Christmas and the Myth of Deadweight Loss

It is once again the season where economists like to argue against Christmas. The argument is simple: Gift giving at Christmas is inefficient. Remember when you asked your mom for a new Super Nintendo controller and she bought you a Sega controller instead? This is the type of situation where anti-gift giving economists thrive. The argument can also become more detailed. For example, perhaps your girlfriend bought you a $50 shirt that you really like, so much so that you value it at $60 (this means you would have a consumer surplus of $10). But suppose there was another shirt that you valued at $75. This means you missed out on an opportunity cost of $15 by receiving the $50 shirt from your girlfriend. The basic tenant of this inefficiency argument is that we are better able to buy ourselves the perfect present than leave it up to someone else. Many economists are very serious about this argument. Some even venture to estimate the amount of wealth destroyed at Christmas. There were pieces in the nytimes Economix blog, Slate, Freakonomics, and this topic has been in many books and journals.

In simple empirical terms the math is right. The problem lies with the assumptions. Too many economists forget that their math is built upon assumptions, and that economics started out as philosophy. Let’s examine the assumptions necessary to argue that Christmas is inefficient and attempt to figure out what a perfectly efficient Christmas would actually look like by the logic of these economists. We will first make the reasonable assumption that even though people are self-interested they still want to give people they love efficiency maximizing presents. Being self-interested doesn’t preclude you from gaining utility from giving (unless you are Scrooge, the Grinch, or Ayn Rand). In fact, economics leaves the definition of ‘utility’ pretty wide open. Utility itself is the idea of happiness or usefulness and is typically measured with dollars. So in this scenario we will make the reasonable assumption that people still want to give gifts. If this is the case the first and most obvious choice would be to give cash. That way the receiver can choose to buy whatever provides them with the most satisfaction. In this scenario it would be silly for everyone to exchange cash though. For example if a child to give his mother $50 and for the mother to give the child $150 there is needless exchange. To solve this problem, everyone should write down the amount they plan to give and subtract the lower gift from the larger gift before exchanging money. In this case the mother would give her son $100 and the son wouldn’t give his mother anything. On Christmas morning everyone would wake up, make the wealth transfers, and then those who received a positive amount would go to the store at a time that best suits them and pick up the item they value the most with the amount of money they received. This seems to be the perfectly efficient Christmas they want to exist.

There is also another argument that gift giving is how people signal that they love each other. They were willing to sacrifice their time, gas, and sanity, to go out to a store and buy you a present. So even if your dad didn’t give you the best gift, he thought about you and what you might like, and drove to a crowded mall to get it for you. His willingness to do that purportedly shows how much he loves you. But why shouldn’t he just pay you the amount he would have valued his time plus the principal amount? He could write a brief note: $50 for principal amount with $24.57 added as a signal of the worth of my time I would normally have spent going to purchase your gift. After all, your dad makes more money at his job then he does searching for gift making this choice more efficient. So an economist should consider this act of giving reasonable, and it would seem to logically unfold back into the giving of money.
These situations seem to forget anticipation, the excitement of getting up at 6:00am to wake up your parents (or be woken up by your children). This itself is a utility generating event. So why do economists pretend it doesn’t exist? Probably because it’s impossible to measure with their favorite unit of measurement: the dollar. Using the dollar to measure utility is reasonable in most settings. But when economists try to get cute by searching for the ‘hidden economics’ behind events such as Christmas it is misleading to use only the dollar as a tool of measurement. There is some truth to the suggested solutions for Christmas inefficiency offered by economists. Wish lists are a good idea. I would imagine pure random presents, such as a bag of potatoes, would be poorly received. But for most the act of giving, receiving, and the overall excitement of the day are what make it complete. Just because as economists we can’t easily measure this effect doesn’t mean it isn’t there. A proper economist should remember that the dollar is just one tool to measure utility and that many forms of happiness take indeterminate forms.

All fields try to use their own secret box of tools to describe human phenomena (except maybe marine biology). While Economics might have much to say about Christmas, perhaps they should stick to the effect it has on the labor market.

-Simon


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