Intro. [Recording date: January 9, 2020.]
[Note to listeners: Listeners to this episode of EconTalk may find some of it more disturbing than our usual fare. If you are listening with young children, you may want to preview it before you share it with them. In the movie industry, the rating may be called 'thematic' PG-13, meaning it may involve objectionable content that does not overtly involve bad language or violence.--Econlib Editor]
Russ Roberts: Today is January 9th, 2020. My guest is economist and author Richard Davies, and that is spelled D-A-V-I-E-S for you Googlers at home. He is a Fellow at the London School of Economics, has held senior posts in economic policymaking and journalism. He's been Chair of the Council of Economic Advisers at the United Kingdom's Treasury Department, an economist and speechwriter at the Bank of England, and economics editor of The Economist. He is the author of Extreme Economies: What Life at the World's Margins Can Teach Us About Our Own Future. Richard, welcome to EconTalk.
Richard Davies: Thank you. It's great to be here.
Russ Roberts: Now, part of what we're going to be talking about in this episode, maybe a lot of what we're going to be talking about, is related to some previous episodes and I just want to mention those at the top. I encourage the listeners to check these out as well. We will link to them on the page for this episode. It's related to how markets can emerge in seemingly impossible situations--sometimes work quite well, sometimes not so well. Michael Munger on Middlemen, Anja Shortland on Kidnap, and David Skarbek on Prison Gangs and the Social Order of the Underworld.
But Richard's book covers a wide range of really extraordinary economic situations, some of great stress--the aftermath of a tsunami in Indonesia, economic life in the rainforest, economic life in a prison--all cases of extreme economics and more than those. It's really a fascinating book of economic storytelling.
I want to start and probably end up focusing on the story you tell about the Louisiana State Penitentiary called Angola. Tell us about that penitentiary, the prison itself. How big is it? How many people?
Richard Davies: Sure. So Angola--which is by the way, what everyone calls it: so, the people that are imprisoned there, the guards, all the locals, everybody calls it Angola--is on the site of a former slave plantation. That's where it gets the name, and the slaves were shipped there from Angola. So, that's why it takes that name. It's a huge place. Geographically, it's the United States' biggest high-security prison. It takes the form of a farm. This is quite common in the South. Mississippi also has a kind of farm-based state penitentiary. At any one time, I think it has around 5,000 men are kept there, are in prison there.
The key thing, I guess, about Louisiana State Penitentiary, the key reason to go there for the book is: I was trying to find, as you mentioned in your intro, places where humans have been put in a kind of extraordinary test, an extraordinary test of resilience. The big picture idea of the book is we face uncertain times, and our own resilience might be tested. So, I wanted to go to these places to see what we could learn. For each kind of test of resilience, I wanted to go to the most extreme example. And so I went to Angola because Louisiana has the highest incarceration rates in the United States, highest male incarceration rates, and so it's the kind of pinnacle of U.S. incarceration. The US itself is the pinnacle of kind of advanced country incarceration, and Angola is the hub, essentially, of the Louisiana prison system.
In terms of the economy and the economic story there, I guess the most important thing to realize is that once you are sent to Angola, the majority of people will not leave. The average sentence while I was there, where the data was showing it was over 90 years. I think it was 96 years. And so, people that are sent there need to quickly come to terms with the fact that this is their new economy, this is their new society, this is where they live. They've been stripped of all the assets they had before they went in, and they need to set about or they do end up setting about creating their own economy.
Russ Roberts: And--I was shocked. It's really a tough place. I'm sure there's some tough people there. Everybody there works, and they get paid a remarkably small amount of money. What are some of the tasks in the prison that they work at, and what are they paid, roughly?
Richard Davies: Yeah. So, again, like other prisons across the United States and actually, prisons in the United Kingdom as well, prisoners do work in an official--not cash-based, but an official monetary economy, you might call it. The tasks range everything from kind of cooking and cleaning. The really big one, the kind of big employer is, as I mentioned at the start, it is a farm--it's a working farm--is the people that work out in the fields. The men call this 'picking greens.' That's their kind of slang for it. It's hard, tough work, out literally planting and picking fruits and vegetables, because the penitentiary itself serves as a source of food and produce for the rest of the Louisiana prison system.
If you behave well over an extended period of time, there are the better jobs. So, for example, at the border of the prison near the gate, they have a museum. There are a couple of jobs for trusted prisoners working there.
The pay rates were set in the 1970s and, for I guess sort of kind of political reasons, are extraordinarily low. So they historically ranged from 2 cents an hour to 20 cents an hour. I think they've now been increased, I was reading, but it's to 4 cents an hour up to 40 cents an hour. So the implications of this are that you need to work for an awfully long time to get enough credit. The credit from these jobs is loaded onto cards, which can be used in a internal official shop. But you need to work for an extraordinary long amount of time to earn enough to buy, for example, a pack of Doritos, or a new pair of trainers [British term for running shoes--Econlib Ed.], or whatever it is. And so, unlike in the outside world, the link between effort, work, and pay, and any reasonable expectation of a good that you might want to buy has been broken.
Russ Roberts: Of course, the prices could be really low too. But, do they correspond roughly to outside world prices? I noticed it takes a long time to earn anything. You give some examples in the book.
Richard Davies: Yeah. No, the prices in the commissary, which is the--
Russ Roberts: The official--
Richard Davies: these official shops, roughly bear, I checked this out, they roughly bear the prices in the external economy.
There's a lot of complaints from the prisoners that they don't, and maybe they're going up faster than inflation and so on. This is because they're a captive market. This is the only shop they're allowed to shop in or it's supposed to be the only shop they're allowed to shop in. But actually, if you look at what they're being charged for trainers, or a pack of Doritos, or whatever, it's not vastly overinflated.
Russ Roberts: Okay. In prices--
Richard Davies: In prices. But the pay is--
Russ Roberts: is very underinflated.
Richard Davies: If U.S. federal minimum is $7, the minimum in the United States prison system is like 4 cents. The reason for that is there's a line in the Constitution that says you cannot be forced not[?] to work except in the example of imprisonment.
Russ Roberts: Okay. So the question then is--well, this is awful for them. They don't like it, obviously. There's a bunch of stuff both that they have trouble affording, and there is a bunch of stuff that's not for sale in the commissary presumably. The commissary is something like a 7/11.
Russ Roberts: Yeah. So, historically--prisons have--this is a common problem, not unique to Angola. How have prisoners solved this problem in the past? One obvious way, of course, is barter. Let's talk about that first. That's the--in the 1945 R.A. Radford article, The Economics of a POW Camp, which Mike Munger and I talked about that conversation on middlemen, that's all about barter. That's about the fact that these supplies come from the outside. You get a tin of meat and you're a vegetarian, or for whatever reason, you don't like what's in your allotment, so you're swapping constantly. For those long, long time listeners who go back to 2008, there's that wonderful story in there about an itinerant priest who manages through barter to end up with more of everything than he starts with in his an original allotment--which is fascinating. So, Angola presumably has some barter, but talk about the problems with barter and how traditionally prisoners have improved on that with some form of money.
Richard Davies: Yeah, absolutely. So, before touching on barter and the problems with it, it's worth kind of thinking about what's the fundamental point of an economy? Why do they need to form an economy? And it's because they have unsatisfied demand. What are those demands? Well, you're in this prison for the rest of your life. Suddenly, that means that if a loved one, a relative, a girlfriend, mother, spouse, father, whoever it is, wants to come in to see you, looking your best and showing the best of yourself becomes hugely important. So, a trade in haircuts, and shirt pressing, and trading clothes to improve the way you look is a really important thing.
The problem with barter is the classic one that economists have known about for centuries, which is this thing: the double coincidence of wants. So, for barter to work, for a swap economy to work, it has to be that you can find somebody who is offering something you want. That's fine. That's a one-way trade. But they also have to want the thing that you have. And that double coincidence very often might not happen.
And this is where currency comes in. So, currency solves this by lubricating trade. The classic example that people will have seen from prisons, war movies, or papers on prisoner-of-war camps, and so on, is tobacco. And that, for a long time, I was told by the long-time prisoners of Angola, had been their cash, had been their form of cash.
Russ Roberts: Why is tobacco attractive as a source of currency?
Richard Davies: So, the reason that tobacco is attractive is that it satisfies many of the properties we want from a currency. These were set out in a paper by Carl Menger.
Russ Roberts: Late 19th century.
Richard Davies: Yeah, exactly. 1870, I think. He called it 'saleableness.' And, so one is durability. You need your currency to last over time. It can't be something that rots. So, fruit doesn't work. Another one is divisibility. It can't be that your currency, if you chop it up into small amounts to make smaller trades, loses its value. So you couldn't use a gemstone. Right? You cut the diamond in half--the two halves are not worth as much as the whole. And it has to be something that's widely accepted and that everybody wants. And, tobacco just fits perfectly. You can have a big batch of tobacco, that's your kind of wealth store if you want, and then you can break it down into smaller amounts.
Actually, one of the things that the prisoners had been in for a very long time told me, is that the move to cigarettes away from rolling tobacco simplified things because when rolling tobacco was the currency, there were prisoners who became very adept at rolling cigarettes that looked like they had a lot of tobacco and actually, they didn't. That's a kind of debasement of the currency, if you want.
The interesting thing, and the reason why I do think these kinds of examples have relevance for the outside world, is that economies--informal economies like this--are hit by shocks. And the United States and the Louisiana prison system was hit by a shock a few years ago when the use of tobacco was completely banned. So, tobacco went from being the currency of the prison to being contraband. Its price, the price of this contraband because it was sort of illegal within the prison, shot up. And one prisoner told me that for a time, packets of cigarettes were trading for $50.
Russ Roberts: Of course, part of that reason was because people wanted to smoke 'em, and not use them as money.
Richard Davies: Absolutely.
Russ Roberts: They had a value in use that was not ideal for a currency. And of course, the technical term for some of this that we're talking about is reduction of transaction costs.
That: I mean, you could find somebody possibly who--you could use more than one person to trade with. You can swap what you have for something the other person has even though you don't like it, figuring that the person who has what you do want will like what they had.
But all that does is add to the work and time.
You could argue in a prison, transaction costs are kind of fun. It's a feature, not a bug. But in general, people prefer not to be wandering around looking for trading partners.
There's one of the thing we have to mention that you point out in the book, which is just amazing. You can't have money in the camp. You can't have American dollars. Why not?
Richard Davies: Yeah. So there are a list of things that are contraband in American prisons, and in U.K. prisons as well; I imagine prisons all over the world.
And, one of the most important is cash. And, the simple reason for that is it can be used in bribery. The point is that not only will other prisoners accept cash, but guards will accept cash.
So, cash is treated as a top-level type of contraband. So, the situation in Angola three, four years ago was that the thing that we would use as cash--i.e., the American dollar--is not an option. And then, suddenly, the thing that they had adopted, which is tobacco, became not an option as well. And they had to very quickly adapt. And the interesting thing is how instantly that happens.
Russ Roberts: Yeah. Normally, you know, if you're a really bad economist, you'd just say, 'Well, they'll just get some seashells,' because historically, seashells, or beads, or cows--there are a lot of things that have been used for currency throughout history in non-modern economies. But those are not available. So on the surface, they're out of luck and they're back to a barter economy. And they're not going to be able to bribe anybody, either. That's certainly out.
But, I think the precipitating event that really increased the demand for an alternative now that tobacco was gone was the introduction of synthetic marijuana, Mojo, that was getting smuggled somehow into the prison and people really wanted to buy it and then had no way to get it.
Richard Davies: Yeah, absolutely.
So, the thing--throughout the book, when I went to these places, obviously, if you're going to make a kind of big journey, you're expecting to find out about some kind of economic story. But a common theme is that there was something I was expecting to find out and a big surprise. So, I kind of knew because of these historical articles we've talked about, about prisoner-of-war camps and so on, that there might be an underground economy.
But the thing I wasn't expecting is there were kind of two layers. The first layer is the thing we talked about: sort of haircuts, shirt pressing, small food items. And those things are traded using some cash alternative. Typically, now, it is noodles. They call that 'soup.' That's the prison slang for it.
Russ Roberts: It's ramen. Ramen noodles, right?
Richard Davies: Ramen noodles, exactly.
Russ Roberts: Dried noodles. Not cooked noodles.
Richard Davies: Not cooked noodles. Yeah, exactly.
Russ Roberts: They last forever.
Richard Davies: They last forever, exactly, and everyone loves them.
Similarly, little dollar tens of mackerel became a big, big prison currency. Quick sidebar on that. We think that currencies, these commodity currencies, have to have value. Actually, there's evidence in some U.S. prisons that they had something called an EMAK currency, Edible Mackerel. But because trade is so valuable and the currency itself is so valuable that even when that currency had gone out of date, i.e., the mackerel was no longer edible, that could trade as a currency. And it was called MMAKs, and they had a differential exchange rate.
Russ Roberts: What's the M stand for?
Richard Davies: Monetary Mackerel. So, EMAK and MMAK. I didn't witness that in Louisiana, but you find stories about that online.
Russ Roberts: And that--what's fun about that, of course, is that canned--it's in a can I assume, a tin. I would assume it's--those dates are somewhat flexible. But there must've been some that may have been around for so long you probably wouldn't take a chance. You just kind of--or there's a dent in it suggesting botulism. But it became--currency is funny. It doesn't really have to have value. It's okay as long as other people think it has value--
Richard Davies: accepts it--
Russ Roberts: So, that was good for everybody, and it probably just kept percolating along.
But, so here we are in Louisiana where people want to buy this scarce but incredibly in-demand thing called Mojo, this synthetic marijuana, and they don't have any way to do that other than to give a haircut for somebody who needs a haircut and has Mojo.
Russ Roberts: I just want to mention that before we go on. The list of things that people are doing in the present are kind of extraordinary, for money or trade. You talk about them baking pralines, which was a pecan dessert, selling fried chicken, tattoos. How do you fry chicken and sell it in a prison? How do you make pralines?
Richard Davies: Well, so a couple of those examples are historical, and they came from my conversation with a guy called Wilbert Rideau, his book, In the Place of Justice, an absolutely great read. And anyone listening that's interested in this would value reading that, I think.
But the reason for that and the reason why some things, some internal trade within prisons is tolerated is another thing you only really discover if you go into these places, which, they are places of cooperative control, I would put it.
So, 'Safety and security,'--this is the mantra that the guards use, prisoners use, everyone that writes about the system use. So, anything that prevents safety of prisoners, fighting, that kind of stuff, or security, i.e. prisoners getting out, that is absolutely clamped down on.
But apart from that, so much of daily life that kind of continues if somebody has a kind of relatively innocent proposal for something, historically--
Russ Roberts: a hot plate--
Richard Davies: yeah--the guards would allow it if this person was very trusted, because they know that it's a way of giving people something to do. And actually, arguably, it's a way of increasing safety. So in that sense, historically, Angola's been a very interesting and quite amazing place that has this prison newspaper, The Angolite, that's won lots of awards. And, things are a bit tighter now, but--
Russ Roberts: It has a radio station.
Richard Davies: It has a radio station. It has this rodeo.
So, there are lots of things that the prisoners can do. So long as, I want to repeat that, the real--the things that are clamped down on are safety and security. And that's where this new development that I discovered when I was in the prison comes in, this drug, Mojo.
Russ Roberts: So the Mojo comes in, and you're a prisoner; your life's not so pleasant. The idea of a drug is very attractive, and you can't really pay for it unless you have a skill or a product that the people who have the Mojo--by the way, how does the Mojo get into the prison at all?
Richard Davies: Well, that's exactly the problem. And that's why--
Russ Roberts: That's the other problem, right? We're going to--
Richard Davies: Yeah. So it's worth explaining what Mojo is and synthetic cannabis is. It's huge in U.K. prisons. It's huge in U.S. prisons. It's huge in the United States college system as well as with sports people, and also massive in the U.S. Navy.
So potted[pot-head?] history, late 1980s, researchers for Pfizer developed the first synthetic cannabinoid. The reasons for that were very justifiable, sensible reasons. Cannabinoids and the receptors they act on have the potential to dull pain and to increase appetite. And if you're a patient, for example, going through chemotherapy, something to give somebody who is already very ill to increase their appetite and dull their pain could be very valuable. So there was this big scientific push to synthesize cannabis.
Then, in Europe in the mid-2000s, there used to be these synthetic sort of herbal mixes you could buy legally in shops in the United Kingdom and in Europe. And nothing really happened if you smoked them. They had some sort of wort, and herbs, and stuff in them.
And then suddenly they started becoming very, very powerful and kind of knocking people out, and people getting really addicted to this stuff. And it's because these chemicals, these synthetic cannabinoids, had infiltrated through of being soaked into this plant matter. What they are is they are exactly like cannabis except many, many times stronger. Unlike cannabis, they are, they can be addictive.
And, the reason the guys I spoke to in the prison said to me that, why they use it, two things, and this explains its use in the college sports fraternity and also in the Navy, is that because the chemicals change so quickly, it's hard to test for them. So those facing drug tests favor them.
And, in the prison, because they knock you out all day, and if you're facing a life sentence, you need something to do with your time that is actually valued. Where. on the outside, that's not valued and most people don't use these things, on the inside, that is valued. So suddenly, there's this huge demand for this synthetic cannabis.
The third reason it's kind of relevant for prison systems, again, both in the United Kingdom and the United States, is it's so hard to trace. So, one of the stories I heard about actually in U.K. prisons is you can spray this drug onto a letter, write the letter as if it's from a child or literally get a child to write it, send it in, and then those pages can be kind of ripped up and smoked. And the drug will stay on there. So it's really, really hard to detect and therefore, much safer actually for anyone trying to smuggle it in.
Russ Roberts: So there's two things now going on. Sorry--I didn't start this off the right way. If you wanted to smuggle it in, there's really not much value to it. The people who can smuggle the most easiest are the guards, obviously; there's some opportunities for maybe visitors or others. But in general, it's going to be guards smuggling it in, I assume. But what's the point? You can't sell it to these prisoners. They want it, but you can't sell to them. They're not going to give you a haircut as a guard. Right? Well, they might make you a praline or some fried chicken.
So, we have a cash, currency shortage here. Cigarettes are gone. They got to figure out something. And what they come up with is so mindbogglingly modern and clever that it's hard--I'm a little bit skeptical. If it was in a movie, I'd go, 'Yeah, I don't know. It seems ridiculous.' But tell us what happened.
Richard Davies: Well, so I was finding out about these underground economies, and, again, there's this sort of relatively innocent one where they're swapping the ramen and so on. And then, they started telling me about Mojo and this huge demand for Mojo. I said, 'Well, how do people pay for this? Do you use ramen and mackerel?' because I understood that to be the currency. I mean, how does that work? And they were like, 'No, no, no. You need proper money for this. You need hard money for this. This is like a serious business.' And I said, 'But look, you don't use cash.' And the guy said to me, 'Yeah, they don't use cash, like cash-in-hand. They use dots.' And they have this new slang for this thing called the dot economy. And it's an ingenious piece of financial innovation.
Russ Roberts: And it goes back to Blockbuster--a defunct American institution. So, tell us.
Richard Davies: Yeah. And very much present in Britain during my youth, Blockbuster. So the idea was that--it starts really with the Blockbuster store card. Idea being parents might want to give their kids some level of buying power. So, because of that, the tickets, the paper tickets that people used to get gift certificates are annoying; they can be lost. And so Blockbuster developed this card where parents could load a certain amount of credit onto it.
Lots of other stores followed suit. And these systems were known as closed systems. So, if you loaded money onto the Blockbuster card, it could only be used at Blockbuster.
Russ Roberts: And as you point out, the problem with that is that if it's a $20 card and it's a $14 rental, that $6--it's annoying. What do you do with that $6? The recipient doesn't like it.
Richard Davies: Exactly. So, financial companies and innovation being what it is, people suddenly thought, 'Aha, this is a good idea, but we need to open it up.' And so then open-system charge cards were developed. And so what that means--the idea, again, then was your kid was going off to college; you'd charge their debit card with a certain amount of credit; and then they could use that at a number of stores. That's a kind of an open system.
The interesting thing about that and the thing that the prisoners have utilized is that the person buying the credit doesn't need to be the person spending the credit. Moreover, the person buying the credit doesn't even need to know the person spending the credit.
So the way it works is as follows. It's a bit of a complex chain. But somebody on the outside goes and buys a charge card for a prepaid debit card. These can be worth up to $500. One brand--there are many brands--one brand is called Green Dot. That's why this currency has its nickname, the dot economy.
Russ Roberts: So a Green Dot card is just a debit card that's preloaded with cash that can be spent in lots of places out in the modern world, nothing to do with prison on the surface? It's just a debit card that I can use Walmart, I assume, or CVS [Consumer Value Store, pharmacy]?
Richard Davies: Almost. The card that I'm talking about--there are two cards. One is the one where you pay the money, which charges the other card. So in this example--
Russ Roberts: Not charges, loads.
Richard Davies: Yeah: loads is a better word. So in this example, let's say, you are on the outside; and you have got a debit card which has a zero balance. Okay. I don't know you . I'm somewhere else, somewhere else in the United States, and I go to CVS or whatever and buy one of these charge cards. I scrape the numbers off the back. There are a string of 14 numbers and those are called the dots. I then go in and visit a relative--
Russ Roberts: But I got lost. Let's back up. There's two kinds of cards here?
Russ Roberts: The first card is the Green Dot card. That's like a credit card, right?
Russ Roberts: I can spend it in lots of places?
Richard Davies: Yeah. That's just one brand. There are lots and lots of different cards.
Russ Roberts: But this card is accepted in many retail stores, correct?
Russ Roberts: The challenge is once--I'm going to back up in your example. Let's say I want to give you this card. So I give you this card and it's got $100 on it. I said, 'Richard, Happy Birthday. Here's $100. Go have a good time.' You use it to go around town. You go to Walmart, you go to CVS, you go to a bar: you spend the money that's on the card. Now it's down to zero.
Russ Roberts: Now, what do you do? Do you throw it away?
Richard Davies: Exactly. So, then the second card comes in, which is called a MoneyPak. So whoever wants to give you this money goes into the store, let's say, with $500 bucks.
Russ Roberts: That's me.
Richard Davies: That's the largest amount. Hands over the $500 bucks--
Russ Roberts: to the retailer--
Richard Davies: to the retailer and gets back in exchange this card called a MoneyPak; and that is worth $500.
Russ Roberts: That card is not for buying with. That card is just for loading--
Richard Davies: Just for loading.
Russ Roberts: loading your Green Dot debit card?
Richard Davies: Exactly. You scrape the little shiny silver stuff--
Russ Roberts: Like a lottery ticket--
Richard Davies: exactly--off the back and you get these 14 numbers. And those numbers, now, if you think about it--
Russ Roberts: 14-digit numbers--
Richard Davies: Fourteen digits. Yeah, one long number with 14 digits. Those 14 digits, which are called the dots, are themselves worth $500 bucks for whoever receives them and loads them onto their card.
And they can just be read out over a phone, or memorized, or written down on a little piece of paper. So the way it works is once somebody has access to those numbers, they can give them, either via a meeting or some other mechanism--talking to them on the phone--to a family member in a prison. And that family member can give those numbers in an exchange to another prisoner, thereby exchanging $500 worth of value--
Russ Roberts: Or less. Because you can buy them in different denominations.
Richard Davies: Or less. [crosstalk 00:30:52]. Exactly. Go to the other prisoner, who then transmits them to the outside; and that other person's card is then charged with that value.
Russ Roberts: Loaded.
Richard Davies: Loaded.
And importantly, the people on the outside never meet. They never linked bank accounts. They don't use PayPal with one another.
Russ Roberts: There's no ID [identification]. Nothing is traceable. It's laundered perfectly.
Richard Davies: The idea is that there should be some ID. But there's large-scale reporting--you know, since I did this and since the book has come out, there have been various other stories of this. It's very easy to get around the ID requirements. So those are easy to skip around.
Russ Roberts: But my presumption is--let's say I'm your uncle. Sorry to put you in prison, Richard. Richard, you're at Angola. You get a weekly--maybe it's some access to a phone while you're there, legally, I assume through the rules. And I give you--I go out. I'm in free society. You're in prison. I go out; I buy a MoneyPak. I scrape the numbers off the back, and I read them off to you or I send them to in a coded--in a letter in code.
And now you have a string of 14 digits that you can tell anyone. And if they have the Green Dot card, they have buying power. Correct?
Russ Roberts: So, I assume you're going to tell that to the guard in exchange for the smuggled Mojo.
Richard Davies: There are lots of reports of--you know, obviously I didn't meet any guards who said they were doing that. But there's quite wide-scale reporting of problems with guards at Angola bringing stuff in. Yes. So--
Russ Roberts: But in your example before, you as the prisoner told somebody else on the outside, the 15 digit number--14 digit number. What transaction would that be lubricating?
Richard Davies: It could be the fact that I could be, the person paying could be the relatively innocent and concerned family member of a prisoner, let's say, who is addicted to Mojo. Okay? So I want to get--and I just feel sorry for them--and I want to get them some buying power. But I certainly don't want to risk bringing Mojo in. One of the other prisoners may have a contact on the outside, a family member who is prepared to take that risk because they're involved in that trade.
Russ Roberts: So this is a totally untraceable, totally liquid form of buying power for anybody. It's real money.
Russ Roberts: It's an amazing thing.
Richard Davies: Absolutely.
And there are now, since I discovered it--and I had this light bulb moment when one of these prisoners said, 'We have this dot currency'--I've been looking into it a bit. And there are other examples and other concerns now about it being used in money laundering, cross border trade, and so on.
Russ Roberts: It's not just prisoners now.
Richard Davies: It's not just prisoners.
And it's exactly this point of--again, it goes right back to that financial innovation of delinking the person that pays for this MoneyPak and the person that needs to spend it; and the ability to just send those digits across the states, across borders, wherever, and it sends buying power.
It's a very modern form of currency and it fits perfectly with those conditions that Menger set out. You know: it's durable. It's equivalent to the dollar, essentially.
Russ Roberts: Yeah. It's amazing. Now, when I interviewed David Skarbek to talk about his book on prison gangs, one of the most depressing and fascinating aspects of that, which is probably related to what we're talking about, is that prisoners get killed who don't abide by the rules in certain settings. In his case, he was looking at gang members who didn't do what they were expected to do or violated the norms of the prison or offended a different gang. And they'd get killed.
Russ Roberts: And I'd say--and I said to David--I said, 'How do you kill somebody in a prison? There must be video cameras everywhere.' And his point was that, at least in California, there are places the video cameras don't reach. The prison--corners, presumably. Prisoners know where those are, more or less, where they can have encounters like this, where two people are going to, maybe, fight to the death. Horribly. And that the prison itself--in his case--kind of likes that because it allows the prisoners to enforce certain norms that lead to stability.
Every once in a while it leads to violence, but that violence damps down the other violence that would happen if that weren't there.
So I wonder if, in this case, you kind of imagine that the guards would kind of like the opportunity to smuggle and would close their eyes to certain things coming into the prison. It would allow them to blackmail prisoners. It would allow them to sell to prisoners. So, my presumption is that the guards, and even possibly the administration, is aware that some of this is going on, but it keeps things somewhat sedate relative to what they might otherwise be.
Richard Davies: Yeah. I mean, I'm not sure is the answer to that question. I think that, although having spoken with long-time prisoners there, there's a big difference between this first economy we discussed--these, I would call them completely natural human wants, to want to look your best when you're meeting your family member and so on--and those trades that are lubricated by mackerel or granules of coffee or noodles.
And I would say certainly that's an economy which should be allowed to flourish because people have these demands, they have the ability to cut one another's hair and making one another better off.
The--when you start getting involved with very addictive drugs, you actually run up, you run up against that thing that I referred back to that everybody that worked in prison systems mentioned to me, which is safety and security. Because people are addicted, they can then be persuaded to do very damaging things. And one of them in particular is debts. One of the ways to settle a debt sometimes in a prison is to carry out an act of violence on behalf of the person who you owe. And if you're addicted to a drug, you might do that.
And so for that reason, I think, other than guards or people who are themselves actually involved in criminality, nobody working in the prison systems wants to have people actively addicted to things. It leads to such sharp demands that you end up with violence.
Russ Roberts: Yeah, fair enough. Good point.
One of my favorite movies, and I'm sure many listeners have seen it, is the Shawshank Redemption, which is a story of prison life. It's kind of weird. It's a, I would say it's, you could describe it either as a comic book or a fairy tale, but it's about a prison, so it's not exactly a normal fairy tale. But it has a certain larger-than-life, surreal aspect to it in the storytelling.
And one of the tragedies of that movie is that the people who do finally get out after a long time in the prison struggle to adapt to what should be Nirvana, heaven, this wonderful freedom. 'It's just going to be great. You were in this horrible hell hole. You couldn't buy what you wanted except through these incredibly complicated means. You were surrounded by the same people every day. A lot of them wanted to hurt you. The work is miserable.' And yet, when they get outside, they're at a loss.
And so talk about what you learned about what happens in Angola. There's a 72 Plus thing you write about, and some of the thoughts about prisoners who have a chance to be free.
Richard Davies: Yeah, there's a fantastic organization called the First 72 Plus. It's based in New Orleans. And they help prisoners in the first 72 hours of their release because they found that this is one of the riskiest and most daunting time for prisoners.
I was, one of the guys I spoke to, he'd been inside for I think 40 years. He said to me, and he kind of made it as a joke. He said 'Coming out Richard, it was like I was in an episode of the Jetsons.'
Russ Roberts: Wow.
Richard Davies: And he, just in that statement sort of made a double joke, because the Jetsons itself is like 20 years old. And he just felt bewildered by the technology, the environment, you know, how to behave.
And there is--this goes way beyond the thing that I study, which is very specific, which was the emergence of currencies in prisons. But, you do see in New Orleans when you go to a place like that, the true economic and social cost of all this. Which is that the guys that come out, if they are successful through these first 72 hours, they are full of ideas and potential and they now have an entrepreneur's hub at this place, the First 72, where they have a kind of credit union, they help each other raise money for the businesses that are setting up. And, just the real sort of punch in the gut with all that is that many of these guys are 38 or something, or in their thirties, and they've lost, you know, 15 years or something on the inside.
Russ Roberts: And I think what's poignant, and you write about it very beautifully, is that there are things inside the prison that they become accustomed to. And going to the outside, a lot of those, that infrastructure of the orderliness of it--there's a wonderful documentary out now about, forget the name of it[?] but I'll link to it. It's about a prison college credit program. And the prisoners in this, it's--they're taking college courses inside the prison with other prisoners, but the instructors are from outside from the college. And they find out, they describe studying and doing their homework and writing their papers from like 11:00 PM til three or four in the morning. And you think, why would you wait until the middle of the night to do it? And the answer is: They're busy all day. And like: What's busy about the prison? And in my mind it's just sitting around on your cot, or, you know. And he said, 'But it's constantly, you're constantly being interrupted for count, constantly counting the prisoners, the meals. Everything is very regimented as a form of control.'
You did that for 20 to 30 years and now all of a sudden you face the wide world. And that whole infrastructure of, that regiment of how your time is used, it must be overwhelmingly challenging.
Richard Davies: That's a big part of it. But interestingly a huge part of it, another part of it, is actually the loss of the role in the informal economy. So, if you were in Angola, for example, and you are one of the best hairdressers, you're going to get a lot of custom--and more--it was described to me--more than the economic value of this, there's status there.
Suddenly you come out and you're no longer a hairdresser. You no longer have any status. And one of the things, that really links to the other chapters in the first part of the book, which is all about people who have in some sense been sent back to days--
Russ Roberts: Square One.
Richard Davies: Square One. Is that, when I spoke to them about why, for example in Indonesia had they been so determined to kind of build back when the aid community was there, or why in the refugee camp where they so determined to build their economy? It wasn't just that, perhaps, what we might as economists term purely economic reasons. It was also these reasons of identity and role and the value that that creates. Because it enables you, for example, trade, as well as the benefits of trade, the economic benefits of trade.
Russ Roberts: Financial. Monetary benefits of trade.
Richard Davies: The financial benefits. Exactly. It allows you to build a reputation. If you have a reputation within a refugee camp or a prison or a post-disaster zone for doing what you say you were going to do, you essentially run a good shop. That's a great thing. That's something people really value.
Russ Roberts: Yeah; and I love that. And we'll return to that in a second. I want to talk about the refugee camp. But I--you talked to barbers, who, after getting out of Angola opened up a barber shop, right?--
Richard Davies: Yeah, absolutely--
Russ Roberts: Who had been hair cutters in the prison.
Richard Davies: Yeah, no--I got a haircut with them.
Russ Roberts: Is it this one I'm looking at? No, because--
Russ Roberts: It's not that recently, too bad. Because it's an excellent hair cut, I can say from here. Wish listeners could see it.
Richard Davies: Thank you. No. I went down and chatted to them and got a haircut with them.
And again, exactly: that was a skill that they had picked up within the prison. They translated it to the outside, and they actually went through the First 72 Program and have set up their own barber shops.
So it's just an example of how the value, the economic system, actually inside this very extreme environment is not in some fundamental sense so different from the outside.
Russ Roberts: Of course, I'm reminded, I'm sure some listeners are too, of my Adam Smith quote, the one I love so much, 'Man actually desires not only to be loved, but to be lovely.' And by loved, respected, honored, praised.
And if you're good at cutting hair, you have some dignity, you have some meaning in your life. And it's--and it's a cool thing. It's a beautiful thing, in this, as you say, you call it 'extreme.' It's also, the word that came to mind, I was reading in your book, is 'harsh.' It's a, a Spartan, tough, place to have dignity.
Richard Davies: Yeah. Yeah.
Russ Roberts: So, let's switch to those refugee camps. You contrast two of them. These are for Syrian refugees, right?
Russ Roberts: And I won't--
Richard Davies: Zaatari and Azraq.
Russ Roberts: Yeah. Zaatari and Azraq. Yeah. So, talk about how they're structured and what's different about them.
Richard Davies: Yeah, absolutely.
As I mentioned, when we were talking about the currencies, one of them was expected. The other one was a surprise.
The one that I'd heard a little bit about was called Zaatari. Zaatari, again, the idea of the book was to go to the most extreme examples, the most extreme places.
So, and when I was first researching at 2016, the fastest growing and for a time largest refugee camp in the world was Zaatari. It formed very, very quickly--it's an important point--as the Syrian Civil War intensified. And it's very close to the Jordanian border with Syria. So, it's in the North of Jordan, about two hours' drive North of Amman. And for a time it had 200,000 people there.
Russ Roberts: So it's a small city. It's not even a village. It's a--
Richard Davies: I certainly came to see it as a city, and in more ways than the number of people that are there.
The interesting thing about Zaatari is that, because it formed so quickly and there were key things that the UNHCR [United Nations High Commissioner for Refugees], which is the global body that oversees refugees, they really must do. And that's things like the provision of water, the provision of housing. A lot of other things that they do--for example, zoning that housing, and the way the internal economy works--they had to kind of loosen the reigns on and the Syrians had a little bit more control of this themselves.
And what I found in Zaatari was a flourishing economy. So there are wedding dress shops. There are all sorts of different restaurants and foods you can buy. There's a pool hall. Again, many barbers' shops. There are the equivalent of kind of Home Depot places where you can, you get given a house when you go there, but you can extend it: you can kind of tack on a kind of extension to the site to improve your living quarters.
And the key conundrum there, the key question there, is how had they managed to do this when actually, officially, there are only supposed to be two shops--two supermarkets within the camp?
Russ Roberts: And what's the answer? And what do we need to know institutionally? A refugee by definition, comes with very little--
Russ Roberts: Right? The shirt on the back, if they're lucky, and whatever personal belongings they're carrying in a sack or their luggage, if they have it.
And they show up at this camp. You say they're given a house?
Russ Roberts: How do they get anything? Forget about buying a wedding dress or a nice meal. How do they get the basic food and everything?
Richard Davies: And these guys even more than I guess in other places because they, the families I spoke to, literally packed up and kind of walked through the night with their children on their backs.
What they have is they have. They live on paper. The paper in reality is very different on paper. Institutionally, they live within a constrained economy, which is designed to give them some choice. But I would say kind of not full agency.
Richard Davies: And what I mean by that is every family has an e-card which is charged--which is loaded--again, with a certain amount of credit every month and that credit varies based on the family size. And that credit can then be used in a relatively free way but only in two shops, two big supermarkets, one each end of the camp. The camp is an oval, it's around two miles by one mile. And these large shops, they're like a Walmart or a Costco kind of thing. And that's where the credit can be spent.
And after a couple of days' talking to the refugees, I realized that there were big problems with this economy they were designed to live in. Sort of, I would say all three problems you can have in a store. First thing is there's a surplus of things they didn't really want. Lots of--
Russ Roberts: 50-gallon thing of pickles. It's just like Costco. Yeah.
Richard Davies: Exactly. Lots of Italian food, actually, in these places, pastas and so on. Lots of--
Russ Roberts: Who's running these? These two official stores?
Richard Davies: It's the World Health Organization.
Russ Roberts: Okay.
Richard Davies: And they do amazing work there. And so I don't want to kind of criticize them too much. But when you go into these supermarkets and you talk to the refugees, you can see that there is some elements of the things that are being supplied not being totally tailored to their tastes. So there's a surplus of things they don't really want to buy.
There's then a shortage of things they do want to buy. They're very--the making of yogurt, homemade yogurt, using fresh milk, is really important to Syrians. And that's lacking. Certain types of grain that they want to use to make breads and so on are lacking. So there's things they don't want, there's lacking things they do want.
And the third problem is that they know that the prices are wrong. A bit like in the prison: they know that they're are captive market and for things like fresh tomatoes, they know that just outside the camp--and the camp is much, much easier to get in and out of than a prison is, the borders are porous--there are farms where people are growing tomatoes at sort of a half or even a tenth of the price they're on sale in the camp.
So they're within this constrained e-credit based economy. And it took me a few days, but I worked out what they were doing one day. Actually, I was in the supermarket and I saw people were coming to the checkout and the contents of their basket just didn't look like the normal contents of a basket. There wasn't a mix of sort of 10 or 12 items. There was just masses of one item. And then I went outside and I saw this--
Russ Roberts: Like masses of?
Richard Davies: The best thing. The optimal thing is powdered milk. And the reason for that is when you get outside--
Russ Roberts: It's storable.
Richard Davies: Exactly. You talk to this guy who's there and you essentially sell the powdered milk for Jordanian dinars. And the trade that works is: valuable commodities--and these are decent quality goods. They're not kind of bargain basement stuff. The powdered milk, for example, an example of global trade, is all the way from New Zealand. It's New Zealand's finest powdered milk, is the brand.
Richard Davies: They, so you buy that on your credit for nine dinars. You take it--it gets smuggled to the border of the camp. A passing Jordanian who wants some powdered milk will buy it for about eight dinars. The cash is smuggled back and you in return will get seven. So, what's happened? You had nine dinars of buying power. That's the price for this five-kilogram bag of milk. You now have seven dinar. So you've lost: there's been a margin there like in many financial transactions.
Russ Roberts: But it's not on their card, is that the case?
Richard Davies: But it's cash.
Russ Roberts: Yeah. So you don't have to spend it in the store.
Richard Davies: Exactly. So they have informally turned a credit, and I'd say sort of choice-constrained economy into a totally free market, cash-based economy.
And for that reason, you can buy--pretty much anything you can buy in Jordan, within Zaatari. And, more to the point: better things. So, Jordanians are now coming to the borders of the camp not just to get the smuggled things, but to get the amazing baked goods that some of the families make there. So, the camp actually exports.
Russ Roberts: It's extraordinary. And it's 200,000 people. And, how much time did you spend there?
Richard Davies: In the Zaatari camp, I was there for four days. That was the shortest trip I did for the book. The reason for that is it's very, very hard to get coverage to go, to get permissions to go. Most people--a few documentaries have been made there and so on. And the normal amount you're allowed is three days. And I was actually fortunate and got four.
And while I was--
Russ Roberts: You bought a wedding dress; ate some baked, some of the best baked goods you've ever had. So, what did you do there?
Richard Davies: I ate a lot of--I just spent four days literally with the families. So I ate lunch with one of the families. One day was, it was a Friday, and very kindly they allowed, the men allowed me to go with them to their Friday prayers at the mosque. There's a mosque there.
And, after that--that was a kind of sort of watershed moment really for me in the camp--I was just kind of completely trusted and was being dragged into people's houses and told, you know, helping them kind of translate text into English using dictionaries they had. But yeah, I played pool with them. I didn't get my hair cut. I ate with them, went to mosque, just tried to spend four days of living, really, as you would do. The one thing I didn't do was sleep in the camp. I was offered after having gone to the mosque to sleep in the camp, but the UNHCR [United Nations High Commissioner for Refugees] don't allow that. And I didn't want to kind of break the rules too badly.
Russ Roberts: Yeah. It's one thing to smuggle in really good yogurt-making stuff, but to smuggle in a journalist who knows economics: Forget that.
Russ Roberts: So you had to, they sent you out at night.
Russ Roberts: Here's the part that's interesting about this that I don't remember you talking about. The authorities have created this artificial--artificial is not quite the right word--but a retailing environment--let's call it that--based on these e-cards, these two grocery stores. They have other things, presumably, than--it's not just groceries or.
Richard Davies: Yeah, they have clothing.
Russ Roberts: Yeah. So there's sort of a grab bag of stuff. And they, I think you said they have two, because that way there's some competition--
Russ Roberts: So the prices--which is weird. But they're both run by who? By WHO [World Health Organization]?
Richard Davies: They're run by contractors.
Russ Roberts: Oh, okay, yeah. Of course.
Richard Davies: [crosstalk 00:55:43].
Russ Roberts: So that's the problem--or, the challenge. So, the--'I'm stuck with this, these options. I don't like them.' And so they've created this wonderful underground system. Someone's noticed that this is happening. You're not the only person, right?
Russ Roberts: The people who are, whoever the, I don't know what the order--source of security--is in the camp. Are there police? Are there--
Richard Davies: Yeah. So, in terms of the policy-making structure, if you want--
Russ Roberts: Yeah.
Richard Davies: there's the UNHCR, that's the overall funding and oversight body. And then within that you have the World Food Organization. And, but the Syrian body that oversees it is called SRAD--the Syrian Refugees Affairs Directorate. And they are, if you like, the kind of police force. They're the guys that sit around the border, the perimeter of the camps, with the kind of machine guns, nominally trying to stop things going in and out. But, you know, it's fairly loose.
The point is, again, going back to the--why the history is important--is that this wasn't by design. But, because Zaatari formed so quickly, and the need for housing was so urgent, and the need for sanitation was required--
Russ Roberts: Clothes; everything, right?
Richard Davies: Those kind of things. The official had to focus on those things and they had to kind of allow this informal market to flower because they were focusing on other things.
So, it wasn't the design. And I guess the kind of slightly concerning thing--again, these agencies do great work out there. But the slightly concerning thing is that the initial interpretation of this is that it was bad. And so, when they designed the second camp that I had--this was the surprise, when I was there--you know, I heard people talking about people that had been caught smuggling and so on, and hushed tones and they'd say, 'You might get sent to this other place.' And this other place is called Azraq. This is further south, closer to the Iraqi border, and was built having, quote, "learned the lessons of Zaatari." And those lessons were: You need stricter control.
And so when I read the kind of blurb or the PR stuff [Public Relations] about Azraq, it sounded like an amazing place. It was built on a kind of village structure all around this central trading post and so on.
I got there: the complete opposite. Totally desolate. Looks much more like a prison camp. Very neat rows of houses, all exactly the same size. No, none of the colors or the paintwork or the vibrancy of Zaatari. And, in the center of it, a marketplace with exactly 100 shops numbered from 1 to 100. And a rule that odd numbers and even numbers, one was for Syrians, one was for Jordanians. And that couldn't be flexed.
And so, and because it was so far away, because they had the ability and the time to control it, they were able to design this much, much more tightly controlled camp. The result, purely economically--forget about the stories of the people there--the result is that the employment rate while I was there was around 9%. Nine percent of people had jobs.
Russ Roberts: At Azraq?
Richard Davies: At Azraq. And in Zaatari, it's been estimated at around over 65%, which is kind of comparable to a regular advanced economy.
Russ Roberts: Modern. Yeah.
Richard Davies: And that has all of the--once you learn that fact and you kind of imagine this place in your mind's eye--very regimented; again, the same e-card system, but a complete prevention of smuggling and so on. And an inability to set up your own company. No wedding dress companies, no informal bakeries. The people there by comparison were very depressed, frankly.
Russ Roberts: And how much time did you spend in Azraq?
Richard Davies: In Azraq, I just went for one day.
Russ Roberts: Couldn't take any more? or just didn't have time? Or it was pretty obvious what was going on there?
Richard Davies: It's so far away--well, three things. It's so far away, it's closer to the Iraqi border. Permissions is the major one.
That one day was--I went to some pretty difficult places for the book, but that one day was one where I kind of thought, 'This is getting close to a place where kind of things are getting a bit risky.' The reason being that one part of Azraq, the so-called Village 5, was actually a place where people suspected of being involved in ISIS [Islamic State of Iraq and Syria] were.
So the security there was like--at Zaatari it's kind of young guys with rifles, kind of slung relaxed way around their shoulder. To get into Azraq requires a lot of paperwork; and the guys on the front have got huge kind of submachine-gun, military grade weaponry. So it's not a place you can go for anything more than a short visit.
Russ Roberts: So, I like your argument that Zaatari kind of--it's an obvious example of a merchant order that wasn't designed. They didn't plan all this stuff. What they planned were these two stores that people were using simply as a source of capital--which is so extraordinary. It's, I just love that checkout line image of people trying to look nonchalant, buying, spending all their money on powdered milk or whatever else they thought could be used to turn into cash so they could buy stuff they really wanted.
But it seems they could fix that if they wanted to. After a while. It's true that at first it could get started, but all they have to do is seal off the perimeter. Once they seal off the perimeter--now, I guess the actual, that wouldn't be the case now that I think about it. Because once the cash is in the economy, once there's dinars circulating alongside the e-cards, you can still have the wedding dress shop and the, everything else. You don't need--it's better to have the bakery: you can export outside the camp, and the goods you can bring in. But you still have quite a bit of economic activity because you now have a currency.
Richard Davies: Yeah, I think that's right.
I also think just if, again, to go right back to the discussion of this, the history is important. The immediate history. Zaatari is very close to the border. It's also very close to a town, quite a big town called Mafraq. And the highway that goes off East to Iraq. It's not in a place that was there by design. They didn't want it there. It's way too close to other Syrian, Jordanian settlements. And if you think that it's difficult to keep the borders of a penitentiary in the rural United States, you know, tight: This is a huge oval in the middle of the desert. It's just impossible, basically.
And the reason that is possible in Azraq is they built it kind of literally in the middle of nowhere.
Russ Roberts: On purpose.
Richard Davies: There was nothing around, so on purpose, because they had the time to do it.
Russ Roberts: Of course, another episodes this reminds me of is the episode we did on Burning Man with Marian Goodell. So, listeners might want to go back to that. Where a town basically springs up out of nowhere. There is some infrastructure put in place, sanitation and a little bit of water. And I think coffee, if I remember.
But why doesn't--how many people were in Azraq, roughly?
Richard Davies: In Azraq, around fifty thousand.
Russ Roberts: Fifty thousand.
Richard Davies: Today, I think it might be a little bit lower. Down to 40. And in Zaatari, it's lower, since the peak. It's now around 80,000, I think.
Russ Roberts: So, why wouldn't Azraq develop, even though they can't--they have e-cards?
Russ Roberts: Do they have two stores in Azraq?
Russ Roberts: Same structure, roughly?
Russ Roberts: Why aren't there some other things circulating as cash that could allow people to be entrepreneurial?
So, here's my image. My image is--I don't know, I'll use Jerusalem. If you go into the souk, the so-called the souk, the market in Jerusalem, there are a couple of places you can do this. One is Mahane Yehuda, which is in the modern part of the city. One is inside the old City of Jerusalem. You get these colors, and there's fabrics and they're spices piled up and everything is--and it's vibrant. It's really alive. It's beautiful.
You can see it in America--ehh, a farmer's market is an attempt to kind of recreate it. It's not the same. It's just not the same. For a hundred reasons, not the same.
And now I'm going to this Azraq place and it's, like--it's gray. It's cinder block. Everybody looks like they were living in Poland during the Cold War, but surrounded by desert. It's miserable. But they're the same people, culturally. They have the same entrepreneurial urges.
It's interesting to me that even with the tighter security of Azraq--and we've just saw Angola, the prison story that even in that incredibly secure environment, there's lots of innovation and entrepreneurship. There's not much going on in Azraq?
Richard Davies: No. And the reason for that is--and I think, exactly these are the same people. And the fundamental difference in economic terms I guess is trade.
Azraq has been built in such a remote place with such high army-led, like, army-grade security that you cannot trade the things in. Okay, so, obviously there's an incentive--
Russ Roberts: So, barter. Still.
Richard Davies: No. They can still barter.
Russ Roberts: Cut haircuts--
Richard Davies: Of course--
Russ Roberts: or fry chicken? Maybe not fried chicken--
Richard Davies: Of course. But relative to Zaatari where they, it's poorer, and so they have gone way beyond barter--they've managed to get in full-size billiard tables. Right? So, proper billiards--two of them. It's not a kind of little joke thing. They've got large-scale cooking equipment and so on--
Russ Roberts: That they didn't buy at the two stores --
Richard Davies: Exactly. There's only so far you can go with when you are resource-constrained like that.
I mean, I guess the other interesting thing to say is: you can take this, and I slightly did take it as a kind of critique of being too controlling and imposing too much on people in any economic system. But it is worth noting that one of the, I guess, problems of Zaatari is, would be incredibly familiar to listeners, and that's one of inequality.
Some people are better at trading, are more successful, are more lucky--whatever it is, than others.
And because of that, because you are allowed to--you are practically able to trade, as I said, and buy extensions to your house. Some people end up living in pretty large, impressive kind of structures. Whereas in Azraq every single home is exactly the same.
And, you know, for a people that have been hit by war, many of them are injured and so on. You know, I think some people would think, 'Well look, this is a temporary thing, and you're kind of staying there as a safety net.' Maybe it's right that everyone's house is the same size, and maybe it shouldn't be the case that somebody just because they're an amazing entrepreneur, can build up these big houses. It's a really interesting debating point, but it's something I know that the kind of aid community is pretty concerned about.
Russ Roberts: Well, it would be, especially in today's world where this kind of t opic is--what is it called? The topic du jour. It's the thing people are, tend to be focused on.
You have a interesting chapter in the book on Chile and some of the economic--the impact of inequality in Chile when it grew dramatically over time.
At the same time, you write beautifully in this chapter on Zaatari and Azraq. You say the following,
In Azraq central control ensures equitable outcomes, guaranteeing that the distribution of important resources is fair. But while refugees in Azraq do not go cold and they do not go hungry, they are left wanting. What they are missing are all the higher needs that are satisfied when trade arises organically, firms are set up as a matter of choice, products brought as a matter of taste. On this deeper view, markets are not just a means to an end, but ends in themselves that provide agency, vocation and life satisfaction.
I think the word that comes to mind when I think of this--it's beautifully written--is, flourishing. People are allowed expression. They're allowed to use their gifts, they're allowed to dream, they're allowed to improve themselves.
Now, it's true, people differ in their ability to do those things. Some people are better at it than others, and it leads to somebody has a nicer house than me.
It also means that, I would guess, that the average standard of living--excuse me--the minimum, the bottom standard of living in Zaatari is higher in many ways I would guess than the constant equal standard of living in Azraq, assuming the amount on the cards are the same in both places, more or less per week or per month, but that there's something lost in that leveling.
Richard Davies: Yeah, absolutely. I would say the opportunity is certainly higher in Zaatari. And a simple way to evaluate it, I guess, is: Where do the refugees want to be?
And they want to be in Zaatari. And they were kind of scared of getting sent to Azraq. So, yeah.
Russ Roberts: Yeah. I always say--and allegedly, I don't think it's a meaningful statement, but allegedly--Cuba is a more egalitarian country than the United States.
Russ Roberts: But strangely enough, the guards in Cuba face south: They have to keep people from leaving. They don't have to keep people from breaking in.
And that's--of course, they could be suffering from false consciousness. Those prisoners, they could not realize that--okay, I'm going to stop being sarcastic. But you know, the point being that people risk their lives in Cuba to come to an unequal place. And I think that's, well, for me, that's kind of, it's the bottom. It's the bottom line.
Russ Roberts: So let's switch gears. Let's talk a bout another example in the book, which is Darien. It is a--it's a word from my childhood. I assume it's the same one in the poem "On First Looking into Chapman's Homer," Keats writes, the last line of that poem, if I remember correctly, is--'stout Cortez'--Cortez is seeing the Pacific for the first time and he says, 'Silent, on a peak in Darien.' Is that the same Darien? And I know that Keats was historically inaccurate, if I remember correctly.
Richard Davies:< /strong> I would have thought it would be. Yeah.
Russ Roberts: Because Cortez never was in Darien.
< p>Russ Roberts: But he liked the way it sounded, I think, in the metre. So I think that's what that's about. But tell us where Darien is and why it's interesting.
Richard Davies: No, I d on't think so.
< p>Richard Davies:
Well, Darien is one of three economies that are in the kind of the central parts of the book. The fi rst ones we discussed are places that got sent back to square one and rebuild themselves. The second part of the book is about places that should be
incredible and yet are not. And so, it's a section that's about loss. It's about the failure to live up to economic potential.
I don't know the history of the poem exactly, but what I do know is that 500 years or so ago, Darien would have been very famous; and it was famous because the buccaneering spirit and books that the buccaneers put together of their tales of swashbuckling through Central America were huge bestsellers.
Darien is a massively important place to the history of the United Kingdom because it's the site of the famous Darien disaster. And so, this was when some explorers went off, they discovered this place, which geographically, it's located, it's the southernmost part of Panama and the northernmost part of Columbia. And like Panama itself, I guess, is a link between the two oceans and the two great continents of America.
And so, these writers came back, one of them called Lionel Wafer, and published this book, this account of Darien, which made it hugely popular and the site of many attempts to explore and invest and set up a trading post there. One of which: The entire Scottish nation invested a huge amount of money in the late 1690s; and when it went wrong, was ill-planned and a true disaster, many people died. They sunk so much money into it that the United Kingdom as part of a financial bargain--England, rather--this purchase, it basically led to the Act of Union in 1707. So, Darien was once very famous. It created the United
But tod ay, no one really knows about it or talks about it. It's sort of a no-man's land in between North America and South America. And is, broad brush --it's not completely lawless: there is oversight from the Panamanian government or supposed to be, this army outfit called SENAFRONT [Servicio Nacional de Fronteras]. But the jungle is so dense and it's so remote that in practical terms you can kind of do what you want to do in Darien. And this is why it's been the home of drug smugglers, also freedom fighters. And as I was to discover, very much to my surprise when I went there, a large number of illegal immigrants trying to trek through the Darien Gap.
Russ Roberts: And the part that I found a particularly confirming of my prejudice is that the first part of the story of Darien, the tragedy of modern Darien, is that it's a rainforest that's being destroyed by the tragedy of the commons. And you talk about in the book about Elinor Ostrom, who wrote about and thought thoughtfully about the ways that communities overcome the tragedy of the commons. But they don't do it successfully in Darien. And so talk about a little bit what's gone wrong there with the rainforest.
Richard Davies: Yeah. So the Darien rainforest, what's left of it, is absolutely pristine. In a way, as I said, this part of the book is really about economic failure and a whole system of economic failures. The precise kind of microeconomic failures of externalities as we call them as economists have occurred there.
So, Elinor Ostrom in her work, she went off and studied places like Törbel in Switzerland and also forest communities in Japan, and people who are able through informal norms to enforce some kind of regulation over common resources.
Russ Roberts: Property rights. Yeah?
Richard Davies: Yeah. I n different places, it worked in different ways. One of the ones that I like from her work is simply, when you're collecting wood as a community, not to create lots of even piles of wood, and not to say at the start whose woodpile is whose. So, it gives everybody the incentive to make a woodpile that's high enough for them, but even compared to the others, and is not so great that it's going to deplete the forest for the next year.
Richard Davies: Some of the conditions that Ostrom set out in her ground-breaking work--essentially one of them was about knowing who people were or having some definition of the perimeter over the common resource, your time to collect[?]--
Russ Roberts: And the interaction with the famous example of the lobster pots of Maine. If you're worried about people poaching, taking your traps--but if you see that person in the bar every night or every week, you're going to act differently than if i t's a one-time encounter.
Richard Davies: Exactly. Regular interaction leads you to sort of a repeated game; it leads you t o bu ild a reputation.
The problem with Darien is that's incredibly fluid, and so that wasn't working.
And so, a series of policy steps have been taken, kind of devastating really for an economist because you see why they were being taken and then you see them going wrong. So, the first thing was to say, 'Okay, informal property rights aren't working. Let's define completely clear property rights, legal prop erty rights, ov er logging,' and those property rights were given to the indigenous communities in Darien.
Russ Roberts: Sounds good.
Richard Davies:</stron g> Yeah, exactly . There are three big groups.
The problem then is essentially one of infrastru cture. Again, it's an economic problem. So I talked to the chief of one of the tribes, it's called the Ember á, and they allowed me to stay in their village for a couple of days. And talk to him and he said, 'Well, look, we don't have the equipment to fell these big trees. They're huge. Some of them hardwood trees.'
And so, what they do , once you've given somebody property rights and then you've given them a piece of paper that says, 'You can cut this many logs. This is your property. You're able to sell that.' So that right to cut a certain number of trees is sold to big, large-scale logging companies.
They , then, build a road up to the village. I kind of heard a little bit about this. I'd expected it to be a kind of little, tiny dirt track. They're not. They're like kind of motorways, freeways, cut through the rainforest. The logging companies go through creating this artery that anyone can then go through, take a certain amount of logs. But that then kind of opens everything up to smuggling and to people taking illegal logs.
You also have precisely the same problem that you have in fishing with bycatch, which is when you give somebody--say that somebody is allowed to catch a certain number of fish or to take a certain weight of wood. When they cut a big tree if it's got a couple of crooked branches that don't look the way you want them to look, you cut those off and discard them and then take another tree, similarly to throwing away the fish you didn't want to catch. And so, it means that the weight restriction, the weight quotas in these logging rights mean that more trees are actually cut because you only take the best and the straightest trunks. One guy--
Russ Roberts: Gives me a stomach ache actually, because you kind of talk --drinking game fans, obvious moment here--the Hayek quote, 'The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.' So here you have a quota.
Russ Roberts: I mean, what could be better than that? You don't want to let people take out too many trees. And so, you restrict it to a certain amount of weight. And weight is a good way to do it, because you can't say a certain number of trees because they're different sizes. So, weight solves that problem.
But if I'm understanding you correctly is that, since it's restricted, you cut down a lot of trees to get the best ones that fill up that weight quota. And so, you think you're restricting it to a certain amount of death in the forest, and in fact, it's dram atically larger.
Richard Davies: You might actually increase the death , if trees have only g ot a certain part of them that's very straight and can make nice hard boards for people's kitchens.
But the kind of microeconomic sort of malaise gets worse. When you drive down into Darien--and I'd never been into rainforest before--after a while, suddenly these huge, lush green plantations start.
And, I mistakenly on my way down into the rainforest thought, 'Oh wow, this is amazing. Look at all these lovely trees.' They were teak trees. Having been into the true rainforest, which is, if you've haven't been those, as you imagine from a film, so it's completely dark, very loud, very wet. Many, many layers of canopy teeming with life, loud--
Russ Roberts: Loud--in what--what's making the noise?
Richard Davies: Cicadas, other animals.
Russ Roberts: Howler monkeys [howler monkey sound]--
Richard Davies: Yeah, just kind [howler monkey sound]. For an economist who spent, like, 15 years in central banking and offices--
Russ Roberts: And libraries --
Richard Davi es: quite concerning stuff. Yeah.
Russ Roberts: Oh--talk about th e roots. Isn't that in Darien, the tree roots?
Richard Davies: Yeah, it' s just the--
Russ Roberts: It's under a bunch of leaves. Talk about that, this one.
Richard Davies:</str ong> Well, Darien has a couple of quite poisonous snakes. One 's called the Fer-de-Lance and actually, it will kill you if it bites you. And, they just--when you're hiking through a rainforest, after a while, the roots of trees just look very, very much like snakes, and it just becomes--it seems, I'm sure, more treacherous than it is.
The point is that those teak plantations, which are absolutely everywhere, I grew, frankly, to--
Russ Roberts: To despise them?
Richard Davies: to despise teak.
And, I met, deep in the jungle, a guy who historically had been responsible for the preservation. And he said, you know, 'The environment is in the ICU [Intensive Care Unit], and now we have the killer problem of teak.'
Teak is not an indigenous species--the first point. It's from Southeast Asia, not from Central America. The reason for teak is the result of a subsidy system. The Panamanians realized that too much of the rainforest was getting cut down, so they set up this system of subsidies for people that would replant. But as the environmentalist there said to me, 'A plantation is not a forest.' It just so happens that teak is hugely valuable and teak naturally has some properties. It has a very--a teak tree has very, very large leaves, much bigger than a dinner plate, like a big serving plate. They are very thick, and they are waxy, and through its own--you know, good for teak, Darwinian evolution--is developed. And the fact that these leaves contain a certain acid which kills bugs that eat them.
The point is that when the teak leaves fall to the floor, that floor, because they're so big, has had no light source at all. That's completely unlike natural trees where, the taller the tree, the smaller the leaves to let light down. There's been no light on the floor at all. And then when a teak leaf falls to the forest floor, it lets out this acid, that's a natural process.
But it means when you walk into a teak plantation that the ground is as if somebody has poured gasoline there and has torched it. There is no other life. And so, what has happened is: primary rainforest has been there. This problem of the failure of the commons has occurred. The property rights system has failed and people have traded that wood away. And then, so then we say as economists, 'Okay, we've got this great idea, let's put in a subsidy.' Put in a subsidy that's also ill-targeted. And a completely unsuitable tree which actually does damage to the bottom, the wildlife below it, is now completely the norm in Panama. It's a kind of devastating catalog of economic mistakes.
Russ Roberts: But the teak plantation, does it stand alone or is it in the middle of the rainforest--is it on the edge of the rainforest? Is it just a bad, failed substitute? or is it also hurting the rainforest itself because it leaks into the--
Richard Davies: No, it doesn't leak in, but it's where the rainforest used to be.
Russ Roberts: Should be. Oh, I get it.
Richard Davies: I would say arguably--I'm not a hundred percent sure, but as the way the locals described to me--I think it would be better off just leaving the fields fallow and allowing local bushes and trees to grow rather than having the teak.
So the teak now--and there are some amazing aerial photos of Darien from the 1960s and then the 1980s, and you can just see the rainforest retreating. And now where the rainforest once was, there was teak. And in a sense, it does do damage because where there is teak, there will never be new rainforest growth.
Russ Roberts: That other--that cornucopia of other life and organic stuff.
Russ Roberts: So, what's that mean for the people who live there? So, it sounds like they're doing okay. I mean, it's a tragedy for the rainforest, obviously, and some biodiversity. Let's backtrack. The indigenous people there, they've got this property right and the ability to harvest a limited amount of pounds, of tons, of whatever, of wood. So they're selling those.
Russ Roberts: They could have made it illegal to sell them, but they didn't. Or if they did, they can't enforce it. Those people, are they doing okay? The people who live there? Is that a vibrant economy in terms of resources?
Richard Davies: I mean, these are incredibly remote communities, right? So, to even get to these people, you have to go right to the end of the Panamanian Highway.
Russ Roberts: Not a lot of powdered milk?
Russ Roberts: Yeah. Okay.
Richard Davies: You then go, drive about another three hours down dirt tracks, and then you take a canoe for about six hours.
So these are near-indigenous peoples, and they use the money, to let you know that the trade they're involved in, it's a very simple one. Culturally, when a young couple gets married, they build them a new house, and they now have access to modern building materials--concrete blocks, corrugated iron roofing and so on--and also outboard motors.
And so, an exchange of a few trees for those things is one that they want to take part in.
The problem frankly, and you can see it from these photos I mentioned, it's just sustainability. You can see the land they live in ebbing away. So yeah, it's not a long-term viable option.
And if you compare, for example, the ability that Panama has had compared to, for example, Costa Rica in creating ecotourism, it's far, far lower. That would be a much more sustainable way of making revenue from their natural environment while protecting it.
Russ Roberts: Were you in that canoe for six hours?
Russ Roberts: Was it fun?
Russ Roberts: Why?
Richard Davies: Because it's fun to be in a canoe for an hour, but for six hours it's not fun. < /p>
Russ Roberts: And how long did you spend in Da rien?
Richard Davies: A couple of weeks in Darien. Yeah, just ov er two weeks.
Russ Roberts:< /strong> What were your quarters like?
Richard Davies: My quarters were--the night that I stayed in the furthest away Emberá village was the least sleep I've ever had in my life. So, I went to see the Chief and he took me down to this thatched-roof building, which was his old building, and kind of presented it to me. And I was very grateful for him allowing me to sleep there. And, you sleep in hammocks. And, you--I was advised to pull my hammock over my face. And I thought, 'Why is this for?' Then as--
Russ Roberts: In a movie, this is an easy one. Go ahead, yeah.
Richard Davies: As night fell, literally as night fell, the first bat--
Russ Roberts: I was going to say, 'Bat.' Is it bats? It's either bats or spiders, yeah?
Richard Davies: No, it was a large bat, the first bat, and it was not small, landed on the mesh a couple of inches away from my face. I thought, 'Oh wow. I've seen a bat.' I would say that the thing that I lived in, this thatched roof was basically a bat's nest, and maybe that happened every 30 seconds for the next eight hours until dawn came. So, but it was just--
Russ Roberts: You slept fitfully that night, I guess.
Russ Roberts: That's interesting. Did you bring a present? Did you pay? Did you bring gifts?
Richard Davies: visited in the book, I did give gifts. I mean, obviously, I didn't--you'd never pay up-front for interviews. But where there was something like a community hall or something like that in some of these villages, and they wanted a donation for that at the end, I did that kind of thing. I think--
Russ Roberts: What was a nice boy like you doing in a place like that?
Seriously. Were there moments in writing this book that you grossly--it sounds like there were moments when you underestimated what you were going to go through to pull this off. Was this part of the fun?
Richard Davies: Um, I wouldn't call it fun. Darien was an incredible experience, and some of it was--
Russ Roberts: I've never slept in a hammo ck with a bat on my face.
Richard Davies:< /strong> That was, seriously, it was not fun. I don't want to do that ever again.
But I felt very determined to get to these people and to try and tell their economic story, to try and give that their narrative, which I hope I've done in the book.
And, just two places. The one we mentioned was in the Azraq camp, where there was th is question of Islamic State. That felt like this is a bit kind of too sca ry. There was one moment actu ally in Darien where I was trekking and there was some evidence of kind of either paramilitaries or freedom fighters being in the area. I thought like, 'This is getting too close to the line.' And so, I backed off.
But in general, the third one was there were a couple of days in Kinshasa--
Russ Roberts: Yeah, we're going to come to that next.
Richard Davies: which were a little bit hairy.
Russ Roberts: Yeah. It was Darien, though, if I remember correctly, where there's no real perimeter. There's no real security, there's no police, there's no--they're vulnerable to outsiders who want to hurt them, if they did.
Richard Davies: Yeah.
Russ Roberts: Most outsiders aren't interested and it's far away. But, you talk about--you mentioned earlier the immigrants trekking through. I think you tell the story of the, you know, guides who would pay to take people through there and then blackmail them, abandon them, and that they came across dead bodies of people who had gotten lost, couldn't get back.
Richard Davies: Yeah. Yeah, absolutely . There is a large number of illegal immigrants in the Darien Gap. Something I'd read kind of a couple of pieces about, but it makes it sound like it's a kind of small phenomenon.
I saw them in every village and town that I went to. People from Nepal, people from Punjab, people from Senegal, Cameroon.
And the reason they do it is because it's so dangerous. If you manage to trek from the Colombian side, which you get to by flying into an airport somewhere in South America--if you manage to get to that side and then trek through, the authorities won't follow you through--
Russ Roberts: Oh. Oh yeah--
Richard Davies: because obviously, that's the sort of fundament al reason pe ople do it.
And then once they're through and they're into Panama, they can find some truck and the Pan-American Highway starts there and goes on up as far North as you want to go. Of course, there are loads of borders you have to cross, but Darien is like a six-day trek through the rainforest, and that's what's going on there.
And t he problem, to go back, tha t they face--to go back to Ostrom and also to go back to the big question of this book is: Can we rely on markets to always spring up?
That was an example of where, if ever there was a market, a trade that could occur, it was between the young Colombian guys that have no real source of income, but do know the way through, and the Punjabi and Nepalese guys that have a large amount of money hidden on them--
Russ Roberts: Have no idea where they're going.
Richard Davies: Have no idea of the way through. The problem being, there's no reputation. They'll only see each other once. And often what happens is people get taken in, robbed, and then left to find their way out.
And yeah, I didn't see any myself, but many of the groups that had tried to trek through reported having seen dead bodies along the way.
Russ Roberts: You mentioned Kinshasa and I wanted to make sure we talked about that. There's a chapter in the book on Kinshasa. And it's amazing how many EconTalk episodes are resonating with me from this offbeat conversation we're having. I just thought--I wanted a minute ago, and I've forgotten it now--but a long time ago, early, early days of EconTalk, I interviewed Bruce Bueno de Mesquita, a few times actually. But something he said I've never forgotten--I think about it a lot--and that was a remark made about King Leopold.
So, King Leopold was the head of Belgium. And he owned the Congo. Personally--
Richard Davies: Yeah, personally, yeah.
Russ Roberts: And Bruce's point--I forgot how it came up, but Bruce's point was: He's beloved in Belgium. There's a lot of things that he created there that people are grateful for. Legislation that was passed during his time.
In Belgium, King Leopold was constrained by a parliament. He was a king, but he was constrained in their system. In the Congo, he had a free reign to do whatever he wanted. The number you give in the book is he killed 12 million people.
So Bruce asked the question--in exploiting the Congo's rubber and other natural resources, Bruce asked the question, 'So which is it? Is he a great man, a good man who is beloved by the people of Belgium? Or is he a despicable tyrant who exploited the people of the Congo in merciless and inhuman, horrible ways.'
Bruce said, 'Well, look where he was unconstrained. In the Congo he was unconstrained. He could have been a nice person there. He could have delivered wonderful things and he didn't. And so that's the real King Leopold.'
So, Kinshasa, which is a very large city--and there's two Congos, right?
Richard Davies: There's the Republic of the Congo and then there's the Democratic Republic of the Congo.
Russ Roberts: Yeah, which is great. It sounds like a Monty Python skit. There should be a People's Democratic Republic of the Congo as well, but--you were in which one? Where's Kinshasa?
Richard Davies: Kinshasa is the capital of the Democratic Republic of the Congo, formally known as Zaire, and before that Congo Free State, under the time when it was owned by King Leopold.
I mean, the other Congo is certainly an important country in its own right. But The Congo--and I call it The Congo throughout the chapter because that's what everybody there calls it--is huge, one of the most important countries in Africa. It has borders, because it's so big, right in the center of Africa--it borders many, many countries. It is involved in a huge number of disputes along its borders. But from my view, we don't hear enough about it. It it, has unbelievable economic potential.
Russ Roberts: Why? It's landlocked, right?
Richard Davies: No, well, it has the link to the Congo River, and then has a very, very small access to the coast, in its west coast.
Russ Roberts: So why does it have a lot of potential?
Richard Davies: The potential is--well, for a start, the people. If we kind of forget about the G-20 [Group of 20] and think about P-20--the most Populous 20 countries in the world--it's there. We never hear about it. 80[sounded like 18?] million people, I think. Mineral wealth: all different types of mineral from copper to extremely rare minerals that are used in mobile phones. Just agriculturally--agriculturally alone--it could feed the entirety of Africa. Incredibly lush, rich soil.
But also in terms of potential it's never been: the Congo itself is the world's second largest river after the Amazon and has, because it's directly on the equator, the Congo, the most regular flow. So, if you wanted to build a hydroelectric dam there, and this has been a long-going idea and project in the Congo, you could potentially build a green city where the industry was powered on this totally renewable and clean source. And yet--and there's a chart that I put in the book, GDP [Gross Domestic Product] per--
Russ Roberts: It's a dramatic chart--
Richard Davies: Yeah. So again, the idea of the book was to go to the world's extremes and there is no economy more extreme than the Congo's.
If you take the World Bank data back to 1960 and then just, and sort of track all the economies together as one economy that is dead last; and it's the Congo's.
And so it's a doubled conundrum. Not just the fact that it's last, but it should be near the top. If somebody--if an alien was coming down and we said, 'What are the things that make an economy grow?' Well, it's access to a European language. They speak French. It's being on a favorable time zone. They are. It's natural wealth, agricultural wealth, and the potential for industry. They have it all. And yet they have nothing.
Russ Roberts: So, in that chart--it's a growth rate chart. It's per capita income in the present relative to 1960. Almost all of the lines in the chart slope upward, some dramatically so, and I assume that's China, and India, and some other countries at the highest growth rates.
And then over this roughly 50-plus year period. And then there's some that are languid: they grow a little more slowly. The Congo isn't just the slowest-growing country. It's one of the few with a negative growth rate. Per capita income is dramatically lower, at least in the measured sense, in today relative to the past.
Richard Davies: Yeah, absolutely.
Russ Roberts: So what went wrong there? And of course a t housand things went wrong. But the thing I want you to focus on, since w e're entering unch arted territory here--we're kind of like in the Darien of EconTalk episodes. This is, I think, going to be the longest EconTalk episode of all time. It's very exciting. It's a shame it's just Richard and I, face to face here over at the Hoover Institution in Washington D.C. Should be a crowd of cheering bystanders. But that's what we have.
And before we go on, I have to, since were in this uncharted territory and you mentioned mobile phones: When you were in Darien, did you have a mobile phone with you?
Russ Roberts: Did it work?
Richard Davies: Not in the vast majority of places.
Russ Roberts: So that GPS [Global Positioning System] thing for getting you out of the woods wasn't going to help you.
Russ Roberts: How did you take notes? How'd you keep track of your thoughts?
Richard Davies: On paper and with a little recording device. I'd ask people if they're okay for
Russ Roberts: Did you have a laptop?
Richard Davies: I did have a laptop, yeah. So, I had a very battered old laptop, which I've only just replaced, that went with me on the canoe up into the villages and so on, so that I could type stuff up in the evenings.
Russ Roberts: Was it battered because it was just happened to be old, or did you take a battered one because you were afraid you weren't going to bring it back?
Richard Davies: No, no, it started new--but it also started very cheap and very slow, so it wasn't anything like, tha t you wouldn't mind dropping.
Russ Roberts: One last chance, one last question in this interlude here: How'd you keep it charged? Is there electricity in Dar ien, in that village you took the six-hour canoe ride to?
Richard Davies: That one--there--there was--no, there wasn't. There wasn't electricity, and I had to just then fall back on notebooks.
< strong>Russ Roberts: Yeah, and the battery-powered recording.
Russ Roberts: Okay. So, Kinshasa, which has a--this is what makes it, for me, that made it so interesting--is a very entrepreneurial society. How many people in Kinshasa?
Richard Davies: Around 10 million.
Russ Roberts: Ten million. How many people in the country?
Richard Davies: Eighty--.
Russ Roberts: Eighty--eight-zero. I thought you said one-eight, 18. But, 80 million people. Big metropolitan area, Kinshasa then. And, it's thriving, in the sense that people are buying and selling stuff everywhere. There's an enormous amount of entrepreneurship. And in fact, wasn't that the part of the book where, on your way home on any street you could buy anything you wanted?
Richard Davies: Yeah, absolutely.
Russ Roberts: So it sounds great. What's wrong?
Richard Davies: What's wrong is that it should be--what's wrong is that it should be and for a time was, I guess, Africa's best city. And actually, what I came to see it as, is very close to Zaatari. Which is good in a sense, but the people--
Russ Roberts: The refugee camp we talked about 25 minutes ago. Listeners may have forgotten it [?]--
Richard Davies: Exactly. There are a lot of pop up shops, there's lots and lots of informal activity.
But, you know, this is not what a mega-city with all this potential should achieve. And that was the reason I wanted to go there, to understand that. Because, I mean one of two things happens with the Congo: Either we don't hear about it at all, or those people who are interested in foreign affairs and so on will know about the east of the Congo and the Congolese War, and the tensions with Rwanda, and so on, and the fighting, which tends to happen in the East.
But there's this hidden city that nobody writes about or talks to, and economists rarely go to or study, which has this incredible potential. And essentially what has happened is a system of, informal, citywide system of informal trade has sprung up.
The problem, the reason why I, to your question--'Isn't everything okay?' It's not okay, because the whole economy has become informal. And, the problem there is that you raise no tax, and so you have no public services.
And so while you are a stone's throw, sometimes literally a stone's throw, from the world's second largest river, there is no source of clean water.
So one of the informal trades that anybody can take part in--just like in any economy trade is based on other people's needs--one of the informal trades is to be, to go around giving people water. This is the Congo, so it's not bottled water. It's water in plastic sort of sacks that is treated, so--
Russ Roberts: It's, I guess it's a black bag.
Richard Davies: Yeah. So there are guys everywhere in Kinshasa with big bags that have 30 or 40 of these little Ziploc bags of water in them. Okay. So that's a clear example of why it is not okay to run a city of 10 million people on an informal economy--because you raise no tax. And so you can't build a sensible sewerage and water system.
Russ Roberts: But there's a Catch-22 here, which is: Everybody is taxed, all the time.
Richard Davies: Yeah, so--
Russ Roberts: Describe that. This blew my mind.
And I guess there's two types of taxes. There's real taxes and just corruption.
Richard Davies: Yes.
The thing that came up most with the people I talked to--and it was everybody, it wasn't just business people; it was everybody that I interviewed, that I stayed with--was the problem of taxation.
The formal system is supposed to be weak. It recently changed from weekly to monthly. For a while it was weekly taxation.
Practically, what happens is tax collectors come around every day and essentially aim to kind of levy a small tax.
Around some markets they actually have a morning tax and an afternoon tax, so that's twice a day. And, as many of the people there--again, formal employment is very, very low. The lowest of any of the countries that the World Bank tracks. But most people are doing some kind of work--
Russ Roberts: They're working, yeah--
Richard Davies: in these informal gigs. The way they described it to me is you get taxed three times. So you get your formal tax---
Russ Roberts: That's a person who has a badge or ID [Identification] that says 'I work for the government'--
Richard Davies: That says he's a government employee. They, then, and that person will then also ask for a little bit of a kickback for themselves.
And the third requirement from anybody providing a service is what they call a bon prix, a good price. I.e., if you, Russ, have a bakery and I'm the tax guy, I collect the tax. Then I have a little tax for myself, and I'd also want a [crosstalk 01:47:15] baked goods. Namely, the bon prix is zero. So, it's payments in triplicate, daily.
Russ Roberts: Yeah. So there is a formal economy. There's not a lot what we would call 'industry.' A lot of it is the bizarre, the souq, the market, the small shop of selling baked goods, giving a haircut, selling water. All of those are contributing to the public 'fisc,' as we say--the fiscal situation of tax revenue.
But it's an unbearable burden. Right? Nobody's doing anything grand because they can't afford it--effectively is what it sounded like.
Richard Davies: There are a few problems.
Yes, it's an unbearable burden. But I shouldn't give the impression that this results in a huge tax take. It doesn't. The problem is, the way that they described it to me there, is it's a pyramid.
So, one amazing young guy that I met and describe in the book explained it to me. I said, 'Look, how do you survive here? This is one of the toughest economy in the world.'
Russ Roberts: And what he's selling? I can't remember. Does he have restaurant?
Richard Davies: Here was a wholesaler and selling sacks of import and export of beans and rice and so on.
Russ Roberts: And he's thriving.
Richard Davies: He's thriving. And he said the only way--and he started off as a young boy in the market selling these Ziploc bags of water. And he said, 'The only way to survive is to become the top man's son.' That's the way he described that.
And the problem that he was talking about was little local pyramids of corruption whereby everybody in the tax collection system takes a little bit on the way up, such that, if you get somebody near the bottom, they have to take that much more for it to go up the pyramid.
So just like a sort of Ponzi scheme. And it's much better to know the local head of the tax system, to try and befriend him, find out what his family likes, giving that stuff to sort of lower your tax rate.
Russ Roberts: Bring him the donuts.
Richard Davies: Exactly. So this is one problem. And it's the burden that the people face.
The second problem, as I've already mentioned, it does not lead to a tax take, which allows the government to build satisfactory public services. And the electricity grid is--you know, there are blackouts. The city is completely dark at night time. A city of 10 million people. It's a very, very strange kind of experience to be there.
But the really--it's kind of odd and troubling, but also interesting thing--is that it's resulted essentially in the informal privatization of the public sector. What I mean by this is: If you need a policeman to do something for you, you have to pay him. And if you need a school teacher, for example, to give you your kids a high school certificate, which is needed to go to the next level of schooling, you will have to pay him, or her, or the principal.
And on the face of it, that just, to us, to someone in the United States and the United Kingdom, that might seem intolerable. And corrupt. And in a sense it is corrupt. But in another sense it's not, because the public understand that those people's wages are so low that they cannot survive. And so essentially what's happening, again, is the informal privatization. So people understand you kind of need to pay the police, because they're not earning enough to do their jobs properly. And you kind of need to pay the school because they're not earning enough.
So everything, I would say--the trade in the market, the trade in the private sector is obviously private and informal, but also informally the public sector and that whole system of tax collection and then given to public sector workers from doctors, to teachers, to police people, has also become privatized.
Russ Roberts: And in a really strange--it's privatized in this weird way where the price, although I suppose--the price gets determined after a while. It's probably understood what that price is. roadblock and just find an excuse to take money from you as you go by. And, there's a certain expected amount. It's just annoying. And you know you have to pay this tax. It's like a toll on the road from bandits, but they're called the police. But if they go, if they try to get more than the acceptable, kind of understood amount of bribe, people get mad and they just drive off.
Richard Davies: Yeah, exactly. So that happened one time. So, the roadblocks happened to us the whole time. But what--and I mentioned--when you asked about were there are any worrying bits, this was one of the worrying bits. These guys had set up a road block. Some of them were drinking. Only one of them was in a police uniform, and the others weren't. And, you know, a big queue of cars in front of us, which is the norm at these roadblocks, and everybody hands out their, you know, couple of dollars, it might be. And suddenly everybody just got out of their cars and started shouting at these guys saying, 'Where is your police uniform?' you know, 'We will not stand for this.' And so--
Russ Roberts: I don't mind paying a bribe. I don't want to bribe a police officer. Not some entrepreneur.
Richard Davies: Yeah, but you have to be pretty brave to do that, because all of these guys have quite large guns.
But the interesting thing is that there's clearly a norm there. There's a norm, which is okay, maybe a couple of dollars, okay, but $10 to guys that have been drinking and don't have their uniforms is not okay.
Russ Roberts: It's against the rules. Even though there's no rules.
Richard Davies: But the--I guess, it's incredibly vibrant place. I would encourage anybody that gets an opportunity to go there to go there. To go there. The people are amazing.
The real problem, though, and we can take this police example, so it's a kind of natural conclusion, is what we think about corruption as economists, that it leads to resource misallocation.
So while I was there, a new rule had come in requiring all taxis to be painted with the Congolese flag. Sensible idea. There was too many illegal cabs. Just like in the States and the United Kingdom, we have rules about how a cab should look, and so on.
Russ Roberts: Against most of those[?], but okay, go ahead. Yeah. Sorry.
Richard Davies: And , this just became an opportunity for the police. So people were being stopped and asked, 'Are you running a cab?' Okay, that's fine for the low-level traffic cops. But then we came to this block, and the locals armed with [?]
And essentially what had h appened is, because it was such a great revenue-creating opportunity, a much higher level of police with much bigger guns, really smart uniforms, the guys that were supposed to be kind of protecting government buildings and investigating kind of dangerous criminality, those guys had been pulled into doing it.
And so it's as if here in the United States your best detectives, forensic detectives, suddenly got dragged into doing traffic cop duty because there was an economic opportunity there. You can see that is not a good use of resource allocation.
Russ Roberts: And of course the other challenge here, and it's--you can answer--we have this really ugly piece of jargon called a deadweight loss, which often gets invoked when we talk about how attacks distorts resource allocation. When you're taxed three times a day--three times a day?
Now, you coul d argue the number of times a day isn't what matters. It's the burden, it's the amount. But just that alone. Forget the amount. It doesn't mean you're going to be tax 365 times more than if it was once a year, because it could be adjusted, the amount. But to confront that experience, to just, it's a waste of time on it, three times a day, once a day, and to be taxed those three slices is discouraging to commerce. But there is a lot of commerce. It's just not very grand. Wonder: why isn't it grander?
Or a better way to say it is: There are people living really well there, I assume. It's just not the average person.
Richard Davies: Oh, yeah. Anyone with access to a higher echelon government job--
Russ Roberts: The top man--and the top man, incentive, is doing it fine--
Richard Davies: No, there are plenty of extremely expensive cars on the road.
You know, as you see across all of emerging and developing countries, there is a subset to the people though who have access to the higher levels of government that do very well.
The reason that people further down the chain aren't able to build up capital and to build their businesses into something more, I think and I discuss it in some length of the book, is an inability to build capital. Partly because of the banking system, partly because of the sheer level of this taxation that means that everything is hand to mouth.
Russ Roberts: It's not just that it's frequent. It's also large.
Richard Davies:</stron g> It's a hand-to-mouth existence.
And also, the extreme currency vola tility that they face means that, again, if in Darien I came to see the teak tree as evil, and in Kinshasa I came to--you know, I'm an ex-central banker--I came to see inflation, and unexpected inflation, as truly evil because I met, like the very poorest people in Kinshasa, the poorest city in the world, are involved in a trade where they get large bags of charcoal, break it up and sell it. So they buy a wholesale good, change its size, as people do across the planet, and then sell it. The problem is that there can be three, or four, or five days in between those two economic transactions. And when you live in a country that, where there can be step changes in the exchange rate, and because people buy and sell in dollars and Congolese francs, that you can suddenly have bought at the wrong price or sold at the wrong price, and completely eradicate your savings. And many of the people I spoke to, that had happened to.
Russ Roberts: And this is because the Central Bank is out of control?
Russ Roberts: Do you know why? Why is the Central Bank inflating the currency that way?
Richard Davies: Wow. I mean there's a long history there--
Russ Roberts: Never mind. Okay, never mind, never mind. We're--on the recorder there are a couple edits here that will be made where where I lost my train of thought and Richard had to cough.
Russ Roberts: But we're at the 2:03-mark here. We probably have--we're very close to two hours for sure, even after the edits. So we should probably wrap this up.
But I want to give you a chance to summarize. You've told some extraordinary stories. You went into the front lines of the world economy in a really educational and eloquent way. I'd like you to close by reflecting on two things: Why bother studying extreme economies, other than--I mean, I love it. I eat this stuff up. And I think listeners will, too. It's fascinating. But I think you'd like to say a little bit more than just, 'Wasn't that interesting?' That's enough for me by the way. I'm totally fine with that. But I think you have a little more to say than that.
And the second thing I'd like to hear from you is: How did it change you, if at all? What was it--having gone through this--and it took you a while, this isn't just--I spent a few days in a cool place and took some notes. And, so reflect on both those things.
At the beginning of the book you talk about the extremes are educational. So, go ahead.
Richard Davies: I mean, the why-bother question is that whatever your perspective on the trends that we face, be it aging, or the rise of technology, or inequality, or the environment. I think we can accept that we live in uncertain times and we feel that we may be tested--our resilience may be tested. And actually it's a way to give us more confidence, is to try and understand in a slightly different way how resilience works.
And something I actually started before I studied economics, I did year as a medical student, doing pre-med essentially. And one of the things that's very clear from the medical sciences is that people have learned, historically, going back into the deep history of anatomy, from very bizarre, one-off, outlier cases.
This is true both in how we, in the way that we learned how circulation works, but also how the brain works with famous cases of people with brain injury and so on.
So, it's certainly the case that in the sciences they have found it useful to test outlier, one-off examples, where a system has been hit by some acute stress but has remained resilience. And that was a kind of big motivation for the book.
Russ Roberts: We didn't get to talk about the tsunami and how this town in Asia bounced back. Listeners should get the book and you can read more about that. It's a really dramatic example of resilience. And we just had Terry Moe talking about New Orleans, responding to the flood of Katrina. So these are fascinating, fascinating examples.
Richard Davies: So I think we, as economists, we sometimes spend a little bit too much time on the kind of ebb and flow of GDP [Gross Domestic Product].
And even if it's slightly deeper measures that are really important like productivity and so on where a lot of our anxiety and our concerns are truly about how is our resilience going to play out.
And from, as I set out on in the start of the book, briefly from the medical sciences through engineering, other fields of research have found, looking at extremes, either surprising successes or surprising failures, helpful. So that was a big part of the motivation.
And part of it changed me. I think, the--part of it changed me. Going on these trips has certainly changed the way I think we should do economics, all of us.
And it's quite a simple thing really, which is that you have to get down on the ground and talk to people, and find out about how their story is actually playing out.
Because, in the prison, in the refugee camp, in other places we haven't discussed like the most aged part of Japan, I went with an expectation essentially based on the current thinking in economics.
I found that was often correct. But there's a big trend in economics at the moment to say hasn't it failed? isn't it worthless? or, aren't economists all bad?
Actually, when you meet people whose lives are really being tested, economics is front and center.
So in part this has urged me on to do more economics.
But even in my kind of slightly, my more academic work, I'm definitely going to take the time to go and talk to people and see how things actually play out on the ground. And that's not something we do as economists. So, just to give a concrete example--
Russ Roberts: We like to look at the data in a book and ideally in digital form.
Richard Davies: Yeah, we like to look at a CSV[?Comma-separated-value spreadsheat?]--.
Russ Roberts: What? Yeah, a spreadsheet. Exactly. So we can just run some analysis and come to some conclusions. But this is very different.
Richard Davies: This perhaps reflects a bias of being part journalist, but for example, there's a big question in the moment of exactly how inflation works. There's missing inflation because of QE [Quantitative Easing] and is missing deflation if you look in the data of a different period.
Russ Roberts: On a database in QE?
Richard Davies: Exactly.
And what a lot of people are doing, great work, is using micro data on prices to understand better the underlying process of how prices are formed and how firms change their prices. And that's a really important strand of the current macro literature.
I haven't seen anybody as part of that, also, just take, I know, a couple of weeks to go out actually on the ground themselves, seeing what it's like to collect that micro data. And that's the sort of thing I mean. Because every time you do that, every time you actually--you're studying aging, will go for a week to an old people's home and actually see how it plays out. You're studying completely different context, inflation and micro data. Ask if you can go out with the price collectors and collect some micro data, because when you're on the ground, you see economic stories that you miss when you're sitting at your desk.
Russ Roberts: My guest today has been Richard Davies. His book is Extreme Economies. Richard, thanks for being part of EconTalk.
Richard Davies: Thanks for having me.