The statue of Skuli Magnusson was erected in 1954 to mark a century of free trade in Iceland.

Skuli Magnusson was born in the remote village of Keldunes in the north east of the country.  He moved to Húsavik with his family before joining a Danish merchant's company as a teenager.  Upon joining the company he was told by the merchant to "weigh it right", meaning to cheat customers.  This made Magnusson angry, and he swore he would strive to replace the dishonest merchants.

Magnusson then took up a position in the south of Iceland as a county magistrate before moving to Skagafjörður in the north of the island 3 years later.  While in this position he discovered a Danish trading ship had foundered in the fjord and was illegally trading with locals.  He seized the ship and cargo and used it to build Akrar village.

Magnusson had a vision to use his wealth and power to destroy what he saw as a corrupt system and help strengthen the country.  Magnusson sued a corrupt merchant for dealing in mouldy flour, poor quality iron and for selling over the maximum price.  He won, becoming popular with the Icelandic public. 

Magnusson became the first Icelandic Governor in 1749 when the Danish Governor was dismissed for drunkeness and bankruptcy.

Magnusson came good on his vision of improving the country by build factories which focused on sulfur processing, developing agricultural machinery, wool weaving, dyeing, leather working, rope-making, fishing and shipbuilding.  He also pushed for Icelanders to use boats with a deck so they could fish deeper waters in safer vessels than the previously used rowing boats.

Twenty-five years ago this fall, Harry Potter and the Sorcerer’s Stone premiered on 8,500 screens in the United States. The first movie adaptation of the Harry Potter book series, it earned more than $31 million on its opening day, enough to break the record previously held by Star Wars Episode I: The Phantom Menace.  

“Harry Potter is bewitching American audiences,” said a story in the New York Post. 

To be more precise, this bewitching may have been a Confundus Charm, producing befuddlement in its target. According to a 2022 academic paper by economists Daniel Levy and Avichai Snir, the Harry Potter franchise may be responsible for spreading economic illiteracy among its fans. And the problem may be even bigger than the paper contends. 

Citing evidence from psychology and neuroscience, Levy and Snir begin by making the case that fictional stories have a significant influence on their audience’s opinions and worldview. 

Success logically magnifies that influence. The Harry Potter novels have sold more than 600 million copies globally. They have been translated into 85 languages, including two that are dead (Latin and Ancient Greek). By comparison, the most popular economics textbook currently used in classroom settings, Principles of Economics by N. Gregory Mankiw, which was published the same year (1997) as the first Harry Potter novel, has yet to reach the five-million threshold.  

Author J.K. Rowling endowed Potter’s fictional realm with a surprisingly detailed economy, which Levy and Snir dissect like a two-headed Adam Smith.  

Here are the basics: Outside of the broomstick industry, the Potterian economy appears to be stagnant. The government (a British-styled Ministry of Magic) is large, inefficient, and corrupt. Private enterprise exists, but businesspeople in the wizarding world are often deceptive. The only bank, Gringotts, is a monopoly owned and staffed entirely by goblins, a race known for greed. And, strikingly, Gringotts does not seem to perform the economically critical banking function of channeling funds from savers to investors. 

On a more technical level, Levy and Snir deduce that the gap between the commodity value and exchange value of gold galleons — a denomination of money in the Potterian economy — is implausibly large. But on the positive side, the infrequency of cash withdrawals (Harry withdraws cash only once a year) does seem to accurately reflect the Baumol-Tobin model of money holding in the face of transaction costs. 

Overall, the Potterian economy often violates basic economic logic while perpetuating numerous biases and stereotypes. It is also not consistent with any one economic model or school of thought. Levy and Snir call it an example of “the formation and dissemination of folk economics — the intuitive notions of naïve individuals who see market transactions as a zero-sum game, who care about distribution but fail to understand incentives and efficiency and who think of prices as allocating wealth but not resources or their efficient use.” 

In other words, the Harry Potter stories present audiences with a view of economic life that conflicts with the reality in which the individuals who make up those audiences (hopefully) earn a living. 

And there may be an even deeper level of conflict, which Levy and Snir do not address, between the Potterian economy and how the capitalist system works.  

For those unfamiliar with the franchise’s premise, Harry is an orphan who learns that he is not a regular person (a muggle), but someone special (a wizard). At age 11, he is plucked from ordinary life into an enchanted realm to develop his craft. 

It’s easy to see how such a mythology would appeal to a child’s imaginative vanity. But carried into adulthood, it’s problematic. It teaches that your identity — muggle or wizard — is innate rather than built. You are born with it. It’s a medieval worldview in which one’s station in life is hard-wired. Virtually everyone — with the notable exception of entrepreneurial pranksters Fred and George Weasley — ends up working for the government.

In the real world, capitalism overturned that system and democratized opportunities for advancement. In Harry’s realm, your role is revealed up front, and then the work begins. In a market-based economy, it’s the opposite. Work comes first. Feedback, failure, and adjustments follow. Eventually you do things worth celebrating. This is how true economic magic happens, and how the Western world created the highest standard of living in history. 

The bad news is that finding your role in a market economy requires struggle. The good news is that it’s a realm where even muggles can become wizards. That’s a lesson young people need to hear.

John Maynard Keynes was not happy with US President Franklin Delano Roosevelt. In 1934, the famed economist criticized FDR for being “engaged on a double task, Recovery and Reform” when Keynes believed reform should wait until recovery was achieved. In fact, Keynes argued that Roosevelt needed to embark on much more deficit spending, and he lamented that the president was too wedded to his belief in balanced budgets. In contrast to many libertarian accounts of Roosevelt, he was not a Keynesian, and the New Deal did not come remotely close to fulfilling Keynes’s vision for the government’s role in combating an economic downturn. 

Overturning the FDR as Keynesian narrative is just one of George Selgin’s contributions in False Dawn: The New Deal and the Promise of Recovery, 1933-1947. Selgin’s main argument is that Roosevelt’s New Deal did not result in economic recovery. He is critical of the New Deal as a recovery program, but is careful to note that he is not evaluating its effectiveness when it came to relief and reform, which along with recovery were the stated goals of the Roosevelt administration. Throughout, Selgin analyzes “particular New Deal policies to see how each influenced the course of production and employment,” and he concludes that most of them were not successful. 

The Agricultural Adjustment Administration (AAA) and the National Recovery Administration (NRA) were “the twin pillars of Roosevelt’s recovery program” and Selgin finds both wanting. The AAA set out to raise farm commodity prices by incentivizing farmers to restrict supply. The goal was to increase farmers’ purchasing power. Unfortunately, the program had unintended consequences and was especially bad for sharecroppers (who were disproportionately black). The increased spending by farmers “tended to be more than offset by reduced spending by displaced former farm laborers, sharecroppers, and tenants.” One post-New Deal assessment concluded it was “extremely doubtful whether the AAA restriction policy did anything to increase total purchasing power” and another found no evidence that the program was “a stimulus to recovery in the economy as a whole.” After evaluating the latest empirical evidence, Selgin concludes that “it’s hard to imagine a plausible social welfare function that would yield a positive balance, let alone a substantial one” toward encouraging economic recovery. 

In Selgin’s account, the NRA performed even worse than the AAA as a vehicle for economic recovery. The goal of the NRA was to lift wages to increase purchasing power across the economy to address underconsumption, which many New Dealers blamed for the Great Depression. To this end, the NRA established “codes of fair competition” that established working conditions, set maximum working hours, and uniform wage rates. The point was to replace competition with cooperation. The result was the cartelization of the American economy. 

Selgin gives voice to the NRA’s many critics, among them Keynes, who “was especially critical of the National Recovery Administration…describing it, accurately, as pretending to promote recovery while actually impeding it.” In 1935, the Brookings Institution released a report on the NRA, which condemned the program keeping “business in a churn, preventing re-employment, and consequently retard[ing] American development.” In short, the twin pillars of the First New Deal did not promote economic recovery and likely impeded it. 

The economy did improve from 1933 to 1937, but the reason for that recovery had little to do with Roosevelt’s policies. Unemployment fell from 25 percent to 11 percent, and industrial capacity more than doubled. Selgin explains that during this time “the money stock (M2) rose by more than 50 percent, boosting the overall demand for goods and services and, with it, both equilibrium prices and real output.” Sometimes the Roosevelt administration is given credit for the improvement, but Selgin demonstrates that their policy efforts did little to contribute to the increase in the money supply. Most of the monetary expansion resulted from European gold flows due to the uncertainty created by Adolf Hitler’s aggression and by Joseph Stalin’s efforts to increase Russian gold output. 

Shockingly, officials in the Roosevelt administration viewed the inflow of gold as a threat to the economy. Fearing inflation, the Treasury and the Federal Reserve embraced policies to decrease monetary expansion. Keynes quipped that they “professed to fear that for which they dared not hope.” The Federal Reserve voted to raise member bank reserve requirements. Furthermore, the Treasury sterilized the gold flows by not depositing those certificates. Combined, Selgin argues, these policies changed inflation expectations and led to the downturn. Their actions led to the Roosevelt Recession during 1937 and 1938, in which GNP decreased by over 18 percent, industrial production declined by one-third, and unemployment increased to around 20 percent.

Selgin is also emphatic that the decline in spending during 1937 did not trigger the downturn. He concludes that the “expansionary fiscal policy wasn’t an important driver of the pre-1937 recovery” and as such the reduction of spending in 1937 “couldn’t have caused or even contributed [to the Roosevelt Recession].” 

The traditional historical narrative asserts that World War II got the United States out of the Great Depression due to the massive amount of government spending. Selgin evaluates the various explanations for economic recovery and concludes that Roosevelt’s decision to end his hostility toward businesspeople and bring them into the administration, while most of the New Dealers left government, resulted in regime change in the early 1940s. 

Following World War II, the United States embarked on a period of significant economic growth. Selgin explains that this resulted from the “revival of private spending” that “far exceeded what many economists, especially Keynesians, predicted.” Pent-up demand from wartime austerity, combined with forced savings and a restoration of private investment, led to economic revival. The Great Depression was over in spite of the efforts of the New Dealers.

In what is the most comprehensive, thorough, and balanced book on the subject, Selgin does more than just overturn the narrative that FDR was a Keynesian. He delves into each of the historiographical debates from 1933 to 1947 in a level of detail that intimidated my undergraduate students when I assigned this book to my American Economic History class last semester. But as my students worked through the book, at a pace much slower than they wanted, they learned to appreciate Selgin’s fair description of scholars who disagreed with him. 

The result is the closest authoritative single volume on the New Deal and recovery. I plan to continue using it in class, and I recommend that anyone interested in a detailed account of the New Deal and recovery purchase a copy of False Dawn. You will not be disappointed.

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