money.