The Mises Institute monthly, free with membership
December 1996
Volume 14, Number 2
The Economics of Santa's Workshop
Michael Levin
Last Christmas some cheeky MIT undergrads pulled one of their
trademark "hacks," publishing a report on the physics of Santa
Claus. Using pseudo-precise estimates of the distance Santa must
travel plus the number of stops he has to make, the MIT-ers
announced (tongues firmly in cheeks) that he would be subject to
accelerations of 60,000 G's, squashing him flat. Sorry, Virginia;
according to Newton there is no St. Nick.
The physical impossibility of Santa got me thinking about the
economics of the old boy's operations. After all, he is not paid
for the goods he delivers, and it would be improper for him to
send a bill the next morning. Nobody asked him to leave the
stuff, or contracted with him to do so. But that means he gets no
feedback from the consumer, much less a clear indication of
profit or loss.
Without an income he cannot pay for the raw materials his
workshop turns into toys, or the intelligence network that tells
him who has been naughty, or keep his elves on salary. How then
do the elves buy food, and what keeps them at their polar posts?
Is the show economically possible?
Magic aside--we are discussing the real world here--one
usually imagines the elves as happy volunteers, and the stream of
wood and glue (and victuals) needed for their labor-intensive
work as donated by good-hearted outsiders. The planner in the red
suit coordinates these productive factors, all for the sake of
the children of the world.
Having gone so far, many people at this time of year go one
step farther: if Santa's workshop can be an island of altruism in
a sea of selfishness, perhaps the whole world could work like
that, placing "human needs" before "profit." Shouldn't that at
least be the ideal?
This line of thinking compels one to look more carefully at
Ludwig von Mises's proof in "Economic Calculation in the
Socialist Commonwealth" (1920) that socialist planning is
impossible. Competition, private property, and a price system are
necessary for the efficient allocation of resources. The world
couldn't be one big Santa's workshop, and efforts to make it
resemble one must yield economic disaster.
To begin with, a system of prices must emerge among
individuals who own property and are willing to trade, even
though their trade ratios differ. Adapting Mises's example, let's
say I own cigars but want cigarettes. I will not demand so many
cigarettes per cigar that I am left with cigars I do not want,
nor so few that hopeful buyers are waving cigarettes at me after
my inventory is gone. Even though I have my own views on what my
cigars are worth, I will eventually exchange them at a
market-clearing rate.
When going beyond this barter stage, all this becomes deeply
complex. Money becomes the medium of exchange, goods go through
many stages of production, production plans take a longer period
of time, and consumer preferences are in constant flux (as every
parent knows at this time of year). The market provides the means
of coordinating these complexities, while prices provide the
means to compare valuations and determine profit and loss.
The correct market-clearing price, an unplanned by-product of
interacting independent preferences, maximizes the satisfaction
of consumer desires. In contrast, prices set by a central planner
are necessarily arbitrary, since there is no standard against
which they can be said to be correct or incorrect.
Mises's second point was deeper: resources can be allocated to
satisfy human wants only on the basis of market prices. In
deciding how to deploy resources, the economic agent is trying to
maximize income while minimizing cost. Robinson Crusoe's
moment-to-moment use of resources is neither efficient nor
inefficient. By hypothesis, there are no preferences to worry
about.
However, once an economic agent begins to interact with
others, not only is his target--the market-clearing price--set by
their preferences, so is the cost of the factors of production
(raw materials, tools, labor). A centrally planned distribution
of productive factors with stipulated prices (such as Santa
presumably uses) cannot duplicate the upshot of the market, and
cannot work efficiently.
So picture Santa, wondering whether to put elf Twinkle or elf
Snifkin in charge of dolls. His ultimate criterion is consumer
satisfaction: which elf will make more dolls more pleasing to
more little girls? For this he needs some feedback, like letters
of appreciation from recipients. (Perhaps such letters are
Toyland's currency, with dolls that garner most the biggest
earners.)
Suppose Twinkle wins on that score, but would rather fabricate
robots. Unless Santa has some power to coerce, he will have to
bribe Twinkle to get him to stay on the doll line--say, with an
extra-long lunch hour. Snifkin the robot-master, coveting
Twinkle's recess, may offer to trade Twinkle an hour on the robot
line for it. As soon as exchange ratios stabilize, a conventional
medium of exchange, a currency of some sort, will arise, and
Santa will find himself supervising actual employees.
A bigger problem is Santa's dealings with the external world,
the donors who keep him in glue and nails. At first, prices seem
avoidable here too. Santa simply asks his donors for what he
needs, and they give it to him because they are nice. Yes, but
Santa's sugar daddies can acquire what they give him only by
paying for it themselves.
The Lego company may wish to give Santa all the blocks he
wants, but they must pay the going rate for the raw plastic. And
if in a sudden act of generosity, the plastic supplier gives Lego
enough plastic to fabricate blocks for Santa, it must still pay
its workmen for synthesizing that plastic. And if the workmen
want to contribute their time, they must still pay the grocer for
the food to keep them going while they synthesize the plastic.
On this process goes, deeper into a complex structure of
production. Nobody can coordinate all the ramifications of free
Lego blocks for Santa, which is why market prices will always be
with us, even under the doubtful assumption that Toyland can be
made to work efficiently.
As Mises pointed out, economies not based on competitive
prices can seem possible because they are always embedded in a
larger context where market mechanisms are at work. Santa
instituted production lines when he read of Ford's revolution in
the auto industry. He once checked the Sears catalog to discover
the relative value of popguns to teddy bears. Now he checks the
Internet to discover which companies are profiting from which
products. He makes wagons of a certain design because of their
popularity with children--which he knows about only because of
their high retail sales. Santa's decisions are parasitic on free
markets elsewhere.
But the biggest problem facing Commissar Santa is the internal
allocation of resources. Toyland's mills are busily converting
trees into lumber. One group of elves requisitions 100 board feet
of wood to make 50 nutcracker-dolls, and another requisitions the
same wood to make 20 sleds.
Who should get it? If sleds on the open market are selling
for more than 2.5 times what dolls are fetching, the sled elves
will use the wood most efficiently. Otherwise, the doll elves
should get it. Indeed, what if the unprocessed wood would fetch
more on the open market than either the sleds or the dolls? In
that case, Santa would be better off lopping off the final goods
division of his manufacturing process, and becoming a supplier of
raw materials. Clearly Toyland's current mode of organization is
incompetent, and needs some shaking up.
None of these determinations can be made without reference to
an external market. Lacking that point of reference, the internal
allocation of resources in Toyland would soon become chaotic and
wildly inefficient. It would collapse into a command economy that
produced less and less until all the once-happy elves were
reduced to hunter gatherers, a frightening prospect in the North
Pole, and even Santa would lose a few inches around the waist.
Santa's realm can function only as an island of autocracy in
an ocean of market freedom, which is why the whole world could
not run like what we imagine to be the worker's paradise of
Toyland. If Toyland ever attempted to provide everything for
everyone and, thanks to IMF subsidies, succeeded in becoming the
world's only producer, it would bring about global poverty and
misery. That's because when firms get so big as to abolish
internal markets for their capital goods, they lose the ability
to calculate efficiently. Inefficiency invites competition.
Compare the dubious economic merits of Toyland with the
competitive marketplace, in which firms pay workers, purchase raw
material, hawk their wares, charge prices, and calculate profits
and losses, all in an effort to give the consuming public what it
wants. Instead of venerating Santa's socialist utopia, let's
raise our wassail mugs to the capitalist economy that provides
for us, not only at Christmas, but all year 'round.
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Michael Levin teaches Philosophy at the City College of New York
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