Sunday, March 25, 2007

Economics in Trading Places

This Tuesday a colleague and I will be showing the Eddie Murphy/Dan Akroyd movie Trading Places to our economics classes. In addition to this being a pretty good comedy, it also has some fantastic economics in it. In fact, I think it's more densely packed with economics than any other film. Topics covered in the film include:

-The importance of private property for stewardship: When Billy Ray Valentine doesn't believe the house is his, he breaks a valuable vase. When he does believe the house is his, he gets angry at partygoers for damaging it. Private property is important because it gives people an incentive to protect and conserve valuable goods and resources.

-Property Rights and Credit: When Winthorp tries to sell a valuable watch at a pawn shop he is unable to demonstrate title--that is, he can't prove it's his. Therefore he is unable to sell it for anything close to its true value. The risk averse pawn shop owner adjusts his payment downward to account for the risk of prosecution.

-Futures Markets: The market for Frozen Concentrated Orange Juice futures is central to the film's resolution. A futures contract is a promise to deliver a good or service at some point in the future at a price agreed upon now. Winthorp and Valentine profit by making everyone think that the price of orange juice is going to go up. In fact, they know it will go down. So they sell frozen concentrated orange juice futures that they don't even own at high prices, and then once everyone finds out that orange juice prices will be low "cover their position" by buying cheap futures contracts. It's brilliant. Of course, it only works because they have inside information (and because they have ensured that their rivals, the Duke Brothers, have false inside information). Futures contracts are a very valuable mechanism for incorporating expectations about the future into current prices.

-Racial discrimination is costly to employers: Employers who make personnel decisions on the basis of the race of their employees, rather than their productivity, do so at the expense of profits. In the case of the film, the Duke Brothers lose everything to indulge their taste for racism. This is not to say that racism does not or cannot exist; it does, of course. The point is that employers who act on their racist preferences forego some profits.

I could elaborate on these and a couple other points, but instead I'll just encourage you to see the film. There are a couple scenes of completely gratuitous, unnecessary, and tasteless nudity, but it's an 80's comedy, so I guess it's to be expected.

(Full disclosure: Art Carden and I have an educational note under consideration at the Journal of Private Enterprise on the economics in this movie. This blog post briefly discusses some of the points which are discussed at length in the article.)