May 15, 2015

Hollywood's economic ignorance, part four: The hoarding one percent

Furious DRebel Blogger
 

So far we talked about why Hollywood is ignorant of economics, and how it can lead to dysfunctional cashless utopias and sinister corporate dystopias where the corporations in question had really bad business plans. Today we look at the rich, who are always at the centre of all the trouble in many science-fiction movies. They’re the ones making plagues, unleashing deranged androids, or as the film Elysium states, sucking the wealth out of the world like a vampire while hoarding all the advanced technology, especially medicine.

The whole premise of the film is that the rich have abandoned a polluted and overcrowded Earth to live in the titular community. That community, a space station, is where the idle rich can live in luxury, seemingly forever, thanks to the advanced medical technology that can keep them young and healthy indefinitely.

Our hero, forced to live in poverty despite being a skilled tradesperson, must somehow take over Elysium to save the lives of all the sick poor people on the surface by freeing the seemingly magical medical technology that the Elysiumites are hoarding.

While the film had a big name cast, the premise has bigger holes than the German battleship Bismark just before it sank.

First is the idea that the rich somehow get rich from the poverty of others.

Now people may point and say: “Look, the gaps between the very richest and the very poorest is wider than it’s ever been!”

But that’s just scratching the surface of the tip of an iceberg. In reality, things are much more complicated.

Yes, the very rich are way richer than the very rich of the past in strict numerical terms. However, in the real world, the standard of living of the poor has skyrocketed alongside the incomes of the rich.

Consider the computer.

When it was first invented only the governments of the biggest, richest nations could afford to own a few computers each, that at most had the combined power of a digital watch from the 1990s. Today, you can get a computer that exponentially dwarfs the powers that sent men to the moon for just a few hundred dollars.

Then consider air conditioning, colour television, cars, and devices for playing music from radios to iPods. A few decades ago those items, or items like them, were only available to the most wealthy people or institutions, but are now available to everyone, even to large swathes of the population that we consider “poor.”

How did that happen?

You’ll have to bear with me, because I will get back to it in a second.

Okay, now that we’ve shown that income isn’t an accurate measure of wealth or poverty let’s look at economic model followed by the world of the science fiction film Elysium. The point of the economy is that 99% of the population live in squalor like Soweto in the 1980s, while the wealthy 1% live, potentially for centuries, in Elysium in luxury beyond the imagination of those below. Meanwhile mercenaries and robots keep the poor, like the movie’s hero played by Matt Damon, from streaming into Elysium and helping themselves to the station’s magical health care.

Now this premise can only work if two fundamental truths about economics didn’t exist.

1. For the rich to get rich, they need to provide a good or service that people want, moreover that those same people, called customers, be willing and capable of paying for it.

2. When it comes to wealth, what comes up must come down.

Sadly, too few people understand the mechanics of the so-called “dismal science” to realize that the economic system the filmmaker Neill Blomkamp presents would actually make the story’s premise impossible. The first problem comes from the fact that those on Elysium seem to be getting richer by making the lives of those on the surface worse.

How?

The surface world is shown to be so poverty stricken even skilled tradespeople have to live in squalor, who is buying what the Elysiumites are selling?

Also, it’s an immutable law of economics that no one maintains the same level of income for their entire life. In fact, it’s statistically more likely for someone to be born in the bottom 5% (the most poor) to die of old age in the top 1% (the most rich) than it is to be born in the top 1% and stay there for their entire lifetime.

Such a problem would be exacerbated by the premise that the people living in Elysium are more or less immortal. Eventually their income will go down, for any number of reasons, chief being that there’s too much poverty among what is supposed to be their customer base. Then what? Are they sent back to the surface, cast out an airlock, or just shot and their bodies processed into Soylent Green and served as hors d'oeuvres?

And let’s not forget, Elysium would have bills that need to be paid. Resources would be necessary to build, maintain, and expand the station for its growing population, feeding and tending to the residents, and then they have to pay, feed, and tend to the mercenaries that keep the lumpen proletariate on the surface of Earth.

Seems like it would be in the best interests of people in Elysium to do something to improve the lives of those on the surface and keep the money flowing. That way it doesn’t matter where they live.

Now let’s get to the notion of the station’s magical medical technology. It’s capable of curing once terminal diseases in a matter of minutes, and is so wonderful the people on Elysium keep it to themselves because the filmmakers think it’s a way they can get rich.

That’s just stupid.

It is possible to get rich selling only to the already wealthy, however, it has limits. Those limits can ultimately cripple a business. Let’s compare the car companies Rolls Royce and Ford Motors.

Rolls and Royce made cars for the wealthy elite.

Henry Ford made cars for average consumer, even going to the point of raising his own employee’s wages, so they could afford to buy his cars.

Rolls and Royce got rich.

Henry Ford got exponentially richer.

The Rolls Royce car company usually operated on razor thin profit margins creating drastic feast famine cycles that they tried to beat through military contracts for everything from armoured cars to airplane engines, which also had thin profit margins. Those cycles and thin margins resulted in the company’s inevitable financial collapse and takeover by the British government in the 1970s.

The Ford Motor Company became one of the largest car companies in the world. The company didn’t take any government assistance during the Great Depression, and again refused bailouts during the 2008 financial crisis.

So which business did better?

The one that made it's product affordable to as many people as possible.

It’s proof that no one gets to the peak of wealth and power mountain by catering only to other wealthy and powerful people. There just aren’t enough of them to sustain a truly successful business. That’s why those one-time luxury items I mentioned early, are now within the reach of the majority. It’s much more profitable to be accessible to the masses.

Now you’re probably wondering why I’m talking about cars when the thrust of the film’s premise is about medicine. About how the free market in medicine in the USA has resulted in only the rich being able to afford quality health care.

Well, there isn’t a free market in the USA for health care.

Health insurance regulations mean that people can only buy insurance from companies based within their home state. Those regulations also ensure that only a small number of companies can operate in each state, and must offer similar coverage plans for similar prices. There’s no undercutting the competition to offer cheaper products like high-deductible catastrophic insurance to young people who make up the bulk of the uninsured, who may only want protection if they are hit with a devastating illness or injury. That’s because the states set the prices and they set the level of coverage.

This also means that the companies must be local, which means they can’t “lay off” the costs of states where “Deep Fried” is considered a Food Group on the money they would have saved on health insurance plans sold in states where granola and jogging are the official dish and past-time.

Then there are the drugs.

It costs literally billions of dollars, and years, if not decades, of time, to develop a new drug. Even then it’s still a crap-shoot where the pharmaceutical company can end up with nothing for their investment, or worse, something that does more harm than good.

Once the drug is developed, billions more dollars, and years more time must be spent getting approval for the drug or piece of technology from the government. Safety and efficacy are no guarantee of passing government inspection, especially if the inspectors are under political pressure after some sort of blunder or scandal. It’s just easier for the regulators to say no, and leave the drug company with nothing but debts.

Those debts have to be paid, and the costs have to be passed onto the price of the drugs that did pass.

Then they have to do it again with other governments and their regulatory bodies.

Even if they get a big “yes” from every country, they still have only a set number of years to get the drug to pay for itself before its patent goes out and everyone can just copy it without investing massive sums in the research and development.

During that time many of the countries the drug company has to do business in let their governments do the buying. Often those governments set the prices they’re willing to pay for drugs by regulatory fiat, or just not buy the drug at all, this can leave the maker with only a small profit, or even a bad loss.

Those shortfalls have to be made up for somehow, or the company goes under and the private sector has to stop developing medicine and medical technology. Then come in the lawyers, perfectly willing to blame doctors, drug companies, and new medical technologies for their client’s problems whether the cause is real or imagined. All the plaintiff’s lawyers need is a sympathetic jury to take the sales pitch that the rich drug companies and doctors can afford to lose a few million to win the case. That’s why most big money class action lawsuits are held in a small cluster of counties in the rural American South.

All this adds up and it results in high medical costs.

So let’s put some practical economic logic to Elysium’s premise. That premise is that there is technology capable of curing all diseases, including cancer, in a matter of minutes, but it is unavailable to all but the super-rich who hoard it. If so, it's a terrible business model since the inventors could be raking in hundreds of millions, if not billions, of dollars a year in profits through quick-treatment clinics even if they only charged patients $5 a pop.

That way they can make fat profits, keep paying their way on Elysium, and have to pay a lot less for mercenaries and robot guards. A point the movie inadvertently proves by revealing that Elysium has hundreds of shuttlecraft, fully equipped and ready to cure all the world’s medical ills just sitting idle. Those machines are not curing anyone, and they’re definitely not making anyone any money.

Why aren’t they?

Because the rich hoard stuff, don't they?

Only if your education in economics was watching Scrooge McDuck flop around the gold in his money bin. Hoarding may sound like a sound strategy for the wealthy, but it has a drawback.

Hoarding, be it money or semi-magical healing technology, doesn't work.

You could hoard your money, but if it's just sitting in a bin doing nothing, you will eventually run out. Money in the bank isn't just sitting in a vault waiting to be spent. It's being invested in loans or the stock market, where it earns interest, and grows. Thus allowing the rich to pay their bills, and live high, while creating new wealth, which creates new jobs, etc...etc...

There's no point to hoard, because it's counterproductive.

I’m all for the suspension of disbelief, but in order for it to work there has to at least be a scintilla of reality in it.

 

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Comments
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commented 2015-07-22 05:53:47 -0400
Furious D, I rather liked these columns. I’m wondering, did you ever watch Babylon 5, and if so, what did you think of the economics therein?
commented 2015-07-22 05:53:47 -0400
Furious D, I rather liked these columns. I’m wondering, did you ever watch Babylon 5, and if so, what did you think of the economics therein?
commented 2015-05-16 10:08:01 -0400
Interesting series. But that was a long way to go to arrive at ‘hoarding is bad’. However, on a personal note, I have been, with an eye to the benefits it will bestow on society, liberally redistributing my wealth on electricity and taxes for some time. Now I understand what Ontario’s Liberals have been up to. They are not spending Ontario into bankruptcy. They have been encouraging citizens to refrain from holding onto their wealth to purchase food. They have been destroying the average Ontario tax payer to stimulate the economy!

I just don’t understand why the Liberals look and act like those ‘Alien’ thingys.