How the Economists Stole Christmas: Or How Not to Think About Gifts

by Ben Schreckinger

At the end of the week, in the predawn hours that most of us will spend sleeping off turkey and pumpkin pie, millions of Americans will gather in the dark to kick off Black Friday, the annual day-long frenzy of bargain-hunting that marks the beginning of the holiday season. Many economists wish they wouldn't.

Not because Black Friday, in which shoppers literally climb over each other to get at plastic toys and electronic gadgets, is an affront to human dignity. Not because it perpetuates crass materialism. But because, according to an influential strain of economic thinking, the act of gift-giving creates a dead-weight loss. The_Grinch_(That_Stole_Christmas)

The seminal paper in this vein is Joel Waldfogel's “The Deadweight Loss of Christmas,” which goes so far as to estimate — based on interviews of Yale undergrads — that Christmas gifts represent a waste of many billions of dollars annually. Waldfogel's indictment of Christmas presents reads like a wonkier cousin of Jonathan Swift's modest proposal that the Irish eat their own babies — but it's totally sincere.

It was published just in time for Christmas in 1993. The Soviet Union had dissolved on Boxing Day only two years earlier. The market had kicked central planning's butt, which was great news for Americans, and especially great news for American economists. But it turned out to be bad news for Santa, because according to the logic of the market, Christmas is an obstacle to maximum efficiency.

That logic is straightforward: A person has a very good idea of her own needs, and given $100 to spend on herself, she'll spend that money on the things she wants most. But someone else spending $100 on a gift for that person probably has inferior knowledge of that person's preferences, and will buy them something they value less. The better option, then, is to give the recipient $100 and let her spend it for herself.

In 2001, The Economist reexamined the case against gifts and came up with a somewhat more nuanced conclusion. Their analysis elaborates on special cases where a giver might be able to make more efficient use of the money — by giving the recipient what he really wants but won't buy for himself, for example — a possibility that Waldfogel acknowledges. It also stumbles upon the insight that gift-giving itself can give an item sentimental value. In the way that it can sometimes read like The Alien's Guide to Being Human, the magazine advises readers to “Try hard to guess the preferences of each person on your list and then choose a gift that will have a high sentimental value.”

On this line of thinking, indifference curves still offer a useful tool for understanding gift-giving: If we add sentimental value to our model and run the figures again, we might be able to save Christmas after all. But in reality, dead-weight loss and Christmas just don't belong in the same sentence. To understand why, it's helpful to look to the work of UCLA anthropologist Alan Fiske, who's observed that human relationships follow four basic models that correspond to four sets of values: communal sharing, authority ranking, equality matching, and market pricing.

In brief, people in a communal sharing relationship treat each other as undifferentiated members of a common entity, for example in the free sharing of food between members of a hunter-gatherer band. Authority Ranking relationships are defined by a strict hierarchy, like that governing an officer's relationship to a private in the military. In equality matching relationships, power and rights are accorded equally to each individual, as in the relationship between voters in a democratic election. And market pricing relationships depend on ratios, like offering one computer for $200 or two goats for seven barrels of wine.

Any act of gift-giving takes place in the context of a human relationship, so it will fall into one of these categories. Someone deeply in love might give lavish gifts to her partner. In this context, the lavish gift reinforces the communal sharing nature of their relationship by sending the message, “What's mine is yours.” Two neighbors will exchange roughly equivalent gifts, reinforcing the nature of their relationship as two independent equals.

The ceremony of gift-giving provides important signals about how we conceive of our relationships to others. Imagine if you give your neighbor a book and he gives you a car. You might worry that he's fallen deeply in love with you and feels he is in a communal sharing relationship with you. The equality matching that had existed between you is gone, and you're left to contend with his attempt to usher in a new model for your relationship. Awkward.

Similarly, attempts to conceive of the gift-giving ceremony within a market-pricing frame have implications for the nature of a relationship. That's why it's a faux pas to leave a price tag attached to a gift. Gifts between two friends are meant to be equal, but that ideal is destroyed by a price tag. Instead of reinforcing the message of We are two independent equals who value each other, attaching a price sends messages like I'm 1.3 times as willing to spend money on you as you are to spend money on me, or I'm 0.8 times as able to spend money on you. That's unfortunate, because the purpose of such gifts is to reinforce a relationship that's meant to be defined by reciprocal equivalence.

But there's an even more fundamental problem than the possibility that specific prices might send the wrong message. The mere presence of market thinking in gift-giving sends a signal about the nature of the relationship between giver and recipient. Communal sharing relationships tend to exist between people who feel intense bonds of intimacy and affection for one another. Equality matching relationships often exist between people who view each other with respect and have some basis for seeing each other as equals. Market pricing relationships, on the other hand, tend to require only that people are willing to put up with each other long enough to negotiate some well-defined, mutually beneficial interaction. If I give you cash, it signals that market pricing defines our relationship and that I view you the same way I view my barber, my clients, and the guy who sells me insurance. If I'm your plumber, that's not a problem. If I'm your close friend or your brother, you've redefined the model of our relationship and in such a way as to put me at a greater distance from you. If you're my friend, and we decide to avoid deadweight loss by giving each other equal amounts of cash, then we've effectively ended the ceremony of gift-giving, because apparently that aspect of the human experience is under-performing.

Microeconomics provides an excellent toolset for understanding market pricing relationships. But when a human custom defies ordering by ratios, quantitative analysis not only misses the point — it has the potential to taint the very phenomenon it seeks to understand by fostering market pricing thinking where it doesn't belong. In the past 20 years, this type of thinking has driven market pricing into corners of American life, and life around the world, where previously it had not trod.

Economists were pushing market thinking to new frontiers long before Waldfogel brought Christmas into it. But rather than receding after a post-Soviet peak, exuberance for the market mechanism has steadily spread to ever more corners of social life around the world. The most lucid critic of the expansion of markets in American society is political philosopher Michael Sandel, author of The Moral Limits of Markets, who has made a convincing case for the corrosive consequences of the marketization of institution like prisons, military service, and electoral politics. But the trend does not appear to be abating.

Waldfogel himself has doubled down on the anti-gift crusade with a 2009 book called Scroogenomics. According to the publisher's description, the book softens its indictment of the “orgy of wealth destruction” created by gifts by coupling it with a call for reclaiming “the true spirit of the holiday season” — which is apparently one of maximum efficiency. In a time when society marks the start of the holiday season with a day whose name has been rebranded so that “black” refers to profitability on retailers' balance sheets, the temptation to look for dead-weight loss in gift-giving is understandable. But it's misguided.

So, my advice this holiday season is to buy friends and loved ones gifts they would never buy for themselves and that they have very little use for. And if you're in an equality matching or communal sharing relationship with me, be more worried about old-fashioned weight loss than the deadweight kind. Because this year I'm giving everyone on my list fruit cakes, and each one will be priceless.