http://bilbo.economicoutlook.net/blog/?p=32683

“(…)There was an article in the Wall Street Journal (December 23, 2015) – Economists Say ‘Bah! Humbug!’ to Christmas Presents – that says a lot about how my profession struggles to appreciate reality in all its dimensions. Every year, it seems that this type of article is written. It discusses whether giving gifts at this time of year “represents an inefficient reallocation of resources”. As my friend Scott tweeted this morning it is just another example of (mainstream) rebuking parallel lines for not remaining straight.

The article quotes an academic US economist:

Anyone who has had microeconomics knows … that an income transfer, as opposed to a gift in-kind, gets you to a higher level of utility.

In fact, I studied microeconomics for many years along with all of those who have a PhD in economics and the mainstream of that study demonstrated to me, repeatedly, how irrelevant orthodox economics is if one seeks an understanding of society, people within society, historical traditions, culture – in other words, reality.

We spent hours writing equations, taking derivatives, seeking local and global optimal solutions, drawing graphs with various triangles marked, and all the rest of it, in our earnest search for how many angels there were on the top of the pinheads that we had before us.

We couldn’t see the pinheads nor did we ever really count the number of angels. Such is mainstream microeconomics.

I also love the following quote which resonates strongly in this context. Post Keynesian economist Paul Davidson [in the book by Bell and Kristol The Crisis in Economic Theory, Basic Books, 1981, p.157] describes how mainstream economics uses methods and approaches that renders it unable to embrace real world problems:

There are certain purely imaginary intellectual problems for which general equilibrium models are well designed to provide precise answers (if anything really could). But this is much the same as saying that if one insists on analyzing a problem which has no real world equivalent or solution, it may be appropriate to use a model which has no real-world application. By the same token, if a model is designed specifically to deal with real-world situations it may not be able to handle purely imaginary problems.

Post Keynesian models are designed specifically to deal with real-world problems. Hence they may not be very useful in resolving imaginary problems that are often raised by general equilibrium theorists. Post Keynesians cannot specify in advance the optimal allocation of resources over time into the uncertain, unpredictable future; nor are they able to determine how many angels can dance on the head of a pin. On the other hand, models designed to provide answers to questions of the angel-pinhead variety, or imaginary problems involving specifying in advance the optional-allocation path over time, will be unsuitable for resolving practical, real-world economic problems.

Note that I am not against simplified (abstract) modelling. Clearly, it is essential if you want to gain some traction on a real-world problem that is complex. But the models have to be capable of capturing real-world dynamics.

In the Wall Street Journal article, we read that so-called “pure-minded economists … cringe it profligate spending untethered to express need or desire”.

They talk of an “efficient gift”, which is “highly liquid” with an “lower expense ratio”.

The father of Monetarism, Milton Friedman “praised the efficiency of spending money on oneself”.

Several academic articles have been written by economists seeking to prove the point that there is “no evidence of significant welfare gains in any gift category”.

Mainstream economists do not consider culture, institutions, intimacy and other human realities important enough to include in their analytical frameworks. They produce analytical models which assume these things away as being of nuisance value only.

They produce models that generate predictions about human behaviour that have nothing to do with the essential drivers of that behaviour.

They don’t consider, for example, that there is value in a gift beyond its so-called utility value.

Clearly, the capitalist sector invokes us to indulge massively at this time of the year and judgement may lapse in that regard by consumers. But that is not the essence of the argument made by mainstream economists.

The point is that the value of the gift is in the sentiment that lies behind it quite apart from any utility value the object might have.

Anyway, it took me a long time to fully appreciate this and I’m sorry I didn’t appreciate it earlier. But I am happy that the fall import of thinking about somebody and putting time into the manifestation of those thoughts in terms of some simple object one exchanges (that is, a gift) came to me. Despite my professional background.”