DRI-248 for week of 1-26-14: Economics as Movie ‘Spoiler’: Some Famous Cases

An Access Advertising EconBrief:

Economics as Movie ‘Spoiler’: Some Famous Cases

Motion pictures evolved into the great popular art form of the 20th century. In the 21st century, many popular cultural references derive from movies. One of these is the “spoiler” – prematurely revealing the ending of a book, play, movie or presentation of any kind.

Economists sometimes experience a slightly different sort of “spoiler.” Their specialized understanding often defeats the internal logic of a presentation, completely spoiling the author’s intended effect. Movies are especially vulnerable to this effect.

The casual perception is that our attitude toward movies is distorted by the high quotient of improbably beautiful and talented people who populate them. While it is true that physical beauty has always been highly prized by Hollywood, it is also true that plain or even ugly people like Wallace Beery, Marie Dressler, Jean Gabin and Rodney Dangerfield have become champions of the movie box office. The locus of unreality in movies has actually been the stories told.

Movies are best regarded as fairy tales for adults. They over-emphasize dramatic conflict and exaggerate the moral divide between protagonist and antagonist. It is difficult to find a real-world referent to the “happy ending” that resolves the typical movie. Protagonists are all too often “heroes” whose actions exceed the normal bounds of human conduct. In recent years, this tendency has escalated; veteran screenwriter William Goldman has complained that movie protagonists are now not heroes but “gods” whose actions exceed the bounds of physics and other natural laws.

In this context, it is hardly surprising that movie plots have sometimes ignored the laws of economics in order to achieve the stylized dramatic effects demanded by the medium. Since public knowledge of economics is, if anything, less well developed than knowledge of natural science, these transgressions have generally gone unremarked. Indeed, the offending movies are often praised for their realism and power. Thus, it is worthwhile to correct the mistaken economic impressions left by the movies, some of which have found their way into popular folklore.

In each of the following movies, the major plot point – the movie’s resolution – rests on an obvious fallacy or failure to apply economic logic.

Scrooge (U.S. title: A Christmas Carol) (1951)

We know the plot of this most classic of all Christmas tales by heart. Victorian businessman Ebenezer Scrooge, famed miser and misanthrope, abhors the spirit of Christmas. He is visited by three ghosts, emblematic of his youthful past, his empty present life and the lonely, friendless end that awaits him in the future. Their guidance awakens him to the waste of his single-minded pursuit of material gain and rejection of personal affection and warmth. He realizes the cruelty he has visited upon his clerk, the good-hearted family man, Bob Cratchit. Most of all, he keenly regrets the fate of Cratchit’s crippled son, Tiny Tim, who seems doomed by Cratchit’s poverty.

Having witnessed Scrooge’s emotional reformation, the audience is now primed for the crowning culmination. On the day after Christmas, Bob Cratchit shows up at Scrooge’s office, a bit late and encumbered by holiday festivities. Fearfully, he tiptoes to his desk, only to be brought up short by Scrooge’s thunderous greeting. Expecting a verbal pink slip, Cratchit receives instead the news that Scrooge is doubling his wage – and that their working relationship will be hereafter cordial. Tiny Tim’s future is redeemed, and the audience has experienced one of the most cathartic moments on film.

Unless, that is, the viewer happens to be an economist – in which case, the reaction will be a double take accompanied by an involuntary blurt like “I beg your pardon?” For this is a resolution that just simply makes no sense. In order to understand why, the first thing to realize is that the scriptwriter (translating Charles Dickens’ timeless story to the screen) is asking us to believe that Bob Cratchit has heretofore been working for half of what Scrooge is now proposing to pay him.

In the 17th and 18th centuries, historical novelists like Charles Dickens played the role played by filmmakers in the 20th century. They brought history alive to their audiences. Ideally, they stimulated further study of their subject matter – indeed, many famous historians have confessed that their initial stimulus came from great storytellers such as Dickens and Dumas. But many readers searched no further than the stories told by these authors for explanations to the course taken by events. Dickens was an exponent of what the great black economist Thomas Sowell called “volitional economics.” In this case, for example, the wage paid by Scrooge and received by Cratchit ostensibly depended on Scrooge’s will or volition, and nothing else. No role existed for a labor market. Cratchit was not a partisan in his own cause, but rather a passive pawn of fate.

This is not a theory likely to commend itself to an economist. Scrooge and Cratchit are working to produce services purchased by their customers. Who are these? Well might you ask, for neither Dickens nor the filmmakers chose to clutter up the narrative with such extraneous considerations. Yet it is this consumer demand that governs the demand for Scrooge’s output, which in turn values the productivity of Cratchit’s work. In a competitive labor market, the market wage will gravitate toward the marginal value product of labor; e.g., the value of Cratchit’s product at the margin translated into money with the aid of the market price for Scrooge’s services. And in crowded London, there is no doubt about the competitive demand for the low-skilled labor provided by Bob Cratchit. That is what attracted the Bob Cratchits of the world to London in the first place during the Industrial Revolution.

Two possibilities suggest themselves. Either Bob Cratchit was working for half of his marginal value product previously and is only now being elevated to that level, or Scrooge is now proposing to pay Cratchit a wage equal to twice Cratchit’s marginal value product. The first possibility requires us to believe not only that Cratchit was and is a complete idiot, but that henot Scrooge as Dickens clearly implies – is responsible for Tiny Tim’s tenuous medical situation. After all, all Cratchit had to do was step outside Scrooge’s firm and wander off a block or two in order to better his circumstances dramatically and pay Tiny Tim’s medical tab without having to bank on Scrooge’s miraculous reformation. Cratchit was guaranteed a job at slightly less than double his then-current wage by simply underbidding the market wage slightly. But he inexplicably continued to work for Scrooge at half the wage his own productivity commanded.

Alternatively, consider possibility number two. Scrooge is now going to pay Cratchit a wage equal to twice his (Cratchit’s) marginal value product. If Scrooge insists on raising his price commensurate with this wage hike, he will go out of business. If he keeps his price the same, he will now be working for much less net income than all the other business owners in his position. (See below for the implications of this.)

There is no third possibility here. Either Cratchit was (is) crazy or Scrooge is. And either way, it completely upsets Dickens’ cozy suggestions that all’s right with the world, Scrooge has restored the natural order of things and everybody lived happily ever after.

Of course, Scrooge may have accumulated considerable assets over the course of his life and business career. He may choose to make an ongoing gift to Cratchit in the form of a wage increase, as opposed to a bonus or an outright transfer of cash. But it is important to note that this is not what Dickens or the filmmakers imply. The tone and tenor of Dickens’ original story and subsequent films adapted from it unambiguously suggest that Scrooge has righted a wrong. He has not committed a random act of generosity. In other words, Dickens implies – absurd as it now clearly seems – that possibility number one above was his intention.

It is clear to an economist that Dickens has not provided a general solution to the problem of poverty in 19th century England. What if Scrooge were the one with the sick child – would his acquisitive ways then be excusable? Dickens makes it clear that Scrooge’s wealth flows directly from his miserliness. But if miserliness produces wealth and good-heartedness promotes poverty, economic growth and happiness are simply mutually exclusive. After all, the message of the movie is that Scrooge promises to reform year-round, not just one day per year. Henceforward, when approached by collectors for charity, he will refuse not out of meanness but out of genuine poverty, his transformation having stripped him of the earning power necessary to contribute to charity.

In actual fact, of course, Scrooge never existed. Neither did Cratchit. And they are not reasonable approximations of actual 19th-century employers or workers, either. But these figments of Dickens’ imagination have been tragically influential in shaping opinions about the economic history of Victorian England.

The Man in the White Suit (1951)

This comedy from England’s famed Ealing Studios (the world’s oldest movie studio) is justly famous, but for the wrong reasons. It highlights the inefficiency of British socialism and the growing welfare state, but its fame derives from its plot highlight. Inventor Alec Guinness worms his way into the R&D division of a local textile business, where he develops a fabric so durable that it will never wear out. Instead of gaining him the wealth and immortality he craves, it gains the opprobrium of the textile owners, who fear that the fabric will ruin them by cutting replacement sales to zero. They block his efforts at production and the film ends when his formula is revealed to contain a flaw – which he may or may not ever get the chance to de-bug, since he is now a pariahin the industry.

The film is often cited as an example of how big business prevents new technology from empowering consumers – that is, it is cited as if it were a factual case study rather than a fictional movie. Actually, it is a classic example of the failure to deploy economic logic.

Would a textile firm find it profitable to produce an “indestructible” fabric of the sort depicted in the film? Certainly. The firm would achieve a monopoly in the supply of fabric and could obtain finance to expand its operations as necessary to meet the immediate demand. In practice, of course, such a fabric would not really be indestructible in the same sense as, say, Superman’s costume. It would be impervious to normal wear but would suffer damage from tearing, fire, water and other extreme sources. Changes in fashion would also necessitate replacement production. Nevertheless, we can safely grant the premise that the invention would drastically reduce the replacement demand for fabric. But that would not deter an individual firm from developing the invention – far from it.

The film depicts textile firms striving in combination to buy out the inventor. Perhaps overtures of that kind might be made in reality. They would be doomed to failure, though, because in order to afford to pay the inventor’s price the firms would have to compensate the inventor for the discounted present value of the monopoly profits available in prospect. But in order to raise an amount of money equal to those monopoly profits, the firms would themselves have to be monopolists willing to mortgage their future monopoly profits. Textile companies may enjoy legislative protection from foreign competition in the form of tariffs and/or quotas, but they will still not possess the kind of market power enabling them to do this, even if they were so predisposed. Thus, both of the movie’s key plot points are undermined by economic logic.

This reasoning explains why there is so little proof for longstanding allegations that large corporations buy off innovators. While it will often be profitable to acquire competitors, it will normally be prohibitively expensive to buy and suppress revolutionary inventions. The value of a competitive firm reflects its competitive rate of return. The value of a revolutionary innovation reflects the value of a (temporary) monopoly, heavily weighted toward the relatively near future.

The Formula (1980)

The Formula was one of the most eagerly awaited movies of its day because it starred two of the most legendary stage and screen actors of all time, Marlon Brando and George C. Scott. It also boasted a topical plot describing a conspiracy to suppress a secret formula for producing synthetic gasoline. Who was behind the conspiracy? None other than “the big oil companies” – in the 1970s and 80s, as today, the oil companies were periodically trotted out as public whipping boys for the adverse effects of public policies on energy prices.

The film begins during World War II with the escape into Switzerland of a German military officer carrying secret documents. In the present day, Scott plays a homicide policeman investigating the grisly murder of his former supervisor. The decedent was working abroad for a large oil company at the time of his death, and his boss (Brando) reveals that his duties included making payoffs to Middle Eastern officials. Scott’s character also learns about the existence of a formula for conversion of coal into petroleum, supposedly developed secretly by German scientists during World War II and used by the Nazis to fuel their war machine.

Scott’s character seeks the killer and the formula for the remainder of the film. Each successive information source is murdered mysteriously after speaking with him. Eventually he learns the formula from its originator, who tells him that the oil companies plan to suppress it until its value is enormously enhanced by the extinction of remaining petroleum reserves. Brando’s character blackmails Scott’s character into relinquishing the formula and the film ends with the understanding that it will be suppressed indefinitely. The world is denied its chance at plentiful oil and the oil companies enforce an artificial oil shortage.

Novelist Steve Shagan also wrote the screenplay, but it should be noted that the version of the film released to theaters was the result of a conflict with director John G. Avildsen. Although no claim was advanced about the veracity of events depicted or information presented, the audience is clearly invited to take the film’s thesis seriously. Alas, history and economics preclude this.

The film makes much of the fact that Germany was able to conduct military operations around the world for a decade despite having no internal source of petroleum and only tenuous external sources. Germany must have had the ability to manufacture synthetic fuels, we think; otherwise, how could she have waged war so long and effectively?

The premise is sound enough. Germany’s oil refineries in the Ruhr Valley were perhaps the leading military target of Allied bombings; both crude and refined oil were in critically short supply throughout the 1940s. And there really was a “formula” for synthetic fuel – or, more precisely, a chemical process. But the film’s conclusion is all wrong, almost banally so.

The Fischer-Tropsch process was invented by two German scientists – not in World War II, but in 1925. It was not secret, but rather a matter of public knowledge. German companies used it openly in the 1930s. During World War II, when Germany had little or no petroleum or refining capability, the process provided about 25% of the country’s auto fuels and a significant share of other fuels as well. After the war, the process traveled to the U.S. and several plants experimented with it. In fact, it is still used sparsely today. Possible feedstocks for conversion into petroleum are coal, natural gas and biomass.

The reason that few people know about it is that it is too expensive for widespread use. Biomass plants using it have gone broke. Natural gas is too valuable for direct use by consumers to waste on indirect conversion into petroleum. And coal conversion wavers on the edge of commercial practicality; just about the time it begins to seem feasible, something changes unfavorably.

In real life – as opposed to reel life – the problem is not that secret formulas for synthetic fuels are being hidden by the all-powerful oil cartel. It is that the open and above-board chemical processes for conversion to synthetic fuel are just too darned expensive to be economically feasible under current conditions.

Erin Brockovich (2000)

Erin Brockovich is the film that sealed the motion-picture stardom of Julia Roberts by earning her an Academy Award for Best Actress. It was based on events in the life of its title character. Erin Brockovich was an unemployed single mother of three who met liability attorney Ed Masry when he unsuccessfully represented her in her suit for damages in a traffic accident. She took a job with his firm interviewing plaintiffs in a real-estate settlement against Pacific Gas & Electric.

In the course of her interviews, Brockovich claimed (and the film portrayed) that she unearthed a laundry list of diseases and ailments suffered by the 634 plaintiffs, who were residents of Hinkley, CA. These included at least five different forms of cancer, asthma and various other complaints. Brockovich was surprised to learn that PG&E had paid the medical expenses of these residents because of the presence of chromium in the drinking water, despite having assured the residents that the water was safe to drink. Eventually, Brockovich interviewed a company employee who claimed that corporate officials at PG&E were aware of the presence of “hexavalent chromium” (e.g.; chromium from multiple sources) in the drinking water and told employees in Hinkley to hide this information from residents. The whistleblower had been told to destroy incriminating documents but kept them instead and supplied them to Brockovich.

The film does everything but accuse the company of murder in so many words. It reports the jury verdict that awarded the Hinkley residents $333 million in damages. (The standard contingency fee to the law firm is 33%.) Brockovich received a $2 million bonus from her delighted boss. The film received a flock of award nominations in addition to Roberts’s Oscar, made a pile of money and got excellent reviews.

However, a few dissenting voices were raised in the scientific community. Scathing op-eds were published in The Wall Street Journal and The New York Times by scientists who pointed out that little or no science backed up the movie’s claims – or, for that matter, the legal case on which the movie was based.

It seems that the only scientific black mark against hexavalent chromium was lung cancer suffered by industrial workers who inhaled the stuff in large quantities. In contrast, the hexavalent chromium in Hinkley was ingested in trace amounts in drinking water. The first law of toxicology (the science of toxicity) is “the dose makes the poison.” Ingestion allows a substance to be attacked by digestive acids and eliminated via excretion; inhalation would permit it to be absorbed by organs like the lungs. Ironically, lung cancer wasn’t among the varieties identified by Brockovich.

What about the lengthy list of cancers grimly recited in the movie? Doesn’t that constitute a prima facie case of wrongdoing by somebody? No – just the reverse. As the scientists pointed out, biological or industrial agents are normally targeted in their effects; after all, they were usually created for some very specific purpose in the first place. So the likelihood of one agent, like hexavelent chromium, being the proximate cause of various diverse cancers is very remote. In any town or city, a medical census covering a reasonable time span will produce a laundry list of diseases like the one Brockovich compiled.

Economics provides equal grounds for skepticism of the movie’s conclusions. The movie imputes both wrongdoing and evil motives to a company. Somewhere within that company, human beings must have harbored the motives and committed the wrongs. But why? The standard motivation behind corporate wrongdoing is always money. The monetary category involved is normally profit. Presumably the imputed rationale would run somewhere along these lines: “Corporate executives feared that admitting the truth would result in adverse publicity and judgments against the company, costing the company profits and costing them their jobs.” But that motivation can’t possibly have applied to this particular case, because PG&E was a profit-regulated public utility.

Public-utility profits are determined by public-utility commissions in hearings. If a utility earns too much profit, its rates are adjusted downward. If it earns too little, its rates are adjusted upward. For over a century, economists have tried but failed to think up ways to get utility managers to behave efficiently by cutting costs. Economists have even argued in favor of allowing utilities to keep profits earned in between rate hearings, hoping that managers will have an incentive to cut costs if the company could actually keep profits in that scenario.

But here, according to the filmmakers, PG&E executives were so fanatically dedicated to safeguarding profits that the company couldn’t keep anyway that they were willing to knowingly poison their customers. They were willing to risk losing their jobs and going to jail (if their deception was uncovered) to guard against losing their jobs for loss of profits that were never going to be gained or lost in the first place. No economist will swallow this.

If the filmmakers had an explanation for this otherwise insane behavior, they didn’t offer in the movie. And without a scientific case or an economic motive, it is impossible to accept the film’s scenario of corporate conspiracy at face value. Instead, the likely motivational scenario is that PG&E executives didn’t confess their crimes and beg forgiveness because they had absolutely no scientific reason to think they had committed any crimes. They didn’t warn Hinkley residents about “known dangers” because they didn’t know about any dangers. They didn’t need to admit the presence of chromium in the drinking water because everybody already knew there were trace amounts of chromium in the drinking water. But they certainly weren’t going to advertise the presence of non-existent dangers for fear that somebody would seize the opportunity to make a legal case where none really existed.

Movies are Fairy Tales for Adults

The moral to these cases is that movies are fairy tales for adults. Given that, the absence of economic logic in the movies is not hard to fathom. How much economic logic did we learn from the fairy tales we heard in childhood?

This is not to indict movies – or fairy tales, either. We need them for the emotional sustenance they provide. Fairy tales help cushion our childhood introduction to reality. Movies help us cope with the wear and tear of daily life by recharging our emotional batteries.

But we must never confuse the fairy tale world of movies with the rational world in which we live. Our ultimate progress as a species depends on our reliance on markets, rational choice and free institutions. Of necessity, movies operate according to the visual logic of dramatic action. We expect reel life to liberate us from the conventions of real life and this is why movies seldom make economic sense.

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