Chris' Original Blogbeque

A fresh, vinegar-based examination of life

How I understand the economics of drugs and diamonds

Posted by Chris on September 17, 2007

This is a tangent I went on while writing about a recent special on the History Channel on conflict diamonds.

I was addressing why terrorists and revolutionaries would look to both diamonds and illegal drugs to fund their military operations. A similarity between diamonds and illegal drugs is that both do not operate in free-market, free-trade environments. I’m making no argument here about them being equal, ethically speaking. Wearing a diamond is not akin to using drugs. You could draw up more similarities (both give some kind of “high”) but that would be missing the larger point that the end result of diamonds would be to bring joy/show love, whereas the end result of drugs, while perhaps bringing some joy, largely reap destruction.

The difference, economically, is that drugs have governmental regulations that open up a black market, whereas diamonds have black markets because there is a monopoly and because we make moral distinctions between diamonds based on the source, conditions in which they are mined, etc…
So I say that diamonds do not operate in a free trade environment because there is not competition. If there was, well, it’d probably be a moot conversation—competition would drive down prices, which I believe would drive down the desire to buy diamonds. Much of the reason they have high perceived value is because they have high price—not due to scarcity in nature, but scarcity in supply. De Beers, as a monopoly, regulates the supply to ensure that high prices and high profit margins remain. This explains why they would buy ANY and ALL diamonds during the 1990s—they had to ensure that the market was not flooded. To their credit, they did not buy conflict diamonds after they knew about it. But I doubt they were asking a lot of questions before then.

Anyway, diamonds are what is known as an inelastic good, at least, I see it that way (meaning that higher price = higher demand. most things we buy are elastic, meaning the lower the price, the higher the demand). Maybe a better statement would be to say that jewelry in general is inelastic, once you get past a certain age/income level. A 13 year old will buy the cheapest fake gold bling he can find. The rest of us would be turned off by a $100 price tag on a diamond ring. Even though that would probably be well above the actual “cost.”

Coincidentally, I had just read an article on whether or not terrorists use drug money to fund their plots, and why they would do so. It can be found here. The author is making the argument in favor of the legalization of drugs, in that it would lower places and eliminate the profits of black markets.

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