AUDIO: Grinchonomics
In an economically rational world, people would not do Christmas Image: REUTERS/Vasily Fedosenko - RTX2W25A
Economists don’t like Christmas.
Why should rational economic actors withhold consumption, then engage in orgiastic eating and drinking and unnecessary spending? Why should they spend money on gifts, the value of which is almost certainly less to the receiver than the giver?
Christmas, of course, is not an economic, but a religious festival:
Christmas apparently started — like Saturnalia — in Rome, and spread to the eastern Mediterranean. The earliest known reference to it commemorating the birth of Christ on December 25th is in the Roman Philocalian calendar of AD 354.
But associated with the celebration are customs and practices that reach back tens of thousands of years into human history. And food, in the form of the Christmas feast, is one of the most important.
Far from functioning merely as social occasions, archaeologist Brian Hayden says feasts are fundamental to the emergence of modern economies:
Social and political conflicts are rife in tribal villages, with many accusations of infidelity, theft, sorcery, inheritance irregularities, unpaid bills, ritual transgressions and crop damage from other people’s domestic animals. In order to defend oneself from such accusations and threats of punishment, individuals need strong allies within the community.
The example of feasts is a reminder that economics is not a science of distribution. Surpluses exist to generate social and political advantage, not to allow the efficient allocation of resources. That is probably not something to share across the extended family dinner table. But maybe one quick lecture from Professor Hayden would have won Scrooge round quicker than a whole night’s worth of ghostly visitations.
Scrooge was the gloomy, miserly misanthrope who appeared in Charles Dickens’s A Christmas Carol only to transform into a jolly old soul by the book’s end.
Dickens is credited with virtually inventing our modern idea of Christmas. But before you think that’s a happy time of joy and kindness to fellow human beings, let business school professor let Philip Hancock explain:
Dickens was writing in an age just before the appearance of industrially produced Christmas goods, and while there were “no gifts or gaily wrapped presents” in the Carol, his message is quite clear. To consume, and indeed produce and sell, on such a scale and with such positive enjoyment in its undertaking was integral to the happiness of the season… Scrooge’s redemption is brought about through a willingness to engage not simply in his relatively isolated practice of usury, albeit more benevolently, but to fully commit to the ideal of market commodity exchange as a means by which he may once again enter the social sphere. Christmas consumption, therefore, is represented both as a means by which individual redemption might be achieved and… a means of meeting the emerging need for a culture of consumption in a manner that is positively virtuous.
The most famous recent economic examination of Christmas is by Joel Waldfogel. His classic 1993 paper, The Deadweight Loss of Christmas, is a grinchonomic, “no sleigh bell” prize-winning take on gift-giving.
In it, Waldfogel argues that the further the relationship between giver and receiver, the more value is destroyed in the gift. In other words, your parents might have a rough idea of what you want, but your grandparents, uncles, aunts, and cousins probably have none. The gap between what they spent on those Christmas-themed socks and the value you place on them? That’s the deadweight loss.
Children will always want presents though. And when it comes to toys, the folks at Frontier Economics have been doing some research on how your stocking fillers perform over time.
Their modelling tells them that the best buy of this year is a Lego Star Wars kit. The bad news is that to preserve value, these gifts have to stay firmly in their box. Good luck with that on Christmas morning.
Their advice is to choose something more traditional.
- gold has achieved a CAGR [compound annual growth rate] of 4% since 1984
- although frankincense and myrrh are no longer the market benchmarks they once were, the price of perfumes has increased by a respectable 2% CAGR over the same period.
Next year, instead of looking for the wrapping paper, just send cash.
It falls to two German economists to have the last word.
Several macroeconomists have tested for a so called ‘Santa Claus Effect’ in business cycles, that is, a boom in the fourth quarter and a following trough in the first quarter. Overall the results are mixed, with some papers finding this effect, while others could not — or only in some countries — establish a ‘Santa Claus Effect’. More interesting than the question of whether Santa establishes a business cycle is whether such an increase in output and employment in the fourth quarter followed by a contraction the following first quarter is economically efficient. Reliable research results on the effects of Christmas on growth are very limited. Maybe the government should smooth the business cycle and decrease spending in the fourth quarter, while increasing spending in the remaining three quarters. In this way, there could be a bit of Christmas every day.
Some Santa-inspired state intervention fits broadly in with the renewed interest in the role of government.
However, Santa’s refusal to allow workshop inspections, his globalized distribution system, and his avoidance of tariffs, means that the skids may be well and truly under his sleigh this Yuletide.
Merry Christmas!
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