DRI-326 for week of 9-1-13: Quantity vs. Quality in Economists

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Quantity vs. Quality in Economists

Students of economics have long complained that economics texts focus too much on quantity and not enough on quality when evaluating goods. The same issue arises when comparing economists themselves. The career of Nobel Laureate Ronald Coase, who died this week at age 102, is a polar case.

Economists advance by publishing articles in prestigious, peer-reviewed journals. The all-time leader in the number of articles published is the late Harry G. Johnson. Despite dying young at age 53, Johnson compiled the staggering total of 526 published articles during his lifetime.

The use of advanced mathematics and abstract modeling techniques has enabled economists to rack up impressive publications scores by introducing slight mathematical refinements that add little to the substantive meaning or practical value of their achievement. When asked to account for the comparative modesty of a list of publications only one-fourth the size of Johnson’s, Nobel Laureate George Stigler countered, “Yeah, but mine are all different.”

Coase stands at the other extreme. His complete list of articles numbers fewer than twenty, but two of those are among the most-frequently consulted by economists, lawyers and other specialists, not to mention by the general public. He published a long-awaited, widely noticed book in 2012 despite having passed his centenary the year before. His life is an advertisement for the value of quality over quantity in an economist.

Another notable aspect of Coase’s work is its accessibility. In an age when few professional contributions can be read and understood by non-specialists, much less by interested non-economists, Coase’s work is readily comprehensible by the educated layperson. Now is the time to rehearse the insights that made Coase’s name a byword within the economics profession. His death makes this review emotionally as well as intellectually fitting.

Why Do Businesses Exist?

At 26 years of age, Ronald Coase was a left-leaning economics student. He pondered the following contradictory set of facts: On the one hand, socialists ever since Saint-Simon had advocated running a nation’s economy “like one big factory.” On the other hand, orthodox economists declared this to be impossible. Yet some highly successful corporations reached enormous size.

Who was right? It seemed to Coase that the answer depended on the answer to a more fundamental question – why do businesses exist? Be it a one-person shop or a huge multinational corporation, a business arises voluntarily. What conditions give birth to a business?

Coase found the answer in the concept of cost. (In his 1937 article, “The Nature of the Firm,” Coase used the term “marketing costs,” but the economics profession refined the term to “transactions costs”.) A business arises whenever it is less costly for people to organize into a hierarchical, centralized structure to produce and distribute output than it is to produce the same output and exchange it individually. And the business itself performs some activities within the firm while outsourcing others outside the firm. Again, cost determines the locus of these activities; any activity more cheaply bought than performed inside the firm is outsourced, while activities more cheaply done inside the firm are kept internal.

Like most brilliant, revolutionary insights, this seems almost childishly simple when explained clearly. But it was the first lucid justification for the existence of business firms that relied on the same economic logic that business firms themselves (and consumers) used in daily life. Previously, economists had been in the ridiculous position of assuming that businesses used economic logic but arose through some non-economic process such as habit or tradition or government direction.

Today, we have a regulatory process that flies in the face of Coase’s model. It implicitly assumes that markets are incapable of correctly organizing, assigning and performing basic business functions, ranging from safety to hiring to providing employee benefits. To make matters worse, the underlying assumption is that government regulatory behavior is either costless or less costly than the correlative function performed by private markets. As Coase taught us over 75 years ago, this flies in the face of the inherent “nature of the firm.”

The “Coase Theorem”

In mid-career, while working amongst a group of free-market economists at the University of Virginia, Ronald Coase made his most famous discovery. It assured him immortality among economists. Just about the best way to make a name for yourself is to give your name to a theory, the way John Maynard Keynes or Karl Marx did. But in Coase’s case, the famous “Coase Theorem” was actually devised by somebody else, using Coase’s logic – and Coase himself repudiated the use to which his work was put!

To appreciate what Coase did – and didn’t do – we must grasp the prior state of economic theory on the subject of “externalities.” Tort case law contained examples of railroad trains whose operation created fires by throwing off sparks into combustible areas like farm land. The law treated these cases by either penalizing the railroad or ignoring the damage. A famous economist named A. C. Pigou declared this to be an example of an “externality” – a cost created by business production that is not borne by the business itself because the business’s owners and/or managers do not perceive the damage created by the sparks to be an actual cost of production.

Rather than simply penalizing the railroad, Pigou observed, the economically appropriate action is to levy a per-unit tax against the railroad equal to the cost incurred by the victims of the sparks. This would cause the railroad to reduce its output by exactly the same amount as if it had perceived its sparks to be a legitimate cost of production in the first place. In effect, the railroad “pays” the costs of its actions in the form of reduced output (and reduced use of the resources necessary to provide railroad transport services), rather than paying them in the form of a fine. Why is the former outcome better than the latter? Because the purpose is not to hurt the railroad as retaliation for its hurting the farmer, the way one child hurts another in revenge for being hurt. A railroad is a business – in effect, it is a piece of paper expressing certain contractual relationships. It cannot feel hurt the way a human being can, so the fine may make the farmer feel better (if he or she received the fine as proceeds of a tort suit) but does not compensate for the waste of resources caused by having the railroad produce too much output. (“Too much” because resources will have to be devoted to repairing the damage caused by the sparks, and consumers value the resources used to do this more than the farmer values the loss.) In contrast, when the costs are factored into the railroad’s production decision, everybody values the resulting output of railroad services and other things as exactly worth their cost.

Of course, the catch is that somebody has to (1) realize the existence of the externality; and (2) calculate exactly how much tax to levy on the railroad to neutralize (or internalize) the externality; and then (3) do it. In the manner of a philosopher king, Pigou declared that this task should be assigned to a government regulatory bureaucracy. And for the next half-century (Pigou was writing in the early 1900s), mainstream economists salivated at the prospect of regulatory agencies passing rules to internalize all the pesky externalities that liberals and bureaucrats could dream up.

In 1960, Ronald Coase came along and gave the world a completely new slant on this age-old problem. Consider the following type of situation: you are flying from New York to Los Angeles on a low-price airline. You have settled somewhat uncomfortably into your seat, survived the takeoff and are just beginning to contemplate the six-hour flight when the passenger in front of you presses a button at his side and reclines his seatback – thereby preempting what little leg room you previously had. Now what?

This is not actually the example Coase used – it was used by contemporary economist Peter Boettke to illustrate Coase’s ideas – but it is especially good for our purposes. Using the same logic Coase applied to his examples, we reason thusly: It would be completely arbitrary to assign either of us a property right to the space preempted by the seatback. Why? Because the problem is not to stop bad people from doing bad things. Instead, we are faced with a situation in which ordinary people want to do good things that are in some sense contradictory or offsetting in their effects. On the airplane, my wish to stretch out is no more or less morally compelling than his to recline. The problem is that  we can’t do both to the desired extent at the same time without getting in each other’s way; e.g., offsetting each other’s efforts.

Indeed, this is true of most so-called externalities, including the railroad/farmer case. Case law usually treated the railroad as a nefarious miscreant imposing its will on the innocent, helpless farmer. But the railroad’s wish to provide transport services is just as reasonable as the farmer’s to grow and harvest crops. It is not unthinkable to enjoin the railroad against creating sparks – but neither should we overlook the possibility of requiring the farmer to protect against sparks or perhaps even not locate a farm within the threatened area. Indeed, what we really want in all cases is to discover the least-cost solution to the externality. That might involve precautions taken by the railroad, or by the farmer, or emigration by the farmer, or payment by the railroad to the farmer as compensation for the spark damage, or payment by the farmer to the railroad as compensation for spark avoidance.

 

In general, it is crazy to expect an uninvolved third party – particularly a government regulator – to divine the least-cost solution and implement it. The logical people to do that are the involved parties themselves, who know the most about their own costs and preferences and are on the scene. These are also the people who have the incentive to find a mutually beneficial solution to the problem. In our airline example, I might offer the man in front of me a small payment for not reclining. Or he might pay me for the privilege of reclining. But either way, we will bargain our way to a solution that leaves us both better off, if there is one. One of us would object to any proposed solution that did not leave him better off.

Of course, it would be useful for bargaining purposes to have an assignment of property rights; that is, a specification that I have the right to my space or that the man in front of me has the right to recline. That way, the direction of compensatory payments would be clear – money would flow to the right-holder from the right-seeker.

What if bargaining does not produce an efficient outcome, one that both parties can agree on? That means that the right-holder values his right at more than the right-seeker is willing to pay. But in that case, no government tax would produce an efficient outcome either.

On the airline, suppose that I value the leg room preempted by the reclining seat at $10. Suppose, further, that airline policy gives him the right to recline. If I offer him $6 not to recline, he will accept my offer if he values reclining at any amount less than $6 – say, $5. Notice that we are now both better off than under the status quo ante bargain. I get leg room I valued at $10 – or course, I had to pay $6 for it, but that is better than not having it at all, just as having the airline’s cocktail is better than being thirsty even though I had to pay $5 for it. He loses his right to recline, but he gets $6 instead – and reclining was only worth $5 to him. He is better off, just as he would be if he accepted an airline’s offer of $500 to surrender his seat and take a later flight, as sometimes happens.

We cannot even begin to estimate how many times people solve everyday problems like this through individual bargains. The world would be vastly better off if we were trained from birth in the virtues of a voluntary society where bargaining is a way to solve everyday disputes and make everybody better off. That training would stress the virtues of money as the lubricant that facilitates this sort of bargain because it is readily exchangeable for other things and because it is the common denominator of value. Instead, most of us are burdened by an instinctive tribal suspicion that money is evil and bargaining is used only to seek personal advantage at the expense of others. Experienced businesspeople know otherwise, but throughout the world the Zeitgeist is working against Coase’s logic. More and more, government and statutory law are held up as the only fair mechanism for resolving disputes.

University of Chicago economist George Stigler used Coase’s logic to devise the so-called Coase theorem, which says that when the transactions costs of bargaining are zero, the ultimate price and output results will be the same regardless of the initial assignment of property rights. This is true because both parties will have the incentive to bargain their way to an efficient improvement, if one exists. The assignment of property rights will affect the wealth of the bargainers, because it will determine the direction of the money flow, but economists are concerned with welfare (determined by prices and quantities), not wealth. No government regulatory body can improve on the free-market solution.

Coase disagreed with the theorem named after him – not because he disputed its logic, but because he foresaw the results. Economists would use it to look for circumstances when transactions costs were low or non-existent. Instead, Coase wanted to investigate real-world institutions such as government to compare its transactions costs to those of the market. He knew that real-world transactions costs were seldom zero but that government solutions almost never worked out as neatly in practice as they did on the blackboard. In fact, he invented the phrase “blackboard economics” to refer to solutions that could never work in practice, only on a theoretical blackboard, because real-world governments never had either the information or the incentive necessary to apply the solution.

Why China Became Capitalist

Ronald Coase devoted his last years to learning how and why China evolved from the world’s last major Communist dictatorship to the world’s emerging economic superpower. In Why China Became Capitalist, he and his research partner Ning Wang delivered an account that contravened the popular explanation for China’s rise. China’s ruling central-government oligarchy has received credit for the country’s emergence as the growth leader among developing nations. Since the Communist Party retained political control throughout the growth spurt, it must have been responsible for it – so the usual explanation runs. Coase and Wang showed that government’s presence as the agency in charge of political life does not automatically entitle it to credit for economic growth.

The death of Mao Zedong in 1976 rescued China from decades of terror, famine and dictatorship. Mao’s designated successor, Hua Guofeng, was an economist who outlined a program of state-run investment in heavy industry called the “Leap Outward.” This resembled the various Five-Year Plans of Soviet ruler Joseph Stalin in general approach and in overall lack of results. Hua’s successors, Deng Xiaoping and Chen Yun, abandoned the Leap Outward in favor of an emphasis on agriculture and light industry. Although Deng was the political figurehead who garnered the lion’s share of the publicity, Chen was the guiding spirit behind this second centralized plan designed to spur Chinese economic growth. It placed less emphasis on production of capital goods and more on consumer goods. Chen allowed state-controlled agricultural prices to rise in an effort to stimulate production on China’s collective farms, which had failed disastrously under Mao, resulting in approximately 40 million deaths from famine. He also allowed state-run enterprises a measure of autonomy and private profit, heretofore unthinkable under Communism.

Although these central-government measures were the ostensible spur to China’s remarkable growth run, Coase and Wang assign actual responsibility to the resurgence of China’s private economy. Private farms had always existed as part of the nation’s 30,000 villages and towns, much as neighboring Russians continued to nurture their tiny private plots of land alongside the Soviet collective farms. And, just as was the case in Russia, the smaller private farms began to outdo the larger collectives in productivity and output. Mao fanatically insisted on agricultural collectivization, but his death freed private farmers to resume their former lives.  By late 1980, the Beijing government was forced to officially acknowledge the private farms. In 1982, China formally abandoned its costly experiment with collective agriculture and de-collectivized its farms. Official grain prices were allowed to rise and grain imports were permitted.

Agriculture wasn’t the only industry that flourished at the local level. Small businesses in rural China labored under official handicaps; their access to raw materials was not protected and they had no officially sanctioned distribution channels for their output. But they bought inputs on the black market at high prices and groomed their own sales representatives to scour the nation drumming up business for their goods. These local Davids outperformed the state-run Goliaths; they were the real vanguard of Chinese economic growth.

Growth was slower in China’s major cities. Mao had sent some 20 million youths to the countryside to escape unemployment in the cities. After his death, many of these youths returned to the cities – only to find themselves out of work again. They demonstrated and formed opposition political movements, sometimes paralyzing daily life with their protests. This forced Beijing to permit self-employment for the first time – another Communist sacred cow sacrificed to political expediency. This, in turn, created an urban class of Chinese entrepreneurs. This led to yet another government reaction in the form of Special Economic Zones, somewhat reminiscent of the U.S. “enterprise zones” of the 1980s. Economic freedom and lower taxes were allowed to exist in a controlled environment; Chinese officials hoped to encourage controlled doses of capitalist prosperity in order to save socialism.

Gradually, the limited reforms of the Special Economic Zones became more general. Increased freedom of market prices was introduced in 1992, taxes were lowered in 1994 and privatization of failing state-run enterprises began in the mid-1990s. For the first time, China began to replace local and regional markets with a single national market for many goods.

Coase and Wang identify perhaps the most important but least-known capitalist element to arise in China as the improved pursuit of knowledge. They accurately attribute the recognition of knowledge’s role in economics to Nobel Laureate F.A. Hayek and note the increasing popularity of books and articles by Hayek, his mentor Ludwig von Mises and classical forebears such as Adam Smith. The economics profession has pigeonholed the subject of knowledge under the heading of “technical coefficients of production,” but the authors know that this is only the beginning of the knowledge needed to make a free-market economy work. The knowledge of market institutions and the dispersed, specialized “knowledge of particular time and place” that can only be collated and shared by free markets are even more important than technical knowledge about how to produce goods and services.

The upshot of China’s private resurgence has been to make the country a “laboratory for capitalist experimentation,” according to Coase and Wang. That laboratory has brewed a recipe for unparalleled economic growth since the 1990s, leading to China’s admittance into the World Trade Organization in 2001. The final piece of the puzzle, the authors predict, is a true free market for ideas – the one thing that Western economies have that China lacks. When this falls into place, China will become the America of the 21st century.

Thus did Ronald Coase add a landmark study in economic history to his select resume of classic works.

Quality vs. Quantity

Never in the history of economics has one economist achieved so much productivity with so little scholarly output. Ronald Coase economized on the scarce resources of time and human effort (ours) by devoting the longest career of any great economist to specializing in quality, not quantity, of work.

DRI-219 for week of 12-16-12: The Economics of Dickens’ ‘A Christmas Carol’

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The Economics of Dickens’ ‘A Christmas Carol’

Charles Dickens’ “A Christmas Carol in Prose,” written in 1843, is one of the hardiest of all Christmas perennials and a seminal example of the Christmas story. Dickens’ gift for evoking emotion and vivid ingredients like ghosts, sickly children and hearty Christmas celebrations made the tale a natural for the movies. Memorable versions came out of Hollywood in 1938 and Great Britain in 1951, while television gave us a distinctive reprise in 1984. (Herein, we follow the example of the movies, which typically shorten the title by omitting the last two words.)

As he did with many of his novels, Dickens used his authorial prerogative to criticize elements of Victorian English society. His protagonist, Ebenezer Scrooge, is a businessman whose lack of Christmas spirit, parsimonious habits and eye for the bottom line have made his name a byword for misanthropy. Scrooge’s relationship with his clerk, Bob Cratchit, would attract unfavorable comment by the EEOC, the NLRB, OSHA and the rest of today’s regulatory alphabet soup.

Over the decades, various commentators have suggested that Dickens’ motives were not purely literary and commercial – that he sought to censure capitalism or, at the very least, its perceived excesses. This story has moved and inspired countless millions through many incarnations over a century and a half, so it is well worth inquiring into its economic significance.

The Carol

Dickens introduces us to Ebenezer Scrooge the aging miser and misanthrope. Scrooge’s life is devoted entirely to his business, formerly a partnership but now a sole proprietorship employing a clerk named Bob Cratchit. It is Christmas Eve, but in Scrooge there dwells none of the Christmas spirit. “Christmas? Bah! Humbug!” is his reaction to the holiday. He refuses a Christmas-dinner invitation from his nephew and niece-in-law. Grudgingly, Scrooge gives Cratchit the day off on Christmas Day. Approached to donate to the poor, Scrooge is indifferent to their misery. “Are there no prisons?” he demands. “Are there no work houses?” Apprised that some might die from starvation and exposure, he snaps that “they had better do it and decrease the surplus population.”

Alone at home on Christmas Eve, Scrooge is visited by the ghost of his former partner, Jacob Marley. Marley’s ghost endures eternal torment for mistakes he made in life; namely, avarice and lack of generosity and compassion for other human beings. The ghost warns Scrooge to mend his ways or suffer a similar fate. Scrooge will be visited by three more ghosts, each with a life lesson designed (so to speak) to scare him straight.

The Ghost of Christmas Past transports Scrooge back to his forgotten youth. He revisits his lost love – his longing to provide for her produced the steely resolve to accumulate wealth. The sight of her moves him deeply. We begin to glimpse a – heretofore unsuspected – sympathetic side to Scrooge.

The Ghost of Christmas Present allows Scrooge to see himself as his contemporaries see him; notably, as he is seen by his nephew and the nephew’s wife. The scathing picture they present sobers him, but he is touched by his nephew’s stubborn belief that goodness lies buried underneath Scrooge’s flinty exterior. Scrooge is taken aback by his visit to Bob Cratchit’s home, where Cratchit’s ailing son, Tiny Tim, bolsters the family’s spirits with his pluck. The lesson is driven home to Scrooge by the sight of two poor, hungry children in the streets of London, each sporting a sign. One sign reads “Ignorance;” the other “Want.” Scrooge recalls his earlier dismissive rejection of the poor and hungry with bitter remorse. Once more we sympathize with Scrooge.

The Ghost of Christmas Future brings Scrooge face to face with his fate. It is a terrifying experience. Scrooge enters dilapidated quarters in which scavengers pick the figurative testamentary bones of a shroud-covered corpse. Their conversation leads Scrooge to suspect the worst. This is confirmed when the Ghost leads him to a cemetery and points with empty sleeve to a tombstone on which the horrified Scrooge sees his own name carved.

Now desperate and bereft of emotional resource, Scrooge begs for reprieve. Is the future irrevocably writ or is there still hope? He receives no answer but is instead transported back to his own time and quarters just as Christmas Day dawns. Intuitively, he recognizes that he has been given a second chance to rectify his mistakes and remake his life.

Scrooge is miraculously revitalized. He purchases a huge fowl for delivery to the Cratchit family for Christmas dinner, tipping the messenger boy extravagantly. He buttonholes the charity solicitors and reverses his previous stance by donating generously to their cause. He makes a surprise – and surprisingly welcome – appearance at his nephew’s Christmas Day celebration. And the following day, Scrooge reproves Cratchit for arriving late to work by … raising his wage and inviting him to imbibe some holiday cheer.

Speaking in narrative voice, Dickens ends by informing us that Scrooge followed through on his reformation by financing successful medical treatment for Cratchit’s son, Tiny Tim. Tiny Tim’s valediction may be history’s most beloved bit of literary Christmas lore: “God bless us – every one!”

The Carol at Face Value

Most people react to “The Christmas Carol” viscerally. Consequently, evaluations of its economic content – and intent – have followed parallel lines. Scrooge is a businessman. Scrooge is a miser. Therefore, Dickens is saying that businessmen – or at least, successful businessmen, which Scrooge was – are misers. Scrooge is single-mindedly devoted to wealth accumulation. Scrooge is unhappy and makes others unhappy. Therefore, Dickens is saying that the pursuit of wealth will end badly and is a bad thing. Since businessmen and wealth accumulation are portrayed unfavorably, it is only a small step to the conclusion that Dickens was excoriating capitalism in general in “A Christmas Carol.”

There is indirect support for this conclusion both inside and outside the story. The plight of the poor is stressed and Scrooge – in his pre-reformation, presumptively-pro-capitalist persona – is indifferent to that plight. In life, Dickens was a noted philanthropist and promoter of causes intended to benefit the poor. In particular, Dickens was bitterly opposed to child labor and relentlessly publicized what he saw as unsafe and unconscionable living and working conditions for poor children. He placed most of the blame for these conditions on wealthy businessmen.

These considerations have been ample to persuade most interested parties of Dickens’ anti-capitalist bent.

The Carol Reconsidered

Not surprisingly, economists view “A Christmas Carol” in a different light. A recent blog by Jacqueline Otto serves up stimulating insights. “I would go so far as to say,” she avers, “that ‘A Christmas Carol’ is a story about capitalism.” Ms. Otto offers three arguments in defense of this thesis.

First, she spotlights what Dickens does not say. “Dickens never condemns capitalism [or] business owners [or] trading… the only criticism Dickens makes is that Scrooge… and Marley… were not generous.”

Second, she points out that business success plays a central role in the tale. “There would never have been a story if Scrooge and Marley were not successful businessmen (e.g., if they had been unhappy poor men instead of unhappy rich men).”

Third, she makes the telling point that when Scrooge reforms, “he does not then become poor,” but instead “uses his wealth to help those around him” by saving Tiny Tim’s life with medical treatment, buying food for local families, donating to charity and raising Bob Cratchit’s salary.

Economist and editor David Henderson observes that today it is political liberals who play the role of Scrooge. Research done by Arthur Brooks (now president of American Enterprise Institute) and compiled for his book, Who Really Cares? strongly shows that contemporary donors to charitable causes are predominantly conservatives or inhabitants of the political right wing. Left-wing poll respondents indicate that they consider their tax payments supporting government programs as sufficient unto their causes.

In other words, Henderson declares, the left wing is reacting much as Scrooge did to pleas for charity for the poor: “Is there no Medicaid? Are there no food stamps?” In effect, their position is that they gave at the office via their withheld payroll taxes. Henderson’s point is that Dickens’ tale supports the conservative position that charity must be voluntary in order to be morally defensible.

Otto’s and Henderson’s parsing of Dickens follows in the footsteps of pioneering work by one of Ronald Reagan’s chief aides, Edwin Meese. In 1983, Meese seized the occasion of a news conference to comment extensively on the relationship between Scrooge and Bob Cratchit. Scrooge, claimed Meese, didn’t “exploit” Cratchit. Unlike many workers of his day, Cratchit lived in a house rather than a tenement. He could afford a Christmas dinner with goose and plum pudding. He was paid 10 shillings a week [actually, 15 shillings], a good wage for that day. The free market, Meese judged, would not permit Scrooge to exploit Cratchit, for it would allow Cratchit to escape an intolerable employment for a better one. For his pains, Meese was stigmatized by the news media of that day as “Edwineezer” Meese.

Readers of Dickens will recall that Cratchit’s inability to afford a full-blown Christmas dinner elicited the sympathy of Scrooge and motivated the (anonymous) donation of a Christmas fowl. An aide to a conservative President resolves to brave the scorn of the liberal news media by using a contrarian interpretation of a beloved Christmas classic to make points about economics – shouldn’t he at least take the time and trouble to get the details right? Still, Meese’s economic logic and history were eminently correct even if his recollection of the source material was shaky. He opened the door to our deeper understanding of the meaning of Dickens and “A Christmas Carol.”

In subsequent years, one point has often been made in passing reference to Dickens and “A Christmas Carol.” Scrooge’s triumphant redemptive gesture is to raise Cratchit’s salary. (In a few of the dozens of movie, television or stage versions, he doubles it.) This is perhaps the surest indicator of Dickens intentions and his view of the economic system of Victorian England. It reveals a mindset best described by economist Thomas Sowell as “volitional economics.” Economic outcomes are determined not by the impersonal forces of markets but rather by the will (volition) of powerful market participants – in this case, employers. Employers are the prime movers; employees are not actors but rather are the passive, helpless recipients of employers’ actions.

Modern economic theory utterly rejects this primitive conception of volitional economics. In the strictest sense, an employer doing what Scrooge did in a competitive market – arbitrarily raising the salary of a key employee – would go broke. In practice, various frictions and modifications to theory might lessen that penalty, but economists nonetheless view Scrooge’s capricious behavior with amusement. In Victorian England, pay policies of employers were constrained by the markets for labor and goods, not by personal whims. Neither personal generosity nor parsimony came into it.

The Carol as a Classic Case of Unintended Consequences

“A Christmas Carol” is one of the most emotionally compelling fictional works ever penned. “The story…has become so well known,” conclude John Tibbets and James Welsh in Novels Into Film, “that it has transcended its origin as a work of fiction and has entered the public consciousness with the life-changing power of scripture. Even those who have never read [the] story, or seen…the movie adaptations…know… what a ‘scrooge’ is and what ‘Bah! Humbug!’ means.”

Dickens himself, in common with other great novelists such as Dumas, was overcome by the force of his own writing. By his own account, he “wept and laughed, and wept again” during the six weeks it took him to complete his work.

Thus, it is not shocking that even economists, hardcore rationalists though they are, should bend over backwards to judge that work favorably. A clear-eyed appraisal suggests that Otto, Henderson, et al have been caught up by the same extravagant spirit of generosity that captured Dickens himself as well as subsequent generations of readers.

Calling “A Christmas Carol” a story about capitalism is overdone for at least two reasons. The first is that the term “capitalism” has not been coined yet. Karl Mark published Das Kapital in three volumes nearly thirty years apart, in 1867, 1885 and 1894 – long after Dickens wrote “A Christmas Carol.” Devotees of free markets eventually appropriated Marx’s pejorative descriptor to characterize the system he abhorred. But Dickens could hardly have intended to defend a system that had not yet been characterized as such.

To be sure, this cuts both ways. Dickens also could not have been criticizing capitalism per se. But he did criticize the institutions and practices that comprise it. Somehow, it is easier to criticize piecemeal than to defend, perhaps because the defense usually invokes the systemic role played by the piece as part of the defense.

Then there is the equally obvious point that the way an author deliberately goes about praising a social system is by…well, praising it outright – not by failing to condemn it.

As economists like Carl Menger and F. A. Hayek have pointed out, a major task of economics is to point out the unintended consequences of human action. Here, Otto and Henderson have demonstrated that – without in any way intending to – Charles Dickens mounted a significant defense of Victorian capitalism in “A Christmas Carol.”

Dickens as 20th Century Liberal

In Playback, Raymond Chandler’s legendary detective protagonist, Philip Marlowe, responds to a woman’s expression of surprise at his amatory gentleness by philosophizing: “If I wasn’t hard, I wouldn’t be alive. If I couldn’t ever be gentle, I wouldn’t deserve to be alive.” Toughness and rationality are the qualities needed to preserve and extend human life. Tenderness and empathy are qualities necessary to make life enjoyable as well as long. In our modern age of specialization, it is common to find toughness and tenderness distributed in a skewed manner rather than in equal measure.

Dickens certainly did not intend to praise or even defend capitalism as such in “A Christmas Carol,” but that does not devalue his work as literature or even as unwitting exercise in economic pedagogy. Like many on the political left, Dickens did not possess highly developed rational skills. His powers to stir and move his readers were prodigious, however. The emotional resonance of “A Christmas Carol” is its principal gift.

Dickens was ahead of his time in several ways. Although he inhabited the 19th century, he was a 20th-century liberal in his lack of ironic self-awareness. “A Christmas Carol” was a straightforward story of personal avarice and excessive preoccupation with wealth and pecuniary aggrandizement. But Tibbets and Welsh note that Dickens “did not necessarily intend to create a deathless and beloved work of literature. His aim was far more prosaic: to earn some much-needed money.” Dickens was mired deeply in debt in 1843 and his current project, the novel Martin Chuzzlewit, was not proving successful in its initial serial form. “A Christmas Carol” succeeded beyond Dickens’ dreams; it has not been out of print since it first appeared.

Thus we have the industrial-strength irony that the world’s greatest cautionary warning against love of wealth and avarice was written to make money and ended up earning a fortune for its author. Even since, leftists have set out to do good and ended up doing right well in bookstores, art galleries, theaters, cinemas and on university campuses. They followed Dickens’ example by remaining unaware or at least untroubled by the glaring contradiction.

In his books and in his private life, Dickens stridently criticized the conditions of life for English children of poor or modest means. Ever since, conventional thinking has blamed the Industrial Revolution for making life in Victorian England hellish for children. Meanwhile, painstaking research begun by men like Ronald Hartwell and continuing on down to present-day quantitative economic historians like Deirdre McCloskey has refuted this portrayal, showing that technological progress and free markets midwived economic growth and gains in longevity and hygiene among the poor. But because Dickens creates more excitement than economic statistics, the conventional view continues to overshadow the facts. In his contribution to economic myth-making, Dickens also foreshadowed his 20th-century counterparts.

Unlike modern liberals, though, Dickens should not be called to account for his failure to square perception with reality. By 1843, among the great economists only Adam Smith, David Ricardo and James Mill had made much impact on the public. It is certainly not clear that Dickens knew or understood much of their works. We do know that Scrooge’s biting comment that the poor had better “[die] and decrease the surplus population” was a veiled reference to the over-population theories of the economist Thomas Malthus, whom Dickens disliked. Although Malthus is recognized today for having done pioneering work in certain areas, he was then known and is still best remembered for his errors in population growth (failing to take technology into account) and consumption theory (supporting a theory of chronic underconsumption). It is hardly fair to blame Dickens for failure to apprehend an economics that was still lingering in its formative stages. For example, Dickens’ enslavement to the concept of “volitional economics” (as outlined above) could have been ended only by exposure to a systematic theory of labor and product markets that did not develop until after Dickens’ death.

“A Christmas Carol” Properly Appreciated

Works of art must be evaluated in temporal and historical context. Dickens’ “A Christmas Carol” is a memorable work whose beauty and tenderness rightfully continues to warm us all. Properly appreciated, it does not condemn capitalism but in fact bolsters free markets and free trade. The fact that Dickens himself was unaware of the full moral of his story may be ironic, but it does not detract from that moral. It shows that even when seeking in a primitive way to overturn the basis for capitalism, even one of the world’s greatest authors ended up doing just the opposite.