Santa Claus’s impact on the business cycle

27th December, 2008

Dear Economist,

When you think about it, Christmas is a strange ritual. Is there any economic logic to it?
FR, London

Dear FR,

The late Cambridge economist, Nicholas Kaldor, is said to have observed that the money supply surges in December and then falls back in January, before dryly remarking, “At last I have discovered the cause of Christmas!”

Professor Kaldor – a staunch critic of monetarism – asked whether central banks might be able to halt the Christmas spending spree by keeping a tight rein on the money supply in December. No, he concluded: people would turn to credit cards. How ironic that this year, the central banks desperately pumped money into the economy in an attempt to ensure that Christmas wasn’t cancelled.

But you are right: the spend-and-give, spend-and-eat side of Christmas makes little economic sense. Mainstream theories suggest that consumers should prefer to smooth their consumption rather than binge at Christmas and then, broke and fat, cut back in the new year. So economists are turning to psychological research to understand what is going on. Demarcation seems to be an important part of the story: we look forward to Christmas, enjoy it while it is happening (if done right), and recall past Christmasses fondly. All of which only happens if the day itself stands out.

Gift-giving works best when co-ordinated – on birthdays, anniversaries and at Christmas. A.A. Milne, in Winnie the Pooh, wished people “happy Thursday” instead of happy birthday; Lewis Carroll’s Humpty Dumpty received unbirthday presents. Alas, neither concept has caught on. Perhaps that is no bad thing. I am always forgetting my wife’s unbirthdays, and live in fear of forgetting our anniversary. But even I remembered Christmas.

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