‘It’s the thought that counts’ is a phrase sometimes uttered at the unwrapping of a gift held in low esteem by its new owner. Although gift-giving can often be justified based on the thoughts of goodwill from the giver to the recipient, there is, unfortunately, sometimes little to justify the actual substance of gift-giving. Despite the good intentions – and the many hours and dollars spent – in obtaining gifts for others, there exists an enormous amount of waste in gift-giving as a result of the inability on the part of the gift-giver to know the true preferences of the recipient.
The economist Milton Friedman classified different kinds of spending into four categories, based on the source of the spent funds, and the person for whom the item is bought. More specifically, they were comprised of: 1) spending one’s own money on oneself, 2) spending one’s own money on someone else, 3) spending someone else’s money on oneself, and 4) spending someone else’s money on a third person.
When someone buys something for himself, we can understand that the object for which he exchanges his money is his most desired use of that money at that particular time given the circumstances. If it were not, then the same money would instead be put towards buying something that he wants even more. This is what we call ‘demonstrated preference’, since action demonstrates the most desired preference of an individual, and we can imagine all his other preferences being considered less desired by that individual on a theoretical ‘value scale’.
The lesson that Friedman drew from his categorization of spending was an understanding of the different kinds of incentives that each of these methods of spending creates for the person undertaking them. We can already see, for example, that since the actions that one takes reveals his demonstrated preferences, whichever way an individual chooses to spend on himself reflects his most desired method of employing money in exchange at that time. This means that the incentive in the first category – spending one’s own money on oneself – is to buy according to the highest preference of the buyer. Now in each of Friedman’s first two categories referred to above, we are assuming that one is using his own money, which means that the way he spends his money in a particular transaction also affects how much money he has left over for future exchanges. Thus we can say that he will wish to economize in line with his value scale. The overall incentive in the first category, therefore, is to obtain the most desired good at the cheapest price. This seems a very efficient arrangement.
What about the second category, in which one uses his own money to buy a good for somebody else? In this case we can assume the same desire to economize as in the first category, since it is still the buyer’s own money at stake. The difference comes in the knowledge of the particular good that is most preferred, since the buyer cannot know the recipient’s theoretical ‘value scale’. This means that he must try to base his judgement of what good is desired by the recipient on much less sure knowledge. But the fact of the matter is that the gift-giver cannot know if the recipient would indeed purchase that good over all others if given the choice. The chances are that they would not. It is this great and necessary ignorance that is the cause of people going to the length of spending many hours and money in order to obtain a good which is not actually desired by the person who receives it!
We are all familiar with the difficulty in buying gifts for people, even those we know extremely well, and so too have we seen many such presents ‘re-gifted’ or exchanged for money after Christmas. Just think: would you buy for yourself all the other things that people buy for you? If not, and the good is not desired, then we can see definite instances of waste cropping up. One should also remember that money itself can be considered a reflection of the time and effort that one has already expended. We must ask, then: is it really wise to pour all this time and energy into acquiring undesired goods? The observations above suggest that spending large amounts of money in buying gifts is a wasteful practice, and that converting one’s energy into the acquisition of objects that the recipient does not get much use from (vs. goods that they prefer) benefits neither the person who gives the gift nor the person who receives it.
There is, however, one key difference between a good bought by someone for himself, and a good bought by someone for someone else at Christmas time. That difference comes from nature of gift-giving, and the fact that ‘it’s the thought that counts’. When something is given as a gift, its utility to the recipient often comes solely as a result of the fact that someone has given it to them. Thus a gift can be useful to someone based on the action of the giver rather than on the substance of the object given. There are, furthermore, certain kinds of goods that one would never buy for oneself, but which provide utility when given as a gift: think, for example of flowers, boxes of chocolate, or objects made by the giver. People also often give presents that they think the recipient would find useful, but which the latter would not normally buy for himself.
Even so, for goods that are of a more practical, and a less gift-like nature, the good’s status as a gift is likely to wear off with time, ultimately leaving the recipient with a less preferred item at the expense of the giver. This goes to reinforce what I have said above concerning the spending on gifts: gift-giving provides greater utility through thoughtful, personal gifts (even if they are cheap) rather than through expensive gifts whose relationship to the recipient’s preferences we cannot know.
To return to Friedman’s categories, we see that in the third category the incentive is to obtain a good which is in line with the purchaser’s preferences, but to disregard cost. In the fourth category, the incentive is to spend as much money as one can, but without much ability or desire to obtain for that person what they value most highly. For this third category, imagine that an unknown stranger has given you a credit card with which you are to buy your own Christmas presents, giving you no limit. You will know exactly what you want, so you will be sure that whatever you buy will be most in line with your own preferences, but you cannot know how much you are supposed to spend on those gifts. Since there is no need for you to economise your own resources, you will care much less about the cost of goods and likely spend a great deal more on them than you would if they were bought out of your own funds. At least, however, you would know that you have bought useful goods with that credit card, i.e. your purchases would not have been completely wasteful.
Now imagine that instead of purchasing your own gifts with this unknown stranger’s credit card, you have to buy them for another person. In this scenario you not only have no incentive to economise, but you also suffer from the problems discussed earlier in the article: you cannot know the preferences of the party for which you are buying gifts! You are therefore spending blind, with little care about either the cost or the content of the presents. Your spending activities will certainly result in waste. Here we find an analogy between this scenario and the spending habits of governments. Because they are have enormous amounts of other people’s money to draw on, and are tasked with spending that money on other people, they cannot help but use that money in extremely inefficient ways, with little regard for economizing or spending line with the most desired preferences of those who they are spending on. The difficulties inherent in buying goods for other people at Christmas time are even greater for those spending from government positions, since they have even less knowledge about the preferences of the people they are buying for. This combined with a lack of economizing leads to the perfect incentives for wasting vast sums of money.
We see, then, that even a simple custom like gift-giving should move us to think more fully about the means and ends of our actions, and whether or not they match up in a fitting manner. I have argued here that the practice of giving gifts can lead to a great amount of waste. This, however, is not a complete indictment of giving presents overall, calling for the abolition of Christmas! Instead, it is a suggestion on how to make Christmas all the better through a smaller mental and monetary burden, and more fulfilling social interactions. If it really is the thought that counts, then it is thought, rather than expense, which should be the major element in gift-giving. Once we understand the tendencies towards waste that exist in buying gifts for other people, we find that the government spending suffers from these problems to an even greater extent, due to the fact that it is associated with an additional incentive that discourages economizing of resources.