I posit the following:

1) Wands are probably heavily subsidized
2) The ministry is a byzantine labyrinth of rules and regulations.
2.5) In regards to 1 and 2, taxation is high
3) Galleons are valued correctly because they are not just gold
4) The economy has no mass production and is therefore reliant on craftsmen and artisans
5) Most wizarding children do not go to Hogwarts due to economics reasons
6) The Wizarding world is much bigger than what Hogwarts would lead you to believe

Wands are heavily subsidized. According to Horace Slughorn, unicorn hair is worth 10 Galleons per hair. Wand cores are likely the whole and non-mutilated magical substance as it is implied that the Phoenix that supplies Voldemort wand's core only gave one other feather leading to only two brother wands. With this in mind, Phoenix feathers are more scarce than unicorn hair and therefore more expensive than 10 Galleons and yet Harry's wand only cost 7 Galleons. The core by itself exceeds then price of the core. We also know that wand wood is scarce since bowtuckles are not exactly rampant if not outright rare. Even worse for a wand maker, the wand choices the wizard which implies that there are far more wands than wizards since the wand maker can't know beforehand what type of wand is suitable for a particular person. The wand maker must have many wands in stock. The raw materials and cost of business for wands exceed the selling price of 7 Galleons and yet Ollivanders stays in business implying profit. On top of that that the ministry has an interest in making sure that every wizard and witch has a wand and is therefore capable of magical economic activity and taxable. Wands are probably heavily subsidized by the ministry.

The ministry is a byzantine labyrinth of rules and regulations. There are seven hundred Quidditch fouls listed in the Department of Magical Games and Sports records. By contrast soccer has only has several dozen fouls. Consider the assumption that sports are likely far less regulated than say much more serious things such as law enforcement, and we can extrapolate that the ministry of magic is far more complex and regulatory than their muggle counterpart due the complexity of magic. Since wizarding Britain is a reflection of muggle Britain, the office of Circumlocution is likely a reflection of typical ministry operation.

In regards to 1 and 2, taxation is high because heavy subsidies and large bureaucracy do not pay for itself. Also the ministry doesn't have control over the currency so it can't just role over debt and inflate like muggles do with central banks. This can explain how Arthur Weasley can be both the head of a department and yet poor.

Galleons are valued correctly because they are not just gold. "To a goblin, the rightful and true master of any object is the maker, not the purchaser. All goblin-made objects are, in goblin eyes, rightfully theirs." Would Galleons be any different? A goblin-wrought helmet which was described as "indestructible." Surely the currency is therefore both rightfully owned by the goblin that minted the currency and is indestructible. The statue of secrecy would also forbid the selling of wizarding currency to a muggle. Therefore, once gold or silver is obtained by goblins and minted into currency, it is trapped in the wizarding world. Due to it's indestructible nature it can't simply be melted down either. Muggle gold, however, is free to flow into the wizarding world either by trickery or fair bargain. Supply demand economics would indicate that there would overtime be an over supply of precious metals in the wizarding world and a under supply in the muggle world. A Galleon is not just gold, it is an indestructible goblin made object that is protected by the statue of secrecy. Sure fiendfyre might be capable of destroying the magics enchantments on the Galleon and melting it down, but how many wizards and witches are capable of such magic without killing themselves and/or alerting the ministry/goblins.

The economy has no mass production and is therefore reliant on craftsmen and artisans. According to Snape, "Time and space matter in magic." Wizards and witches are limited in how much they affect reality and only those of magical talent can do so. We see that each potion must be independently created one at a time by a witch or wizard. Machines and automated processes can't mass produce potions. If this principle is extended to all other magical objects, we can see why a firebolt would cost so much and be in limited supply as well as many other magical goods. If every enchantment layered on a magic good must be done by a person, and for sake of business practices those enchantments are trade secrets, and not every wizard or witch is capable of such enchantments, then the shear number of craftsmen and artisans required to produce goods is high.

Most wizarding children do not go to Hogwarts due to economics reasons. If the production of magical goods is limited by the number of craftsmen/artisans and the knowledge of trade secrets, then why send your children to a magical school? After all, Hogwarts provides an all encompassing education in magic, but the creation of a magic good requires only a highly specific knowledge of magic. Those children of craftsmen and artisan could be producing economic activity instead. Also the creation of magical goods is not industrial and therefore labor intensive, creating further incentive to train the children of craftsmen and artisans in the trade instead. Further evidence of a lack of a Hogwarts education is that most ministry personal can't produce a basic shield charm.

The Wizarding world is much bigger than what Hogwarts would lead you to believe. A large bureaucratic ministry, medieval style mercantilism and craftsman/artisan base economy, and ensuing low Hogwarts attendance would create a large Wizading world that is more than capable of hosting a news paper and all of JKR's social/governmental institutions. Hogwarts is likely the entry point for muggleborns and the school of those of appropriate economic/social standing. That could be a reason for why there is such a high degree of pure blood ideology among the wizarding world. Muggleborns are introduced to the magical world through Hogwarts, and are seen as artificially being given a high status education beyond their standing.

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I'm very drunk at the time of writing this, so be harsh.

Also, I've been formulating a fanfic that incorporates these ideas (among others) so harsher y'all are the better I can gauge if I'm on the right track, so be harsh

 

If wands are heavily subsidized, to clarify, would you say this is a subsidy for specific wandmakers, or all wand purchases? In the event the wizarding economy relies on artisans, there is probably a finite, manageable number of wandmakers, and given that wands are usually a once-in-a-lifetime purchase, the market really only demands as many wands as there are eleven year old children every year. With Olivander being the best wandmaker, there are of course others, though most likely not many, and with Apparation they needn't be spread throughout the country. In this sense the Pigouvian shift that the state would be trying to generate would be to decrease the price rather than increase the quantity, as most children find their ideal wand more easily than Harry. Quantity would increase all the same, leading to cluttered shops as we see in PS. It's fortunate for the young witches and wizards that the state decided to go with a subsidy instead of a price ceiling, since as always that would result in a shortage, though it wouldn't surprise me if the Ministry's tried that at least once.
The advantage of subsidizing specific wandmakers would be like a reward for being the best, though the problem with that is that no one else can sell at the same prices so they'd just fall of the map and Olivander wouldn't be putting out the quantity necessary because he's one guy who hasn't heard of slavery. On that note I would like to see an elf breeder in a story that seriously goes into wizarding economics. If it's legal to own slaves, it's legal to breed them for specific traits and then sell them.
I suspect they subsidize all wand sales, and but because we don't know a lot of the factors like the equlibrium market price, slope of demand, or the magnitude of the subsidy, there's only so much we know about how effective the subsidy is. At the same time, something important to consider is the price elasticity of wands. Given a highly inelastic demand curve, the Pigouvian shift would look like pic related.
You'll notice that Q' isn't really that far away from Q, the equilibrium Quantity supplied and demanded. My point is that in the event that we see a demand curve as steep as this, the Ministry is really not going to get the quantity up that much with a subsidy, even an incredibly generous one(the magnitude of this subsidy is like 12G) and an incredibly lowballed minimum price of 11G. This is probably a best case scenario with the stated objective, so basically the state is paying 12G each time a kid buys a wand for 6G- I can only imagine the taxes.

 

Your ideas are quite similar to my own conclusions, so I would find it very interesting if you are able to incorporate it meaningfully in a fanfic without just making it exposition.

To address each of your assumptions in turn:

1) Wands are probably heavily subsidized

If the finest wands in Britain are actually 7 galleons a piece, there would no scarce need for the inferior wandmakers that are hinted at nor, really, for Ron to use a handed-down wand. The vast majority of wizards and witches likely use heirloom wands or wands of sub-standard quality. Harry's wand was certainly subsidised, but I would not posit that this is true generally. Consider it a subsidy for children with no magical guardians - perhaps financed by a levy on other wands. Another reason for the lower classes to be disgruntled at the advantages given to muggleborns.

2) The ministry is a byzantine labyrinth of rules and regulations.
2.5) In regards to 1 and 2, taxation is high

I would turn the causality around. Taxation is probably overwhelmingly indirect - no income tax but fees levied on a lot of transactions and licenses. Possibly a poll tax as well. The need for income would drive regulations. Apparition license? Cauldron thickness certificates? Why, what marvelous ways to raise cash for obliviators and the Department of Mysteries!

3) Galleons are valued correctly because they are not just gold

Galleons are fungible and inheritable. They cannot be ruled by the same rules as commissioned goblin-made objects. Some sort of agreement must be in place, such as an indefinite and transferable lease in exchange for providing the metal in the first place. Otherwise I agree; the only way for minted currency to become something else would be highly illegal or by way of them being paid to goblins. This also explains why the exchange rates are fixed despite the metals having different value.

4) The economy has no mass production and is therefore reliant on craftsmen and artisans

This is true, but consider also that wizards in general are able to provide for most of their needs by magical means. Every purchase is going to be a specialised luxury that the ordinary wizard is incapable of making or harvesting for themselves, such as broomsticks and rare potion ingredients, or is purchased as a status symbol, such as clothing.

Something should also be said about food and drink. This appears to be quite reasonably priced both when dining out and from the lavish meals the Weasleys are able to have even as a poor family. We know the food cannot be conjured. Does the MoM heavily subsidise foodstuffs?

5) Most wizarding children do not go to Hogwarts due to economics reasons

Agreed. I would posit that Hogwarts students invariably are either rich, the children of reasonably high-level ministry employees and muggleborns. The latter two categories are subsidised. I would speculate that there previously there would also have been scholarships for the "deserving poor", but that this has become less and less common as the relative proportion of ministry employees and muggleborns has increased, leaving Hogwarts/the MoM with little surplus for other scholarships.

Hogwarts is a special track leading to the top academic, public and private sector jobs.

6) The Wizarding world is much bigger than what Hogwarts would lead you to believe

Agreed. I would assume, as you do, that the general population is much more "pureblood" than the Hogwarts/MoM bubble would lead you to believe, but not particularly affluent or influential. Practically speaking, like Hagrid stated, everyone is more or less a half-blood. Outside of the sacred twenty-eight, not many care enough of about blood purity to either maintain or check generations' worth of family trees.

To reach this conclusion, we also see that outside of the Hogwarts-attending class, marriage to muggles is rare. I can think of a couple of reasons: (i) the general population are less exposed to muggles through muggleborns, (ii) contact with muggles for business transactions is handled by the MoM, and mainly by muggleborns at that, (iii) the illiquid artisan economy means the average wizard has little money that can be converted to spend in the muggle world even if they were so inclined and (iv) there is real prejudice against muggles, both historically and form the perception that muggleborns have unfair privileges.

 

I view things differently than you guys.

I disregard Slughorn's comment and instead believe that 7 galleons is a lot of money.

Wands are the foundation of everything in the HP world. You need a wand to do anything. As such, other than something like a magical animal (dragons, hippogrifs, etc.) a wand is the most expensive thing out there.

A wand is the single most expensive thing an average wizard will have to purchase in their life.

I do have one exception to this rule. LAND. Land is highly expensive in Hogsmeade and Diagon Alley because it is usually passed down a family and very rarely sold. Good land or a store (this is an artisan based economy so stores are highly necessary) can sell for over 500 galleons.

Of course, this brings into question the fact that Harry has mountains of money and that the TriWizard Tournament gave a prize of 1000 galleons. In my headcannon, most people in the wizarding world can't afford luxuries, or the finer things. (This goes to my remark earlier being about the average wizard).

The common person can live their life with their wand and very little money. In the wizarding world, you are either poor (though still comfortable) or rich (able to afford just about anything). The middle class doesn't really exist.

The only things you NEED to buy with money are wizarding land and luxuries. The ministry won't bust you if you can successfully "convince" a muggle into "selling" you things. After all, once you are over 17, they don't know where you perform magic.

As such, everyone in the wizarding world is comfortable. The rich are just the ones who can experience every wonder that magic has to offer.

 

The Ministry would probably have many regulatory limits to manage costs. One such limit would be that subsidies come into play for a wizard's or witch's first purchased wand. Subsequent wand purchases by an individual would not be subsidized. Parents would therefore have incentive to pass down wands to their more reckless children, I'm thinking of Ron, because in the event that said wand is broken the child is still eligible for the first purchase subsidy.

There is likely protectionism at work. Ollivander is said to be the best wand maker, but the same is said of Gregorovitch. Neither seem to sell outside of their respective home countries. Local populations also seem to have rather low familiarity with foreign wand makers. With the incredible ease of magic transportation there should be no reason for this to naturally occur; however, economic protectionism out right preventing foreign wand makers from selling in Britain and the fact the Ollivanders have held the profession for over a 1000 years would be an adequate explanation.

Subsidies would probably be obtainable to all domestic wand makers. The problem is obtaining the subsidy would be limited by ability to navigate the rules and regulations (and outright corruption) of the British ministry of magic, good luck.

Bergeton, The ministry would not have to subsidize food because it not magical and for all intents and purposes not scarce. Either you outright steal it from the muggles without them knowing any better or large plantations run by house elves simply drive down the cost to the point that there is no reason for subsidies. The most scarce thing in the magical world is, ironically, magic. Everything else you can steal from the muggles. There is a real problem with services due to segregation. If you could do magic, why would you want to spend time with such mundane things such as cooking or robe production? Hence the second most scarce thing in the magical world is mundane services.

momo, "As such, other than something like a magical animal (dragons, hippogrifs, etc.) a wand is the most expensive thing out there."
Omnioculars are 10 Galleons, Advanced Potion-Making textbook is 9 Galleons, apparition lessons are 12 Galleons, 1500 Galleons for the cursed necklace Draco used, A skull is 16 Galleons. Hell, Percy made a 10 Galleon bet in Harry's Third year. There are many things that are far more expensive than a wand and far less important than a wand. If 7 Galleons is a lot of money, then buying NEWT level textbooks along with apparition lessons is a fortune spent. If the average wizard buying a wand is their greatest expense, then the average wizard is not buying textbooks, potion ingredients, and cauldrons. The average wizard is probably not going to Hogwarts with those type of expenses.

Wizards do not behave as if 7 Galleons is a lot of money, but they do value their wands significantly. This difference in valuation would indicate that something funny is going on with the pricing mechanism of wands such as subsidies.

I agree with you on land priced highly in wizarding communities. Hogsmeade I would imagine is lower cost since expanding outward is not a problem. Diagon alley is probably near its limit on expansion. Otherwise land would be "free" in the style of Slughorn's squatting.

 

@VonVolk I am well aware of that. However, in my personal headcannon, it makes no sense for a book to cost more than a wand.

Obviously you could argue the subsidy thing but the Ministry of Magic really seem like the kind of body to pay for other people to get wands?

 

Given the large amount of speculation as well as direct contradiction of canon in this thread, I assume this is not supposed to be a "your take on canon" type thread, but rather a brainstorming type thread for fanfiction. With that in mind, here is an excerpt from my Victoria Potter planning document:

Goods

When it comes to using magic to directly fulfil economic needs, transfiguration has pride of place. In simple terms, Gamp’s Law of Elemental Transfiguration states that any physical thing can be turned into any other physical thing. Clearly this ability possesses the potential to completely eradicate the goods economy, leaving only demand for services. However, there are six factors preserving the wizarding goods economy:

1. Gamp’s Law has five principal exceptions, which describe the five classes of physical item which transfiguration simply cannot create (either by transformation or by conjuration).
   
   
2. Gamp’s Law has many subsidiary exceptions, which describe classes of physical good which can be created with transfiguration, but only within certain limitations.
   
   
3. Transfiguration is widely considered the most difficult magical discipline, and most wizards have not mastered it to the degree necessary to use it to create the goods they demand (see below, Education).
   
   
4. Wizarding goods are generally not merely physical, but come with enchantments to improve their qualities. Transfiguration can only create physical things; it cannot imbue an object with magic it did not originally have.
   
   
5. While transformations are permanent, nonetheless they can be reversed by the active intervention of a wizard. This is especially relevant for the magical construction industry, where durability and security are of particular concern.
   
   
6. While highly skilled wizards could theoretically use their abilities to put some traditional industries out of business, it is usually more profitable for the wizard to put those skills to a different use. For example, a highly skilled wizard might be able to perform large, perfect, animate transfigurations in an instant. Such a wizard could likely replace many farms if they devoted their life to transfiguring items into cows. However, that same level of skill means the wizard in question could easily obtain even more lucrative and exciting employment elsewhere (or would seek to enter politics).

The five principal exceptions to Gamp’s Law are: food, gold, silver, bronze, and gems. Note that these are the things transfiguration cannot create directly. Transfiguration can still make tin and copper, which may be turned into bronze via alchemy. Similarly, transfiguration can still make animals, which can be turned into food by one who knows butchery and cooking charms, and seeds, which may be turned into food by a herbologist or farmer. Nonetheless, these goods which cannot be created directly will generally be surprisingly costly in the wizarding economy.

The subsidiary exceptions to Gamp’s Law are too many to list. A number of illustrative examples will suffice. There exist a complex series of subsidiary exceptions which relate to knowledge. For example, while it is generally possible to access new information with transfiguration (indeed, all transfigurations contain information unknown to the caster, who cannot possibly know the true and entire physical nature of the thing they are creating), it is not possible to use transfiguration to gain access to secrets which are unknown to the caster. Similarly, while it is generally possible for transfiguration to supplement creativity (it is not necessary for the caster to visualise the end result of their transfiguration), it is not possible for transfiguration to create artistic works wholecloth. A third example relates to invention: while novel objects can be created with transfiguration, this must be done “manually” by actively guiding the magic; it is not possible to create a novel object by reference to its Platonic form.

Many attempts have been made by scholars to reconcile these knowledge-related subsidiary exceptions into a unified principal exception, but the field has proven consistently too varied to bend to any generalisation. Similar situations exist for the subsidiary exceptions related to beauty, health, and textiles. These subsidiary exceptions mean that books, documents, and certain clothing have high economic value in the wizarding world. They also explain the limitations on transfiguration with regards to healing (including cosmetic healing).

To conclude, the following goods and commodities will generally achieve a relatively high value in the magical world: gold, silver, bronze, gems, cooked food (e.g. bread, restaurant food), edible ingredients (e.g. apples), prepared ingredients (e.g. butchered meat), books, musical scores, visual art, scripts, and certain types of clothing.

In addition to these, goods which are enchanted will attract additional cost. This is because the act of enchantment is a service.

In contrast, there are many goods which may be expensive in the Muggle world but will generally be cheap in the wizarding world. For example, the products of Muggle craftspeople and manufacturers will be generally cheap for wizards, as they can be easily replicated with transfiguration. This would include (unenchanted) furniture, musical instruments, and kitchenware. Even unskilled wizards are capable of transfiguring themselves a knife and fork; it is rare to see a wizarding shop selling cutlery. Similarly, certain raw substances in the Muggle world may be extremely valuable but, as there is no barrier to their magical creation, they have little value in the magical world. This would include precious metals such as platinum, as well as industrial products like oil and coal. Additionally, undeveloped land is much cheaper in the magical than Muggle world, unless it happens to be home to magical flora or fauna.

 

This is hardly the only example of it being incredibly easy to make a killing by doing business with muggles. In Many Deaths Harry had a side business where he repaired luxury cars, which turned out a small fortune. I can only conclude that Secrecy is so important to the Ministry and wizards in general that doing business with the nonmagical is banned and the ban is enforced with extreme prejudice, otherwise it would be incredibly common in canon. The ban makes sense given the vested interest in Secrecy, there are just way too many potential interactions between muggles and wizards to keep track of them all, and on our end there would be too many questions, even if you did something conceivably possible, like repairing luxury cars- you'd be doing it faster or for less or both, and this would invite questions. It is for this reason I conclude that the wizarding economy is entirely decoupled from the normal economy, though it seems the wizards aren't inclined to observe the ban. Almost all of them seem to own a set of muggle clothing, if arranged with poor fashion sense, though I suppose that might be an exception to the ban. If the magical are getting around the ban or if there are exceptions to it, they have to be getting pound sterling somehow, which is probably done through some sort of exchange counter in Diagon Alley- people raised by muggles bring in their own currency and denizens of the wizarding world trade it for their generic fantasy gold.

 

Well, seems to me that food is a natural thing wizards would want to buy from Muggles. If it has a naturally high value to wizards by virtue of Gamp's Law, and there's probably not a lot of wizards that want to be farmers, then it's likely cheaper to get your apples from the local muggle grocery store than a Diagon Alley farmer's market. Wizarding food sales would be specialized items with something magical about them (Honeydukes is a prime example. You're not getting Chocolate Frogs from muggles). The only place a proper wizarding grocery store would work would be Hogsmeade, where the local wizarding population can get their food without ever interacting with muggles. It would be more expensive, but Hogsmeade is probably a fairly expensive place to live anyway.

And if there's a favorable exchange rate between wizarding and muggle currencies (which there certainly is, though with a sizable exchange fee), then that explains how the Weasley's low income doesn't seem to impact their meals.

 

Do you mean to say they just transfigure their muggle clothing into existence? Virtually all of them need a set to go around in public, and the more they go around in public, the more they would need or want.

Well, yes, the exchange counter I suggested would be highly controlled and I doubt many people would want to exchange their entire fortunes.

 

My thoughts on the currency issue is that Gringotts was given monopoly on its private trade, under the condition that it allows a certain yearly quantity of galleons to be easily purchased by muggleborns during their Hogwarts years. For everyone else, should they want to trade their worthless tiny old lady portraits for real money, they would have to pass trough a byzantine amount of paperwork and probably a fight to the death or two. The opposite is naturally much easier, the goblins would gladly allocate your gold to a loving home. This legislation could have been seen as too pro-muggleborn and a diplomatic loss with the goblins, resulting in resentment from the poorer purebloods and those with anti-goblin sentiment, adding some fire to Voldemort cause.

Even if it's dead easy to earn money as a wizard among muggles, the Ministry would very heavily discourage this, as even if the magic is done in secret it still leaves questions and traces in the air. I could see certain employees whose job is to constantly check on those wizards working amidst muggles in hope on catching some fineable offense (of which there would be many, of course). The ministry would take the job of being the middleman with the muggle world wherever possible, both to diminish breaches to the Statute and to increase its power and importance. Their "muggle funding" would come by trading magical favors with the muggle government.

For something like land purchasing that it's not between two wizards, the Ministry would get the wizard's galleons and give pounds to the seller (though obviously not the opposite), probably in better rates than the Gringotts to compensate for the imbalance between the two economies size. Though still quite expensive to the wizard's generally lower buying power. This would also benefit older families that have large estates from before the Statute, allowing then large revenue and power as landlords.

 

Barring those who aren’t good at Transfiguration this is the easiest solution.

 

We know that throughout Hogwarts, students do reach the stage where they are transfiguring animals. The first transfiguration (two similar inanimate things in a matchstick and a needle) is most like accomplished by everyone.

This is changing one type of clothing to another type of clothing. I would imagine that everyone can do it.

 

I wonder if it's worth it to try and spend so much brainpower on stuff like wand subsidies instead of just ret-conning it and making wands more expensive. Obviously JKR messed up the numbers, and the 5 pounds = 1 galleon exchange rate makes it absurd for Ron (or others) to be unable to afford a 7 galleon wand.

Maybe wands could be equated with a car purchase. Thinking about it this way, you could buy a cheap wand or use a hand-me-down, but that's like taking a risk and buying a 20 year old car. It might work just fine or it might backfire on you and then you can't get to work. And while a 20 year old car could be perfectly capable of doing it's job, no one would mistake it for a luxury or performance vehicle, just as no one would mistake your old shitty wand for a nice new one.

Alternatively, if you're rich, you go to the local Porsche dealership Ollivander's and buy a top-of-the-line wand, for a premium. You can even get the manual transmission and sparkly metallic paint.

 

I don't know if JKR has opened an economics book. That said, it's a detail from the books that makes fanfiction seem more real; you're generally trying to contradict the universe as little as possible. It makes sense that the overlarge, overbearing Ministry would be forcing Pigouvian shifts with subsidies.