Economics as a Theory of Exchange

Abstract

The theory of value has serious limitations as a general theory of economics. Consequently, many economists have sought to modify it by incorporating those aspects of exchange that it assumes away--the difficulties of exchange, the methods of overcoming them, and the implications of expanding exchange.. I distill from this body of work a coherent conceptual framework -- a theory of exchange. Such a theory of exchange is not an extension of the theory of value, but an alternative to it. The basic assumptions of the two are incompatible and their domains of application disjoint. While the theory of value addresses relative prices, a theory of exchange addresses the origin and function of economic institutions -- firms, markets, financial systems, governments, and legal systems -- the nature of business fluctuations, and the processes of growth, development, and transition. The two frameworks differ significantly in their normative implications. A theory of exchange requires normative criteria quite different from Pareto efficiency and implies a very different attitude to government intervention.

JEL Classification: B40, D50, D23, D60