Do gifts destroy value? Are they a drag on the economy, as many economists suggest?
In “The economist’s guide to gift-giving” at FT, Tim Hartford collects the research of these economists who say that “Gifts typically destroy value. The total deadweight loss of Christmas in the US alone was $12bn.”
They say that givers pay more than the most the recipient is willing to pay for the gifted item.1 This difference in their willingness to pay is interpreted as a waste.
The same economists and authors point out all of the bad gifts. Many times, gifts aren’t even used or enjoyed by the recipient, only to end up in the attic for a few years and then sold at a yard sale or donated to the local thrift store. From the FT article:
If you give someone a jumper that doesn’t fit, a book they’ve already read or a box of chocolates when they’re on a diet, this is a waste of valuable resources. Fossil fuels have been burnt, tedious hours have been worked, trees have been felled, all to produce products that were unwanted. The same resources could have been devoted, instead, to goods that people actually do value.
Gift-giving and demonstrated preferences
The error in this line of thinking is a faulty measure of the value of gift-giving. Both the giver and the recipient are parties in the exchange, which means you cannot ignore the giver’s preferences. Also, the recipient’s willingness to pay for the item is irrelevant, because the choice is to accept or reject the gift and neither option involves the recipient’s willingness to pay a market price for the item.
Rothbard’s “Toward a Reconstruction of Utility and Welfare Economics” is indispensable in correctly analyzing cases like these. Here is Rothbard’s introduction of the demonstrated preference concept:
The concept of demonstrated preference is simply this: that actual choice reveals, or demonstrates, a man’s preferences; that is, that his preferences are deducible from what he has chosen in action. Thus, if a man chooses to spend an hour at a concert rather than a movie, we deduce that the former was preferred, or ranked higher on his value scale. Similarly, if a man spends five dollars on a shirt we deduce that he preferred purchasing the shirt to any other uses he could have found for the money. This concept of preference, rooted in real choices, forms the keystone of the logical structure of economic analysis, and particularly of utility and welfare analysis.
The giver demonstrates a preference for the recipient to own the item over any alternative use of the item. Also, in receiving the gift, the recipient demonstrates a preference for accepting the gift over rejecting the gift. Thus, each gift (as long as it is accepted by the recipient, even if reluctantly or ungratefully) represents a mutually beneficial arrangement like any other voluntary transaction.
What makes gifts different than other market exchanges is that one party doesn’t offer anything tangible as payment — perhaps just a smile and a “Thank you,” which is all the giver wants anyway. Givers exchange material goods for immaterial feelings of having done something nice for somebody. Recipients exchange immaterial actions (accepting and acknowledging the gift) for the material gift.
Holiday gift-giving, then, represents a gigantic set of mutually beneficial exchanges, which can hardly be characterized as a “drag on the economy” or billions of dollars of deadweight loss.
The long-run effects of the holidays
We can say, however, that holiday gift-giving does not encourage economic growth. Only saving and capital accumulation provide for future economic growth.
Since gifts are usually consumption goods, they don’t represent an increase in our ability to produce. The year-end holiday season is one of feasting and consuming, in which we enjoy the abundant fruits of our previous production.
To clarify: this doesn’t mean that holiday gift-giving and feasting with friends and family are bad. Remember that the whole point of production is consumption. All it means is that we are voluntarily using up present resources for our direct satisfaction as opposed to our indirect satisfaction. That is, we choose to have a feast today instead of a feast tomorrow.
The anti-gift economists are wrong. Gifts represent a mutually beneficial arrangement for the giver and the recipient. The only real economic drawback to the holiday season is a bit of forgone economic growth because of the choice to enjoy oneself with family and friends. But it’s a tradeoff people make voluntarily, and consumption is the whole point of production, anyway.
Instead of looking for quasi-intellectual ways to ruin everybody’s fun, the anti-gift economists should just let people enjoy their holidays.