Wednesday, July 8, 2020

An Odd Attack on Mises and the Purchasing Power Theory of Money

A Korowai tribe member
Chris Barcelo points me to a  post by George Mason University professor Tyler Cowen:

“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.
This is an odd attack on Mises.

Actually, Mises was discussing the purchasing power of money between different monies.

His chapter (IV) on the purchasing power of money in TMC begins this way:
The existence of an exchange-ratio between two sorts of money is dependent upon both being used side by side, at the same time, by the same economic agents, as common media of exchange.
Further, Mises never denied there wouldn't be price differences in goods (monies) because of transportation costs.

This is what he wrote in Human Action  9my highlight):
The purchasing-power parity theory of foreign exchange is merely
the application of the gcneral theorems conccrning the determination
of prices to the special case of the coexistence of various kinds of
It does not matter whcthcr the various kinds of money coexist
in the same territory or whether their use is limited to distinct areas.
In any case the mutual exchange ratio between them tends to a final
state at which it no longcr makes any difference whcthcr one buys
and sells against this or that kind of money. As far as costs of interlocal transfer come into play, these costs must be added or deducted. 
The higher cost of goods is clearly in play in Korowai because of the cost of transport which Cowen hints at in the second part of his quote. If you have to take a helicopter, a longboat for a day and then travel by foot for two days to get to Korowai that means a serious transport cost.

There is nothing to be befuddled about in Mises when it comes to the purchasing power of money or different price points in different high transport cost far off regions.


1 comment:

  1. How can Cowen be so clueless?
    Is it that as an academic, he has to make some pronouncement , no matter how inane.
    As an official Joe Sixpack, these economic issues are so obvious and simple, that I am befuddled by highly regarded academic jaspers like Tyler Cowen to be so spectacularly stupid and still keep their positions.