Dec

21

Victor,

I have revised this essay from some years ago. It is my take on the market economics in Dicken's A Christmas Carol.

Maybe Daily Speculations readers would enjoy it.

Season's Greetings!

Greg

——–

The Economics of Scrooge, Speculation, and Wages

by Gregory Rehmke

Charles Dicken's Ebenezer Scrooge has been brought to life on stage and screen a great many times. Mister Magoo's Christmas Carol from 1962 was my first introduction to the story. Years later a George C. Scott’s 1984 television version of A Christmas Carol shows Scrooge as a competent businessman who just finds Christmas and philanthropy a waste of time and money. His eyes are opened (as were Mister Magoo’s), through a series of nightmarish dreams. The book and various movie versions are offered today as indictments of greed and business. Dickens saves his Scrooge from his self-centered world and awakens him to celebrations of the joys of family, Christmas, and giving to those less fortunate.

Market-savvy viewers can look at this classic story through pro-market lenses and see deeper lessons than those who mistrust the business and investment world. Market enthusiasts can imagine a new last chapter to the story with Scrooge living a happier life but still running a productive and profitable business.

I would argue that a better interpretation of the story is simply that people—including successful businesspeople—can get too wrapped up in their work, and lose touch with the rest of their lives. Engagement in civil society brings many unexpected and hard-to-quantify pleasures. Philanthropy feels satisfying to the giver, sometimes more than it is helpful to the receiver. A Christmas Carol concludes with an enlightened Scrooge helping the poor through his private philanthropy. Anti-business readers may believe Scrooge caused the problems by paying low wages and speculating in grain. But this view I think reflects a misunderstanding of economic forces.

The story begins with Scrooge successful in business but having let his personal and social world fade. He long ago let his love relationship drift away and deep down regrets the loss. After a difficult childhood, he gradually gained a kind of comfort in solitude and emotional isolation. As is usual in novels and movies, nothing positive is said about his work. No glimmer of understanding that successful business people are likely providing valuable services in order to stay in business and earn profits. But we can agree that focused businessmen like Scrooge can lose track of their family and social lives and find themselves years later wealthy but alone.

Second, the story features an interesting, if subtle, attack on government welfare. Scrooge is asked to donate to a relief fund. He answers that he pays taxes for just such purposes. Why don't the homeless go to existing poor houses or to prisons he asks? The private-relief fund-raisers ask him if he has ever seen the government relief houses. Scrooge answers no, he hasn't. He is responding reasonably and so are they. (Should we expect a socially-responsible Scrooge of today to donate to well-run private charities, or to agitate for repair of failing government welfare programs?)

Tax-supported relief houses give the emotionally-distant Scrooge an excuse not to feel personal responsibility for the poor. He has already paid through his taxes. He uses government-funded welfare agencies as an excuse to avoid supporting private relief agencies. With no state-run poor houses in England, he might still have said: “Bah, Humbug!” and been tempted to “free-ride” on donations of others. That is, he might free-ride (an economics term) by relying on others to donate to help beggars. Scrooge would benefit from beggar-free streets without spending a dime on donations (he is greedy in the story, after all).

Few of us enjoy seeing and dealing with homeless people begging on the street or in front of the neighborhood Trader Joe's. Scrooge could well have been drawn into private relief just to keep beggars out of his way. Still a selfish motive, but one that would require helping others in order to help himself. He could have invested in enterprises that create job-expanding opportunities to help the unfortunate or unwise get back on their feet. Consider too that Scrooge's current business, speculation, could very well be helping the poor more effectively than any charity he might choose to support (more on this possibility below).

Had Scrooge invested in a job-training firm, for example, he could carry business cards promoting his services to put in the cups of those asking for help. In this way he could have helped the needy and profited as an investor in training-services at the same time. Many for-profit as well as Christian and secular nonprofit organizations provide job-training services and generate income through job-placement. The poor learn skills and pay a portion of their later salaries back to the job-training/job-placement organizations.

My great-great-grandfather, Dr. Thomas Guthrie, helped start the Ragged Schools for Children in Scotland and England. He went to the Scrooges of his day (the 1840s) and convinced them to contribute. With 192 Ragged Schools in operation at its peak, 20,000 destitute children attended each year, learning skills through work, and receiving an education. An estimated 300,000 attended overall, from 1840s to 1880s. The English government apparently saw the Ragged Schools as unwanted competition to their poor houses and new government-funded schools, and worked to undermine the Ragged Schools. (Students apparently preferred the industry-training education at the Ragged Schools, and voted with their feet. The government filed lawsuits to force students out of Ragged Schools and into government schools. Glimpse this fascinating story here: www.infed.org/walking/wa-shaft.htm). The Christian emphasis of the Ragged Schools was scorned by the enthusiasts for the emerging utilitarian welfare state.

Because Scrooge had already been taxed to provide for the poor through state-funded poor-houses, he lacks any voluntary or civil society connection with charities for the poor. He doesn't bother looking into the management and operation of poor houses because their tax-funding insulates them from private reform. He knows he wouldn't be allowed to withhold his taxes if he found them badly managed.

Had he donated to a private charity, Scrooge would have an incentive to investigate how his donation was used. He doesn't do much investigation after being saved, in the George C. Scott version. He just gives a big donation to the private relief effort he refused the day before. But even so, he will surely take an interest in that private relief project after donating a huge sum to it. He would be angered as well as embarrassed if the relief effort he supported turned out to be ill-managed or a fraud.

Thanks to tax-funded welfare state programs, Scrooge is less likely to be drawn into civil society philanthropies that might have opened up his life. The holiday season is rich with Christmas gatherings for charities of various stripes, and these social occasions allow donors to meet others of similar interests and hopefully to learn more of the good deeds their donations enable.

Scrooge's very skeptical eye would be a valuable service for private charities, as he seems to understand that good intentions matter less than good results. He would likely be a better trustee of a private charity than his "do-gooder" nephew, for example.

George C. Scott's Scrooge notes with disapproval his nephew's offer to overpay Cratchit's son. Scrooge understands that overpaying for a young person's first job can have negative consequences. It breaks the connection between a person's productivity and their pay. It confuses charity with wages in the mind of both the employee and employer.

The intricate dance toward “just” or market wages not only pits each worker against others willing to take on a job, it pits each employer against other employers willing to pay higher wages for productive workers. When employers get greedy and try to hold wages below the marginal earnings each worker brings the firm, other employers have a profit opportunity, if they can hire that worker away.

The push for profits in the labor market leads employers to a bidding war that narrows the gap between what workers earn for firms and what they are paid. Competition for workers is endlessly frustrating for employers who hire and train new employees only to find them lured away by better offers. The core source of Bob Cratchit’s low pay is likely his limited responsibility and productivity at the firm of Scrooge and Marley. In fairness to Mr. Cratchit, it may not be his fault that Scrooge has been holding on too tight and not delegated enough. Perhaps the late partner Marley offered Scrooge more opportunities to learn and share responsibilities at the firm than Scrooge had so far given Cratchit. Either could be blamed, but it seems reasonable to find fault with the side most capable of changing the situation: the boss.

Seeing the Ghost of Famine Future

Some are visited by the ghosts of terrible futures that never happen, but might have. Imagine Ebenezer Scrooge dreaming a terrible famine would soon strike. Perhaps nightmare tariffs on imported grain coupled with bad harvests in England drive corn prices beyond the reach of the poor and spread famine across the land. Or maybe a Civil War in America will soon block cotton imports, shutting down textile mills that employ millions.

Famines in Scrooge’s time were not rare and he would have lived through one in his youth. The Europe-wide famine of 1816/17 followed poor harvests across Europe and the general destruction of the Napoleonic Wars. Crop yields in Western Europe fell 75 per cent triggering wide-spread famine and death.

For a businessman like Scrooge, such a vision might lead to careful (and costly) review of weather news across Europe as harvests approached. News of potentially bad harvests or of bad politics raising the chance of conflicts, could be a reasons for taking a major investment position in grain. Early on in the movie George C. Scott’s Scrooge visits the city grain exchange to do some business. He holds out for a higher price for corn in his warehouse, and is accused of hurting the poor through his greed. But is holding out for higher prices really hurting the poor? Yes and no.

His “hoarding” is speculating on grain futures and does raise the price today. But it also has the consequence of pushing prices down in the future. Scrooge has seen a vision of scarcer grain and higher prices in the future (otherwise he would sell at today’s prices). He is raising the price of grain for the poor (and everyone else) today, in exchange for lowering the price in the future. If his vision proves true, he will have performed a service for society by pushing all to conserve now a resource that will be more scarce in the future.

The businessmen in the movie claim Scrooge is raising grain prices for the poor today by holding back. These less visionary businessmen may lack the weather or foreign politics information Scrooge could have gathered. Or they may just wish to buy Scrooge's corn at lower prices either to help the poor today or to help themselves. How can we know they would pass these lower prices on to consumers? Perhaps they would just pocket gains from below-market prices themselves. In any case, I will argue that raising prices now can in fact help the poor. (How is that for a Scrooge-like claim!)

Speculators like Scrooge are time-shifters. Whether or not inspired by ghostly visions, they trade goods through time. Scrooge fills his warehouse with corn then turns the dial on a time-machine to transport them to the future. It is an expensive and risky enterprise. Who knows what the future will bring? Such businessmen make informed guesses, they speculate about the future. If they are right, their fourth-dimension transportation system earns profits, even after paying rent on warehouse space and counting the interest lost on money tied-up over time. If they guess wrong they lose money. And after too many wrong guesses, both Scrooge and Cratchit would be looking for new work.

Across Europe, in old city-centers, you can often find the grain exchange building. Here sellers and buyers of grain would gather each day to buy, sell, and speculate. Farmers are just one part of working agricultural markets. Weather and harvests are hard to predict. Grain can be stored for some time, though at a cost. Grain prices embody the collective guesses of hundred or thousands of people about what the future will bring for the supply and demand of grain. Prices change each day as news of hundreds or thousands of events small and large filter into the buyers, sellers, and speculators on the grain exchange.

Steam powered ships opened vast lands in American and Argentina to supply grain the Europe. And steam-powered railroads allowed Ukraine to become a bread-basket to the world. Transportation costs dropped gradually, then rapidly through the 1800s. Low-priced grain from the America's “flooded” Europe with less-expensive grain, leading European landlords, the landed Aristocracy, to lobby Parliament for tariffs on imported grain. The landed Aristocracy of the time favored “fair trade” not free trade. Lower grain prices led to lower rents on their farmland. Struggling workers who benefited from lower food prices had less opportunity to explain the benefits of lower food prices whilst playing whist at the club.

Scrooge was neither a landed aristocrat born with a silver spoon, nor a farmer, nor a manufacturer. How did Scrooge happen to have the corn in his warehouse in the first place? Economists argue he is performing a service by warehousing corn and releasing it when demand is strong. In the movie he is presented as being greedy and pushing prices higher, thus hurting the poor. But by aiming to make profits speculating on corn, his early purchase pushes prices slightly up and encourages conservation now. By speculating in corn he is a visionary. He guesses that in the near future, current plentiful corn supplies will turn scarce. Those lulled by relatively low corn prices to use it casually today would regret it later–but by then it would be too late. Only by taking action ahead of the shortage can some of today’s relative plenty be set aside for tomorrow.

No one can really see into the future and know what corn, oil, or copper prices will be next week, next month, or next year. No one can know the future, but professional speculators invest time and resources to make educated guesses. When they are wrong, they lose their own money, but when correct they make money by better coordinating consumer behavior through time. The warning from a Ghost of Famines Future alerts speculators to act today. Consumers angry now at rising prices benefit in the future when Scrooge’s warehoused corn is released, easing the shortage and stabilizing or lowering the future’s higher prices. Scrooge profits by coordinating consumption through time.

Yet, interestingly, his actions also generate incentives that can eat away at his potential earnings. By warehousing corn and pushing prices higher now, he not only signals conservation by consumers, but also new production. Higher than expected prices signal farmers to work to expand output, to bring new land into production. These behavior changes caused now by Scrooge’s purchases and warehouse will take time to bear fruit. So when the future shortage and perhaps famine arrives some farmers will have expanded production without ever having seen a ghost themselves. Scrooge’s vision and visionary action, signal invisibly through higher prices today that high or higher prices are expected in the future.

Such “excess” grain production does not help Scrooge profit, in fact it will lower his potential gains as the expanded harvests come to market. Still, Scrooge could not expect to feed all of London from his warehouse. He will likely profit enough even with his speculating having spurred production. The ghost of possible famine will fade in the face of both grain sources. All this happens invisibly through changing prices, trusted contracts, and private property. (And not only happens invisibly, but stays invisible for 160 years!)

Back to Cratchit, Wage Rates, and Responsibility

Many have been written of the economics of A Christmas Carol. But some I think hit a sour note by attacking Cratchit as incompetent and painting the early Scrooge as a hero. We have the luxury of writing our own postscript to the story, one where Scrooge gains some friends, socializes some, and continues to run his business profitably. In our free-market postscript, Scrooge can take an active interest both in supporting well-run and effective charities, and in agitating for government to shut down poorly-run poor houses.

After his conversion, Scrooge gives Cratchit a raise, doubling his salary. Does that mean he was just exploiting him earlier? Or that Cratchit was not particularly competent? No, I think the raise can be seen as a very reasonable decision, part of Scrooge's change of heart, that he wishes to give Cratchit more responsibility at the firm. Scrooge met his own mortality in his dreams that night. He dreamed himself standing before his own grave. Mortality creeps up quietly on all of us, perhaps especially on busy and successful businessmen. With no board of directors to push for a “succession plan” for the firm of Scrooge & Marley, he had avoided the issue.

Scrooge likely didn't pay more earlier because he hadn't given Cratchit enough responsibility to enable him to be worth more. With Scrooge’s change of heart, higher pay would go hand in hand with higher productivity from Cratchit, which would follow from additional responsibilities. And Scrooge will need to free up his time for board meetings at the charities he will be asked to join–word of unexpected large donations gets around fast in the nonprofit community.

Consider too that giving Cratchit more responsibility and more knowledge of the business could dramatically raise Cratchit's income earning ability for the firm. Scrooge might make even higher profits from a better-paid Cratchit.

It could be claimed that Cratchit is incompetent, but nothing indicates bad work habits in the movie, apart perhaps from showing up late to work–but that could be blamed on the overlarge and unexpected turkey Scrooge himself donated the day before. The audience, unfortunately, sees only the seemingly arbitrary nature of pay. Bosses can apparently double someone's pay if only spirits scare them half to death in nightmares (something politicians and labor unions have tried to do ever since).

So I recommend George C. Scott’s A Christmas Carol to students. They will enjoy it, though perhaps not as much as the Mr. Magoo’s cartoon version. So Hollywood can offer lessons in sound economics. It just takes a little reading between the lines.

Gregory Rehmke is a writer and economic educator based in Seattle. He directs Economic Thinking, a program of the nonprofit E Pluribus Unum Films. More information at www.EconomicThinking.org.

(Revised and expanded from 2004 article quoted in December 17, 2004 Toronto Star article "The Politics of Ebenezer Scrooge")


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