Barter Economies and Centralized Merchants

Abstract

The main goal of this essay is to analyze the emergence of a barter economy, and the rise of centralized merchants and a barter redistribution system out of a primitive barter system. The environment is a spatial general equilibrium model where exchange is costly. Since exchange becomes more complicated as the scope of the economy increases, we prove that, after the economy reaches a critical size, the cost of trade expansion surpasses its benefits. This imposes limitations on the scope of the economy and the production level. To overcome these limitations, rational individuals can develop a more advanced barter system leading to the appearance of centralized merchants. This more sophisticated system is the redistribution system. We also show that under some circumstances, in the presence of transaction costs it may be optimal for individuals to keep using barter instead of adopting a monetary system. This result explains why some primitive economies, like the Incas in Peru and ancient Egypt, did not evolve to a monetary system, and kept barter as their main exchange system.