Movies that understand economics #13: American Gangster

American Gangster“My Company sells a product that’s better than the competition at a price that’s lower than the competition.”

Anyone familiar with the book Freakanomics is well aware with the fact that the black market is a wealth of information about economics. But this is not only limited to one or two books, there are films that allow us to see the economics through illegal markets as well, in this case American Gangster.

American Gangster is primarily the story of Frank Lucas, a New York drug dealer who was able to amass millions in a very short amount of time because he was able to offer a better product at a cheaper price. Specifically heroin. He was able to offer heroin that was almost pure for a fraction of the cost that his competitors in the underworld offered heroin that had been cut with filler on every stage of its journey to the drug users. And this is basic economics, if you can offer a better product or a cheaper product you can compete with anyone in any field. If you can offer that which is cheaper and better, you will control the market for a time. I say only for a time because many competitors, when faced with the alternatives of adapt or die, as we have already repeatedly covered in previous blogs, presented by the cheaper and superior product will likely choose adapt because the threat of being driven out of business is a powerful motivator. And this is true of the illegal sales of heroin or any legal market.

Getting back to Lucas’s ability to offer a cheaper and purer product, he was able to do this by cutting down his supply chain. Rather than buying from the Five Families who bought from cops who confiscated it from Five Families dealers who bought it from whatever Cartel(s) moved the Heroin from Southeast Asia to America who bought it from the cartel within Southeast Asia who bought it from the producers in Vietnam (and remember it’s getting cut with filler on every step of the way)…Frank Lucas just went to Vietnam bought from the producer, and shipped it along the shipping lines he created. No middlemen, no huge infrastructures to pay off at every level. As most consultants will likely tell you, if you can pay someone to do something (meaning they’re making a profit) you can probably do it in-house for less. Frank rather than dealing with dozens of middle men (all making a profit), he just cut them out. Earlier in the move his previous boss stated, a man who clearly would choose to die rather than adapt, “What right do they have cutting out the suppliers, pushing out all the middlemen. Buying direct from the manufacturer.” And the answer is anyone has the right to do something when it makes more logical sense and will save people money. That’s economics 101. And you will see this in any business, not just the black market, the more middle men you can cut out, the more you have control over every part of the process, then your business will likely thrive.

“Who can afford to sell shit twice as good for half as much?” The answer is the person who can think better than their competition and cut out unneeded costs.

Then of course there is the all-important scene about trademark infringement.

Even with drugs, trademarks are important because they tell consumers about the products you’re buying. You have relative assurance of the quality of a product when it has a certain trademark on the front…and Frank’s protectiveness of his trademark, his intellectual property, is important as he points out because if he lets others use it on inferior products then his reputation, and the economic benefits that come from that reputation are hurt. Again this is basic economics, people buy things they know have the quality and cost they want but if you can’t assure a way to inform your customer of the quality through a name brand your customers have no way to verify the quality and will just buy the cheapest thing around.

And all of this ties into a very subtle implication through the film, and any discussion of black markets. The fact is that black markets often show us why the naïve fantasies of anarchists are rather silly. When business in a capitalist economy are faced with adapt or die pressure they either adapt or die…when this happens in black markets, killing your opposition is a very real option (yes there are business related murders in the regular economy but they are much fewer and far between because the costs of getting caught are rather high, whereas in black or anarchistic markets, the cost of violence is comparatively low compared to everything else you’re already paying). Also we see extravagant protection rackets spring up on black markets, far in excess of what the government usually wants to take (unless you live in France). While government is a terrible necessary evil, black markets tend to show why government is needed and anarchy is terrible (not that government couldn’t use a good deal of heavy pruning with a machete).

“You know I don’t think they want this to stop. I think it employs too many people. Judges, lawyers, cops, politicians, prison guards, probation officers. They stop bringing dope into this country, about a hundred thousand people are gonna be out of a job.”

And course we see the nature of corruption that black markets breed two very unfortunate consequences. One is the massive corruption that springs up needed to keep a black market afloat. If there is a product that people want so much they will go to a black market to get it, it will inevitably lead to corruption in direct proportion to how much people want it. The more you try to stop it, the more profitable corruption will become. And larger the infrastructure to stop it will become. Thus the initial negative costs to society that an unregulated market would cause are just as bad (if maybe not a little better) than the costs of trying to keep the product illegal. And I’m not saying this means that we should just legalize drugs, but we do need to begin to understand that the way we are currently fighting drugs costs us as much if not more than the costs of letting them go unregulated. Also the other problem, as shown by Frank Lucas’s story, is that black markets create stronger drugs, because only those become more economically sound to sell.

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Filed under Economics, Movies, Movies for Conservatives

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