Scrooge economics

Peter Lawlor

Dickens’ A Christmas Carol is one of the best stories ever written. It’s also one of the greatest works of economic theory. If that had been recognised, many decades of theoretical hard labour and ill-formed economic policies could have been avoided.

You might think I’m about to say something like: Scrooge embodies “homo economicus”, a self-interested man who’s little more than a calculating machine, concerned only with money. The term homo economicus was coined by J.S. Mill in 1836; just seven years before A Christmas Carol was published. Mill saw homo economicus as an unrealistic presupposition, despite being propounded by the leading theorists of the time, like David Ricardo, Adam Smith, and Jeremy Bentham. As Mill pointed out, most people don’t act like self-regarding, hyper-rational calculating machines. Therefore, any theories standing upon this foundation were built on sand.

Dickens’ acquaintance with the claims of the “Dismal Science”, is displayed in Scrooge’s casual reference to Malthus’ theories of population in his encounter with the gentlemen from the charitable trust.

“Can’t the poor go to workhouses?” “Many can’t go there; and many would rather die.”

“If they would rather die they had better do it, and decrease the surplus population.”

So, in his Scrooge character, is Dickens presenting an attack on rational economic man, on homo economicus? Maybe, but there’s more to it than that. For one thing, Scrooge always remains rational. Of course, we’d need to use the term “rational” precisely, and there’s the rub. Rationality is simply the systematic response to one’s circumstances as one perceives them.

But if Scrooge remains rational, if the basis for his behaviour doesn’t change, how does the nasty joyless humbugging miser at the beginning of the work finally become the generous, happy man who “kept Christmas as well as any man alive”?

It’s here we see the genius of Dickens, the economic theorist. Economic theory is essentially an attempt to understand why we behave as we do, and to predict the outcomes of our collective behaviour.

In the decades after the publication of A Christmas Carol, the French economist Léon Walras questioned how the myriad of kaleidoscopic choices in the economy could be reconciled. How can the production decisions of a vast number of firms, and the purchasing decisions of even more consumers, end up being coordinated?

As a way of rendering this highly complex question mathematically tractable, Walras, in a self-conscious thought experiment, abolished time; in his system, no actual trade happened until there was complete coordination. This meant that if his system were to be adjusted to allow for time, two assumptions needed to be added to the postulate of rationality: first, everyone was assumed to have a complete knowledge of their circumstances; secondly, everyone was given perfect foresight of the future.

These additional conditions were in no way intended as a description of the world; they were just intellectual scaffolding intended to be gradually dismantled. However, General Equilibrium theory was so impressive and influential these additional conditions seeped into the definition of economic rationality: Mill’s homo economicus became Homo Omniscienticus.

It wasn’t until the late 1920s that economists began seriously to question the utility of this omniscience. The work of Frank Knight reminded us that the future is radically uncertain. In the 30s, Keynes made this uncertainty the centrepiece of his magnum opus, The General Theory. But the siren call of complete information and perfect foresight continues to pull some economists onto the rocks.

Dickens, however, was on the right track back in 1843, fully aware of the difference between rational behaviour, complete information, and perfect foresight. The change in Scrooge isn’t because he abandoned rationality in favour of some fluffy boomshanka basis for behaviour; Scrooge remains fully rational. His behaviour changes because his perceptions of his circumstances, and his expectations of the future, changes.

Of course, circumstances have two components: the past, and the present. You see where I’m going here? The Ghost of Christmas Past reminds Scrooge of things he’s forgotten or has chosen not to think about anymore. This is vital information that affects his decision making and behaviour.

Present circumstances are even more important to decision making than the past, but it’s easy to forget the present is even less accessible than the past. As I write, I’ve no idea what’s going on across the road, never mind what’s happening in a different city or another country. Much has been made of “radical uncertainty” in economics; the future isn’t just unknown, but unknowable. However, it’s almost always overlooked that the present is radically unknowable. But Dickens didn’t overlook it: the Ghost of Christmas Present is an omniscient being who knows everything about the present. We ordinary people do not.

Finally, we have The Ghost of Christmas Yet to Come. He shows Scrooge the nature of the unrealised future. Again, decisionrelevant information is made available. But there’s something else going on. Dickens, unlike so many others, had a strong grasp of “equilibrium”, one of the most important but misunderstood concepts in economics.

We might never actually be in equilibrium, but that doesn’t affect the utility of the concept. Equilibrium is what we’re heading towards as a result of our actions. It’s the product of human action but not of human design. We simply don’t know what future our actions are creating for us. The future emerges from the combined effects, and counter effects, of everyone’s behaviour: not just what I do, but also what everyone else does in response. My behaviour affects your outcome, and your behaviour affects mine.

Keynes famously said: “The mastereconomist must possess a rare combination of gifts …. He must be mathematician, historian, statesman, philosopher – in some degree. He must understand symbols and speak in words. He must contemplate the particular, in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must be entirely outside his regard.”

Perhaps we economists should have heeded Keynes’ words better. Nevertheless, it’s clear that Dickens was most definitely a master economist.

Peter Lawlor is a trustee of the John Hicks Foundation in Oxford. He was formerly the Principal Economic Advisor to the German Stock Exchange (Deutsche Börse), and continues to act as an adviser to senior Wall St figures and political leaders. These are his own views and should not be imputed to any organisations with which he is, or has been, affiliated


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