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Part Two: The Value of Money > Chapter 9. The Problem of the Existence of Local...

3. Alleged Local Differences in the Cost of Living

There is a certain connection between the assertion of local differences in the purchasing power of money and the widespread belief in local differences in the cost of living. It is supposed to be possible "to live" more cheaply in some places than in others. It might be supposed that both statements come to the same thing, and that it makes no difference whether we say that the Austrian crown was "worth" less in 1913 than the eighty-five pfennigs which corresponded to its gold value, or that "living" was dearer in Austria than in Germany. But this is not correct. The two propositions are by no means identical. The opinion that living is more expensive in one place than in another in no way implies the proposition that the purchasing power of money is different. Even with complete equality of the exchange ratio between money and other economic goods it may happen that an individual is involved in unequal costs in securing the same level of satisfaction in different places. This is especially likely to be the case when residence in a certain place awakens wants which the same individual would not have been conscious of elsewhere. Such wants may be social or physical in nature. Thus, the Englishman of the richer classes is able to live more cheaply on the Continent, because he is obliged to fulfill a series of social duties at home that do not exist for him abroad. Again, living in a large town is dearer than in the country if only because the immediate propinquity in town of so many possibilities of enjoyment stimulates desires and calls forth wants that are unknown to the provincial. Those who often visit theaters, concerts, art exhibitions, and similar places of entertainment, naturally spend more money than those who live in otherwise similar circumstances, but have to go without these pleasures. The same is true of the physical wants of human beings. In tropical areas, Europeans have to take a series of precautions for the protection of health which would be unnecessary in the temperate zones. All those wants whose origin is dependent on local circumstances demand for their satisfaction a certain stock of goods which would otherwise be used for the satisfaction of other wants, and consequently they diminish the degree of satisfaction that a given stock of goods can afford.

Hence, the statement that the cost of living is different in different localities only means that the same individual cannot secure the same degree of satisfaction from the same stock of goods in different places. We have just given one reason for this phenomenon. But, besides this, the belief in local differences in the cost of living is also supported by reference to local differences in the purchasing power of money. It would be possible to prove the incorrectness of this view. It is no more appropriate to speak of a difference between the purchasing power of money in Germany and in Austria than it would be justifiable to conclude from differences between the prices charged by hotels on the peaks and in the valleys of the Alps that the objective exchange value of money is different in the two situations and to formulate some such proposition as that the purchasing power of money varies inversely with the height above sea level. The purchasing power of money is the same everywhere; only the commodities offered are not the same. They differ in a quality that is economically significant—the position in space of the place at which they are ready for consumption.

But although the exchange ratios between money and economic goods of completely similar constitution in all parts of a unitary market area in which the same sort of money is employed are at any time equal to one another, and all apparent exceptions can be traced back to differences in the spatial quality of the commodities, it is nevertheless true that price differentials evoked by the difference in position (and hence in economic quality) of the commodities may under certain circumstances constitute a subjective justification of the assertion that there are differences in the cost of living. He who voluntarily visits Karlsbad on account of his health would be wrong in deducing from the higher price of houses and food there that it is impossible to get as much enjoyment from a given sum of money in Karlsbad as elsewhere and that consequently living is dearer there. This conclusion does not allow for the difference in quality of the commodities whose prices are being compared. It is just because of this difference in quality, just because it has a certain value for him, that the visitor comes to Karlsbad. If he has to pay more in Karlsbad for the same quantity of satisfactions, this is due to the fact that in paying for them he is also paying the price of being able to enjoy them in the immediate neighborhood of the medicinal springs. The case is different for the businessman and laborer and official who are merely tied to Karlsbad by their occupations. The propinquity of the waters has no significance for the satisfaction of their wants, and so their having to pay extra on account of it for every good and service that they buy will, since they obtain no additional satisfaction from it, appear to them as a reduction of the possibilities of the enjoyment that they might otherwise have. If they compare their standard of living with that which they could achieve with the same expenditure in a neighboring town, they will arrive at the conclusion that living is really dearer at the spa than elsewhere. They will then only transfer their activity to the dearer spa if they believe that they will be able to secure there a sufficiently higher money income to enable them to achieve the same standard of living as elsewhere. But in comparing the standards of satisfaction attainable they will leave out of account the advantage of being able to satisfy their wants in the spa itself because this circumstance has no value in their eyes. Every kind of wage will therefore, under the assumption of complete mobility, be higher in the spa than in other, cheaper, places. This is generally known as far as it applies to contract wages; but it is also true of official salaries. The government pays a special bonus to those of its employees who have to take up their duties in "dear" places, in order to put them on a level with those functionaries who are able to live in cheaper places. The laborers too have to be compensated by higher wages for the higher cost of living.

This also is the clue to the meaning of the sentence, "Living is dearer in Austria than in Germany," a sentence which has a certain meaning even though there is no difference between the purchasing power of money in the two countries. The differences in prices in the two areas do not refer to commodities of the same nature; what are supposed to be identical commodities really differ in an essential point; they are available for consumption in different places. Physical causes on the one hand, social causes on the other, give to this distinction a decisive importance in the determination of prices. He who values the opportunity of working in Austria as an Austrian among Austrians, who has been brought up to work and earn money in Austria, and cannot get a living anywhere else on account of language difficulties, national customs, economic conditions, and the like, would nevertheless be wrong in concluding from a comparison of domestic and foreign commodity prices that living was dearer at home. He must not forget that part of every price he pays is for the privilege of being able to satisfy his wants in Austria. An independent rentier with a free choice of domicile is in a position to decide whether he prefers a life of apparently limited satisfactions in his native country among his own kindred to one of apparently more abundant satisfaction among strangers in a foreign land. But most people are spared the trouble of such a choice; for most, staying at home is a matter of necessity, emigration an impossibility.

To recapitulate: the exchange ratio subsisting between commodities and money is everywhere the same. But men and their wants are not everywhere the same, and neither are commodities. Only if these distinctions are ignored is it possible to speak of local differences in the purchasing power of money or to say that living is dearer in one place than in another.