“The purchasing power of money is the same everywhere”

Didn’t Mises insist on that proposition in his Theory of Money and Credit?  The claim always bugged me, as it is true only tautologically.  Here is one counterexample:

In a remote area of Papua’s Pegunungan Bintang regency, purchasing staple commodities will put a far bigger dent in your wallet than in most other areas of Indonesia.

For a sack of rice, typically weighing 10 kilograms, people in the traditional gold mining area of Korowai have to spend at least Rp 2 million (US$138.5), similar to the cost of a low-end smartphone.

For comparison, in Jakarta, 1 kilogram of rice costs Rp 10,000 to Rp 11,000, meaning 10 kg of rice costs people in the capital around Rp 110,000.

The massive price discrepancies are not limited to rice. A box of instant noodles costs Rp 1 million in Korowai. Sometimes, people even pay with two grams of gold.

“A pack of instant noodles costs Rp 25,000,” said Hengki Yaluwo, an administrator of a cooperative in Korowai’s Mining Area 33 on Wednesday.

“Ten kilograms of rice costs four grams of gold. If you pay with cash, you need Rp 2 million,” he said.

One can of fish typically costs Rp 150,000, while a cell phone could cost 10 to 25 grams of gold, Hengki said.

As for arbitrage:

Reaching Korowai is difficult. People must take a helicopter from Bovel Digoel regency, and then continue by longboat, traveling along the Boven Digoel river for one day. After this, they must travel by foot for two days before finally arriving at the Korowai mining area.

Here is the full story, via Shaffin Shariff.  Here are photos of the Korowai people, ignore the text.  Here is a more sober and probably more accurate Wikipedia article.

Comments

Winged drone, ten Hp engine, 12 inch prop, 15 foot wing span. Lots of room in the belly for drops, automatic. Make the fifty mile trip for ten bucks in fuel, can land on short prepared airfields, or low pass drop or parachute. Price? Call 1-800-sendmecash.

That will come. But remember, it is a lot cheaper to pay a Korowai to shoot down your drone than it have competition in the instant noodle market. Best talk to the people currently delivering the goods and make a deal with them. If there is already competition, don't go with the biggest. A smaller outfit will be more grateful. Just make sure they aren't so small they can't protect you.

The Law of One Price is valid everywhere, except in New Jersey.

Inquiring Austrian minds want to know, as they are fully aware of the difference between Waehrung and Zahlungsmittel as forms of Geld.

The cost of rice in PB regency is the same as Jakarta. Both include the value of the rice and the value of the shipping. If rice really has a price premium there, sellers will rush to bring more to the market and the price will fall. The fact that they don't indicates the price doesn't support more supply.

"Both include the value of the rice and the value of the shipping."

And knowledge of alternatives, market power, and barriers to entry.

Indeed. In North America things like glass beads were traded at first, but it didn't take Americans long to get wise to that. Then it was fire water. And while they soon realized that was a lousy deal, saying no was not something they were generally equipped to do.

That there are people playing the role of robber baron/company store owner effectively.

Nice boat you have there - shame about the bloodstains, guess you won't be needing it any more, thanks.

Alaska and Hawaii are similar that way. Everything there costs more. The San Francisco Bay Area is in another coordinate system altogether. Where I live now in Europe, two people can have a nice dinner out for $50. In San Francisco, that's almost the price of one entree.

Islands/remote places: dictatorship of shipping. SF: dictatorship of rent.

Yes, and it goes even farther than that: the first time that I visited Hawaii, I was not surprised at the higher prices of most goods. The one that did surprise me was papaya: they grow wild in Hawaii, they literally grow on trees. But in the grocery stores, papayas were more expensive in Hawaii than on the mainland.

What happened to comparative advantage and relative prices? The only explanation we could think of is just plain generally higher costs overwhelm the cost advantage of papaya suppliers in Hawaii. Or maybe Hawaii has to import papaya for some reason?

Interesting. Been to Hawaii a lot and never noticed that. I've written to the Hawaii Papaya Industry Association (https://hawaiipapaya.com/) to ask about this. :)

"Mises came to be regarded by many as the "archetypal 'unscientific' economist." - Wikipedia. "unscientific economist"? talk about tautology.

this gets my vote

Pretty sure this is Marx not Mises. Marx was very confused about how things could very in price in time and space. He thinks it is necessarily proof of some kind of exploitation. Das Kapital was bad enough to read before that point, but I couldn't keep going after he put that argument down.

"Marx was very confused about how things could vary in price in time and space."

Most people still are. The average person has no concept of price or value as a variable. I noticed the other day that even Morningstar stock reports have a "fair value" estimate for companies - as if that had any reasonable meaning regarding the value of the company as an investment.

In other words. a good transportation network is essential for economic development. Indeed, the first north-south crisis in the U.S. was the Mississippi Navigation Crisis of 1786-88. Secretary of State John Jay had negotiated a treaty with Spain that would open markets in Spain and its colonies to U.S. shipping and merchandise, which were mainly located in the north, in return for ceding control of the Mississippi River to Spain. "The Mississippi Navigation Crisis was one of the most significant precipitating events of the constitutional convention. During the convention, the subject was fully discussed and was one of the southerners' strongest justifications for requiring in Article II, section 2, clause 2, of the Constitution that no treaty be signed with a foreign nation without the consent of two-thirds of the Senate. By requiring a two-thirds majority, they ensured that a southern bloc could obstruct the passage of any treaty injurious to the South. The Navigation Crisis was also an important bargaining point in the three-fifths slavery compromise."

Tyler, I'm surprised by your introductory line to the news about another case of failed arbitrage (btw, our history is full of both cases in which the initial conditions prevented arbitrage but later changed and arbitrage led to "one price" and cases in which those initial conditions have not changed enough to lead to "one price").

Indeed, the introductory line is irrelevant to the report of what is happening somewhere in Indonesia. But let us discuss what Mises said about the purchasing power of money. Please read

https://mises.org/library/determination-purchasing-power-money

and tell me exactly what has led you to suspect that Mises argued that "the purchasing power of money is the same everywhere".

Sorry, your suspicion is an unfounded rumor. In Buenos Aires 1963, I learned about Mises's chapter on money in his Human Action thanks to a classmate whose father was a Mises's friend. At that time, our newly Ph.D. professors from Harvard, Oxford, and other foreign universities were not able to explain to us (undergraduate students) the purchasing power of money (I don't have my Ackley's Macroeconomics and Newlyn's Theory of Money but you can check what they said about money around 1960).

IIRC some years ago Matt Yglesias was daydreaming about the possibility of enticing the Korowai to the US. It may have some other group in the region that practiced cannibalism - the getting cannibals to immigrate to the US was definitely something he seemed to want.... my guess is that it had to do with foodie credentials* (and the other idea that there was no human group anywhere on the globe that he thought wouldn't be improved by immigrating to the US...)

*if any of them do immigrate and start up restaurants I'm sure Tyler will let us know...

"mining area", talk about Americans' loving to bury the lede!

The purchasing power of poker is the same everywhere. Forget Annie Duke. Maria Konnikova is what's happening now. https://www.theatlantic.com/health/archive/2020/06/how-i-became-poker-champion-less-year/613372/

Maybe Cowen is referring to this: https://www.nytimes.com/interactive/2020/07/02/opinion/politics/us-economic-social-inequality.html

And this: https://www.nytimes.com/2020/07/02/opinion/private-equity-inequality.html

I would think that the the mark-up in Rp price between Jakarta and Mining Area 33 would be entirely shipping, if markets in Area 33 are fully competitive. If the Mining Area 33 price is > Jakarta price + shipping, then the mark-up becomes some sort of monopoly power for sellers in Mining Area 33.

Isn't it all entirely explained by travel cost?

Moral of the story: Build more infrastructure or basic things like pricing goes out of wack.

PS. Rice is supposed to be more valuable than cell phones in the deep jungle. Phones are useless without electricity and you gotta eat.

But what you are purchasing in Pegunungan Bintang is *a 10-pound bag of rice in Pegunungan Bintang*, whereas what you are purchasing in Jakarta is *a 10-pound bag of rice in Jakarta*--not the same thing!

Anyway, since Mises surely knew about such cases, the question must be: Did he really say that?

"Anyway, since Mises surely knew about such cases, the question must be: Did he really say that?"
If he did, the question should be : " what did he mean by it?" Was he saying that people perceive $1 to be of same value everywhere? That they confuse nominal and real value?

Mises seems to be assuming, as Coase did, that transaction costs are zero. But Coase said so explicitly, and Mises should have but didn't.

The purchasing power of money isn't the same everywhere, and it isn't the same for everyone. Ask a Negro who tried to by a house in the suburbs back in the 1950s.

My favorite example of dealing with location costs was Detroit and the steel industry. Detroit was chosen as the Motor City because it was centrally located with regards to sources of steel. Since some steel makers were closer to Detroit than others, the Gary price fixing breakfasts set the prices so that the cost was the same delivered to Detroit with the price high enough so that even the more distant sources could make a good profit.

The US railroads and their opaque tariffs were a transportation network and a means of controlling locality. They were run by NYC bankers who set tariffs to keep the midwestern "trunk" manufacturing and the south a raw materials provider. This only ended when the interstate highways came in and government policy overrode private initiative.

It is implied that everything that makes purchasing power unequal is just another variable that needs to be accounted for in order to prove that purchasing power is equal everywhere.

The Mises quote in your headline ends not with a period but with a semicolon. It finishes, “; only the commodities offered are not the same.“

Comments for this post are closed