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What surprises me is how much implied real interest rates fluctuated, over such a short time. All the goods in question were storeable, at least over 3 or 4 days. Time-preference must have been very high, to get those (presumably predictable) price fluctuations as the equilibrium result of fluctuating endowments over the week.


Compensation required to defer consumption of $100 from 2020 to 2021?
Compensation required to defer consumption of all cigarettes until tomorrow?

Just asking.

Actually this raises an interesting point - lenders to the very poor generally charge high interest rates. Even the Grameen Bank charges interest rates that are comparable to credit card rates. When one is on the edge of subsistence, bread today is a very different thing from bread tomorrow - hence the high rates of time preference (bread going from 7 to 8 over a course of 3 to 4 days) that you note.

Frances: yep. Smokers definitely have hyperbolic time-preference. I've rolled butt ends in my time. And dumping in the rapids miles from anywhere last Summer was nearly a disaster. But fortunately I just managed to dry my papers in the sun.

But was it bread going from 7 to 8, or cigs going from 1/7 to 1/8? What happened to other relative prices? Was it intertemporal bread preferences, or cig preferences?

And if you are hungry today, but know you will be even hungrier tomorrow, a presumably rational person should still save.

Nick, sorry, I couldn't resist the cigarette comment.

He doesn't say exactly, but I got the impression that it was bread changing in price from 7 to 8, not cigarettes. Changes in the price of cigarettes generally caused overall inflation/deflation, except towards the end of the war, when their economy was nearing collapse.

Radford does discuss a number of examples of relative price changes caused by external factors/tastes.

The discovery of a means of fermenting dried fruit dramatically increased the price of raisins.

The invention of immersion heaters increased the price of tea.

Hot drinks were cheaper in the summer, but soap was more expensive.

Because the British and French had restricted access to each others sections of the camp, the relative prices of tea and coffee differed in the two areas - tea being more expensive in the British part, coffee in the French (there was also an external to the camp black market for coffee).

One reason why prisoners might have had such a high rate of time preference is genuine uncertainty about whether or not they would be alive to eat bread tomorrow ("eat, drink and be merry for tomorrow we die"). Radford only mentions it in passing e.g. talking about black-outs and the increase in cigarette consumption during bombing raids, but there was a non-trivial risk of being bombed.

I wonder, also, whether or not the storage technology was perfect (if not human theft, presumably there were vermin in the camps, though he never mentions this).

I have a feeling this is going to be one of those incredibly insightful blog posts that next-to-nobody comments on because there's nothing left to say. As such, I'll just say how much I enjoyed it!

Me too. Awesome post.

Mike, Stephen, thank you!

Yep. I can beat you three at number of comments any day. It's easy. Just say something controversial, with lots of mistakes, bits left out, without empirical support. ;-)

Frances: yes, risk of death would raise interest rates. But from my reading of POW books, for British soldiers in Germany it was much less than the 1% or 2% or more per day that would be needed to make those rates an equilibrium.

Nick:"it was much less than the 1% or 2% or more per day that would be needed to make those rates an equilibrium."

Don't forget risk premium.  Maybe people are risk averse about dying?

Absolutely fascinating. Very good post.

Fascinating, and a lovely Remembrance Day tribute. Here's my question: does the ability to do economic analysis within the relatively closed economy of the POW camp distort the sense of the workability/usefulness of economic analysis within more complex economic/social systems?

Alice, thanks for your kind words.

The thing that I love about Radford's article is that one can tell so many stories about it.

Another way of interpreting his account is the that economic systems require social organization. The trading system worked in part because each part of the camp had an 'exchange and mart' board where items were posted for sale. People bought and sold on credit because they trusted each other - and trust was maintained in part, one imagines, by the military command structure, and in part by the fact that, if you reneged on a promise you could hardly hide from the person you reneged upon!

That's a lesson that carries over to more complex economic/social systems.

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