Dec 06 2011

Grinchonomics, 2nd edition: “Santa’s hollow threat…” or “how the Economist can help save Christmas”

Last year, I argued that Christmas was the most inefficient time of the year due to the large loss of welfare that goes with the tradition of gift giving. This year I will argue that Santa Claus, as the tradition is embraced in the English speaking world, fails to provide children with strong enough incentives to behave nicely, thus resulting in too much naughty behavior, reducing society’s welfare in the months leading up to Christmas. We’ll explore a market-based solution to this market failure,  already being practiced across the European continent, which harnesses the power of incentives to improve children’s behavior, and the overall efficiency of the Christmas holiday.

The lyrics to the popular Christmas song, Santa Claus is Coming to Town, are a warning to little children that they better not act naughty, OR ELSE! Read them and see what I mean:

You better watch out, You better not cry
Better not pout, I’m telling you why
Santa Claus is coming to town
He’s making a list, And checking it twice;
Gonna find out who’s naughty and nice
Santa Claus is coming to town
He sees you when you’re sleeping, He knows when you’re awake
He knows if you’ve been bad or good, So be good for goodness sake!
O! You better watch out! You better not cry
Better not pout, I’m telling you why
Santa Claus is coming to town

“So be good for goodness sake,” a child will say, ” OR WHAT? What are you going to do Santa, if I am naughty? Are you not going to bring me a present that I really want?”

You see, this is the problem with the Santa I grew up with. He is all carrot, and no stick. Humans respond to incentives, and the Santa I grew up with is great at incentivizing nice behavior, but he’s really bad at disincentivizing naughty behavior. Consider the following:

  • Santa sees me when I’m sleeping and knows when I’m awake, so he knows when I’ve been bad or good. If I’m good, the implication is that I will be rewarded with wonderful gifts from Santa come Christmas time.
  • If I’m bad, however, I will experience no loss whatsoever. While I will not benefit as much as the good children, nothing will be taken away from me. I will be made no worse off by being naughty, rather the degree to which I will be made better off is reduced.

This is a classic incentive problem. Santa provides rewards for good behavior, but fails to dole out punishment for bad behavior. A culture which embraces this benevolent Santa will invariably produce too many naughty children. Such a market failure can be illustrated clearly using benefit and cost analysis:

As economists, we’re always exploring ways to improve efficiency in the markets for different goods, services, and human behaviors. Clearly, in the market above, in which children determine how naughty they will be based on their perceived private benefits and costs of their own behavior, there is a market failure.

Due to Santa’s hollow threat (“…you better watch out!”), children lack a strong disincentive to not act naughtily, and therefore choose to engage in naughty behavior to the extent that overall welfare in society is reduced. The marginal private benefits of naughty behavior are far greater than the marginal social benefits of naughty behavior (let’s face it, acting naughty is FUN!).

So how could Santa better harness incentives and disincentives (both the carrot and the stick) to reduce naughty behavior and increase overall welfare in society, thereby increasing the overall efficiency? Santa must do more than just encourage good behavior; he must also strongly discourage naughty behavior.

Well, as it turns out, the Santa I grew up with is not the only version of Santa Claus in the world, and in fact the Santa known to millions of children all over Europe is one with a fearsome, wrathful side that is not timid about doling out punishment to naughty children. Allow me to introduce the European Santa, and his evil alter-ego, known here in Switzerland by the ominous name Schmutzli (which translates loosely to “dirty face”).

img source: http://www.ricksteves.com

The Swiss news site Swissinfo.ch introduces the character Schmutzli:

This is not the Santa Claus known to English-speaking countries but the Swiss version – who is normally accompanied by a strange-looking individual with a blacked out face.

The Swiss Father Christmas was based on Saint Nicholas, whose feast day was celebrated on Saturday – his Swiss German name, Samichlaus, alludes to that. But the origins of his sinister companion are less easy to make out.

Known as Schmutzli in the German part of the country… Samichlaus’s alter ego usually carries a broom of twigs for administering punishment to children whose behaviour throughout the year has not been up to scratch.

You see, here in Switzerland, and in much of Western Europe, Santa brings gifts for the children who have been nice, but his partner Schmutzli delivers harsh punishments to those children who have been naughty. Schmutzli, who goes by different names in other parts of Europe, is known to throw naughty children in his sack, carry them into the woods, and administer a fierce beating with his birch stick, and for the naughtiest children, to eat them or throw their beaten bodies into a river.

Schmutzli, quite literally, provides the stick to accompany Santa’s carrot. In Europe, children not only receive wonderful rewards from Santa for good behavior, but fierce punishments from Schmutzli for naughty behavior.

From an economic perspective, Schmutzli’s existence increases the efficiency of the Santa character dramatically, and therefore improves overall welfare in society by giving children both an incentive to act nice and a strong disincentive to act naughty, thereby internalizing the negative social costs of naughty behavior. The outcome can be as illustrated as below:

As the graph illustrates, Schmutzli’s presence by Santa’s side come Christmas time forces children, in their decisions regarding naughty behavior, to account for the likelihood that Santa truly “knows when you’ve been bad or good”. For if he does know when you’ve been bad, Santa will unleash Schmutzli, his child-hauling sack and his birch stick on those whose behavior has been more naughty than nice.

Schmutli’s existence in Switzerland’s Santa story internalizes the external costs of naughty behavior among children, and thereby reduces the marginal benefits enjoyed by naughty children, reducing the actual number of naughty children and the size of the deadweight loss they impose on society. Fewer children will act naughty, the externality is reduced, and overall welfare in society improves.

There you have it. The deadweight loss of Santa. If you ever doubted that Economists could find the inefficiency in Christmas, I’ve shown you once again that it is indeed the most inefficient time of the year. By providing a balance of rewards and punishments, Schmutzli’s presence corrects the incentive problem of an always benevolent Santa. Society as a whole should therefore suffer from less naughty behavior among its children.

Once again, a little Economic analysis can help make Christmas more efficient for all!


About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

8 responses so far

8 Responses to “Grinchonomics, 2nd edition: “Santa’s hollow threat…” or “how the Economist can help save Christmas””

  1. Carmenon 08 Dec 2011 at 7:23 am

    Not to throw a wrench in things but according to SwissInfo..Not to throw a wrench in things but according to SwissInfo…

    Praise and trust

    But there is no longer the threat of children being punished by St Nicholas’ forbidding-looking cane-wielding helper – known as Schmutzli in the German-speaking part of Switzerland – who has undergone an image softening of late.

    “A good St Nicholas praises the children and seeks out the good things rather than the bad,” Wüst, who was also at the synod, told swissinfo.ch. But he should be able to gain enough trust to point out where the child could improve their behaviour, he said.
    http://www.swissinfo.ch/eng/culture/Keeping_up_th

  2. welkerjasonon 08 Dec 2011 at 10:20 am

    Yeah, even the Swiss are getting soft! What a shame!

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