humbug

Christmas redux

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It’s Christmas time again. Tim Harford’s on the case of that gift-giving economics article I talked about back in January, with typical accuracy:

“Waldfogel’s work is often misinterpreted as suggesting that gift-giving is pointless. That is not true. He explicitly excluded the sentimental value of gifts from his calculations, and, of course, the sentimental value is part of the purpose of giving presents.”

More than that, though; his positivist reading of the original article leads to some very sensible, common-sensical normative prescriptions:
“the economists Sara Solnick and David Hemenway have discovered that we prefer unsolicited presents to those we have specifically requested… All this points to the optimal gift-giving strategy: you need to minimise the deadweight loss while maximising the sentimental value. This suggests buying small gifts and striving for emotional resonance. Look for something inexpensive, and consider supplementing it with a letter, a photo, or time spent together.”

Prescriptions we can all relate to.

A Christmassy footnote

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A quick footnote to the Christmas talk: this article by Harvey Mansfield mentions the “deadweight loss of Christmas”:

“Economists as ambitious as they are cagey–perhaps bored with economics in its usual confines–have become critical of the frenzy of Christmas gift-making. The gist of what they say: Christmas is a highly inefficient way of connecting consumers with goods.”

So far, so familiar. After that, though, it’s is the best of times and the worst of times for the impression of economics it conveys. I think it’s worthwhile that Mansfield says:

“Most of the time economists these days do not care to pass judgment on the things people buy or sell. These are “preferences” not examined within economics; they are givens from which economists take their start.”

This is right on the message of the fundamentally agnostic approach to assumptions on what people care about. My only complaint is that “buy or sell” already shows a bias toward the tangible: I’d say “the things people care about”.

Mansfield goes on to speculate that the discipline of economics is in the business of trying to reconcile this idea of preferences being givens and some idea that the economist seeks to promote “economizing”:

“Here, too, is the connection we expect between economics and learning to be economical and to economize …. The fundamental incoherence in economics is that it wants to pinch pennies (utility) but has no reason to stop you if you don’t (liberty).”

An interesting discussion, but again, I can only argue again that economics does not – and in fact cannot – promote any one decision or system, but attempts to estimate what will happen and suggest some ways to compare outcomes. I don’t see the connection between “pinching pennies” and utility: Mansfield again incorrectly presents the economist as one who equates “utility” with money. I’d be embarrassed to meet an economist who assumed to know for sure what made every person happy.

OK, no more Christmas talk until at least November.

Economic Imperialism

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Is it true that economics is invading the space of other social sciences? The idea of economic imperialism is only admissible if we believe that economics equals money. If we don’t believe that, economic reasoning is one of many ways of answering questions: a map, not a country.

The old textbook definition of economics as the social science of the allocation of scarce resources doesn’t really limit us at all. Gary Becker is perhaps the economist most associated with the idea of economic imperialism; his position is that “the horizons of economics need to be expanded”, but, without being too dramatic, those horizons aren’t as close as they look.

When we see economists pop up in the press, they’re usually talking about unemployment, inflation, growth, all the old ones. Sometimes, when we see an economist talking from over the “horizon”, he looks fully as foolish as possible.

The famous one about Joel Waldfogel’s “deadweight loss of Christmas” is a good example. Let me try to paraphrase: “if people only care about money, Christmas gifts are a big waste of resources because their cash value to the recipient is less than their cost to the giver. Give money instead!”. Logical people subsequently point out that gift giving and gift receiving are two of life’s great pleasures, and economists should go back to the cesspool they crawled from.

A microcosm, if you will, of the “economics as money” problem. The story’s no fun if we actually talk about the “if people only care about money” part; with it, it’s just a fun, throwaway logic game, but without it, it’s a nice excuse to print some combination of “humbug” and “economist”. Who’ll print my story that says “if people care about money, being nice to their relatives, not looking like someone who can’t think of a good gift, and a bunch of other stuff, Christmas gifts are an excellent use of scarce resources to spread satisfaction in our cold, crazy world. Happy Christmas!”.

No-one will print it, of course. At least, not if they want to show me as a stereotypical economist. The trick is that both my story and the one about the deadweight loss of Christmas are equally acceptable applications of positive economic reasoning on the topic “what happens to people’s satisfaction when they give or receive gifts?”. I think my assumptions on the desires of the giver are more realistic, and I think Waldfogel’s story lends itself better to measurement. It’s the same rock and the same hard place: how can we be realistic and accurate at the same time? Not, perhaps, a life or death matter in the Christmas story, but pretty important when we’re making policy-relevant models.

My interpretation of Becker’s ambition is to apply the rational choice paradigm of economics to decisions that are decidedly not financial. I also believe that this doesn’t require us to expand the horizons of the discipline: the horizons of economics are not financial, because applying economic reasoning doesn’t require us to think only about money.