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Gifts: Philosophy and Economics involved.

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 waswonderful. 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 wasnt what she had expected. Though she did no t 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

persons 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 tomaximize 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 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 fiance

cash in order to maximize the total utility. The next day he ended breaking up. His fiance felt

offended for being offered cash instead of a gift. Cash didnt 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 canbe 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 its 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 cant. Selecting a good gift requires time and

effort which giving cash doesnt require. So gifts signal love, affection and care which cash

cannot.

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Is Mankiws 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 andeffort to select a gift. Because the gift required time and effort and was also expensive, it was a

good signal according to Mankiws 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 theorieswould 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 itrequired money, time and effort to purchase a wig. Still you cant 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 beestablished and the required message cannot be conveyed. My friends gift to his mother didnt

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 doesnt work because such a gift reflects thoughtlessness. Giving your

fiance cash instead of a prudently chosen gift reflects a similar thoughtlessness and an inability

to connect with her. Your love doesnt find the fullest expression in wads of currency notes even

though they may be a good signal. There are things that money cant buy. We cant 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.