Cyril Morong, an Associate Professor of Economics at Northeast Lakeview College in Universal City, Texas, sent me a letter that he had sent to the Wall Street Journal. The Journal decided not to publish it and I got Cyril’s permission to run it here. His letter was in response to an interview that Tunku Varadarajan did with Dr. Jay Bhattacharya and Professor (not Mr.) Martin Kulldorf in the Journal. It’s titled “Epidemiologists Stray from the Herd,” WSJ, October 23, 2020. (October 24-25 in the print edition.) The paragraph he singled out was this: Mr. Kulldorff says the Covid-19 restrictions violate two cardinal principles of public health. First, “you can’t just look at Covid, you have to look holistically at health and consider the collateral damage.” Among the damage: a worsening incidence of cardiovascular disease and cancer and an alarming decline in immunization. “People aren’t going to the doctor,” he says. Dr. Bhattacharya also points to the suspension of tuberculosis programs in India and of malaria-eradication programs elsewhere. Mr. Kulldorff’s second principle: “You can’t just look short-term.” Dr. Bhattacharya says we will “be counting the health harms from these lockdowns for a very long time.” He says anti-Covid efforts are sowing the seeds of other epidemics: “Pertussis—whooping cough—will come back. Polio will come back because of the cessation of vaccination campaigns. All these diseases that we’ve made substantial progress in will start to come back.” Cyril wrote: Epidemiologist Martin Kulldorff seems to channel Henry Hazlitt, the author of the book Economics in One Lesson, in stating two cardinal principles of public health (“Epidemiologists Stray From the Covid Herd,” Opinion, Oct. 24.) Hazlitt said “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” One of Kulldorff’s principles is “you can’t just look at Covid, you have to look holistically at health and consider the collateral damage.” The other is “You can’t just look short-term.” Both Hazlitt and Kulldorff say you can’t focus on how policy affects just one group or disease and that the long run matters, not just the short run. Maybe more of our leaders, including both politicians and scientists, should read Hazlitt. And, I would add, should read the author that, to some extent, Henry Hazlitt channelled, Frederic Bastiat, especially this. (0 COMMENTS)

Life, Liberty, and M*A*S*H: From Anti-Authority to Government-Skeptical This fall, LIFE magazine has published a special issue commemorating the 50th anniversary of the movie M*A*S*H. Despite the hook, the issue focuses on the ensuing TV series, which ran from 1972 to 1983. Though the show has often been characterized as being politically left-wing, it actually is heavily classically liberal, celebrating the individual, civil liberties, and the market, and harshly criticizing anti-individualism, government compulsion, and government decision-making. In a series of essays, I examine the classical liberalism of M*A*S*H. This is Part 2. Part 1 is here. The TV series evolved from a fictionalized war memoir, MASH: A Novel about Three Army Doctors, written by Korean War Army surgeon H. Richard Hornberger Jr., with help from sportswriter and one-time war correspondent W.C. Heinz, and published under the pen name “Richard Hooker” in 1968. The book inspired a 1970 movie, M*A*S*H, directed by Robert Altman and starring Donald Sutherland, Elliott Gould, and Robert Duvall. Hornberger was a conservative Republican with hawkish, nationalist leanings, and his book is frat-boy crude, funny, and largely untainted by the ugliness of war, though honest about the grim nature of “meatball surgery” at a field hospital. The 1970 movie is just as crude and even funnier, and it captures the grisliness of war and the madness of those who love it. Hornberger liked the movie despite its lefty politics, a testament to a time when personal judgments were not always made through a red–blue political lens. Altman wasn’t a fan of the book, though not for political reasons. Both Hornberger and Altman despised the TV series. One theme common to all three versions of M*A*S*H was the comedic skewering of authority. Hornberger’s book makes clear his opinion that his conscripted, jokester doctors are superior to the military figures and protocols that try to control them. Altman’s movie luxuriates in contempt for authority. The TV series pokes plenty of fun at overpuffed authority figures, from hypocritical flag-waver Maj. Frank Burns (Larry Linville), to unhinged Maj. Gen. Bartford Hamilton Steele (Harry Morgan, who was later recast as the very-different Col. Sherman Potter), to sadistic Col. Sam Flagg (Edward Winter), to a parade of officers willing to trade troops’ lives for ground, glory, and promotion. But where Hornberger’s skewering is limited to the career military and Altman’s to the military generally, TV’s M*A*S*H has plenty of skepticism for government broadly. The show is not outright anti-government — and neither are proper classical liberals, because government is important for accomplishing certain public goals. But classical liberals know, and M*A*S*H regularly shows, that there is plenty to criticize in what government does — or, more specifically, what the politicians and bureaucrats who animate it do. Many government failures happen when it extends its reach beyond truly public problems, meddling in people’s private decisions and interactions. But failures also happen when government limits itself to its proper sphere, such as the conduct foreign and war policy. From the crooked U.S. senators mentioned in “For the Good of the Outfit” (season 2) and “The Winchester Tapes” (s. 6), to the Congressional investigator for the House Un-American Activities Committee in “Are You Now, Margaret?” (s. 8), to Hawkeye’s irreverent letters and telegrams to President Harry Truman (and wife Bess) in such episodes as “Dr. Pierce and Mr. Hyde” (s. 2), “The Interview” (s. 3), and “Give ‘Em Hell, Hawkeye (s. 10), the show depicts how foolish, hubristic, dangerous, hypocritical, uncaring, and dishonest government officials can be. For instance, in “Depressing News” (s. 9), the unit receives an erroneous, enormous shipment of tongue depressors. Hawkeye realizes the shipment reflects the U.S. government’s blithe preparation for the war to continue for years, bitterly concluding, “We wouldn’t have this supply if [the Army] didn’t think there’d be a demand.” So, he embarks on a symbolic crafting project, getting the attention of company clerk Max Klinger (Jamie Farr): KLINGER Excuse my impertinence, but if all these sticks were laid end to end — and they are — what would they be? HAWKEYE They would be, and are, the foundation for the Washington Monument. KLINGER Don’t they already have one of those someplace? HAWKEYE It’s completely different. That one commemorates Washington the man, who crossed the Delaware and gave us wooden teeth. This one commemorates Washington the place, which sent us across the Pacific and gives us wooden legs. KLINGER Excuse me. My nose for news thinks it smells a story here. HAWKEYE They sent us half a million of these things, which is monumental stupidity. So I’m building a monument to stupidity, made out of tongue depressors and dedicated to all the wounded who have passed through here. Klinger writes about Hawkeye’s project for the camp newspaper, a copy of which finds its way to Army headquarters. Not understanding the meaning of the “monument,” HQ dispatches a public relations officer to the 4077, believing Hawkeye’s creation would be “great for enlistment.” But as the officer snaps a picture of the monument, Hawkeye and Klinger explode it. When the befuddled information officer asks why, Hawkeye explains: “Senseless destruction—that’s what it’s all about. Get the picture?” (0 COMMENTS)

I used to teach my students, before I was allowed to vote in this country (I became a U.S. citizen in 1986) that even in swing states, their vote for President would not be determinative. When I finally got to vote (I think it was in the June 1986 California primaries), I voted and experienced the truth of my statements. My vote for U.S. president makes no difference on the margin and neither does yours. (That’s why I always vote for the person closest to my views, no matter how slim his or her odds.) Which, of course, doesn’t mean that politicians running for office should think that votes don’t matter. They’re dealing with much thicker margins. My favorite example I liked to give in class after 2000 was the Bush/Gore election for President because all my students had followed it, at least somewhat. One of the big issues in Florida was that, on April 22, 2000, Bill Clinton’s administration had used guns to rip away Elian Gonzalez from his relatives in Florida and send him back to Cuba. That was a big upset to a large number of Florida voters from Cuba or whose parents left Cuba. Gore, of course, was part of the Clinton administration. So what was he to do? I followed it pretty carefully and my recall is that Gore lamely criticized Bill Clinton for one news cycle and then let it drop. Then I asked my students: What if Al Gore had lambasted Clinton for it over, say, 3 days? Is it conceivable that he would have shifted, say, 0.2 percent of the Florida Cuban vote? If so, we would be referring to President Gore. Or, I pointed out, George W. Bush was an effective campaigner. What if, instead of thinking he had Florida in the bag, partly because his brother was governor, he hadn’t gone home to Texas to do a premature victory lap? Then we might have avoided the legal nightmare of Bush v. Gore. (2 COMMENTS)

What’s the appeal to people? Obviously I agree with you when you talk about a liberal society being a good one. The idea of intellectual or ideological pluralism, I’m all in. But people who are saying, “That’s a false front for a system that is rigged against trans people, against black people, and against other types of racial, ethnic, ideological, or sexual minorities”—how do you engage them when they are not interested necessarily in hearing what you have to say? How do you engage with them? The single most common question I get when I talk about free speech and open inquiry on college campuses comes from a student—usually it will be a freshman, sometimes it’s a sophomore—who says, “What do I say, Mr. Rauch, when I try to speak up in a conversation and I’m told, ‘Check your privilege. You can’t say that.’ What do I do when I’m disqualified from the conversation because I don’t have the minority perspective?” I used to try to say all kinds of things that they could say: “Try this. Try that.” That wasn’t a good answer. Then I began telling them, “Well, you figure it out. You know how to talk to your generation. I don’t.” That wasn’t a good answer. The answer that I finally settled on—though the first two were also partly true—was: “It doesn’t matter all that much what you say to them, because they’re not listening. That’s what they’re telling you. They’re not listening. What matters is that you not shut up. They do not have the power to silence you if you do not allow yourself to be silenced. Insist on your right to continue the conversation to say what you want to say. Don’t slink away. You won’t necessarily persuade those people, but, as we found in the gay marriage debate, your real target is that third person on the periphery of the circle of the conversation who is seeing one person acting rationally and reasonably and other people acting irrationally and unreasonably. You’re probably winning the heart and mind of that third person, so don’t shut up.   This is from “How To Tell If You’re Being Cancelled,” Reason, December 20, an excellent Nick Gillespie interview with Jonathan Rauch. Rauch is the author of Kindly Inquisitors. The whole interview is great. I focused on this because I so like the spirit and substance of the last paragraph of his answer. Lately, I’ve been giving moral support to people who speak up against the cancel culture and/0r against people who target others because of their skin color. The latest example is Jodi Shaw, who works at Smith College. When I watched her video on Friday, the number of dislikes exceeded the number of likes. That has changed. She gives a public Facebook address and so I went to it, expecting to see a lot of support. I saw the opposite and so I weighed in on her October 28, 3:50 p.m. post. If you think this is important, I recommend that you do so also. Check out how I responded to one person who went after me and two people who disagreed with me. (0 COMMENTS)

Virtually any serious intellectual writing will be drowned out during Election Week, so I’m pausing until next Monday.  Instead, I’ll just remind you of some bets. In the 2016 election, I had three outstanding bets.  I won all three. This year, I only made one election bet, which I’ve already won.  I do however have one outstanding election-related bet: That Trump does not leave office early. Specifically: If Donald Trump dies in office, resigns, is removed  by the Senate after impeachment, or otherwise is permanently removed as per the the 25th Amendment, or if it never happens that he takes the Oath of office as POTUS on Jan 20, 2017, the BC owes [redacted] $350. Otherwise, [redacted] owes BC $100″. There is considerable speculation that Trump, if defeated, will not gracefully acknowledge defeat.  I considered this a plausible scenario back in this 2016 bet, though I ultimately won the conventional way. This time around, many suspect Trump will actually try to illegally cling to office.  While you can imagine that this attempted clinging will get him removed early, I seriously doubt it will.  If Trump stubbornly refuses to leave office, the system will just let him run out his clock, ranting all the while, then sideline him on Inauguration Day. P.S. Remember my Twitter poll from a year ago?  It was really about Bolivia… Suppose Trump loses the 2020 election and loses the recount, but refuses to leave office. How should U.S. military leadership respond? — Bryan Caplan (@bryan_caplan) November 14, 2019 (0 COMMENTS)

A Book Review of Strategies for Monetary Policy, John H. Cochrane and John B. Taylor, eds.1 Each year, the Hoover Institution hosts a conference on monetary policy at its Stanford University headquarters. The conferences bring together academics and Fed officials to discuss issues in monetary economics. The proceedings from the 2019 conference have now been published in a…

[E]conomists and psychologists studying Western samples have simply assumed for decades that they were measuring a feature of our species’ psychology rather than a local cognitive calibration to society’s institutions, languages, and technologies. —Joseph Henrich, The WEIRDest People in the World1 (page 389) The latest book by Joseph Henrich is the most ambitious analysis of social behavior that I have ever read. It attempts to cover essentially all human history and the entire spectrum of different societies, using the full range of disciplines of social science. To offer a review is difficult, and to attempt a summary is impossible. At the center of the book are the traits that Henrich describes using the acronym WEIRD: Western, Educated, Industrialized, Rich, and Democratic, referring to the cultures of certain societies. Over a decade ago, Henrich and colleagues came to the realization that many findings in psychology and behavioral economics that were based on studies of people living in WEIRD cultures did not replicate when attempted in other cultures. One of Henrich’s central theses is that culture affects psychology, particularly when cultural institutions persist over many generations. For me, this raises a question: What makes a trait a psychological trait, as opposed to a cultural trait? Intuitively, I would say that if it is a trait that you would have regardless of the culture in which you are raised, then it is a psychological trait. But if a trait is mostly determined by the culture in which you are raised, then it is a cultural trait. Still, for me the distinction between psychological traits and cultural traits seems blurry, so I will describe traits as psychological/cultural, or PC. The opposite of WEIRD PC is kinship or clan PC. In kinship PC, what knits a society together are familial interconnections, including many marriages among close relatives. Figure 14.1, on page 473, offers a summary of the key ideas in the book. Here I will present a few points based on that figure. 1. All societies were kinship cultures until[B]etween about 400 and 1200 CE, the intensive kin-based institutions of many European tribal populations were slowly degraded, dismantled, and eventually demolished by the branch of Christianity that evolved into the Roman Catholic Church (page 158) 2. The Church instituted rules about marriage and children that made kinship societies unsustainable. Most notably, forbidding marriage among cousins and other relatives meant that a clan would die out unless its members married outside of the clan. 3. Weakening kinship relationships led to people becoming more individualistic and less dependent on their clans.National populations that collectively experienced longer durations under the Western Church tend to be (A) less tightly bound by norms, (B) less conformist (C) less enamored with tradition, (D) more individualistic, (E) less distrustful of strangers, (F) stronger on universalistic morality, (G) more cooperative in new groups with strangers, (H) more responsive to third-party punishment… and (L) more analytically minded. (page 227) These PC traits enabled some Europeans to adapt to markets, cities, and voluntary associations. 4. These impersonal institutions in turn promoted the development of PC traits that made people better able to cooperate with strangers and less inclined to favor kin. People became more patient, more concerned with efficient use of time, and more inclined to locate characteristics in an individual. These PC traits in turn adapted people for representative government, our concept of the rule of law, and innovation and economic growth. With those main themes sketched out, let me turn to some interesting tidbits. Compared to farmers and herders who have more intensive kin-based institutions, hunter-gatherers emphasize values that focus on independence, achievement, and self-reliance while de-emphasizing obedience, conformity, and deference to authority. (page 224) This reminded me of comments that Robin Hanson has made about farmers vs. foragers.2 Hanson and Henrich do not necessarily agree completely. [C]ultural evolution has found myriad biological pathways into our brains and behavior… monogamous marriage suppresses men’s competitiveness, risk-taking, and revenge-seeking, while increasing their impersonal trust and self-regulation. (page 273) This struck me because we seem to be seeing an increase in the number of unmarried men, with adverse consequences. As I was wandering from store to store in the tiny town of Chol-Chol, I noticed something odd… I puzzled over how such small stores, which were so close together, could maintain different prices for the same goods… In retrospect, the answer was obvious… While many households were lifelong friends and relatives, other families were considered undesirable, arrogant, or just unfriendly… The density of these interpersonal relationships constrained market competition… The locals’ decisions to purchase… were embedded in bigger and more important enduring relationships. Of course, buying and selling did occur, but this was more interpersonal exchange than impersonal commerce. (page 301) “As economists, we tend to assume that whenever and wherever trade took place, it was the sort of impersonal commerce that we observe today.” As economists, we tend to assume that whenever and wherever trade took place, it was the sort of impersonal commerce that we observe today. But perhaps ancient trade in a kin-based society was part of the rituals that served to cement familial relationships. This is a topic that economists should explore more with anthropologists. As the church dissolved kin-oriented collectivism, … individuals joined guilds, monasteries, confraternities, neighborhood clubs, universities, and other associations. (page 307) Henrich is suggesting that a phenomenon that struck Tocqueville about 1830s America was present in the late Middle Ages in Europe. Henrich argues that intergroup competition strengthens organizations and societies. Remember, we need to conceptually separate intergroup competition from within-group competition… intergroup competition favors beliefs, practices, customs, motivations, and policies that promote the success of groups in competition with other groups… By contrast, within-group competition is the competition among individuals, or small coalitions, that occurs within firms, organizations, or other groups. This form of competition favors… practices that benefit some employees at the expense of the firm. … This means that modern companies, like ancient societies and chiefly institutions, eventually implode in the absence of intergroup competition. (page 347) For more on these topics, see “The Social Learning Animal,” by Arnold Kling. Library of Economics and Liberty, June 5, 2017. See also Rent Seeking, by David R. Henderson in the Concise Encyclopedia of Economics and Democracy in America, by Alexis de Tocqueville, available at the Online Library of Liberty. Economists would term this problem rent-seeking. Henrich is applying Public Choice theory to monopolistic firms. Henrich argues that cultural evolution is faster and stronger than genetic evolution. More recently, the power of cultural evolution over genetic evolution can be strikingly seen in research on the genetic and cultural contributions to educational attainment during the 20th century… Over the entire 20th century, culture has raised Americans’ educational attainment by 9 to 11 years, while natural selection has lowered it by less than 8 months. (page 482) I believe he is saying that if one uses a polygenic score for educational attainment, the composition of America’s population changed adversely in the 20th century, but educational attainment nonetheless dramatically increased. Henrich tries to be careful not to merely tell “just-so” stories to describe cultural differences and cultural evolution. He relies instead on statistical studies that test his hypotheses. But many of these studies are of the type that have suffered from improper causal inference and failure to replicate (even among WEIRD subjects). Those who are inclined to hunt for weaknesses in Henrich’s analysis are bound to find some. But I find his work to be highly credible. Footnotes [1] Joseph Henrich, The WEIRDest People in the World: How the West Became Psychologically Peculiar and Particularly Prosperous. Farrar, Straus and Giroux, 2020. [2] Robin Hanson, “Forager v Farmer, Elaborated.” Overcoming Bias, August 31, 2017. *Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012. Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

OOn September 4, Disney released Mulan on its Disney+ streaming service. Mulan’s release was delayed because of COVID-19. For about $30, depending on what country they are in, Disney+ subscribers purchase early “Premier Access'” to the movie before it becomes available to all subscribers. In some countries, including China and others that do not have (legal) access to Disney+, it will still play in theaters. All eyes in Hollywood are on this move. A few movies have been released straight to video on demand or after a short theatrical run, including Trolls: World Tour and The Invisible Man. But this is the first major blockbuster going straight to streaming that had the potential to be a billion-dollar movie. It’s hard not to see this as a test for other big films like Black Widow. This plan could completely change how movies are distributed going forward. Economics alone cannot tell us whether Disney’s plan will pay off, but it can tell us something about what it will take to succeed. The key concept I want to focus on is price discrimination. Nerdies and Normies Imagine two types of consumers: Nerdies and Normies. Nerdies are particular. They like what they like, and they are less willing to accept substitutes for those goods. They like Coke, not Pepsi. Marvel, not DC. And whiskey, not vodka. Normies are more laid back. They care less about particulars. Soda is soda, comics are comics, and booze is booze. In real life, most of us are Nerdy about some things and Normie about most others. I’m a Normie about clothes, but very Nerdy about movies. Others might be the opposite. Nerdies and Normies react very differently to differences in price. Let’s take each in turn. The demand curve that Nerdies have for the things they nerd out about might look like the ones in Figure 1. They have what economists call relatively inelastic demand. At a high price, Nerdies are still willing to shell out to get the good. At a low price, they buy more, but not a lot more. If a bar doubles the price of whiskey, Nerdies still won’t switch to gin. Sellers can charge a high price per unit without scaring off the Nerdies, so (all things equal) they make more money selling to them at a high price. Figure 1. Nerdie Demand Normies are the opposite. Normie demand curves are shown in Figure 2. They have what economists would call relatively elastic demand. At a high price, Normies just buy other goods. But at a low price, they massively increase their purchases. If Pepsi goes on sale for 10% less than Coke, they switch to Pepsi, because soda is soda. Sellers can bring a lot more Normies into the market by offering goods cheap, so (all things equal) they make more money selling to them at a low price. Figure 2. Normie Demand “One of the problems many businesses confront is figuring out how many of their customers are Nerdies and how many are Normies. Without that information, it is hard to settle on a pricing strategy.” One of the problems many businesses confront is figuring out how many of their customers are Nerdies and how many are Normies. Without that information, it is hard to settle on a pricing strategy. Do you make your money offering a select product to Nerdies or selling in volume to Normies? Why not both? Price Discrimination Price discrimination is when a business sells the same (or extremely similar) products to different consumers at different prices. It doesn’t take a lot of math to show that, if you can charge the Nerdies a high price and the Normies a low price, you can get the best of both worlds. High prices on some units, and high volume on others. For this to work, though, a business needs to segment the market into Nerdies and Normies. If Professor Charles Xavier—the world’s most powerful telepath—ran a bar, he might be able to pull this off. You, a Nerdy whiskey connoisseur, saunter up to the bar. Professor X reads your mind and figures out that you are willing to pay $20.00 for a pour of Lagavulin. He offers to sell you a pour for $19. Your Normie friend can’t tell the difference between a Speyside scotch and an Islay scotch. (Is he really your friend?) Professor X reads his mind and charges him $10.00.1 Economists call this perfect price discrimination. Professor X knows exactly each customer’s willingness to pay. Real world businesses don’t have Professor X’s amazing ability to read minds, so they have to use cruder methods to separate the Nerdies from the Normies. But while perfect price discrimination is fairly unrealistic (though universities get astonishingly close by charging the same tuition but offering different levels of financial aid), it highlights two important effects of price discrimination more generally: 1. With price discrimination, sellers get more of the gains from trade. The buyer of Lagavulin only gets $1 of consumer surplus, but Professor X gets $19—the price he paid for it. 2. Fewer consumers get priced out of the market. If Professor X had charged $12 for the scotch, your Normie friend would not have gotten any at all. Focusing on the first condition, price discrimination strikes many first-time economics students as a bad thing. It’s another case of producers—especially Big Bad Corporations—extracting all the gains from economic cooperation for themselves. (This, of course, ignores the fact that consumers in one market are producers in another.) But taken together, the two conditions underwrite the greatest artistic achievement in mankind’s history: big budget comic book movies. Fixed Costs and Price Discrimination Tony wants to put on a puppet show. Putting on a puppet show involves fixed costs that only have to be paid once. To make the puppets, pay the writers, and create the sets costs Tony $8. Each performance adds $1 to his total cost. That includes wear and tear on the puppets and sets, contracting with a venue, and the (meager) opportunity cost of Tony’s time. Tony has two potential consumers: Dan is Nerdy for puppet shows. He is willing to pay $8 to see one. Geoff is less enthusiastic. When it comes to puppets, he is a Normie who is only willing to pay $4. What should Tony charge for a play? If Tony charges $4 per ticket, both Nerdy Dan and Normie Geoff are in. But he’ll only make $8, not enough to cover his fixed costs plus his cost per performance ($8 + $1 = $9). If he charges more than $4, Geoff isn’t interested. So the most he could make is $8 from Dan. But what if Tony can price discriminate? If he can charge $7 to Dan and $3 to Geoff by offering two separate performances, he can make enough to cover his fixed costs and the cost per show. This is exactly how modern blockbusters work. Separating the Nerdies from the Normies The simplistic example of Tony’s puppet show illustrates exactly how big budget movies work. Blockbusters have a very high fixed cost. Large casts full of famous actors, expansive sets and props, and—in the past couple decades—armies of talented people and sophisticated machinery generating visual effects. But once the movie is made, the cost of an additional screening is much lower. To make back those fixed costs, movie studios need to separate the Nerdies from the Normies. How do they do this? On opening weekend, Nerdies like me pay a premium price to watch the latest Marvel Studios production. In fact, my wife and I usually go twice: once on opening night, and again later in the weekend for brunch. This allows us to see the movie largely spoiler free and on the big screen. We usually buy whatever special pint glass the Alamo Drafthouse releases, with licensing fees going back to Disney. These sorts of complementary goods also help separate the Nerdies from the Normies. The classic example is cheap printers with expensive ink refills, which allows heavy users to subsidize the printing of light users. For big blockbusters, this often takes the form of co-branded merchandise. Toys and apparel are the most conspicuous examples, but these days you can find nearly anything with a Marvel character slapped on it. Over the coming weeks, slightly less Nerdy Nerdies catch the movie on T.A.C.O. (Tickets Are Cheaper On) Tuesday or a matinee showing. Matinee showings are price discrimination par excellance: those who can see a movie during the day have more flexible schedules and thus more substitutes for how to spend their time. Those who work regular hours are constrained to the evenings, so theaters discount daytime showings to fill as many seats as possible during the day. A few months later, second-run theaters (known as dollar theaters when I was growing up, but I bet that has changed) show the movie at an even lower price. The whole process repeats itself with the home video release.2 First it comes out to buy. Nerdies like me have it preordered (usually in SteelBook form that costs $5 more). The sticker price is higher for a blu-ray than a theater ticket, but the price-per-viewing drops dramatically, especially for families with kids. After that, it becomes available rent on-demand. For $6 or so, the entire family can watch it once. Then it lands on an all-you-can-watch monthly streaming service, like Netflix or Disney+, or to a premium cable channel like HBO. Regular cable channels get to show it after that, and eventually it comes to free over-the-air network television. At each step of the way, the movie becomes an attractive purchase to buyers that are progressively more Normie. Time serves as the instrument of market segmentation, allowing studios to charge a high price to the Nerdies and a low price to the Normies. These days, most tech-savvy consumers can wait until a movie hits streaming before watching it because most consumers are Normies about most movies. But thanks to the exuberance of Nerdies like me, for only pennies they get to see spectacularly crafted and very expensively produced movies. The Streaming Gambit That brings us back to Mulan. Will Disney’s plan succeed? It depends. Can studios, going straight to streaming, still sort out the Nerdies from the Normies? Will the Nerdies pony up an extra $30 to watch the movie now, while the Normies wait to have access as part of their normal $7 a month subscription? Dozens of factors are at play. By going straight to online, studios give up a number of steps in market segmentation. They effectively collapse the opening weekend and digital purchase markets into one. A $30 price point will scare some Nerdies away, while appealing strongly to those with families. For a family of four, $7.50 per person—and popcorn purchased at the grocery store instead of at theater prices—will be a steal. Some Nerdies are Nerdy about the cinema experience, others only about seeing the movie as soon as possible. Those attitudes have probably shifted as the quality of televisions and home theater setups has dramatically increased over the past two decades. Variety recently ran a survey that suggests most people would be willing to watch upcoming blockbusters at home, even if they might prefer the theater. Trolls: World Tour did remarkably well, making over $70 million off of content-starved, sheltered-at-home families. Disney needs more sales than that for Mulan to turn a profit. But the Mouse has one key advantage: it owns its own streaming service. When a moviegoer buys a ticket, 60% of the ticket price typically ends up with the studio. This number varies from one country to another. The rest goes to the theater and any third-party ticket merchants, such as Fandango. By offering Mulan through Disney+, Disney gets to keep a much bigger percentage of the ticket sales.3 Mulan was projected to have an $85 million domestic opening. With over 60 million Disney+ subscribers, Disney needs less than 5% of its subscribers to buy Premier Access to match the return on that opening (since they keep a larger revenue share). That’s only opening weekend, and only domestic (the numbers are much more complicated for international because of the different share in ticket prices), but it shows that the gambit might well pay off. Of course, price discrimination is far from the only economic concept at play in this move. Other factors include: • Opportunity cost: When it comes to blockbusters, one resource is fairly fixed: release dates. Blockbusters rarely go head to head, because they need the Nerdies to turn out in big numbers on opening weekend across as many screens as possible. If studios hold onto the big blockbusters they have made, they forego potential release dates for future blockbusters. • Economic profit: If opportunity costs are fully accounted for, the profit maximizing strategy is the same as the loss minimizing strategy. Instead of the dawn of a new business model, this may be a stopgap to stem the bleeding during the pandemic. • Complements: Disney probably has mountains of Black Widow merchandise sitting in warehouses. That merchandise will move a lot faster if the film comes to Premier Access rather than again delaying its theatrical release. The real billion-dollar question may be piracy. When a movie releases first in a theater, the only pirated copies that are readily available are handheld camera recordings of the screen in a theater. The picture is bad. The sound is worse. And if someone in front of the camera gets up to use the restroom, home viewers get the real thrill of the theatrical experience. But once Mulan goes live on September 4—unless Disney has perfected a secret and miraculous encryption technology—there will be virtually perfect clones of the file that Disney is streaming to its customers available the same day. Piracy is a real concern. But it is important to remember that the market for digital music and movies arose after widespread file sharing was already common. Digital media distribution has been so successful that some worry that the future of physical media is in jeopardy. Some consumers object to piracy on principle. Some simply value the convenience and safety of buying through official channels. And some are willing to pay to support content creators that they particularly like. If studios want to release blockbusters straight to streaming, they are probably banking on their Nerdy customers falling into that last group. But the fact remains that the higher the price, the more people will pirate a film. Is Mulan‘s $30 price point low enough to mitigate piracy and high enough to cover Disney’s fixed costs? We will see. The Future of Movies What happens after the pandemic has subsided? Will movie studios return to the older model, or will there be a new normal? One possibility is that COVID-19 has accelerated changes that were already on the way. Over time, the window of time between the theatrical and the home release of films has shrunk. When I was growing up it would typically take about 6 months. Now 3 months is closer to the norm. How small might that window get? It might shrink to zero. A week before Mulan‘s scheduled release, Bill and Ted Face the Music will release simultaneously in theaters and on video on demand. While it does not have nearly the budget Mulan does, it is another experiment that studios will be eagerly watching. Money has value over time. If studios can compress the time separating the Nerdies from the Normies—while still keeping them separate—they might be willing to take a small hit from piracy. While the standard window between theatrical and home releases may not shrink all the way to zero, it is highly likely that it will shrink more as studios such as Disney and Warner Brothers develop their own streaming services. Theaters are the obvious losers from this trend. Variety‘s report suggests that many consumers still prefer to see blockbusters in a theater, but many consumers will choose to stream from their couch rather than going out. For someone like me, who wants to see a Marvel movie opening night but finds the behavior of other theater-goers generally obnoxious, the chance to stream at home from opening day would be a no-brainer. To get movie goers into the cinema, theater chains are going to have to offer service above and beyond the movie itself. I predict that, as these trends continue, the share of premium movie experiences as a percent of the total will increase. A higher share of screens will be IMAX or Dolbyvision and a higher share of theaters will offer table service, alcoholic beverages, and other amenities. But a recent legal change might slow this move to streaming. In 1948, the Supreme Court ruled, on anti-trust grounds, that movie studios could not own theaters. That ruling was recently reversed.4 If studios can get a higher share of revenue from both streaming and from owning theaters, the calculus driving the Mulan decision might change. But ultimately, of course, this will depend on consumers: if other companies are offering straight-to-streaming blockbusters, studios might have no choice but to follow suit. Even the most powerful media companies have to mind the gap between the Nerdies and the Normies. Footnotes [1] Professor X’s ability to know you and your friend’s willingness to pay is not a sufficient condition for price discrimination. He also needs to make sure your friend doesn’t pay the lower price for two scotches and share one with you. This is sometimes called the no arbitrage conditions. [2] A puzzle for my price-theory savvy friends. The digital release of modern blockbusters to own at home usually precedes the physical media release by one week. Why? [3] The exact amount depends not only on payment processing charges, but also on whether Disney will allow purchase directly in-app. If that is the case, some app stores take a cut of the purchase. [4] See “Studios Can Now Own Movie Theaters Following Judge’s Ruling,” by Jeff Sneider, Collider, Aug. 7, 2020, for more information. *Adam Martin is Political Economy Research Fellow at the Free Market Institute and an assistant professor of agricultural and applied economics in the College of Agricultural Sciences and Natural Resources at Texas Tech University. (0 COMMENTS)

Deirdre McCloskey and I have a new book for AIER and the Adam Smith Institute, The Myth of the Entrepreneurial State. It is short, it is cheap, it benefits from Deirdre’s wisdom and splendid prose. So, what are you waiting for? Buy it! I suppose most of our readers may be familiar with Michele Boldrin, who teaches at Washington University in St Louis, for Against Intellectual Monopoly, written with David Levine – and some for his more theoretical work. But Michele has also developed a remarkable network in Italy and built an online counter-information and education effort, Liberi oltre le illusioni, (Free Beyond Illusions), which is offering tons of interesting videos on both more technical and theoretical issues and on current events. He debated the book (as well as the notion of spontaneous order and, in a sense, the feasibility of a libertarian political theory) with Deirdre and me here. As a good debate host, he played devil’s advocate: he could not put on a very convincing act as an advocate for industrial policy, his objections to libertarianism as a comprehensive philosophy are genuinely *his* own and forcefully argued.       As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

In his 1945 book On Power, Bertrand de Jouvenel wrote: Democracy, then, in the centralizing, pattern-making, absolutist shape which we have given to it is, it is clear, the time of tyranny’s incubation. Sometimes, democracy in America looks a bit like the South American version. In general, democracy as we know it works differently than what Christopher Achen and Larry Bartels call its “folk theory” version. In their book Democracy for Realists, they describe the folk conception of democracy: In the conventional view, democracy begins with the voters. Ordinary people have references about what their government should do. They choose leaders who will do those things, or they enact their preferences directly in referendums. In either case, what the majority wants becomes government policy. … Democracy makes the people the rulers, and legitimacy derives from their consent. That nothing like this happens in the real world should be obvious by observing the current electoral campaign in America, reading the political advertisements, and listening to the presidential candidates of the two main political parties. Public choice theory explains many failures of folk democracy. There is much to disagree with in the alternative proposed by Achen and Bartels, which is an elitist democracy based on group identities. But the populist solution does not produce better democracy. It is more an extreme form of “folk theory” democracy that worsens democratic failures. What is said and done in President Trump’s rallies is more entertainment than information on a political program. These rallies are liturgical spectacles of fusion between the great leader and “the people.” Extreme illustrations were given when the president danced as the crowd was chanting “YMCA” (videos are available on YouTube). This sort of show is not new in contemporary populism. In his book Populisms: A Quick Immersion (which I review in the forthcoming issue of Regulation), Carlos de la Torre, a professor of sociology at the University of Kentucky, observes that “[p]opulism blurs the line between politics and entertainment.” Of Rafael Correa, the populist president of Ecuador from 2007 to 2017, Torre writes: Rafael Correa’s campaign strategy in 2006 was also based on mass rallies, where common people were in close proximity to the candidate and sang along with him to revolutionary music of the 1960s and 1970s. Even though this music was retro, Correa’s political rhetoric was innovative. Unlike the long and boring speeches of his rivals, Correa blended music and dance with speech-making. He spoke briefly, presenting a simple idea, music was played, and Correa and the crowd sang along the campaign tunes and dance. (0 COMMENTS)