Eat the Rich: A Treatise on Economics (3 page)

I dozed through it. And I was covering politics, too. Even I realized that money was to politicians what the eucalyptus tree is to koala bears: food, water, shelter, and something to crap on. I made a few of the normal journalistic squeaks about greed and self-interest, and let the thing slide.

It wasn’t until the 1990s, when I’d been a foreign correspondent for ten years, that I finally noticed economics. I noticed that in a lot of places I went, there wasn’t anything you’d call an economy. And I didn’t know why. Many of these countries seemed to have everything—except food, water, shelter, and something to crap on.

I decided to go back to the Econ texts I’d finessed in college and figure things out. And my beatnik loathing returned full-blown. Except this time it wasn’t the business majors I despised; it was the authors of the books they’d had to study. It turns out that the Econ professors were economic idiots, too.

Looking into a college textbook as an adult is a shock (and a vivid reminder of why we were so glad to get out of school). The prose style is at once puerile and impenetrable,
Goodnight Moon
rewritten by Henry James. The tone varies from condescension worthy of a presidential press conference to sly chumminess worthy of the current president. The professorial wit is duller than the professorial dicta, and these are dulled to unbearable numbness by the need to exhibit professorial self-importance. No idea, however simple—“When there’s more of something, it costs less”—can be expressed without rendering it onto a madras sport coat of a graph and translating it into a rebus puzzle full of peculiar signs and notations. Otherwise the science of economics wouldn’t seem as profound to outsiders as organic chemistry does. And then, speaking of matters economical, there’s the price of these things—$49.95 for a copy of
Economics,
fifteenth edition, by Paul A. Samuelson and William D. Nordhaus.

Economics
has been, as its edition number indicates, in use as an Econ text forever—that is, since 1948, which counts as forever to the baby-boom generation. The book is considered a fossil by many economists, but it has been translated into forty-six languages, and more than 4 million copies have been sold.
Economics
was what the current leaders of international business and industry were afflicted with in school. And here was another shock. Professor Samuelson, who wrote the early editions by himself, turns out to be almost as much of a goof as my friends and I were in the 1960s. “Marx was the most influential and perceptive critic of the market economy ever,” he says on page seven. Influential, yes. Marx nearly caused World War III. But perceptive? Samuelson continues: “Marx was wrong about many things…but that does not diminish his stature as an important economist.” Well, what would? If Marx was wrong about many things
and
screwed the baby-sitter?

Samuelson’s foreword to the fifteenth edition says, “In the reactionary days of Senator Joseph McCarthy…my book got its share of condemnation.” I should think so.
Economics
is full of passages indicating that Samuelson (if not William-come-lately Nordhaus) disagrees with that reactionary idea, the free market. The chapter titled “Applications of Supply and Demand” states, “…crop restrictions not only raise the price of corn and other crops but also tend to raise farmers’ total revenues and earnings.” Increase your corn profit by not growing corn? Here’s a wonderful kind of business where everybody can get rich if they’ll just do nothing.

In the chapter “Supply and Allocation in Competitive Markets,” the book seems to be confused about the very nature of buying and selling. “Is society satisfied with outcomes where the maximal amount of bread is produced,” it asks, “or will modern democracies take loaves from the wealthy and pass them out to the poor?” Are the rich people just going to keep those loaves to grow mold? Why would they produce “the maximal amount of bread” to do that? Or are we talking about charity here? If so, let us note that Jesus did not perform the miracle of the loaves and taxes. We all know how “modern democracies take loaves from the wealthy.” It’s the slipups in the “pass them out to the poor” department that inspire a study of Econ.

It was not reassuring to learn that the men who run the companies where our 401(k)s are invested have minds filled with junk from the attic of Paul A. Samuelson’s
Economics.

There were newer texts than
Economics
for me to look at, and what they said wasn’t so obviously wrong. But then again, what they said wasn’t so obvious, period. Here are the first three sentences of
Macroeconomics
by David C. Colander (donated by Eric Owens, who lives next door to me and is taking Econ at the University of New Hampshire): “When an artist looks at the world, he sees color. When a musician looks at the world, she hears music. When an economist looks at the world, she sees a symphony of costs and benefits.” Somebody change the CD, please.

The textbooks weren’t good. This sent me to the original source material, the classics of economic thought. But here I had to admit, as I was tacitly admitting thirty years ago, that I don’t have the brains to be a Tri-Delt.
The Wealth of Nations, Das Kapital, The General Theory of Whatchmacallit
were impressive works and looked swell on my bookshelf, but they put me to sleep faster than the economic news of the ’70s had.

There were, of course, popular books on economics, but the really popular books were about extraordinary people doing extraordinary things and getting fabulously wealthy or going to jail—preferably both. I was interested in ordinary people doing ordinary things and getting by. And the less popular but more worthwhile books on economics all seemed to presume that I’d made it through something like
Economics
without blowing a fuse.

So I gave up trying to be smart about economics. I decided that if I wanted to know why some places were rich and other places were poor, I should go to those places. I would visit different economic systems: free market, socialist, and systems nobody could figure out. I’d look at economically successful societies: the U.S., Sweden, Hong Kong. I’d look at economically unsuccessful societies: Albania, Cuba, Tanzania. And I’d look at societies that hadn’t decided whether to be successful or not: Russia and mainland China. I’d wander around, gape at things, and simply ask people, “Why are you so broke?” Or “How come you're shitting in high cotton?”

An investigation of money might as well begin where lots of money is being made—for the moment, anyway—on the New York Stock Exchange. Maybe the magic of Wall Street can work for everyone in the world. Perhaps the peasants of China can all “go public” and form a billion corporations with assets of “1 water buffalo, 2 conical hats, wok.” Each peasant will then make an initial public offering, sell his stock, get rich, and put a lap pool in the rice paddy.

This is actually happening, or will be soon, say economic and political experts. They claim there’s a triumph of free-market capitalism occurring around the globe. If that is true, then the New York Stock Exchange really does merit inspection. The NYSE is the world’s largest single trading center for investments. Investments are the “capital” part of capitalism. The NYSE’s market is free in the sense that no government, religion, or discernible law of physics controls its prices. And the prices have been rising triumphantly. Hence: “Triumph of free-market capitalism.”

Of course, how long this free-market triumph will last is another question. Can men who have guns restrain themselves from interfering in the affairs of men who have nothing but checkbooks? And is the free market really that triumphant? Recent events in Asia show how corruption and the collusion of governments and businesses can cause the rules of capitalism to be violated—as you noticed if you lost all your capital by investing it in Asia.

But international politicians are crowing about the free-market victories they’ve achieved. Never mind that politicians are cheerleaders who have themselves confused with the people who carried the ball. (And never mind that many politicians are cheerleaders for the other side.) Laissez-faire—as the theory of the hour—seems to have displaced central planning, nationalization, democratic socialism, and the thoughts of Senator Edward Kennedy. The free market—triumphing or not—has been recognized as a potent and ultimately unavoidable force in human events, and as something that’s going to get in our hair for the rest of our lives.

And here is another reason to look at the New York Stock Exchange. It’s personal. That’s our own money in the stock market, jumping up and down like a maniac on the price trampoline. Either we’ve made somersaulting investments of our own or pension funds and insurance companies have done it for us. We’re worried our money is going to break its neck. Even if we don’t have a cent in stocks, we’re concerned about the economy in general—what will happen to Bill Clinton’s sex life if the Dow Jones goes down?

So the stock market is important. We should pay attention to it. However, we’re already paying attention to it—too much attention. And almost all of that attention is the wrong kind.

The New York Stock Exchange has achieved celebrity status. It appears on the network news every night and in
The New York Times
headlines every day, is kidded during Jay Leno monologues, and attracts 700,000 tourists a year to live performances. Expect the secondary effects of fame to kick in soon. Nike merger-and-acquisition shoes. Tommy Hilfiger margin-call sweat suits.

This is an era of strange renown, but the New York Stock Exchange is an odd star even by current standards. It’s just a room, or actually three rooms: the Main Room (it’s the main room), the Blue Room (the walls are blue), and the Garage (it used to be one). These are big, dumpy, overlit spaces festooned with coaxial cables and mobbed by gesticulating clerks and hollering middle-aged men all wearing ridiculous jackets and scurrying around with complete absence of dignity. Thousands of telephones ring. The floor is covered with trash. Large boards full of little lightbulbs blink astronomy-class strings of digits. Hundreds of video screens display runic symbols and funny numbers. And girdling it all, at cricked-neck height above the frenzy, is the ever-changing stock ticker, a crawling electronic ribbon of gibberish.

Behold the hero of the late ’90s. We thrill with its victories, shudder at its defeats, admire its resilience, sympathize with its shortcomings. And now there are the effects of the “Asia crisis” to add tabloid interest.

We identify. Generation X has given up playing in garage bands and trying to make indie films, and has gone back to grad school en masse to get that MBA. An older, even loopier generation is spending the money in its IRAs and Keoghs and 401(k)s on stocks, betting the ranch (or the ranch house it expects to inherit from its folks) on no-load mutuals, index funds, and 100 shares of Intel bought at…bought at the peak of the market, probably, but we’re in this for the long haul, right? We’re fans of the American economy. Rock and roll will be as a passing fad compared with the baby boom’s loyalty to growth-oriented investment planning.

This is a big change. Something has happened to the huffy indignation that right-thinking people felt about getting rich during the “greedy Reagan years.” Finance has been famous before, and not long ago, but it played the heavy. There was the movie
Wall Street
with its Gordon Gekko, the hubris-oozing Masters of the Universe in Tom Wolfe’s
Bonfire of the Vanities,
and preppie hysteric Michael Lewis at Salomon Brothers taking notes for
Liar’s Poker
and tut-tutting about “big, swinging dicks.”

In the modern-celebrity tradition, money making has re-created itself. It has acquired a new, burnished, lovable image—the way Richard Nixon did with years of post-Watergate statesmanship poses and Princess Di did with a car wreck.

But we never really know these luminaries, do we? And nobody knows the stock market. The unpredictable rise and fall of stock prices prove it.

Watching the market all the time doesn’t really help. When we see the moil and tumult on the exchange floor, we’re looking at something we aren’t seeing and seeing something that isn’t there. The something we aren’t seeing is, essentially, nothing. We think of stocks as being constantly bought and sold—1,201,347,000 shares traded on October 28, 1997, the NYSE’s busiest day to date. But there are 207 billion shares registered on the New York Stock Exchange. In an absolute buying and selling frenzy, less than 0.6 percent of those shares changed hands. Investment usually stays invested.

What we’re seeing that isn’t there is “a rush to get into the stock market” or “a panic to get out,” depending on the day. In a bull market we have an idea that stock is only being bought. Street people are cashing in their pop cans for a share of Microsoft. Dogs bring their bones to the stock exchange. In a crash we think stock is only being sold. The wealth of the nation has been converted into T-bills or Franklin Mint commemorative plates. But every share of stock that sells has a buyer. There are no stocks sitting empty with
OPEN HOUSE ON SUNDAY
signs out front. At the end of the worst possible day for stocks, the market contains the same number of shares it started with. The market is not a different size, we just like it less. And this isn’t some fuzzy hormonal mood we’re in. Our feelings can be measured precisely, in dollars.

In fact, when we own any “financial instrument” (as people in the money business call anything worth money), what we basically own is an opinion. When the British pound loses value, the number of pence in a pound doesn’t change. We just don’t feel the same way about pounds anymore; we’re nuts about Euros now. It always takes the same number of pigs to make 1,000 pork-belly futures, but next year’s bacon suddenly smells bad to us. One share of common stock continues to represent the same percentage of a corporation’s assets, and the corporation is probably not growing or shrinking very fast, but our love for that corporation can swell or pop overnight.

We have an opinion. That opinion is a price. And since prices are constantly changing, our opinion is always about to be wrong. Think of the stock market as an endless Gallup poll with 207 billion things that people can’t make up their minds about.

So in order to understand the stock market, we have to realize that, like anything enormous and inert, it’s fundamentally stable, and like anything emotion-driven, it’s volatile as hell. Got that? Me neither. Now what about all those people running around on the stock-market floor in a state of utter chaos?

There isn’t any. The New York Stock Exchange is enmeshed in rules. There are rules about everything. To sell even one share of stock in the U.S., a corporation has to file a “full-disclosure statement,” complying with the Securities Act of 1933. The law itself is eighty pages long with four hundred additional pages of Securities and Exchange Commission regulations. Then, to get a stock “listed” on the NYSE, the corporation has to meet further requirements about the size, value, and soundness of the offering. Once a stock is listed, there are myriad rules about how it can be bought and sold. And no running around is involved; there’s a rule against it. (Formidable power walking is allowed.) The NYSE is one of the most organized places on earth. But the organization is so complex that I stood, stupid, on the trading floor for two days before I noticed that there was one.

During my first hour in the Main Room, I didn’t notice anything at all. I was too fascinated by the littering. You don’t see good littering in America anymore. In the 1950s, people used to chuck their newspapers in the gutter, heave sandwich bags from cars. Your mom would tell you to do it: “Now put the candy wrapper out the window, honey.” Stockbrokers are the last nonpsychotic people in the U.S. throwing garbage over their shoulders. Four thousand pounds of canceled buy and sell orders, scribbled stock quotes, and phone messages from the ex-wife about taking the kids this weekend are removed from the stock-exchange floor each day.

I talked to one stockbroker who said he knew the market was getting intense when he caught himself tossing empty milk cartons on the kitchen linoleum at home.

It’s the littering as much as anything that gives the stock market its free-for-all atmosphere. But it’s not free, and it’s not for all. In order to trade stocks on the NYSE, you need a “seat” on the exchange. The 1,366 seats are traded the way the stocks are and currently sell for more than $1 million apiece.

Possessors of these seats do no sitting. A stockbroker may conduct millions of dollars of business in a day, but instead of a corner office with a Statue of Liberty view, he has an eighteen-inch space filled with phones, computer screens, and the infinite pieces of paper that attach themselves to anything involving money. And he can’t even get near this because a couple of clerks are in it taking orders to buy and sell.

There are various kinds of brokers on the stock exchange. The floor broker works for a brokerage house. When you get a tip from your acupuncturist that Disney is going to buy Seagram and open a Scotch-and-Water Park in Boca Raton, the floor broker is the person who buys you your shares. He is your actual stockbroker. (And he will be a he. Only 169 seats on the Exchange are held by women.) The person you call your stockbroker is a salesman who doesn’t even sell stock, or buy it, either. He just sells you on buying and selling. The brokerage house makes money on the commissions, no matter which you do.

Besides floor brokers, there are competitive traders who are independent businessmen buying and selling for their own accounts, specialist brokers who deal only in certain stocks, and two-dollar brokers who handle excess business for floor traders and can buy and sell for any brokerage.

Two-dollar brokers are so-called because they used to get a two-dollar commission for every 100 shares of stock they traded. The commissions are now negotiated, but “what-the-fuck-is-this-costing-me brokers” takes too long to say. And that is how it would be said. One of the old-fashioned charms of the NYSE, besides the littering, is the constant use of
fuck
as a noun, verb, adverb, and adjective with every possible meaning except “sexual intercourse.”

Around the walls of the NYSE trading rooms are the tiny workstations grandiosely called “telephone booths”—more than 1,200 of them. In the middle of the rooms are the horseshoe-shaped counters with banks of video screens overhead, the “trading posts.” Here the hollering middle-aged men gather, looking like they’re doing something foolish. This is what we see on television.

The middle-aged men are there because of the specialist brokers. Each specialist has a location at a trading post, and every stock that’s listed on the NYSE is assigned to one specialist. If a floor broker wants to buy or sell a certain stock, he has to go to the specialist’s post.

The broker who goes to a post is called the “trading crowd” even if he’s the only person in it. Although usually he isn’t, because the cattle-herd instinct is as strong on Wall Street as it is, for example, in a cattle herd. The specialist’s job is to give a “quotation” on the stock—to tell the trading crowd the highest price that anybody is currently willing to pay for a share and the lowest price at which anybody is willing to dump it. The video screens above the trader’s head show the last price at which a stock was traded and whether that price was an “uptick,” a “downtick,” or no tick at all. The stock “ticker” running around the room is a compilation of the trading prices from all the specialists’ posts.

What’s going on in the trading crowd is a double-jointed, Hydra-hatted auction—as though Sotheby’s had a dozen guys with gavels, each with the same Rembrandt, and not only could the bidders raise their prices but the auctioneers could lower theirs.

It sounds complicated because you and I don’t buy a lot of Rembrandts at Sotheby’s. But shopping for a car this way would be a pleasure. You want a Lexus. You know exactly how much the last Lexus sold for—with the same option package you intend to get. All the Lexus dealers in the world are in one place. You can hear their lowest prices. You don’t have to read their fibbing newspaper ads or spend all day traveling to their dealerships in the outer ’burbs and getting soft-soaped. All the Lexus buyers are in one place, too. You can listen to each of them bargaining. Now you know—to the fraction of a dollar—how much you should pay for a Lexus.