Ten economic lessons from the treasure of the Sierra Madre.

• Author: Whaples, Robert
• Position: REFLECTIONS - John Huston's 'The Treasure of the Sierra Madre' - Critical essay

With the price of gold having soared to more than $1,000 per ounce, here's an investment tip. Spend a couple hours watching a cinematic classic: John Huston's The Treasure of the Sierra Madre. The American Film Institute selected Sierra Madre as thirty-eighth on its list of the best one hundred movies from the first century of American cinema because it showcases fine acting and just the right balance of action and dialogue, suspense and intrigue, sentimentality and cold calculation. But critics have missed another fundamental attraction: this engrossing tale is packed with an unparalleled awareness of economic forces at work. The lessons of Sierra Madre about entrepreneurship, the importance of property rights, the creation of value, and a range of other economic issues deserve a very close examination.

The film, based on a novel by the enigmatic B. Traven (1935), (1) tells the tale of three prospectors who trek into the mountains, dodge bandits, and laboriously unearth enough gold to make themselves filthy rich--before losing it all. Although it didn't do particularly well at the box office (perhaps because of a bitter streak, the lack of a traditional Hollywood ending, and an absence of women in the cast), contemporary critics lauded the movie, which garnered John Huston the 1948 Academy Award for direction and screenplay adaptation and earned his father, Walter Huston, the Oscar for Best Supporting Actor. In addition, the New York Film Critics picked it as the year's best picture, and it won the Golden Globe.

The film is set in Mexico in 1925, first in Tampico (the hub of an oil-drilling boom) and later in the isolated Sierra Madre of the interior. Fred C. Dobbs (played by Humphrey Bogart) and Bob Curtin (played by Tim Holt) are having trouble finding good work in Tampico. The two naively think about prospecting for gold after an employer tries to stiff them and after hearing the stories of a seemingly broken-down old prospector, Howard (played by Walter Huston). After Dobbs wins the lottery, the three pool their resources, form a partnership, buy supplies, and head for the mountains to seek their fortune. Howard discovers gold and teaches the mining trade to the others. After months of backbreaking labor in a secret, isolated location, the trio's wealth begins to grow, but so does mistrust-- especially on the part of Dobbs. The three fend off" an attack by bandits and must decide how to deal with an interloper, Jim Cody (played by Bruce Bennett), before the mine's output runs down and they make the dangerous trek with their fortune back to civilization. After Howard saves a boy's life, the local Indians insist that he must stay with them, so he agrees to meet up with the others later. Spoiler alert: at this point, Dobbs gives in to greed and paranoia and attempts to kill Curtin and take the treasure for himself. Traveling alone, he is overcome by exhaustion and killed by highway robbers, who think the gold dust is ordinary dirt and dump it out on the ground. A storm arises and blows away all the gold dust just before Howard and the injured Curtin arrive on the scene to see the trick that fate and nature have played on them.

Not only is there gold in these hills, but also a slew of economic insights.

Lesson 1: Entrepreneurs Need Not Be Omniscient to Be Successful

When Dobbs and Curtin first encounter Howard in a flophouse, he is expounding on the reasons that gold sells for $20 an ounce. Most economists would consider Howard's variant of the labor theory of value way off the mark: "A thousand men, say, go searching for gold. After six months, one of 'em is lucky--one out of the thousand. His find represents not only his own labor but that of nine hundred and ninety-nine others to boot. That's, uh, six thousand months or five hundred years scrabbling over mountains, going hungry and thirsty. An ounce of gold ... is worth what it is because of the human labor that went into the finding and the gettin' of it." This analysis, of course, leaves out the demand side and isn't too accurate on the supply side either. By the late 1800s, most gold production came from very capital-intensive mines using methods much more advanced than those envisioned by Howard and shown in the movie. By the early twentieth century, massive earthmoving equipment and chemical processes were the state of the art (Gaggio 2003). (2)

Howard brushes off the demand for gold: "Gold itself ain't good for nothing, except for making jewelry with and gold teeth." (3) Saying that "gold itself ain't good for nothing, except ..." isn't much different than saying that chairs or haircuts or dogs or DVD players aren't good for anything except.... Yet gold, chairs, haircuts, dogs, and DVD players have value to humans beyond our biological need for enough food and shelter to survive. They all have value because they are things that help make civilized life worth living.

So, Howard is zero for two--his understanding of the nature of both the demand for and the supply of the product is lacking. Or maybe he's zero for three in that the determination of the price of a durable natural resource, such as gold, is especially complex because the current demand interacts with both the stock in existence and the flow of newly discovered production--as well as with expectations about the future supply and demand.

Zero for one, zero for two, zero for a million--it doesn't really matter whether Howard's theories about the value of gold are refined or unrefined. As Friedrich Hayek (1945) explained so well, an entrepreneur doesn't need to know why the price is high or low; he merely needs to know that the price is higher than his expected costs for it to signal him to enter a business. And costs are a subject that Howard knows quite well due to a lifetime of experience. He turns out to be a very savvy entrepreneur: the lesson is that he needs to know his part of the business; he doesn't need to know everything.

Lesson 2: Economic Value Arises from Voluntary Cooperation

As if following a page out of Ronald Coase's insightful essay "The Nature of the Firm" (1937), Dobbs, Curtin, and Howard form a partnership when it becomes obvious that they will be more productive working together than separately. There are clear gains to be had from teamwork. Howard has knowledge about how to organize production and plenty of experience; Dobbs and Curtin have strong backs; Dobbs has more capital than the others. Teamwork is physically important in several tasks, such as putting the timbers in place in the mine. There are also economies of scale in teamwork, especially in the ability to guard and protect the treasure from bandits. Finally, teamwork overcomes the immense loneliness of going it alone far from civilization.

Dobbs initially dismisses Howard as a potential liability. Fortunately, Curtin realizes that they "might have real use for an experienced guy like that old- timer." The greenhorns initially assume that that it's a matter of hiking...