Monday, October 19, 2009

Scroogenomics: Economist wants to improve the efficiency of Christmas

My grandmother always gave me really big underwear for Christmas. I never wore it. Joel Waldfogel must have had similar experiences since he has written a book on the topic. Not underwear, but Christmas and gift giving in general. Here is the main story.

Serious economist: Giving a gift is not efficient if the recipeint values the gift less than the full cost of the gift. In fact, even if they value it higher than the costs, it may not be efficient since  - assuming you know your own preferences better than other people - you could have spent the money on something that gave you an even higher surplus. So, obviously we should only give each other money. By not doing so Americans waste around $12 billion per year, according to very unbiased estimations.

I do not know whether to laugh or cry. I once read a satirical paper about this is an economics journal. To my surprise I then found that the American Economic Journal has published several articles on the topic - with lots of discussion. And please tell me that I was wrong, please tell me that I just mistunderstood the article, please, please ... but it seems to me that these papers were not satirical.

And now a book has been published by one of the participants: Scroogenomics. The $12 billion is from the book. I have not read it and I pray to God that it is satirical, clever and funny ... but from the description it sounds like he is a serious economist.

Why do I hope this? I would not mind getting more money and less baggy underwear, but the nature and meaning of a gift-exchange is often very different when it involves money. Ariely has some observations on this in his book Predictably Irrational. For instance, bringing wine to a dinner party is OK. Giving money instead is not. Maybe economists would advise us to change the norms, but maybe also economist should recognize that this is not all there is to it. Waldfogel probably knows all this, but goes on anyway. So instead of just saying that it is absurd, I did a real survey and asked people about their willingness to sell gifts and at what price. The result? Many gifts were valued much higher than the cost. Why? Probably because of the sentimental value. So instead of destroying value, Christmas gifts increased value in my calculations.

Wow, I cannot believe I was tricked into doing this. Taking the discussion seriously and playing on their court. Even if the estimation had shown a loss I do not believe we should take it seriously. There are simply too many aspects of gift giving that will be left out in of the quantification to make the conclusion credible. Verdict: Absurd!Afternote: On no, he is serious! See interview.

Tuesday, October 13, 2009

Will the crisis change economics?

Q. In your view, what can save economics?

A. I am very pessimistic about whether we can actually pull out of this. I think we have created a locomotive. This is the sociology of the economics profession. We have created a monster that is very difficult to stop.

Q. Could real-world empirical facts or a severe economic cataclysm change it?

A. That would certainly change it, but I do not see that around the corner. Perhaps I am too pessimistic, and it is very depressing to stay there. There does not seem to me to be any way out.

(Mark Blaug, The problems with formalism – Interview with Mark Blaug, Challenge, May-June 1998)

Paul Roemer, The Nobel Prize for Elinor Ostrom

In a short essay about the The Nobel Prize for Elinor Ostrom, Paul Roemer writes: 
Bravo to the political scientist who showed that she was a better economist than the economic imperialists who can’t tell the difference between assuming and understanding.
Well said!