Liberal Market Economies
Most countries, and especially Western countries, have some form of liberal market economy. This means that the main way that resources are transferred throughout the economy is by using the exchange. In a system of exchange people exchange labour for money, money for food, and so on. Food might be grown by a farmer, and then exchanged by that farmer to a wholesaler for an amount of money, and then from the wholesaler to a shopfront for an amount of money, and then from the shop to a consumer for some money, and that person could then eat the food. The economy is made up, primarily, of networks of exchanges that move resources from one place to another.
Although there may be other ways to transfer resources in a liberal market economy (such as tax), the primary and preferred way is through the exchange. The exchange holds a special position, and other ways of transferring goods are seen as necessary exceptions for one reason or another. It is seen as better to get money from a job (an exchange of labour) than through welfare, for example. The exchange is the central pillar of any market economy.
What is the exchange?
An exchange is an agreement between two parties (for example, an individual and a business) to transfer specific resources to each other. Generally, both parties want to benefit from the exchange, so they will only make the agreement if the resources they would be getting are of a certain sort and meet a certain condition. For example, a customer might want to buy some apples, and will agree to an exchange with a shop if the shop has apples that are of a certain quality. The shop, in turn, will agree to the exchange if the customer will give a certain amount of money (and money of a sort that they believe will be accepted elsewhere for other exchanges). Only if both parties have something to exchange that the other party wants can the exchange take place.
The value of the things being exchanged is subjective. A person will part with a certain amount of their money for some apples if they value the apples more than the money, and the shop will part with the apples for a certain amount of money if they value the money more than the apples. They are likely to, because they have more apples than they can eat, while the customer is likely to part with their money because they are hungry for apples.
An exchange - at least the way I am going to use it - covers a particular agreement to provide something. The contents of that agreement can vary a lot. But I want to emphasise the idea that only the things agreed to be exchanged are part of the exchange. This might sound obvious, but different people conceive of the idea of the exchange differently, and I think it is worth adding a bit of clarity here.
I'll use a cinema as an example. The cinema can sell tickets to a movie which a patron can buy. What does the ticket entail them to? Well, it might give them the right to sit in a seat in the cinema while the movie plays with a particular visual and audio quality. If that is what the agreement of the exchange was, then the patron would be able to ask for a refund if they did not receive this - if there were no seats, or the visual quality were awful, or something similar. However, this is distinct from the ticket satisfying the want that they had when they purchased the ticket. For example, if the patron bought the ticket to be entertained, but the agreement of the ticket were "simply" for the seat and the viewing, then the patron would not be able to get a refund if they were not entertained because that was not part of the exchange. Conversely, if the cinema did guarantee entertainment, then the patron would be able to get their money back. Similarly, if a person buys a product because they think it will make them more influential among their friends, the exchange is for the product and the influence is not part of it (unless a guarantee of influence is specified within the product).
In this sense, I am using the exchange to mean an agreement for each party to deliver or transfer a certain set of resources in a certain manner, but not to mean any non-specified or non-guaranteed other outcomes or intangibles, such as happiness.
What's good about the exchange?
The exchange is considered beneficial for a variety of reasons: it upholds liberal principles, it allows rational allocation of resources, it provides increasing benefits for the parties involved, and it upholds the principle of fairness.
The exchange is voluntary by both parties, and the parties are generally free to decide what the conditions of the exchange are. This is the basis for the word "liberal" in a liberal market economy - that individual actors can decide the terms of the economic transfer. There are, however, usually some conditions on the exchange (you cannot, for example, agree to murder someone for money in most cases). In general, however, people are able to individually choose when to participate in an exchange, and what conditions they will exchange under - they will not complete an exchange if the price is too high, or the quality of the goods is too low, or they do not want the goods at all.
The exchange also allows for the rational allocation of resources. The shop has more apples than they know what to do with, and the customer doesn't have enough food to eat - the voluntary nature of the exchange and the subjective evaluation involved mean that the customer is likely to get apples that they want and the shop is likely to get money that it wants. If the apples never got to the person who wanted apples, and instead became rotten and were thrown out, that might be considered an irrational allocation of resources. Similarly, if the person were allocated a bunch of apples that they didn't want or need, that would also be a poor allocation of resources. The exchange helps things go to where they need to go.
Because the customer is happier with the apples than the money, and the shop is happier with the money than the apples, both parties benefited from the exchange. The different contexts of the parties involved, and the different subjective evaluations that they make, mean that they can each believe they increased their satisfaction by engaging in the exchange, rather than one party winning and one party losing, or both just breaking even.
And, finally, the exchange is considered to uphold the idea of fairness. A common understanding of the exchange is that it rewards effort or sacrifice - that when you give something up you receive something in return.
In the next few articles I will explore some scepticism of these ideas.