Fundamental Problem of Exchange

Thefundamental problem of exchange is an economic problem that is inherent to all transactions. The problem is central to the liberal institutional perspective in international political economy. Institutionalists believe that institutions can solve the problem at the multiple junctures in an exchange where it surfaces.

First, the parties to an exchange must recognize that a mutually beneficial potential for exchange exists. If two entities are not cognizant of a potential exchange, then that exchange will not occur. An example of a solution to this problem is Amazon.com which is an institution that provides information to consumers. Second, after the parties are cognizant of a possibility, they must evaluate the goods or services to be exchanged and must then negotiate the terms of the exchange. In order to do this, parties to an exchange must usually have some form of standards to judge what exactly they will be receiving from the other party. A third-party website with product reviews is an example of this, and the precedent of contract law in the United States provides an institutional means to negotiate the terms of trade. Finally, the parties must ensure that the other party will not renege on the terms of the exchange and must devise ways to enforce such terms in the event that the other party does renege.

The fundamental problem of exchange can be solved by an almost infinite constellation of institutional arrangements, but the main point emphasized by institutionalists is that the importance of institutions cannot be disregarded and must be considered in international political economy.