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Is cash the most 'efficient' Christmas gift?
Yes — but we don't give gifts for efficiency
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You're welcome. (Tetra Images/Corbis)
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ome economists think that Christmas gift-giving is a big waste of resources, and that cash is a much more efficient present.

When giving specific gifts, people often get things they don’t want, which is a waste of resources. An estimate by Wharton Professor Joel Waldfogel suggests that 20 percent of gift giving money is wasted this way.

Woldfogel argues that a person who spends $100 on himself or herself will presumably spend that money on something that actually nets them $100 worth of satisfaction. But when another person spends that amount on a gift they may end up getting a painting of a cat for a dog-lover, a sweater in the wrong size, or a coffee maker for a tea drinker, etc.

Woldfogel argues it would be much more efficient to just give cash, so that the recipient can spend something that nets $100 worth of satisfaction.

A survey of economists by the University of Chicago Business School found that most actually disagree with this idea.

Economists were asked to agree or disagree with the statement, "Giving specific presents as holiday gifts is inefficient, because recipients could satisfy their preferences much better with cash."

In response, the economists suggested that gift-giving sent important social signals, and was about more than finding the most efficient way of allocating resources.

Joseph Altonji of Yale noted that "cash is more efficient in a narrow sense, but holiday gift exchanges are about interpersonal relationships."

Janet Currie of Princeton argued that "gifts serve many functions such as signaling regard and demonstrating social ties with the recipient. Cash transfers don't do this as well."

Larry Samuelson of Yale said that "gift-giving is a form of communication. Comparing the gift to what the recipient would purchase with cash misses the essence of gifts."

And Carl Shapiro of Yale added "this narrow notion of 'efficiency' — and what life is about — gives economists a bad name."

I tend to agree with these views. Cash is the most efficient gift because it can be converted into anything the recipient chooses. But Christmas gift-giving is not about allocating resources efficiently; it’s about building and maintaining social bonds. And for that, cash is often a poor substitute for the social display of the time and effort of choosing, wrapping, and giving a specific present.

Former Obama White House economic advisor Austan Goolsbee — now a professor at the University of Chicago — summed up the importance of gift-giving in building and maintaining social bonds: "Instead of proposing to your wife [with a] diamond ring, you offer a gift card of equal value. Efficient — if you don't count your hospital bills."

John Aziz is the economics and business correspondent at TheWeek.com. He is also an associate editor at Pieria.co.uk. Previously his work has appeared on Business Insider, Zero Hedge, and Noahpinion.

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