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Deadwood Economic Wrap-Up

HBO's Deadwood ended its first season this week. The last episode tied up some loose ends, but was light on economics.

Here are the tidbits I saw:

Luxury has a specific meaning in economics. It is a good whose purchases go up faster than rising income. The big moneymaker in town is Al Swearengen, and the luxury he shares for important meetings is: canned peaches. Today, these are probably an inferior good (one whose purchases decline as income increases).

The arrival of an army detachment leads to a consideration of opportunity costs and tradeoffs for ths soldiers: desert to pan for gold and possible pay the consequences, or report back for duty after some rest and recreation.

Later in the episode, Farnum (the mayor and a hotelier) sets himself up as a monopolist to sell provisions to the army detachment. There are not a lot of specifics, but later the quartermaster for the unit complains about the resulting high prices. There is no mention of the monopsony power the army detachment has.

Dr. Cochran engages Swearengen and his prostitutes for the care of the dying Reverend Smith. Later Swearengen euthanizes Smith in an act reminiscent of current debates about the cost of health care for the terminally ill.

Alma's marriage to Brom Garrett had implicit value. Apparently, Alma's father was able to leverage his connections into $47,000 in loans which he expected Alma to help him cover.

The conflict regarding the value of a white person's life vs. a Chinese person's life continues with a murder of a Chinese laundry worker. Swearengen refuses Wu's request for retribution.

Swearengen suspects that inciting unrest regarding the Chinese is a business method being used by Tolliver to take over the burgeoning Chinese Alley. This dovetails with Tolliver's speculative purchase of a lot on the alley several episodes earlier.

Tolliver tries to buy/bribe the protection services of the army. The price of $50,000 gives an indication of how much he thinks he can make in future profits.

Lastly, Swearengen had bribed a magistrate (Clagett) to "handle" an arrest warrant on him, and then had bribed the Clagett's bag man (Adams) to kill the Clagett when it became clear that he was going to take the money and demand more. Anticpating this, Clagett had arrived with the army detachment. Clagett and Swearengen then begin to negotiate with Adams present, feeling each other out for imperfect information. Clagett committs a major bargaining error by revealing that the warrant is on his person. Suspecting that Clagett is the only person who both knows of the warrant, and his location, Swearengen directs Adams to kill Clagett on the spot.

See my earlier Deadwood posts:

See my earlier economics in Deadwood posts at:
Prices Only Economists Can Appreciate in Deadwood
Corruption's Prices in Deadwood
Deadwood's Invisible Hand
Derivatives in Deadwood
Collusion and Asymmetric Information in Deadwood
Elasticities in Deadwood
21st Century Economics in Deadwood

Deadwood's Economics

This week's episode of HBO's Deadwood continues with old economic themes.

The major feature this week was Swearengen offering a contract to another character that is based on the contingencies in a repeated game (in the game theoretical sense). Specifically, Swearengen had earlier bought off a territorial administrator to eliminate the problem of an outstanding arrest warrant. Now, the administrator has sent back a bag man for more cash. Swearengen offers the bagman $2,000 to kill the administrator. The bagman balks at the offer, indicating that something more like $20,000 would be appropriate. Swearengen points out that there is a repeated game here. If he does this job for this price, there will be other more lucrative jobs in the future. The bag man agrees to the contingency deal.

In more minor economic tidbits:

Tragedy of the commons is touched on when Charlie Utter remarks that his new position as Fire Marshall is not making him friends. Even though what he is doing is good for the camp as a whole, the affected individuals are not pleased.

The effects of uncertainty on a small business are shown as Joni Stubbs notes that her plans for opening a new brothel have been on hold due to unclear funding.

Negative externalites and cash flow valuation are shown when Jewel, a handicapped worker at the Gem Saloon, discusses obtaining a brace for her leg to prevent the shuffling that her boss finds annoying. A fixed cost investment in a brace may help her retain her future cash flow (this sounds like a primitive form of having plastic surgery to enhance your job prospects).

Sy Tolliver is still upset that the opportunity cost of one dead Chinese courier is one dead white man, so he encourages Leon (the junkie) to stir unrest.

Lastly, Trixie offers her services to Sol Star for free, and he accepts. When Swearengen finds out, he demands a payment from Star, or from Trixie in lieu of that. This touches on contracting (do Trixie and Swearengen have an implicit contract forbidding this), property rights (who owns Trixie's services, Trixie or her employer), and market power (Swearengen charges them the normal rate, since he does not have market power over the sort of relationship they are engaged in).

See my earlier economics in Deadwood posts at:
Prices Only Economists Can Appreciate in Deadwood
Corruption's Prices in Deadwood
Deadwood's Invisible Hand
Derivatives in Deadwood
Collusion and Asymmetric Information in Deadwood
Elasticities in Deadwood
21st Century Economics in Deadwood

Prices Only Economists Can Appreciate in Deadwood

HBO's Deadwood continues to pour out blatant economics disguised as a western in this week's episode.

Economists are sometimes described as heartless and unemotional, and you probably need to be that way to see the economics of this episode.

The plotline is that Wu imports opium from California by (Chinese) courier. He then sells it to Swearengen who is the prime distributor. This week, Wu confronts Swearengen with the news that two white men killed his courier and stole his opium. He expects Swearengen to find the culprits and deal with them (the unspoken idea is that Wu cannot pursue the culprits himself due to prejudice in the old West). Wu clearly desires a blood atonement for the death of his hireling. And, there is never a question about catching the perpetrators, or passing judgement.

So, where is the economics? It is in the question that comes up repeatedly throughout the episode. If two white men committed the murder, how many need to be killed in order to settle the issue? Swearengen inquires with a number of people (whites only), who tell him implicitly that the opportunity cost of a Chinese man is definitely not two white men. In fact, many exhibit their prejudices by saying that the opportunity cost is zero white men! Ultimately, Swearengen settles on a price of one white man for one Chinese man, but this is only because he is afraid that Wu could extract that cost in other ways that might hurt Swearengen more.

See my earlier economics in Deadwood posts at:
Corruption's Prices in Deadwood
Deadwood's Invisible Hand
Derivatives in Deadwood
Collusion and Asymmetric Information in Deadwood
Elasticities in Deadwood
21st Century Economics in Deadwood

Corruption's Prices in Deadwood

Government corruption rears its ugly head in this week's episode of the HBO series Deadwood.

Deadwood at this time is not a legal entity. In fact, it is probably best described as a illegal non-entity. It is illegally located on land given to the Sioux by treaty, and is technically not part of the United States. Further, there is a camp known as Deadwood, but it isn't incorporated in any way that would make it an entity with legal standing.

This is a problem when a new treaty is negotiated with the Sioux which will potentially bring Deadwood and its burgeoning wealth under the purview of the government of the Dakota territory.

An agent of the territorial government shows up with three pieces of information. First, a willingness to provide Swearengen with a list of government officials and the size of the bribes that would likely sway them. Second, news that there is a warrant for Swearengen's arrest in Chicago, and a price for that problem to be fixed. The third one is the most interesting. The agent asserts that the territorial government would want to deal directly with a local government agency. The absence of such an agency will impede the ability of capitalists in Deadwood to preserve their position through the corrupt territorial government. Ouila, a local government is created two hours later. The idea that entrepaneurial corruption can lead to the creation of government institutions is a hot one in the theory of economic growth.

See my earlier economics in Deadwood posts at:
Deadwood's Invisible Hand
Derivatives in Deadwood
Collusion and Asymmetric Information in Deadwood
Elasticities in Deadwood
21st Century Economics in Deadwood

Deadwood's Invisible Hand

The May 9th episode of HBO's Deadwood contained two more tidbits of economics.

Adam Smith's invisible hand shows up when Star and Bulloch offer up the use of their hardware store as the location for injections of smallpox vaccine. Star notes that the store made $27 extra because of this show of goodwill. Whether or not it was planned this way, this is a classic of the invisible hand. Star benefits personally by making available a completely separate benefit to other people from which he does not profit. His self interest helps him and society.

There is also the continuing evolution of the value of Alma Garrett's claim, Swearengen's interest in it, and Farnum's compensation derivative to act as the go-between. An assayer finds a gold deposit on the claim, increasing Garrett's subjective valuation of her equity. News that a new treaty has been negotiated with the Sioux causes Swearengen to reevaluate the possibilities, and recognize that there may be more money made without Garrett's claim than with it. For the current term, this pushes the value of Farnum's compensation derivative to zero.

See my earlier economics in Deadwood posts at:
Derivatives in Deadwood
Collusion and Asymmetric Information in Deadwood
Elasticities in Deadwood
21st Century Economics in Deadwood

Derivatives In Deadwood

The economic content keeps flowing in HBO's Deadwood.

This week's episode featured Farnum negotiating compensation from Swearengen for the acquisition of Alma Garrett's claim on the behalf of Swearengen.

The original price for this service (negotiated a few episodes back) was a flat 10% of the last posted price of the claim - provided that Farnum bargained Ms. Garrett to a lower price.

This week, Farnum begins to suspect that Swearengen knows more about the underlying value of the claim than he lets on. So, he negotiates what amounts to a derivative as his compensation - a percentage of the first million dollars made from the claim, and a different percentage for every dollar past that.

The ultimate value of the claim is not yet known, but Farnum did raise his offer to Ms. Garrett by about 60% under the new compensation scheme - indicating the underlying value of the derivative.

Collusion and Asymmetric Information in Deadwood

HBO's Deadwood featured collusion and asymmetric information in this week's economics oriented western.

The collusion was actually beneficial and created a public good. In the absence of government, the capitalists in town got together to jointly fund a collective treatment for smallpox. Money was pooled, and property was donated to: 1) advertise the solution, 2) establish a quarantined location, and 3) send for and buy vaccine. The invisible hand of unenlightened self-interest was the motivating factor: the businesses all want to preserve their potential future profit.

The asymmetric information was all over the episode. Alma Garrett and Trixie hide Alma's recovery from laudanum addiction from Swearengen, so they can negotiate a better deal. The two saloon owners hide the prevalence of smallpox from their clientele. Joni leads Ellsworth to the craps table where he is an easy mark. The collusive businessmen hide the extent of the smallpox problem through newspaper editorialising.

All in all, the economics was subtler this week than earlier in the season. See my other recent posts about elasticities and property rights in Deadwood.

Elasticities In Deadwood

HBO's Deadwood has some economic nuggets in it that keep getting my attention.

In this week's episode, Swearengen explains some cross-elasticities of the saloon/brothel business to his henchmen Dan Dority.

For lack of a better place, the trial of Jack McCall for the murder of Wild Bill Hickock is held in Swearengen's saloon, The Gem. McCall is wrongly found innocent, and celebrates at the bar.

Swearengen then explains to Dority that this sort of result causes the crowd to be agitated. Increased agitation in turn causes the sale of liquor to go up (a positive cross-elasticity), but the sale of prostitute services to fall (a negative cross-elasticity). He concludes that on net, the combination of these is bad for business. As a profit maximizing manager, he then arranges for a horse to be left outside for McCall, and tells him directly that he will be killed if he stays in Deadwood.

The show strives for historical accuracy, so I wouldn't be surprised if the creator (David Milch) found those business nuggets in original source documents.

21st Century Economics in Deadwood

I chortled an economist's belly laugh as I watched Sunday's episode of the new HBO series Deadwood on my PVR last night.

While Montana (Seth Bullock) builds his hardware store, Wild Bill Hickock notes that there "isn't much law around [Deadwood]", to which Montana deadpans "I'd settle for property rights".

Is that an option I can have right now?