The Deadweight Loss of Economic Theory and the True Meaning of Christmas

It’s Christmas time, and that can only mean one thing at the Economist: Time to run a story on the Deadweight Loss of Christmas*. What, you might ask, is the deadweight loss of Christmas? In general, a deadweight loss refers to “the difference between the satisfaction a person gets when she spends a dollar on herself and when a well-meaning benefactor spends that dollar on a present for her.” (From the Economist story.) Deadweight loss as a concept is often applied to taxes, but also can cover situations involving externalities or monopolies (see wikipedia, as usual).

Ok, so far so good, now on to Christmas. Each year, millions of people give millions of other people presents. And each year, a few well-meaning economists go on a rant about it. Because gifts are often things that recipients would not buy for themselves, gifts are seen as creating a deadweight loss – the dollars spent on the gift are smaller than the presumed benefit. “Inefficient!” they cry. “Pareto Sub-optimal!” they protest. Just give money! Christmas should be like a giant derivative swap – many gifts would cancel out, leaving some marginal redistribution from the old to the young, and richer relatives to poorer ones.

But what are economists missing? Well, for one, they are missing the utility of the giving of the gift to the giver. That is, the joy each of us gets (or doesn’t get) from shopping for our friends and family, and finding something that they like. For two, economists miss the potential to give gifts that a recipient could not buy – admittedly, a small number of cases for adult to adult gifts, but still significant. Any gift brought back from a vacation, or created by hand, seems like it ought to not produce a deadweight loss. So, at a minimum, the economists (and their media popularizers, e.g. The Economist) should be a bit more specific, based – giving store-bought, generic gifts to people you don’t know very well produces a deadweight loss over and above giving money (and assuming that the utility of the giving is low, which is plausible, since this is, by assumption, a generic gift bought at a store for someone you don’t know well). Third, the usual sociological concern: economists miss the way that gifts reinforce social ties. To translate for the economists, gift giving may produce a positive externality by creating and strengthening social networks, which in turn produce positive economic (and non-economic) outcomes (think “social capital”, James Coleman-style).

So, to reiterate: stop being Grinches, economists! Enjoy the season! Of course, being a secular Jew, I might have a slightly biased perspective on the whole situation, having received exactly 2 Hanukkah gifts and 1 Christmas gift, all of which were great. Apparently, this is not typical – most gifts do resemble the sort that economists criticize, and most people give and get an awful lot of them. Even so, benefits 1 and 3 might still apply. And anyway, that some gifts are worse than others would be a great finding, one that might help Christians find the true meaning of Christmas (which is, after all, the worship of society). Or, to summarize: give a meaningful gift to anyone you receive joy from so giving, give gifts that are creative and unique, and give gifts to friends and family you want to stay connected to, and your gifts will not produce any deadweight loss.

(Note: This whole analysis is premised on what I think are reasonable, but perhaps worthy of testing, assumptions: that the giving a gift of cash does not usually produce the same kinds or magnitude of benefits for the giver and that gifts of cash do not reinforce social bonds the same way as more thoughtful, but less economically theorized!, gifts.)

* To be fair, a second Economist story (hoisted from their own archives) is a bit more nuanced, and makes some of the same points I do (with an additional emphasis on the way that gifts have an added value by the virtue of being gifts). Their punchline? “The lesson, then, for gift-givers? Try hard to guess the preferences of each person on your list and then choose a gift that will have a high sentimental value. As economists have studied hard to tell you, it’s the thought that counts.”

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2 Comments

  1. What Christmas is all about is Big Corporations. It’s the time of year when we are expected to stop being scrooges and spend some of our money as a way to give back to the big businesses that make the American Way of Life possible.*

    *Of course, it is preferable if you don’t actually spend cash and instead buy on credit.

  2. I guess, gifts would be a dead-weight loss if the one who gifts happens to be a ‘rational’ utility maximizer. But, with changes in the notions of ‘rationality’, gift-giving would provide greater utility to the parties concerned. [Trust The Economist to act in this way!]

    A book by C A Gregory ‘Commodities and Gifts’ 1982 looks at Papua New Guniea as a gift economy.

    PS Came here via Hist of Economics Playground; this place looks interesting.