Philosophy and Economics of a Gift

This Christmas my sister received a gift from her uncle as she did every year. His gifts were always special and she waited for this day all through the year. Last year she got an ipod. It was wonderful. This year too she expected an equally exciting gift. As she opened the gift wrap, she found a beautiful dress. As she tried, she found that the dress was not her size. Also the front design was not of her choice. This wasn’t what she had expected. Though she did not express it, she felt disappointed. But what could her uncle have done? How could he so precisely estimate the size of the dress? How could he pre-empt what design would my sister like?

We often come across such situations in our lives. Gifts of our choice do not match with other person’s choice? What should we do? Standard economic theory of ‘maximization of total utility’ offers a solution.  Instead of choosing a gift for the other person, allow him to choose for himself. Gift the cash directly and permit him to buy the gift of his choice. This would help to maximize the choice of the recipient and hence maximize the total utility, marginal utility and the ‘welfare’.

So if the economic theory is to be relied upon, then gifting cash will be a better idea. Is it so?

Mankiw examines this problem. He cites an example in his celebrated economics textbook- ‘Basic Principles of Economics.’ One of his students at Harvard once decided to gift his fiancée cash in order to maximize the total utility. The next day he ended breaking up. His fiancée felt offended for being offered cash instead of a gift. Cash didn’t work. Did the standard economic theory fail?

Mankiw suggested that the economics can explain even this event in a way similar to its explanation of consumer behavior.

Mankiw admits that gifts do hold a special significance which theory of maximum utility cannot explain. But he argues that there are other theories in economics which should be used. He calls in the theory of ‘economic signals.’ An economic signal can be understood by considering the following example. Suppose a firm is sinking and is on a verge of liquidation. Investors have lost their confidence in the firm. Such a firm may buy a lot of expensive shares in the market or buy a lot of expensive advertisements to send a ‘signal’ to its investors that its economic position is sound and it’s not sinking. This will help to restore investors’ confidence.

Mankiw applies the theory of signals to gift-giving. He explains that gifts are important because they send a ‘signal’ to its recipient that the cash can’t. Selecting a good gift requires time and effort which giving cash doesn’t require. So gifts ‘signal’ love, affection and care which cash cannot.

Is Mankiw’s explanation satisfactory? Does the theory of ‘economic signal’ completely explain the phenomenon of gift-giving? Let us examine it in the light of the following real life example.

When I was in ninth standard, a very peculiar guy used to study with me. He was nicknamed ‘Mental’ for reasons that will be shortly evident. He asked his father for Rs 1000 to buy his mother a gift on her birthday. He goes to the market and spends considerable amount of time and effort to select a gift. Because the gift required time and effort and was also expensive, it was a good ‘signal’ according to Mankiw’s theory. So it should work.

‘Mental’ went back home very excited. He placed before his mother a box with a beautiful wrapping. Mother was very happy. As she opened the gift box, to her utter amazement, she found a shaving kit! Obviously, the gift was doomed even though it was a good ‘signal’. Why? Economics’ theories would argue that this happened because the shaving kit was of no use to the mother and thus it failed to increase the overall utility as. But does that mean that you can gift your bald boss an expensive wig on his birthday to camouflage his baldness better? A wig would be very useful to him and also it will be a good enough signal because the wig was rare and it required money, time and effort to purchase a wig. Still you can’t think of gifting your boss a wig on his birthday. Why do both economic theories appear to fail?

Both the explanations do not stand every test because they fail to consider the abstract virtues associated with gifts. Philosopher Michael Sandel argues that gifts are not ‘signals’ but expressions of love, affection and care. Signaling love is not the same as expressing it. Love is not a piece of information that cannot be explicitly evinced without ‘signaling’ it like the economic position of a firm. Gifts are means to connect one individual to the other as one shares and exudes his feelings with the other through the gift. So thoughtfulness is also important while selecting gifts. Without a thoughtful effort to choose a gift that vital connectivity cannot be established and the required message cannot be conveyed. My friend’s gift to his mother didn’t work because it lacked thoughtfulness required to establish that connectivity and convey a message. Though a good ‘signal’ it was an inadequate expression of affection. Similarly, gifting your bald boss a wig doesn’t work because such a gift reflects thoughtlessness. Giving your fiancée cash instead of a prudently chosen gift reflects a similar thoughtlessness and an inability to connect with her. Your love doesn’t find the fullest expression in wads of currency notes even though they may be a good ‘signal’. There are things that money can’t buy. We can’t buy a friend even if both the sides consent to such a deal because we know that a hired friend is always different from a real friend. Similarly gifts cannot be valued solely in economic terms as they have certain abstract virtues attached to them which economic theories cannot explain. Gifts are tokens of friendship, expressions of love and affections and thus cannot be gauged solely in monetary terms and economic theories find it difficult to explain them completely.