How do economists view Christmas?
In one word: dismally. It is, according to them, a woefully inefficient waste of resources. The original example of this view is Joel Waldfogel’s celebrated 1993 paper, The Deadweight Loss of Christmas, published in The American Economic Review. The title says it all. Not that they have anything in particular against Christmas, their argument is against gifts in kind—in India, a similar paper could just as well be called “The Deadweight Loss of Diwali”.
What is it that so riles the economist? Put simply, while the gift-receiver knows exactly what he would like to get, the gift-giver doesn’t. We’re all familiar with that umpteenth dinner set we don’t know what to do with, or that tacky vase given by a distant cousin, or yet another wallet we can’t wait to pass on. In other words, a gift you don’t appreciate destroys a part of its value. This was what Waldfogel called deadweight loss.
Translating that into economics, if the recipient’s personal valuation (V) of a gift is lower than the cost (C) incurred by the giver, then the difference, C−V, represents deadweight loss or inefficiency. Alternatively, if the yield of the gift, Y = V/C, is less than one, then a deadweight loss has occurred.
Waldfogel’s smug conclusion: “between a tenth and a third of the value of holiday gifts is destroyed by gift-giving.” He estimated the total deadweight loss in the US economy from holiday gifts at between $4 billion and $13 billion in 1992.
Economists would rather you give your friends and relations cash instead. That way the recipient can maximize her utility.
But cash is sometimes seen as socially inappropriate, which is why some people opt for gift cards. Unfortunately, gift cards, too, restrict choices for recipients and a research paper by Jennifer Pate Offenberg in 2007 came to the conclusion that the average welfare loss on gift cards was 15%, taking the difference between the face value of the gift card and its resale value on eBay.
Lesser mortals would be tempted to dismiss all this with an airy, “It’s the thought that counts.” Economist John M. Solow, of the University of Iowa, had an answer to that. In a 1993 paper titled Is it really the thought that counts--toward a rational theory of Christmas, he found himself terribly perplexed why people chose to give gifts. He wrote, “It cannot be that rational people, who otherwise spend their waking hours equating marginal rates of substitution to relative prices, should choose to act irrationally on this occasion.” After much cogitation, Solow came to the conclusion that there must be externalities involved that lead to such odd behaviour. His conclusion: if you derive some enjoyment from the recipient using the gift you’ve given, then that’s a positive externality. A husband gifting perfume to his wife is an example Solow uses. Sighing with relief, he crowed, “in the analysis of economic institutions, such as Christmas, is it not natural to assume that people are motivated solely by self-interest?”
Just in case you didn’t find that convincing, Solow then gets into game theory and shows that “gift-giving can emerge as a Pareto-superior equilibrium of non-cooperative individual behaviour.” It’s all very clever and very depressing.
But this is just microeconomics. Shouldn’t macroeconomists have a more positive view of festivals, because of the huge boost they give to the economy? Well, not really. All the Santa and Diwali effects do is boost consumption at one point of the year, while lowering it in another. In the absence of these festivals it could well be that consumption would be smoothed out throughout the year, instead of having large seasonal variations. And which country, economists ask, has developed just by consuming more?
Richard Thaler, who won the Nobel Prize for Economics this year, said in an interview to US News and World Report, “I think there are many gift-giving arrangements that are welfare-reducing, and in large families, when they exchange gifts, almost everybody is unhappy with everything they get. Just stop giving those gifts. Donate the money to some good charity.” He omitted mentioning that donating money to those less fortunate than you means the gains in their marginal utility are more than your losses. Everybody wins.
It’s very doubtful, though, if flesh-and-blood economists actually practice what their dismal doctrine preaches. Maybe they realize that the welfare gains of not giving gifts would be more than offset by the welfare losses of being lynched.
Perhaps the most appropriate retort to this Scrooge view of Christmas (Waldfogel has a book proudly called Scroogenomics) would be to mutter, in Ebenezer Scrooge’s own words, “Bah, humbug!”