Tuesday, May 6, 2014

The Gift of the Economist

This post is inspired by Michael Sandel’s What Money Can’t Buy: The Moral Limits of Markets.  Let me begin by saying that Sandel teaches "Justice", Harvard University's most popular course ever, and if you watch one of his lectures (which is easy to do), you will immediately know why.

In What Money Can't Buy, Sandel provokes some important questions about how we have moved from a market economy to a market society, where anything and everything is for sale.   Today we look at "The Case Against Gifts" and "Monetizing Gifts" (pp 98-107).

The economist's case against gifts is simple: it is not a rational social practice.  Sandel (who I should point out is not promoting this idea) outlines it in this way:

From the standpoint of market reasoning, it is almost always better to give cash rather than a gift.  If you assume that people generally know their own preferences best, and that the point of giving a gift is to make your friend or loved one happy, then it's hard to beat a monetary payment. [...] Your friend or lover can either spend the cash on the item you would have bought, or (more likely) on something that brings even greater pleasure.

A great champion of this view is Joel Waldfogel, an economist at the University of Pennsylvania.  I started my review of Waldfogel's work with his 1993 article The Deadweight Loss of Christmas.  The essential message is that gifts are a poor way to maximize utility for the recipient (econo-speak for "make them happiest").  Assuming that the greatest result is achieved by purchasing exactly what the recipient would buy for themselves, anything less represents money spent that does not return full value.  He estimates that this typically ranges between a 10% to 35% drop in value.  In 2009, he presented his case in a more popularly accessible book: Scroogenomics: Why You Shouldn't Buy Presents for the Holidays.

Reading over the book's Table of Contents, I thought I might personally find his arguments very appealing.  In the interests of full disclosure, I hate Christmas gift-giving.  But if you expect Waldfogel to condemn the rampant consumerism of this multi-billion dollar holiday, you might be disappointed.  His take is still that of an economist, trying to maximize utility.  More on that in a moment.

Back to the original book, Sandel points out that a contributing factor to cash not being a popular gift is the stigma attached to simply giving money. It has a lazy, uncaring connotation.  Alas, the recent and fast-growing trend of gift card giving seems to be blurring that distinction.  The recipient knows exactly how much money was spent on the gift, but now it seems slightly more personalized - that single step from cash makes it more socially acceptable.  And if the recipient really doesn't like the retailer featured, there are websites that allow you to cash them in - at a discount that presumably reflects Waldfogel's value drop (as well as the profit margin of the middle-man).

And yet, imagine the perfect economist's world of the utility maximization through giving cash.  Christmas rolls around and I give my good friend a $100 bill, and my friend gives me a $100 bill.  So what?  And what is the message when the amounts are different?  The kiss of death for this practice, for me, is the attachment of a number to the exchange.  When the value of gift-giving is expressed and measured as a number, you introduce all of the awkward baggage that comes along with number-based values - baggage that is derived from the unique properties of numbers themselves.

Numbers are linear, consistent, and universal.   Ten is always greater than five, and always by the same amount.  If the value of a ten-dollar gift is measured by number alone, then a ten-dollar gift will always be worth twice as much as a five-dollar gift.  When the gift is cash, there can be no other value than a numeric one.  So far, Waldfogel would not only be in complete agreement - he wouldn't see the problem.

I believe the fallacy of this entire line of inquiry is in the primary objective of utility maximization.  I propose that, at its most important level, that is NOT what gift-giving is about.  The giving of a gift is a communication between two people. The message conveyed is derived from many factors, only one of which may or may not be the monetary cost of the gift.  No matter how much your girlfriend wants to lose weight but can't afford the fees of her favourite weight loss program, I don't recommend picking up the tab for her with a gift card to a weight loss clinic.  When was the last time you received a hand-made birthday card and bemoaned the fact that the giver may not have spent a dime of money on it?

I contend that when I give a gift, I am not trying to maximize utility by giving the recipient something that I know they would have spent the money on anyway, given the cash.  Think about the most 'successful' gifts you have ever received.  How many are measured by their monetary value?  Are they things you would have bought for yourself anyway?  Or are they instead powerful expressions of love and thoughtfulness based on what went into their creation or selection?  Many great gifts are 'luxuries' that the recipient might never have spent their own money on, or they might lead to discoveries of new interests and pleasures.

One of Waldfogel's areas of research was the correlation between the closeness of the relationship between giver and receiver, and the resulting value drop.  Not surprisingly, the more remote the relationship, the less likely that the value of the gift to the recipient will match the money spent.  If Aunt Gloria doesn't know you very well, her selection of the dollar-store crockery and butterfly cardigan might not be a hit on Christmas morning.  In such cases, it might be more appropriate to give the gift card or cash.  I would agree with this, because it is also a more accurate reflection of the real message behind gift: "I feel I should give you something, but I don't know you well, so I'm not going to pretend that I do."  Personally, my preference in such cases is to either give a tasteful consumable, such as the ubiquitous bottle of wine, or to not give anything at all - which to me seems more honest.

Fans of "The Big Bang" TV series may recall the episode where super-geek Sheldon Cooper goes out and purchases several gift baskets at varying prices so that when he receives a Christmas gift he can reciprocate with a matching monetary value.  When Penny from next door gives him a signed paper napkin used by Star Trek icon Leonard Nimoy, Sheldon is overwhelmed and gives her every basket in his possession - and it still isn't enough.

The old adage is that it's the thought that counts.  I hope this gives you something to think about.


  1. I loved your blog re gift giving - I think I will share it with my grandchildren, who very much regard the monetary value of every gift as proof of affection! I guess that is why I try to keep all at the same level, knowing full well they probably compare notes. My most memorable gifts? among them - a wooden toy row-boat that my father made for me when I was probably three or four; a pair of cast iron crows given by a close friend - we had looked at them together and I know she wanted them, but she know I did, even more!! One had little of no monetary value, the other was quite expensive ( too expensive for my budget) - but there you go - it had nothing to do with numbers.............

    1. Thank you so much for your comment!

      You remember your most memorable gifts. Now what do you think is the greatest possible gift that you could give your grandchildren? Surely it would be a similarly memorable gift, no? Not just to give them the same evocative memories, but also to possibly open their eyes to the true value of giving and receiving! Don't bow to their worship of numbers and prices - get them off it! Please - be the change you want to see in your grandchildren....


[Dear Reader:  I would *love* to receive your comments, but NOTE: Blogger will only accept comments here if your browser's Third Party Cookie blocking is turned OFF (even if just temporarily).  Sorry!  Not my software...]