The “law” of One Price: Implausible, yet Consequential

The law of one price (hereafter LoP) is one of the most basic laws of economics and yet it is a law observed in the breach. That a given commodity can have only one price, except for the briefest of disequilbrium transitions, seems to be almost an axiom. Economists are bent on considering their subject to be empirically based, yet the most elementary of laws seems to defy empirical confirmation. Would it not be wise to simply admit that economics cannot do without some a priori beliefs? Why has the law been accepted? Can the law be confirmed by data? If not, why is the law still accepted? and what does this acceptance tell us about good economic method? McChesney et al. have challenged the logical validity of the law and since no logical flaw exists in their presentation (McChesney, Shugart, and Haddock 2004, pp. 706–16), clearly there must be some implicit institutional factor that the usual description of the market ignores. The provenance of the LoP extends beyond methodology—to the treatment of real exchange rates, of industrial regulation and of such contentious issues as wage discrimination by sex—and hence some synthetic treatment has to be attempted. How do we treat a phenomenon that we believe to be true yet are unable to establish empirically? It may be noted that these thoughts lead one toward an Austrian methodology. While I have sympathy with various aspects of Austrian economics, it is not my intent to plead that the LoP is proof positive of the validity of Austrian ideas, especially as I am not an “Austrian.” But the contradictions implicit in the neoclassical attitudes toward the Austrians perhaps need exposure. Verifying the law of one price involves getting accurate data on many thousands of individual prices as well as the many forces that have affected