Wednesday, October 31, 2007

lobsters and diamonds

Glenn Jones studied several hundred menus in the United States, going back into the past. ‎He made a remarkable discovery: there was a time when lobsters were so cheap that they ‎were used as fertiliser! They were so abundant that they were fed to prisoners and ‎children in orphanages. Servants deplored the fare, bargaining with their employers not to ‎be served the crustacean more than twice a week. ‎

Then lobsters became scarce, and their price began to rise. In 1870, a meal cost $4 (in ‎today's money), but $30 dollars or more around 1970. ‎

That's when the lobster became a prized delicacy, sought by the rich. ‎

This is an excellent example of the failure of economic theory: economic theory predicts ‎that the more expensive a product, the less people will consume it. When the supply of ‎lobsters began to shrink, the price rose, and the product came to be in greater demand, ‎pushing prices even further.‎

This observation was made a hundred years ago by Thorstein Veblen: he noticed that the ‎rich engage in conspicuous consumption; they value things just because they are ‎expensive (diamonds, for instance). ‎

If you're still not convinced, consider the case of diamonds ('girl's best friend'): if ‎diamonds were cheaper, more people would buy them, right? Wrong! Diamonds can be ‎as cheap as glass, and hardly anyone would buy them then. ‎

The only reason why diamond is not cheap as glass is because DeBeers, the cartel, hoards ‎several billion dollars worth of diamonds in its vaults: it releases just enough to ensure ‎that the price remains high – but not too high. Does that make sense? It certainly goes ‎against economic theory: if diamond drops sufficiently low in price, nobody will buy ‎diamonds!‎

It is the same case with gold: there is enough gold in the world's central bank vaults and ‎the IMF's hoard to make gold as cheap as any metal. Then who would ever buy gold? ‎

Still not convinced? Consider silver: at one time, it was very expensive; today it is cheap, ‎and how many people crave silver? ‎

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