DRI-309 for week of 10-21-12: The Economic Logic of Gifts

An Access Advertising EconBrief:

The Economic Logic of Gifts

The approach of the year-end holidays releases a flood of gift-oriented online content. One such article appeared on MSN on October 19. “What Women Want Men Don’t Give,” by Emily Jane Fox, seized the publication of research by American Express and the Harrison Group as an opportunity for male bashing. The full findings, though, don’t provide ammunition to either side in the battle of the sexes. But they do supply grist to the mill of economists.

Economists study the practice of gift-giving carefully. This surprises most people, who view gifts and pecuniary purchases as antithetical behavior. Yet in both theory and practice, gifts loom large in economics.

Most laymen are aware that the bulk of retail sales are expended on holiday gifts during the Christmas season. But they are probably unaware that economists are even more interested in the individual motivations for giving than in their seasonal macroeconomic impact. Senator Jed Sessions recently identified nearly 80 separate federal welfare programs that dispense around $1 trillion annually. Whether cash or in-kind, these disbursements are gifts in the technical sense. War reparations demanded by victor nations from the vanquished have sometimes changed the course of history, the most famous example being the steep debts levied on Weimar Germany by the Allies after World War I. Such reparations are yet another form of gift, this time on the national level. Their effects are proverbial among students of international economics.

The MSN article is best understood as an exercise in the modern practice of rhetorical journalism. That is, it is intended not to report facts but to produce an effect on the reader. Economists study unintended consequences of human action, and in this case the author’s attempt to manipulate her readers has produced surprising revelations about the economic logic of gift-giving.

The Process Frustrates Everybody – Including the Author

The research, sponsored by American Express and a consulting firm called the Harrison Group, surveyed 625 households whose working members ranked in the top 10% of wage-earners by income. The survey questions probed respondents’ preferences in both gift-giving and receiving. The results found “…a wide gap between what people want and what they actually get.” Apparently, the gap occurs because people do not give gifts in accordance with recipients’ wishes. Indeed, they do not even behave the way they themselves want their own gift-givers to act.

The author showcases women as victims of this asymmetry. “Two-thirds of affluent American women want gift cards. But less than a fifth of men will [comply]…Instead, 70% of American women are gifted clothing or jewelry.”

Thus, the article begins in a familiar manner. The reader is presented with stereotypes – woman as practical consumers, men as selfish dinosaurs who persist in their ways heedless of feminine sensitivities. But just when the reader feels able to predict what is coming, the article changes course.

Men, too, suffer the pain of asking without receiving. Men “…want food and alcohol – a third are hoping for gourmet foods and fine wine, and another third want gift cards. But women like to give none of these – 30% are expected to give clothing and another 15% books… What wealthy shoppers are better suited for [is] giving gifts to themselves.”

The author’s frustration seems comparable to that of her subjects. Having begun with one agenda in mind – to reinforce the stereotype of male insensitivity – she runs up against the comparable worthlessness of female behavior. When her gender angle encounters a roadblock, she makes a last-minute detour in the direction of class envy by indicting the self-absorption of “wealthy shoppers.” But she lacks the space to start up another argument and must rest content with allowing the headline to do all her work.

What Do Women Want, Generically Speaking? Does This Differ From Male Wants?

Economists try to interpret facts in light of what they know – or think they know – about human motivation. Can we take the scenario as presented above and make sense of it?

“What do women want?” is an age-old question. Economics does not recognize separate male and female systems of logic, so the apparent frustration felt by the author does not affect them. The fact that men and women behave broadly alike is not shocking. The question is: Is their behavior logically consistent?

Some commenters on the online article showed disdain for the author’s willingness to question the value of a gift. Why not accept it in the (presumably charitable) spirit in which it was offered? That is a question worth tackling.

The exchange of gifts is a ritual dating back many centuries. The distinctive features of holiday gift exchange in the Western world are its reciprocal and quasi-compulsory character. Reciprocity implies that, roughly speaking, the net monetary value of the exchanges can be treated as cancelling out. Consequently, their only real value must be to achieve some sort of efficiency. Otherwise, why bother? When it comes to random gifts, the commenters have a point. The mouth of a non-reciprocal, fully voluntary gift horse is certainly not worth close examination.

There is much to criticize about the holiday gift-giving ritual, though. The custom of giving gifts in-kind runs afoul of the long-recognized economic presumption in favor of gifts in cash. Students of intermediate microeconomics courses are routinely shown the inefficiency of programs like the federal food-stamp program, which subsidizes the consumption of (somewhat) poor people by giving them subsidized food rather than a cash payment of equal value. (Technically, the term “equal value” must refer to the value of the subsidized good – food – that the recipient chooses, which can only be determined after the consumption choice is made on pre-selected terms. But it is easy to show diagrammatically or mathematically that giving the recipient an amount of cash equal to the value of the food they choose could never make them worse off and would probably make them better off.)

The inherent logic behind the demonstration is quite straightforward. The gift confers an increment of real income upon the recipient. An addition to real income creates a willingness to consume a larger amount and/or higher frequency of all normal goods, not merely more of one specific good. Hence, the new optimal basket of consumption goods will include increases in more than just one good or service. Receipt of real income in the form of cash allows maximum scope for distributing the increase among the different possible choices.

Why doesn’t this same logic apply to gifts? The short answer is that it does. Economists have devised various ad hoc explanations to rationalize the practice of in-kind gift giving, but none of them really satisfies. That is why these research results are so unsurprising. Women prefer receipt of gift cards to clothing and jewelry. If the gift cards are issued by specialty stores, they allow the recipient a wider range of choice among the styles, brands and sizes of clothing and jewelry. If the cards are to department stores, they allow even wider branching out to other types of goods and services. There is even a legal market for the exchange of gift cards for cash (at a discount), just as food-stamp recipients once traded stamps for cash illegally at discounts up to 50%.

Gift cards are also among the preferred options of men, but men display more willingness to delegate the shopping for their preferred choices of gourmet foods and liquor. This is probably owing to the traditional division of labor, in which women shop for and prepare food but men often purchase liquor. This is the rare case in which you will be willing to let somebody else make your consumption choices for you – they are an expert and you are not (or may not be).

In the light of this, the oft-expressed nostalgia for the Christmas of childhood is understandable. Children are typically net beneficiaries of the gift-giving ritual, with their gift exports being outweighed in number and value by their imports. This favorable holiday balance of payments casts a rosy glow over the holidays that gradually dims in intensity as increasing export responsibilities accompany the aging process.

Note that there is a role for gender in these research results, all right – just not the invidious one implied by the article’s headline. Another way to consider this matter is to ask whether women’s responses would differ markedly if the gift-giver were another woman, as opposed to a man. (Later, we will consider the significance of the degree of intimacy between giver and recipient.) Assuming the answer is no – and the article made no reference to any such distinction in this research – then the economic logic above is sound.

Modifying for the division of labor, the research results show both men and women displaying the basic utility-maximizing, economic preference for cash or cash substitutes rather than narrow in-kind gifts. What are we to make of the apparent fact that both sexes appear “better suited for giving gifts to themselves?”

Utility Maximization and Selfishness

The article’s author is apparently affronted by the possibility that some of us are better suited for giving gifts to ourselves than to others and she wants us to feel her outrage. She probably likes her chances because her target – the top 10% of wage earners – is a loose proxy for “the wealthy,” who are under assault from many sides these days. The overriding sin committed by the wealthy is alleged to be “greed” or “selfishness.” This has often been likened to the behavioral assumption underlying the economic theory of consumer demand, which is utility maximization. We assume that people try to become as happy as possible.

The equation of utility maximization with selfishness simply won’t wash. For one thing, utility maximization doesn’t say anything one way or the other about other people because the individual’s utility function is assumed to be independent of the consumption of other people. “Independent” means just that. It doesn’t mean that we set out to hurt other people or to studiously ignore them. It just means that our overriding goal is our own happiness.

And in fact it could hardly be any other way. The reality of our internal and external worlds dictates it.

Each of us instinctively recognizes the difficulty of ever really knowing another person as we know ourselves. The closest most of us ever come is through the institution of marriage, yet nearly half of U.S. marriages end in divorce. The same basic conflicts that drive couples apart also militate against optimal gift-giving – budgetary disagreements, differences in tastes and preferences, in maturity and temperament, in perception and grasp of reality.

Looking out for number one has been our evolutionary priority since day one. But ever since man began congregating in groups, an ethic of sacrificing individual wants to the needs of the group was promulgated. This ethic had survival value for the group, although it tended to be hard on particular individuals. And, over time, group leaders became adept at suspending the rules in their own case.

Meanwhile, mankind slowly developed a market process for increasing wealth and happiness. This market process ran counter to the group ethic because it increasingly demanded cooperation with individuals outside the group – indeed, cooperation between individuals who never met or even suspected that they were cooperating. This extended order of cooperation was one of the market’s greatest strengths, since it prevented political, religious or cultural differences from interfering with the growth of wealth and real income.

When the social order consisted of mated pairs living in caves, it was not unreasonable for one mate to control the consumption pattern of the pair. The choices were so few and so starkly simple, the human species so primitive that one could envision coming to anticipate the wants and desires of a spouse to a high degree. Today’s sophisticated world with tens of thousands of consumption choices made by evolved human brains makes nonsense of that concept. Even spouses cannot be expected to read each other’s minds well enough to reach the apex of consumption choice.

In this context, it is worthwhile to observe that women are apparently the ones who pretend to this level of expertise. They refuse to delegate their clothing and jewelry purchases but are more than willing to overrule mens’ consumption choices, to the point of substituting clothes for food and liquor in their “gifting.” (Why not “giving,” by the way?) We accuse government bureaucrats of paternalism, but it would appear that this should instead be maternalism.

It is luminously clear that there can be only one true expert on your consumption, and that is you. Nobody else in the world could begin to accumulate the objective information on the thousands of potential goods that you can or might consume, or the subjective data on your particular tastes, preferences and attitudes towards them. It is sobering to realize that not even a life mate can approach the degree of familiarity needed to truly run your life for you.

Small wonder, then, that “nearly half of women” in the survey “said they were extremely, or very likely to buy themselves presents this holiday season. A third of men have similar intentions.”

It is idiotic to call this behavior selfishness when it merely acknowledges the practical facts of life. We need a vocabulary to describe an inordinate preoccupation with self – the kind displayed by thieves, murderers, embezzlers and the like – and this is the proper preserve of words like “greedy” and “selfish.”

The Theory of Gifts and Public Policy

The economic logic of gifts has important implications for public policy. For over four decades, various researchers have estimated the amount of welfare expenditures necessary to lift every man, woman and child above the so-called poverty line. Then they have compared this irreducible necessary minimum expenditure on fighting poverty with the amount actually spent by federal welfare programs. The ratio between what we spend and what we would theoretically need to spend has fluctuating over time. It has been as low as two and as high as ten. Currently, according to the latest estimate, it is about five.

We are ostensibly trying to eliminate poverty. We are currently spending five times more on indirect ways of doing this than we would need to spend if we simply gave cash directly to poor recipients. And we are failing to achieve the stated objective of eliminating poverty, since even if the value of cash and in-kind subsidies is added to income there are still a substantial number of people living below the poverty line. We know that cash subsidies are more effective at increasing the happiness of recipients than the in-kind subsidies, such as food stamps, in which the federal government specializes.

So why are we still pursuing a horribly wasteful and inefficient policy of fighting poverty and failing instead of implementing a simpler, much cheaper and more efficient policy that will succeed?

Put this way, the answer stands out. It is reinforced by the experience of any classroom teacher who ever explored the issue. In droves, students insist that we cannot afford to give cash to welfare recipients because they will spend the money in unsuitable ways; e.g., ways that the students do not approve of. Expenditure on illicit, mind-altering drugs is the example most often chosen to illustrate the point.

Students persist in this view even after the irrefutable demonstration that current in-kind forms of welfare, such as food stamps in both its former and present incarnations, also allow recipients to increase their expenditure on “other goods” besides the subsidized good. (In-kind subsidies hinder the flexibility of recipients but allow them to buy the same amount of the subsidized good as before with less money, thereby freeing up more regular income for use in buying drugs or other contraband.)

Thus, it is clear that the actual rationale behind the government welfare system is not to improve the welfare of recipients by maximizing their utility. Instead, it is to maximize the utility of taxpayers by allowing them to control the lives of recipients while assuaging their own guilt. Taxpayers are responding to the vestigial evolutionary call of the group ethic that demands individual sacrifice for group preservation, while meeting their own need for utility maximization. They are countenancing interference in the lives of the poor that they would never sit still for in their own lives, and which they resist even in areas as relatively trivial as holiday gift-giving.

Economists look for ways to make everybody better off without making anybody worse off. Eliminating the federal welfare system would end an enormously wasteful and unproductive practice. Research shows that private charity is highly active and more efficient than federal efforts even though substantial taxpayer income is now diverted into federal anti-poverty efforts. If federal programs were ended, more funds would become available for private charitable purposes. Recipients could choose the degree of maternalism they found tolerable and donors could demand or reject maternalism, as they saw fit.

Meanwhile, resources would be freed up at the federal level to produce other things. Dislocations among employees due to agency closures would be no different than layoffs in the private sector due to shifts in consumer demand between different goods and services. Obviously, some federal employees would migrate to private-sector charities, where employment would rise.

Another extension of these principles applies to recent attempts by federal bureaucrats to fine-tune the pattern of consumption by banning or requiring the consumption of particular foods, minerals, vitamins, fats or other substances. In principle, a case might be made for provision of information allowing informed choice by consumers. The problem is that even here, the federal government’s past efforts have worsened the very problems it now purports to solve. But there is no case in favor of allowing government to dictate consumption choices made by citizens because government cannot possibly possess the comprehensive information necessary to verify whether its actions will improve or worsen the welfare of its subjects.

The Economics of Gifts

The research results reported in the MSN article may have frustrated its author, but they are consistent with the economic principle of utility maximization – properly understood. People request the kind and general form of gifts that tend to maximize their utility, but they take exactly the same tack when it comes to giving gifts to others – they tend to maximize their own utility, not that of the recipient. We can fume, fuss, moralize and complain about this behavior, but it is the only practical way to behave. Practical human limitations dictate it.

And when it comes to public policy, it is utterly futile to expect altruism and omniscience to suddenly triumph in an arena where they are even less potent than they are in private life. Private charity has its limitations, but it is best situated to cope with the inherent difficulties involved when one human being tries to help another.