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Economic Reflections 3 (part 2): Utility and Gifts

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In ch. 3 of What Money Can’t Buy, Michael Sandel’s topic was how markets crowd out morals.  Discussing gifts, Sandel cited Joel Waldfogel’s argument that gifts are economically inefficient, rarely satisfying as much as what recipients buy for themselves, thus to maximize utility one should give cash.  Stephen Dubner and Steven Levitt argued that the social taboo on gifting cash “crushes the economist’s dream” of “a beautifully efficient exchange” (p. 103.)

Sandel responded that “To insist that the purpose of all gifts is to maximize utility is to assume, without argument, that the utility-maximizing conception of friendship is morally the most appropriate one” (p. 103.) Sandel is right. Assuming utility maximization as the optimal market metric begs the question of utilitarian self-interest, which seems symptomatic of Vernon Smith’s (Rationality in Economics) “constructivist rationality,” or “the deliberate design of rule systems to achieve desirable performance” (RE, p. 2.) However, behavioral economists have observed that markets can change the nature of things exchanged (p. 120-122,) which seems more about Smith’s “ecological rationality,” or discovering the “emergent order … governing action by individuals” (RE, p. 2.)

I suggest that virtuous self-giving can yield a more beautifully efficient exchange, though in terms other than a utilitarian calculus.  The Jim and Della story does not endure for its egoistic utility maximization (O. Henry, The Gift of the Magi.)

* This is adapted from a series of one page papers I wrote for an independent study in micro- and macroeconomics; the material included the excellent text The Economic Way of Thinking by Heyne, Boettke, and Prychitko, as well as several texts I brought in from communitarian, market anarchy, and experimental economic perspectives.

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