Movies that understand economics #5 and #6 Other People’s Money and Pretty Woman

Movies that understand economics #5 and #6 Other People’s Money and Pretty Woman

Now I have covered both of these movies before, but Pretty Woman and Other People’s Money, so no need to waste your time on a summary of the plots, cover one of the most important economic concepts that people tend to misunderstand: Creative Destruction.

In general, creative destruction is when a company that is not producing as well as its competitors is removed, for one reason or another, from the economy, and the resources it once had are taken up by more innovative and productive members of the economy.  In more practical terms it is when a company begins to fail and stops making profits, when it no longer has any new way to innovate and refuses to change with a changing economy, that investors or venture capitalists come in, buy up the company and sell the pieces to companies.  In short liquidation.

And never have I seen such a perfect description of what economists call creative destruction than in Other People’s Money:

Amen. And amen. And amen. You have to forgive me. I’m not familiar with the local custom. Where I come from, you always say “Amen” after you hear a prayer. Because that’s what you just heard – a prayer. Where I come from, that particular prayer is called “The Prayer for the Dead.” You just heard The Prayer for the Dead, my fellow stockholders, and you didn’t say, “Amen.” This company is dead. I didn’t kill it. Don’t blame me. It was dead when I got here. It’s too late for prayers. For even if the prayers were answered, and a miracle occurred, and the yen did this, and the dollar did that, and the infrastructure did the other thing, we would still be dead. You know why? Fiber optics. New technologies. Obsolescence. We’re dead alright. We’re just not broke. And you know the surest way to go broke? Keep getting an increasing share of a shrinking market. Down the tubes. Slow but sure. You know, at one time there must’ve been dozens of companies making buggy whips. And I’ll bet the last company around was the one that made the best goddamn buggy whip you ever saw. Now how would you have liked to have been a stockholder in that company? You invested in a business and this business is dead. Let’s have the intelligence, let’s have the decency to sign the death certificate, collect the insurance, and invest in something with a future. “Ah, but we can’t,” goes the prayer. “We can’t because we have responsibility, a responsibility to our employees, to our community. What will happen to them?” I got two words for that: Who cares? Care about them? Why? They didn’t care about you. They sucked you dry. You have no responsibility to them. For the last ten years this company bled your money. Did this community ever say, “We know times are tough. We’ll lower taxes, reduce water and sewer.” Check it out: You’re paying twice what you did ten years ago. And our devoted employees, who have taken no increases for the past three years, are still making twice what they made ten years ago; and our stock – one-sixth what it was ten years ago. Who cares? I’ll tell you. Me. I’m not your best friend. I’m your only friend. I don’t make anything? I’m making you money. And lest we forget, that’s the only reason any of you became stockholders in the first place. You want to make money! You don’t care if they manufacture wire and cable, fried chicken, or grow tangerines! You want to make money! I’m the only friend you’ve got. I’m making you money. Take the money. Invest it somewhere else. Maybe, maybe you’ll get lucky and it’ll be used productively. And if it is, you’ll create new jobs and provide a service for the economy and, God forbid, even make a few bucks for yourselves. And if anybody asks, tell ‘em ya gave at the plant. And by the way, it pleases me that I am called “Larry the Liquidator.” You know why, fellow stockholders? Because at my funeral, you’ll leave with a smile on your face and a few bucks in your pocket. Now that’s a funeral worth having!

Creative destruction is often depicted by people who don’t understand economics as evil.  But as shown in both movies, the victims of liquidation are not just randomly picked companies that are targeted just because some evil businessman wanted to hurt someone.  In both films it is made clear that companies that become victims of the kind of takeovers that end in liquidation are not the victim of the investors and liquidators…but victims of failing to change with the time, victims of bad managements, victims of not adapting as any business must to survive because, with the exception of Coca-cola, no company has discovered a recipe for success that should never be changed and subject to innovation.

And both speak to the fact that the goal is not just to hurt people (in Other People’s Money, as shown above he points out how creative destruction leads to investments that will benefit people, and in Pretty Woman in describing how the employees are not just going to be thrown out).

And while creative destruction usually works by allowing more productive companies to use the equipment, land, and human capital more effectively, both of these movies show that it can take other forms.  In Other People’s Money it is in the form of changing the operations of the company to fit the new economy, in Pretty Woman is it putting the company under new and more competent management (don’t kid yourself, that’s what happened—old management was destroyed and new creative management under Richard Gere’s company was taking over, if the owner’s name on the letter head wasn’t changing is irrelevant).

Economies are a lot like ecosystems. In both the rule is adapt or die.  And in both you need carrion feeders who can allow the dead material to work its way back into the cycle of birth, death and rebirth.  Some people who don’t understand his important function may view the work of liquidators in economics, or carrion feeders in nature as repulsive, but only because they don’t understand the valuable and needed process that they perform. If you do not have something that can take the dead and dying companies and move their resources to where they can be of more help (like, oh, by saying this or that company is too big to fail, and thus preventing it’s needed death) you only get systems that continually get worse and worse and a drain on the economy and as it so happens the taxpayers and it will fail again given time because it did not change – sometimes smaller works out better – more competition more innovation.