Santa Claus: The World’s Worst Economist?
Ethan Loh Wen Hao
The origins of a 16-year old Grinch
There was a period in my adolescence in which whenever my mom asked what I wanted for Christmas, I would look from my phone briefly, yell “Money!”, then get back to scrolling on social media. I realise this might not portray a very flattering image of angsty 16-year-old me.
But, I had my reasons. My main rationale behind this response was repeated failures of loved ones to meet my demands (as spoilt as that sounds). Year after year, my requests would constantly be misinterpreted, or even ignored entirely. A particularly egregious example was when I asked for a pair of Adidas Superstars for Christmas, then received a collection of DVDs narrated by Sir David Attenborough. The reason? My grandparents had remembered how interested in animals I was at 5.
Many readers are now going to turn to me and say: “Ethan, this sounds super spoiled of you. Haven’t you considered the time and resources they invested into getting you the gift? The thought and care?” And my response would be that was EXACTLY the point. My mom once complained she spends 2 whole weekends buying and wrapping presents. She is not alone. According to the World Economic Forum, in 2019 Americans spent an average of 15 hours gift shopping, and a whopping $942 in total. Imagine going through all that effort, time, money, just for the recipient to not even like the present? Ouch.
Economists call this an issue of asymmetric information. Simply put, no one knows you quite like you do! Loved ones often struggle to respond to your wants because there is no easy way to access this insider information. Sure, you could always just tell them, but even then one runs into obstacles conveying this information. I could want shoes for example, but what style and colour would I prefer? Does the giver know my brand preferences, or how my shoe size varies with each brand I like? And how often do I interact with this person to have the opportunity to convey this information to them? But even if all these obstacles are overcome, why didn’t I simply buy what I wanted myself?
A solution from the East?
I now propose an alternative. As a Chinese person, Christmas was not my favourite holiday of the year (cue the outrage!) – Lunar New Year was. Besides the fact that I connected better to its customs and enjoyed the food a lot more, I also thought the gift-giving system was more efficient. During Lunar New Year, children are given red envelopes of cash (known as Hong Bao in Mandarin) as symbols of good luck and auspiciousness. As an economist, my eyes gleam at the mention of money. After all, the use of cash as a medium of exchange was implemented precisely to overcome this mismatch between people’s wants vs what they receive, as cash allows the person to buy whatever they want within it’s amounts. I used to love the fact that I just had a wad of cash to buy whatever I wanted, but also save if I wanted to.
This is where the title of this article comes from. In Joel Waldfogel’s “The Deadweight Loss of Christmas” (1993), he estimates that the deadweight loss of holiday gifts ranges between 10% to a staggering ⅓ of the gift’s value!² Given that gifts are such a destruction of value, Santa Claus has to be the worst economist of all time. Think about all the money wasted building and maintaining a factory in the North Pole, hiring and providing accommodation for his elves, the costs of training and feeding reindeer – not that far from what really goes into making your Christmas presents. Would it not be easier for poor ol’ Santa to simply standardise a fixed sum of money to wire to good children every year? I know from personal experience my mom has a much easier time leisurely stuffing money into red envelopes, rather than running from shop to shop buying and wrapping gifts.
How my heart grew 3 sizes bigger: A defence of gift-giving
But as I grew older and my cold economist heart thawed just a little, I have begun to appreciate the joy coming from receiving gifts. Something about just giving cash to someone feels… a bit disingenuous. There is a sociological value in giving gifts, as stated by the American Institute for Economic Research:
“The answer to this puzzle becomes clear if one considers gift giving not to be a one-time exchange of worthless items, but an ongoing practice of reciprocity that builds and enhances social networks and promotes trust amongst individuals.”
This view is one strengthened by Camerer (1988), who argues that gifts act as “signals” of the giver’s knowledge of the receiver, and are demonstrative rituals of how much the individual cares and knows private information about the person. So, it seems like risk is the whole point. I undertake the seemingly inefficient and risky action of getting gifts precisely because of the altruistic nature of this relationship and my certainty of understanding you as a person. In fact, “signalling” might not do it justice. There is that sense of happiness and connection felt when loved ones give you a present, no matter the quality. Gift-giving is an expression of love, pure and simple. (Cue the sappy music.)
But even disregarding this sentimental argument, there are many tangible benefits to giving and receiving gifts. Ruffle and Kaplan (2001), in their paper on gift-giving, highlight that gifts often save on search costs – costs associated with finding and procuring a good/service we are interested in. Earlier in the article, I bemoaned the fact that we waste on average 15 hours a year shopping for Christmas presents. But those 15 hours are hours saved by recipients who would otherwise waste precious time buying the gifts themselves!
The problem with previous models of gift-giving is they implicitly assume buying the gifts themselves is costless, only taking the monetary value of the gift into consideration; when in reality it takes time and effort to procure the exact gift a person may want. When my mom received a pack of ceremonial grade matcha from her friend in Japan, she was overcome with joy; not just because it was really good, but because she knew the person queued hours for it and she would have to fly to Kyoto just to buy it herself. So it seems that not only is gift giving instrumental to the overall preservation of relationships, but help recipients save the opportunity costs of the time taken to purchase the gift themselves.
Finally, do we really know ourselves best? We all hear stories of the quintessential “ugly sweater” gifted by some great-aunt during Christmas, discarded and forgotten in the closet. But as an international student, I underestimated the extreme cold of winter here in the UK and ended up wearing that same sweater every day last winter.
In their paper “Children and the economics of Christmas gift-giving”, Carol and Victor Tremblay argue that children especially gain a positive impact from gift-giving, due to parents having a greater understanding of what is good for them than the children themselves, leading them to paternalistically “give gifts to children that enhance the child’s human and consumption capital” (Stigler and Becker, 1977). Although I hesitate to infantilise readers with this comparison, we must admit that sometimes we get gifts we think we will dislike, but end up loving. Or better yet, gifts we didn’t know we needed! The great thing about other people looking for gifts for you is their access to resources we might not have, enabling them to give gifts so out of the box they might just surprise us for the better. Whether they are eccentric household gadgets that make chores easier, or a new book we have never heard of, givers sometimes paternalistically gift presents that benefit us tremendously.
Now that the Christmas season has ended, leaving us with piles of gifts from friends and relatives (some that we love, some maybe not so much!), I hope this article convinces even you Grinches out there of not just of the magic of gift-giving, but the economic benefits of it! Maybe you will look at those tired old socks or ugly sweaters differently, and your heart might grow three sizes bigger too…