Eat the Rich: A Treatise on Economics (18 page)

If John Grisham spends 100 percent of his time inventing dumb adventures for two-dimensional characters and Courtney Love spends 100 percent of her time calling cats, the result will be 100 thrillers and 5 songs for a total Benefit to Society of 105 BS.

(Just to make things more confusing, note that Courtney Love loses 40 percent of her productivity by splitting her time between art and music, while John Grisham loses only 25 percent of his productivity. She has the “comparative advantage” in making music because her opportunity costs will be higher if she doesn’t stick to what she does best.)

David Ricardo applied the Law of Comparative Advantage to questions of foreign trade. The Japanese make better CD players than we do, and they may be
able
to make better pop music, but we both profit by buying our CDs from Sony and letting Courtney Love tour Japan. And if she stays there, America has a definite advantage.

Comparative advantage is a rare example of the counterintuitive in economics. It’s also unusual because it requires a little arithmetic to understand. We think of economics as strangled in math because of the formulas and graphs filling most economics textbooks. But you can (and I did) search the entire founding volume of economics, Adam Smith’s
An Inquiry into the Nature and Causes of the Wealth of Nations,
without encountering a mathematical formula. In
New Ideas,
Buchholz quotes Alfred Marshall, the preeminent economist of the late nineteenth century (and a mathematician):

 

(1) Use mathematics as a shorthand language, rather than as an engine of inquiry. (2) Keep to them until you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics.

 

We don’t need to know math to understand economics, because economics isn’t about abstract principles, it’s about microwave ovens, cow howitzers, steam engines, wet knitting, snowboards, mousetraps, and Courtney Love on permanent tour in Japan. And this brings us to one more economic exception to common sense and a thing that requires all sorts of mathematics from us every day: money.

Why is this soiled, crumpled, overdecorated piece of paper bearing a picture of a rather disreputable president worth fifty dollars, while this clean, soft, white, and cleverly folded piece of paper is worth so little that I just wiped my nose on it? And what exactly is a “dollar”? If it’s a thing that I want, why do I prefer to have fifty grimy old dollars instead of one nice new one? This isn’t true of other things—puppies, for instance.

But money is not a puppy; it’s not a specific thing. Money is a symbol of things in general, a symbol of how much you want things, and a symbol of how many things you’re going to get. Money is a mathematical shorthand for value (and per Alfred Marshall, we seem to burn the stuff).

But what is value? The brief answer is “complicated.” Value varies according to time, place, circumstance, and whether the puppy ruined the rug. Plus, there are some things upon which it is difficult to place a value. This is why we don’t use money to measure all of our exchanges. Kids get food, clothing, and shelter from parents, and in return, parents get…kids. Important emotional, philosophical, and legal distinctions are made between sex and paying for sex, even if the socially approved sex costs dinner and a movie.

We need economic goods all the time, but we don’t always need money for them, and it’s a good thing, since for most of human existence, there wasn’t any. Money didn’t exist, or, rather, everything that existed was money. If I sold you a cow for six goats, you were charging it on your Goat Card.

Anything that’s used to measure value, if it has value itself, is “commodity money.” Societies that didn’t have fifty-dollar bills picked one or two commodities as proto-simoleons. The Aztecs used cocoa beans for money, North Africans used salt (hence “salary”), medieval Norwegians used butter and dried cod, and their ATM machines were a mess.

Some commodities are better as money than others. Movie stars would make bad money. Carrying a couple around would be a bother, and you’d have to hack a leg off to make change. Precious metals, however, make good money and have been used that way for more than 5,000 years.

Metal commodity money is portioned out by weight. A coin is just a hunk of metal stamped to indicate its heft. From weighing money to making coins is a simple step, but a couple thousand years passed before the step was taken. Nobody trusted anybody else to do the stamping.

When coins
were
invented, the distrust proved to be well-founded. The first Western coins were minted by the kingdom of Lydia, in what is now Turkey, and were made of a gold-silver alloy called electrum. It’s hard for anyone but a chemist (and there weren’t any) to tell how much gold is in a piece of electrum versus how much silver. The king of Lydia, Croesus, became proverbial for his wealth.

In China, the weight of bronze “cash” was supposed to be guaranteed by death penalties. A lot of people must have gone to the chair. A horse cost 4,500 “1-cash” coins during the Han dynasty (206
B.C
. to
A.D
. 220) and 25,000 cash during the Tang dynasty (618-
A.D
. 907).

Kings, emperors, and, indeed, Swedish cabinet ministers have expenses. It is to a government’s advantage to pay for those expenses with funny money. One reason that money violates common sense is that governments do tricky things with it.

Another reason that money violates common sense is that we don’t have to use real commodities as money. We can use pieces of paper promising to deliver those real commodities. This is “fiduciary money,” from the Latin word
fiducia,
trust.

In Europe, paper money developed privately in the thirteenth century from bills of exchange traded among Italian merchants and from receipts given by goldsmiths to whom hard money had been entrusted for safekeeping. We still use such private money when we cash a traveler’s check.

Public fiduciary money was first printed, predictably enough, in Sweden. Swedish commodity money came in the form of copper plates. Thus, in Sweden, a large fortune was a
large
fortune. In 1656 the Stockholm Banco began issuing more convenient paper notes. The bank issued too many notes, and the Swedish government went broke—for the same reason that the Swedish government is broke today.

In 1716, Scotsman John Law helped the French government establish the Banque Royale, issuing notes backed by the value of France’s land holdings west of the Mississippi. Banque Royale issued too many notes, and the French government went broke—for the same reason the French government is broke today. (Meanwhile, with the fates looking toward bank scandals of the distant future, John Law was created “duc d’Arkansas.”)

But the most extensive Western experiment with paper money took place right here. In 1775 the Second Continental Congress not only created paper money but passed a law against refusing to accept it. The Continental Congress issued too many notes and…a pattern begins to emerge.

All fiduciary money is backed by a commodity, even if the backers are lying about the amount of that commodity. Historically the commodity most often chosen has been gold. By the nineteenth century, the major currencies of the world were based on gold, led by the most major currency: the British pound. This was a period of monetary stability and, not coincidentally, economic growth. There are people who think we should go back on the gold standard, and not all of them have skinny sideburns, large belt buckles, and live on armed compounds in Idaho. Money ought to be worth
something,
and gold seems as good as whatever.

But there’s that endlessly perplexing relationship between money and value. The high value of gold is a social convention, a habit left over from the days when all bright, unblemished things (people included) were rare. Gold may go out of fashion. A generation may come along that, to the surprise of its parents, regards gold as gross or immoral, the way current twenty-year-olds regard milk-fed veal. And gold is a product. Different ways to get huge new amounts of it may be discovered. This happened to the Spanish. When they conquered the New World, they obtained tons of gold, melted it down, and sent it to the mint. It never occurred to them that they were just creating more money, not more things to spend it on. Between 1500 and 1600, prices in Spain went up 400 percent.

Presented with the enormous wealth of America’s oceans, fields, and forests, Spain took the gold. It was as if someone robbed a bank and stole nothing but deposit slips.

Gold is an irrational basis for currency, but the real problem with fiduciary money—from a government standpoint—is that it’s inconvenient. A currency that can be converted into a commodity limits the amount of currency that can be printed. A government has to have at least some of the commodity or the world makes a laughingstock out of its banknotes—“Not worth a Continental.”

So if a government can lie about the amount of a commodity that is backing its currency—as the Stockholm Banco, Banque Royale, and Continental Congress did—why can’t a government lie about everything? Instead of passing a law saying one dollar equals X amount of gold, why not pass a law saying one dollar equals one dollar? This is “fiat money” (from the Latin for being forced to drive a cheap, unreliable car), and it’s almost the only kind of national currency left in the world.

Fiat money is backed by nothing but faith that a government won’t keep printing money until we’re using it in place of something more important, such as Kleenex. Concerning this faith, the experiences of Wiemar Germany, Carter America, and Yeltsin Russia make agnostics of us all. The only thing that protects us from completely worthless money is our ability to buy and sell. We can move our stock of wealth from the imaginary value of dollars to the fictitious value of yen to the mythical value of stock shares to the illusory value of real estate, and so forth. Our freedom to not use a particular kind of money keeps the issuers of that money—
honest
wouldn’t be the word—moderate in their dishonesty.

I subjected myself to a large dose of economic theory because I’d finally realized that money was as important as love or death. I thought I would learn all about money. But money turns out to be strange, insubstantial, and practically impossible to define. Then I began to understand that economic theory was really about value. But value is something that’s personal and relative, and changes all the time. Money can’t be valued. And value can’t be priced. I should never have worried that I didn’t know what I was talking about. Economics is an entire scientific discipline of not knowing what you’re talking about.

Trying to observe economic practice showed me that I needed to learn some economic principles, and trying to examine economic principles showed me that I’d better look at the practice again.

If I was going to continue trying to understand economics, I had to go back to reality—a remarkable example of which is Russia. In contemporary Russia, there are all kinds of economics, good and bad, capitalist and socialist. The economic activity is being conducted under conditions of anarchistic freedom and totalitarian restraint. The people who make the laws have too much power, and yet no power seems able to stem the lawlessness. Russia, as a case study, is wonderful. Unless, of course, you’re a Russian.

At least with Russia, nobody even pretends to know what he’s talking about. No economic textbook prepares a visitor for the Russian experience. No school of economic thought foresaw the Russian situation. Can a society that has had the full faith and credit of its government contradicting economic sense for generations become a free market and not blow up? Can a Cuban-type mess be turned into Wall Street pandemonium without causing Albanian bedlam? And is there some middle way like the ball-up in Sweden? All the world’s Russia experts (and most of its Russians) are trying to figure these things out. But Russia is “a riddle wrapped in a mystery, inside an enigma, tied in a hankie, rolled in a blanket, and packed in a box full of little Styrofoam peanuts,” said Winston Churchill, or something like that.

The Russians may adopt our ideas, our way of living, and our point of view. They may join the great international society of rights, law, and progress. Or their response may be, as graffiti I saw on a Moscow factory wall put it,
FUCK YUO
.

I came to Russia for the first time in July 1982, arriving at the twilight of the Brezhnev era and also, literally, at twilight. Dusk is prolonged and shining in midsummer at latitude 55°, but nothing shone in Moscow. Storefronts weren’t lit, and there were very few storefronts. No headlights were visible. More to the point, no cars were. The city had street lamps, but as far apart as Patti Smith albums. The endless apartment blocks seemed blacked out. Could it be that no one lived in Russia? Or was there just not much living to be done? Red Square was shadowy. The Kremlin was dim. The Moskua River was an opaque trough beneath dismal bridges. The USSR was very dark, considering it was still daytime.

I came back to Russia in 1996 to find Moscow crowned in an arc of lights—Camel Lights. This being spelled out in tall letters atop a downtown high-rise. And the city below sparkled with ads for Sony, Coke, Levi’s, Visa, Pizza Hut, Sprint, and Nike. Freedom had come to Moscow.

Well, one freedom anyway. Many human rights had been taken from the citizens of the old Soviet Union, and the first human right they got back seemed to be the Right to Outdoor Advertising. Maybe this was a minor liberty, but I don’t know. Without advertising, human desires and intentions are invisible. What can people have? What do people want? Where are people going? They could be lining up to see
Titanic.
Or they could be lining up to tell on you. What succeeds with this public? What fails? A government could say the most popular flavor of ice cream is asparagus. How would you know? And what are all those buildings for? What’s going on in them? (The answer to that question in 1982—in a country without profit or loss, with little to sell and less to buy—was “nothing.”)

Now everything is going on in Moscow. Crowds load the sidewalks, moving briskly. The masses are actually massed. The masses are finally progressive. Except every member of the masses is progressing in a different direction. And he’d better be careful getting there. The pedestrian crosswalk is not yet an idea in Russia. Cars, trucks, and city buses approach intersections with the same speed and inclination to swerve as avalanches. Nor is this traffic the tinny, puttering, tacked-together output of the Soviet industrial pre-Cambrian age. You could have stood in front of that stuff and watched it fall apart as it hit you. But now there are Volvo semis and Mercedes sedans and solid little Opel coupes barreling down…crash…into one of a hundred gaping holes in the street, products of a flurry of construction that envelops Moscow in a glorious aureole of mud, dust, bulldozer exhaust, and jackhammer noises.

The place is hopping, happening, swinging, smoking. Factually smoking. You can fire a butt anywhere in Moscow, and nobody fakes a cough or pulls a C. Everett Koop mug on you. These people are busy. They have lives. And this vast liveliness does something unlikely to Moscow: It makes the city almost beautiful.

The Communists wanted to turn Moscow into a showplace and couldn’t get it right in seventy-four years of trying. From Stalin through Khrushchev, most building was done in the style of TragiComic Classical. The architectural forms of the ancients were reproduced in badly poured concrete and gross-out scale. Thus, poky offices are entered through arches more fit to be sitting at the end of the Champs-Elysees, and nasty warrens of slum housing are fronted with Ionic pillars as wide as tennis courts.

The city’s main streets are so broad that you can’t hit to the far curb with a three wood. Driving anywhere in Moscow is a half-day excursion because the streets were laid out, not with a view to getting anywhere, but according to what made the best parade routes. And traffic signals are timed to let three battalions of crack airborne troops and a hundred missile launchers through before the yellow caution light comes on.

At least now there’s something to do while you’re waiting to cross the street. You can have dinner. Moscow is engorged with good places to eat. I spent my first night in the Hotel Metropol’s restaurant, a Kubla Khan’s worth of stately pleasure dome with a fountain in the middle and enough space to fly a radio-controlled model airplane. A full orchestra was playing (among the selections: an instrumental version of Billy Joel’s “Honesty”). You have heard of Tiffany lamps. The restaurant at the Metropol has what looked to me like an entire Tiffany ceiling. The cooking was French to such an exquisite degree that the garlic breath from my escargots melted a hand towel when I got back to my room.

The next night I went to Uncle Gillie’s, which had California cuisine in perfection. My chicken had not only been allowed to range free, it had been given aroma therapy and stress counseling. The night after that, I went to Il Pomodoro for Italian food authentic enough to satisfy the Corleone family, Russian versions of which were eating at several other tables. Then there was the Starlite Diner, built in America and shipped in modular sections to Russia. Here even the water was imported from the States. Great burgers—and it is the world’s only diner filled with Republicans. International bankers in pinstriped suits crowded the booths, drinking milk shakes and bobbing up and down to the Four Tops.

“Tomorrow night I want caviar, blinis, and borscht,” I said to my dinner companion, Dmitry Volkov, correspondent for the
Sevodnya
daily. “Where’s a Russian restaurant?”

“There aren’t any,” said Dmitry.

And there aren’t any Russian products in the stores, either, other than vodka, fish eggs, and a few tourist tchotchkes. There is a simple reason for this. The Russian stuff is no good. Even the smallest, simplest items stink. The way you use a Russian match is: After you strike it, you put it back in the matchbox. It’s as likely to work as any of the other matches in there. In the old days the soda pop tasted like soap, the soap lathered like toilet paper, the toilet paper could be used to sand furniture, the furniture was as comfortable as a pile of canned goods, the canned goods had the flavor of a Solzhenitsyn novel, and a Solzhenitsyn novel got you arrested if you owned one. Now the Russians have discovered brand names. Easy to sneer at this. But there’s a reason why, when we go to Florida, we don’t drink Ocala-Cola.

Think what American shopping preferences would be if Sears were suddenly filled with wonderful products from the future—typewriters that could write things by themselves, safe cars that could go twice as fast as our own, shoes that made us sexually irresistible. The Russians are getting all these things.

Especially the shoes. Shoes are to Moscow what T-shirts are to Jimmy Buffet concerts. Shoes rule the store displays, particularly women’s shoes—pumps, mules, sandals, boots—all of them with the highest possible heels, even the clogs and espadrilles. High heels and nude hose define the Moscow look and are worn with thigh-flaunting skirts so that even policewomen and female army officers are tottering around, knees in the breeze. The ensemble is not always chosen on the best of fashion advice. Often the effect is sausage on a stick. But what the hell. This is a country where in 1988, when I was covering the Reagan-Gorbachev summit, I saw a near riot in the shoe section of the GUM department store. Scores of women were pushing and shouting for the opportunity to buy Bulgarian sneakers.

Now, GUM is a mall, fully American, except for seventy-four years of Soviet maintenance on the greenhouse roof, which leaks, and containing more than a hundred private stores. They sell everything from high heels to nude hose.

Plus you can shop 24/7 in Moscow at thousands of Plexiglas and plywood kiosks that have been built Tirana-fashion in parks, under bridges, on railroad and subway platforms, and along every footpath wide enough to walk a dog. A full half of these market the instant mini-party with wares consisting of Marlboros, hooch, and pirated audio-cassettes.

Unlike Tirana, however, Moscow had McDonald’s. The McDonald’s was expensive. Everything in Moscow—except the thirty-cent subway—was expensive. The drinks, meals, and hotel rooms were as costly as Monaco’s. And retail prices were no better than in most places on the value-added-tax-plagued continent of Europe. Yet the average wage in Russia is $143 a month. Unless everybody is fibbing. Which they are.

Russia’s businesses pay a 35 percent federal tax, plus a 20 percent VAT, plus local taxes that can be as high as 45 percent. That adds up to 100 percent, so a tremendous amount of Russia’s business is conducted via the “informal” economy. And it can be very informal. The way you hail a cab in Moscow is that you don’t. You hail any car, and if the driver feels like it, he’ll stop, negotiate a fee, and take you where you want to go.

But some people in Russia don’t have cars—or anything else. Respectable grandmothers beg on the streets. The old folks are broke in Russia. Increases in pension payments have been modest, while inflation has been indecent. In 1988 one ruble was worth $1.59. By mid-’96, one dollar was worth 5,020 rubles. And though money had been printed with abandon, the government ran out of it anyway. At the end of the first quarter of ’96, pensions went unpaid. Then the panhandling golden-agers were all over the place.

Things have gotten somewhat better, but there’s still gross poverty in Russia. I talked to economist Sergei Pavlenko, the director of the Working Center for Economic Reform of the Russian Government. He estimated the Russian poverty rate to be 25 percent. You can compare this with the 10 percent poverty rate claimed by the Communists before 1991. But don’t. Pavlenko said that he had to wonder what the Communists considered poverty. The U.S. government sets the poverty threshold at $15,569 a year for a family of four. The Soviet government fixed the poverty line at seventy-five rubles per month. That was $119.05 at the official ruble exchange rate. But as in Cuba, the official exchange rate was a joke. The black-market rate back then varied from ten to fifteen rubles to the dollar, so seventy-five rubles was really something between $5 and $7.50. People were getting nothing under the Communists, too. It’s just that they knew how much nothing they were going to get and when they’d get it.

But there’s been more to the high price of freedom in Russia than high prices. You can be mugged these days or even shot if you put your mind to it. Moscow is no longer a town as safe as the tomb it used to resemble after 9
P.M
. Random felonies, however, are still fairly rare. Russian crime is more likely to be the organized kind, and lots of it. The U.S. State Department estimates that there are 50,000 murders a year in Russia. More than half go unsolved. Sergei Pavlenko told me that four businessmen a day are killed in Moscow.

The key word is
businessmen.
Russia does not yet have an effective system of civil law. The only way to enforce a contract is, as it were, with a contract—and plenty of enforcers. What would be litigiousness in New York is a hail of bullets in Moscow. Instead of a society infested with lawyers, they have a society infested with hit men. Which is worse, of course, is a matter of opinion.

Moscow’s English language weekly,
Living Here,
publishes a club and bar guide which had this to say about a typical
vorovskoi mir,
or “thieves’ world” hangout:

 

Marika

Entrance:
Entrance: $20 for men, free for women

Why:
Come here to gawk at Moscow’s coked-up femme-fatale elite, none of whom will notice your existence; end your fun-filled evening by getting your date stolen and your life threatened by slobbering-drunk Mafiosi and their unshaven thugs.

Why Not:
You still have dignity; you want to live.

 

The reliance on muscle means that criminals have a cut of everything mercantile or financial happening in Russia. This, combined with endless political wire-pulling and universal bureaucratic jobbery and graft, leads to an atmosphere that is…still a lot more fun than a KGB torture cell.

On my first evening in post-communist Moscow, after the lavish dinner, I ambled through the busy midnight streets to the Hungry Duck. An enormous circular bar occupied what looked like a trading pit from the Chicago Commodity Exchange. But there was no futures trading—or much future—in the old USSR. God knows the room’s Soviet-era purpose, but the current purpose was clear. A thousand twentysomethings—Americans, Russians, Germans, British, French, Australians, Japanese; the foot-soldier employees of the corporations that have invaded Moscow, the Anne Kleined and Brooks Brothered sentinels who man the mouse pads and keyboards of capitalism’s front lines—were having a Thursday night screen saver. Happy youth was pressed breast to pec in one raving mass while fifty people danced on the bar top and giggling waitresses passed out free vodka shots from some booze company promoting a new brand. Ties were yanked off. Blouses were unbuttoned. Beer spills were whipped to foam by flapping loafer tassels. Arms waved in the air. Legs waved in the air. Whole bodies fluttered in the smoky space above the crowd. And on the sound system, through speakers so big they would have done Stalin proud and played at volume enough to wake the old shit in his grave, Coolio sang “Gangsta’s Paradise.”