How Trade Helped Shape the Modern World
I’m Andy Temte and welcome to the Saturday Morning Muse! Start to your weekend with musings that are designed to improve financial literacy around the world. Today is May 10, 2025.
Last week, we introduced a simple two-country macroeconomy and discussed the rationale for establishing a mutually-beneficial trade relationship. In our example of trade between FruitLand and ProteinLand, trade was executed through barter.
Barter is a direct, immediate exchange of goods between two parties. In our example from last week, representatives from FruitLand brought fruit with them on their trek over the mountains to ProteinLand. Once there, the intrepid traders from FruitLand made a subjective determination of how much fruit they would “pay” for each “unit” of meat offered by representatives of ProteinLand.
The ProteinLand traders made a similar subjective calculation from their perspective. The question they’re answering is “how much meat will we give up to acquire fruit from the FruitLand traders?” After fruitful negotiations (pun completely intended), the parties agree on the amount of fruit that will be “paid” for each “unit” of meat. We’ll call this the fruit-to-meat ratio or “price.” For example, the “price” of one meat could be expressed as 3 fruit.
After the trade is complete, time passes and each trading partner refines their expectations of value that will be used the next time traders pass over the mountains. The previous fruit-to-meat ratio (or price) is likely to change based on changes in expected value. For example, representatives from ProteinLand might want more fruit per “unit” of meat because the quality of the fruit was lower than expected, it perished at a rate higher than expected, or its desirability declined.
The main point is that each bartering session is unique and will likely yield different results for both parties. Negotiations to determine the fruit-to-meat ratio (or price) are time-consuming and prone to unnecessary conflict between traders because each negotiation is highly subjective.
To ensure continued, mutually-beneficial trade, both parties recognize that flaws in the barter system must be fixed. The most obvious flaws or inefficiencies of barter are:
Traders must have the physical goods with them every time a trade happens. If a trade can’t be negotiated, traders must transport physical goods back to their home country.
There must also be what’s called a double coincidence of wants where both parties want what the other has for a trade to occur. If I don’t want what you have or vice versa, we will not trade.
There are no standard units of measure in our examples which makes trade very cumbersome. Traders must establish weights and measures to ensure consistency across trading events. In the US we use the imperial system (feet, pounds, acres, gallons) and nearly every other country uses the metric system (meters, grams, hectares, liters).
It’s difficult (and sometimes impossible) to trade because some physical goods are indivisible. For example, if I’m trading fruit for a live sheep, I might not have enough fruit to trade for a whole live sheep. You can’t divide a sheep and still have a live sheep!
It’s difficult to store value or build wealth across time and trading events — especially when trade is occurring with perishable goods.
You’ve likely bartered at some point in your life. As a kid, I’d show up at a sleepover with a large chocolate bar and would barter with my friends to receive a peanut butter cup and other candy in exchange for part or all of my chocolate bar. All parties benefited because I didn’t need (or necessarily want) my entire chocolate bar. My personal satisfaction increased as a result of these trades because I enjoyed consuming a wider range of candy. While fun as a child, economies don’t grow and flourish when trades are cumbersome, tedious, and subjective.
The reason we’re spending so much time on the barter system is that human civilization has its beginnings rooted in solving the challenges with a barter economy. Here are a few monumental human advancements that are a direct result of trying to make trade more efficient:
Recorded history — as opposed to prehistory — started with the invention of writing and counting systems around 3500 BCE in Mesopotamia (modern day Iraq). There is evidence that clay tokens were used as record-keeping devices as early as 10,000 BCE. So the written word and numerical counting systems got their start as a result of trade — we had to figure out a common (or interpretable) communication system for tracking and recording our trades.
We also had to agree on units of measure such as length, weight, area, and volume to create standard ways to measure the things we were trading. As you might expect, we started by using physical body parts (palms, fingers, forearm) but graduated to standard units like the cubit rod for length, talent for weight, and sextarius for volume. The imperial system that is used in the US can trace its roots back to the Romans, but was formally introduced in the UK starting in 1824. The French developed the metric system after the French Revolution and formally adopted it in 1799.
Finally, currencies were developed. To truly take advantage of the benefits of trade, we needed to create a more reliable medium of exchange to solve the problems of measurement, indivisibility, double coincidence of wants, and store of value. Early trading partners used “durable” goods like pigs, sheep, and cattle as a medium of exchange, but they were cumbersome and didn’t solve the indivisibility and measurement issues. Also, currencies are a much better tool to express the price of a good. Instead of one meat being equal to three fruit, meat and fruit can be expressed in units of an agreed currency.
So the headline of this episode is this. The world you live in today is a direct outcome of advent of trade — of entrepreneurial humans recognizing that their lives can improve by trading with other groups who possess skills and/or resources that they do not. Making trade more efficient and effective has driven some of the most fundamental tools and advances we take for granted as modern humans.
We live on a very small rock that circles our sun in an unremarkable corner of the Milky Way. Although Earth can seem incomprehensibly vast with limitless resources and potential, history has shown time and again that we need each other to survive and thrive. Trade is an essential component of the human condition.
History has also shown the horrible things that happen when we fight with one another over resources and when trade is unnecessarily disrupted by conflict, political egos, and misunderstanding.
Until next time…
Grace. Dignity. Compassion.
