Priceless: the Inefficient, but Merry Economics of Christmas

December 20th, 2014
in econ_news

by Kevin Albertson, The Conversation

Fingers crossed, we are soon to be inundated with Christmas joy disguised as presents from our family and friends. I received my first card more than a week ago and a present – now sitting under the tree – from our eldest, wee Jimmy (now not so wee and living away from home in his own flat). I found this particularly gratifying as I had told Jim, that he didn’t have to buy a present. I had hoped he would want to send a present. The fact that the gift was not required, but offered freely, makes it the more valuable.

Follow up:

The value of affection

Casual observation indicates many of us appreciate gifts more than those items we require or buy for ourselves: consider the giving of birthday presents, flowers, and such like. This is despite the fact that, according to strict neo-classical economic theory, such giving is inefficient. Waldfogel makes this clear in Deadweight loss of Christmas.

According to Waldfogel, the inefficiency arises because when we give, we might not perfectly match the recipient’s preferences. He estimates that giving “destroys” between 10% and 30% of the value of a gift. However, it strikes me Waldfogel has not figured in how much value is added, even to a simple pair of socks, because of the affection with which it is given.

The extra value imbued in a gift is something with which many economists have difficulty. Adam Smith doesn’t mention it in the Wealth of Nations:

It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self-interest.

The appeal to self-interest as a sufficient incentivising factor is often taken to mean that no other motivating factor is required. Commonly self-interest is incentivised with monetary payment. It has been suggested, for example, if we want nurses to show more compassion, pay them more if they hit that target; if we want to boost student grades, pay teachers more if that target is hit.

Maslow’s Hierachy. Updated version Matthias Mueller, CC BY

Yet, according to Maslow’s eponymous Hierarchy, human beings are not motivated solely by mercenary self-interest, but have higher goals – for example, self-actualisation. Our Christmas giving might have an ulterior motive attached to it, but the motive is to reflect ideas about anothers’ worth and value, not to make sure we profit on the deal.

The social and the asocial

There are several difficulties which arise when we consider self-interest to be people’s sole motivation:

Firstly, we limit the potential of human interaction. If we consider all interactions are market transactions, it follows all friends are fair-weather friends and every gift under the tree an investment of sorts. Such an outlook has been shown to have a detrimental impact on our mental health.

Secondly, there is the potential error of equating price with value. A baby’s smile is priceless, but far from valueless: similarly, Christmas morning in a warm and gaily decorated front room with one’s family is priceless. To argue I could have bought everything much more cheaply in the boxing-day sale is to miss the point.

Thirdly, and rather more broadly, we limit the scope of the policy debate. Many human interactions take place in a social, not a market, context. If we consider only monetary self-interest as a motivating force it suggests government should limit itself to market-based solutions, rather than considering social solutions to social concerns.

Therefore, we risk undermining our economy. Economists have shown policies which favour the individual pursuit of self-interest undermine morality and the development of trust and co-operation. As well as limiting human capacities and engagement, this limits the potential for economic growth, which depends, in part, on trust.

Greed is bad, if lucrative. Great Beyond, CC BY

Ultimately, we limit human expectations. Behavioural economists have shown that tolerating, even encouraging, greed is likely to lead to an increase in amoral behaviour while reminders of moral codes are likely to discourage cheating. There is also evidence that greed and bad behaviour are contagious, while it is generous people who are more likely to be happy.

No one, of course, would deny the existence of financial self-interest, particularly in the field of business – though it is by no means clear we should encourage it even there. However, if we promote a solely mercenary focus in human interactions we risk crowding out higher and more satisfying motivations.

There is an alternative

If we limit our consideration of human interactions to those described by self-interest in a market context, then we run the risk of alienating ourselves from each other and from our own individual, social and economic potential. Yet Adam Smith never supposed that, just because he had to pay for his dinner, that was the sum total of his feasible human interactions. As he wrote in The Theory of Moral Sentiments:

To feel much for others and little for ourselves, that to restrain our selfish, and to indulge our benevolent affections, constitutes the perfection of human nature; and can alone produce among mankind that harmony of sentiments and passions in which consists their whole grace and propriety.

Many of the best things in life are not necessarily “free”, but neither can they be bought and sold: they arise from our relationships. In short, a very Merry Christmas one and all – and thanks for the present wee Jimmy. See you soon!

This article was originally published on The Conversation. Read the original article.

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