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Posted
December 22, 2008

Revisiting “The Deadweight Loss of Christmas”

When it comes to understanding “value,” economists are a bit clueless.

Charles Dickens’ character Scrooge has lasted for more than two centuries because we love to witness a villain who stubbornly refuses to see the value of human connection and kindness – and then, suddenly, gets it! Scrooge comes to mind when re-reading The Deadweight Loss of Christmas (pdf file), a now-classic essay that appeared in the venerable American Economic Review in December 1993 (vol. 83, no. 5, pp. 1328-1336).

The actual author of this memorable article is Joel Waldfogel, a Yale economics professor at the time who has since become the chair of the business and public policy department at the Wharton Business School. It is hard to tell if the author is an inspired, deadpan humorist from The Onion (which, alas, did not exist in 1993) or simply obtuse, as many economists tend to be.


_Image by Nickolas Muray, 1945, via Flickr Commons. Image from the “George Eastman House Photography Collection.”: http://www.eastmanhouse.org/inc/collections/photography.php. _

It is clear, however, that the human meaning of gift-giving eludes him. But then, economists have never been shy about grandiose applications of their methodologies to inappropriate realms of life. Waldfogel’s innovation was to apply the standard logic of free-market economics to the practice of giving gifts at Christmas, Hanukkah and other holidays. He wants to know, Is gift-giving “efficient”?

Waldfogel conducted two surveys of Yale University students, asking them how much they would be willing to pay for the gifts that they had received from family and friends. By calculating the difference between the actual price paid for the gifts and the price that the recipients stated they would be willing to pay, one can ascertain the “deadweight loss,” or total waste, that occurs through Christmas gift-giving.

One of Waldfogel’s surveys found that friends and family paid an average of $438 for the recipients’ total gifts, but the 86 recipients surveyed were willing to pay only $313, on average, for the same gifts. This is an open-and-shut case that gift-giving is enormously “inefficient.” In fact, after conducing a variety of economic calculations, Waldfogel concludes that “between a tenth and a third of the value of holiday gifts is destroyed by gift-giving.” Now there’s a novel concept – the gift as destructive.

The author concludes that it would be far more efficient for the grandparents and parents to just give cash. Which is exactly what grandparents disproportionately do. They fear they don’t know the “utility function” of their loved ones, and so give cash instead of a gift. Whether gifts of cash are evidence of greater economic literacy, or instead evidence of great love and consideration for the giftee, goes unexplored.

In his nine-page essay, Waldfogel notes that economists usually welcome occasions like Christmas because, from a macroeconomic perspective, they stimulate a great deal of market activity and thus economic growth. Our steady march toward progress and happiness is accelerated. Ah, but from a _micro_economic perspective, Waldfogel cautions, this is a delusion: “It is more likely that the gift will leave the recipient worse off than if she had made her own consumption choice with an equal amount of cash.”

It bears adding that Waldfogel shows no signs of irony or tongue in cheek. He makes a passing acknowledgement that gift-giving may entail some “sentimental value.” But the ramifications of “sentiment” as a form of value are not deemed important enough to explore. They remain as opaque to orthodox economists as Tiny Tim’s grace was to Scrooge.

The funny thing is, within economics circles, the Waldfogel essay is now regarded as a seminal piece of thinking – a piece that is quoted and studied with some regularity. For the rest of us, who regard the gift economy as every bit as generative of value as the market, “The Deadweight Loss of Christmas” stands as a paragon of intellectual myopia. It is a seasonal reminder of just how “autistic” conventional economic analysis truly is.

Scrooge ultimately had an epiphany and woke up from his nightmares. Most economists, however, are still tossing and turning at night about imagined deadweight losses, unable to see the real value that stands squarely in front of them. No regression analysis or chi-square test required. Just an open heart. (Tiny Tim enters stage left.)

To the many faithful readers of Onthecommons.org, thanks for joining in the conversation. And peace and goodwill to all!