eBay and Aristotle’s Model of Isolated Economic Exchange

Aristotle’s writings about the dismal science of economics lack the attention and favor that has been shown his philosophy. Why? Perhaps the magnificence of his collected works overshadows his important contributions to the theory of isolated exchange. Isolated exchange occurs when two parties arrive at terms of an exchange of non-uniform products without (objective) consideration of market forces and alternatives in the market for said goods. In effect, the exchange is negotiated in isolation and based on the subjective preferences of the individual parties. An underlying assumption is that there is no organized or informed market on which to base the transaction. Isolated exchange was commonplace in Aristotle’s time and can be found in pre-industrial economies employing barter in our own age. By way of comparison, consider eBay.com and the market information it provides as the ultimate safeguard to the perils and advantages of isolated exchange to both buyer and seller.

Many economic historians might be unaware of the extensive writing of the Greeks on economics and their related commentaries written throughout the intervening centuries. This is understandable because economics was not organized into a separate discipline in antiquity. Economic science developed its own identity in the late 18th century as political economy when it was discovered that the market was a self-regulating system, and thus afforded its treatment as a unique discipline. Until this realization, the lines of demarcation between the social sciences were not significant enough for economics to be recognized as a unique scientific discipline, and hence the thread of thought stretching from Aristotle is not immediately obvious.

Those historians who are aware of Aristotle’s writings by way of the Scholastics of the Middle Ages, who dealt extensively with Aristotelian ideas, may be predisposed to dismiss his ideas based on the Scholastic interpretation and point of view. (Aristotle had a marked effect on the Scholastics some of which is felt among economists today.) Despite his historical influence, Aristotle did not understand the concept of a self-regulating market -- he would not have approved of the selfish motives behind using money to accumulate wealth and the subsequent influences of those motives on cognitive evaluation of utility and value in market exchange. Aristotle’s analysis of two-party exchange did not include an analysis of how market price is arrived at, and this led to continual confusion about his model. The confusion over Aristotle’s isolated-exchange model made it foundational for discussions of value during the Middle Ages. Furthermore, he condemned the charging of interest, so he would have also been skeptical of modern notions of the cost of capital that lubricate today’s markets. Nevertheless, Aristotle’s ideas are fundamental to modern economic theory and he influenced many of the early thinkers. I do wonder what the Greeks and the Scholastics would think of eBay.com…

Reference

Ekelund, R. B., Jr., & Hébert, R. F. (1997). A history of economic theory and method (4th ed.). New York: McGraw Hill.