It’s a wonderful economic life lesson

Opinion

Hey there, time traveller!
This article was published 21/12/2018 (2451 days ago), so information in it may no longer be current.

Truth be told, I could never sit through the perennial holiday “classic” It’s a Wonderful Life. Many people make an annual ritual of watching this movie, but I always thought the story schlocky and Jimmy Stewart’s performance overwrought.

I recently changed my view when I saw a theatrical version of the story told in the 1946 Frank Capra movie. At the Royal Manitoba Theatre Centre’s production of It’s a Wonderful Life: The Radio Play, audience members became viewers at a traditional live radio show, set in the early 1950s, with the actors playing multiple roles in front of microphones, lighted signs to cue applause and a Foley artist creating scene-appropriate sound effects. This stage production encouraged me to view the movie through new eyes and I realized it contained several economic insights.

In brief, the story centres on George Bailey, a manager at a small town savings and loan (S&L), a family-owned company perennially teetering on the edge of bankruptcy and seemingly at the mercy of a local bank, headed by Mr. Potter, a greedy capitalist (of course!). The play opens with George contemplating suicide because his absent-minded uncle has “lost” a large deposit. Mr. Potter always had designs on the S&L, which George continually rebuffed, but now with bankruptcy looming because of the lost deposit, he fears that his clients will face ruin.

Some may see a central economic lesson in the struggle between a small “family” firm and the impersonal larger business, but this is a cliché and not the main economic insight.

The play opens with Clarence, a hapless angel-in-training dispatched by the Heavenly Boss (HB), showing agitation at the onerous and seemingly impossible task of rescuing George from his planned suicide. We learn that the HB runs a strict meritocracy and has no use for seniority. Other angels doubt the capacity of Clarence to work this miracle, since he has the “IQ of a rabbit.” It turns out that Clarence has been an angel in training for 200 years and has yet to earn his wings. Before accepting this task, Clarence wishes assurance that success in rescuing George will be rewarded with a promotion and that he will get his wings.

So, one lesson involves a clear success/reward payoff that underpins the employment relationship between the HB and Clarence. A second lesson is the importance of enforceable contracts. In addition to public goods such as education, defence and transportation, contract law underpins our economy. Now the HB and Clarence make a verbal contract that success will brings wings (though legal purists might note a certain looseness in this arrangement). But one “takeaway” from the Old Testament is that the HB must obey the law, so this verbal agreement is binding.

However, these are still minor lessons from the movie. A significant insight is the importance of altruism as the economic “glue” for our society. After his father dies, George gives up his plans to travel the world to return home to take over the S&L. Through a flashback, we also learn that George had risked his own life to save his brother from drowning. And finally, while a teenager in a drugstore, he intervenes when the pharmacist, drunk and grief-stricken at the death of his own son, mistakenly prescribes a poison rather then a medicine and George saves a second life.

The economics of altruism, first introduced by Adam Smith and later revived by economists such as Kenneth Boulding, has become an increasingly important idea. My well-being depends first on having empathy for the ­misfortune of others and second on a willingness to give up income to improve their lot. The widespread support for using taxes to fund social safety net programs such as social assistance reveals that maximizing personal welfare, a touchstone of traditional economics, also depends on ensuring at least the minimum well-being of others.

George’s selflessness illustrates the themes of benevolence and the power of altruism that echo through modern economics.

A second economic lesson is even more current. In a stroke of genius, Clarence devises an experiment: through heavenly powers, he transports George to a world into which he had never been born. His brother drowns, the pharmacist’s client dies from receiving the poison and Mr. Potter acquires the S&L, immediately foreclosing on many mortgages and throwing George’s friends out of their homes.

Creating the “counterfactual,” a world as it is now, except with or without a policy/program/tax, is a standard technique in modern economics. Traditionally, economists used “thought experiments,” logical arguments or abstract math to parse policy.

Modern economics, under the influence of such thinkers as the Nobel laureate Vernon Smith, has become more experimental. Economic laboratories put undergrads through countless studies in behavioural economics, and we attempt to use large-scale social experiments such as the Ontario basic income pilot to chart policy. Clarence, in his bumbling way, hits upon a very modern economic research technique. George now understands the pivotal role he has played in others’ lives and decides to live.

Popular culture contains hidden economic insights. I still think the movie is hokey, but I now need to break away… I am late for my annual viewing of A Christmas Carol with Alastair Sim as Scrooge.

Gregory Mason is an associate professor of economics at the University of Manitoba.