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September 18, 2007

Arthur Foulkes: Economic laws operate, regardless of time or place

By Arthur Foulkes

TERRE HAUTE — Economic laws and concepts have a way of popping up in the most unusual places – even in World War II POW camps.

A great article demonstrating economic laws at work is R.A. Radford’s “The Economic Organization of a POW Camp,” published right after the war in 1945. Radford was a British military officer who spent the last years of the war in a camp known as Stalag 7A in Bavaria in southern Germany.

The first, and probably most basic economic concept to present itself in Stalag 7A was simple, ordinary trade.

Because there was no production in the camp and each prisoner received equal rations of food, cigarettes, soap and other items from the Red Cross or the Germans, trade quickly emerged as the primary way for individuals to improve their lives.

“It is by trade that individual preferences are given expression and comfort increased,” Radford wrote.

And trade the prisoners did. They traded eagerly among themselves and occasionally with the German guards, who would grant small favors in return for cigarettes – something all the prisoners received – or other goods such as coffee, which was even more scarce outside the prison.

The second important economic phenomenon to emerge in the camp was money. In this case, money emerged in the form of cigarettes.

As Radford wrote, “Cigarettes became the normal currency” in the camp. Everyone, even nonsmokers, would accept cigarettes in trade because they knew they could use them later in an exchange for something else.

Cigarettes, while not an ideal money in the way gold or silver are – because they are much less durable and divisible – served the function of money well.

Another important economic lesson Radford witnessed in Stalag 7A was the effect of competition on prices. Radford wrote that some prisoners – those who spoke a foreign language for example – could gain access to other areas of the camp and take advantage of price differences. For instance, tea was relatively cheap among the French prisoners, who valued coffee much more highly. Coffee, on the other hand, was less valued among the British, who largely favored tea.

Along these lines, Radford wrote of one prisoner who capitalized on his ability to speak Urdu by making deals with Indian prisoners living in another area of the camp. This prisoner was able to make profitable exchanges by buying certain goods at relatively low prices from the Indians and reselling them at higher prices to the British and Americans. However, other prisoners, after learning of this operation, soon jumped in and started competing for the Indian goods. Eventually, Radford wrote, prices in the Indian compound roughly approximated those everywhere else in the camp.

Time is another important concept in economics. Put very simply, there is a difference between the value of goods now versus goods later. This also was demonstrated nicely in Stalag 7A.

Radford wrote that an offer of “bread now” on a barracks bulletin board was always seen as very different, and drew a much higher price in cigarettes, than “bread Thursday,” the day bread rations usually were issued.

And, of course, the laws of supply and demand also were clearly in operation in the camp. For example, when the prisoners discovered that a fairly strong alcoholic drink could be made from raisins and sugar, the price of these rations in terms of cigarettes rose sharply. The price of other goods, such as cocoa, varied dramatically as demand rose and fell with the seasons while the price of oatmeal sank rapidly after it became a common part of Red Cross parcels.

Because cigarettes were “money” for the prisoners, changes in the supply of cigarettes also affected prices, just as changes in the supply of any money affects prices in all economies. When new shipments of cigarettes arrived at Stalag 7A, prices of other goods, in terms of cigarettes, rose. When cigarettes became more scarce – many prisoners smoked, after all – prices of other goods in terms of cigarettes would fall.

Another economic law that emerged in Stalag 7A is known as Gresham’s Law, commonly stated as “bad money drives out good.” In this case, Gresham’s Law meant that lower quality, hand-rolled cigarettes were used as payment whenever possible over the more prized factory-made variety, which the prisoners saved whenever possible.

I also think it’s worth noting Radford’s comments on what he calls “public opinion” in the camp regarding entrepreneurs and “middlemen.” Radford notes that, “taken as a whole, opinion was hostile to the middleman. His function, and his hard work in bringing buyer and seller together, were ignored; profits were not regarded as reward for labor, but as the result of sharp practices.”

Indeed, Radford continues, the middleman was only appreciated when he was willing to advance the price of a sugar ration or spot someone against a future sale.

Public opinion also looked suspiciously at prices in general, especially when they changed sharply. Prices in the camp – in terms of cigarettes – were seen as “unjust” when the number of cigarettes offered for a good fell steeply for some reason, such as when the supply of cigarettes was low or an air raid left prisoners uncertain about receiving future rations.

Sometimes camp leaders attempted to interfere with the laws of supply and demand by setting prices or banning certain trades, but in every case, after a short period of success, these policies failed. As Radford wrote, eventually, “opinion was always overruled by the hard facts of the market.”

Radford’s article is one of the most cited in all of economic literature and possibly this is because, in a short space, it reveals so many different economic laws and concepts. And it shows that economic laws always operate, regardless of time or place.

Arthur Foulkes writes a weekly column on business and economics. The Tribune-Star reporter is a Terre Haute native and longtime resident. He can be reached at (812) 231-4232 or arthur.foulkes@tribstar.com.

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