Go Ahead, Exchange Gifts. Forget the Economic Logic.

Spend much time with economists around this time of year, and you will, eventually, get around to hearing about the dreadful inefficiency of exchanging gifts. You desperately wrack your brains for something, and then buy a supply of scented bath oil for someone who has only got a shower; they return the favor by giving you three books you already had. This is, an economist will solemnly point out, an extreme waste of resources, because each of you would have been happier taking the same amount of cash to buy something for yourself.

This observation is frequently greeted with cries of “Scrooge!” And yet on one level, it’s obviously true, as attested by the vast stocks of unused scented bath sets accumulated by mothers, grandmothers and aunts in their linen closets. And yet, on another level it’s just as obviously false: Even if you are the sort of rational calculating machine who shows up in economics models as Homo economicus. There is a higher logic to the gift economy, a metarationality, that mandates we keep giving and receiving objects of dubious value rather than giving one another money or just abstaining from the exchange of gifts.

We think of “the economy” as a single vast sphere, where cash is king and caveat emptor. But in fact, every American lives in two economies: the market economy, dominated by arms-length transactions with strangers; and the “gift economy,” regulated by what anthropologists call reciprocal altruism. Market transactions are specified exchanges of value for value, with few residual obligations on either party once the contract has been executed, the sale completed. Reciprocal altruism is a lot fuzzier; it’s a sort of favor bank, where you and I (tacitly) agree that we will help each other out without knowing when or how that help might be demanded.

Reciprocal altruism has some benefits over market exchange, which is why smaller groups generally at least partially rely on it. It lowers what economists call “transaction costs”: the non-cash costs of coming to an agreement. These can include things like finding someone who will sell you what you want, negotiating a price, and paying a lawyer to draw up a contract. I don’t need to negotiate a price with my sister when I ask her to drive me to the airport, or call a cab company, or worry that the cab won’t show; she’ll show up because she’s my sister.

Reciprocal altruism also has some higher costs: You have to put more work into signaling loyalty to the relationship, often by putting favors into that favor bank; you generally can’t just decide that you’d rather not trade today. You stand by your brother in a fight, even if that fight is unwise; you take your friend to the doctor, even if you have other important things to do and your friend is a hypochondriac. But there is a payoff to this: When you have a crisis, and really need them, those people are going to be there for you no matter what time of night, or how costly it may be. Reciprocal altruism is a universal insurance policy that neither the market nor the government can fully replace.

gifts_small Go Ahead, Exchange Gifts. Forget the Economic Logic. Economy

Trying to conduct one sort of exchange by the rules of the other doesn’t really work. That’s why communism has never successfully worked above the level of a small group; it’s trying to manage transactions with strangers on the logic of small-group reciprocal altruism. Those small groups have a lot of social mechanisms, from shaming to threat of exile, to prevent people from cheating. When you try to scale it up to millions of strangers, it collapses into destitution or bloody tyranny.

But that’s also why trying to scale down the rules of market exchange to the intimate network of family and friends is doomed to fail. (If you don’t believe me, try offering your partner money to have sexy time with you.)

The rules of reciprocal altruism actually require some inefficiency. Imagine the two possible outcomes if gift exchanges were reduced to cash:

  • You both give each other equivalent amounts of cash, in which case, why bother?
  • One person gives the other more cash, in which case we now observe a sudden disparity in how committed the two parties are to the relationship. This is corrosive to reciprocal altruism.

That’s why we don’t let cash intrude into these relationships (and why a lot of people have a deep moral intuition that turning certain sorts of (typically intimate) dynamics into market transactions, via prostitution or organ sales, is morally wrong or at least questionable. Gifts, unlike cash, put us into a relationship with someone, one in which some labor had to be expended on choosing the gift, some thought given to the other person and what they might like. It is the maintenance fee for your relationship, the premium for your insurance policy.

So no matter how fond you are of economic logic, don’t let it spoil your holiday season: Go ahead and buy that scented bath set. The recipient will enjoy having something to open. And since our brains are hardwired for reciprocal altruism, it will probably make both of you just a little bit merrier, toward each other and everyone else.