Everything Is Bullshit: The Greatest Scams on Earth Revealed

Read Everything Is Bullshit: The Greatest Scams on Earth Revealed Online

Authors: Zachary Crockett

 

EVERYTHING

IS BULLSHIT

 
 
 
 
 
 
 
 
 
 

Priceonomics

Copyright
© 2014 by Priceonomics Inc.

All
rights reserved. Printed in the United States of America. No part of this book
may be used, reproduced, or used as toilet tissue in any manner without written
permission.

 

For
information, please contact us: [email protected]

 

ISBN-10:
0692224963

ISBN-13:
978-0692224960

 

***

Priceonomics Authors

Alex
Mayyasi

Rohin
Dhar

Zachary
Crockett

Special Contributor

David
Raether

Cover Design

Dan
Abramson

INTRODUCTION:

THE BIG LIE

 

W
hich lies
are so big that no one questions them?

In life, we grow up, attend school, get a job, buy a car, start
a family, get a mortgage, lose a job, get a divorce, find a new job, start a
new family, move a few times, retire, un-retire, re-retire, play some golf, and
then die. Is it possible that as we act out this script, we occasionally make a
very important life decision incorrectly because we had some misinformation?
Almost certainly.

Misinformation has consequences. You could merely overpay for a
bottle of wine. Or worse, you could waste tens of thousands of dollars and
years of your life on the wrong kind of education. Or perhaps you’ll spend much
of your youth feeling bad about your body if you start to believe an
advertising campaign. And sometimes when many people believe a particularly
vicious lie, truly horrific things can happen.

 

The
History of the Big Lie

 

The
canonical example of a “Big Lie” in the 20th century is Adolf Hitler’s
propaganda machine. Hitler created a lie so reprehensible that it seemed
impossible that the head of a government could simply make it up: he claimed
that Jews were responsible for all of Germany’s problems.

Hitler’s big lie led to the mass murder of millions of Jews, the
slaughter of other minority groups, and a
world-wide
war. Today it seems unfathomable that such a blatant lie could instigate
something so atrocious. But a mere 75 years ago, an entire nation committed an
act of unthinkable evil in the service of a lie.

The term “big lie” was popularized
by Hitler himself
. In his 1925 autobiography Mein
Kampf
,
Hitler wrote “that in the big lie there is always a certain force of credibility”
because the
public
“would not believe that others could have the impudence to distort the truth so
infamously.” Hitler painted Germany’s Jews as perpetrators of the big lie,
scapegoating them for the country’s defeat in World War I. Even in coining the
phrase “big lie,” Hitler did so with a big lie.

After World War II, the United States military produced an
anti-communist film called "The Big Lie," which began with the Hitler
quote: "The great masses will more easily fall victim to a big lie than to
a small one." The film likened Hitler to Stalin, Nazis to Communists, and
World War II to the struggle against Communism. The strength of big lies is
that simple, forceful statements seem true. Selling the American public on the
formula that Communists are the new Nazis was an easier justification for the
Cold War than the complicated reality of communist revolutions intertwining
with geopolitics, anti-colonial movements, and nationalist sentiments. A big
lie sidesteps the need for a debate about the facts.

In 2003, the United States government invaded Iraq based on
evidence that Saddam Hussein had weapons of mass destruction. But the weapons
didn’t exist; instead, politicians jumped to a conclusion that the data did not
actually support. Who could believe that the American government would be
impudent enough to start a war over flimsy data?

Governments perpetrate some of the most consequential big lies.
Sometimes the lying is overt. Other times, leaders selectively weigh evidence
to draw their preferred conclusions. Either way is lying.

But big lies have other progenitors. Once you start looking for
big lies, you’ll find the world is built on many ideas that the facts don’t
necessarily support. Yet we accept them because “that’s just the way things
are.”

 

The
Marketing of a Big Lie

 

For
us, the revelation of the power of a big lie came when we investigated the
history of diamond engagement rings. Our whole lives, we’ve been inculcated
with the notion that diamonds are valuable and wonderful. Diamonds are “a
girl’s best friend,” priceless family heirlooms, and the best way to express
your love. To get married, a man has to buy a diamond engagement ring and spend
approximately two months’ salary on the purchase.

Why two months’ salary? Why diamonds? As it turns it, the
tradition of proposing with diamond engagement rings is largely a 20th century
marketing invention by De Beers, a company that has a global monopoly on the
diamond supply. If a fundamental part of American life is a marketing gimmick
to drum up demand for diamonds, what else out there is bullshit?

So the Priceonomics team started researching things that seemed
suspicious to us. Why is wine so expensive? Why is it harder for Asians to get
into Harvard than other students? How does art become “art”? Why does college
cost so much? Why do college football and basketball coaches make so much money
while players are unpaid? Why do so many pets die in animal shelters?

Why is the world the way it is, and which practices fall apart
under scrutiny? The result is this book.

 

***

 

In
our view, the big lie of our society is the notion that our current beliefs and
traditions are based on solid facts. When you start investigating some of our
most hallowed values, you find that much of what we hold dear is actually based
on historical accident, the profit motives of a few companies, or the agenda of
someone who died long ago. A lot of what we believe and do is bullshit, yet we
walk around thinking that it’s objectively the right way of doing things.

The philosophy of this book is that the best defense against a
big lie is curiosity. How did a particular custom originate, and who benefits
from its existence? This line of questioning can lead you down an illuminating
and sometimes disturbing rabbit hole. It can also allow you to identify and
call attention to practices you believe need to change.

The
title
Everything is Bullshit
may sound cynical, but we see it
differently. If so much of what we believe is
bullshit, that
means that many of our social values are up for grabs
to be influenced. On one hand, it’s scary to think that
some of our most cherished traditions were implanted by others to
serve their own purposes
. On the other hand, it’s liberating to know
that you can actually impact the values that people hold dear.

You have the option to build the next generation of companies,
institutions, and ideas. If you think companies are misbehaving, you can start
a campaign that shames them publicly. If you’re disappointed that the
government is spying on us, you can work on the technology to make that more
difficult. If you think police brutality is out of hand, you can make it easier
for citizens to record and share when these violations take place. If you think
we live in a sexist world, you can start a movement that helps change how
people think about sex, gender and our bodies.

Everything we believe today is the result of a movement someone
else started long ago. You can shape the future version of the world, just as
others shaped the current one.

If
you see something out there that is bullshit, you can replace it with something
that is not.

PART I:

STATUS SYMBOLS

***

“
What
is a cynic? A man who knows the price of everything and the value of nothing.
”

(Oscar
Wilde,
Lady Windermere's Fan
)

1.

DIAMONDS ARE BULLSHIT

 

A
merican
males enter adulthood through a peculiar rite of passage: they spend most of
their savings on a shiny piece of rock. They could invest the money in assets
that will compound over time and someday provide a nest egg. Instead, they
trade that money for a diamond ring, which isn’t much of an asset at all. As
soon as a diamond leaves a jeweler, it loses over 50% of its value.

We exchange diamond rings as part of the engagement process
because the diamond company De Beers decided in 1938 that it would like us to.
Prior to a stunningly successful marketing campaign, Americans occasionally
exchanged engagement rings, but it wasn’t pervasive. Not only is the demand for
diamonds a marketing invention,
but
diamonds aren’t
actually that rare. Only by carefully restricting the supply has De Beers kept
the price of a diamond high.

Countless American dudes will attest that the societal obligation
to furnish a diamond engagement ring is both stressful and expensive. But this
obligation only exists because the company that stands to profit from it willed
it into existence.

So here is a modest proposal: Let’s agree that diamonds are
bullshit and reject their role in the marriage process. Let’s admit that we as
a society were tricked for about a century into coveting sparkling pieces of
carbon, but it’s time to end the nonsense.

 

The
Concept of Intrinsic Value

 

In
finance, there is concept called intrinsic value. An asset’s value is
essentially driven by the (discounted) value of the future cash that asset will
generate. For example, when Hertz buys a car, its value is the profit Hertz
will earn from renting it out and selling the car at the end of its life (the
“terminal value”). For Hertz, a car is an investment. When you buy a car,
unless you make money from it somehow, its value corresponds to its resale
value. Since a car is a depreciating asset, the amount of value that the car
loses over its lifetime is a very real expense you pay.

A diamond is a depreciating asset masquerading as an investment.
There is a common misconception that jewelry and precious metals are assets
that can store value, appreciate, and hedge against inflation. That’s not
wholly untrue.

Gold and silver are commodities that can be purchased on
financial markets. They can appreciate and hold value in times of inflation.
You can even hoard gold under your bed and buy gold coins and bullion (albeit
at approximately a 10% premium to market rates). If you want to hoard gold
jewelry, however, there is typically a 100-400% retail markup. So jewelry is
not a wise investment.

But with that caveat in mind, the market for gold is fairly
liquid and gold is fungible — you can trade one large piece of gold for
ten smalls ones like you can trade a
ten dollar
bill
for ten one dollar bills. These characteristics make it a feasible investment.

Diamonds, however, are not an investment. The market for them is
not liquid, and diamonds are not fungible.

The first test of a liquid market is whether you can resell a
diamond. In a famous piece published by The Atlantic in 1982, Edward Epstein
explains why you can’t sell used diamonds for anything but a pittance:

 

“Retail jewelers, especially the prestigious Fifth Avenue
stores, prefer not to buy back diamonds from customers, because the offer they
would make would most likely be considered ridiculously low. The ‘keystone,’ or
markup, on a diamond and its setting may range from 100 to 200 percent,
depending on the policy of the store; if it bought diamonds back from
customers, it would have to buy them back at wholesale prices.

 

Most jewelers would prefer not to make a customer an offer that
might be deemed insulting and also might undercut the widely held notion that
diamonds go up in value. Moreover, since retailers generally receive their
diamonds from wholesalers on consignment, and need not pay for them until they
are sold, they would not readily risk their own cash to buy diamonds from customers.”

 

When you buy a diamond, you buy it at retail, which is a 100% to
200% markup. If you want to resell it, you have to pay less than wholesale to
incent a diamond buyer to risk her own capital on the purchase. Given the large
markup, this will mean a substantial loss on your part. The same article puts
some numbers around the dilemma:

 

“Because of the steep markup on diamonds, individuals who buy
retail and in effect sell wholesale often suffer enormous losses. For example,
Brod
estimates that a half-carat diamond ring, which might
cost $2,000 at a retail jewelry store, could be sold for only $600 at Empire.”

 

Some diamonds are perhaps investment grade, but you probably
don’t own one, even if you spent a lot. Empire Diamonds estimates that only one
in several thousand of the diamonds it appraises are actually of investment
grade quality.

The diamond classification scheme is extremely complicated, and
as a result, diamonds are not fungible and can’t be easily exchanged with each
other. Diamond
professionals
use the 4 C’s when
classifying and pricing diamonds: carats, color, cut, and clarity. Due to the
complexity of these 4 dimensions, it’s hard to make apples to apples
comparisons between diamonds.

But even when looking at the value of one stone, professionals
seem like they’re just making up diamond prices. In 1977, a jewelry industry
magazine asked a number of dealers to value a diamond; their valuations varied
by over 100%.

So let’s be very clear, a diamond is not an investment. You
might want one because it looks pretty or to have a “massive rock”, but not
because it will store value or appreciate in value. But among all the pretty,
shiny things out there — gold and silver, rubies and emeralds — why
do Americans covet diamond engagement rings?

 

A Diamond
is a Measure of Manhood

 

"The
reason you haven’t felt it is because it doesn’t exist. What you call love was
invented by guys like me, to sell nylons."
 

(Don
Draper, Madmen)

 

We
like diamonds because
Gerold
M.
Lauck
told us to. Until the mid 20th century, diamond engagement rings were a small
and dying industry in America, and the concept had not really taken hold in
Europe.

Not surprisingly, the American market for diamond engagement
rings began to shrink during the Great Depression. Sales volume declined and
the buyers that remained purchased increasingly smaller stones. But the U.S.
market for engagement rings was still 75% of De Beers’ sales. With Europe on
the verge of war, it didn’t seem like a promising place to invest. If De Beers
was going to grow, it had to reverse the trend.

And so, in 1938, De Beers turned to Madison Avenue for help. The
company hired
Gerold
Lauck
and the N. W. Ayer advertising agency, which commissioned a study with some
astute observations. Namely, men were the key to the market. As Epstein wrote
of the findings:

 

“Since ‘young men buy over 90% of all engagement rings’ it would
be crucial to inculcate in them the idea that diamonds were a gift of love: the
larger and finer the diamond, the greater the expression of love. Similarly,
young women had to be encouraged to view diamonds as an integral part of any
romantic courtship.”

 

However, there was a dilemma. Many smart and prosperous women
didn’t want diamond engagement rings. They wanted to be different.

 

“The millions of brides and brides-to-be are subjected to at
least two important pressures that work against the diamond engagement ring.
Among the more prosperous, there is the sophisticated urge to be different as a
means of being smart…. the lower-income groups would like to show more for the
money than they can find in the diamond they can afford…”

 

Lauck
needed to
sell a product that people either did not want or could not afford. His
solution would haunt men for generations. He advised that De Beers market diamonds
as a status symbol:

 

“The substantial diamond gift can be made a more widely sought
symbol of personal and family success — an expression of socio-economic
achievement. Promote the diamond as one material object which can reflect, in a
very personal way, a man’s … success in life."

 

***

 

The
next time you look at a diamond, consider this: nearly every American marriage
begins with a diamond because a bunch of rich white men in the 1940s convinced
everyone that its size determines a man’s self worth. They created this
convention — that unless a man purchases (an intrinsically useless)
diamond, his life is a failure — while sitting in a room, racking their
brains on how to sell diamonds that no one wanted.

With this insight, they began marketing diamonds as a symbol of
status and love. Epstein documents the campaign in his article for The
Atlantic:

 

“Movie idols, the paragons of romance for the mass audience,
would be given diamonds to use as their symbols of indestructible love. In
addition, the agency suggested offering stories and society photographs to
selected magazines and
newspapers which
would
reinforce the link between diamonds and romance. Stories would stress the size
of diamonds that celebrities presented to their loved ones, and photographs
would conspicuously show the glittering stone on the hand of a well-known
woman.

Fashion designers would talk on radio programs about the “trend
towards diamonds” that Ayer planned to start. The Ayer plan also envisioned
using the British royal family to help foster the romantic allure of diamonds.”

 

Even the royal family was in on the hoax. The campaign paid
immediate dividends. Within 3 years, despite the Great Depression, diamond
sales in the U.S. increased 55%. Twenty years later, an entire generation
believed that an expensive diamond ring was a necessary step in the marriage
process.

The De Beers marketing machine continued to churn out the hits.
It circulated marketing materials suggesting, apropos of nothing, that a man
should spend one month’s salary on a diamond ring. It worked so well that De
Beers arbitrarily decided to increase the suggestion to two months’ salary.
That’s why people think that they need to spend two months’ salary on a ring
— because the suppliers of the product said so.

Today, over 80% of women in the U.S. receive diamond rings when
they get engaged. The domination is complete.

 

A History
of Market Manipulation

 

What,
you might ask, could top institutionalizing demand for a useless product out of
thin air? Monopolizing the supply of diamonds for over a century to make that
useless product extremely expensive. You see
,
diamonds
aren’t really even that rare.

Before 1870, diamonds were very rare. They typically ended up in
a Maharaja’s crown or a royal necklace. In 1870, enormous deposits of diamonds
were discovered in Kimberley, South Africa. As diamonds flooded the market, the
financiers of the mines realized they were making their own investments
worthless. As they mined more and more diamonds, they became less scarce and
their price dropped.

The diamond market may have bottomed out were it not for an
enterprising individual by the name of Cecil Rhodes. He began buying up mines
in order to control the output and keep the price of diamonds high. By 1888,
Rhodes controlled the entire South African diamond supply, and in turn,
essentially the entire world supply. One of the companies he acquired was
eponymously named after its founders, the De Beers brothers.

Building a diamond monopoly isn’t easy work. It requires a
balance of ruthlessly punishing and cooperating with competitors, as well as a
very
long term
view. For example, in 1902, prospectors
discovered a massive mine in South Africa that contained as many diamonds as
all of De Beers’ mines combined. The owners initially refused to join the De
Beers cartel, and only joined three years later after new owner Ernest
Oppenheimer recognized that a competitive market for diamonds would be
disastrous for the industry. In Oppenheimer’s words:

 

“Common sense tells us that the only way to increase the value
of diamonds is to make them scarce, that is to reduce production.”

 

Here’s how De Beers has controlled the diamond supply chain for
most of the last century. De Beers owns most of the diamond mines. When faced
with mines it doesn’t own, De Beers has historically bought out all the
diamonds, intimidating or co-opting any that think of resisting its monopoly.
It then transfers all the diamonds over to the Central Selling Organization
(CSO), which De Beers owns.

The CSO sorts through the diamonds, puts them in boxes and
presents them to the 250 partners that it sells to. The price and quantity of
the diamonds are non-negotiable — it’s
take
it
or leave it. Refuse your boxes and you’re out of the diamond industry.

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