Seven Economic Views on Christmas Presents: with best wishes for 2014

Coming out of the festive season’s hibernation (spent in Sydney), I thought it appropriate to commence the New Year with a cheeky take on the usual clash between different ‘schools’ of economics, focusing on how each of seven such ‘schools’ might view Christmas… presents.[1] Besides the comic value of the entries below, there is a serious aspect to them: for they reveal, at least, partly, the pompousness, the self-importance, the vacuity, the dark side even of each and every economic theory.

The Neoclassicists: Consumed by their view of individuals as utility maximising algorithms, and their fixation with a paradigm of utility-driven pure exchanges, neoclassicists have no way of seeing the point in Christmas gift exchange. For one, it is a fundamentally inefficient form of exchange. When Jill receives a present from Jack that cost him $X, but which gives her utility that is less than the utility from some alternative commodity Y, which retails for $Y (that is less than or equal to $X), Jill is forced either to accept this utility loss or to embark upon the costly and usually imperfect business of exchanging Jack’s gift for Y. Either way, there is a deadweight loss involved. In this sense, the only efficient form of gift is an envelop containing cash. However, since Christmas is about exchanging gifts, as opposed to one-sided offerings, what would the purpose be in Jack and Jill exchanging envelops stuffed with cash? If they contain the same amounts, they are pointless. If not, they are embarrassing to the person that has given less than the other and can damage Jack and Jill’s relationship irreparably. In this sense, the neoclassicist is drawn to the Scrooge conclusion: the best gift is no gift!

Keynesians: To prevent recessions from turning into depressions, a fall in aggregate demand must be reversed through increased investment which will only come if entrepreneurs trust that increased consumption will mop up the extra production that new investments will bring about. In this sense, the elimination of Christmas gift exchange, or even the containment of Christmas largesse, would be a terrible thing during recessionary periods. Indeed, they might go so far as to argue that it is the role of the government to encourage gift exchanges (as long as they are purchased, as opposed to crafted or home produced), even to subsidise gift giving through sales tax reductions during the festive season. To the extent that it is possible, Keynesians would want to have Christmas two or three times yearly during recessionary times (preferably spaced out during the year). On the other hand, Keynesians are also keen to stress the importance of reining in the government deficit, as well as overall consumption, when the economy is booming. To that effect, they might suggest a special gift, or sales, tax during the festive season once growth has picked up again, even to cancel Christmas when GDP grows beyond a pace consistent with full employment.

Monetarists: Convinced that the money supply is the sole tool that government should ever use, and that the government’s task is to keep average prices stable through the equilibration of the money supply vis-á-vis aggregate production, monetarists believe that the central bank ought gradually to increase nominal interest rates once summer ends and reduce them sharply every January. The changes in nominal interest rates they recommend depend on the central bank’s inflation target, the economy’s underlying real interest rate, and must reflect the rates necessary to keep the rate of change in consumption demand balanced with the rate of change in the inventories of large retailers. (Yes, it is true: Monetarists are the dullest economists that have ever walked the planet!)

Rational Expectations (Chicago School) economists: They disagree with both Keynesians and Monetarists. Their quarrel with the Keynesians is that they think that a fiscal policy stimulus of Christmas present-buying in recessionary festive seasons will not succeed in encouraging gift producers to produce more gifts. Keynesians are, in their opinion, underestimating the acumen of entrepreneurs who will not be fooled by such government intervention since they will foresee that the current increase in demand will be offset in the long run by a drop in demand for gifts in the future (as the government subsidies will turn into increased taxation and/or there will be fewer Christmases during the good times). As output will not rise, all the government subsidies and the additional Christmases will achieve is more debt and higher prices for no new output or employment.  

Libertarians-Austrian economists: Supporters of Friedrich von Hayek and Ludwig von Mises have two major objections with Christmas. First, there is the illliberal aspect of the festive season: they feel that the state has no right, and no business, to force entrepreneurs to close down, against their will (for four days 25th & 26th December, 1st and 2nd January) in a fortnight. Secondly, there is the tendency of the ever-lengthening pre-Christmas consumption boom to expand credit thus causing bubbles in the toy and electronics market. In this sense, Christmas is like an annual ritual of creating bubbles during the Fall that will burst in January with potentially damaging consequences for the rest of the year. 

Empiricists: Convinced that observation is our only tool against ignorance regarding economic phenomena, empiricists are certain that the only defensible theoretical propositions are to be derived by establishing empirical patterns where changes in one set of variables (the exogenous variables) constantly precede changes in another set of variables (the endogenous ones), thus establishing empirically (e.g. through Granger tests) the direction of causality. This train of thought leads them to the safe conclusion that Christmas, and a spurt in gift exchanges, is caused by a prior increase in the money supply and a ceteris paribus drop in savings.

Marxists: In societies in which profit is derived exclusively from surplus value ‘donated’ (as part of the capitalist labour process) by workers, and which reflects the capitalists’ extractive power (bequeath to them by one-sided property rights over the means of production), the Christmas tradition of gift exchange packs a dialectical significance: On the one hand, Christmas gift exchange is an oasis of non-market exchanges that points to the possibility of a non-capitalist system of distribution. On the other hand, it also acts as another opportunity for capital to usurp humanity’s finest instincts and subvert them in its own petty interest so as to boost its own returns through the commodification and cheapening of all that it pure and good about the festive season. As for the more purists amongst the Marxists, i.e. those who still advocate the so-called ‘law of the falling (long term) rate of profit’, they are convinced that capital’s capacity to profit from Christmas diminishes from year to year, thus creating social and political forces which, in the long run, undermine the festive season.



[1] (Readers may profit from comparing my take with that of Dario Perkins’ here.)

15 thoughts on “Seven Economic Views on Christmas Presents: with best wishes for 2014

  1. Pingback: Yanis Varoufakis on Seven Economic Views on Christmas Presents |

  2. Nice touch for Chrismass, Yannis. Happy New Year and Orthodox Christmass.
    Where is the post-Keynesian school view, particulary MMT with Job Guarantee Christmass scheme?

    Maybe something like..
    Job guarantee program by MMT school will provide a special jobs for Christmass with Santa Claus entertaining jobs even for raindeers. Many non christians will have an oportunity for a decent job that will also bring them joy from faces of numerous kids. Muslims who act as Santa Claus, budhists serving at Yom Kippur, christians who represent guests at Ramadan sacrifical lamb sharing…. Seing an effect of such joy and happiness shared among people, government will offer jobs at every religion’s holiday.
    Succes of this will in time produce a new job demand that will bring nice income. Entertaining all who are alone in holiday season and troughout a year will usher a time of pay for friendship and entertaining of old and lonely ones while automatization is taking other less challengin and repetitive jobs.
    Friendship will demand to be payed for while personal private entertainment will be with an iphone. No more friendships without paying for it.
    (this is a parody without intetnion to undermine any religion)

  3. You can’t fool me! There ain’t no sanity clause! [If there was this crisis would have been resolved]

  4. Dear Yanni,

    best wishes for your nameday, may you have a year of health, happiness, wisdom and έπαινος.

    ps. Sorry, no present… I am crisis-struck :-)

  5. Pingback: Seven Economic Views on Christmas Presents: with best wishes for 2014

  6. Clearly, Christmas gift giving is a form of forward guidance intended to manipulate the aggregate savings rate. If for the sake of a simple model each adult gives another adult $100 worth of gifts the net transfer of wealth between people is zero. However the $100 per person is effectively transferred from savings to consumption. For this to work, a good gift has to be useful enough to deliver the maximum utility to the recipient, while being useless enough to be resistant to substitution with the recipient’s other needs, as the dour Neoclacissists would otherwise seek to do.

    What about the forward guidance? By giving gifts and throwing a feast at Christmas each person indicates to the market that their savings exceed the amount needed to survive until the summer harvest by at least the amount given, probably more. The direct and second-order confidence effects cause people to resume consuming and dis-save from midwinter to harvest, while otherwise they might over-cautiously be holding savings due to collective uncertainty. A modest deadweight loss in winter is meant to offset a larger loss of unnecessary or spoilt savings by the time of the summer harvest.

  7. This post is unfair to the Chicago Schoolers – the reality is much worse, since their conclusions do not hold even within the context of their model (as prof. Krugman points out, for example).

    Why is that? Simple: The main argument of the Rat-Ex people is that at a given point in time, a person’s wealth equals the present discounted value of his or her current and rationally expected future income. If we limit ourselves to two periods for simplicity’s sake, a person’s current wealth equals:

    o = B + Y(1) + Y(2)/(1 + r)

    Where r is the real interest rate, Y(x) is income in a time period, and B is wealth a person already has.

    Here’s the catch. If the government increases spending, it will eventually have to increase taxes. As taxes represent a transfer of purchasing power, future income falls and wealth falls, which should depress consumption. But even if that assumption (full Ricardian equivalence) were to hold, fiscal policy would still be effective.

    The reason for this is simple: Consumption smoothing. An implication of the Rat-Ex argument that consumption is equal to wealth is that people with the same rationally expected present value of wealth can achieve the same consumption distribution through time, regardless of their income distribution: People who expect to earn more in the future can borrow at rate r (consume more in period one and pay later), while people who earn more now and expect to earn less later can lend at rate r. According to the Rat-Ex argument, consumption is influenced by wealth, not (directly) by income, if there is no credit rationing. Here’s the thing: People have preferences about how much to consume now and how much later, and if their wealth is expected to decline, they will not reduce their spending all at once, but will smooth their reduction in demand over several periods. This is called consumption smoothing. As a result, increased government spending in a recessionary period (+G) will not be met with a one-on-one reduction in private consumption, as customers will spread their reduction in demand over several periods. As a result, if aggregate demand is deficient in the current period, fiscal stimulus can work even under full rational expectations.

    Not to endorse the Rat-Ex position (wealth is probably important, but the strong form of the assumption is rather silly), but the fact that Rat-Ex economists’ arguments tend to fail even within the structure of their own models seems to be a rather unflattering comment on how much thought they gave to the whole thing.

  8. “All these theories enhanced the beliefs of some economists like F. A. Hayek, whose economic models were totally excluding altruism and were totally dependent on personal interest. Another economist, James M. Buchanan, disputes the concept of “public interest” and supports that organizations should be managed by people whose motive is money. Concepts like “feeling of personal fulfilment” or “sense of duty”, are not included in their theories.”

  9. Funny article. What isn’t so funny though, is the way schools of thought restraint us. Under “schools” arrest, if you know what I mean…

  10. Pingback: Yanis Varoufakis: Seven Economic Views on Christmas Presents – The News Doctors

  11. Intersting because it is imaginative. For the marxists though I would argue that “Xmas is a capitalist contraption designed to boost profits at the expense of the poor who are forced to accumulate debt in order to keep up with the Joneses. So, Xmaw is henceforth abolished.”

    • bravo kefala and bravo Yanis. Wish everyone a prosperous and healthy New Year

  12. Pingback: Seven Economic Views on Christmas Presents: with best wishes for … - FunLand.ORGfree.Com

  13. Pingback: Yanis Varoufakis: Seven Economic Views on Christmas Presents | naked capitalism

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