The Economics of Christmas

“What I’m always trying to say to the consumer is: buy less, choose well, make it last.”
– Vivienne Westwood

This is the second post about Christmas that I am making this season. The first post was on Christmas Eve, about the Innovation Story of Santa Claus and Coca Cola.

Boxing Day

Today is Boxing Day, the third day of Christmastide, and this post will be about the more trivial topic of how Christmas have become the most important consumer and shopping holiday of the year, and what this means for the economy.

To write about this today is appropriate, as Boxing Day is a secular holiday and traditionally the day the sales starts when millions upon millions of consumers queue in shops, hoping to make discount bargains.

The original meaning of “Boxing Day” comes from the tradition to keep boxes for alms in the churches on Christmas Day, where well-off people could make contributions of cash or goods to those less fortunate. On Boxing Day the boxes were opened and the contributions were distributed to the needy.

In my native Sweden Boxing Day is called “Annandag Jul” (literally “another day Christmas” ) and it is an official part of the Christmas holiday. It marks the start of the “mellandags rea” (literally “middle days sale”, representing the days between Christmas and New Year’s) where retailers try to unload all the stock they did not move for Christmas.

Christmas shopping frenzy

For the past few weeks, we have all been through it. It has been cold outside, the traffic has been heavy, the stores have been packed solid with cranky, pushy people and Christmas music, and the news have been dominated by stories about shopping. December is that time of year economists call the mass consumption month!

While those who work in the retail industry are engaged in the intensity of the Christmas holiday shopping season, retail analysts, investors, researchers, and consultants are engaged in the intensity of Christmas holiday shopping season predictions. There seems to be no limit to the number of ways that retail holiday sales, traffic, jobs, hiring, and technology can be measured and predicted. There also seems to be no limit to the number of people who have and want to express their opinions about what this year’s Christmas season retail results will be before it was underway.

Here in France where I live, this year people buy and give books, like The Truth About the Harry Quebert Affair, they go to the movies to watch Skyfall, they buy Adele´s latest CD with the movie soundtrack and they buy package trips to French speaking Tunisia for holiday.

If you think about it, it’s truly remarkable how we are driven into a buying frenzy. The Christmas music is usually the first sign. Shopping malls and stores begin to play the Christmas music earlier every year, tricking the shoppers into thinking that the holiday season is quickly approaching.

It is scientifically proven that background music affects shopping habits, and I cannot help but thinking that the music associated with Christmas is extremely powerful in increasing buying.

Have you ever thought about what the "Christmas spirit" really is? It is a mindset that has been meticulously created by clever marketing over the last century. It has been handled so expertly that companies can now advertise their products and spread sappy messages about how Christmas is not about presents at the same time!

To give an example, below is a video from Financial Times this morning, where FT’s reporter Christopher Booker goes behind the scenes of the toy design world on how to make a “hit toy” for Christmas.

The video shows the careful orchestration between designer, manufacturer and, most importantly, the retailers (WalMart, Toys R Us and Amazon). Having a hit on their shelves can make or break a retailer’s holiday season, but for the toy designer, getting a chance to enter the contest takes far more than an innovative idea.

The true Christmas spirit?

For me the true Christmas spirit is not about consumption, it is about resting, not receiving business calls for a few days, and about experiencing special, memorable moments with friends and loved ones.

Moments such as experiencing slowly falling powder like snow,  such as taking a casual stroll through the traditional Christmas markets on Römerberg in Frankfurt, or in the Old Town of Stockholm, in Basel, in La Condamine in Monaco or by the harbor in Cannes. I know, I am fortunate that I have got to travel so much in my life. The true value of that lies in the accumulation of experiences and the wisdom that hopefully follows.

It is also about visits to church. I am not particularly religious, but I do like to experience spiritual events together with other people, be the Christmas Day morning mass (I fondly remember travelling on a horse-sleigh on dark, snow-filled countryside roads to the church with my parents when I was a child), episcopal church gatherings in Connecticut or South Carolina in the United States or a visit to the Blue Mosque in Istanbul on Christmas day.

Here are some pictures that I like to connect with Christmastime:

Interesting enough, the images I connect with Christmastime are about places, showing the mood and feeling of a place, and not with people.

If you have read this far, dear reader, then please comment in the comment field furthest below, and let us know what the Christmas spirit is for you?

The Economics of Christmas

To get to the main topic of this blog post, shortly after the ham, steak, ribs or turkey and trimmings are eaten and the dishes done, millions upon millions of families gather to start to open their Christmas presents.

For many retailers, fourth quarter sales will determine whether the year ends with profits or losses.  It is not just the gifts under the tree that drive sales during the fourth quarter.  We purchase trees and decorations to deck the halls, splurge on Christmas food, alcohol and candy canes at the grocery store and take the kids on special outings to Christmas market and we send greeting cards in mail and e-mail.

One of the lesser-known forces in driving sales is the televised news. For the past four weeks or so, the news channels have featured numerous stories about….shopping.

Some years ago, I resigned myself to the fact that we economists are the wet blankets of the world. We can ruin almost any situation with just a couple of analytical tools and the words “unintended consequences.”

Rent control? It causes shortages and hurts poor people. Minimum wages? They reduce employment and hurt poor people. Laws against “price gouging and cartels?” They also cause shortages and hurt poor people. Interventions, regulations, and subsidies that were supposed to make housing and higher education more affordable and thereby make the world a kinder, gentler, more prosperous place? We’re seeing how that’s working out right now.

You get the idea: the list of dreams that have been dashed upon the rocks of the hard principles of economics is long indeed.

Not content to ruin the dreams of a few idealists, some economists have turned their attention to Christmas. Here are a few thoughts from the Dismal Science that rain on the holiday parade.

Economists’ disdain for Christmas shopping is not limited to criticizing the inefficiency of spending hours shopping for gifts, in fact the tradition of giving gifts itself is considered economically irrational and inefficient.

Sure, you say, it is the thought that counts. Well, that is just not so. A gift giver can think all he wants about what a friend or a loved one may want for Christmas, and end up buying the thing they think the other person wants. But when it comes down to it, each of us only really knows what one person in this world wants, and that is ourselves, that’s right, the royal ME.

Throughout his research, the economist F.A. Hayek emphasized the knowledge problem and explained how markets utilize and disperse knowledge that cannot be known or articulated by a single mind. Buying and giving gifts that we think the recipient might like runs into the same problem. People know their own preferences better than you do.

So basically, any gift you can buy for someone else will bring them less benefit than a purchase they themselves make. This is what’s known as the dead weight loss of Christmas (see chart below).

What the chart says is that the marginal cost of shopping for and buying Christmas presents exceeds the marginal benefit of those who receive them, hence, the market for Christmas gifts fails since the behavior of private individuals results in a level of Christmas shopping that exceeds the socially optimal efficient level, at which the marginal benefit of the give receivers intersects the marginal cost of gift production.

Resources are over-allocated towards Christmas present shopping because it is simply impossible for gift givers to know the precise preferences of those for whom they shop. Thus from an economic standpoint, Christmas is not “the most wonderful time of the year”, rather it’s “the most inefficient time of the year” (not so catchy as a song lyric, I’m afraid).

In the developed economies, we consume about two-thirds of economic output every year. It is true that production takes place with the goal of generating goods and services that make people happy. At the same time, consumption per se does not create sustainable economic growth.

“Spend more” is an intuitive-but-wrong prescription for what ails the economy. While purchasing a greater assortment of consumer goods might pad retailers’ and manufacturers’ bottom line in the short run, they leave us with fewer unconsumed resources with which to build the economy of tomorrow.

As an economist told me many years ago, economics shows us that it is very difficult to be charitable in ways that actually benefit the people we’re trying to help. Some people might find this sad, dismal, even. I actually think it’s kind of liberating because it suggests that, at the risk of being dramatic, a better world is possible.

A new paradigm for charity and justice will require a lot of thinking outside the Boxing Day donation box. With Christmas 2012 soon over and a brand new year right around the corner, it is a challenge I look forward to meeting head-on.

Enough said

Having written this blog post and thought through this topic, I have decided to not enter any shop today. Instead I will go to visit our local village church in the afternoon.

For the reader that wish to learn more about the economics of Christmas, the definite article is Joel Waldfogel´s “The Deadweight Loss of Christmas”, published in American Economic Review in December 1993. Click on the link below to read the article.