John Hood: Christmas gifts aren’t wasteful

RALEIGH — Among the pagan-inspired customs of the Christmas season, there has come to be the ritualistic burning of the straw man. Specifically, I refer to the traditional seasonal column by a sly journalist or political analyst asserting that the exchange of Christmas gifts is a major lose-lose for the economy.

I’ve read pretty much the same piece over and over for decades. The first version of the argument I saw was, I believe, in a New Republic column several years after I left the magazine. In brief, the argument is that gift-giving is a waste of economic resources. Because the giver cannot crawl inside the mind of the receiver, the giver’s selection of a present can’t possibly be as satisfying as a good the receiver would purchase for himself with the same money.

If I spend $20 on a book for you, and you spend $20 on a DVD for me, we may each end up with goods that please us very little. I may have bought you a new history of the War of the Pacific, to which you may respond: “But I didn’t know the Chilean Army fought in World War II.” And you may have bought me the complete Mariah Carey film collection, to which I may respond: “What led you to believe I was a masochist?”

We are both worse off, the argument goes. Far better would be to exchange gift cards, or just straight cash. Indeed, some versions of the argument suggest that even this would be inefficient, given that we are exchanging the same dollar value. Why not just forget the whole thing? The exchange does, after all, involve some transaction costs (cards, wrapping paper, getting together, etc.)

This is a good example of folks knowing just enough economics to get them over the river and into the woods but not quite enough to lead them out again.

A key error in this analysis lies in the definition of a good. It is not correct to say that the good in question is simply a book or DVD. It is a gift. It consists not only of the tangible item but also of the time invested by the giver in picking it out, and the sentiment or message conveyed in the selection. The giver is demonstrating affection or consideration, something that can have real value to the receiver.

We all know this is true from everyday experience. Think of some of the gifts you’ve received. Don’t they mean more to you than simply the retail price, because of who gave it and how, when, and where it was given? Indeed, while a simplistic valuation of the good might start at the retail price and then go down due to depreciation, we often find that older items go up in value as we grow to appreciate more the circumstances in which we came to possess them.

Besides, individuals acting within the market process already figured out a way to address the problem of the truly awful or unsuitable gift. It’s called a return.

Millions of Americans take back gifts to stores and purchase something else, a practice that fuels major retailer discounting in after-Christmas sales. Most people don’t see this as a big waste of time. In order to receive the benefits of gift exchange, they accept the risk of the occasional return — and often walk away with something else they didn’t expect to buy but come to value.

That brings up another way gift-giving adds economic value: the pleasant surprise. You see, another flaw in the reasoning here is that we all know precisely what we want at all times. No serious defense of markets is predicated on this unrealistic proposition. In reality, we sometimes come to appreciate things we would never think to buy for ourselves, either because of sentimental value or just because it turns out our gift-giver knew something we didn’t.

Which is not, by the way, an invitation for anyone to inflict Mariah Carey on me.