Harry Potter and the Economics of Magic

They may be able to make things fly (“It’s Wing-gar-dium Levi-o-sa”), but are wizards’ magic powers a safeguard against the economics of real life? Indeed, how does the wizarding economy function, if it even exists? J.K. Rowling may not have written the Harry Potter series with Economics undergraduates as her intended audience. However, from Horcruxes to house-elves, and everything else in between, economic concepts such as opportunity cost and marginal gains have startling relevance to the wizarding world. Whilst wizards cannot simply conjure cash up out of thin air in Harry Potter, they trade in a tri-metallic system beyond anything Muggles have ever used.

Let’s start with the wizarding economy itself. The tri-metallic standard of gold Galleons, silver Sickles and bronze Knuts is complemented by an all-powerful, very efficient goblin-controlled Gringotts bank that is anything but a Muggle federal reserve. For example, the ability to print money, enforce interest rates and distribute loans are just a few traditional features of our banking system. All of these are nowhere to be found in Diagon Alley. Gringotts also has vastly different security measures in place, such as the dragon which guards the Lestrange family vault (“Thief, you have been warned, beware”). These have surprising implications for the wizarding economy. The separation of government from finance allows for economic efficiency, in comparison to the Ministry of Magic, which is a bureaucratic shambles under the rule of the hapless Cornelius Fudge. Likewise, the system of multiple metallic standards reaps benefits. One Galleon is worth 493 Knuts or 17 Sickles. This great flexibility in the use of gold, silver or bronze coins ensures price stability: if the output of one metal falls, the supply of another can be increased, and vice versa. This leads to a decreased risk of inflation, which in turn, adds stability to the wizarding economy. Naturally tri-metallism also facilities international wizarding trade, because all of the wizarding countries across the globe would be on a fixed gold or silver standard. Therefore, they would not experience some of the problems traditionally associated with bi-metallism. One particular problem was that with each country independently creating its own exchange rate between metals, rates vary from nation to nation. Hence international cooperation is difficult to achieve. However, given the small international wizarding population, the same exchange rate is implemented by all. No International Monetary Fund needed here!

Thus, the world of Harry Potter operates under a system similar to the gold standard, “a monetary standard under which the basic unit of currency is defined by a stated quantity of gold”. This is an advantage for wizards. The gold standard encourages governments, or in this case, Gringotts (London’s wizarding bank) to act in a responsible manner. Griphook’s stringent personality is testament to this. In contrast, fiat money, with no intrinsic value, is not backed by physical reserves, and so runs the risk of becoming worthless in hyperinflation. So why don’t all countries use back their currencies with the gold standard? Due to the scarcity of gold worldwide, it is subject to exploitation, and is therefore a somewhat artificial measure of the value of a currency. For example, in 1914, many currencies were on the gold standard, and each country was required to maintain some quantity of gold which acted as a reserve. As a result nations were often strapped for cash, not being able to increase the money supply during times of need. This became evident in the Great Depression, when governments were unable to stimulate the economy by injecting cash. In order words, if the wizarding world were to collapse into a fiscal crisis, Gringotts would presumably be unable to obtain further Galleons, leading to a shortage in circulating currency.

One ounce of gold is worth $1320 in today’s money. As a result, a middle-class wizarding family would be unbelievably wealthy in a normal (muggle) society. Of course, some wizards must buy certain Muggle goods, especially if they share the same fascinations as Arthur Weasley. As a result, an exchange rate between the pound and the galleon must exist, so that wizards may convert their gold into muggle money. It is also a perturbing thought when one considers that the astonishing amount of gold in Gringotts (think the LeStrange vault) could, in theory, swamp the muggle markets. Hyperinflation and quantitative easing are some terms that come to mind when one envisions the consequences of wizards converting all their savings into muggle money, to live a life of superfluous retirement.

At the beginning of the series we realise that even magic cannot save wizards from facing trade-offs and opportunity costs in their everyday lives, as is seen when Harry is ‘sorted’ into Gryffindor.

“Not Slytherin, eh?” said the small voice. “Are you sure? You could be great, you know, it’s all here in your head…”

The omniscient Sorting Hat forces Harry to weigh up the opportunity costs of wanting to be in Gryffindor (consistent with his values) over Slytherin, which would offer him fame and power. Likewise, at the end of Harry Potter and the Deathly Harrows, Harry, a horcrux of Voldemort, painfully realises that the cost of defeating Voldemort is to take his own life – a paradoxical choice in which the opportunity costs could not have greater implications. Witches and wizards also struggle to think at the margin. Instead of overloading her study timetable in the third book, why can’t Hermione grasp that she is, in fact, not super-human, and that the law of diminishing marginal product applies to her studies too? Similarly, despite the minimal marginal benefit he obtains from receiving an extra present, Dudley voraciously insists on obtaining 37 presents when he turns 11, compared to the 36 from when he turned 10.

“Dudley: 36?! BUT LAST YEAR LAST YEAR I HAD 37!!!
Uncle Vernon: Yes, but some of them are a bit bigger than last year’s!
Dudley: I don’t care how big they are!”(Harry Potter and the Philosopher’s Stone).

House-elf slavery, to which Hermione so vociferously objects, is another prominent economic feature of the series. Whilst the practice of slavery is morally reprehensible, its merits lie in its economic efficiency. This is particularly true in Harry Potter, whereby enslaved house-elves ensure high standards of living for their masters, such as the Malfoys, whose opportunity cost of employing a house-elf is relatively low. Without the existence of house-elves, many wizarding families would struggle to complete rudimentary muggle tasks, such as purchasing groceries at the muggle supermarket. The supply of wizards willing to work as household-helps would be scarce. Who would undertake menial tasks when you can perform magic? Only Squibs, essentially wizard-born Muggles, would choose to enter this market, because their skills are transferrable. However, for an average wizard, their opportunity cost of completing such tasks is relatively high and so house-elf slavery adds value to society. If SPEW managed to outlaw house-elf slavery, this would simply create a negative externality, as the social marginal cost to the entire wizarding population would exceed SPEW’s private marginal cost.

Nevertheless, given the moral imperative to change slavery, perhaps an alternative could be considered. For example, Dobby, and indeed all house elves have considerable magical powers. Could they be employed as free labour or servants? This would not only capitalise on their magic powers, but also lead to economic benefits in the long-term, as elves would be more efficient in completing such mundane tasks. With high demand for house-elves, they could presumably also be selective in their choice of family, and hence their working conditions would improve. Perhaps Hermione’s admirable efforts to free the elves are not unfounded, and that there is scope to alter the equilibrium in the market for slavery, if not abolish it completely.

Clearly J.K. Rowling has worked her magic again (pun intended) to create a somewhat fool-proof economic system that holds the wizarding world together. Thus far Gringotts has prevented a fiscal crisis (although the Dragon came pretty close!) and society flourishes in this perfectly competitive market, trading with a literal gold currency. However, witches and wizards still face trade-offs, and are at times forced to think like rational decision-makers. Wealthy or poor, the ability to perform magic spells is no guarantee of financial stability, and so they too must face the economic realities of real life.