The engagement-ring theory of property bubbles

Google ‘the bread market’ and you get 135,000 hits, mostly from specialist food industry websites. Google ‘the property market’, however, and you get over 180 million. ‘The financial markets’ nets you 282 million.

Seen like this, it’s unsurprising that capitalism has a reputational problem. The likelihood that the word ‘market’ is attached to any area of commercial activity is in direct proportion to the degree to which that category is seriously messed up.

The idea that all ‘markets’ are effectively the same is perhaps one of the stupidest economic errors of the past 50 years. For a start, asset markets are not like other markets. As John Kay explains, writing in the FT, ‘A semantic confusion leads us to use the word market to describe both the process which puts food on our table and the activity of gambling in credit default swaps. That confusion has enabled people to claim the virtues of the former for the latter.’

Let’s consider one decidedly weird market: diamonds. In order for a chap to show the seriousness of his intentions, he has to demonstrate some costly form of up-front commitment to his fiancée: he therefore spends a large amount of money on an allotrope of carbon for her to wear on her hand.

Diamonds are what’s called a Veblen good. Their value lies in their being widely known to be expensive. And much of this value was created out of thin air by an advertising campaign, ‘A diamond is forever’, written by Frances Gerety (part-inspiration for Peggy Olson in the series Mad Men) at the agency N.W. Ayer. One of the greatest slogans of the campaign simply read: ‘How else can a month’s salary last a lifetime?’

That is pretty damned clever/evil. A social norm is created that you are deficient husband material if you don’t spend a set proportion of your annual salary on carbon-based jewellery.