From the Santa Claus Principle to Krampus Economics

The “Santa Claus principle” is what Ludwig von Mises sometimes called the use of coercion to redistribute wealth according to someone’s political preferences. But if people don’t create taxable wealth at least as fast as the government redistributes it, sooner or later “Santa” will run out of goodies.

Mises writes,

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole doctrine of interventionism collapses when this fountain is drained off. The Santa Claus principle liquidates itself.

Another way to think about the Santa Claus principle, however, is as a particular combination of two other problems.

The first problem is how to align the incentives of demanders and suppliers. Call this the incentive problem. The second problem is how to enable demanders and suppliers to become aware of what each side has to offer and its value. Call this the knowledge problem.

(I believe Milton Friedman gets the credit for the following formulation.) 

Santa Clause: Spending Your Own Money on Someone Else

During the holidays, we typically buy gifts for other people. On the one hand, we’re very careful how much we spend on others because we know how much we value our own money. We have an incentive to limit our spending.

On the other hand, we often don’t care all that much whether the person we’re buying for even likes the gift (incentive problem). But assuming we do, we still have a much fuzzier idea about that than if we were buying the gift for ourselves (knowledge problem). The better we know the person — ourselves, a family member, a close friend — the more successful we can be.

On the recipient’s side of t…