Showing posts with label The Wonderful World of Potternomics. Show all posts
Showing posts with label The Wonderful World of Potternomics. Show all posts

Tuesday, 9 August 2016

Case Study: ‘Voldemort – From Orphanage to Oligarch’

In the social sciences, we all love a good case study. So what better way to round off this series of articles and draw together our economic musings on the Potterverse than with a study of (arguably) its greatest economic success story? Now, before there is a furore over the implication that Voldemort is ‘good’, let me define my criteria for success. I’m talking about success in the strictly economic sense, which we could define as the ability to better your socio-economic position against difficult odds and institutional bias. Voldemort was able to do that; he was born in an orphanage, and by the end of his career he was the most powerful wizard in the world, effectively in charge of the Potterverse.

For the record, I also think the Weasley Twins are economically successful too, through the development of their joke shop (discussed in Article 3). And undeniably Harry is perhaps the epitome of ‘all-round’ success; magically competent, slayer of Voldemort (no ‘biggie’) and from what we know of his later life, professionally esteemed too.

So there are clearly economic lessons to be learnt from the rise of Voldemort, despite his manifest evilness. How did he make it? How did he gain support? How did he game the system? All these questions, despite his evident evilness, can help teach us about how we can build a society that encourages social mobility, maintains freedom of speech and prevents tyranny. These are key questions in today’s society as much as they have ever been.

Why the Dark Lord, and not Barty Crouch?

Voldemort was a talented wizard. We learn this in the Half-Blood Prince (Book 6) when Dumbledore recounts a visit to the orphanage where young Voldemort (real name, Tom Riddle) lived. The future mass-murderer is able to move objects without needing a wand and to command animate beings, such as small animals, as he wishes; things which your average wand-toting student can’t do.

So Voldemort was gifted, and he presumably could have pursued that gift in any direction (although in the books, Rowling implies an ingrained malevolence in Tom Riddle, which probably makes the future Dark Lord more credible). As we discussed in Article 3, though, the Potterverse is skewed against outsiders through the active preservation of the societal status-quo. In part this is due to pre-existing prejudices; wizards seem generally afraid of socio-economic change and so are not too concerned with economic growth or the emancipation of minorities such as house elves.

The chief consequence of a static society is that it reduces the pobability that fresh talent and ideas will come to the fore. Logically if it is not encouraged, and is in some cases actively repressed (witness Hermione’s Elf-right’s campaign), it will not grow. This means that there is less competition at the top; to break through and be talented, you don’t need to do very much. In other words you just need to be marginally better than everyone else, in an area where you have a comparative advantage (thanks Ricardo!).

The implication here is that Voldemort wasn’t actually the greatest wizard of all time; rather that he was marginally better than his peers during that particular period, and had the capability to ‘cash in’ on his magical comparative advantage without requiring societal support. There’s no reason why Barty Crouch, or anyone else for that matter, couldn’t have been as talented; it’s simply that the social structure they required to discover their skills was inadequately equipped to enable this.

Expelliarmus – disarming the system

So having looked at how Voldemort was a bit better on average than everyone else; how did he manoeuver his way to the top?

By definition he wasn’t one of the elites, like Minister Fudge or the Malfoys. He had no apparent economic power, and the financial system didn’t offer adequate funding (in part due to wizards’ distrust of finance, but you’d also hope that Gringotts had robust KYC policies!). This meant he needed to recruit acolytes, preferably rich and powerful ones. This he did with success; the Death Eaters are a rich and privileged gang, ranging from the mercenary Lucius Malfoy to the die-hard Bellatrix L’Estrange. All have a vested interest in preserving the status quo.

With powerful retainers comes access to power and capital, we see Lucius bribing Fudge in the Order of the Phoenix (Book 5). These are things that would ‘grease the wheels’ of Voldemort’s takeover bid, as even the Dark Lord couldn’t do it with just a big wand and ego.**

Voldemort also benefitted from a stagnant government, which was unable to counter a significant internal rebellion due to its unclear decision-making and review powers (Article 4). The general feeling of terror that swept the wizarding community upon Voldemort’s return is in part a comment on the trust people place in their government to address threats to society.

What’s next for the wizarding world?

There are laudable aspects of the Potterverse economy; universal, high-quality education for example. However much remains unresolved, stagnant economic growth, an underdeveloped financial system and lack of effective debate both in society and government to name a few. All this contributed to an unacceptable period of social instability, culminating in a terrorist’s successful seizure of power which need not have happened. Voldemort was un-exceptional; yet it was the un-exceptionalness of wizarding society that allowed him to flourish.

This series has taken a (hopefully) tongue-in-cheek look at the economics and sociology underpinning the Potterverse. Of course, we couldn’t examine everything in depth, and it is still a fascinating world with many similarities to our own that could be explored further. Thank you for reading this far, now time for me to disapparate!

Wednesday, 20 July 2016

Mischief Managed?... The role of government in the Potterverse

Towards the ‘business end’ of the Potter series, Rowling greatly expands upon both the institutions and actors involved in the whole good versus evil thing. We are introduced to functionaries at the Ministry of Magic, robber barons in Voldemort’s Death Eaters, and lackeys aplenty on both sides. The existence of developed institutions, with their nuances and inconsistencies, begs us to consider the impact of these institutions on the denizens of the Potterverse. This is part of what makes the Harry Potter story interesting from a socioeconomic perspective; that a well-developed society with long standing (albeit not democratic) institutions is essentially subverted by terrorists.

So how does the Ministry of Magic interact with the wizard economy? And how does the government’s failure aid and abet Voldemort’s rise to power? Let’s look at these issues in more depth…using something like a Pensieve, of course.

It is our choices, Harry, that show what we truly are.

Public Choice theory is the branch of economics charged with assessing the impact of large institutions on the economy and its actors. The underlying concept of public choice is that an institution paid for by the state is required when the private sector underprovides or fails to provide this service adequately and competitively to individuals. A commonly cited example of this is national defence; it would be unreasonable (not to mention medieval) for individuals to run their own armies. The rich would dominate, presumably using their armies in self-interest, and they could charge extortionate prices for ‘defence services’.

Other areas of the economy are also managed by the government to a greater or lesser degree, depending on the above assessment. Of course, such government intervention is also inevitably informed by political beliefs on the level of state economic activity. We will try to avoid such pitfalls here!

In the Potterverse the Ministry is a significant player in the economy, employing a large number of the workforce in a variety of roles. Its area of largest impact that we know of is education, as Hogwarts is state-funded, however there also appear to be a myriad of government departments such as the Muggle Liaison Office and the Regulation of Magical Creatures Department. It therefore seems likely that the Ministry feels the need for greater state intervention in the economy. Perhaps this is because, as we discussed in article 3 (Weasley’s Wizarding Wheezes), there appears to be a distinct lack of competitive market activity in the wizarding economy, something which should generate a level of self-regulation through appropriate pricing. For example, there would be presumably higher prices for dangerous dragons.

However, although we said the Potter economy was stagnant due to a lack of innovation, we can’t say that it is uncompetitive. For example, the Ministry felt the need to regulate cauldron thickness due to an influx of cheaper foreign equivalents, thus leading to higher leakages (Percy Weasley oversees this in Book 4). This is an example of the wizarding government intervening in a competitive market to ensure fair standards and hence the public good. Conversely, an entrepreneur is barred from importing magic carpets as an alternative to brooms as transportation in an attempt to reduce the cost of flying (Book 4). The Ministry prohibits this as carpets are deemed to be too similar to ordinary Muggle carpets, however this clearly has a distorting effect on the market for transport. Similar to real-world governments then, the Ministry engages in direct economic management with varying degrees of success.

The Office of Magical Debates?

Yet over and above basic economic intervention, the Ministry undoubtedly fails in a key area, that being defence against external threats. The menace of Voldemort is so great that eventually vigilantes, in the form of Harry and chums, are required to dispatch the Dark Lord, the latter having neutralized the government’s effectiveness.

Part of this is pure obstinacy; the government refuses to recognizes Voldemort’s return until very late in the day. The Ministry has the tools and resources to at least mount an effective resistance against the Dark Lord, despite the latter being ‘the most dangerous wizard of all time’. After all, it employs a good proportion of the population and (we assume) must levy taxes either directly or indirectly to finance its activities. Given the vast resources at its disposal, it seems hard to believe that it was rendered completely incompetent.

The Ministry could perhaps benefit from a dose of internal review and separation of powers, something for which there is no spell that we know of. The wizarding government has no body charged with independent scrutiny, either elected or unelected, such as a House of Lords or a Senate. Additionally, its legal system is intertwined with government through the Wizengamot, whose judges both make and exercise the law in a pre-modern mishmash of the judicial and legislative functions. This means that there is no effective debate of current and proposed policies, something that even your average totalitarian state does a bit of nowadays, even if it is just between the oligarchs. A capacity for debate increases the likelihood of effective decision-making, even if it is achieved through a more protracted process. The argument that a unified judiciary, executive and legislature would achieve a policy response to a crisis more quickly than a separated equivalent is flawed, as the Ministry demonstrates through its stasis when confronted with Voldemort.

So had the ministry been more accountable to wizarding society, Fudge and his successors might not have needed Harry to do battle with Voldemort, and the 'Boy Who Lived' could get down to some actual schooling in sixth form!

Saturday, 2 July 2016

Weasley’s Wizarding Wheezes Trumps The Pack – social stratification and innovation in Harry Potter

The wizarding world is a divided society. Rowling is clear about this from the start of her seven book narrative, when Hermione is bullied by Slytherin students for being a muggle (someone who has no wizard blood). The existence in the Potterverse of social stratification and its ugly offshoots, discrimination and prejudice, give the books a darker element than simple ‘goodies and baddies’. Certainly, one of Rowling’s aims was to make us question the existence of a status quo that permits arbitrary discrimination, suppresses meritocracy and distorts justice. After all, although Voldemort imposes a new rule of law, it is undeniably founded on preexisting prejudices that were already latent in the wizarding world.

Why do wizards, an educated breed, allow this system to be maintained? Why do they seem ignorant of the economic consequences of social stratification; wealth inequality, suboptimal investment, rent-seeking and cronyism? What impact do these issues have on the wizarding world if left unaddressed, Voldemort or no Voldemort?

The Potterstrata

Wizarding society is a semi-market driven, semi-liberal society. ‘Sort of but not quite there’ would probably be the assessment of its liberal democratic peers if it were a real country today. Indeed, given recent events in Europe, consequences of the Potterverse’s divisions seem particularly pertinent to us. So let us begin.

There are three main classes of economic participant; wizards, goblins and elves. Wizards are primus inter pares, Goblins are essentially second-class finance managers with no real political power, and Elves exist as a type of servant underclass with no autonomy. Added to this, there are squibs and muggles; wizard-born persons who have no magical ability, and human-born persons who do respectively.

There is active discrimination against elves through indentured labour laws, and against Goblins through regulatory oversight from the Ministry of Magic. The status quo in regards to these social groups is so embedded such that any agitation for change is resisted even by supposedly liberal wizards, a prominent example being Mr. Weasley’s advice to Hermione to abandon her Elf Rights campaign.

It’s difficult to levitate your position

Unfortunately we can’t learn much from looking at cases where social discrimination is codified in law, aside from a general observation that of course Goblins and Elves have skills of benefit to the wizarding society that would be fully realized under a more liberal regime. Both are talented magical beings in their own rights, with unique skills such a financial acumen and home management skills that wizards have chosen not to develop.

Instead, we can look at the economic impact of discrimination against those unofficially marginalized; lower-class wizards, muggles and squibs.

The salient point of labour economics in the Potterverse is that upward mobility seems very hard. There are few examples of people ‘moving up the ladder’. Notable examples are the successes of Voldemort and the Weasley twins, albeit via very different strategies (a naked power-grab and a joke shop enterprise respectively). The difficulty of upward mobility in the wizarding world is strange, given that there is universal provision of standardized education through Hogwarts.

Education is generally considered a ‘human capital enabler’; in other words it allows those who put the effort in to develop life-long skills of innovative thinking and analytical rigour, to generate ideas and to challenge them. The logic then follows that any wizard, muggle or squib who attends Hogwarts (and they are all permitted to enroll) is capable of developing themselves and achieving their long-term aims, regardless of their socio-economic background. In turn such personal development, known in the jargon as ‘human capital accretion’, should stimulate the overall economy by encouraging investment through the application of creative thinking; witness Fred and George’s joke shop.

The wizarding education system fails in this regard, given that the above examples are exceptions rather than the rule. Hogwarts seems calcified, the syllabus unchanged for centuries and, aside from some maverick analytical training imparted by Dumbledore to Harry, focused on rote-learning for academic achievement. Harry’s poor results in certain academic subjects, for example, significantly impede his chances of pursuing a career as an auror, a type of wizarding detective.

This does not benefit those who fall outside of the system; squibs and more practically-minded students. If you can’t do the spells, then the system rejects you. No spells means no job in the ministry, viewed as the pinnacle of professional achievement, and it’s not as if start-ups are commonplace as a fallback option; Mr. Weasley considers Fred and George’s endeavour highly risky.

Wingardium Leviosa – raise that economy?

Between the Philosopher’s Stone and the Goblet of Fire (4 years), the price of a Daily Prophet newspaper remains 1 Knut. This tells us something interesting about the wizarding economy; it is stagnant. Textbook economic consensus generally states that an economy should grow at roughly 2% per year, evidenced by a 2% growth in the money supply (i.e. inflation). This is why most Central Banks target an inflation rate of 2%.**

You don’t need to be an economist to conclude that if, all things being equal, the Daily Prophet has earned the same total revenue for 4 years on the trot; they can’t possibly have improved anything at all. Where would the extra money come from? And if they haven’t improved anything, how would they entice more customers, and thus raise revenues.

A dose of innovation would help the Prophet, and the economy, recover from its torpor. Innovation boosts productivity by raising the number of outputs per unit of input, which in turn reduces the price of goods. This makes everyone better off and simultaneously frees up more cash for future productive investments. But innovation comes through encouraging creative and analytical thinking… sounds like a job for Hogwarts! 

**I know, I know, current economic growth theories are open to a great deal of debate! I’m just using the consensus here as a yardstick.

Tuesday, 21 June 2016

Of Galleons and Goblins – Gringotts as a Financial Institution

In our imaginations, Gringotts is the quintessential bank. It is well constructed, has vaulted hallways and is full of gold. When you want to explain to a young reader with little experience of financial affairs roughly what a bank is (as Rowling did), you would say it is a safe place to put your money, accessible when required. As Hagrid quipped, ‘yeh'd be mad ter try an' rob it’.

But does Gringotts fulfil the roles of a financial institution as we would understand it today? That is to say; does it serve the wizarding community by efficiently allocating their capital, earning income (i.e. via interest) in the process? Do wizards even need a conventional financial institution, or are they happy with a very large vault to hold their gold coins?

Financial Institutions - a recap (I'll keep it brief!)

Financial institutions allocate capital by transferring money from lenders (i.e. the bank’s depositors), who have less immediate need for it, to borrowers, who have more immediate need for it. The ‘techy’ term for this is credit creation and it is most commonly achieved via the loan system, residential mortgages being the best-known example here. Borrowers pay a higher rate of interest, lenders receive a lower rate, and the bank takes a cut.

Credit creation should boost economic growth by allowing value-enhancing projects to occur more quickly than they otherwise would have done (imagine how long it would take you to save for a house before you could buy it outright!), and it is a signal of confidence in the economy. Along with such things as an independent legal system and an exchangeable currency, credit creation is considered a cornerstone of modern economics.

Do the Weasleys need a mortgage?

If wizards could use magic to make anything, then presumably they would not need money. They could ‘magic’ all their required items and so scarcity would not exist. The absence of scarcity would also render unnecessary the study of economics (err…yay?)** as the study of choice optimization in a world of limited resources.

In the Potterverse, scarcity still exists. Rowling tells us it is so via Gamp’s law, which essentially says that you can’t make something out of nothing. So we can assume that magic, like technology, acts as an enhancer to underlying economic fundamentals. It can accelerate and polish, but it cannot add or remove.

Wizards, therefore, must work for a living (cue niche jobs such as quidditch players and curse breakers). It also follows that their wants and needs are not satisfied by their current incomes because if they were, the Weasley children would not need to buy second-hand school books. So there is demand for credit in the Potterverse, which probably means that the Burrow (the Weasleys’ house) has a 95% Loan-to-Value mortgage. Such high ‘leverage’ would be problematic for the Weasleys if they couldn’t cover their interest and capital installments, the consequences of which we are all familiar with given recent economic history.

Yes they do...and that's where Gringotts steps in 

Clearly Gringotts makes an income, how else can is Goblin owners pay their staff and feed those massive dragons?

They would probably earn some income from vault fees, and from the actual process of minting coins (called Seigniorage, basically 'taking a cut off the top'). However, in an economy where Gringotts is a state-sanctioned monopoly over a critical industry, it seems likely that the Goblins would engage in credit creation if there were demand for it. The rewards would be too lucrative to miss!

Indeed Rowling gives us one example of money-lending in the Potterverse, where Ludo Bagman (the Tri-Wizard cup organiser) borrows money from the Goblins at an usurious rate for gambling activities, in what looks to be the first wizarding payday loan. Nonetheless wizards don’t seem to be overly fond of banking; otherwise they would presumably manage Gringotts themselves.

What's with all the gold coins?

But how can the Goblins lend money when the stock of money seems fixed? A key requirement for credit creation is flexibility in the money supply. That is to say, if Gringotts has 100 Galleons deposited by savers, they cannot loan out all 100 (thereby maximizing their income from interest) whilst keeping 10 galleons in reserve for savers' instant access.***

In the real world, the money supply problem was historically solved by banks issuing their own notes, backed by the gold or other assets they had in their vaults. The process was eventually transferred to central banks to prevent over-issuance of notes (thus leading to inflation). Scottish banknotes are a hangover of this old practice, although today they are bound by the Bank of England’s monetary policies.

It seems likely then that Gringotts follows a similar process. They must either make coins when they need them to lend, or they must issue notes backed by the Galleons in their vaults. But as we said, Rowling tells us that you can't make something from nothing, and mining gold must be time-consuming even for magical beings like Goblins.

Credit creation, on the other hand, needs to be immediately responsive to consumer demand. So when the Weasley children need new school books, they don’t have time for the Goblins to mint some new coins. A better banking solution would be for the Goblins to loan them some pre-existing Galleons from say, Harry's vault, and replace those with a note that says 'Gringotts owes the bearer of this note (currently Harry) X amount of Galleons'.

And if Harry were willing to take that note instead of Galleons buy a new Firebolt broomstick, and it was then used by the Quidditch shop to pay their suppliers and so on, then the note has been accepted as a medium of exchange. In other words, it is money too!

Exchanging confidence for what’s the spell for that? Creditum facere?

PS - I am aware that there are a lot of technical arguments around credit creation, its inflationary effects and whose responsibility it ultimately is etc (Central Bank vs commercial banks), which I didn't have a chance to address here so please excuse any omissions.

** Response of Economics undergraduates when polled on this issue.

***Contact me if you would like an explanation of how this process, called Fractional Reserve Banking, works using zero technical terms!

This is part two of a poponomics series on 'Potternomics'- the economics of Harry Potter. Check out the first part here. 

Monday, 13 June 2016

The Wonderful World of Potternomics

'Welcome' said Hagrid, 'to Diagon Alley.'

Economic systems are fascinating. They come in all shapes and sizes, from classic liberal democracy to more notorious historical ne'er-do-wells such as communism, empire (mercantilism) and autarky. The world of fiction is also replete with them; think Star Wars, The Lord of the Rings, Prachett's Discworld or even simpler constructs such as The Borrowers. In numerous ways, depending on the preferences of the author, they can offer up a whole range of similarities or differences to our own economic experiences. In turn, these fictional 'case studies' offer a unique opportunity for us to explore the world of economics in new and interesting ways.

And what better place to compare and contrast fictional economic concepts than the wizarding world depicted in J.K Rowling’s Harry Potter series? Not only is it a modern childhood classic, but part of its charm as a story is that many aspects of both the protagonists’ personal lives and the realm they inhabit are directly comparable to our own, with enough unique differences to complete the fantasy effect in our imaginations.

Potternomics - The Basics 

I’m assuming anyone reading up to this point probably has a passing interest in the Harry Potter franchise, and a grasp of the at times convoluted but essentially simple plot. From this point on, then, we’ll start looking at the various different actors and institutions that populate the ‘Potterverse’ (a bit of fan-vocab, but useful), and hopefully uncover some interesting economics that we can compare to our own societies.

So what sort of things in the wizarding world could interest economists? Well, from pretty much the moment Harry walks through the wall (a magic wall, naturally) at the Leaky Cauldron, we are presented with a wonderful array of economic participants in Diagon Alley and beyond.

At the firm level, we have commercial enterprises (Ollivander’s wand shop, Flourish and Blotts’ bookshop), financial institutions (Gringotts), a central government (the Ministry of Magic) and an established education system (no need to reference here!). At the individual level, we have wizards, goblins and elves as the three main economic participants. The latter two are distinctly subordinate in status to wizards, with goblins fulfilling the ‘negative’ role of moneylenders at Gringotts, and elves as a type of servant underclass. Whilst it is clear that Rowling uses these social strata to discuss moral and ethical dimensions, and to encourage her readers to contemplate these subjects, the economic aspects of such stratification are also of interest. Why, for example, do the wizards feel the need to maintain such an economically discriminatory system?

In addition to economic participants and institutions, we also have a fascinating collection of economic items; commodity money in the form of gold Galleons (and their sub-units, the Sickle and Knut); magic itself as a productivity-enhancer akin to technology; a developed legal structure that has frightening inconsistencies, and much more. This is an intellectual dream for economists of all stripes, encompassing microeconomic theories of individual preferences to macro level institutional policies.

Diagon Alley and beyond...

Over the next four posts, I’ll be looking at a number of areas in the Potterverse that I think are of particular interest to economists in the real world today. We’ll assess the role of Gringotts as a financial institution, and the wizarding preference for commodity money over a paper equivalent. We’ll look at social stratification in the wizarding world, and assess why wealth differences still persist despite the universal provision of standardized education. Then we’ll turn to the role of institutions, and ponder their effectiveness in serving the wizarding population. Finally, we’ll conclude with a magical case study; ‘Voldemort – from orphanage to oligarch’. How did he make it, how did he gain support, how did he game the system and what lessons might there be in this tale for economic management in the real world today.

Who knows, if we learn a thing or two about our own societies in the process…well that may be what JK intended all along! So get your broomstick, and see you outside Gringotts!