Originally posted on November 24, 2009.   A famous paper in economics showed how cigarettes became a medium of exchange in a POW camp (even leading to booms and slumps depending on Red Cross deliveries).  For a long time cigarettes were the money of choice in American prisons as well but today, according to a great piece in the WSJ, the preferred medium of exchange is mackerel. There’s been a mackerel economy in federal prisons since about 2004, former inmates and some prison consultants say. That’s when federal prisons prohibited smoking and, by default, the cigarette pack, which was the earlier gold standard. Prisoners need a proxy for the dollar because they’re not allowed to possess cash. Money they get from prison jobs (which pay a maximum of 40 cents an hour, according to the Federal Bureau of Prisons) or family members goes into commissary accounts that let them buy things such as food and toiletries. After the smokes disappeared, inmates turned to other items on the commissary menu to use as currency…in much of the federal prison system mackerel has become the currency of choice.   I loved this point which raised the possibility of significant mack seignorage. …Mr. Muntz says he sold more than $1 million of mackerel for federal prison commissaries last year. It accounted for about half his commissary sales, he says, outstripping the canned tuna, crab, chicken and oysters he offers. Unlike those more expensive delicacies, former prisoners say, the mack is a good stand-in for the greenback because each can (or pouch) costs about $1 and few — other than weight-lifters craving protein – want to eat it.   Thanks to Brandon Fuller for the link. ... View more

Originally posted by Alex Tabarrok on November 24, 2009.   Here is a fun, easy and effective experiment that instructors can use to illustrate the gains from trade.  The instructor puts chocolate bars ("fun-size") or other candy in bags, one bag for each student. (Alternatively, you can use the type of small items that you can find at a dollar store.  Filling the bags is where the most work comes in especially if you have a large class). Students open the bag and are then asked to write down how much they would be willing to pay for the bag's contents.  But before snacking, students are allowed to trade.  After a few minutes of trade, ask the students to write down their valuation again.  Voila!  Gains from trade.  With a few numbers pulled at random from the students you can do a back of the envelope calculation for the total increase in value.  The experiment doesn't take long and the students will appreciate the candy!   A hat tip to Randy Simmons who first introduced this experiment to me.   More classroom experiments can be found here and here. ... View more