DRI-275 for week of 8-24-14: The Movie Law of Inverse Relevance

An Access Advertising EconBrief:

The Movie Law of Inverse Relevance

Beginning in the late 1940s and early 50s, more Hollywood movies were made to push a polemical agenda or send a political message. Prior to that, the major Hollywood studios followed “Mayer’s Maxim.” Metro Goldwyn Mayer’s boss Louis B. Mayer is credited with the dictum: “When I want to send a message, I’ll call Western Union.” Mayer objected to “message movies” because he didn’t think they were good box office.

This space has taken a different tack, objecting to Hollywood message movies a posteriori, doubting not their entertainment value but rather their veracity. The problem is that Hollywood producers, directors and screenwriters cannot keep their thumbs off the scales. Since reality stubbornly refuses to accommodate itself to their warped vision, they film their “true stories” by lying about the facts in order to satisfy the audience and themselves simultaneously. The problem is so endemic that the only safe approach is for viewers to assume that filmmakers are lying until proven otherwise.

This tempts us to the conclusion that truth and movies are mutually exclusive. We’re congenitally suspicious of entertainment-oriented Hollywood films. For example, we know that action movies defy the laws of physics and suspense movies end happily whereas real-life suspense often does not. If movies that advertise “This is a true story” are almost certainly lying to us, where can we hope to find a semblance of reality?

The surprising answer is that some of the most entertaining movies from Hollywood’s Golden Age, movies made with no apparent thought for social relevance, occasionally offer stunningly accurate illustrations of history and economics. This forms the basis for an empirical dictum called the Movie Law of Inverse Relevance: The more entertaining the movie, the greater the likelihood of encountering truth within it; the more socially conscious the movie, the less likely it is to be true.

Boom Town: More Than Just Another Hollywood Potboiler

Oil has been the lifeblood of life on Earth for over a century. You’d never know it from depictions of the oil business on screen, which have tended to treat petroleum as a commodity freighted with tragedy and the oil business as populated by psychotics. Yet it was not ever thus.

The 1940 movie Boom Townwas one of the biggest box-office movies in the year after Hollywood’s legendary year of 1939. It starred Clark Gable, the “King of Hollywood,” and Spencer Tracy, winner to consecutive Best Actor Academy Awards in 1937 and 1938. The female lead, Claudette Colbert, had teamed with Gable in 1934’s It Happened One Night, the first film ever to win Academy Awards in the five major categories – Best Picture, Best Actor, Best Actress, Best Director and Best Screenplay. This was their “reunion” film, long-awaited by movie audiences throughout America. As if this blockbuster combination of stars weren’t enough to assure the film’s success, they were joined by Hedy Lamarr, perhaps the most beautiful woman in the world, and Frank Morgan, a scene-stealing character actor and eventual Oscar nominee in both the Best Actor and Best Supporting Actor categories.

The movie’s formidable assemblage of talent was enough to lure people into the theaters and keep them in their seats. But the script, by Gable’s favorite screenwriter, John Lee Mahin – based on a story by another Gable favorite, James Edward Grant – told more than the usual Hollywood tall tale. It told a true story of the oil business and the men who made it work – and a government that tried to torpedo it.

The Plot

The time is 1912. The place is a dusty Texas town called Burkburnett, which some spring rains have turned into a mudhole. Two men are crossing the muddy street from opposite directions on a narrow, rickety bridge of planks built from two-by-fours. They meet in the middle. The tall one (Gable) addresses the other (Tracy) as “Shorty” and cordially invites him to stand aside, knowing this would entail a side trip into the mud. This meets with a stony refusal. The two trade insults and the impasse is about to escalate into fisticuffs – then gunfire splits the air when a man flees the nearby saloon with a deputy sheriff in hot pursuit. The two men abandon their dignity and leap head-first into the mud rather than risk meeting a stray bullet.

Thus is born a famous friendship between “Big John” McMasters and “Square John” Sand. The two share more than a first name. They are both wildcat oil prospectors, freshly arrived in town thanks to the discovery of oil that has turned a tiny Texas fly-speck into a legendary boom town. They have both staked out a likely looking stretch of ground outside of town. They pool their meager assets and find they lack sufficient funds to purchase drilling equipment and supplies. McMasters allows Sand to choose the precise spot to “sput in” (drill) but promises to produce the necessary materiel. At his urging, the two stage a skit to deceive a local equipment dealer, Luther Aldrich (Frank Morgan) into supplying the necessary stuff in exchange for a small share in their well which, they assure him confidently, is a sure thing to succeed.

The well fails. Sand reluctantly admits that McMasters’ choice of drilling location would have been better. Now the pair must raise their roll again – after first fleeing town one jump ahead of that same sheriff’s deputy whose bullets they had earlier dodged, one Harmony Jones (character actor Chill Wills). The film skillfully uses montage to concisely depict the succession of odd jobs and travails that eventually takes them back to Burkburnett. They have enough money to pay for tools and equipment now, but not enough to pay off the debt for their previous dry hole.

Undaunted, the two bluff their way past Luther Aldrich a second time. They’d be crazy to try the same routine on him again, wouldn’t they? This time they’ve really got a sure thing, and they’ll increase his stake as an incentive to agree to an ownership share against what they owe. Luther is imprudent enough to agree, but not completely crazy; he dispatches Harmony as a security guard over their claim to make sure they don’t run out on him a second time. McMasters gives Sand the naming rights over their claim and Sand chooses “Beautiful Betsy” in honor of the girl he left behind back East.

As the drilling progresses, the restless McMasters leaves Sand on duty at the rig one Saturday night and goes into town to relieve the monotony. He bumps into a proper Eastern girl (Claudette Colbert) who has journeyed to Burkburnett to meet a friend. She and McMasters experience the classic Hollywood “love at first sight” evening. By morning, they are married. Sand returns to their boarding house to break the news that their gusher has come in and the time-honored plot device of unknown identity unfolds – Colbert is Betsy Bartlett, the woman Sand is expecting to marry, while Sand is Betsy’s best-friend-who-she-doesn’t-feel-that-way-about. McMasters, in true Gable fashion, steps forward and invites Sand to take a poke at him. But Sand quietly asks Betsy if McMasters is the man she really wants. Upon verifying the truth, he calmly leaves the scene, implicitly giving the two his blessing. “Honey,” McMasters concludes admiringly, “that is a man.”

The movie’s next few minutes set the scene for the rest of the film. The audience learns that McMasters’ love for Betsy is true but equaled by his love of the chase and conquest. Betsy’s real rival is not other women but oil; women only tempt McMasters when he is tied down and prevented from exercising his talent for serial exploration and exploitation of oil. And Sand remains faithful to Betsy, his romantic ardor now sublimated into friendship. The movie resolves into the kind of romantic triangle that only Hollywood could dream up. McMasters and Sand make and lose a succession of fortunes and their friendship is broken and mended repeatedly. The cause of these episodes is Betsy; Sand will not allow McMasters to abuse Betsy’s love.

When McMasters meets the illegally lovely Karen Vanmeer (Hedy Lamarr), the two are drawn to each other. Vanmeer is a skilled business analyst who wants to acquire McMasters in a hostile takeover from his wife. Sand won’t permit it. He proposes marriage to Vanmeer and offers her lavish financial terms including a draconian divorce settlement that would enrich her. Astonished, she mutters, “I see. Greater love hath no man than…”

Eventually, the long-delayed fisticuffs between McMasters and Sand explode. The movie culminates in a battle over control of the oil business.

The plot summary highlights the entertainment value of Boom Town. It says nothing about the movie’s contributions to our understanding of history and economics.

Boom Townas History

There is no narrative or visual prelude assuring us that “this is a true story.” Nevertheless, there is no movie that tells the story of wildcat oil exploration and drilling in the early 20th century as vividly and truthfully as Boom Town. Burkburnett was a real Texas boom town where oil was discovered in 1912. The discovery turned the town upside down in just the manner portrayed in the movie.

How many movies shown today are as relevant to life today? The Burkburnett of 1912 is uncannily like parts of Texas and North Dakota today – scruffy, muddy, starved of infrastructure, crowded with roughnecks, troubled with petty crime but bursting at the seams with opportunity and unbridled vitality. Both today and a century ago, this was a frontier region – not in the geographic sense but in an economic sense. This was entrepreneurship at its most raw and visceral, not something out of business school.

Perhaps the most neglected feature of Boom Townis the role played by this scenic backdrop. The movie is so dominated by its multiple stars and impeccable supporting cast that the audience is unconscious of the background. We feel it acutely nonetheless. The critic James Shelley Hamilton wrote long ago of the elements that make up “the feet a movie walks on.” Boom Town owes its jaunty strut to its brilliantly observed picture of the life of an oil town, whether in Texas, Oklahoma, Pennsylvania, California or Central America.

Boom Town as Economic Theory and Logic

Boom Townshould be shown in university courses on economic history and theory. We could leaf diligently through reference sources like Halliwell’s Film and Video Guide or Leonard Maltin’s Movie Guide without encountering another movie so rich in economic meaning.

The physical, geologic circumstances of petroleum evolution and extraction create an age-old problem of economic investment and consumption. In the movie’s final third, McMasters discovers that the refining of oil offers even more scope for entrepreneurial skill and profit than does exploration and production. Characteristically, he charges into the market full-bore, determined to risk going down in flames in order to become a leader. He forms a partnership with wily veteran Harry Compton (character actor Lionel Atwill). But when Sand and McMasters feud over the latter’s treatment of Betsy, Sand enlists Compton in an effort to break McMasters by double-crossing him. In retaliation, McMasters calls on his countless contacts among the country’s small wildcatters, persuading them to forsake the partnership of Compton and Sand and sell their oil to him instead.

McMasters uses an argument that must have seemed obscure to most movie audiences – and probably still does. But knowledgeable industry observers and economists will recognize within it a time-honored conundrum. “Sand will make you force-pump your wells,” he insists to the wildcatters. “Pretty soon you’ll be looking at dry holes. Go with me and I’ll keep you pumping years longer.” Hollywood was – and still is – famous for dishing out all manner of baloney in the service of its plots. But this wasn’t the usual nonsense.

According to orthodox geological theory, petroleum is created by fossilized deposits that crystallize in the ground over many millennia. These deposits eventually liquefy and congregate in underground reservoirs called “traps.” That term is particularly apt when the liquid is literally trapped within rocks like the shale or sandstone that now supplies much of the oil being produced in the northern United States and Canada. Oil exploration has traditionally consisted of the location, identification and confirmation of these traps.

But just locating oil isn’t enough; that’s just the beginning of the process. Getting the oil out of the ground was no picnic in the early 20th century. Drilling holes in the ground using percussive methods – e.g.; knocking holes with heavy machines – enables the oil to be reached and exhumed. Raising it to the surface isn’t like dropping a dipper in a pail of water lifting it to your lips. It takes great physical persuasion to accomplish. McMasters’ use of the term “force-pumping” referred to the practice of pumping compressed air down the drilling shaft to force the oil to the surface. This term involved a certain amount of time, trouble and danger. But the worst thing about it was the tradeoff it implied. Its use eventually made the trap unproductive – not because the oil was fully extracted but instead because the remaining oil could no longer be withdrawn from the ground. Given the technology currently in use, it was stuck there. We know it was there, or at least those in the know did. But it didn’t count as “reserves,” because “proven reserves” only consisted of oil that was actually extractable. Depending on particular circumstances, this might be anywhere from 30% to 60% of the original petroleum deposit in the trap.

These facts of geologic and economic life are particularly germane today. The U.S. economy today is getting a shot in the arm from oil exploration and production in Texas and North Dakota, not to mention the oil coming from our longtime leading supplier to the north, Canada. Strictly speaking, this oil comes not from “new” discoveries but from long-existing fields and rigs that only recently became economically useful. New techniques of “enhanced recovery” like horizontal drilling (over fifty years old but newly profitable) and “fracking” have given these sources a new lease on life – which aptly describes the effect the oil has had on the America economy.

The wildcatters McMasters and Sand fought over faced a classic economic dilemma. They could pump more oil now and a lot less later or pump somewhat less now and somewhat more in the future. Sand himself alludes to this in courtroom testimony by calling McMasters a “conservationist… although he didn’t know it.” We are taught – conditioned is a better word – to view “conservation” as a good thing, as the antonym of “waste.” That is simply not true, though. There is no inherent, technological logic of efficiency that allows us to prefer consumption in the future to consumption now; only human preferences and purposes can resolve this issue.

That is where the interest rate enters the picture. Interest rates balance the supply of saving funds and the demand for investment funds – that is, the desires of those who want to consume more in the future and those who want to produce things to be consumed in the future. In pure theory, there is an optimal rate of extraction for natural resources such as petroleum that depends on the level of interest rates. Relatively low interest rates suggest that people want to consume lots in the future and that we should economize on consumption now and concentrate on production for the future. High interest rates encourage current consumption and discourage saving and investment geared toward the future.

The movie presents conservation in a whole new lightas governed by economics. Boom Towndoesn’t present this relatively sophisticated analysis explicitly; it just treats McMasters as a hero for promoting “conservation.” The implications of this, however, are unprecedented.

For one thing, Sand suggests that McMasters is acting entirely in pursuit of his own profit, yet his actions promote the general interest. That is, he is providing an operational definition of Adam Smith’s famous invisible hand at work. Celebrations of Adam Smith in Hollywood movies occur roughly as often as Halley’s Comet visits our solar system. For another, conservation in the movies is practiced by environmentalists or mavericks or nut jobs that are portrayed as really smarter than successful people – but never by successful businessmen. In 1940 as today, businessmen weren’t allowed to act nobly or altruistically within the framework of a movie unless they were portrayed as deliberately scorning profit.

Compton matter-of-factly uses the antitrust laws as a tool to harm his competitor, McMasters, thus serving his own business advantage. When Compton (Atwill) muses, “I wonder what the federal government would say about McMasters’ activities…,” and we then witness McMasters’ trial for violating the provisions of the Sherman Antitrust Act, it is a seminal movie moment. It would be over twenty years before radical historian Gabriel Kolko would advance his famous theory of “regulatory capture,” which was eventually co-opted by the right wing as a key plank in its opposition to the regulatory state. Kolko’s research showed that the first great regulatory initiative, the Interstate Commerce Commission (ICC) in 1887, was ushered in by the corporate railroad interests it ostensibly was created to regulate. The railroad business was beset by the age-old bugbear of industries with high fixed costs and low variable costs: price wars among competitors. The ICC cartelized the industry by raising prices and ending the price wars. Subsequent research has shown that antitrust enforcement has specialized in suppressing competition by concentrating on protecting competitors from competitive damage rather than safeguarding the competitive process itself.

McMasters successfully persuades wildcatters to forsake Compton and Sand in his favor. Yet his actions are criminalized as “monopolization.” It is true that orthodox economic theory describes a monopolist as one who “restricts” output in his own interest. But his ability to do that derives from restrictions on entry into the industry. The oil business is legendary for the absence of just those restrictions; indeed, that is what Boom Town is all about. Even the smallest wildcatter, whose fraction of total oil output is so tiny as to foreclose any influence on the market price of oil, still faces a problem of optimizing the time structure of oil extraction and sale. This problem is absent from orthodox theory only because that theory is timeless; it foolishly treats production and consumption as though occurring simultaneously in a single timeless instant.

In the event, the movie and the jury both vindicate McMasters by finding him innocent of monopolization. Unfortunately, he has spent so much money in his legal defense that he is now broke again, for what seems the umpteenth time. And this is yet another sophisticated economics lesson: somebody can be right and win in court, yet still be defeated by the magnitude of legal expenses.

Entertainment Wins Out in the End – as Usual

We are seemingly set up for a downbeat ending. But not in 1940, not when Clark Gable, Spencer Tracy and Claudette Colbert are heading the cast. At the fadeout, we find ourselves on a California hillside, overlooking a valley. McMasters, Betsy and Harmony and broke but happy, living out of a trailer and working the one small section of oil property that McMasters has left after his devastating brush with antitrust law. Who should come wandering over the hill but Luther Aldrich and John Sand? Aldrich has persuaded Sand to invest in the property as a devious scheme to reunite the old partners. Grudging at first, they spar over where the oil structure is located and where the rig will sput in. They turn their aggressive humor on their old target; Aldrich will naturally float them the tools and equipment in exchange for an ownership share in the property, in lieu of cash payment. “Oh, no!” Aldrich exclaims. “You two go broke on your own this time. There’s a dry hole in every foot of this place.”

As the background music score swells, the four principals stroll arm in arm toward the camera, grinning happily. “What’s the name of this sucker’s paradise?” demands Aldrich. “They named it after some old guy called Kettelman,” McMasters explains nonchalantly. “They call it ‘Kettleman Hills.'”

“Kettleman Hills?” Aldrich scoffs. “Doesn’t even sound like oil.”

The 1940 movie audience knew what today’s audience, for whom American history is a lost pastime, never learned. The gigantic Kettleman Hills discovery was one of the greatest oil booms of its day. McMasters, Sand, Aldrich and Betsy will soon be richer than ever. It’s happy-ending time for the cast of Boom Town.

The Moral

Metro Goldwyn Mayer never set out to make Boom Town a “relevant” movie, slake an executive’s social conscience or satisfy a star’s altruistic longings. If anybody associated with the project sensed its historical or economic uniqueness, it was a well-guarded secret. Its singular goal was entertainment, one that it fulfilled admirably.

The bleached bones of failed socially conscious and message movies litter the pages of Variety and other trade publications. The lies told by the numerous “true stories” and exposes await exposure by an investigator with the intestinal and anatomical fortitude for the job. Buried within the boundless entertainment of gems like Boom Town are the real lessons Hollywood can teach us about economic history and theory, freedom and free enterprise.

The relationship between socially relevant pretension and truth in movies is inverse. The more relevance, the less value; the less relevance and the more entertainment, the more truth.

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.