No, Christmas Is Not an 'Economically Efficient' Holiday (and That's Okay)

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If you were to design, from scratch, a gift-giving holiday to warm the hearts of the coolest classical economists, it would look nothing like December 25. But gift-giving rituals have never been about the economics of efficiency ...

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In 1881, George Blankenshop, a Canadian bureaucrat surveying the Indian population around modern-day Vancouver, sent a scathing note to the Canadian government regarding a ceremony called "potlatch." 

Tribes would gather to distribute, and occasionally even destroy, their accumulated fortunes at a tremendous feast and celebration called "potlatch," an ancient Indian custom. Blankeshop, a businessman and a Christian, considered the practice a violation of Christian capitalism and suggested the Canadian government criminalize the ceremony. Three years later, Canada did just that, declaring that "every Indian or person who engages or assists in celebrating the Indian festival known as the 'potlatch' ... is guilty of a misdemeanor, and liable to imprisonment for a term not exceeding six months and not less than two months."

A Canadian bureaucrat tattle-telling on Pacific Northwest Indians is not the typical beginning to a Christmas story. But it's a fitting beginning to the story of why Christmas doesn't make any sense, from a pure and undistilled economic standpoint ... and also why its economic inefficiency is utterly besides the point when it comes to the holidays.

If you were to design, from scratch, a gift-giving holiday to warm the hearts of the coolest classical economists, it would look nothing like the blind gift-giving we see on December 25. It would look more like middle school allowance. Children would scamper downstairs to look under the Christmas tree to find ... cash. Or perhaps, slightly more sentimental, a holidays-themed check with a message in the Memo line: "Just go buy whatever you want, Love Santa."

When it comes to efficient gifts, cash is king. The Ur text of economic Scrooge-yness is Joe Waldfogel's glum treatise "The Deadweight Loss of Christmas," which proceeds, with devastatingly glum logic, to explain how much of our Christmas gifts to friends and loved ones are wasted (i.e. deadweight loss). The impulse to buy our friends and family actual gifts "destroys" up to a third of their value. Typical example: Grandma buys you for $100. For you, it's worth more like $70. If she'd given you five $20 bills instead, you'd have in your hands a gift every agreed was worth $100.

The most reasonable objection to this argument, in addition to it being a total killjoy, is that the full value of gifts isn't captured in how much the recipient values the gift, or in how much the gifter spends. Gifts feel good to give. And they feel good to get. The neurological benefits of what academics call "prosocial spending" (and non-academics call "buying stuff for my friends") aren't accounted for in Waldfogel's math. It's not his fault. They're just not calculable.

Even an awful I-would-not-wear-that-reindeer-monstrosity-if-the-rest-of-my-clothes-somehow-caught-fire-simultaneously sweater from your grandmother sends a sweet message. A gift is a signal: I know you. Money is just money. One hundred dollars in cash doesn't really say anything, except, "Hey, I just went to the ATM and asked the machine for $100, so here." 

Many people prefer gifts that are demonstrably impractical and inefficient. In his behavioral economic guide to gift-giving, The Atlantic's Jordan Weissmann pointed to a finding that women tend to prize gifts, especially from spouses, that were sentimental and extravagant and sometime simply impractical. Practical gifts can lack a certain romance.

Gift-giving rituals simply aren't about the economics of efficiency. They've always been about signaling and the emotional rewards that have zilch to do with the sticker price. Nineteenth-century Canadians didn't understand potlatch, but it was the Indians themselves who, in their response to the anti-potlatch law, made the case for prosocial spending that couldn't be defended on purely "capitalist" grounds: "We work for our money and like to spend it as we please, in gathering our friends together and giving them food to eat, and when we give blankets or money, we dance and sing ... the 'potlatch' does that."

So, this Christmas don't be a Waldfogel (or a Blankenshop). Give lavishly. When it comes to the holidays, our rituals are smarter -- even, you might say, more economic -- than economists think.


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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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