The Diamond Economy

I’m a fancy grad student now. That means that I spend all of my free time drawing indifference curves, calculating z-scores, and using words like “problematic,” “hegemony,” and “navigate.” It also means that I don’t have as much time to write blog posts (sorry, world). The good news about being a grad student, however, is that now that I have 2 months of basic microeconomics under my belt, I’m basically a bona fied economist and I’m qualified to incorporate sophisticated economic analysis into my commentary. As such, I couldn’t resist weighing in on a recent news story.

A couple of days ago, a diamond was sold at auction in Geneva for a record $83 million. The diamond, known as the “Pink Star” or “Pink Dream,” was mined by De Beers in an undisclosed African country in 1999. It was unveiled to the public in 2003 and was finally sold for the first time in 2007 for an undisclosed amount. The $83 million price tag includes an $11 million commission for Sotheby’s, the multinational corporation that auctioned it off. The new, proud owner of the diamond is Isaac Wolf, a New York diamond cutter.

The Pink Star

The Pink Star

There are a lot of remarkable things about this story. But most remarkable (to me anyway) is that someone would pay $83 million for something that does nothing but look pretty and sit on someone’s finger. To explain that, we need a history lesson.

Economics of the Diamond Industry

Diamonds are made when carbon interacts with intense heat and intense pressure. I don’t have my fake geology credential yet but Wikipedia tells me that carbon is the 4th most abundant element in the universe. You can also find a lot of it in the earth’s mantle which happens to be very hot and highly pressurized. This means that a lot of diamonds are formed in the earth’s mantle. Some volcanic stuff happens and pushes the diamonds up through the earth’s crust to the surface where we live. Because of very complicated science stuff, diamonds are more commonly pushed to certain parts of the earth’s crust (like Southern and West Africa) but they can be found all over. Since there is always a lot of carbon, pressure, and heat in the earth’s mantle, diamonds are actually very common.

When Europeans first started settling in Southern and West Africa, they were amazed at how common diamonds were. In many cases, they didn’t even need to be mined. You could just walk along a stream or coastline and pick them up. Some industrious imperialists (Cecil Rhodes being the most famous) realized that they could make a pretty penny selling African diamonds to Europeans back home who had a penchant for shiny stones. But they had a problem (this is where the economics comes in). Diamonds were so common that if they were introduced into the market as quickly as they were mined and processed, they couldn’t be sold for much money. People spend a lot of money on things like diamonds because they believe that they are “rare” or “precious.” If consumers knew that diamonds were as common as sea shells, why would they spend millions of dollars on them?

So, in the late 1800s and early 1900s, Rhodes got together with the Oppenheimers, the Rothschilds, and J.P. Morgan and they formed De Beers and Anglo American, two intertwined, multinational mining cartels which continue to dominate the diamond trade today. First, De Beers established a monopoly on diamond mining by buying up all the other mining operations, establishing themselves as basically the only buyer of diamonds from freelance African miners, and pulling some political strings to close mines in other parts of the world (like Arkansas). With the market cornered, De Beers had near total control of the supply of diamonds.

The strategy then was to artificially limit the supply of diamonds available for purchase on the world market. In other words, De Beers mined up all of the diamonds that it could and then stockpiled them, only making a small fraction of them available for purchase. This made diamonds seem rare when they were actually very common. (That’s why the Pink Star diamond wasn’t sold until 8 years after it had been mined). This, of course, was only the case for gem-grade diamonds which would be sold to individual consumers as engagement rings, earings, etc. Industrial-grade diamonds were mass produced and very commonly found in the market in everything from weapons (especially during WWII) to drill bits.

While diamonds did have some practical, industrial uses, De Beers had high hopes that they could get more money for the especially shiny, pretty diamonds. So, De Beers launched one of the most successful marketing campaigns of all time to create consumer demand for the rocks. We are all familiar with this. “Diamonds are a girl’s best friend” and “Diamonds are forever” are two of the marketing slogans that have stuck in the collective psyche. Other, more subtle efforts were geared at convincing the rich and famous to never be seen in public without sparkling diamonds and glamorizing diamonds in American cinema. All of these efforts compounded and gave De Beers a monopoly over an incredibly lucrative industry. A monopoly that has declined somewhat over the last 30 years but allowed it to control 90% of the diamond market in 1980.

Diamond Politics

Also illustrative are the political implications of the Pink Star.

Most significantly, the diamond was mined in an “undisclosed African country.” This could mean a number of things. It could mean that the De Beers and Sotheby’s of the world would rather not be specific about exactly which country lost out on $83 million. Then people like me could say things like, “Wow. Country X, where the Pink Star was mined only, only has an average income of (insert startling low number here). Imagine how much better off their people would be if so much of this diamond wealth wasn’t syphoned off to the West.” But the process is still revealed. A natural resource is extracted from an impoverished part of the world. The people who actually do the extraction receive measly compensation for their labor. A series of middlemen traffic said resource into the trusty hands of a Western-owned transnational corporation. The resource is processed and “made valuable” in Europe and then sold at massive profits to America where it will likely continue to garner massive profits. Wealth moving from the Third World to the West.

But another reason that the country of origin may be undisclosed is that De Beers and Sotheby’s might not want the world to remember who their in business with. Colonialism was the perfect arrangement for a company like De Beers. It’s no coincidence that De Beers was founded by Cecil Rhodes, a powerful imperial leader (so powerful that they entire region of Southern Africa was once called “Rhodesia”). Political domination and economic exploitation go hand-in-hand. Over the years, De Beers has maintained close working relationships with some of the most repressive and brutal regimes on the planet.

But we don’t see that. Instead we just see a pretty white woman, smiling. And why wouldn’t she smile with that rock on her hand?

Take it away Lupe.

If you’re really anxious to learn more about the history of the diamond trade, check out the Frontline documentary The Diamond Empire below.

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