All I ever needed to know about economics I learned from Beanie Babies
The recent financial meltdown has given rise to a new genre of television pundit: the former laissez faire advocate who has seen the light and now acknowledges that the market may not always be the wisest judge of risk and value. This sentiment can even be found coming from such heavy hitters as Alan Greenspan and Richard Posner. And while it’s always nice to see people learning from their mistakes, it makes me laugh to see prominent economic theorists going on TV and explaining that they have now learned something that I’ve known since I was about thirteen, and managed to learn without driving the entire US economy into a ditch.
Now, I actually owned several Beanie Babies. Mostly I got them as presents and I treated them as toys. They were cute, and they were heavy enough to play catch with. At that point I still operated in the largely cashless economy of someone who got a dollar a week for allowance, but if you’d asked me I probably would have said that the enjoyment of having a Beanie Baby to play with was worth at least two or three dollars.
Then, when I was about twelve, the Beanie Baby collecting craze hit. Adults lined up in front of stores to buy limited edition Beanie Babies and traded them on the newly-popular eBay for thousands of dollars. You could buy special acrylic cases to keep them clean and plastic covers to keep the tags “mint”. I thought they were insane. But from a free-market perspective, those Beanie Babies genuinely were worth thousands of dollars. After all, that was what the market was willing to pay. There were people who actually considered their Beanie Baby collection an investment that would pay for their children’s college tuition, and even some who got in on the trend early enough and out early enough to make a decent amount of money. I continued to consider them an entertaining toy that was worth two or three dollars.
Eventually, the fad ended, as fads tend to do. The Beanie Baby bubble burst, and these priceless collectibles went back to being worth two or three dollars if the owner was lucky. From a free market perspective, the value they had disappeared. From my then-thirteen-year-old perspective, crazy people had spent thousands of dollars on something that was worth two or three, but their inherent value had never changed.
Soon after the decline and fall of the Beanie empire, I got to see tech stocks do exactly the same thing. People were paying hundreds of dollars a share for stock in companies that did not, in fact, seem to do anything. Again, there were people who got in early enough and out at the peak who managed to make quite a lot of money. But in general, people were paying obscene amounts of money for things you couldn’t even play catch with. Most of these stocks did not promise dividends, and people were buying them solely because they expected the price to go up and that they would be able to sell them for a profit. And so once people woke up and realized that there was no actual inherent value in these stocks, they crashed hard.
These sorts of booms and busts are more the exception than the rule when it comes to capitalism. In the ten years since then we’ve seen real estate, financial derivitives, and Pokemon cards. As soon as people begin to make purchasing decisions with the assumption that they will be able to sell what they’re buying for a profit because the price will go up, the price of the item rapidly loses its link with any inherent value the item has. Classic economics assumes that both consumers and investors make rational choices based on complete information, but anyone who has spent ten minutes around humans knows that they are far from rational. They get caught up in trends, they like to think of themselves as more knowledgable than they are, and our modern economy is simply too complex for anyone to understand the entire thing in detail. And they are easily bullied by our capitalist ethos into thinking that everything they do should be turned for a profit.
I mention all of this because even in our current recession, there is one big bubble left. One shared delusion of value that is not backed by anything substantive: money itself. Let me make clear here that I am not saying this because we are no longer on the gold standard. Gold is one of the longest lasting bubbles in human history. Shininess does not count as inherent value. I’m saying it because as a culture we have long since lost track of what money was actually for: a way of getting people to barter with each other. If I’m a tailor and I need bread, there’s no guarentee that the baker needs clothing. The blacksmith needs clothes and the baker needs a frying pan, but it’s hard to know that in advance. Currency allows us to close the circle. But that’s all it does. It does not have value in and of itself. The point in that circle is never the money, it’s the bread, clothes, and frying pan.
These days when we look at the productivity of a nation, we’ve stopped looking at what it is actually producing. Instead, we look at the money that it has generated. Here in the United States, we’ve systematically eliminated the manufacturing sectors and now consider ourselves a “service economy”. Basically, one that does not actually produce anything. And yet our Gross Domestic Product has remained high because we are still producing money and we think that counts. Meanwhile under Reagan and George W Bush, the government has run itself deep into debt, and American consumers have contributed to an increasing trade deficit. Both the US private and public sectors now owe massive amounts of money to entities outside our borders. And we have very little in the way of tangible goods that we can use to support that debt.
So if you’ll forgive a bit of crackpot prophesying, here is what I think happens next: At some point in the next ten years, the world stops lending money to the United States. Finding itself with a crushing debt burden and no major industries with which to earn money from the rest of the world, the US is forced to resort to inflation. Either at that point or at an earlier point, the rest of the world loses confidence in the value of the dollar. Between these two, the value of the dollar crashes. Americans, who had been importing so many of their consumer goods from other countries, suddenly find the price of those goods skyrocketing. Meanwhile, the collapse in the value of the dollar throws the worldwide financial system into chaos as major investors across the world are destabilized by the loss of their American assets. Other currencies are destabilized by the upheaval, and the very concept of currency is called into question as people realize the illusory nature of money. And humanity is faced with a choice: to go back to the roots of capitalism, first with barter and then with various shiny metals as currency, or to adopt some sort of post-currency socialism such as the theories I am exploring in this blog.