We all have that one friend or relative who’s impossible to shop for come birthdays or holidays. They just don’t seem to want anything. Either they already have everything or keep things close enough to the vest that you have no idea what they want. They won’t tell you and they’re difficult to read.
All the ideas that come to mind seem like generic, thoughtless gestures meant only to fulfill a social obligation. Of course, you don’t want your gift to be a mere token to be met with polite gratitude and tossed in a closet until that closet is cleaned out years later. You want this person to have something they truly want. What do you do?
The practical answer is to give them cash. Though it’s often rejected as a gift idea for coming across as thoughtless, in practicality, cash guarantees that the receiver will get exactly what they want. Why is this? Because cash can be exchanged for literally anything they want.
Even if you could find the perfect gift, giving them the cash equivalent is just as good since they can go out and get the gift itself. In fact, this is the very purpose of money – to create a fungible medium of exchange and, by extension, something everybody always wants.
Though it may fall short when it comes to fulfilling the purpose of gift-giving (after all, it’s the thought that counts), money does quite well at solving this problem when it comes to commerce.
One of the biggest problems with the barter system is finding a double coincidence of wants. By creating a medium of exchange, you guarantee that you will always have something valuable to both yourself and whomever you are seeking to trade.
In this article, we’ll explore the double coincidence of wants, including the problems it creates and how money helps solve these problems.
What is a Double Coincidence of Wants?
A double coincidence of wants refers to a situation in which you want something another has, and you have something that the same person wants.
This is why it’s called a double coincidence of wants – you both want something the other happens to have. The other key piece of this is that you both have to be willing to give up that thing in exchange for the other.
For example, say you both have Playstations and have just finished playing games the other wants to play. You want GTA (which he just finished) and he wants Red Dead Redemption (which you’ve just finished).
Since you both are done, you are willing to give your respective games up – there is a double coincidence of wants and a trade can occur.
However, pretend you have an Xbox and he has a PlayStation. Both of you would like to have both systems, so you both have something the other wants. However, since that trade would require you to give up the other system, neither of you is willing to do it.
There is no double coincidence of wants since neither of you can provide for the other’s wants without losing something with which you are unwilling to part.
Importance to the Barter System
Since all commerce in a barter system is based on direct trades, a double coincidence of wants is the key to allowing it to function.
As we just talked about, no trade can occur where there is no double coincidence of wants. By creating something that everyone wants all the time, money helps solve this problem by fulfilling half the equation.
As long as party A has something party B wants, a trade can occur since party B will always want money.
Problems of the Double Coincidence of Wants
Here are several problems created by the double coincidence of wants and how money helps solve them.
1) Finding someone
The first problem is finding someone with whom you have a double coincidence of wants.
Say you want a loaf of bread. You have to first find someone with a loaf of bread that they are willing to give up.
You would probably start with the baker. They could make you a loaf of bread, and you have satisfied the first half of the double coincidence of wants – you’ve found someone who has the thing you want.
However, now you have to find something you have that you are willing to part with and the baker wants. Say you are an accountant. You could offer accounting services in exchange for the loaf of bread.
However, if this baker happens to be a numbers whiz, they may prefer to do their own books. They may want a new pair of shoes. Are you really willing to give them the shoes on your feet for a loaf of bread?
Money solves this problem. Now, as soon as you find what you want, you know there’ll be a double coincidence of wants since everyone wants money. They have the loaf of bread, you have money – there’s your double coincidence of wants.
Even if they want shoes, they can take the money and buy shoes with it – that’s how money works. Money gets around the double coincidence of wants problem by making it one-sided; if the buying or selling party can find what they want, they’ll always have something (i.e. money) the other party wants.
2) Ensuring Equal Value
Another problem created by the double coincidence of wants is that, even where a double coincidence of wants may exist, the items or services may not be of equal value.
For example, say the baker is willing to give you a loaf of bread if you’ll do his taxes next year. Is this really a fair trade? It might be, or you might have to barter for multiple loaves of bread or agree to a long-term deal like free bread for monthly bookkeeping services.
Or pretend that your friend has that PlayStation you’ve been looking for. Furthermore, they’re done with it and willing to give it up, but they need a new car.
It just so happens you have a car that you’re looking to get rid of. There is a clear double coincidence of wants here, but are you willing to trade your car for your friend’s PlayStation? Probably not.
The reason is that the car is much more valuable than the PlayStation. Even though you aren’t using it and want the PlayStation, you want to get much more for the car than a video game system. Money helps solve this problem by either making up the gap or allowing the transactions to occur separately.
You can now trade the car for the PlayStation and $X in cash (X being the agreed-upon value of the car minus the value of the PlayStation).
Alternatively, you could simply sell the car and buy the PlayStation, pocketing the difference and allowing your friend to put the value of the PlayStation towards his savings for a new car.
3) Addressing Future Wants
Another problem posed by the double coincidence of wants is that it exists in the present. You want something now and are willing to give up something to get it. How do you deal with future wants? For example, how do you plan to feed or shelter yourself in your retirement?
You can stockpile food, trading whatever you can today for food that you’ll stash away for tomorrow. Of course, you’re limited to non-perishable items, so say goodbye to dietary diversity and enjoy eating rice every meal.
You could make a deal with others such as you’ll feed and support your kids today if they’ll do the same for you in your golden years. Of course, there’s no way to ensure your kids don’t grow up to be deadbeats.
Money gets around this problem by acting as a store of value. You can simply save your money and use it at a later date to address the wants you’ll have in the future. This assumes the money will hold its value and still be used as a medium of exchange, but that’s another issue for another article.
Because money is fungible, it also allows you to address unanticipated needs or wants instead of simply the ones you planned for. That rice stockpile isn’t going to fix your car when it breaks down, for example.
4) Selling Labor With No Immediate Wants
You’ve been working hard and have everything you could ask for – a car, a house, and food on the table. Do you quit your job? Probably not – you have all day, so you might as well work and save up.
The problem is this – how do people compensate you? You are looking to work, but nobody seems to be able to offer you anything you can use. People offer food that will perish before you can use it, shoes that will sit in the closet, and entertainment systems you already have.
A double coincidence of wants can be impossible to find if people don’t want anything.
Money gets around this by creating something people always want – related to what we just discussed, even if there are no immediate wants, it can always be saved for a rainy day. This allows you to get something you want in exchange for your labor even if you have no pressing needs.
5) Limiting Specialization
Finally, a double coincidence of wants can limit niche products or highly specialized labor since there is very little demand.
Say you’re a nuclear physicist. We would expect this to be a highly-paid field, but what do you do when you want a loaf of bread? It’s unlikely you could trade the baker your services for a loaf of bread.
In fact, the only place you can really sell your services to is a nuclear power plant since they’re the only ones who can make use of your talents.
But how is the nuclear power plant going to pay you? Compensating you in energy only meets one of your many needs – you still need food, shelter, and transportation. The idea is that they’ll use your talents to make power, sell that power to everybody, and pay you.
But how can the baker pay the nuclear power plant for its services? The power plant could accept bread that it can in turn pay to its employees, like you.
What about the car dealership? Do they pay for power in cars, and, at the end of the day, what is the nuclear power plant getting to keep?
By creating a fungible commodity that can be used both for purchases and compensation, money allows for specialization and niche products to be profitable. It doesn’t matter that there’s very little demand for nuclear physicists since the corresponding lack of supply still makes it a profitable field.
Likewise, niche products can still find a market since you don’t have to find somebody with something you want to sell your niche product to – you can sell it to anyone who will buy it, and use the money to get what you want.
We hope this article helped clarify the problem the double coincidence of wants poses and how money helps solve this problem. We hope you’ll subscribe to see other information like this, and we thank you for joining us.