The Free Market 15, no. 12 (December 1997)
After hundreds of years of attacks on Christmas, economists have finally gotten into the act. Yale University’s Joel Waldfogel, writing in the American Economic Review, condemns what he calls “The Deadweight Loss of Christmas.” Once you cut through the calculus and graphs, his conclusion is clear: though Christmas generates a $50 billion gift-giving industry, a tenth to a third of that is sheer loss. Why? Because the recipient doesn’t always get what he wants. Given the chance, the recipient would have purchased something else.
All of this follows directly from his underlying theory. In neoclassical economics, the consumer is best off when he chooses, within his means, the highest-rank good or service on his “utility” scale. If he can afford a steak, and he has to settle for a hot dog because the restaurant is out of t-bone, he experiences dead-weight loss. It’s even worse if he has to pay the price of steak and gets a wiener instead.
So it is with gifts. They generate a net loss, this theory says, unless the recipient would have otherwise purchased, with his own cash, precisely what he unwraps. Of course, this is rarely the case. To provide empirical meat to his theory, Professor Waldfogel interviewed students. The students received an average of $438 in gifts, for which these kids reported they would have paid only $313 if they had done the shopping themselves. The gap narrows when the gift is from a friend, and widens when it’s from the family.
Imagine Mr. Waldfogel attending your next Christmas gathering. Aunt Janie gives her nephews soap-on-a-rope, and they all praise her for her generosity and thoughtfulness. The economist then prods the youngsters to ‘fess up that soap-on-a-rope isn’t so great after all, and with the $9.95, they would have bought the newest Spice Girls tape. He declares the gathering a waste and encourages the party to break up in the interest of everyone’s economic welfare.
Professor Waldfogel proposes that we could eliminate these losses, which could be as high as $13 billion per year, by giving money instead of gifts, and letting the recipient spend it as he chooses. But then why not take matters one step further? What is the point of all this shuffling around of cash in the first place? According to neoclassical theory, it would be far better if everyone just clung to his own bank account and spent his own money as he saw fit. Indeed, we’d all be better off economically if Christmas were merely abolished—heck, maybe the Congress should do it—until such time as we all have perfect knowledge of each other’s preferences and are willing to act on them.
Far from being one man’s opinion, this thesis is becoming a classic “extra credit” question on microeconomics tests. Waldfogel is only distinguished for having formalized the model and tested it against his own students’ experience. The conclusion allows economists to presume they are smarter than the mass of the buying public, which persists in the irrational habit of buying things for each other instead of sending money or, even better, just spending it on themselves.
So, what’s wrong with the theory? Plenty. It equates personal utility with dollars spent, the classic conflation of value and price. In fact, a gift is a special kind of good with its own value. For example, we value the soap from the Aunt precisely because of its tie-in with familial affection. Even if the recipient would never have bought it, his personal utility is enhanced by the knowledge that his extended family is thinking about him and cares enough to give.
The source matters. If soap were given by a classmate who complains that you are odoriferously challenged, the “gift” is an insult in disguise. It has negative value. “Rich gifts wax poor when the givers prove unkind,” writes Shakespeare, who seemed to have a more complete view of economics than Professor Waldfogel. Neither is the person who receives a gift purchased under duress likely to be grateful. People on long-term welfare, for example, tend to think of taxpayers as suckers.
A comment later published in the same journal picked up on this. The authors (one from Harvard, one from the University of Miami) also did an empirical test. They used a different method (asking students about prices of specific gifts, not whole bundles), a larger sample of students (209 instead of 78), and asked more detailed questions. The results were the opposite of Waldfogel’s. The authors showed that more than half valued the gift above its retail price, suggesting that Christmas giving actually represents a gain in social welfare.
Moreover, these authors found that gifts asked for were less valued than gifts that were not. This fits with experience: we’re pleased to get what we want, but especially appreciative when we like something we had not expected. Indeed, good gift shoppers think about this ahead of time. They buy someone a tie he would never buy for himself. They buy items the receiver might be too modest or frugal to purchase himself, even if he had the resources.
Some items are just gifts and nothing more: fancy soaps, paisley boxer shorts, blankets with school logos, coffee cups printed with witty slogans, and the like. That’s why there can be such things as “gift shops” as distinguished from regular stores. Gifts have a different value because they are altogether different goods. They embody not only themselves but also their meaning. Imagine if someone came to dinner, and instead of bringing a bottle of wine, gave you $15 and told you to spend it on anything you wanted. It’s just not the same.
For his part, Waldfogel responds by accusing the authors of biasing their results. The very nature of their survey questions encouraged students to report “sentimental value” instead of pure “material value.” Going back to the drawing board, and correcting for this and other supposed errors, Waldfogel surveyed another group of students—455 this time—and still found a dead-weight loss, less than before, but a substantial one nonetheless. Christmas is inefficient: that’s his story and he’s sticking to it.
Of course there is no way to decouple one kind of value from another kind of value, since all economic value is ultimately subjective. Surveys can’t reveal what people value; only action in the marketplace does that. What’s deeply odd about this wrangling is that everyone seems to agree that only the value to the recipient should matter. That leaves out the really crucial point of gift giving: that it benefits the giver as well as the receiver.
People feel good in being generous, especially towards family and friends. Giving is an act of charity and liberality, virtues people practice because they’re good for the soul. And even if they aren’t, economists should follow the rule of “demonstrated preference”: if a person gives a gift, it is because he preferred giving the gift to keeping his own money. The action is “utility enhancing” on its own terms. Why? Because it, as opposed to something else, took place. Value is revealed in the preferences people demonstrate voluntarily. A well-chosen gift also reveals something about ourselves: we care enough to make our affections known in a personal way.
Again, the problem of the welfare state presents itself. In its form of “charity,” people do not give voluntarily. So resistant are people to dumping billions of dollars on millions of freeloaders, that the government has to threaten them with fines and jail terms (that’s what taxation is) to get them to fork over this “gift.” No one demonstrates a preference for the welfare state (voting doesn’t count since people are not using their own resources to purchase the services for which they vote). This degree of redistribution has to be imposed. Taxation, in contrast to Christmas, is a clear example of a utility-reducing activity.
But economists of the neoclassical school have rarely bothered with such distinctions. Their theories leave little room for reflection on property rights, individual choice, and the distinction between market exchange and forced redistribution. For them, a mathematically determined standard of efficiency is the only test that matters. Not even an absurd conclusion—for instance, that giving gifts is inefficient—causes them to rethink their core theory.
Economists are hardly alone in this. Skeptics and opponents of the market economy have long had a beef with the idea of giving and charity, especially as it occurs at Christmas.
Perhaps the socialists have long understood something about Christmas that others, even advocates of the market, have overlooked. In the institution of the gift, we find a strong rationale for the establishment and protection of private property and the capitalist economy. In order to give, we must first produce, acquire, own.
G.K. Chesterton, a great defender of Christmas against English Puritans who regarded it as corrupt and pagan, observed that collective ownership would mean the end of voluntary giving. Moreover, he clarified, “giving is not the same as sharing: giving is the opposite of sharing. Sharing is based on the idea that there is no property, or at least no personal property. But giving a thing to another man is as much based on personal property as keeping it to yourself.”
And contrary to the complaints of materialism at Christmas, meaningful gifts can be as elaborate as gold, frankincense, and myrrh, or as humble as two fish and five loaves.
It’s no wonder, then, that history’s dreariest socialists have denounced Christmas. The economic core of its gift giving centers on private property, while its ethical core belies the claim that private property institutionalizes greed.
“There is the greatest pleasure in doing a kindness or service to friends or guests or companions,” wrote Aristotle in The Politics, “which can only be rendered when a man has private property. These advantages are lost by excessive unification of the state.... No one, when men have all things in common, will any longer set an example of liberality or do any liberal action; for liberality consists in the use which is made of property.”
As for intellectuals—economists no less—who have failed to understand this simple truth, it’s staggering to think of the dead-weight loss their ideas have imposed on society.
Jeffrey Tucker is editor of The Free Market
FURTHER READING: “The Deadweight Loss of Christmas,” by Joel Waldfogel (American Economic Review, December 1993), pp. 1328-1336; “The Dead-Weight Loss of Christmas: Comment” by Sara J. Solnick and David Hemenway (American Economic Review, December 1996), pp. 1299-1305; Religion, Wealth, and Poverty by James Vincent Schall (Vancouver: Fraser Institute, 1990); “Ethics, Efficiency, Coasian Property Rights, and Psychic Income,” by Walter Block in The Review of Austrian Economics, vol. 8, no. 2, pp. 61-126.
