Gifts. You’re going to hear, see and hopefully receive lots of them in this coming month. Consumerism has turned Christmas into a frenzy of feasting and gift giving. Not that I am complaining about it. Economists have long struggled with this behaviour. Joel Waldfogel is probably best known for writing ‘The Deadweight Loss of Christmas”. The essence of the problem is that gift giving doesn’t get the recipient what he wants.
What happens here is that the amount spent derives zero benefit and is thus considered a loss to society because the same resources (funds, time, etc) could have been better utilized and allocated to nearly any slightly positive activity. But it is right here that this economic approach has failed to grasp the full extent of reality.
The Concept of Utility
I am often bemused that the foundation of both microeconomics and macroeconomics lies in a core concept that is not introduced to students at the ‘A’ level standard. You only hear about this (at least during my time) at an undergraduate level. Utility is not a complex concept. In fact, it is overly simple. Utility is just benefits, things that make you satisfied or even better, happy. There is no quantitative value of utility, only relative comparisons. I don’t know exactly how much satisfaction an apple gives me but am sure that a chicken drumstick would do much better. Chicken > Apple > Nothing. I get a higher utility from the first and it goes downhill from there. This is what utility is.
Every agent has a singular goal. An incentive that is assumed and is considered generally uniform.
In order to analyze an economy, we bring in different actors or agents and then we assign each group an incentive – basically, a reason for existence. Most models have 2 basic components: A consumer and a firm. The consumer works at the firm, earns a wage and then spends it on a good (E.g. Food). The firm is owned by the consumer and also employs the consumer. It produces the good that the consumer then consumes. The loop is now closed. Of course, you can expand the system to include different types of consumers and different types of firms. Expand it more and you can put in different economies and the like. But the point is simple. Every agent has a singular goal. An incentive that is assumed and is considered generally uniform. In economics, the consumer maximizes utility and utility is usually identified as satisfaction from consuming a good. Something tangible that you desire.
The Problem of Unwanted Gifts
Now since the gift is not what the recipient wants, it is considered to be of zero utility. Thus, the argument concludes that the billions spent during this festive season generally comes to nought more often than we like. After all, most gifts are meant to be surprises and it is often nearly impossible to hit the bulls-eye of the recipient’s desires with a gift.
Assumptions Gone Wrong
There’s one big problem with this argument. It focuses only on the material value of the gift. A gift of a shirt is only the benefit (utility) derived from wearing it (or displaying it in your wardrobe). What this argument fails to comprehend is that there is utility from receiving a gift even though it is not something you want. The satisfaction gained from knowing that someone took time and effort to get you something is an intangible benefit that economists often do not consider. After all, all agents we create and model have no emotions. All they care about is satisfying their one and only need. And this need is almost always an item.
The assumptions and generalizations that many economic models tend to adopt have relegated the discipline to a position of lower applicability than an economist would like. The key take away of economics is the balance of benefit and cost focusing on the decisions at hand. However, the drive to model human behavior by making sweeping assumptions has made theorizing simpler at the cost of reality.
There would have been no need to write a paper on the deadweight loss of Christmas if we had initially placed value on emotions and other intangible benefits.
It is the desire to take a strong mathematical approach to modelling economic behavior that has made such sweeping assumptions needed. If not for such simplicity, computation will become too complex and mathematical models too unwieldy to manipulate. There would have been no need to write a paper on the deadweight loss of Christmas if we had initially placed value on emotions and other intangible benefits. Because in gift giving, the consumer does maximize his utility. His utility simply spanned more than getting what he wants. He is also interested in being cherished and loved by others. The gifts presented to him are not the end products in their own right. They are also symbols of things unmeasurable by our favoured mathematical models.
Christmas is Not The Problem
Economics is deemed a social science. However, much emphasis has been placed on the science part of the equation that we often ignore its social roots. This is how the Christmas spirit and festive joy has been reduced to that of zero benefit and utility.
Gift giving is not a deadweight loss. In fact, the measurable billions spent actually depict the great utility derived that our current mathematical methods have chosen to conveniently ignore. So go ahead and spend on your loved ones and friends. You are also doing the economy a great favor, unlike what some economists would have you believe.