David R. Henderson  

American Hustle: Unreal and Real

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WARNING: MULTIPLE SPOILERS AHEAD

I saw the movie, American Hustle, on Friday night and liked it a lot. I liked the pace and I especially liked the integration with 1970s music, one of my favorite decades for pop music.

I did, though, find one of the key economic ideas in the movie highly implausible. Irving Rosenfeld, played by Christian Bale, and Sydney Prosser, played by Amy Adams, run a loan scam operation called London Associates. In return for a large non-refundable fee upfront, they promise to get large loans for people. We are led to believe that they rarely, maybe never, get those loans. But they keep bringing in customers and make enough money to have a nice office and to finance a nice apartment.

See the problem? They have a fixed address and they keep scamming people and yet the word doesn't seem to get out. Not only that, but also the people who are scammed apparently never feel upset enough about it to do anything. The only way they are brought down is by an FBI agent.

On the other hand, there was one aspect of the movie that I found illuminating because it did seem real. In one scene, Rosenfeld realizes he is potentially in a pile of trouble because he is put in a position where he needs to scam the Mafia (this is the price he must pay for the FBI agent, Richie DiMaso, to let him and Sydney off). DiMaso explains to Rosenfeld that he really is in trouble with the Mafia--that the Mafia will be looking for blood and he, Rosenfeld, will be the victim. Why him and not DiMaso or the major of Camden, one of the other characters involved in the scam? Because, explains DiMaso, the Mafia would never go after someone in the FBI or a politician.

DiMaso doesn't explain further--but he doesn't need to. The Mafia would be crazy to go after an FBI agent, because the rest of the FBI would retaliate. The Mafia would be almost as crazy to go after a politician because the politician is in a position to retaliate.

As I said above, this seems real. It also implicitly illustrates a key difference between economic power and political power. Economic power can mean monopoly or monopsony power. More usually, though, people use the term "economic power" simply to refer to wealth. But those with economic power, whether it means wealth or monopoly power, can't, solely because of that power, force you to do anything. At worst, they can withhold options. But even a low-level FBI agent or a mayor of a small city, can unleash a large amount of force on people.


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COMMENTS (19 to date)
Curtis L. writes:

I loved the movie as well. It's one that sticks with you.

Very good points. One rejoinder to your last paragraph -- can economic power (as wealth) make the jump to other kinds of power, such as political?

Enial Cattesi writes:

@Curtis L.:
Economic power can buy you political power. But the point is that economic power is very different from political power.

Political power is pure aggression, it is power to unleash violence without or with little fear of retaliation. In the case of economic power, you can retain it only as long as you can serve the customer.

It is true that most of those who acquire wealth trough economic means will want to get political power. This is because the consumer is fickle and has demands and complains a lot while a guy under the thumb of state has to pay or he will get it.

Pajser writes:

Those with economic power, the owners and their employees, can demand that people obey their decisions. Those who do not want that have the choice to [1] stop using owner's property, including land, or [2] go to jail.

Those with political power, the states and their employees, can demand that people obey their decisions. Those who do not want that have the choice to [1] stop using state's property, including territory, or [2] go to jail.

It is surprisingly similar, isn't it? It is not accidental: modern political power is the result of the nationalization of the king's power. The king's power is derived from his property rights on the territory and from the contracts he signed, i.e. it is economic power.

Mark writes:

What did you make of the main character's breaking windows in his youth to drum up customers for his father's failing glass business? And the fact that he says that it was the turning point in his life to becoming a scam artist?

AS writes:

If the government abided by constitutional limits, political power would not be so dangerous. The founders did their best to limit the scope of government, but those limits have eroded over time. What can you do about it?

David R. Henderson writes:

@Mark,
My friend with whom I went to see the movie, who, himself is an economist, turned to me and grinned, mouthing the word “Bastiat."

Harold Cockerill writes:

Pajser, do the likes of Warren Buffett and Bill Gates have their own jails?

Jim Caton writes:

The portrayal of Carmen Polito was insightful. He took for granted that he had to work with shadowy elements in order to accomplish his goals. It was simple business to him.

Pajser writes:

Harold, Gates and Buffet have no prisons, (except maybe that they're married.) Is it important?

James writes:

Pajser,

Can Bill Gates decide a case in which he is also a plaintiff? Can Warren Buffett? Can the state of New Jersey?

Can your landlord require you to pay rent for a ten year period after leaving, even if this were never a term of the lease? Can the government of the US require this of a citizen who leaves?

These differences are not trivial.

Rusty writes:

I'm not sure I agree with your characterization about why there would be a hesitation to kill a politician or an FBI agent. I don't see it as those people are able to retaliate (not sure how they can retaliate if they're dead). I think there's a general recognition that the killing of someone integral to the legal process (judges are another example) represents a heightened danger to society.

Harold Cockerill writes:

Pajser, jail is where the state sends me if I refuse to do business with it. What can Gates or Buffett do (an example of economic power) if I choose not to do business with them? What would happen if Mr. Gates came to my house, kicked in my front door and forced me to buy Windows 7?

On the other hand every day large men that work for the state show up at people's houses and kick in the front door. Sometimes they shoot the people inside.

It may be that Mr. Gates and Mr. Buffett have had people shot (I have absolutely no knowledge of that ever happening) but if they did (not that they've even thought about it) they would have to be very careful and not let anyone know.

It isn't that I think economic power is irrelevant. Its that political power that controls the state is frighteningly powerful. In the twentieth century hundreds of millions of people were murdered by their own governments. Can it get more powerful than that?

Gene writes:

Rusty, I'm not clear on your point about killing a politician or FBI agent. The dead FBI agent obviously cannot personally retaliate; but law enforcement organizations are tight-knit and tribal. They take the killing of a colleague very seriously and go to great lengths to punish the perpetrators. Governments are also likely to go very aggressively after the killers of a politician.

And in your last sentence are you implying that the Mafia is worried about a "heightened danger to society"? Seems it is mostly worried about a heightened danger to itself.

Steve Sailer writes:

In real life, the scam was that they charged an "application fee" to have your loan application looked at, which they just pocketed and then told victims that they'd been turned down by the lenders (who didn't exist).

"Weinberg did start a firm called London Investors, and for a large nonrefundable upfront fee, he promised to secure for his clients huge loans that would never materialize. One of his victims was Vegas singer Wayne Newton, who was one of the lucky ones since he was only duped out of $850. Weinberg said the suckers were so eager that some of them got taken twice, although this doesn’t seem so crazy if you think about the high interest rates of the stagflation years."

http://www.thedailybeast.com/articles/2013/12/17/the-real-story-and-lesson-of-the-abscam-sting-in-american-hustle.html

A small time scam.

Philo writes:

The distinction between *withholding options* and *unleashing force* seems soft.

Steve Sailer writes:

Think about it from Wayne Newton's viewpoint: He's not just a singer but a Vegas real estate developer. He doesn't want the word to get out that he's so desperate for a big loan that he got ripped off by some minor league scamsters. That makes it harder for him to raise money from investors. He could probably have some of his friends in Las Vegas have their friends break the conman's thumbs on the qt, but that's a big favor that could boomerang if the FBI is wiretapping his friends, and anyway he's not sure he got ripped off at all. So, it's $850 gone, which isn't the end of the world for Wayne Newton.

David R. Henderson writes:

@Steve Sailer,
Thanks.

Pajser writes:

Harold Cockerill: "jail is where the state sends me if I refuse to do business with it. What can Gates or Buffett do...?"

Russian or Sudan cannot do anything if you refuse to do business with them. But if you live in Russia or Sudan, yes, they can send to jail ... On the same way, Gates and Buffett can send you to jail if you break their rules on their land.
James: Can Bill Gates decide a case in which he is also a plaintiff? Can Warren Buffett? Can the state of New Jersey?
The capitalists have lot of superior authorities above them. New Jersey - one or two. I am not sure that it is in nature of economic power, and not just one of many possible decisions.
Harold Cockerill: Its that political power that controls the state is frighteningly powerful.
It might be that it is about amount of power. The power of Saudi king is economic power - he is owner of the Saudi Arabia territory. His power depends on profitability of his actions with own property, not on the quality of his administration of public property. I think he is more scary than, say, President of slightly wealthier Netherlands.
David Summers writes:

How about this?

Economic power decreases when abused.

Political power increases when abused.

What makes power frightening is not the power, but the lack of controls on that power. A homeless guy is more scary than a banker because even though the homeless guy may have only power his personal power amplified by a knife, and the banker has can hire a professional hit man, the homeless guy has no controls (nothing to lose) while the banker has to at least appear "good" to keep his position in society. (Obviously most homeless guys are actually good people, but this is why they are scary.)

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