Looking for a lesson in economic behaviour? Put down your textbooks, and head off to the cinema or video store.
I thought we had a great night at the cinema on Saturday. You laughed when I told you we were going to see A Beautiful Mind . But I thought you should find out what life with a great economist was like. I know John Nash was a touch schizophrenic, but most economists are OK, and anyway the film showed how even someone with a mental disability could produce great work when supported by the love of a good woman.
You looked a little tired afterwards while I was explaining exactly what was meant by a Nash equilibrium. So I thought I’d fill in some of the details. You remember that evening we went to a festival of film classics, and saw James Dean’s Rebel Without a Cause. Its highlight is when Dean and his rival both drive their cars towards a cliff and the one who drops out first is chicken. Dean jumps at the last minute and the other car goes over the edge.
As I was saying when the person in the next seat elbowed me in the ribs, the really interesting thing about Rebel Without a Cause is that it doesn’t have a Nash equilibrium in pure strategies. We’re looking for a situation where both players are employing their best strategy, given the strategy of the other player. Obviously the guy who went over wasn’t playing his best strategy. He should have jumped a second after Dean. But then Dean’s strategy wouldn’t have been best for Dean. He’d have been chicken, and lost his girl. So he should have hung on – and so on.
It’s a real life problem. It’s why we often find firms pursuing competitive battles long after it is certain that all the parties will lose on the deal.
Generally, economics lessons from the cinema work better when they’re not intended. Your nephew and niece seemed to get impatient at Christmas when I rewound the video to the scene where Mary Poppins takes the children down to the bank. Still, you’ve got to give credit to the people who made that film. They explain compound interest, reserve requirements and financial market contagion in less than five minutes. But best of all is when Mary sings ‘when gazing at a chart that shows the profits up, their little cup of joy should overflow’. You’ve got to read it with the preceding line ‘they must feel the thrill of totting up a balanced book, a thousands ciphers neatly in a row’. That’s where Enron came unstuck.
Hollywood made It’s a Wonderful Life to show how capitalism functions in small town America: James Stewart explained how the depositors couldn’t get their money back from the Savings and Loan because it is all invested in their neighbour’s houses. Perhaps it is time for the follow up. In It’s Still a Wonderful Life, Michael Douglas could explain how the depositors can’t get their money back from the Savings and Loan because the folks in charge have stolen it, but the Federal Government will reimburse them anyway.
Still, at least Hollywood understands how markets work. Ealing Studios made a real howler when they tried a send up of capitalism in The Man in the White Suit. Alec Guinness has this fabric which never wears out or gets dirty. Management and workers get together to fight the threat to their profits, and jobs.
It’s the old everlasting light bulb fallacy. A monopoly won’t suppress a new innovation because they can charge more for it. And a competitive market encourages new innovations because that is what gives each company a competitive edge. In business, it never makes sense to fight the future. I guess that’s why Ealing Studios went to the wall. They thought business was like I’m All Right, Jack, and weren’t up with the latest management thinking.
But the best film to star an economist is still Lorenzo’s Oil. This is the true story of a World Bank economist, Augusto Odone, a World Bank economist, whose son was diagnosed with a rare and incurable disease. The more Odone investigated the relevant medical research, the more depressed he became. The difference between economic research and medical research is that doctors tend to rely only on their own experience, and attach too little significance to the findings of other people. Since economists don’t have much experience of anything, they don’t have this luxury, and are more ready to analyse history and data.
And it paid off with Lorenzo’s oil. Through extensive work in libraries, Odone found the cure for his son’s disease that a generation of medics had missed. And in the film he got to be married to Susan Sarandon. Not bad for an economist!
You told me that A Beautiful Mind and Lorenzo’s Oil were the only films starring economists. Well, I’ve tracked down another one. It’s a war movie, called The Black Sheep of Whitehall. A Nazi agent who disguises himself as an economist to sabotage international trade negotiations! Will Hay has the job of unmasking the economist before he destroys the civilised world. Fortunately, he succeeds.