*This piece owes a debt to Josef Moscovici, who served as my team partner at the Hogwarts Open, a British Parliamentary style debating tournament set in the HP universe. Some of the arguments presented here first emerged from our collaboration during rounds in that tournament.

The Wizarding Propensity to Exchange

There are questions which traverse the bounds of time and space, and even our imaginations. In addition to tragedy and hope, love and fear, we should consider the problems of economics. Wherever intelligent beings of a choosing, acting nature may roam, the constraints of scarcity, competing incentives, and valuation on the margin follow them too. Indeed, as Sarah Skwire has noted, the presence of scarcity or the lack of it changes the rules of the game in realms as diverse as Star Trek, Firefly, and Battlestar Galactica. Such questions are also equally applicable in looking at the incentives faced by people in worlds of vampires and zombies.

Despite a few significant exceptions, the world of Harry Potter has been far less discussed than the more traditional science fiction or fantasy. This is perhaps understandable, since as Megan McArdle notes, the magic of the Potter universe seems to radically change or even remove entirely the kinds of issues economics explores. Since wizards are aided by spells that can conjure up food, put together housing, and multitude of other wonders, scarcity has been eliminated (so the story goes) and society has transcended the old problems.

This interpretation quickly becomes problematic, as economic features are present in the narrative, creating confusion for those who know a little economics. How might we explain the existence of wizard currency, since most necessities can be transfigured from other existing matter, or seemingly conjured out of thin air? After all, wizards don’t need to participate in an economy to get normal necessities like food or healthcare. And yet the Potter world is also filled with people who are rich, and those who are poor, such as the Malfoys and the Weasleys. In a world where goods can be conjured up at will, what need is there for markets, trade, and money, and why is anyone poor? Furthermore, Gringotts Bank provides essential financial services (magical trading in a literal futures market?) and both Diagon and Knockturn Alleys are thriving commercial areas.

However, this paradox can be resolved if we only glance below this seemingly invisibility cloaked social order. First, the apparent contradictions within the Potterverse can be reconciled with the observation that many magical items or services require specialization and expertise and can’t simply be created by anyone with the wave of a wand. There is an enchanted division of labour around items like wands, cauldrons, broomsticks, and other equipment. On more extended, higher level margins, wizards need to specialize and trade with one another.

Yet it is also notable that this trade occurs at a higher level of human capital development than we find in most real world economies. Unlike our universe, in which both service sector and manufacturing jobs range from the relatively simple to the highly complex, most wizarding employment exists at higher orders of production. These involve particular magical specialities like potion making, that then service a wide range of tasks that an individual witch or wizard can do by themselves, without other employment attached. Furthermore, most of these professions have an artisanal quality that is not mass-producible and must be uniquely crafted, often for a single client. For example, despite the universal demand across the WW for wands, the number of known wand makers globally barely reaches the low teens.

The limited market carries with it significant consequences. As we shall see, this state of affairs is highly particular to the cultural context and governing institutions in which wizarding society functions, bounded by a badly functioning state, deep inter-species tensions and prejudices, and other social problems. Furthermore, similarly to recent cases of real world public policy, these elements cut deeply into the potential for certain sorts of markets and broader networks of cooperation to be easily transplanted to new environments. Wizards are systematically disincentivized from beneficial engagement with both the domains of non-Wizard magical creatures and the far more mundane world of Muggles.  These features of the HP universe mean that while more markets might have benefits, they will be less than would otherwise be the case.

Why Life As A Centaur Sucks

In general, the Wizarding World (WW) seems to exist at a stable social equilibrium most of the time. Conflict is usually low, and there don’t seem to be grave problems of poverty, deprivation, crime, and other social ills. On the other hand, rights are inconsistently allocated, and there is a high degree of racial and species inequality.

As aghast as the mainstream WW apparently was at the return and attempted takeover by Voldemort, I think that the existing society was nonetheless ripe for those events. One highly notable part of the wizarding social structure is the strong divide between different levels of magic users, and between wizards and the rest of the magical world. Under the mandates of the Ministry of Magic, only wizards can carry wands. Wands in this universe are arguably not only tools, but markers of social status. As in the case of women’s right to vote or own property in recent Western history, wands are passports to being a full-fledged, publicly recognized member of society.

Thus, wands are used as differentiators of social status. That status distinction is repeated in the norms and legislation surrounding treatment of various races. Those with wands and high levels of magic have the most value, while those who have less are lower on the totem pole. Furthermore, the wizarding hierarchy functions such that other species are effectively “separate but equal”, existing within the magical world, but restricted in what areas they can occupy, both physically and socially. This ranges from the limited spaces and autonomy allocated to races like the Centaurs (classified as Beasts despite their intelligence, and restricted to rural areas and forests) to the prejudices surrounding and violent repression of the Goblins. In perhaps the most grievous instance, chattel slavery fueled by Stockholm syndrome is perpetrated on the House Elves. For the latter, not only are they absolute servants in seeming perpetuity, but they are apt to become emotional wrecks upon being freed, as happened in the case of Dobby’s friend Winky.

The Enchanted Rules of the Game

All of these events take place within a highly dysfunctional government  that has contradictory mechanisms and ill-defined rules, which are enforced inconsistently.  (For example, consider the deep mess in the governance of underage magic). This government is furthermore evaluated via a court system with little institutional accountability. We can see this dysfunction through the outsized influence that Lucius Malfoy was able to procure via his donations to the Ministry, such that Cornelius Fudge became beholden to him. Additionally, we have a number of cases in which people are able to escape judgment due to political influence, undermining the rule of law. Most notably, Harry is let off twice for violating the prohibition against underage magic, firstly in relation to the incident with Aunt Marge (and seemingly excused for being “Harry Potter”), and again when he is accused of purposefully doing a Patronus in front of Dudley (saved only via Dumbledore’s influence). On the flipside, the final accusation against Harry was arguably politically driven, as Cornelius Fudge was interested in disgracing Harry so as to avoid admitting that Voldemort had returned.

Thus, it should not be at all surprising that Voldemort had such success in creating a “Vichy of Magic” in the final books, or that recruitment for the Death Eaters continued to regenerate. Wizarding society was, to a large degree, set up as a breeding ground for the kind of ‘alt-wizards’ that his movement encouraged. Recall for example, the normalized “country club” bigotries of Dolores Umbridge, which ultimately came to a head in her confrontation with the centaurs from the Forbidden Forest. Later, we see her easily transition into a servant of the puppet regime lead by Pius Thicknesse.

This state of affairs isn’t just an unfortunate accident, but a partial by-product of wizarding economics. Although it is true that wizards require some degree of specialization, what is striking about wizarding society is not how much trade happens, but how little. Although certain special items are required for magic to take place, magic otherwise leaves the WW fairly autarkic. This has significant social consequences. We can understand this better by looking at the work of Gary Becker in the economics of discrimination, as well as literature in political science supporting the idea of “doux commerce’, or capitalist peace theory.

For Becker, market pressures naturally push against prejudices by adding significant material costs to holding them. If you don’t want to hire an employee despite good qualifications because they are African American, your bottom line will suffer in a competitive environment. Since minority communities can offer low wages in a hostile environment, it becomes economically advantageous to hire them, on the margin. Furthermore, even as minority applicants become more socially accepted and earn higher wages for their work, they continue to present an economic incentive when they reflect the best applicant available, and thus present value to firms that use their talents, and costs to those who indulge their prejudices.

Research on the capitalist peace outlines how free trade creates both interdependence and common norms. Initially by establishing interaction on the basis of material gain from one another, the fates of different groups become economically intertwined, lowering the likelihood of conflict out of rational self-interest. Furthermore, this process also establishes norms of cooperation, understanding, and social/cultural exchange that enable us to expand our social circle and ethical capacity to lower our focus on honour (magical or otherwise) and engage in recognition, seeing the dignity in people unlike ourselves. In turn, this too contributes to less violence and more peace between groups.

Unfortunately, both of these mechanisms are woefully lacking in the WW. Magic reduces the costs of prejudice towards those who are magically diverse, while simultaneously removing opportunities to establish trade networks fostering cooperation and social interdependence. As I mentioned earlier, trade networks are highly specialized and limited towards aiding wizarding magic. Other kinds of magical creatures are cut out of this process, and the potential gains from exchanging with them are limited within the wizarding market system.

This easily encourages a process of otherization and xenophobia towards species that operate differently from the wizarding community. Wizards don’t get opportunities to bridge social divides through economic gains, because those profit opportunities are far fewer in number.

Why We Shouldn’t Tell the Muggles

In light of all this, contrary to what some have suggested, removing the Statute of Secrecy and opening up to the Muggle world is not necessarily the best idea.  The power imbalance between Muggles and Wizards is enormous. Since the WW is structurally limited in how much they can gain from trade within their status quo equilibrium, the Muggles, who have no magic whatsoever, would be automatically pushed to the bottom of heap.

Furthermore, the technology Muggles have developed can be learnt by wizards, particularly Muggle-borns, while Muggles (by definition) will never be able to adopt and use magic themselves, placing them at an inherent disadvantage. Especially since wizards don’t necessarily need technology, (having Skype beats sticking your head in a fireplace, but isn’t a crucial addition) this severely limits the development of comparative advantage, in which Muggle specialization would be potentially valuable. They would be wholly dependent on the Wizards to provide a wide variety of things, from medicine to food, amongst a variety of items which continue to be costly and resource-constrained in our world today, particularly in developing countries. The incumbent racial inequality and prejudice that exists in the WW would likely be applied to the Muggles, turning them into the lowest class of citizen, forced to be servile, and at the beck and call of the wizards whose services they seek.

Ultimately, the Potterverse teaches us something about comparative institutional analysis– how and why we might expect certain social institutions and sets of incentives to work successfully, and why that might not be always the case. In some cases, we can expect markets to work their own particular brand of magic. In others, actual enchantments may very well get in the way.