Christmas Presents

On first sight, presents sound like a wonderful thing. You receive a surprise or something that you had always wanted, and you receive it for free. An economic benefit, surely. But it’s not that simple, because most people make presents at least in the expectation of receiving something in return (not necessarily presents though). If you never return anything, you will realize that people will stop giving to you as well. Trust me, I have noticed it myself.

What a waste!

You might still think that this underlying quid pro quo may put a dent in the philosophical value of Christmas presents, but it surely is normal economic behavior. But Christmas presents are in fact quite different from other economic transactions:

1. In a usual economic transaction, the value of a product is about the same to the seller as it is to the buyer. Otherwise, they wouldn’t agree on a price.
2. With Christmas presents, the value to the giving person is what he or she spends on the present: 40 $ for a tie. 29 $ for a book. 30 $ for a ticket to the theater.
3. For the receiving person however, the value is independent of that investment. It is solely determined by how useful he or she will find the present. He might only wear the tie once or twice a year. He might not read the book, for lack of interest or time, or he might have wanted to read it anyway, but wouldn’t have spent money on it and would have gotten it from the library instead. And she might be bored all the way through the theater performance and even have to pay a bus fare or fuel to get there. In all these examples, the economic benefit to the receiving person is much less than the investment made by the giving person.
4. Thus, economic value is destroyed.
5. Of course, there is also the possibility of the reverse scenario: A present requiring a small economic investment might bring lots of benefit. A painting that you can finish in a day might decorate somebody’s office for a lifetime (and save him the money he would have to spend to buy a painting). A book that you bought at a flea market for 3 $ might keep someone entertained and happy for a week.
6. Countless disappointed faces under Christmas trees and the scores of people in shops after Christmas wishing to return gifts suggest that in too many instances, we are closer to the scenario described in no. 3 than the one in no. 5.

This blog is never about nagging, but always about constructive solutions. So we will analyse how to increase the economic value of your Christmas present transactions:

1. The best approach would be not to give any presents at all. In a free economy, people will buy what they need and want, and suppliers will produce and sell what people want. This radical approach might seem a bit heartless though.
2. Give money. The receiving person will know how to get the most personal benefit out of your present and we can be certain that they will spend it to maximize their is economic gain.
   

   Books and cigars are perfect presents – for me.

3. Give something that everyone needs and would have to buy for themselves otherwise. Examples are bread and milk, or frozen pizzas for bachelors. Toilet paper is another favorite of mine. This will free up the receiving person’s budget for other investments.
4. Make wish-lists. Let people know what you want and ask what they want. This way, everyone will be happy and we have even demonstrated that a market functions best if all information is freely available.

In line with my last suggestion, I have posted my own wishlist, which will even remain valid beyond Christmas.

Christmas Travel

I have to admit I never got the point of Christmas travel to reunite with other members of your family or clan. Surely, if you have parents to visit on Christmas, you also have them in May and August. My feelings and respect towards my parents might go up and down a bit with certain events and developments, but they are not dependent on a recurring event in a calendar.

From empirical evidence, we know the following facts about Christmas travel:

1. Far more people than usual travel.
2. As is normal (and foreseeable), this makes travel more expensive at this time of year.
3. People start their journeys relatively late (22 or 23 December at the earliest) and all want to arrive at their destinations on the evening of 24 December.
4. Christmas is in winter (at least in the northern hemisphere). Roads are blocked, sea lanes are frozen, airports are closed. This reduces the travel capacity at a time of hiked-up demand, which can only lead to chaos.
   

   Engaging in economically neutral Christmas activities. At Nonsuch Park, Surrey in December 2010.

5. Because of the winter conditions, travelers do not have access to all the substitute options that they would have in other seasons, like going by bike or driving themselves.

We can easily detect a vicious circle of ever-decreasing supply and ever-increasing demand. The only sensible option therefore is to travel at other dates. It will be cheaper, more enjoyable and you have a higher chance of actually reaching your intended destination.

Christmas Shopping

As you are already getting a sense of my rather negative economic assessment of Christmas, I can see you are itching to say: “But I thought Christmas was GOOD for the economy because of all the extra spending and increased retails sales.”

Fair enough, some businesses do indeed make a large junk of their turnover in the two months leading up to Christmas. And Christmas is undoubtedly good for some businesses, for example those that farm and sell Christmas trees, candles, Glühwein (mulled wine), even book stores.

More turnover for these businesses, more profit, more jobs, what can be bad about this from an economic perspective? Well, this part of Christmas does not deserve a negative verdict. But it also doesn’t deserve a positive remark. Because it is neutral. Christmas shopping has no positive effect on the economy.

Why is that? Simply because any dollar, pound or euro that you spend in December, you won’t spend in January or you will have saved in November. Christmas shopping does not increase spending in an economy, it just shifts your spending away from other months and away from other products and services. If this effect is positive or negative therefore depends on which spending you cut to have a party on 24 December. If you decided to forego university to save on tuition fees, it will be a terrible (dis)investment. If you decide to cut back on drug use to buy presents for your family, it will be rather positive.

Conclusion

• Your Christmas spending has a neutral effect.
• If you spend your money on presents, do so wisely.
• Don’t travel on Christmas!

If you do need to get together with your family over Christmas, I hope this blog will give you something a bit different to talk about at the dinner table. Enjoy the holidays!