Russ Roberts

Adam Davidson on Hollywood and the Future of Work

EconTalk Episode with Adam Davidson
Hosted by Russ Roberts
Nathaniel Popper on Bitcoin an... Continuing Education... Adam D...

What's it like to hang out with Brad Pitt, Christian Bale, Ryan Gosling, and Steve Carell for two months? Adam Davidson, who writes for the New York Times Sunday Magazine, was the technical advisor to the upcoming movie, The Big Short. Besides rubbing shoulders with celebrities, he noticed what he calls the Hollywood model where highly talented workers come together temporarily in project-based employment. Davidson discusses the costs and benefits of this approach and its potential emergence as a more common phenomenon throughout the economy.

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0:33Intro. [Recording date: May 29, 2015.] Russ: Our topic for today is an article you wrote recently in the New York Times Magazine called "What Hollywood Can Teach Us About the Future of Work." It's some of the economics you learned while being a technical advisor on a Hollywood film. And I want to start by hearing more about that experience. Technical advisor to a Hollywood film sounds like a very good job, or what the Gershwins called 'nice work if you can get it.' What was that like? Guest: So it was absolutely awesome. It was a really fun experience. Although I will say, it was not a lucrative experience. I mean, it was fine--a friend of mine yesterday said, 'Is this retirement money?' And it is definitely not something to do for the money. The technical advisor definitely makes the least amount of money on a Hollywood set. I would say, But, I am not upset because it was really, really fun. What happened was, Adam McKay is a major Hollywood writer and director. He was at Second City and helped found the Upright Citizens Brigade and then went on to be the head writer at Saturday Night Live, and became a creative partner with Will Ferrell and wrote and directed the Anchorman movies, Talladega Nights, Step Brothers. But he is a guy who cares a lot about economics and economic issues, and he decided to helm the adaptation of Michael Lewis's book, The Big Short. Russ: Former EconTalk guest. I have to get into the name-dropping, Hollywood thing. Guest: Of course. Former EconTalk guest. And former Planet Money guest, I'll also mention. So, Adam McKay was working on this script for The Big Short and he quickly found himself struggling, as I think all of us did, with understanding what these toxic assets were, that were so central to the financial crisis. He wanted to understand better the broad world of Wall Street but also how a crisis in Wall Street could have such a devastating impact on people around the country and around the world. And my brother, Evan Davidson, is a senior Vice President at Paramount Pictures, so he's one of the guys who is in charge of making movies at Paramount. And he was talking to Adam McKay and said, 'Hey, you should talk to my brother. My brother, Adam Davidson, knows a lot about that stuff.' And so that's how it happened. And so, for over a year, Adam McKay and I would talk quite often, for hours at a time, very often, as he was writing the script. But it was when the movie actually got green-lit and started production that I really got involved even more so. Russ: For the non-insider, green-lit means the company approved the filming of it, right? Guest: Yeah. That whole part of it was really interesting. This is a movie, a major motion picture, starring Brad Pitt, Christian Bale, Ryan Gosling, Steve Carell--so a major motion picture. Russ: Couldn't they get anybody good? Guest: I know. It's ridiculous, ridiculous cast. Russ: How did they stoop so low on the technical advisor side? They're going top shelf. Never mind. Go ahead. Keep going. Guest: No, I agree. Yeah. Although I will tell you--like, Adam McKay did talk to a variety of economists. I'm not an economist. Russ: But you play one on Hollywood? On a Hollywood set. Guest: And I play one on the radio and in print. But I don't want to speak for him, and he'd be thrilled to be a guest on your show and would be happy to tell you himself. But I think economists are--and Russ, I would genuinely say you are an exception to this--but economists as a group are not the greatest at conveying their work in English so that people can understand it. And also not the greatest at accessing the emotional stakes of the work they do. So a lot of our conversations were about linking some financial product or someone's view about a financial product to ground it emotionally. So, he could write a scene where someone is deciding to short a collateralized debt obligation, say, and Adam really wants to understand: What is a collateralized debt obligation? Why would someone short it? Why was that considered a strange trade in early 2006, say? And what was it like to be a person who was going against the market and having a very different view than the rest of the market? And--we don't have to go too deep into it unless you want to, but a collateralized debt obligation--a CDO for those who don't know--when I think of toxic assets, that was the essential toxic asset. That was one of these weird derivative products based on mortgage-backed securities that were at the heart of the financial crisis. And this movie is about a handful of people who understood before others did that CDOs and other mortgage-related financial products were a bubble or about to lose a lot of value and create a lot of havoc.
6:27Russ: So, how--when it came time to film the movie, how long were you on the set for? Was it a day, a week, a month? What were you doing? Guest: Yeah, I was there probably a month all together, maybe just under a month. I think it was about two months of, I think they call it 'principal photography.' So, the economics of shooting a movie that takes place entirely in New York but shooting it in New Orleans was very interesting. That's all about tax incentives; and that's a whole conversation we could have. Yeah, I think you and I would both agree that that's probably not a great use of public resources. But there it was in New Orleans and finding those corners of New Orleans that they were able to make look like New York or in another case of California or Florida. So that was all interesting. Russ: But when you were on the set, were you doing things like, 'Oh, he wouldn't be happy when the price went down'? Did you have a role, or were you just there for fun? Guest: No, no. So, working on the script, there was a lot of conversation about what the characters would feel based on different market conditions. So, if you try and put yourself in the shoes of--and these were real people in Michael Lewis's book, Michael Burry or Danny Moses or whoever, who were making huge bets, taking a lot of their personal wealth and their professional reputation on betting against the product and that product continued to rise in value despite their telling their investors, 'No, no, it's about to go down in value.' What would that feel like and what was going on there. That was all sort of in the year before, as he's writing the script. Or, that was largely in the year before. Then, on the set, and I'd say my biggest role was working with what they called the Department Heads. So, there's a bunch of what they call 'creative departments.' There's the Set Designer, who is in charge of the overall look and feel of the set; but then there's separately a Set Dresser, who is in charge of the physical objects that are on the set that actors do not touch; and then separately there's a Prop Master, who is in charge of the physical objects that actors do touch. And then there's a Costume Designer, who is obviously in charge of the costumes. And it was fascinating to me how specific and specialized these roles are. So, for example, a-- Russ: I have to quote Adam Smith because his insights--and I'm going to mention him later, but his understanding about the power of specialization to create wealth and in turn create more specialization is very--this is an incredible 2015 experience, right? I mean, it's absurd how specialized things are. But go ahead. Guest: It's amazing how specialized things are. Yeah. On the set there are 250, 150-250 people, each of them with a very clear and understood job. That's what struck me. I was on set, the very first morning, the very first day of shooting. It's dawn, it's 6:50 or something in the morning. And it's, I think 150 people that day, who have never worked together in this configuration--maybe some of them had known each other on other shoots. And instantly, without anyone saying anything--there's no speech, there's no meeting--it's just instantly everybody is doing their job. They are laying cables for the lights; they are setting this, they are setting that. Anyway, it was all very fascinating. Russ: Did you want to say something about specialization? I interrupted you. Guest: Yeah. So, you have--and it's very clear to them. It took me a long time to figure it out. But there's someone who is in charge of painted walls if they are not active in the scene, but someone else is in charge of the walls if the walls are somehow interacted with by actors. So, there is a wall where someone did some drawing on it--that's the Prop Master's work, not the Set Designer's work, because it involves markers, I guess, that the guy holds in his hand. I learned that watches, for example, is Prop Master, not Costume Designer. There's the Director of Photography, there's the Lighting Department. And what struck me was they had a relatively little bit of time before production started where Adam McKay, the Director and Writer would meet with them and set an overall tone. Adam McKay is known for these kinds of absurdist, almost cartoonish live action comedies. And a lot of these people were people he had worked with on those. But he wanted to make clear: 'That is not what I'm going for.' This is a very real-feeling, almost documentary-feeling film. There is certainly a kind of melancholy. This is a film about a financial crisis that affects real people. So, Adam McKay sets an overall feel, an overall tone; but then each of the creative department heads has to interpret that in their own way. So, I had a very long talk with the Set Designer about the particular color of off-white he used for the walls in certain offices. The Costume Designer was really, like, she was amazing--Sue Matheson--and she called all the real people involved; she did enormous amounts of research to understand exactly what people wore. It was technically considered a period piece, even though the period was 2006, not that long ago. Russ: It's an historical film. Guest: Yeah. She had to know how were people wearing their collars way back then in 2006 on Wall Street. What kind of shirts were they wearing? And then the Prop Master, etc. So they were in charge of that, although they asked me--I talked to them a lot on the phone; I actually took them to a trading floor in Los Angeles and brought them on a tour of a trading floor and explained the different kinds of computer screens that would be there, all the paper--there is a surprising amount of paper, I find, on trading floors these days, research that people get from banks or lists of prospectuses and stuff like that. So I explained all that to them. They were very fascinated--on trading floors people always have these like Lucite awards and Lucite objects. And a lot of the discussion was how "real" would this be: How documentary was it? And McKay said 'I want this almost, like 98%, 99% real.' And this was a real challenge. A bunch of the people on this film had worked on The Hunger Games. Some of them worked on the new Terminator movie. So, these are people who are-- Russ: A little bit different. Guest: They can create crazy worlds. And suddenly, there's nothing more boring than a trading floor. It's an office with desks and computer screens and mostly guys in like white and blue shirts and dark slacks sitting and typing. And McKay was not going to have the fantasy that people have. There weren't going to be people standing on chairs and screaming out buy and sell orders. He wasn't going to fake it a lot. So, it was amazing to me how they were able to both be true to reality but still somehow make it alive. And that just--I guess you need to be a genius at what kind of off white makes a really boring office look interesting. So, at first they were asking me very broad questions: Just what is this universe? They didn't know. I think a lot of them didn't--think of the movie Trading Places or the movie Bonfire of the Vanities where there's people screaming and yelling and throwing things and cursing. And I dissuaded them from that. But then it became very, very pragmatic. What exact documents would be on this desk, and what documents would be on that desk? I was the middleman with Bloomberg--because everybody has Bloomberg screens, who is a trader. And Bloomberg actually has a process where they create screens for movies. And I was the guy who would talk to them: here's what this guy would have on his computer screen, but this woman would have this other chart, this other graph, or whatever it might be. And in this movie they really wanted it accurate. When the movie comes out, and hopefully you'll see it, you'll see there are offices filled with paper, just piles and piles of paper. And I'm pretty confident that all of that paper is pretty much what would have been there. So, there are real prospectuses from real financial instruments; there are real reports from real banks and analysis firms. One of the actors was telling how cool it was to be kind of waiting between shots and just randomly picking up a piece of paper and thinking, 'Wow, that's actually what my character would have had at his desk.
15:56Russ: Well, what's weird about it is, there's this famous story--I forget which book it's in; doesn't matter--Williams Sonoma had some catalog, and on the cover was some kind of food, and it was a pie. And they did this real beautiful photo shoot of the pie, and somebody tasted the pie; it didn't taste good. So they threw everything out. So when you say [?] in pictures, right? So, here are these people trying to recreate something that 99.99% of the audience has no idea what's authentic; but they want it to be authentic anyway. And that's interesting by itself. Given the list of people who were there and what that whole experience was like, is this the most fun you've had since, you know, getting to know about the Keynes-Hayek rap videos? How would you rank this in terms of professional thrills? It's got to be up there. Guest: I would say it's definitely high up there. It was really fun. And I'm not above saying that it is thrilling to sit down with Brad Pitt or Ryan Gosling or Christian Bale or Steve Carell and be tasked with explaining the financial crisis to them. That's pretty exciting. I've got to admit. I'd love to say I'm above all that. But I'm not. It was really fun. And I have to say, by the way: They were all awesome. Just like, honestly humble, professional, cool, easy. I was surprised. I had in my head what a movie start might be like. And these guys--they came to work; they were serious; they were brilliant. I mean, even if they weren't superstars it would have been just a thrilling experience. Everybody involved, I have to say, were top of their game. Just everyone--the Costume Designer--I don't know, I would never care about the Costume Designer, but she's amazing. And the thought that went into what people wore and how that conveyed the story and how that supported the mood. And as I said, the Set Designer, the Prop Master--all of that was really, it was just cool. I was just going to say--several people told me this was an unusually pleasant experience, and that whatever nightmares you can imagine is a very real possibility--just an abusive director who screams and yells, actors who act like divas. You know. A bunch of people who don't coalesce so elegantly. People told me this was an unusual experience. And part of what make it unusual--I think Adam McKay--he's become a close friend and he's just a really good guy. But he set a tone that we are telling a real story and an important story, and this is not just a piece of entertainment but this is something of an historic document, and it's important that people understand it. So I would said this was a huge outlier in the degree of respect they gave, not just to me but to the idea of getting it right--getting the economics right, getting the finance right. I don't think that's typical. Russ: I'd like to volunteer to be the technical adviser to the technical adviser. If that position is available in your next gig. I hope you'll keep me in mind. Guest: You would have been very helpful. I'll keep you in mind. Russ: I'll take a small, very small stipend.
19:32Russ: The reason I mentioned Adam Smith before, saying I would mention him again, is one of my questions, which you've kind of answered but I'm going to ask, to get Smith in--Smith says, in The Theory of Moral Sentiments, "Man naturally desires not only to be loved but to be lovely." And he says there's two ways to be loved. One is to be rich, famous, and powerful. And the other is to be virtuous. And there's a seductive aspect to being loved in that first way: we all are attracted by wealth and by power and by money, and people who have those things, people pay attention to them. They are loved. That's what Smith means by 'loved'--they are respected, and when they walk in the room, heads turn. So you were in that universe in an extraordinary way. Those names that you mention, those are real stars. Those are the top of the top. And yet you are saying they were pretty lovely in the virtuous sense, too--not just that they were rich and famous, a little bit powerful. Guest: Yeah. It felt like--I remember seeing the dancer Margot Fonteyn give an interview where she said she was always taught to take the work very seriously and not to take herself seriously at all. And that is definitely the experience I had. This was a group of people who felt they were doing something very important, both the story itself and adding, hopefully, to people's knowledge of this financial crisis; but more broadly that, embodying characters, telling an emotional story is a serious and important job. And I did not witness anybody taking themselves too seriously. Russ: Of course, they could have been acting. Guest: They could have been acting. And I should say: My Dad's an actor; my Dad's not a famous actor--he's a solid, journeyman actor. And so I grew up surrounded by actors. And I would say that is my general experience of actors. There certainly might be, broadly speaking, a touch more narcissism than there is in the general public, and there certainly have been divas I've met in my life. But I think people take it pretty seriously. And certainly that's what I saw on this production. Russ: Incredibly fun. Before we move on to the "economics," the less glamorous part of this episode, is there any story you want to share with us--that you can share? I know you can't tell everything that happened on the set; you are under all kinds of confidentiality and nondisclosure agreements. Do you have anything you can share that's G-rated for our audience that might amuse? Guest: Here's the constraint--and this was something that I was mindful of; and it is an economic lesson. So, one thing that I have thought about celebrity in general is, when you are a significant celebrity, there is an orbit around you. There is a world of people whose lives, whose income depends on you. And it's ecosystem after ecosystem. You have your own people--your manager, your agent, might be a producer, a film company. Then you have these other people--paparazzi and gossip columnists and others that feed off of that fame. And the end result is that anything I might say about any one of these celebrities suddenly has this economic value in the world. And can be distorted and misused, etc. I honestly have nothing negative; I have nothing salacious. But I have some nice stories of having nice times with really pleasant people; and they are nice stories. But I don't want to tell them, because it's-- Russ: It's okay, Adam. I'll just [?] make [?] I talked to somebody who was saying Christian Bale, might be very excited. They are big fans of Christopher Nolan and that's great. Guest: Yeah. Here's just a quick--we just had this funny moment. My son who is 3 always wears some Superman costume on set. And he happened to be wearing his Captain America outfit when he met Christian Bale. And normally he wears his Batman outfit. And we were going to explain to him, like 'That's Batman.' Russ: Awkward. Guest: But then I realized that to a 3-year-old that literally means nothing. He's the actor who played Batman. Russ: Or if it means something, it's probably years of therapy ahead of him to cope with that, at 3; he's not ready to--it's too intense. Guest: Right. Exactly. Although I will say, my son, after spending--he probably spent a few hours, several days in a row on the set. And again, this is a movie about people sitting in offices talking about financial profits--and it's a great, great movie, by the way-- Russ: I'm sure. Guest: But for a 3-year-old. And so one day we are getting ready to the set. And he said, 'Can we go to a set where they make movies I like to watch?' Russ: That's awesome.
25:02Russ: So, let's get to the economics that you wrote about in the piece. Thanks for all that. That was fascinating and a lot of fun. But you took this time and made a set of observations about the experience; and made some more general observation, partly about Hollywood but also about the wider economy. And in particular you are going to riff off this observation that here are these hundreds of people who just spring into action on Day 1. And when the lights go out, when the set is taken down, they are scattered to the winds. They are not part of a company; they are all freelancers brought together for this experience. And you called that the Hollywood Model. So, talk about what you saw that made you think about that. Guest: So, I've been thinking a lot because I'm writing a book, which will not be out till next year; and I'll definitely be calling you repeatedly to be a guest on EconTalk about that. Russ: I'll think about it. Guest: But it's a book that tries to explore how work will happen in the 21st century. And I've been thinking great deal about how work happened in the 20th century. And, like you, Ronald Coase, the crucial U. of Chicago economist-- Russ: And LSE (London School of Economics). Even though I have a Chicago Ph.D. [?] Some of the work we are talking about is the LSE's. I think it's the LSE. Guest: Right, yeah. It's an incredible story, by the way. So, he asked and answered one of the fundamental questions I would say of the 20th century. Which is very much on my mind. And he did it at 20. It really is an incredible story. He was a college kid studying economics, in England. I don't think he was at LSE, yet, although I'm not sure about that. Russ: I'll do some googling while you talk. Go ahead. Guest: Yeah. And he got this grant or this research project to travel around the United States and look at American businesses. I believe this is 1930; he's 20 years old. And he asks this incredibly simple question. And I know you've talked about this on EconTalk. Russ: Many times. Guest: So we don't have to go too far down this road. But basically noticed: Hey, we were taught this Adam Smithian world of markets continuously adjusting using the price signals that match supply and demand. Why is the major thrust of business, in America, these large corporations, where the market signal is completely blunted, where people-- Russ: It's command and control. Guest: Where it's command and control. And in the context of the Hollywood Model, the average worker is not given signals about their market value. You get a job, you work--and I'm now spinning off of Coase. I mean, this is, in my mind, embedded in Coase. But this wasn't explicit in his paper, "The Theory of the Firm" ["The Nature of the Firm"--Econlib Ed.]. But embedded in Coase is this idea: the average worker, a person with a salaried job, is not receiving a lot of information from the market. They get a job for a certain task, and they have that job maybe for decades. And in that time they are not given the opportunity--or the pain--of learning what their market price is. And for someone, for much of the middle part of the 20th century this was a pretty good deal for an awful lot of people. You know, we have the great wage compression and people who are kind of sheltered from those market signals did fairly well. There's a whole conversation now about efficiency wages and on and on about, you know. But broadly speaking, it wasn't, for people who got those jobs, it was not a bad thing to be shielded from the market. Russ: And to have a long-term relationship with one employer, where both sides could invest in one another, and get better at the job, and the worker could acquire skills that the firm would find useful. And there's some romance about long-term employment in the United States and how long term it was in the 20th century. But, on average I think, the model that you are talking about, that you saw, it's clearly not that long. Guest: Right. So my argument would be that, for a whole host of reasons that Coasean--it's not Coasean; it's not like he was for it. He was just observing it. But that kind of classic Coasean--or also Alfred Chandler, the great Harvard business historian describes this also, that kind of Chandlerian firm where there's, you know, thousands of people protected from market signals that, because of trade, because of technology, that is less and less the case. I'm not making some absolute claim that that's going away forever. But more and more people are finding that the market is signaling them continuously. I see this in my field, in journalism. When I joined Public Radio in the 1990s, it was already, even though NPR (National Public Radio) was only 22 years old at that point, it was already well established--it's a solid union job where you could make a solid low 6-figures income, and very few people lost the job; very few people made more than that. It was just a very predictable, solid career with very little market signal. And I would say, today in journalism, I have friends who have lost enormously: they've lost their jobs, they've had probably a permanent wage shock. And then I have other friends who are multi-millionaires, who made a fortune because of shifts in the marketplace that they've taken advantage of. And so, the Hollywood Model, one of the salient facts in my mind was that all of these various workers--the Creative Department Heads, the actors, the writer and director, even the technical folks, the electricians, the carpenters--they live in a world where they receive a market signal all of the time. Their life is broken up into these projects. This one was 2 months. Some bigger movies, like the Hunger Game movies, that might be a year and a half. You know, the big franchises, like the Hobbit movies, you might get a job for 3 or 4 years. Russ: Sequels. Guest: Yeah. But for the most part you are talking about people who, 2 or 3 or 4 times a year are directly receiving market information about their value. They are negotiating their wages movie by movie. And they are also receiving continuous information from the market because it's a very networked world, and they are learning who else is getting hired and getting a sense of how much money other people are getting paid. So just as one example that I found really funny was, Julie Hewett who was the Head of Makeup for the film, was telling me that there's been this explosion in zombie makeup over the last few years. There's the Walking Dead and all these zombie movie rip-off stuff. And that's not a specialty of hers. She's not particularly interested in zombie makeup. But she had some friends who were, who knew how to make a living person look like a dead person seeking to eat brains. And that went from a very obscure skill with little market demand to an extremely in-demand skill, with very extreme market demand. The demand far exceeded the supply. And so she was telling me her friends were doing great; there were all these people taking classes on how to do zombie makeup. But that kind of signal is happening continuously. And it's happening on many dimensions. It's happening because of tastes; so, there's no way to predict 20 years ago that zombies would become really hot, and so there's no way to tell someone in 1997 like, 'Oh, boy, you should really go to zombie makeup school.' So there's just kind of tastes. There's also technology. As camera technology changes it dramatically shifts the kinds of jobs. And I had a long talk with the Director of Photography, this brilliant guy, Barry Ackroyd--he did United 93 and Captain Phillips and a ton of other great movies. And he was telling me--there's a whole job called the Focus Puller--somebody who just--there's the Director of Photography setting the overall look of the photography; then there's a cameraman actually operating the camera; and then there's someone who puts the camera into focus. So there's a Focus Puller. And that Focus Puller job is being threatened because there is new technology that allows focusing to be done more quickly. And in my mind, for the highly skilled people who I was meeting, this was a much better deal than the Coasean, Chandlerian world we described. That these were people at the top of their game. They were receiving continual signals telling them what skills they needed to refresh; what skills were no longer valuable and needed to be replaced. And as time went on, they were able to establish a kind of reputational value. So that was some else I learned, in this world where you need a team to come together very quickly and work well together, not being a jerk is a hugely valuable thing.
34:54Russ: I think of the Hayekian role of prices to convey information, that you're talking about. It's really an incredibly dramatic part of it. But there's also this--what Hayek called the particular circumstances of time and place. And it would seem to me that there must be certain directors who have certain styles and certain tastes--obviously many of them will use the same actors, and I assume they use the same cinematographers. But under--those are the highest end. But throughout that whole chain of cooperation, the hundreds of people you are talking about, they have to have some feel, or at least the flexibility to adapt to the tastes of a particular director or the kind of movie that's being made. And they have to draw on their past experience or again their ability to adapt to it, because that image that you conveyed--it's sunrise, it's dawn on Day 1 and all of a sudden this beehive, almost literally because it's decentralized beehive, the Director is not sitting in a 1940s chair bossing people around. The Director might, for certain scenes, might move people over to this point or that point. But all the technical stuff that underlies that is emerging through the knowledge that the players have of how this gets done from, that they've had in the past. And this current model, this current project: you're not doing a good job, they are going to pay a very high price. Because they are going to be in less demand next time. So it must be. It's a really amazing application--it's where Hayek and Coase come together, it seems. Guest: Yeah, absolutely. And it's a delicate ballet. Because you're--and this was some advice my brother gave me, early on, where he said: Basically people make two mistakes. One mistake is they don't assert themselves enough, and they just, 'All right; I'll just support your vision. I'll just do whatever you tell me.' But the Director is hiring all these people to have an opinion, to have a view. And so you need to assert your view. Russ: The Director is specialized. The Director is not someone you want to figure out what costume, watch the person, what you should be wearing. Waste [?] of the time. Guest: Exactly. And you want a Costume Designer or Prop Master who has strong opinions, who says 'I think this really works. This is in keeping with the character. I don't agree on this thing.' But at the same time, you don't want to assert it too much. And that's an incredibly delicate game, and has to adapt because I think Adam McKay is a fairly accessible, easy to get along with guy; other directors are very rigid and are not at all easy to get along with. So this isn't a problem you solve once. This is a problem endemic to the field. I [?] a couple other nice features about it; and then I hope we can talk about some of the other negatives to this world, as well. Another feature I noticed is that there is--it's somehow both simultaneously rewards experience and rewards professionalism or whatever you want to call it. Russ: Reliability. Guest: Reliability. Yeah. It's not like a cartoon version of Silicon Valley where it's just all about 24-year-olds and as soon as you are old you are no longer innovating. When you've got to do this job, and each day of shooting is hundreds of thousands, or millions, of dollars, you want everyone to be a pro. And so you are willing to hire the 58-year old with a proven track record even if there's that super-hot 24-year old who you are not quite sure about yet. But that being said, there still are slots for the young people. There's a real apprenticeship program that is--not a formal apprenticeship program--but it's very well understood that the young assistants are trying to learn and are trying to mimic and to mirror their elders. And also because these movies come together so last-minute, sometimes, and you just can't get your first choice--the younger people do have an opportunity, maybe not as quickly as they wanted, but there's a reasonable expectation that, 'At some point, I'm going to be given my shot.' That, 'I'm going to get to be the top guy, simply because the first, second, and third choice top guys or gals weren't available. So, I'm going to come in.' I was talking to a--who didn't work on this movie but another friend of mine, who is a Set Decorator. So, he picks things for the set, and he really wants to be a Designer; and he told me, 'I'm just waiting for that day, that there's just no Designer available and they say we've got to give this guy a shot.'
39:55Russ: So, the thing that struck me when you--one of the things that was insightful about your piece was the idea that perhaps the last hundred years of economic history--the corporate form and the more longer-term employment--is an aberration rather than something that would persist. And thinking about it, one of the reasons it's dying--there's a lot of reasons: it's not dying but it's less common--one of the reasons the Hollywood Model is on the rise is the Coasean reason, which is the reduction in transactions costs. Of course, Coase argued that the reason you go through this "inefficient" firm structure of bossing people around instead of using price signals is that it's not free to use price signals. And so, what looks inefficient actually isn't. And I was thinking that when you live in a world where information and reputation is much more easily discovered, where you can hire somebody out of Seattle if you are in Florida or out of Boston if you are in Los Angeles who is "the best person," there's got to be a much more--I'm guessing--refined and knowledgeable set of--much more information about who can do these jobs well. So that if you said to me, 'In 3 months we're going to put together this team to do x, y, and z,' that Director or that Producer can find those people quickly and not worry that it's going to be a disaster. Because if that weren't true, then you'd have your own in-house Costume Designer, your in-house etc. But once it becomes relatively inexpensive--not inexpensive but the quality can be maintained through this more spontaneous model, you really have a much better chance to survive, it seems like, and to thrive. Guest: Yeah, absolutely. And the one thing I kept thinking about is the economic importance of gossip. This wasn't gossip in the mean way--I know nothing about the sex lives of anybody involved or anything like that. But one thing I notice is when you get a bunch of movie people together, very quickly the conversation is about other movie people. And, 'Oh, did you hear about this guy, who completely flamed out on this project?' Or that woman who saved the day on this project. Or 'Oh, boy, you're going to work with that guy?' 'Yeah, he's really temperamental. He's brilliant but really temperamental.' And that just was a constant thing. And then my wife would--if she were here, she would say that's also true for me and my journalism friends, that we're constantly having that conversation. Russ: Yeah. That's part of every workplace. Guest: And in a kind of Coasean, Chandlerian world, where the market signal appears only occasionally--once every few years or so--that still exists. But here it has real economic force. I have to assume that if the number of people out there are saying 'Adam Davidson, kind of a lame technical adviser'--if that goes up too high, I'm not getting another job.' Russ: It's over, Adam. Guest: Yeah. Right. Although I will say I think I was a very good technical adviser. [?] Russ: That's what I hear. Guest: Yeah. Russ: I heard there were times when you needed someone else to lean on and it would have been helpful to have the Technical Adviser to the Technical Adviser. Just what I heard. I can't-- [?] Guest: [?] I am very honest--this is a true story. I sent your podcast to Adam McKay and to some of the actors; I mentioned you. I really did. You're not the only economist I mentioned, but there weren't a lot. Russ: We don't want to hear about the other ones, Adam. Guest: Yeah. Russ: That's okay. That's fine. Let's keep that between you and me. I just want to mention, we had an interview with Reid Hoffman and Ben Casnocha about a year ago on their book, The Alliance, where they argue--it's not the same point but it's clearly very related--that people who work in corporations today, who pretend that it's a long-term relationship, their book is about the fact that we sort of having this lingering allure of this relationship between employer and employee that is dying. Even when you are in a corporation, you should recognize that it might not be for very long. And both employer and employee should be transparent about it to make that relationship work more effectively. So they are not talking about this Hollywood Model, projects that start and stop over 6-12 months, whatever it is. They are just saying that realistically most people don't stay on the job for a long time. That changes all the incentives on both sides. And it would be better to talk about it openly. What are your thoughts on that? Guest: Yeah, absolutely. I had dinner with Reid and Ben some time last year, and I told them that their book made me very excited, because it was, for me, the first solution I had heard of in a corporate context that actually seemed hopeful and honest. I found it extremely exciting, to basically import the best aspects of the Hollywood Model into a corporate model where everything is explicit. That's one thing about the Hollywood Model--it's very explicit. There is no--you know exactly how valued you are in the marketplace and you are told that several times a year, over and over again. Russ: And you know that each project has a start date and a probable end date. It might drag on longer than people think but in general you know that you are going to be out looking for work again. Guest: Yes. Absolutely. I think where I get worried, or get sad, is thinking about people who don't have specialized skill, who the market has not [?] be kind to, year after year. And I would say that there clearly is some dividing line where above that line, this system is much better than the old system. So, if you're a really great graphic designer at Procter & Gamble in 1957, you are probably making the same money as a really crappy graphic designer at Procter & Gamble in 1957. Like, your skills are not being rewarded. Maybe if you are a superstar you can stand out. But basically the 80th percentile guy is making the same as the 20th percentile guy. I would guess. And in this world, you are being priced much more according to your skill. So, if you are in the 20th percentile, it's good to make 20th-percentile wages. But if you are in the 80th percentile, it's bad to make 80th percentile--you're talking about in the 1950s Model. Guest: Yeah. I mean, I'm saying that the shift--so my claim would be for most of the 20th century there's a fairly crude ranking. There's a small handful of superstars; then there's a huge middle where everyone is basically making around the same and it's not very precisely correlated with your particular quality, your passion, your skill. And now, I would argue, more of us are seeing our wages more directly correlated with our particular passion or skill.
47:17Russ: Let's go back to the economics. Because in your magazine piece, you argued that you didn't talk about the transactions costs part, because that's only part of it. The other part you emphasized and focused on was the idea that the products we make are different. So, when you are in a manufacturing environment, say, where they are churning out a commodity that's the same over and over again, the type of skills that are demanded and then thereby the workforce structure and the firm structure are going to be different than today's world. So, what I want to push you toward is: What's changing on the output side on the nature of work in America that makes you think that the Hollywood model is going to be more common? And then we'll talk about who is going to have trouble fitting into that. Why do you argue that that's the future rather than just a quirky think that happens in L.A. (Los Angeles)? Guest: So, the analogy here, a place that I learned a lot, is this textile company in the South that I'm writing about in my book. Which was very much a commodity textile producer. They just made manmade fibers for like cheap sweaters and athletic wear, for most of the 20th century; and then that business collapsed very abruptly and they lost it all. And they've reinvented themselves as making kind of complex, value-added fibers that are pretty cool. Resistant to stain or resistant to flarings for people who work on utilities and stuff so that if a spark happens on them, they won't burn up. Anyway, very highly technical fibers. But the point I would make is, the way to get rich--if it's 1920 and you are all-knowing about the next 80 years, becoming better and better at commoditizing your product, becoming better and better at making the same thing over and over again, cheaper and cheaper and cheaper, that's a great way to make a living. And that's a really smart way to make a living, certainly well into the 1970s. And that is I would argue the kind of core thrust of the American economy is, on the production side, it's having a fairly homogenous suite of products and focusing the bulk of your energy on getting the production cheaper. And so the prices keep falling; but your costs are hopefully falling faster than the prices are-- Russ: Competition is forcing you to innovate; it's forcing you to pass most if not all of those savings on to the customer. And you are on this constant treadmill. I think of it as the Walmart model: you find ways to lower and control your inventory so that you can sell the same stuff everybody else is selling at a lower price; and eventually that forces prices down. And it's great. It's fantastic. It's an amazing thing. Guest: Yeah. And what this textile guy explained to me is, in that model you don't want people thinking for themselves. You don't want--the last thing you want is a guy, you know, at a Fiber Spinning Machine Number 378 to think, 'Hey, I've got a great idea. I know how to do this even better.' You want that guy-- Russ: But it's really hard to do. Guest: It's really hard to do. It's really expensive to have a system to learn from that person. Lean manufacturing is actually a brilliant system for doing this and saving money at it, but let's leave that aside. For now. That complicates my story in an interesting way. Russ: I think it's the right point. It's going on; it's just not going to be done by the person who is working the machine often. Even though, Adam Smith in the Wealth of Nations talks about the person with the machine having an idea on how to make it better. That was okay in 1776. But by 1976, that was a very specialized task already, improving that machine. And that's not going to happen with the people who work on the line, most of the time. Guest: Exactly. And so--in extreme form you have Taylorism and an absolute obsession with every body movement, etc. I think we pretty quickly learned that was too extreme. But basically you want consistency; you want predictability. And you want to know that if Frank is sick, we can put Bill in and he'll do the job just as well as Frank would: that there are clear work roles, clear expectations. And you want people not to know that much about the market signal. You don't want them responding on a moment by moment by basis to cotton prices or fiber prices or sweater prices or whatever it is, your costs and your revenue. It's just not important for them to know. But today that commodity-level business--there are companies in America that do it. We do have a lot of fiber spinning operations that export yarn to China. So we are competitive in it. But that's a tough, tough way to go. And it involves massive capital expense. You have to just stay on top of the absolute latest in machinery and that's a tough way to go, commodities. But a much better way to go is to have some high value added premium on top of your product, so that you are not in a commodity price competition race. And again I--this can be misunderstood as talking in extremes, because obviously costs and prices, the price you charge and the price you have to pay, both are important in any business. But the emphasis, I think, today, the core thrust of American business is no longer as much on the production side, on getting your costs down, but on the added value side: getting the price you can charge up by creating a product that people value more than any other product, so you are not in a price competition. And that turns out to be really a totally different challenge, that requires a system that is receiving signals from the market in a continuous way and coming up with creative solutions. It just requires more people, more brain power--and more, just you want that system to be really sensitive to the market. And another thing I think about is Ivory soap. So, up until the 1870s or so, for the most part soap is this horrible thing that you make, like your mom makes out back with the fat from the pig your dad slaughtered. And it has gristle in it, rots in the sun and stinks. And suddenly there's Ivory soap. Which is not great soap--it's actually pretty awful soap. It dries your skin; it's not a particularly nice soap. But it doesn't have gristle; it doesn't take a lot of time; it doesn't stink on a hot day in the summer. So, for like 100 years, the the soap for everybody. It's exactly wrong for everybody but it's better than the alternative. Today there's so many soaps--there's an explosion of soaps. And there's an explosion in technology, the chemicals inside of soaps. There's such a range of possibilities that soap designers have at creating new soaps and new feelings and new scents and new everything that you want to really know a specific subgroup of people: What do they care about? What do urban women in their 40s want to feel in a soap? And, what do hip kids who are 17--what do they want? Want do elderly people in an old age home, what do they want? And requires-- Russ: What a strange world it is when my teenage sons leave their body wash in my shower and I mistakenly use it. It's a frightening thing. I walk down the street and--I won't tell you what happens. Let's just say it's dangerous. [?] I couldn't resist. Guest: Yeah. Russ: I tried to stay away from it. It smells different. It's not for me. Pheromones. Guest: Yeah. And so the way I think about it is you are injecting the market more deeply into your business--into your product development, product manufacturing, your production. I always use manufacturing as a metaphor just because it's easier to picture, but I think this is actually more so in certain services. I've spent time with accountants, with lawyers, with doctors who are--and medicine is its own problem, obviously--but who are trying to think about what is the service people want. Nobody wants a tax return. That's not saying what anyone wants. It's something you have to pay for. But what advice, what help do you want to think about money and how can I add to that? How can I as an accountant add more value. Russ: So it's-- Guest: I think about that constantly as a journalist. I feel like I'm getting more market signals today than I did when I started 20 years ago. Twenty years ago I lived in a broadcast world where I was one of dozens, hundreds of reporters were producing content for a radio station. We didn't really know what people listened to; we didn't really know what they liked or didn't like. I didn't know what I personally was adding. But now I live in a world of podcasting and Twitter and online commentary, and I know--believe me, I know, day by day, week by week--I know how many people listen and read-- Russ: Butters your bread-- Guest: I know what they like and what they don't like. I'm getting tons of market signals all the time.
57:02Russ: So, I just want to push back a little, but I think what you are talking about is an incredibly important part of the change in the economy, and those implications we're not going to get into, unfortunately, because we're running short on time. But they are obviously implications for a premium that's placed on creativity and flexibility, responsiveness. And we're not the first people to notice that life's a lot harder for people who aren't well educated. It seems to have gotten a lot harder because some of the kinds of jobs you are talking about just aren't there any more. And our education system is not very responsive to that; and I think in the last episode that we did, we talked a lot about that. Obviously a related issue. But it seems to me that on the commodity argument, what you are really saying is that the value-added part--which is not just coming from the supply side; it's also coming from the demand side. As we get wealthier we want more choice; we want something more tailored to our interests, so one way to think about this is it's all about customization. It's about: How do we figure out ways to give our customers what they want, by either making different types of products or allowing them to use the products in ways they can tailor themselves to their own desires. This is the dynamism of the last 20 years. It just exploded. So, that is undeniably true, I think. What's not obviously true is that seems to me mainly on the output/product side. The question is, why is it going to be the case, if indeed it will be, that on the employment side, the input side, the workforce side, that workers then, because of that transformation towards value added and customization will tend to be more project based? In other words, obviously Procter and Gamble, if you are in the soap business today, if you are in the software business today, you are going to have a very creative, specialized team. But when Apple creates a new product, Johnny Ive is still the guy, and has been the guy for a while who figures out what its look and feel is. Steve Jobs didn't hire a different product design guy even though each product coming out was very different. They had an in-house team. So, you are arguing--which is fascinating to think about--you are arguing that it's more likely that people are going to come together for shorter term projects because of the economy in the future. And I see it right now as more, again, as transaction cost driven side, that it's cheaper to put that team together. It's not obvious to me that they are going to be more effective in creating the output side. Do you want to think about that? Comment on it? Guest: Yeah, yeah. And this is a big, tough area. And it's, I would say a lot of the data is against me. So, actually tenure at firms-- Russ: It's early. Guest: Yeah. That's basically what I think. I feel like the characters in The Big Short. I feel like see something coming before some other people see. That's how I feel. But that means there's a very good chance I'm completely wrong. But in a backward-looking way, tenured firms have increased. Part of that is demographics: people are just older. But the average length of time of working is longer than it was in the 20th century. Firm size is really large. New firms, new entrant firms is shockingly slow to grow. We have this entrepreneurship deficit--it just stays flat even as population grows: around 400,000 new firms a year. Now, I would point out: we are not very good at measuring what that means. A lot of those are Mom-and-Pop grocery stores or whatever, and not-- Russ: [?] a lot of people. Guest: Yeah. The day Google opened, it was just one firm out of 400,000. But broadly speaking, we clearly have not yet completely tipped into the world I'm describing. I think what--what I see as highly likely is something of a barbellification: that, there are certainly huge industries where economies of scale are only going to get more valuable. And the iPhone really is a singular product; and Apple is a singular company in which creating a product that everybody--one product that everybody loves, that's a tricky thing. And if everyone can do that, great; but not everyone can do that. But I certainly think there's lots of places where economies of scale are only going to increase. Google, Amazon--we're seeing it in health care, banking. But I also expect there to be enormous growth on the small and intimate side of the scale, where people are able to profit from intense, more intense, deeper interactions with their customers. An example I'd give is my buddy, Alex Blumberg and his new podcasting company Gimlet. And he's been very public about this, because he has this great podcast startup. He has a podcast company that reaches a tiny fraction of the audience he was able to reach when he was working--he and I created Planet Money together, so when he was working on Planet Money. So, he's reaching far fewer people. But I can tell you, he's bringing in a lot more revenue. And that's because he's creating content that has a level of passionate engagement that's reflected in what companies are willing to pay for advertising and kind of the buzz he gets, etc. And there's a guy in my book, an accountant, who is a really interesting guy, used to be kind of a standard CPA (Certified Public Accountant) who had hundreds of clients who he would do taxes for. And then he decided to throw that model away and basically become a much more deeply trusted adviser for forty people. And he makes a lot more money provided a highly valued suite of services for 40 people than he did doing basic accounting functions that software can do for hundreds of people. And so, I just don't know how to see the future without seeing a lot more of that--people finding intimate, passionate engagement with their customers. In a way, that requires--in unsexy language--a sensitivity to market signals, that fuels every aspect of an organization. So that's my intuition. That's what feels like that's going to be more and more. Now, whether that's going to be 8% of the workforce or 20% of the workforce--it's certainly not going to be 100% of the workforce. But what I do feel, quite strongly, is people who listen to EconTalk, who listen to NPR, who read the New York Times, people who are educated, who have curiosity and ambition--this is something to look at carefully. This is a real opportunity, and something to pay a lot of attention to. I do[?]--a blue collar family who didn't go to college, some of them didn't graduate high school--I don't think I'm going to tell them, 'Hey, you should become a value-added entrepreneur who is constantly shifting jobs.' I don't think that's good advice for them. But I do think there are people for whom this is a model that you should be prepared for and even excited about.
1:04:34Russ: So, I want to close with some of the downside; and I want to put my own optimistic spin on it and get your reaction. A lot of people are critical of the rise of companies like Uber, where their workforce is essentially piece-workers: workers who are paid--they don't earn an annual salary; they are paid a commission if they can get a ride, if they can get a passenger, they can take someone somewhere. And they don't have long-term promises about necessarily benefits; maybe they have to provide their own car, pay for their own gas, insurance. And a lot of people are very critical of that. And my answer to that always is, 'But how do they get people to do it, if it's really so awful?' And I think that's really important. But I want to say something slightly more optimistic about it, even, which is: A lot of people like Uber, working for Uber; or I bet they like working on this Hollywood project for 6 months, because when it's over, they can take a month off. Or a week off. A lot of the people I talk to who drive for Uber--and of course, my kids tease me all the time that I always talk to them because I'm interested in it--a lot of them are entrepreneurs. They are waiting for their funding to come through; they are waiting for something to happen. And they might work 80 hours a week while they are waiting and the money comes through or when their idea starts to click. They are going to work 5 hours a week and then they'll just stop. They don't owe any loyalty to anyone. They can move in and out of work as they choose. And I think--there's large group of people who really love that. And that's a feature for many people. Not a bug. And what matters is your--besides your satisfaction and how rewarding your life is emotionally in that world--your financial part of it depends on what you make while you are working. It's true it's only sort of part time. But if you make enough--and evidently many Uber drivers are former taxi drivers who make more money with Uber, for example--if you make enough, it's great. And so it seems to me, to move more generally to your point, that if we move to a world where people are essentially their own company, their own brand, their own--the captain of their own ship rather than an employee--there are many good things about that as long as they have the skills that are in demand that people are willing to pay for. Many people unfortunately will not have those skills--that's a serious issue. But for many people those are enormous pluses, not minuses. Guest: Yeah. Yes. I agree with you. And I think--thinking of life as an Uber driver where that is your only possible source of income, I would guess that would be tough. I would expect, and with [?] etc., price competition is not going to be your friend. But thinking about a world where you have a whole bunch of options, including TaskRabbit and who knows what else--Airbnb--to earn money in a variety of ways at various times and at various levels of intensity, that strikes me as only good. If we could shove that into the 1950s, I think you would have seen a lot more people leaving that corporate model and starting their own businesses or maybe spending more time doing other creative endeavors. So, that all strikes me as a helpful tool. It is, it does sound like some of the people who work at Uber have kind of been jerks, as I understand; but it does strike me as weird that we're like--some people are mad at the company that's providing this opportunity, as if--you know--it is tough that there are lots of Americans who are underemployed and aren't earning enough. That is a bad situation. But it is confusing to me why we get mad at the companies that are providing a solution. I will say, by the way--I hope we only get more information. I had an Uber driver recently who, I came in; she offered me snacks and water. She provided-- Russ: her iPhone. Yeah-- Guest: [?] Yeah. It was really amazing. But I thought: I have no way of selecting you. All I do is order an Uber. Russ: Oh, you do, though. You rate her, you give her 5 stars, and people who continually give her 5 stars make it more likely that Uber will give her the best customers. And there are other ways that that market signal I think is working. I just have to say--it's very important--when I tweet about Uber--I tweeted about Uber recently. And people asked me if I had shares in the company. I don't. I don't have a financial stake in Uber. It's not some thing where they are paying me to say nice things about them. They may not be nice people. They may be nice people. I'm not judging that. I have no idea whether they--they have problems, of course. What I love about Uber and Airbnb and similar companies is that they shake things up and they give consumers more of what they want. And as an economist, that's as close to lyricism as we get, other than the fact that it allows some people to flourish and get freed from their cars, say. There are some beautiful, beautiful things about that. That's what I'm excited about. I have no personal stake. I just want to say that--forestall any emails on the topic. And if you want to make a similar disclaimer, you can, too. Guest: Yes, I will make a similar disclaimer. I have no shares in Uber, although I am a frequent customer. And feel like--I bought a car right before Uber. My first car ever. I mean, my first new car ever. And I think if Uber had been part of my life a month earlier, I wouldn't have bought that car. So, yeah. I do love Uber. Even if I don't agree with everything everyone involved in Uber ever said. Russ: No doubt.
1:10:24Russ: So, I don't want to end on this Uber note. So, tell me--close and talk about storytelling. Because you mention at the end of your article that storytelling is going to be a part of the economy of the future. Guest: So, I think overall, when I think about--there's some phrases that just feel ugly, like 'monetizing passion' or 'the value-added premium', that are phrases I sometimes use in describing how I think business will work, increasingly, in the 21st century. But I think, for me, anyway, it's really about a [?] storytelling--that creating products and services that fit into a person's life in a rich, intimate way and learning how to--phrase it and sometimes think about it is, people have to--in a world where you are receiving, where you have to be more sensitive to market signals, you have to be better at articulating the value you add. That place where your passion and interest coincides with the market demand. You have to be more active. You have to--one way of saying that is you have to be a salesman or salesperson about yourself. But you have to tell stories about yourself. But you also have to be better at articulating the needs that others have in your domain. So, if you and I decided--well, you did direct a music video. You and I don't know what we need in costumes. We don't know what we need in set design. And part of why we are going to hire the person we hired to do that is because they are good at articulating what we need. They are good at articulating what they can give and what we need. And so, again, just using Ivory Soap as a crude example, it's a fairly low bandwidth product. Here's soap, and it cleans you, and it's not going to stink or ruin--it's not going to rot. But it's not really telling you much about how it will fit into your life. And by the way, I'm not talking about some BS narrative of, you know--the soap is from some plant that will make you feel like you are in the tropics and you'll be rich--and I'm sure that will continue to be an important part of advertising. But I'm talking about, you know, a more honest, a more grounded articulation. When I start researching soap, for example, I learned that there really are different soaps, and they really do interact with your skin differently. And I really should know more about that. And there are products I should buy and there are products I shouldn't buy--because of who I happen to be and what I care about and biology I have. And so that ability, both to articulate your own value, both like moral values but also the value you bring to the market, and being able to articulate what people in your domain want and need, I think that's increasingly going to be important. I think that's increasingly going to be lucrative. And so it's something people need to get better at. And so I summarize that as you have to become a better storyteller.

COMMENTS (19 to date)
xian writes:

Great conversation. Surprised that unions were not touched on.

SJ writes:

I enjoyed Davidson’s Hollywood stories, but I don’t buy his thesis. Although he praises Coase’s Nature of the Firm, the paper, taken as a whole, seems to undermine his argument more than it supports it.

As far as I understand it, Davidson’s argument runs as follows:

1. Firms exist because transaction costs limit individuals’ ability to coordinate via the price mechanism, making some degree of command and control organization necessary. (Coase’s thesis)

2. Various technological developments have reduced these transaction costs, making it easier for individuals to coordinate and negotiate with each other directly. (Actually, Russ is the one who states this explicitly.)

3. As a result, the coming “Hollywood model” economy will feature fewer and smaller firms, and more freelancers who organize and disperse based on the economic demands of the moment.

Davidson admits that his argument has an obvious empirical problem: the rate of new company formation is low. But it’s not even clear that the argument’s sound theoretically. Coase’s paper answers two questions: 1. why firms exist at all, and 2. why firm size is limited. The answer to the first question involves the transaction costs, and the answer to the second is that there are both economies and diseconomies of scale, and that a firm’s size will increase until the marginal cost of additional internal work is higher than the contractor price of that work, or the price that it costs competing firms to do it internally.

Technological developments affect both of these dynamics. That means it’s entirely possible for new technology to drive down transaction costs between individuals while increasing firm size, because the technology has removed diseconomies of scale even faster than it’s reduced the transaction costs.

We can see this trend in any number of industries. Whatever costs drove the organization of bookselling firms (cataloguing, security, payments, accounting, etc.) have surely been reduced by technology. But the limits to booksellers’ size (shipping costs, constraints on long distance communication, etc.) have declined even faster, so the new equilibrium is a small number of huge booksellers, with the few remaining mom and pop shops clinging for dear life. In fact, Coase specifically says that changes that reduce the cost of organizing spatially tend to increase firm size.

I’m sure that the style of work Davidson describes will become common in plenty of market niches, but I don’t see any reason to assume that it will become the dominant pattern of organization in the future.

Michael Byrnes writes:

That was great. I look forward to Davidson's book.

Warren writes:

This was a very enjoyable talk. Thank you.

Two years ago we had the opportunity of closely observing one day in the making of a film that was being filmed in our barn. The production crew had asked us to be physically present in case someone wanted a horse moved. So we had a wonderful excuse to sit around and talk to everyone we could. It was amazing.

We were accustomed to watching the process of home construction. In this endeavor a crew of workers show up early in the morning, say about 5am, and work until 3pm with one lunch break. Then they all disappear. The same crew shows up every day for several weeks, then the next week a different crew shows up to the same site and continues work. The changes of crew are not really that clear-cut, but that’s the approximate picture. In the end a house sits on the site.

Movie making is entirely different, almost the opposite. Early in the morning a crew of people shows up at the day’s pre-selected restaurant. Their union guarantees one meal a day and most companies provide breakfast. After breakfast they all hop in their own cars or trucks and drive to the site. There they work like the most amazing beavers until told to quit, which may be afternoon or midnight. Each member brings all his/her own tools. For example, the electrical crew (3 men) came in a van packed to the gills with electrical supplies which they either owned or rented. They had everything that could possibly be needed under any stretch of imagination or catastrophe. (Electrical does not include Cameras or Lights, those are different specialties.) Those electrical men had heavy cables laid all over, inside and outside, of that barn in 45 minutes flat. Amazing! It’s a big barn.

Before they are told to leave, they are told where the next filming site (and restaurant) will be, and when. If they finish at 11pm, the next days’ filming might begin at 3am the following morning, in an aquarium. But the same crew will show up every filming day until the end of filming. Then there will be a lot of film in many cans. No house.

I was able to talk with the make-up woman at more length. She lived in L.A., had found a make-up artist school in L.A. online, and gone to the 2-year school. The school then supplied her with recommendations and a list of online movie-job sites. Every evening (that she wasn’t working) she hunted jobs for an hour, at least to line-up the next job. Because she had only been working for 4 years she didn’t have enough experience to get union membership yet. That was her big goal. Union membership would give her a significantly higher pay level and better job choices.
On the job she treated the actors, and everyone, like Kings (or Queens); Yes Sir, No Sir, etc. And she ran to help them with her kits and brushes. Her car back seat and trunk were packed with make-up kits.

But she said she loved the work and even the schedules. I asked if it didn’t get a little wearing. She said Oh no, the head of the Make-Up part of the Union was a woman in her 70’s who was still working.

I guess they never got the movie sold because I’ve not heard from them since.

I would not like a job so very close to and dependent upon market signals, in which you probably have a job lasting several months, but on any given day that may end.
If the entire marketplace in the U.S. operated in this fashion, and had had time to season (come to equilibrium) there would be many large ‘production’ companies, but there would be only a few, maybe only one, union. If only one, that union could possibly take over the government. Just joking, I think.

Michael Byrnes writes:

SJ wrote:

"Whatever costs drove the organization of bookselling firms (cataloguing, security, payments, accounting, etc.) have surely been reduced by technology. But the limits to booksellers’ size (shipping costs, constraints on long distance communication, etc.) have declined even faster, so the new equilibrium is a small number of huge booksellers, with the few remaining mom and pop shops clinging for dear life."

Good point. I think Davidson kind of got at this with his "barbell" comment. I think the businesses that will really end up squeezed in the end are not the Amazons and or the independent booksellers {which seem to be making something a comeback in some places), but rather what lies between those extremes: the big chains that can neither compete with Amazon (B. Dalton, B&N) nor offer the experience that one can get at an independent bookstore.

Mort Dubois writes:

The movie example is an outlier: one set of transaction costs to produce a very large value product. Once that set of transactions is complete, the set operates more like a traditional manufacturing firm, with internal communication costs minimized by physical proximity.

I run one of the small volume, specialized manufacturing firms that Davidson says are the future. (A 17 person shop making custom boardroom tables.) It’s not as simple as he makes it seem to find a place in the market - Davidson doesn’t seem to realize that most customers have the option to purchase the commodity product and just make do with lesser performance. Just because a producer can make a specialized product doesn’t mean that lots of people will buy it. Also missing from the discussion is any sense of the difficulty of finding buyers and making sales. As the product becomes more specialized, there are fewer people who must have it. How to make the match at the right moment? Google has been a godsend, but it’s not perfect.

In many businesses (like mine) the average value of each transaction isn’t sufficient to assemble a team just to do that transaction - the workable model is to find a way to arrange a steady stream of transactions, of sufficient aggregate value to support a permanent team of producers. The higher the skill level of the team, and the more specialized the endeavor, the more incentive the firm owner has to keep them on staff. A stable team gets the opportunity to do a large number of tricky projects, and can start to develop a cultural memory that makes the next challenge more manageable. A large number of customized transactions requires a huge number of internal communications to complete - it’s extremely important that the cost of these communications be minimized. In making a physical product, the team needs to be in one place. For digital products, maybe not. It’s also important to have the team in the same place as the production machinery, if it is of any size and complexity. Again, digital production doesn’t require this.

Missing entirely from the discussion is the desire of most humans to have a steady, predictable employment situation, and our built-in tendency to group loyalty. Firms provide both of those. It remains to be seen how taking away the opportunity of most people to enjoy stability will provoke a political response.

One of the pleasures of owning a business is being able to assemble a team and lead it. I think that this taps into a very basic drive in many leaders - to “love and be lovely” in the context of command. The boss doesn’t just give orders, but also acquires resources from a hostile world (in the modern world by arranging trades, in many older contexts by plunder) and distributing them for the well-being of his tribe. I’ve been in business for 29 years, and at this point there is no customer or product so thrilling as the satisfaction of distributing another payroll, on time and in full. I’ve been able to watch my people grow and mature, start families, buy houses and cars, and develop into solid citizens. There have been many years where I made very little money, or lost large amounts, but I have never missed a payroll. And it has been great. My employees respect me in a way that nobody else respects me.

A boss in a small firm comes to know his team very well, and rely upon that knowledge to manage the many difficulties of operating in a competitive environment. The thought of moving to the Hollywood model gives me a headache. Why would I ever want to release my best workers from my employ, if I couldn’t count on them showing up when we need them? The skills I need are not evenly distributed in the workplace, and it’s a competitive advantage to not only have them at my beck and call, but to deny them to my competitors. Letting your good people walk out the door is a huge mistake in many businesses.

Interesting that elites promoting the Hollywood model are so prominent in the culture - as the traditional business model of the press is destroyed by the digital revolution, those left standing are the winners in the new gig economy. Who presumably have good reason to congratulate themselves on their new success. Where’s the rest of the story? I eagerly await Russ’s interview of a business owner who has found a way to provide long-term employment to stable group of workers, and has created a culture of mutual respect and loyalty.

steve hardy writes:

I don't see what is so unique about the "Hollywood model" It is pretty much the same contract model used for many specific projects. Custom homes as well as other building projects have used this model for years. The home owner or developer (producer) hires the architect (writer)who designs the project. The owner also hires The general contractor (director) who assembles a team of subcontractors such as framers, plumbers, electricians etc. (actors, set designers, etc.). Each new project may have different architects, general contractors and subcontractors depending on their costs, expertise and availability.

I am also having difficulty understanding how the small boutique firm doing custom work or creating unique products that Mr. Davidson discusses has anything necessarily to do with the Hollywood or contractors model. If the work involves intermittent projects maybe so. If not then a team of the same employees working at the same company doing pretty much the same job seems to be the primary requirement.

Ryan Marr writes:

This episode reminded me of a situation that came up a few years ago involving a friend.

My friend started working at a bank (one of the largest in Canada) in a job that had previously been held by a woman maybe twice his age with less knowledge of computers. The work that he was hired to accomplish would take the woman who previously held this role the entire week. My friend realized very quickly that using some basic spreadsheet functions that he would be able to automate much of this work and accomplish the weeks work in a couple of hours on Monday mornings. He would spend the rest of the week reading articles, writing poetry, and staying on top of social media.

We would debate whether he had an obligation to report his efficiency to his manager, some people would say he was wrong (and that the company deserved the profits of his efficiency) and other said that he was given a task and just happened to be much better than the previous employee and had no obligation to report his task being completed by 11am Monday morning.

So I guess my question is: In a case like this where an individual in a larger organization brings an incredible innovation to the role, who deserves the profits of their innovation? The individual or the corporation?


Ajit writes:

I wish some of the conversation had at least discussed the decision to film movies in places like New Orleans due to taxes.

I realize this is purely a second(third?) order effect, but if you care at all about global warming, these type of responses to taxes should alarm you.

More deeply, whenever the future of "work" is discussed, they never seem to bring up the effects that taxation of labor and savings has. I suspect a great deal of outsourcing/labor savings is driven by taxation especially at the margins.

Taylor Davidson writes:

My Weird Background: I've worked in independent film insurance and risk management for most of my career, and (while I still own the agency) I returned to school 3 years ago to pursue additional degrees in Economics and Political Philosophy at the University of Arizona.

There are two interesting things in film that I would add to this discussion and what was covered on the podcast, both go to Coase's discussions of efficiencies and property rights:

1) The crazy division of labor on most production sets, works like property boundaries. As Coase argued it doesn't so much matter where you establish them (though there may be some logical divisions), just that you draw them.

One of the reasons films can work so well on a contractor model is because of the incredibly detailed division of responsibility limits that have developed over the last 100 years. It's like saying that a film is an acre plot of land, and to efficiently work it you need to split it up into smaller pieces that one person can manage. The divisions may seem weird (particularly in the props/sets/wardrobe areas) but it doesn't matter that they are weird, it matters that they are well-defined. Because everyone knows where their "piece" starts and ends, you don't have anyone bumping into each other and thus everyone can show up and just start working with VERY little top-down management.

Additionally however, these understood divisions don't really tell the hire what to do inside their little "piece". As with the land example they tell the person hired what space to stay inside, where NOT to go. In other words, if you are NOT the camera operator, you are NOT to touch the camera. But the job doesn't actually detail what the camera operator is to do. He is hired based on the fact, that if you exclude everyone else from messing with his space you can clearly see how well the job was handled in the space in which he is left alone. This means it is very easy to develop reputational capital (to the good or the bad) because it is easy to take credit, or blame, for the work you do. These "property" definitions thus drastically increase the efficiency of gathering work quality information and allow people to hire more confidently.

The history of the emergence of these divisions is in itself interesting as it combines business necessity, artistic/technologic innovations, and union negotiations.

2) Technological advances are also an incredibly important contemporary topic in the production industries.

They have lead to an explosion of creative and commercial content EXACTLY because they have increased the efficiency of individual team members. With new RED Digital Cameras, you don't need ANY post services for developing negatives, and many jobs like Cinematographer, DP, Focus Puller, Camera Operator, etc. (on the margins) can be consolidated into fewer positions.

These types of advances, along with simple economic growth, have lead to a significant up surge in the amount of filmmaking occurring around the world. There is more work (though less *union* work) if you are willing to travel, work in sprints not marathons, etc.

The independent film community in particular is exploding around this model, and while people might decry the lack of one identifiable "employer", what you find is that working groups congeal over time into regular teams. The number of organic, emergent entertainment "firms" have only increased due to the expansion of affordable, accessible, high-quality technology. The technology has reduced the "admission fee" for filmmakers (has reduced their transaction costs for entry to the market), and thus they can start their own groups vs needing to sign up with a larger production house.

Carl writes:

Michael Byrnes wrote:

SJ wrote:

"Whatever costs drove the organization of bookselling firms (cataloguing, security, payments, accounting, etc.) have surely been reduced by technology. But the limits to booksellers’ size (shipping costs, constraints on long distance communication, etc.) have declined even faster, so the new equilibrium is a small number of huge booksellers, with the few remaining mom and pop shops clinging for dear life."

Good point. I think Davidson kind of got at this with his "barbell" comment. I think the businesses that will really end up squeezed in the end are not the Amazons and or the independent booksellers {which seem to be making something a comeback in some places), but rather what lies between those extremes: the big chains that can neither compete with Amazon (B. Dalton, B&N) nor offer the experience that one can get at an independent bookstore.

I believe the application of Davidson's concept in this industry may also be in the ability of authors to self publish through these larger companies without having to associate themselves exclusively with a large publishing firm in order to get their books to market.

John Kantor writes:

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Andrew McDowell writes:

Computer programmers in the UK (and I suspect the USA) have long have had a choice of two career paths: work for a company, or work as a freelance programmer. My boss (who has done both) reckons the choice is driven as much by personality as by skill set, and this fits my possibly more biased observations as well (salaried employee sometimes sent by his employer to work on another firm's premises as if a freelancer). Free-lancers accept higher risk for a greater expected return. They are happy with the business of selling their services, and they are prepared to travel longer distances to work, and for their place of work to change with each contract. I note that the film industry these days is very mobile, so a salaried employee would not have the benefit of a more settled place of work.

Tax law also had a big effect in the UK, specifically It did not escape the notice of computer contractors that the Inland Revenue had brought in a regulation effectively penalizing them at a time when the Inland Revenue had become very dependent on the services of a large computer services company to whom independent contractors were dangerous competitors.

Ralph Soule writes:

An academic paper that has some bearing on the podcast is about the role trust plays in temporary systems like Hollywood-style project management. The reference is: Meyerson, D., Weick, K., & Kramer, R. (1996). Swift trust and temporary groups. In R. Kramer & T. Tyler (Eds.), Trust in organizations. Thousand Oaks, CA: Sage. The authors argued that the trust that develops in temporary systems is a special type of group perception and relating that helps the group manage vulnerability, uncertainty, risk, and expectations associated with the project. They argue that if these issues are not managed, project participants function as more of a permanent crowd (a bunch of people working on their own agendas and not together for common goals) than a temporary system.

Ralf Arnemann writes:

Davidson mentions correctly transaction costs for hiring people in Hollywood as well as in his journalistic profession is low enough for the flexible work structures, as people invest a lot of "gossip" to find out about the quality of other peoples work.

I quite agree.

But one should keep in mind, that Hollywood and the media are by nature very "chatty" sectors of the economy. Perhaps the most "chatty" of all.
There are many other sectors where people tend to be more introvert and "gossip" is not encouraged.

This would mean that transactions costs are much higher in these sectors, thus the classical firm should have an advantage.

MF writes:

Hi Adam,

I have to say that I am very excited about this movie. I also thought that this one of the most interesting Econtalk episodes I have listened to recently. The general message really resonates with me. A month ago I started as a Business Analyst at Accenture, and what you are saying is really true. It's all about finding the right people to work with. Thanks for this great hour of radio!

Michael F.

bogwood writes:

I suspect neither model, corporate or contractor, currently pays the full life cycle cost of the average laborer. This would include growing the employee to maturity and retiring her after a certain age, time roughly equal to the total employment years. This is in part due to higher mandated training and retirement costs, Yale and yachts.
Government is picking up the difference but not getting any extra corporate taxes.
Historically, the reversion to the mean, would be a smaller pool of more highly paid formal workers and a much larger informal work force doing the child care, lawn care, elder care, all the jobs recently placed in the formal economy. Youtube would handle the movies.
Where did workers come from and retirees go to in Adam Smith's day?

Ralf Arnemann writes:
I suspect neither model, corporate or contractor, currently pays the full life cycle cost of the average laborer.
I suspect they do - otherwise "full life cycles" would not be possible for the average laborer.

From his pay (and package), the laborer finances the upbringing of children, his own retirement and the taxes, for which the state provides some other services necessary for the life cycle.

Where did workers come from and retirees go to in Adam Smith's day?
From and to their family. Which - as today - meant, that the worker while in his active time got enough wages to pay for everything.
John Rako writes:

I've long advocated that individuals should pursue a career based on projects rather than salary. But I don't think one business model or the other is the future. If the business involves projects, home building, movies, the Panama Canal, it makes sense to create a team of experts who know their role very well.

But many industries are not project based, oil refining for instance. A refinery or manufacturing organization wants reliable, predictable expertise. Moreover, in the manufacturing organizations I've been in, the expertise of the employees was a competitive advantage. Having workers move around between organizations would eliminate the competitive advantage of a particular organization's culture and would prevent the development of that advantage.

The Hollywood model has many advantages. But a huge disadvantage is the inability to use trade secrets developed by the workforce to gain a competitive advantage over other studios. Interestingly, the old studio system, where employees stayed with one employer long term, fostered a lot of trade secrets.

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