A sideways look at economics
“My only regret in life is that I didn’t drink enough Champagne.” – John Maynard Keynes
Last weekend I celebrated a special birthday (yes, one with a zero on the end, but no, I’m not 50). As a treat, I decided to indulge: take my wife and one-year old daughter to Champagne; rent a luxurious villa with friends; visit a number of Champagne houses in a rented Tesla; spend a night at a super fancy chateau and buy (and drink) a fair amount of the good stuff. The trip was expensive and tiring, especially doing it with a little one who caught a cold, but I loved every minute of it. What cost memories and a good time? To reflect on my weekend and (hopefully) justify my outlay, I reflect on why we drink Champagne and why we are prepared to pay more for it than other wines.
The economists’ answer is that we drink Champagne because doing so gives us utility. And we are willing to pay more to drink it because it gives us more utility than drinking other forms of alcohol. Boring! Let me reframe my question: why do we associate more utility with drinking Champagne than drinking other forms of alcohol?
As most people know, Champagne is a bubbly alcoholic drink: normally white, but it can also be rosé. Many people call any sparkling white wine Champagne, but this is incorrect: Champagne is only Champagne if it comes from a specific part of the region in France called Champagne. It needs to be made using one or more of just three types of grapes – chardonnay, pinot noir and pinot meunier. Add juice from any other grape and it isn’t Champagne. Astute readers and oenologists will know that pinot noir and pinot meunier are in fact red grapes. Yes, red grapes are used to make white wine.
To understand the cost of Champagne it is important to know how it is made, so here is my layman’s guide: grapes are picked at the end of summer and pressed; the juice is added to a tank, or barrel, where it undergoes its first fermentation; this early-stage wine is tasted and a decision is made whether to blend that year’s harvest with another (a cuvée) or keep it as a single-year vintage; yeast and sugar are added, the wine is bottled and a second fermentation occurs in the bottle, which is capped, not corked; the yeast eats the sugar as part of the fermentation process; when it runs out of sugar to eat it dies and turns into a sediment called lees; the lees are left in the bottle, giving the wine extra flavour; the lees are carefully positioned in the neck of the bottle by the wine maker; the bottles are turned twice a day for a period of time ranging from 15 months to years (I think); the neck of the bottle is frozen, the cap and the lees are removed, and a cork is inserted; bottles are left to mature again; the Champagne is sold for an extortionate sum of money.
This is a lot more complex and requires more work than other wine making processes. Prosecco, for example, is often compared to champagne, but it tastes different and is made differently: it doesn’t require the second-stage fermentation or bottle-turning process. There is an Italian drink called Franciacorta, which is made in the same way (méthode traditionelle), and using the same grapes, as Champagne. It tastes a lot more like Champagne, but it is still not quite the same in my opinion (though, admittedly, not all Champagnes taste the same either). The French make other sparkling white wines, such as the various regional versions of Crémant, as do other countries, including the UK, with varying degrees of success. But no matter how good these other white wines are, or how much work has gone into them, they cannot officially be called Champagne. They are not Champagne.
The first reason we drink Champagne (and pay more for it) is the taste. All that bottle turning, resting on the lees and general care by the French, just seem to make Champagne taste better than other sparkling white wines . Those fine little bubbles and the crisp, structured taste of Champagne blow every other white wine away, and are worth every penny. Cynics might say that I have conditioned myself to like the taste of Champagne more than other wine and that it actually doesn’t taste any better. But haters will be haters.
The second reason we drink Champagne is for the prestige. We are paying money to feel good because we know something is good. Demand for some goods (known in economics as Giffen goods, or Veblen goods when dealing with luxury items) strangely rises as the price increases. Champagne probably falls into the latter category. This doesn’t apply to me, but I’m sure there are people who have a lot more money than I do who would be more likely to fork out on a bottle of Champagne if it was more expensive.
The third reason we drink Champagne is that its supply is limited, and more limited than other wines. Limiting supply of something can give it more prestige. All else equal, restricting supply should push up the price for any level of demand. In Champagne’s case, restricting supply may well push up demand, and prices.
The fourth reason we drink Champagne is that it is associated with special occasions. Reasons two and three explain this, as well as the savvy job done by the Champagne marketing folk – centuries of good marketing has ingrained these beliefs into our culture and psyche.
The fifth reason we drink Champagne is that the French know what they are doing with this kind of thing. Yes, your Parisian waiter may judge you like you’ve never been judged before when you ask for a Carlsberg at dinner, but the fact is they have got this stuff (taste, etiquette and drinks pairing) down to a fine art. Credit where credit is due. If the French say we need to drink Champagne, I drink Champagne.
The sixth reason we drink Champagne is that it may have health benefits. Some studies have suggested that drinking a glass or two of wine a day may be good for you. And other studies have pointed out more than seven unique health benefits of drinking Champagne. Can’t argue with science — or take any risks when it comes to health(!)
There are undoubtedly more reasons to drink Champagne. After reflecting on the evidence, I can conclude that we drink it and are prepared to pay more for it because it is good. Effort and care goes into its production. The effort is not just physical (turning the bottles every day), but all the intellectual property, experience and culture passed through the generations by the French winemakers. That stuff makes it good too. It is also true that a premium is paid due to the scarcity, the imagery and associations of drinking Champagne.
If you are completely rational and looking for a taste-arbitrage opportunity, Crémant de Loire or Franciacorta may be options. But the reality is that we are not always completely rational, nor should we be. Not everything in life is tangible, or should be justified from a financial point of view. You could argue that there is something rational in being irrational; and therefore spending more for a similar, rationally-justified product wouldn’t be the same. At times, forking out a little more for those irrational intangibles is perfectly rational too.
A lot of our happiness is psychological. Some people can drink water with lemon and associate good feelings to it. In fact, we should probably do more of that. Equally, there are times where, if you have the money, you should spend it as you like. Yes, if you can afford it you could give to charity, you can also save for a bigger house, your child’s education, etc. There are many responsible and altruistic ways to use your money. But we also need to indulge from time to time. And I can’t think of a better way to indulge than to drink Champagne. Just ask John Maynard Keynes, the great economist, who like me was born on 5 June. Be more like John Maynard Keynes as an economist or a human being, but don’t be like him and live to regret that you didn’t drink enough Champagne. Cheers!
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