What does the exchange need?

As well as individual requirements (such as exchange capacity), there are also structural requirements for a system of exchange, such as money, contracts, and property rights.

Medium of exchange

For widespread exchanges to work, there needs to be some medium of exchange. This is very helpful, because it's not always the case that two people have things each other wants. If a customer wants apples, but a shopkeeper wants milk, the two can only complete the exchange if they both have what each other wants. That would limit who can shop at the shop, leaving the customers without, and the shopkeeper without. However, if there is an abstract type of exchange capacity - something that everyone wants to accept in an exchange because they know that they can exchange it later - then it's much easier to complete exchanges. The shopkeeper would be happy to accept it in exchange for apples, because then they can go to someone who has want they want and it exchange it onwards. This is the role of money.

Money has two other useful functions. The first is that it can be a store of value. That is, you can put money in a safe, and come and get it later, and it will still do its job of exchanging things. This is different to, say, apples, because even if people want to accept apples as payment, eventually the apples will rot and you will have nothing to exchange.

Unit of account

The other is a unit of account. This is an abstract unit of measurement that, in-and-of-itself means nothing, but which different things can be compared against. For example, how many litres of milk is equivalent to a kilo of apples? The question is pretty hard to answer, unless you have some useful unit, such as dollars or Euros or yen, to measure both with. A person can ask, "How many dollars would I give up for a litre of milk?" and "How many dollars would I give up for a kilo of apples?" and then be able to compare the value of the two. This is important because it allows us to make decisions about how to use resources, perhaps favouring resources that are cheap when relevant. However, I'll raise a critique of these functions of money a little later.

Law, arbitration and enforcement

The other major structural requirement for a system of exchange is contract law and arbitration. An exchange is an agreement between two parties to deliver certain things of certain qualities to each other. But what happens if that contract is not fulfilled? One answer is that the party who didn't fulfil their part of the contract is named and shamed and loses out on future business. But that doesn't help the party who gave something valuable away and got nothing in return. They are now poorer. How can they get that value back? And naming and shaming will only work if the word gets out, but that doesn't always happen.

Exchanges can also get pretty complicated. Lots of exchanges involve one party giving something right now, and another party completing their part of the exchange at a later date. There are also complexities that are placed on the conditions, and it can be the case that a product is found to be defective weeks or months after money has changed hands. Some businesses simply lie. If every exchange were merely between two parties, without any regulatory environment and without any enforcement of those regulations, many of these complex exchanges would be unworkable because it would be impossible to trust that the other party would complete their end of the exchange, or impossible to recover and lost value in the case of an issue. So a system of exchange requires contract law and contract arbitration in order to function reliably.

Finally, a system of exchange needs enforceable property rights. This is because of a combination of three factors: every thing that someone possesses was likely obtained by exchanging some value and in some way represents that value, every thing has some value because it has some exchange capacity, and people need to hold onto things until they want to exchange them. For example, if a person buys a tv for $1000 and it gets stolen, they are now down $1000, which might mean that $1000 worth of labour has now produced nothing. Second, the tv itself could possibly have been sold, so the person has now lost out on $1000 (or whatever depreciated value) of value if they suddenly need to make a different purchase. Third, even if the person is not using the tv, the fact that they can sell it means it is worth holding onto, and it is only valuable so long as they retain it (of course, if they sell it for $800, then the money is worth holding onto). Some assets appreciate over time, so holding the asset instead of selling it is more valuable.

For these reasons, having exclusive possession and use of property - even if one isn't actually using it - is something people need to be able to do in an exchange economy. Like contract law an arbitration, this functions better when there are laws and enforcement about property rather than when people are left to fend for themselves.