The economics of Christmas presents: how Michael Sandel gets beaten by his own straw man
Sandel asserts that economists find the notion of giving someone a present deeply troubling, and even frustrating. That is because economists, on Sandel’s account, believe that everybody is a super-rational, coldly calculating, utility-maximising robot. Since everybody knows their own preferences best, choosing a gift for someone else must necessarily involve inefficiencies. The recipient could have attained a higher utility level if they had simply been given the corresponding amount of money in cash (or a voucher), leaving it up to them what to buy with it. Within standard microeconomic assumptions, Sandel claims, gift-giving can never be superior to cash. It can at best be equally good, if the giver buys exactly what the recipient would also have bought.
Sandel then seriously goes on to explain the errors in this thinking, as if he really expected anyone to disagree with him on this matter. Straw-man bashing is fine as long as it serves a rhetorical purpose, but it gets weird as soon as you start believing in your own straw men, as Sandel apparently does. Since I have never met an economist who mistakes Christmas gifts for an inefficient attempt to maximise consumer surplus, I will not comment on Sandel’s reasoning. It is noteworthy, however, that if this straw man came alive and began to fight back, Sandel would probably lose the fight.
Even in the most narrowly conceived utility-maximisation framework, Christmas presents need not be inefficient. If necessary, one could quite easily integrate Christmas presents into a standard utility function (not that I’d recommend doing so).
In order to do this, one could, first of all, incorporate the assumption that on occasions like Christmas, most people enjoy being surprised. Technically, this would mean including a ‘surprise factor’ in the recipient’s utility function. For a cash gift, that surprise factor would be set to zero; for a very predictable gift, it would take a low value. Total utility derived from a gift would then be a combination of the utility derived from the good itself, and the utility derived from being surprised. The surprise element could be modelled in such a way that it can also work the other way round: a nasty surprise would subtract further from the already low utility associated with a poorly chosen gift.
One could also model interpersonal differences in surprise-affinity, that is, the ratio at which people are willing to trade off consumption utility for surprise utility. A teenager who desperately wants the latest computer game would be at the lower end of that spectrum. They do not want to be surprised, they just want their computer game. Under those conditions, a cash gift or a voucher need not be such a bad idea. Elderly people, meanwhile, who already have everything that is genuinely useful, could be on the other end of the spectrum.
Secondly, one could model the fact that giver and recipient possess different sets of information about product markets. A gift-giver cannot know your preferences nearly as well as you do, but they can nevertheless have an informational advantage over you: they may spot potential gifts that you would never have discovered for yourself. I don’t know about you, but the Christmas presents that I receive are often better than what I would have bought for the cash equivalent, simply because they contain things I was not even aware existed. So one could quite easily model a situation in which a gift provides greater utility than a cash sum, and still remain entirely within the confines of the microeconomics textbook. Nobody knows your preferences as they currently stand as well as you do, but somebody else might have a good guess about your preferences as they will be once you have seen their gift. Gift-giving would then be an entrepreneurial activity – it would be about discovering somebody’s latent preferences, rather than maximising utility on the basis of their already known preferences. The more disparate the sets of information which giver and recipients possess, the greater the potential for that effect.
In short, even in the unlikely event that you took every page in your microeconomics textbook at face value, that would not be an argument against joining the Christmas present fray. So do join it, and go on a utility-maximisation spree. I hope Michael Sandel finds a decent economics book under his Christmas tree this year.