Tuesday, December 16, 2008

Santa Claus Meets The Dismal Science

You knew this post was coming, right?

You know, the one where Will drags boring crap like history and economics all over the clean, pristine rug that is the Christmas season.

Well, folks, I'm at the door and I am going to do a real number on that carpet, so hold on...

First, let us bypass the soundbyte-take on the economy and Christmas. In this view, for this year, they both suck and will do so for the forseeable future.

I want to delve deeper, to get at some of the basic motivations for why we behave the way we do between Thanksgiving and New Year's.

In this cause, I intend to focus on a few central questions: why do we give gifts? Why don't we just give everyone cash? What is the broader social function of gift-giving, especially around a holiday?

Why Do We Give Gifts?

In many rituals and customs for people around the globe and through time, the giving of gifts has been and remains central to the meaning and execution of those rituals. What makes a gift exchange a special sort of relationship? I believe it is two things: reciprocation and a different rendering of value.

First, I say "reciprocation," but I should really add the two words, "or not." One thing that is central to a market or barter economy is the fact that there is a quid pro quo, or if you give something, you expect to get something of value in return. In gift exchange, this is not really the case. There are some sorts of gift-giving where reciprocation may be implied, but not required. If reciprocation is required, and enforced by some sanction, then it is not truly a gift exchange.

Second, a different rendering of value. Some economists think that part of the value of a gift given to another is that you spent a lot of time making it or picking it out (to use the terminology, what are your sunk costs for this particular gift?) There is another side to this, courtesy of the always-brilliant David Friedman...more on him below.

All of these notions fall under the idea of a mixing of a gift economy with the market economy that usually governs our economic relationships.

Have I answered my original question? Well, as ever, yes and no. It seems that we give gifts to each other and these gifts are not necessarily reciprocal and they are not valued in the same way as other things. This is, to me, confusing.

Let's ask a more specific question that I think will clear up things a bit...

Why Don't We Just Give Cash?

This is the classic question concerning gifts for many economists. The answer that usually comes back, furthermore, interests a more general audience because of the seeming coldness and insensitivity of it.

Many economists believe that, to a greater or lesser extent, the only really acceptable gift in any situation is cash. What we should all do is just take the amount of money that we would have spend shopping, paying for and wrapping gifts and just hand it out to the intended recipient.

Let me guess. For many of you, this idea seems repellent, but you are not completely sure why.

On one level, it is a completely sensible idea. Money never spoils, is always the right color, shape and size, it is accepted for goods and services anywhere and it is exchangeable so that it can travel globally. Why do you buy the man who has everything? Nothing. Just hand over the cash.

For one such classic view, see this 1993 article by economist Joel Waldfogel. If you don't want to read it, Waldfogel's main point is that the deadweight loss for most individuals' holiday purchases is 18% higher than what it should be. In other words, people get an 18% better deal if they just spend money on themselves. A gift of cash would allow them to do this.

On another level, though, I am sure that this idea makes a lot of you squirm. Why? As I said before, it is hard to define, but there seems to be something, well, rather impersonal and cold about just cutting someone a check. We all do it in some situations, but why not in all situations?

This is when some thinking on the part of some sharp economic minds is in order.

Mankiw and Friedman on Gifts

In this excellent post from his always interesting blog, Greg Mankiw discusses gifts as a form of signalling. To boil it down, Mankiw argues that people know their own preferences better than those of others. If your boss decided to pay you in merchandise that he/she chose, you would probably complain. Why, then, is our reaction so different when someone we love does the same thing?

Mankiw goes on to say that it is also an asymmetric information problem and is related to signalling. If you are giving a gift to a loved one, you have information that they do not, namely, how much you love them. If you do love them, then you will spend the time to learn their preferences and pick out a good gift. This gift serves as a signal to the other person of your level of affections. Even if you pick out a bad gift, the reciepient still knows that you put effort and money into it, so the love must be there. If you give cash to loved ones, surmises Mankiw, you are signalling that you are not even willing to try.

David Friedman, on the other hand, argues in this post at his excellent blog that the best way to conceptualize it is having two individuals in one body. One is a short-term pleasure maximizer, the other a long-term utility maximizer. The short-term me is the me that always wants another beer, more gyros or an extra hour of sleep. The long-term me is the me that tries to hold off these short-term pleasures for a gain in the more distant future.

Friedman argues that buying gifts shows that both the long and short term me care about you. The short-term me cares because I am forgoing extra resources for me in order to buy a gift. Long-term me cares because I will have a few less dollars and a little less time when I retire. See, we BOTH love you!

Great, Will. So What?

I have never been someone to leave well enough alone. I cannot accept that we do things because we do them. What fun would life be then?

No, I have always been inclined to the sort of thinking we see above by Mankiw and Friedman. Take a behavior that we do and ask why we do it. Go on. Anything. This is the very basis of the social sciences which, to my estimation, are all behavioral sciences. Today, we have delved into why we pursue a certain sort of behavior at this time of year.

Does this mean that I will practice what I preach and just give cash? Well, if you think that, you sort of missed the point. Cash is an acceptable gift for some people and not for others. Why the distinction? Go back and read the previous section again.

Can't I just accept a gift, not ask why someone did it, cram some fruitcake in my gob and shut the hell up? No, sorry. I will take that gift, but wonder why we do this with each other. I will cram said fruitcake in said gob, but I will ask if this is a good deal for me and why. Oh, and I will ask why so many people hate fruitcake? Buy this fruitcake and thank me later.

So, I think that there is time in all situations to dig deeper, to demand more. That is why I am an academic and that is why I write this website. I hope you agree that these are worthy pursuits. I know I do.

Oh, and if you are intending to send a gift my way, let me deal with the asymmetric information problem for you.

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