Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Thursday, December 23, 2004

Grinching and Altruism

Sometimes the thought isn't enough, especially when you figure out how much utility is lost with futile gift exchanges. Here's what Justin Stone posted to Lloyd Cohen's Economics and Law e-mail list on December 22nd (quoted in full with permission):

It's that time of year again, when we wade through crowds to buy people we don't really know things they don't really want . . .
It is obvious that (in economic terms) gift-exchanging between peers is a negative-sum game. If I am part of a group of 5 that has agreed to spend exactly $50 on each other, the result is a net decrease in total welfare. I pay $200 for gifts, and take in $200 worth of gifts, and yet each gift is (almost by definition) something I wouldn't have paid $50 for myself (if it was worth more than $50 to me, I would have bought it for myself already). And this is before considering the very real costs (in terms of time and aggravation) of choosing, finding, and acquiring the gifts. When this is added to the net welfare effect of the gift-exchange process, we see a very real drain on resources.
Of course, it is simply argued that the goodwill generated by gift-giving outweighs these costs; that the benefits of sharing gifts with loved ones make up for this huge outlay of wasted resources. To this I say: Humbug! I am legitimately happy to buy 2 or 3 gifts a year, and these typically are not peer-exchange gifts but gifts to individuals who cannot afford them for themselves (i.e., kids). The rest of my shopping I do with the sort of grim resolve usually associated with soldiers on the march. I do this shopping not out of goodwill, but out of fear of the negative social impact that would erupt if I didn't produce some offering for (for example) my fiancee's brother-in-law. Fear of retribution is not an offsetting benefit -- it is an additional cost!
It is clear that the lawmaking bodies of this great nation need to step in and outlaw peer-exchange gifting holidays. These occasions and the social pressures they create generate negative externalities that create net negative welfare effects. Only through government action, complete with criminal sanctions for transgressors, can these problems be overcome.
And then, maybe, I could get my Christmas shopping
I was quite amused by this rant; I had discussed "re-gifting" with some of my fellow actors the other night, and we all agreed that the practice helps reduce the inefficiency identified by Justin (although the discussion was not exactly in those terms).
And not everyone agrees with Justin (although I think there's a fair-sized chunk of his tongue firmly planted in his cheek with some of this). Nicholas Georgakopoulos quickly replied to Justin's post (again, quoted in full with permission):

Having just returned from a hour wasted selecting gifts at a bookstore, I more than share the frustration at the inefficiency of gift-giving. Yet, we are forced by social norms to do it. Inefficient as the norm may be in terms of immediate utility, however, it may be efficient as a signal.
When someone gets me a gift that I really enjoy receiving, it shows that this person has (a) understood my utility function; and (b) managed to produce an item that increases it. I think these are two very important pieces of information for peer relationships. It may be one of the few true signals about who is really your friend.
As much as I agree with Justin's sentiments, I also like what Nicholas wrote. I can remain civil and pleasant to someone who gives me a fruitcake (especially if I'm able to "regift" it), but if I receive something that adds to my utility, I'm pleased, especially if it is something for which (unlike Justin) I wouldn't have wanted to spend the money but which I am delighted to receive (e.g. an expensive bottle of bourbon).
Furthermore, even though I know and teach the indifference curve analysis about how giving cash is better than giving subsidies in-kind, I still want some people to know how much I care for them, and I can signal that by, as Nicholas indicates, showing that I care enough to select something that will add a lot to their utility. [ironically, this is from someone who was, until yesterday, considering
skipping Christmas]. And don't forget, shared experiences are the best gifts.

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