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A few years ago, I gave my school-going daughters an odd summer project. They had to map the Harry Potter economy.

I tried to explain to them the one big flaw in the entire system. Wizards should ideally be able to produce whatever they needed with the wave of a wand, so what is the need of a market, money and the division of labour? The price of everything should be zero. There should be no economic exchange. There should be no financial system, or any of the other institutions of our Muggle economy.

Their sheer admiration for J.K. Rowling meant that my arguments fell on deaf years.

I have recently begun to read the latest teen sensation, The Hunger Games. It describes a dystopian future in which 12 districts in a country named Panem are ruled over by the Capitol. Each year, two tributes—a boy and a girl—are selected from each district to participate in a bloody battle to the end as part of a brutal pageant. The lone survivor of the 24 participants in the hunger games gets to go back home.

Most of the districts are extremely poor. Their economies are limited. The two main characters come from District 12, which produces coal. District 7 produces lumber. Others focus on commodities such as grain and cattle. The Capitol is extremely rich and technologically advanced, with high-speed trains, advanced weapons and genetic engineering. The inequality between the districts and the Capitol is stark.

The residents of the Capitol seem to be living in a Schumpeterian world of technological advancement while those living in the districts seem to be living in a Malthusian world of bare survival. In a recent article in Slate, an online magazine, writer Matthew Yglesias asks: “Could a real country have an economy like Panem’s?" Yglesias answers in the affirmative.

He borrows from the recent book by economists Daron Acemoglu and James Robinson on why nations fail, where they draw the important distinction between inclusive and extractive institutions. The former allow broad participation through property rights, rule of the law and competition. The latter keep people out of the pale so that one group can extract wealth from another. Institutional economist Douglass C. North has drawn a similar distinction between open-access and closed-access economic systems. Rich countries usually have inclusive systems that offer immense opportunities for advancement.

“District 12 is a quintessentially extractive economy. It’s oriented around a coal mine, the kind of facility where unskilled labour can be highly productive in light of the value of the underlying commodity," writes Yglesias. “In a free society, market competition for labour and union-organizing would drive wages up. But instead the Capitol imposes a single purchaser of mine labour and offers subsistence wages. Emigration to other districts in search of better opportunities is banned, as is exploitation of the apparently bountiful resources of the surrounding forest."

Low wages in such an extractive system ensures that demand for other products is weak. There is no incentive for even the smaller businesses, such as the bakery, in the district to expand operations, says Yglesias. “The extractive institutions keep the entire system in a state of poverty, despite the availability of advanced technology in the Capitol." The institutional structure breeds poverty and inequality.

Some other economic lessons can be gleaned from the Suzanne Collins trilogy. One is that the internal economies of the districts are based on barter that is conducted illegally in the black market, a bit like the old Soviet Union. Squirrel meat is quietly exchanged for a loaf of bread. But the level of trust (and even empathy) in these markets is shown to be far stronger than the level of trust in other social interactions.

Another set of issues deals with strategy (the word keeps cropping up in the novels) in the actual hunger games. Some participants play a signalling game, at times underplaying their strengths while exaggerating them at other times, which game theorists would perhaps describe as mixed strategies. There are times when the contestants even collaborate to help each other despite being caught in a battle to death.

All this may sound far-fetched, but works of fiction do sometimes offer economic lessons. I have previously written in this column (http://www.livemint.com/2011/12/20214958/Importance-of-sweet-talk.html) about how the famous O. Henry short story on love and disappointment, The Gift of the Magi, could help us understand basic economic issues such as information asymmetry, cheap talk and trust.

Literature sometimes enhances our understanding of economic issues because it captures the complex patterns of human behaviour and institutional diversity in ways that standard economic models do not.

Niranjan Rajadhyaksha is executive editor of Mint. Your comments are welcome at cafeeconomics@livemint.com

Also Read |Niranjan Rajadhyaksha’s earlier columns

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