The story of Whoville, from Dr. Seuss’ story “How the Grinch Stole Christmas,” which prompted the now-classic year-2000 movie, is one we all know: a society pushed to reallocate resources and become efficient when their seemingly-public-goods are suddenly privatized. We’ve seen it across our (not-fictional) history–from the bombing of Pearl Harbor (of which happened only 16 years before Dr. Seuss wrote the story in 1957) to 9/11. These are stories of an enemy stealing an abstract public good (national security and trust in government, in both instances) and the society reallocating their resources to become more efficient after their loss (joining the war and implementing proactive measures to protect national security, rather than just sitting around and assuming nothing would happen–whether that was the right call or actually worked is another debate). Thus, How the Grinch Stole Christmas is a perfect example to tell the story of overlap between Smith and Coase.
In the beginning of the movie, we see the entirety of Whoville going crazy. It’s Christmastime and residents are at their least efficient. They’re running around spending money on food, gifts, and decorations, all of which may stimulate the economy, but leaves residents stressed and with no time or money to spare and use efficiently for new businesses or building human capital. They mostly just sit around and make waste of everything they’ve purchased (see: Martha May Whovier vs Betty Lou Who, and the Grinch). Those who are actually working are treated terribly and not working/can’t work at their most efficient (see: Lou Lou Who, the mail worker, and the mall workers).
At first, this seems to be a Smith story, and the Whos believe it to be one–they expect their happy, little world to work itself out without any intervention. In Smith’s theory, price signals would kick into gear and, with the high demand of Christmas-related items, prices would rise until the Whos stopped purchasing in such high quantities, leaving time and resources for them to more efficiently contribute to their economy. This, of course, doesn’t happen in the real story here. The issue is that, for Smith’s economics to work, we have to be talking about private goods. At the surface level, all of the goods the Whos are buying seem to be private–they’re tangible things that they take home when they leave the store, right? In actuality, the Whos equate purchasing of these goods to making use of a public good: happiness. If we go with that, like the Whos do–happiness is a public good, to be shared through gifts and decorations–then we quickly see the break-down of the entire concept of price signals. This society believes they’re investing in and making use of a public good, so they will never stop purchasing, even when prices rise. And when prices do rise, they’re all left with even more stress and less money to distribute in other ways, in a never ending cycle of “never-enough” where people can never actually make full use of the public good in question (happiness). Thus, the pursuit in this manner creates so much stress that it is impossible to achieve what they seek.
So, we come to our Coase argument, and to what actually happens. The Whos are using, and making waste, of their happiness-as-a-public-good. They’re in a never-ending struggle over who gets the most of it and there are no price signals to force them into efficiency. This all changes, however, when their happiness becomes privatized (just as Coase would have liked). As the name goes, the Grinch “steals” Christmas from each home. The Grinch gains ownership over all of these possessions that represent happiness, and forces the price signals back into action–supply of material happiness finally drops, demand drops with it, and the Whos decide that the price of the material happiness is too high. They find their true happiness, in a far more efficient and equitable way.
In Coase’s story, everything works out. When the Whos follow the price signals and slip into their new, efficient use of happiness, everyone turns out for the better. The citizens of Whoville are calm and happy, enjoying their Christmas; useless competition between neighbors falls to the wayside; people are able to do their jobs without stress, working more efficiently. Even the Grinch becomes a part of society again, benefiting from his ownership over material happiness and finally making good use of his time–think to his original daily schedule and see how much time he was wasting and how much happiness he was lacking: “Even if I wanted to go, my schedule wouldn’t allow it. 4:00, wallow in self pity; 4:30, stare into the abyss; 5:00, solve world hunger, tell no one; 5:30, jazzercize; 6:30, dinner with me – I can’t cancel that again; 7:00, wrestle with my self-loathing… I’m booked” (Khurana).
In the plot of the film this makes sense. The Grinch once loved Christmas; as a child he was a hard-working part of the society, and wanted to do good. But when happiness (around Christmas specifically) was treated like a public good, to be used and shared throughout the society, the Grinch (and others) ended up unable to use it. This is what created the efficiency spiral downwards and the externalities growing in number, all with no theory to fix it. This is what created the situation in which the Grinch had to step in and “buy” the towns happiness, for their own sake. It helps here that Coase’s theory is, in many ways, so close to Smith’s. The townspeople were, at first, very resistant to any change. They didn’t want the Grinch involved, they thought he would make everything worse. Once he had intervened, though, they quickly saw that now they could actually follow Smith’s rules and they quickly adjusted back to the equilibrium point of happiness.
When we look at that potentially-story-inspiring example of Pearl Harbor, we can see this too. Historically, society relied on Adam Smith’s economics to solve problems. Sit back, let price signals explain what to do. But the issue returns: what do you do when the good at hand is public? And, what do you do when that public good is something like national security, or autonomy in world politics? Smith has no answer for this, and so the country was left without a plan. Fortunately, at it’s true form, Coase’s theory is just an up-to-date version of Smithian economics, and his theory is easy to trust in this situation (harder in others, but, again, another argument). Coase brings instruction for when Smith’s rules aren’t followed. For a concept like national security, it’s obvious to see that it should be privatized, and thus the price signals work for it. Prior to the bombing of Pearl Harbor, the US avoided entering the war, we expected that we would be fine if we remained uninvolved; this could be called the Smith look at national security, assume it’s already private–that we own it–and let things work out for themselves. The US only became actively efficient, though, when Pearl Harbor was attacked: our national security was stolen from us, and we had to decide it was worth buying it back. The cost/benefit analysis worked out, and the US entered the war in order to “re-purchase” our national security, to own it privately ourselves. And since then, we have been mostly proactive in maintaining its efficiency (or at least have the intention to be, but when we make poor decisions, so-called price signals do their job).
While I don’t want to make light of the tragedies of Pearl Harbor and 9/11, I do want to make (and have made) the connection between them and the movie: when public goods are being wasted or are threatened, someone has to stand up and privatize. We did it when we actively chose to provide the service of national security and thus it was protected (we won-ish the war, we now go through airport security). And it was done in a children’s story when the Grinch “purchased” the then-known concept of happiness, and the town decided to become more efficient rather than continue paying the price of buying more material happiness for the Grinch to collect on later.
Coase’s concept of privatization is the rulebook society seems to need. Without guidance about “what to do when the rules are broken,” society tends to act like nothing is wrong (we’ve also seen this with Keynes’ expansionary policy and the inflation of the 70s). We bury our heads in the sand and wait for the storm to pass, but usually, it takes someone actually paying attention for things to get better. However, Coase’s theory relies on Smith’s original rules–it would not exist without the other–and so these theories are of equal importance in history and in the future of economics. Price signals do work, if we have the right situation; if we don’t, we have to make decisions and create/purchase the rights to the correct situation.
Unfortunately, these theories are often misunderstood and are believed to be against each other. Like Whoville, people often assume that privatization means regulation (which would be directly opposing Smith’s theories). To some degree, this might be true, if everything is private there have to be some rules to what the owners can or cannot do, but in reality, it’s much less regulated than a government system would be. It ends up this way because the responsive price signals act as regulation. If regulation had been the solution to Whoville’s dilemma, they likely would have been rationed a certain amount of happiness, and it would be near impossible for the average person to tell how the market was doing. In the way that the Grinch privatized happiness, the city had the power to refuse to continue to pay him (they didn’t go out and buy more happiness for him to collect, they made their own, efficiently). So, the price signals worked, where they weren’t before, and the Grinch didn’t have to keep charging them.
Overall, How the Grinch Stole Christmas is a fictionalized version of a dilemma the country has faced time and time again, with a solution to the ones we’ve found ourselves. This happens, we turn tragedies into digestible stories to teach the same lessons. But really, all we have to do is follow guidebook left for us: a market will behave like Smith explained if the rules are followed; if they’re not, follow Coase until they are.