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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.


Michael Levin teaches Philosophy at the City College of New York


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