We’re finally watching Breaking Bad. Halfway through the second season, Walt reveals the folk economics he holds dear; folk economics is the often nonsensical belief system that substitutes for economics in the untrained.
In this case, Walt plans to pursue an old belief that remains popular today, even though economists have shown that it pretty much never works out.
Here’s the plan: erstwhile normal guy and ersatz drug kingpin Walt, after vicariously eliminating three layers of competition, has a monopoly — so now his plan is to raise the price.
This works in the short-run, but not in the long-run. Folk economic beliefs miss that long-run consequence.
The reason is that “vicariously eliminating two layers of competition” by liquidation is a form of raising costs and reducing profitability for others. What keeps out new competition is the signal that potential future profits are low.
But, Walt is going to intentionally muddy this by raising prices, signaling higher potential profits and encouraging new entrants into the market.
This is going to go badly. Of course, not having it work out might be a story arc for the show, so don’t spoil it for me.
Hey, glad you're finally jumping on the bandwagon. I just finished season 4, and it's intense. In my personal opinion, it's the best show currently on television, and one of the best of all-time, at least in terms of acting, if not it's understanding of fundamental economics. =) Brian Cranston has won the Emmy award for Best Actor three years running.
Posted by: Kit Lloyd | January 05, 2012 at 11:34 AM
*its. Sorry, that bugs me too...
Posted by: Kit Lloyd | January 05, 2012 at 11:37 AM
Sorry for so many comments, but I just had a thought. Maybe, giving Walt the benefit of the doubt, he does understand the long-term consequences of what raising prices will mean for potential new entrants, but simply doesn't care because he doesn't plan to live long anyway. He wants to maximize his short-terms profits as much as the market (and his product) will allow.
Posted by: Kit Lloyd | January 05, 2012 at 11:45 AM
Hey Kit:
First reply: Don't get me wrong, I am enjoying "Breaking Bad" very much. But it isn't quite as good as I thought it would be — a 9 instead of a 10. For me, it's not up there with, say, "Deadwood", "The Sopranos", or "Oz". And that's coming from someone who liked Bryan Cranston way back when he was Jerry Seinfeld's dentist (I also liked Anna Gunn very much in "Deadwood").
Posted by: Dave Tufte | January 05, 2012 at 01:09 PM
Second reply:
Don't worry about leaving too many comments ... one decent comment makes up for 10 spammers.
You may be right about Walt's short term bias. I had thought about this in some other context about the show, but I didn't make the connection to this situation.
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