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No, I haven’t morphed into the Grinch. But given I work for an economics think-tank, this subject inevitably led to some heated debate among our colleagues at the staff Christmas party earlier this week.

My colleague Chris Snowdon has long been convinced by the arguments of Joel Waldfogel (author of 'Scroogenomics' and ‘The Deadweight Loss of Christmas’) that Christmas is inherently inefficient. His essential argument echoes the take-home lesson of Milton Friedman’s ‘4 ways of spending money’. We tend to spend money on ourselves better than other people can spend money on us. We are much more familiar with our own preferences and tastes. Waldfogel backs this up with some evidence: whereas we would usually expect to buy things which we value more highly than the cost of the product, Christmas often leads to situations where people value what they receive at less than the cost of the item. Think of that awful jumper from your long lost Aunt. Or in Chris’s case, the Polly Toynbee book he was given in the staff Secret Santa. Using surveys of Yale students, Waldfogel estimates this mismatch between the utility you’d get from spending the money yourself and receiving a gift represents a deadweight loss at anywhere between 10 to 33 per cent of the cost of the gifts.

To those who accept this evidence, there is an obvious solution to this gift-giving inefficiency. Net off how much you were going to spend on each person, and just make cash transfers so people can spend on themselves. That way you get no deadweight loss and an efficient allocation of resources. Cold hard cash is the best gift. We should stop buying presents and just give each other money.

Except, it is self-evident that people don’t do this even though they are free to do so. Every year, millions of people prefer to buy gifts for their loved ones. How are we to explain this phenomenon?

One explanation may just be that people, especially in the holiday season, are subject to a collective irrationality. Despite repeated difficulties in buying presents and aggregate outturn dissatisfaction each year, shoppers do not learn from their mistakes. We don’t have sufficiently adaptive strategies for more efficient gift-buying, perhaps because the feedback information we get from the gift-receivers is warped by social norms (i.e. most people smile and say ‘thank you’ even when they have been given a load of old tat). This seems to be the explanation preferred by many Scroogenomics acolytes. Personally, I’m not convinced by this explanation – in fact, I’d suggest this belief in collective inefficiency in some ways undermines the case for economic liberty generally. But it is an explanation.

Another is that of Michael Sandel, who simply believes that economics cannot explain Christmas – and that attempting to use economics to think about Christmas shows us how obsessed we’ve become with the marketisation of society. This heavy handed declaration that some things must be above economic analysis may go down well with Guardian readers and the left-wing clerisy, but given economics in reality is just the study of how various actors make choices on allocating scarce resources, it is distinctly unsatisfactory.

No, the most plausible explanation for me is that the economic analysis presented by Waldfogel and others just misses some key things which influence our choices and behaviour, and utility. In other words, there’s nothing inherently inefficient about Christmas at all – it’s just that the economic analysis is incomplete if we just think of monetary values of gifts alone.

What might the analysis of Waldfogel ignore?

  • Utility for the givers: for starters, Waldfogel’s surveys ignore the utility that the giver gets from gift-giving. It seems self-evident that people’s lives are enhanced by giving gifts to people. Many buy gifts for young babies who will not have any idea of the value of or thought that has gone into the gift. In fact, people buy gifts for some pets too. It should be pretty obvious that in many cases the primary utility gain here is to the giver, not the receiver.
  • People value surprises: many people get utility from knowing that someone has given them a surprise gift. As my colleague Kristian Niemietz has outlined, a cash gift obviously has no surprise factor. Some people will value surprises more than others: grandparents quite often give teenagers cash, because they know that teenagers fairly often prefer to get what they want and the grandparents might be out of touch with their preferences. But others put higher weight on having something unexpected to open. 
  • Gifts as signals: giving presents is often an expression of goodwill or thoughtfulness which in itself enhances utility. These may in essence be what Chris Dillow has described as ‘love tokens’. He cites good evidence that gifts from young to old can be extremely valuable. But they can also play a useful role in allowing us to analyse the strength of the relationships with the giver in other ways: if someone misjudges us or gets us something which we might consider offensive (a diet book, perhaps) then that information can help us assess whether that relationship is one we really want. For some religious people, the gifts can simply be symbolic and help to bring enhanced meaning to the festival.
  • The communal act of gift-giving: people may value the actual physical experience of sitting round and giving each other gifts as a shared experienced.
  • Gifts are a part of the overall Christmas experience: it is very neo-classical to think that gift-giving could be stripped out of Christmas without devaluing the whole experience. If Christmas constitutes eating turkey plus a religious component for a family plus gift giving, and the first two add value and the third does not, it may simply be impossible to think of Christmas as the sum of three products that can be consumed separately because any attempt to do so devalues the rest (turns it into a turkey fest or just another Sunday going to Mass).
  • Sometimes the giver can have better information: whilst not invalidating Waldfogel’s work, the microeconomic argument that cash-giving is always superior is undermined by the fact that sometimes the giver may have information about other products/experiences/activities that the receiver might not have otherwise have known about, but may well value highly after receipt. To this extent, gift giving can be an entrepreneurial activity, helping to tap into people’s latent preferences.

In other words, there are many plausible explanations for why the inefficiency of Christmas argument need not hold and a simple system of cash transfers may not be utility enhancing.

What is true is that these counterpoints (the value of surprises, utility for the givers, the communal act etc) are more likely to be true for your nearest and dearest. Perhaps there’s a happy compromise: cash transfers for extended family or when informational problems are worst, gift-giving for close friends and family (especially generationally upward gift-giving).  In fact, that is not far off how my own family operates. All of which leads me to believe that the Scrooges are wrong: long live gift-giving at Christmas!

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As in all IEA publications, the views expressed in this blog are those of the authors and not those of the Institute (which has no corporate view), its managing trustees, Academic Advisory Council or senior staff.

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