Rationale for rounds keeps turning in circles

Wed, Dec 19, 2012, 00:00

Economics:Why do we exchange gifts? I once enjoyed a heated debate with a group of anthropologists. After discussing what we might learn from each other we adjourned to the pub, where the debate continued. We bought rounds of drinks. But why?

For the anthropologists, the custom of standing a round represented ritual gift exchange. They drew an analogy with Native American potlatch festivals, where tribes would gather to eat, sing, dance and confer lavish presents – sometimes treasured or essential possessions – on each other.

The economists preferred a more hard-nosed explanation. Buying drinks in rounds rather than individually was a means of reducing transaction costs. The number of dealings between the customers and the bar was reduced, and the need for small change diminished.

I proposed an empirical test between the competing hypotheses. Did you feel successful or unsuccessful if you had bought more drinks than had been bought for you?

Unfortunately, the result was inconclusive.

The anthropologists believed their generosity enhanced their status. The economists sought to maximise the difference between the number of drinks they had consumed and the number they had bought. They computed appropriate strategies for finite games and even for extended evenings of indeterminate length.

The lesson is that if you want a good time at a bar, go with an anthropologist rather than an economist.

So it is a relief that Christmas sounds more like a potlatch than a mathematical economist’s multiperiod equilibrium. The purpose of the festival is plainly not transaction-cost minimisation. Although commercial interests obviously profit from Christmas, the economic function of the event is not apparent.

Indeed, from time to time, economists point out the inefficiency of customary gift exchange: the gifts we receive are often less valuable to us than those we would have bought ourselves with the money the donor devoted to their purchase.

Canadian missionaries made the same observation. Concerned that such festivals seriously damaged the economic welfare of the tribes, they successfully lobbied the government to criminalise potlatches.

A narrow focus is characteristic of scientific method but gets in the way of understanding social phenomena. That was my error when I sought the “true” explanation in the pub.

The custom of the round has both economic and social advantages, and it is likely that both help to account for its prevalence and persistence.

The earnest missionaries and misanthropic economists who want to shut festivals down because they damage the economy have missed the point that the prospective enjoyment of such events is the reason we engage in economic activity in the first place.

The economists who argue that the rationale of the family is found in cost savings have a point.

Two together can live more cheaply than two separately, if not as cheaply as one. But anyone who thinks the quest for scale economies is the primary explanation of the human desire for family life is strangely deficient in observational capacity, as well as common sense.

The “economics of the family” is a prime example of an economic imperialism that seeks to account for all behaviour through a distorted concept of rationality, an extreme example of economists’ notorious physics envy.

Some models developed in physics demonstrate a combination of simplicity and wide explanatory power so remarkable that it makes no sense to think about the world in any other way.

But such powerful explanations are rarely available in other natural sciences, and almost never in social sciences. Even the visit to the bar is governed by a complex and tacit collection of social conventions. How do you know that you have bought the beer but only rented the glass?

So if you want to understand, say, the 2007-2008 financial crisis, your approach must be eclectic.

You need to work through standard economic models of financial markets because without them you cannot appreciate how many market participants – and most regulators – think.

But you also need the perspectives of journalists, historians and psychologists. And, of course, you need the anthropological insight that accounts for the peculiarity of human institutions, whether you are dealing with the pub, potlatch or trading floor. – Copyright The Financial Times Limited 2012


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