Before you start reading, just be aware that I have started the Swift Economist Person of the Year. Soon this will rival Times Person of the Year. Please have a vote here: Swift Economist Person Of The Year.
The “Big Screen Economics” posts imagine the economy in a fictional world and discuss the issues within these worlds. This is made to be approachable for people with no knowledge of economics. They learn, while those who are more experienced can consider what they know in an applied sense and enjoy the economic extrapolations.
Voldemort returned, controlled the ministry and looked to put an end to Harry. Most people were watching, wanting to see whether Harry Potter can destroy all of the horcruxes. I, and all economists alike, however were considering the economic implications of the return of “He who must not be named”.
The consequence of his comeback is the lack of confidence in the economy and political instability. This was obvious as a result of political unrest. Even in the half blood prince you could see the effect of the lack of stability as Diagon Alley was empty.
This means that there is a higher unemployment and people have less money.
The ministry of magic will also most likely have a large deficit and debt that is spiralling out of control. Rowling’s world seems to be a very socialist state, and a recession will lead to a falling revenue. There is a universal free healthcare (St. Mungos) and education (Hogwarts). Although, Weasleys considered, the child allowance is probably mediocre at best. There isn’t much inheritance tax as Harry seems well off. Who knows, his parents may have just invested in apple shares.
Monetary policy is basically changing interest rates to stimulate investment and demand and affect inflation. I have explained why they’re useful in the past: Why have we just lowered the interest rates?. The central bank of the wizard population is of course Gringots. Humans and Goblins are infamous for not getting on well, therefore it is safe for one to assume this bank to be independent of the government (ministry of magic).
Is this independence good? Yes it is. When banks are in control of interest rates they are seen as more reliable by investors. As a result there is more stability in the economy as politicians don’t just use interest rates and banks for political gain. Although no doubt there is a magic equivalent of Jacob Rees-Mogg who wants the banks back with the ministry (I bet it’s Lucius).
So what are the interest rates like in the wizarding world?
In short the answer should be pretty low. Despite Harry having a lot of money (all of his parents savings with 10 years interests) some of this is probably from generous donors. The reason it would be so low is because the probability of people paying back loans is higher.
In banking economics there is a term called hidden type. As a banker I can’t tell how likely you are to pay back a loan. Therefore I need to charge you a higher interest rate. What if there was a way to make sure a person would pay it back, like a life or death situation. Generally we use different levels of collateral to determine who is reliable. Making an unbreakable vow to pay money back would mean your life is collateral. This would make the interests crazily low. It would hardly cost anything to take out a loan.
Veritaseurem or the Penesive could also be used to extract perfect information and determine hidden types. However the problem with all three of these methods isethics. However, economists are horrible people and quite frankly don’t care about ethics.
Ask me who the real enemy is in the Harry Potter series, go on…
Bellatrix, she killed Dobby
Ask the economist within me who the real enemy is….
Ron states in one of the books/films that “everybody gets their wand from Olivander” and I believe that Hagrid says this to. I am aware that a Harry Potter fan will probably murder me for misquoting. Sorry. But Olivander has a monopoly on the wand selling industry. He is the only one of note in Britain and in Diagon Alley.
As a monopoly (The only firm in an industry), this means he can be inefficient and not run his business sensibly. It means he can exploit customers and charge them whatever he wants to for a wand. The fact that a wand is essential means it will be price inelastic (People are irresponsive to a change in price), therefore he can charge even more and be more exploitative than most monopolies are. I know, what a snake.
Hogwarts is a publicly owned monopoly. This is worse. That means that they are protected and can also be inefficient. It’s like the royal mail before privatisation. THey charge you a ridiculous amount for a stamp and thanks to government regulation you can’t go anwyehere else. Also the lack of competition within the public sector in this case means that Hogwarts can be awful when it comes to teaching and let their standards slip and there isn’t anything that anyone can do about it. The public monopoly of Hogwarts is bad for the young people of the wizarding world as the standard of education can fall as far as it wants. This was proven by the advocation of torture at Hogwarts during the seventh Harry Potter book.
Union of the Pheonix
One thing of note in Rowlings socialist paradise is the lack of unions. House elves don’t have them. They aren’t mentioned in the ministry either. But the biggest assumption in the wizarding world is that teachers don’t have them. In Order of the Pheonix, Professor Umbridge is rather dastardly to teachers. Despite this there is no mention that they take industrial action. How does this effect the wizarding economy?
It makes the labour markets more efficient. There is no collective bargaining over salary, therefore there isn’t more unemployment. Consider, if you want to, a demand and supply curve (figure 1) which considers wage and employment. If wages are higher, more people are willing to work, while if wages are lower, employers are more willing to hire people, basic economic intuition. There will be employment where supply = demand (employment = 100 & wage = 100). However, if a trade union demand a minimum wage for a job (180), there will be a new supply curve (figure 2). As a result, wage will increase (to 180) but employment will fall (to 50) and as a result there is more unemployment (180-50). Therefore in Rowling’s world, more people work but earn less. The labour market is at its most efficient though.
Of course unions can bring about positives for workers, there is much debate, but this is a basic economic look at unions, wage and employment.
JK Rowling constantly talks about the black market throughout her books. In fact, Arthur Weasley regularly deals with cursed objects. Mundungus Fletcher constantly sells magical items on the street and in The Half Blood Prince, Draco is purchasing the vanishing cabinet off record. Even Fred & George are shown to be using the black market when purchasing ingredients for their joke shop products during The Order of The Phoenix.
No doubt the question on your lips is how does this affect Mr Fudges GDP figures for the wizarding economy. Well, the size of the black market seems large, so the GDP of the wizarding world will be underestimated. This is because the black market isn’t considered in GDP.
The black market also makes purchases and items more dangerous. This is because they are not produced to ministry regulations, therefore putting wizards and witches in more danger.
So this was a brief look into some aspects of the magical economy of the world constructed by Exeter’s own JK Rowling. Did I mention she went to Exeter? Well she, JK Rowling went to Exeter. That’s right, the author of Harry Potter went to Exeter.