Tag: Michael Sandel

The Economic Inefficiency of Gift Giving: Why You Shouldn’t Buy Presents for the Holidays

From Michael Sandel’s What Money Can’t Buy: The Moral Limits of Markets.

Joel Waldfogel, an economist at the University of Pennsylvania (now at Minnesota’s Carlson School of Management), has taken up the economic inefficiency of gift giving as a personal cause. By “inefficiency,” he means the gap between the value to you (maybe very little) of the $120 argyle sweater your aunt gave you for your birthday, and the value of what you would have bought (an iPod, say) had she given you the cash. In 1993, Waldfogel drew attention to the epidemic of squandered utility associated with holiday gift giving in an article called “The Deadweight Loss of Christmas.” He updated and elaborated the theme in a recent book Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays: “The bottom line is that when other people do our shopping, for clothes or music or whatever, it’s pretty unlikely that they’ll choose as well as we would have chosen for ourselves. We can expect their choices, no matter how well intentioned, to miss the mark. Relative to how much satisfaction their expenditures could have given us, their choices destroy value.

Applying standard market reasoning, Waldfogel concludes that it would be better, in most cases, to give cash: “Economic theory—and common sense—lead us to expect that buying stuff for ourselves will create more satisfaction, per euro, dollar, or shekel spent, than does buying stuff for others . . . Buying gifts typically destroys value and can only, in the unlikely best special case, be as good as giving cash.”

Waldfogel’s conclusion:

“We value items we receive as gifts 20 percent less, per dollar spent, than items we buy for ourselves.”

If gift giving is so massively wasteful why does it persist?

It isn’t easy to answer this question within standard economic assumptions. In his economics textbook, Gregory Mankiw tries gamely to do so. He begins by observing that “gift giving is a strange custom” but concludes that it’s generally a bad idea to give your boyfriend or girlfriend cash instead of a birthday present.

But why?

Mankiw’s explanation is that gift giving is a mode of “signaling,” an economist’s term for using markets to overcome “information asymmetries.” So, for example, a firm with a good product buys expensive advertising not only to persuade customers directly but also to “signal” to them that it is confident enough in the quality of its product to undertake a costly advertising campaign. In a similar way, Mankiw suggests, gift giving serves a signaling function. A man contemplating a gift for his girlfriend “has private information that the girlfriend would like to know: Does he really love her? Choosing a good gift for her is a signal of his love.” Since it takes time and effort to look for a gift, choosing an apt one is a way for him “to convey the private information of his love for her.”

Why thoughtfulness matters

“Signaling” love is not the same as expressing it. To speak of signaling wrongly assumes that love is a piece of private information that one party reports to the other. If this were the case, then cash would work as well—the higher the payment, the stronger the signal, and the greater (presumably) the love. But love is not only, or mainly, matter of private information. It is a way of being with and responding to another person. Giving, especially attentive giving, can be an expression of it. On the expressive account, a good gift not only aims to please, in the sense of satisfying the consumer preferences of the recipient. It also engages and connects with the recipient, in a way that reflects a certain intimacy.

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Is Everything For Sale? What Money Can’t Buy

Should we worry that we are increasingly moving towards a society where everything is for sale? In What Money Can’t Buy: The Moral Limits of Markets, Michael Sandel argues that we should for two reasons: inequality and corruption.

“Consider inequality,” he writes, “[i]n a society where everything is for sale, life is harder for those of modest means. The more money can buy, the more affluence (or the lack of it) matters.”

If the only advantage of affluence were the ability to buy yachts, sports cars, and fancy vacations, inequalities of income and wealth would not matter very much. But as money comes to buy more and more—political influence, good medical care, a home in a safe neighbourhood rather than a crime-ridden one, access to elite schools rather than failing ones—the distribution of income and wealth looms larger and larger. Where all good things are bought and sold, having money makes all the difference in the world.

“This,” Sandel argues, “explains why the last few decades have been especially hard on poor and middle-class families. Not only has the gap between the rich and poor widened, the commodification of everything has sharpened the sting of inequality by making money matter more.”

The second reason we should hesitate to put everything up for sale is more difficult to describe. It is not about inequality and fairness but about the corrosive tendency of markets. Putting a price on the good things in life can corrupt them.

“Of course,” he writes, “people disagree about what values are worth caring about, and why. So to decide what money should—and should not—be able to buy, we have to decide what values should govern the various domains of social and civic life. How to think this through is the subject of this book.”

The answer Sandel offers can be summed up into this paragraph:

[W]hen we decide that certain goods may be bought and sold, we decide, at least implicitly, that it is appropriate to treat them as commodities, as instruments of profit and use. But not all goods are properly valued in this way. The most obvious example is human beings. Slavery was appalling because it treated human beings as commodities, to be bought and sold at auction. Such treatment fails to value human beings in the appropriate way—as persons worthy of dignity and respect, rather than as instruments of gain and objects of use.

For now at least, there are some domains that are off limits — We don’t allow children to be bought and sold on the market. Neither do we allow citizens to sell votes. Having babies and selling them in order to make money “is a corruption of parenthood, because it treats children as things to be used rather than beings to be loved. Political corruption can be seen in the same light: when a judge accepts a bribe to render a corrupt verdict, he acts as if the judicial authority were an instrument of personal gain rather than a public trust. He degrades and demeans his office by treating it according to a lower norm than is appropriate to it.”

I find some of Sandel’s arguments lacking — limited, perhaps, by space and not thought. For instance, by Sandel’s arguments, allowing wealth to influence the quality of education received corrupts not only the public education system, but also permeates into broader civic responsibility. In this way it corrupts two domains and not one.

A simple, but unpopular, fix for this is to make private schools illegal. That’s not my argument, it’s Warren Buffett’s. If you want to fix schools:

“Make private schools illegal and assign every child to a public school by random lottery.”

While not a conclusive look at the moral limits of free markets, What Money Can’t Buy is a good place to start.