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Business Life in Diagon Alley


Hogwarts Shield

Abstract: This is a study of the business life described in the Harry Potter books 1-6. The business life is found to be rather old-fashioned and to agree with Adam Smith's descriptions. In the books Fred and George Weasley start a shop selling magical jokes. The description is found to agree with Joseph Schumpeter's theories on entrepreneurs. In general, J.K Rowling's description of business life in the magical world is found to be interesting and suitable for her readers.

1.a Problem

J.K. Rowling is the author of the very successful series of Harry Potter books. The books have achieved a profile unparalleled by any other series of books, with worldwide sales exceeding 300 million copies. [Note 1] Most of the action takes place at the "Hogwarts School of Witchcraft and Wizardry"

In the books there are also descriptions of business life in the magical world. Most of the business life takes place in Diagon Alley, a street hidden in the centre of London.

  • The books describe business life as a world of family-owned small-scale business with a few signs of modern marketing. This is in agreement with Adam Smiths descriptions of the economic life as he saw it but not necessarily with what he wanted.
  • The figures Fred and George Weasley establish a new joke shop. They are described as entrepreneurs, very innovative in both their products and their marketing methods.

Originally the publishers targeted the books for young readers aged 8 to 15. Now there are also many adult readers. The language and the content of the books have matured as the characters grow older. [Note 2]

  • How will the readers understand the connection between business life in the fiction and in their everyday life?

1.b Hypotheses

  1. The business life in Diagon Alley and elsewhere in the magical world agrees with Adam Smith's descriptions
  2. Fred and George Weasley's new business agree with Schumpeter's theories on entrepreneurs
  3. J.K. Rowling's way of describing business life in the magical world is interesting and suitable for her readers

1.c Delimitations

This paper is dealing with all kinds of business life described in the Harry Potter series, books 1-6. Other parts of the books' content are only included to illustrate the business life. The Harry Potter films are not included.

1.d Definitions

Business life: All kinds of exchange of goods and payment described in the books.

1.e Design of the Examination

This is a theoretical study of a fiction text with a certain amount of business description. The study is an attempt to create a new frame for understanding and interpreting of a series of children's books read by adults as well. The business life is a subplot compared to the magical world described in general in the books.

No explanation of the actions: The fiction text is invented and cannot be explained in the same way as you can explain natural phenomenons. For example: The landlord of The Three Broomsticks, Madam Rosmerta, is complaining to the Minister for Magic:

    'You know that the Dementors have searched my pub twice?' said Madam Rosmerta, a slight edge to her voice. 'Scared all my customers away ... it's very bad for business, minister.' (3-10-220)

Nobody can explain why Madam Rosmerta is complaining, because she is not a subject that can be explained. Both Madam Rosmerta, the Dementors, and the minister are products of the author's mind.

Understand or interpret the intentions: Instead of explaining the characters' actions we must try to understand the author's intention with the fiction text. The author is acting as an object that one should try to understand through the content of the fiction text. Why does she choose to describe a certain situation, and why not another?

The author's intention may be open, hidden, or unconscious. Examples:

  • Open intention: The fictional text reveals the intention directly, or the author explains the intention, hopefully in an honest and correct way.
  • Hidden intention: The author is consciously hiding the intention, or we have no access to ask, or we don't like to ask.
  • Unconscious intention: The author neither can nor will explain the intention, because it is unconscious.

Most fictional authors are reluctant to reveal their innermost intentions, but say: "Buy the book and read it and you will understand". As J.K. Rowling is not accessible for interviews, the researcher must try to interpret the fiction and compare with various, possible intentions. [Note 3]

Sources: There are three main kinds of written sources for this paper:

  1. The Harry Potter books 1-6, see section 8.a
  2. Literature on economics and organization, see section 8.b
  3. Various Internet sources on theories, J.K. Rowlings, etc., see section 8.c

2. Applied Theories

2.a Adam Smith's Theory

Adam Smith published in 1776 "The Wealth of Nations", or "An Inquiry into the Nature and Causes of the Wealth of Nations". It is regarded as the starting point of analysis for the classical economics. Smith's main idea is to let anyone pursue his aim, and it will benefit the whole society. If you are doing the best for yourself (microeconomics) then the whole society will prosper (macroeconomics):

    What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. (IV-ii) [Note 4]

    It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages. (I-ii)

    Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow-citizens.(I-ii) [Note 5]

Adam Smith describes the division of income from labour, stock, and land:

    Whoever derives his revenue from a fund which is his own, must draw it either from his labour, from his stock, or from his land. The revenue derived from labour is called wages. That derived from stock, by the person who manages or employs it, is called profit. That derived from it by the person who does not employ it himself, but lends it to another, is called the interest or the use of money. (I-iv)

    As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labour adds to the value of the materials. (I-iv)

Most of the business of Adam Smith's time was small and medium-sized enterprises where business ownership, management and capital were combined. Under these circumstances the strict division between labour, stock, and land is blurred as Adam Smith acknowledges here:

    The revenue of the farmer is derived partly from his labour, and partly from his stock. To him, land is only the instrument which enables him to earn the wages of this labour, and to make the profits of this stock. (I-iv) [Note 6]

Adam Smith's and other classical English theories on economics were based on the idea of an economy in equilibrium. The theories did not make way for the influence of individual entrepreneurs. [Note 7]

Adam Smith is rather normative in his way of writing. The normative view can be seen when he condemns businessmen's deals to raise prices. It is good if they deal in the market, not if they deal with the market:

    People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary. (I-x-II) [Note 8]

Pity the innkeepers:

    Honour makes a great part of the reward of all honourable professions. ... Disagreeableness and disgrace affect the profits of stock in the same manner as the wages of labour. The keeper of an inn or tavern, who is never master of his own house, and who is exposed to the brutality of every drunkard, exercises neither a very agreeable nor a very creditable business. (I-x-I) [Note 9]

2.b Joseph Schumpeter's Theory

Joseph A. Schumpeter was an Austrian economist born 1883. He was analyzing and writing in the style of Karl Marx but from a rather bourgeois point of view. From 1932 till his death in 1950 he was working at the Harvard University in the United States. Schumpeter explains growth in the economy as great waves of innovation where increasing economic returns attract entrepreneurs who cause a storm of "creative destruction".

The Walrasian entrepreneur: Schumpeter's theory has its starting point in the French economist Walras' very formal model, where the cast consists of a landowner, a worker, a capitalist and an entrepreneur. It is the task of the entrepreneur to combine the resources of the three other participants to produce goods or services. The Walrasian entrepreneur is not using any kind of new inventions he is solely adapting to obtain equilibrium within the existing framework. [Note 10]

The Schumpeterian entrepreneur: There is an avant-garde of economic actors who is unsatisfied with the routines. They introduce innovations and try to persuade the customers to use the new goods or services. [Note 11] If the innovation prove a success the entrepreneur will earn a "Schumpeterian rent", that derive from the new and innovative product or service. [Note 12]

For Schumpeter, innovation has six distinct criteria: [Note 13]

  1. The innovation is a discontinuous, irreversible change: "It is spontaneous and discontinuous change in the channels of the flow, disturbance of equilibrium, which forever alters and displaces the equilibrium state previously existing. ... Add successively as many mail coaches as you please, you will never get a railway thereby." [Note 14]
  2. The innovation is the introduction to the market, not the preceding invention of the product or service: "As long as they are not carried into practice, inventions are economically irrelevant." [Note 15]
  3. It is carried through by a newly established entrepreneur: "it is not essential ... that the new combinations should be carried out by the same people who control the productive or commercial process which is to be displaced by the new." [Note 16]
  4. It is carried through in a newly established firm "which generally do not arise out of the old ones but start producing beside them, ... it is not the owner of stage-coaches who builds railways." [Note 17]
  5. It is carried through with borrowed money: "The possessor of wealth, ... must resort to credit if he wishes to carry out a new combination." [Note 18]
  6. It is carried through with resources that so far has been used elsewhere "we must never assume that the carrying out of new combinations takes place by employing means of production which happen to be unused." [Note 19]

These six criteria is Schumpeter's successful attempt to enhance Walras' formal model so that it can contain the innovative entrepreneurs. Comments:

  • Criteria no. 3 is a bit weak, but must be seen in connection with criteria no. 4
  • Criteria no. 5: Schumpeter's argument is that a newly established business cannot be financed by returns from a previous production. Further, it may be his intention to equalize the cost of capital so that the cost per unit will be identical for all competitors in the market place, no matter how much the individual entrepreneur can provide of his own capital.
  • Criteria no. 6: Schumpeter acknowledges that unemployed resources may be a favourable condition and an incentive for new combinations. The reason for the rule must be that the cost of resources is equalized for all competitors if all resources have an alternative cost.

There are five types of innovation:

  1. The introduction of a new good that is one with which consumers are not yet familiar or of a new quality of a good.
  2. The introduction of a new method of production, that is one not yet tested by experience in the branch of manufacture concerned, which need by no means be founded upon a discovery scientifically new, and can also exist in a new way of handling a commodity commercially.
  3. The opening of a new market, that is a market into which the particular branch of manufacture of the country in question has not previously entered, whether or not this market has existed before.
  4. The conquest of a new source of supply of raw materials or half-manufactured goods, again irrespective of whether this source already exists or whether it has first to be created.
  5. The carrying out of the new organization of any industry, like the creation of a monopoly position (for example through trustification) or the breaking up of a monopoly position. [Note 20]

Adam Smith claimed that if anybody does the best for himself then the whole society will prosper. In the same train of thought Schumpeter claims that the single entrepreneur's actions may result in economic growth in the society as a whole:

    It is the entrepreneur's innovative actions at micro level, originating from the single individual's own situation and creativity as the result of an inner process, which in special situations gives rise to a vast throng of followers who may in turn influence cyclical fluctations. [Note 21]

Schumpeter criticized Adam Smith for flattening the theory of economic growth into a single, oversimplified cause: The division of labour. Schumpeter insisted that the entrepreneurship is a unique factor of production and at the same time the scarce social input that makes economic history unfold. [Note 22] One might propose that Schumpeter propagates entrepreneurship in the same way as Adam Smith propagated division of labour.

2.c Knowledge Economy Theory, etc.

The theories of Smith and Schumpeter are based on creation of value through investment in material assets and manufacturing of raw materials. At present this is still the point of departure, but the creation of value tends to be more and more dependent of immaterial assets employees, technology, and processes.

Many enterprises are not producing physical goods at all they produce value to their customers through knowledge, service, image and relations, and they use information technology to create close links to contractors, partners, and customers. On the other hand the customers have changed to be more demanding; especially they want products adapted to their wishes, but at bulk production prices. [Note 23]

Other tendencies in the global competition:

  1. Outsourcing of production, etc. to other firms or other parts of the world
  2. Distributors wanting the producer not only to provide goods, but also to provide a strong brand image
  3. Knowledge management in respect to markets, brands, customers, subcontractors, distributors, etc.
  4. Large corporations employing strategic planning bureaucracy
  5. Large corporations with a gap in power between senior managers and widespread, powerless shareholders [Note 24]

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