24 December 2019

The economics of classic Christmas films

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Christmas is upon us, which means the usual films will be on the box. As well as being thoroughly entertaining, many of our festive favourites also have important lessons for public policy.

Let’s start with my favourite: The Nightmare Before Christmas. If you’ve never seen it before (what have you been doing with your life?), it concerns the goings on of Halloween Town. The inhabitants are all ghoulish, and the high point of their year is the celebration of Halloween, with festivities led by the ‘Pumpkin King’ Jack Skellington. After one year’s Halloween, Jack, full of angst, stumbles across Christmas Town. Enchanted by what he has seen, he becomes obsessed with trying to understand Christmas through experimentation. He manages to convince his fellow Halloween Town citizens (and the Mayor) into celebrating Christmas.

Despite the enthusiasm and smarts of Jack and the rest of Halloween Town, it’s an absolute disaster. They kidnap Father Christmas and put their own spin on Christmas. Despite Jack’s best efforts and trying to understand and explain Christmas, they are still influenced by what they know best: Halloween. Gifts include sinister dolls, evil rubber ducks, presents which attack children, and ‘Snakes and mice get wrapped up so nice with spider legs and pretty bows’.

The whole film shows the problems with central planning. The characters are all well meaning: they want to create a nice Christmas, they just don’t know how. It’s the same wherever it has been tried. Whether it’s the Soviet Union, Cuba, China, or Venezuela, attempts by central planners to direct economic activity towards beneficial outcomes always fails.

One of the main issues highlighted in the film is what is known as tacit knowledge. This is knowledge which, according to F.A. Hayek, is difficult to transfer to other people through explanation. Rather, it is acquired through experience. This is why the inhabitants of Christmas Town do such a good job at doing Christmas and why Jack does such a bad job at trying to understand and explain it. The same is true of government. People on the ground know their own situation and what needs changing better than any politician or civil servant ever could.

Thankfully, unlike the central planners in real life, Jack accepts that he’s made a terrible mistake. Instead of trying to fix it himself, he releases Santa, and Christmas is saved.

Another classic is It’s A Wonderful Life, in which George Bailey gets the chance to see what life would have been like if he’d never been born. It’s also an opportunity to think about what the world would be like without banks.

Banks and bankers are easy targets. It’s tempting to think of them as being greedy and grasping, contributing nothing to society. However, as George Bailey points out during a run on his own bank, this could not be further from the truth. As the citizens of Bedford Falls start to panic and demand their money, George says: ‘You’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house, that’s right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can’.

This highlights the importance of banks. They provide capital for people to be able to afford their own homes and entrepreneurs to start their own businesses, providing jobs and economic growth. In the alternative reality of the film, Bedford Falls is a bleak and miserable place as most people are not able to access the capital they need to own a home or start a business.

‘Every time a bell rings, an angel gets its wings’ is one of the last lines in the films. Another motif might be, ‘every time you put money in the bank, you’re providing the capital which to grow the economy’.

It wouldn’t be Christmas without watching A Christmas Carol. There are many versions, but the Muppets one is the best. In one of the most famous scenes, the redeemed Scrooge sends a huge turkey to the house of his poor and long-suffering employee, Bob Cratchit.

It’s a great scene, and certainly a nice gesture. However, it’s problematic from an economic perspective. The issue is that we do not know the preferences of other people as well as they know their own, which causes problems when it comes to gift giving. We saw earlier in the film that Mrs Cratchit normally cooks a goose on Christmas day, and so we can only assume that she is half way through cooking it once Scrooge’s gift turns up. Even if she hasn’t started cooking, that goose might still go to waste. What is more, perhaps the Cratchit family actually prefers goose to turkey. Or, maybe Tiny Tim has just become a vegetarian and so a nut roast would be preferable. Scrooge did not know their preferences.

Research reveals that we do not know the preferences of other people as well as we think we do, especially when it comes to gift giving. This is the case even when it comes to spouses and also parents and their children. In 1993 economist (and Grinch) Joel Waldfogel surveyed some of his students at Yale in order to find out their attitudes towards their Christmas gifts. He found that the students valued the gifts at 20% less, per dollar spent, than items they bought themselves. Waldfogel went on to calculate the deadweight loss of Christmas at between 10 and 33% of the cost of the presents.

The lesson is: we’re all lousy at giving gifts. So, if our loved ones don’t know our preferences that well, what chance do politicians and civil servants have? They take our money in the form of taxation, and then spend it on services for us.

It would be far more effective if the government trusted its citizens enough to spend their own money on what they want and need. What is more, rather than providing public services, it should accept that it does not know our preference. Instead, it should give money to people in the form of health insurance and education vouchers.

So, this Christmas, as you’re collapsed in front of the TV, unable to move due to all the food you’ve shovelled into your mouths, think on the economic lessons of classic Christmas films. Central planning is bad, banks are good, and you spend your money more effectively than the government. Merry Christmas!

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Ben Ramanauskas is a Research Economist at Oxford University