Because the process of exchange plays a fundamental role in all economic theory, I will refer to it frequently. I will begin with this detail discussion of the theory of exchange.

Exchange provides the basis for all market activity. Making any progress whatsoever in a free-market require some form of exchange.

Voluntary Exchange

Provides a foundation for free markets. In order for markets to be free exchanges we must conduct exchanges without intervention.

Direct Exchange

The simplest type of voluntary exchange consists of direct exchanges — the exchange of one economic good for another. Although this type of exchange seems simple on the surface, it has severe limitations.

Indirect Exchange

Indirect exchanges consist of those in which a person accepts an economic good in exchange for the express purpose of exchanging that good for one they prefer over the first good exchanged. Indirect exchange eliminates some of the problems inherent indirect exchange, but even with the indirect exchange of goods difficulty still arise.

Money

An economic good that people generally accept for the purpose of indirect exchange frequently becomes what we refer to as money. Money opens the door for the most effective and efficient methods of exchange available and free markets.

We will start this discussion with a description of voluntary exchange.