The Economics of Gifts

In The Armchair Economist, Steven E Landsburg ponders the suggestion that one should never buy presents since it is economically inefficient. The idea relies on the argument that it is always better to give cash since the recipient can then decide how to use it, maximising the utility of your contribution; buying a present means opportunity cost. On the whole I would agree.

I’d however like to propose a few counter-arguments I’ve come up with since reading that book: reasons why buying gifts is sometimes better than giving cash. If the recipient has always wanted something dearly but can never justify spending money on it, buying that person the gift may well be the way to go. You may think that is a slightly bizarre situation – surely if the recipient wanted something he would buy it? In fact, I’d argue this situation quite commonly arises. Take for example the studious schoolchild who desperately wants a new computer but knows if he received money that it would be ‘best’ spent on the £50 textbooks and besides, that his ageing laptop ‘will have to do’. While the overall utility of giving him the money may be numerically greater in the long term, and if the student knows that, it may be better to force-feed him the joy of the new computer. Another idea that ties in with this is the utility of surprise; von Neumann laments in the initial chapters of his book Theory of Games and Economic Matter that his model doesn’t yet take into account utility of taking risks which ultimately ties in with the element of surprise, and I think some people (though not all!) treat surprise in gifts positively.

In fact perhaps the strongest reason for opting to buy gifts instead of offering money is the very fact that the recipient has to make a choice. One of the party slogans in George Orwell’s Nineteen-Eighty-Four, ‘freedom is slavery’, demonstrates my point quite clearly: nobody really has the time to compare prices extensively on a new laptop and read every review on each of the potential buys within the specified price range, and having that choice made for you – getting the legwork done for you – in my opinion, is itself worth the opportunity cost providing the gift is reasonably well-chosen.


One Response to The Economics of Gifts

  1. You are absolutely correct; many will simply not buy what they desire even when they have the resources to do so. There are so many psychological reasons for this that would be an entirely different subject; however, I do agree that buying the gift makes since – especially when it is a functional gift you already know the recipient really wants.

    Sometimes – as in this case – a wisely selected gift is MORE economically efficient.

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