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Blair Witch Economics

Mises Daily: Wednesday, October 27, 1999 by

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Joseph Salerno, senior fellow of the Mises Institute and author of "Ludwig von Mises as a Social Rationalist" (read in .PDF), among many other articles, teaches economics at Pace University. At the most recent Mises University, he spoke about the implications of the "Blair Witch Project" for the theory of entrepreneurship. With the film now out on video, Mises.org interviewed him on the subject.


MISES.ORG: What does the "Blair Witch" phenomenon teach us about economic theory?

SALERNO: There are varying estimates of what it cost to produce the "Blair Witch Project," but it was somewhere between $60,000 and $100,000. In the first two or three weeks, it had already grossed $60 million, and then $120 million in the full run. Eventually, including videos and product spin-offs, the profits could easily reach a quarter of a billion.

From an economic point of view, this demonstrates that the resources that went into making the film were tremendously undervalued by the market. This includes the actors as well as the ingenuity of the writers. Just by taking these raw resources and turning it into a totally different kind of movie, they brought about a fantastic increase in the value of these resources.

And what was the test to determine whether these film entrepreneurs made the right decision? The consuming public. With their decision to pay to see it, they rendered the final judgement. And it was a judgement that surprised everyone, even those most schooled in what makes a movie work. Nobody could have predicted the success of this film.

Hence, the film not only shows us something about the market economy; it illustrates the way profits and losses induce producers to respond to changes in consumer tastes. The test of their success in doing so is the magnitude of the profit.

The film demonstrates entrepreneurial genius of a special kind. It is completely different in format and style, with no apparent precedent. The producers had the actors themselves film the movie. It was a horror movie without blood or gore or even an identifiable monster. The producers counted on audiences to create the terror in their own minds.

They also ran a fantastically successful advertising campaign, which further boosted the value of the invested resources–a nice illustration of the fact that advertising is not "waste" but rather a form of consumer education.

MISES.ORG: Why does the Austrian view explain this better than the neoclassical view?

SALERNO: In the neoclassical view of "perfect competition," there is no innovation and all products of each industry are identical. No resources are undervalued and there is an absence of entrepreneurial profit. Because perfect knowledge is assumed, there are no mistakes being made and there are no opportunities being overlooked. In fact, there is no real change at all. This is why that model cannot explain real-world innovation.

With "Blair Witch," we have a film that is completely new and unexpected, and ends up being more successful than all existing competitors. The Austrian view of the entrepreneur, that he is someone who is constantly aware of, and willing to act on, undiscovered opportunities, can account for such events because it highlights the central place of individual judgement and creativity.

Neoclassical models of economic growth also squeeze out entrepreneurship; they don’t account for new products either. But to have genuine economic growth, you have to have an entrepreneurial vision, and the institutional framework of private property and free markets to realize that vision. By shifting resources (actors, script writers, editors) from undervalued uses to more highly value uses, we increase consumer welfare.

MISES.ORG: Oddly, the film is decidedly low-tech.

SALERNO: With the pace of hi-tech development today, we might be tempted to think of entrepreneurship as identical to technological innovation. But these are not the same thing. Entrepreneurship consists in seeing and acting on maladjustments in the market process, converting undervalued resources to higher-valued uses. It might go along with technological improvement, but it doesn’t require that. In the case of "Blair Witch," the technology involved was actually very primitive by today’s standards.

Further, it is not the capital itself which creates the profit, as if this were some automatic process. The capital itself doesn’t accomplish anything. The cameras and film created nothing of any economic value in themselves. The former Soviet Union, for example, was flooded with capital goods, but they didn’t create much value. Market profits stem from the decisions, the subjective judgements and objective actions, of entrepreneurs operating within a market-price system. This is why Mises said profit is a spiritual and intellectual phenomenon.

Analyzing the success of "Blair Witch" helps us dispense with this idea that somehow profit should be related by some specific ratio to the costs of production. That would be true only if the data of the market were unchanging. In fact, in a changing economy, profits have no necessary connection to how much it costs to make a final good.

Finally, this example demolishes the popular fallacy, accepted by many economists, that large profits in a market economy accrue mainly to large and previously successful firms. The makers of "Blair Witch" were outsiders, a garage-shop operation. But with their entrepreneurial insight and willingness to take a risk, they showed up one of the largest and most capitalized industries in the world.

MISES.ORG: Is there any sense in which the success of Blair Witch is equilibrating?

SALERNO: The concept of equilibrium is necessary for analytical purposes, but the way in which a new idea affects the direction of economic change cannot be explained on the basis of equilibrium. The "Blair Witch" is precisely a radical break with routine of the past; neither is the real-world market somehow more equilibrated as a result of the film.

The success of Blair Witch is now part of history, but peoples tastes continue to change. It may even be the case that the next "Blair Witch" will be a terrible flop. There are no certainties in real-life economic affairs.

MISES.ORG: What about the political implications?

SALERNO: Imagine a National Endowment for Films trying to pick which films to support and which not to support. There is no way it could reliably imitate the success of profit-and-loss process that made "Blair Witch" an artistic and commercial achievement. The people involved in this project were completely unknown. They certainly would not have come to the attention of a government bureaucracy.

What an NEF would in fact do is bid up the prices of resources, including the price of actors, script writers, and editors, and everything else that goes into making a film. All of these would become more expensive. And because the films subsidized by government are not constrained by the test of profit and loss, the products would be of dubious merit.

The higher prices would have put these resources beyond the reach of the people who made "Blair Witch," who didn’t have much money. Like all entrepreneurs, they depended on buying undervalued resources and turning them into a product that was a great success.

MISES.ORG: Did you see the film?

SALERNO: Twice, and it was one of the scariest I’ve ever seen. I also found it to be a bitter commentary on our times. These kids are in college, and they had no internal values. Their vocabulary consisted mostly of profanity, and they couldn’t even come up with a coherent plan for getting themselves out of a fix. They wandered around aimlessly and eventually turned on each other. What could this be but an inadvertent commentary on the state of American education today?


See the Austrian Study Guide on Entrepreneurship

Read another interview with Joseph Salerno in the Austrian Economics Newsletter.

You can write Joe Salerno at Jsale@earthlink.net.