Varoufakis on why Christmas will wither away

Did Santa take pity on Varoufakis and endow him with knowledge of Economics this Christmas?

He has published an article titled 'The Economists who stole Christmas' which, sadly, reveals that this year too, Santa decided he'd been a naughty boy and withheld the needful gift.

Varoufakis shows, in this article, that he misunderstands every single school of Economics.

neoclassical economists can see no point in such a fundamentally inefficient form of exchange as Christmas gift-giving. When Jill receives a present from Jack that cost him $X, but which gives her less utility than she would gain from commodity Y, which retails for $Y (that is less than or equal to $X), Jill is forced either to accept this utility loss or to undertake the costly and usually imperfect business of exchanging Jack’s gift for Y. Either way, there is a deadweight loss involved.

Varoufakis doesn't understand that adults give kiddies presents on Xmas. These are not reciprocal transactions. They are gifts. There is no deadweight loss.
Adults exchanging gifts do so to change the information set. Jill gets information about Jack and vice versa when they exchange gifts. Neo-classical economics has no difficulty with understanding why information asymmetry gives rise to signalling behavior. Once again, no deadweight loss is involved.

Varoufakis writes-

In this sense, the only efficient gift is an envelope of cash. But, because Christmas is about exchanging gifts, as opposed to one-sided offerings, what would be the purpose in Jack and Jill exchanging envelopes of cash? If they contain the same amounts, the exercise is pointless. If not, the exchange is embarrassing to the person who has given less and can damage Jack and Jill’s relationship irreparably. The neoclassicist thus endorses the Scrooge hypothesis: the best gift is no gift.

Greece, of course, is famous for fakelaki- little 'envelopes of cash'- which 'grease the wheels' and contribute to the corruption and tax evasion which caused Greece's fiscal woes. Varoufakis, poor fellow, probably thought all those little envelopes were just early Christmas presents.

Keynesians: To prevent recessions from turning into depressions, a fall in aggregate demand must be reversed through increased investment, which requires that entrepreneurs believe that increased consumption will mop up the additional output that new investments will bring about. The neoclassical elimination of Christmas gift exchange, or even the containment of Christmas largesse, would be disastrous during recessionary periods.

This is nonsense. To prevent a Depression, Keynesians believe Aggregate Demand must be boosted through increased Consumption- financed through Transfers- or increased Government spending or else increased Exports. Keynesians don't think Private Sector Investment will rise during a Recession. 'Christmas largesse' is irrelevant because, if economic circumstances are worsening, gifts are more likely to take the form of a fungible asset which is not consumed for precautionary purposes. In other words, a well thought out gift is likely to represent a decline in the propensity to consume as opposed to some self-regarding impulsive action.

Indeed, Keynesians might go so far as to argue that it is the government’s job to encourage gift exchanges (as long as the gifts are purchased, rather than handcrafted or home produced), and even to subsidize gift giving by reducing sales taxes during the holiday season. And why stop at just one holiday season? During recessionary times, two or three Christmases might be advisable (preferably spaced out during the year).

Keynesians only care about the real economy. They don't distinguish between 'handcrafted' or 'home produced' goods and those that are purchased on the market. Why? The latter yield tax revenue and lower the Government's deficit but the former don't. Surely Keynesians are against Deficits? Nope. Keynesians are for bigger deficits under recessionary circumstances. The best way to achieve this is Government Transfers to the neediest because they have the highest propensity to consume.
Christmas is irrelevant.

But Keynesians also stress the importance of reining in the government deficit, as well as overall consumption, when the economy is booming. To that end, they might recommend a special gift or sales tax during the festive season once growth has recovered, or even canceling Christmas when the pace of GDP growth exceeds that consistent with full employment.

When the economy is booming, Transfers to the poorest will fall automatically. Tax Revenue will go up automatically. There is no need to cancel Christmas. It is wholly irrelevant.

 Monetarists: Convinced that the money supply should be the government’s sole economic-policy tool, and that it should be used solely to maintain price stability through equilibration of the money supply vis-á-vis aggregate production, the central bank should gradually increase nominal interest rates once summer ends and reduce them sharply every January. The changes in nominal interest rates they recommend depend on the central bank’s inflation target and the economy’s underlying real interest rate, and must reflect the rates necessary to keep the pace of change in consumption demand and large retailers’ inventories balanced. (Yes, it’s true: Monetarists are the dullest economists to ever have walked the planet!)

Monetarists believe the Money Supply to be exogenous and wish it to grow according to a fixed rule. They believe that markets will smooth seasonal fluctuations. Thus there is no need for nominal interest rates to track such fluctuations. Christmas, once again, is irrelevant because people are rational and plan ahead.

Rational Expectations: These Chicago School economists disagree with both Keynesians and monetarists. Unlike the Keynesians, they think a fiscal stimulus of Christmas gift spending in recessionary festive seasons will not encourage gift producers to boost output. Entrepreneurs will not be fooled by government intervention, and will foresee that the current increase in demand for gifts will be offset in the long run by a sharp drop (as government subsidies turn into increased taxation and fewer Christmases are observed during the good times). With output and employment remaining flat, government subsidies and additional Christmases will merely produce more debt and higher prices.

Rational Expectations is perfectly compatible with Monetarism. Indeed, it predicts that adoption of the 'correct' Monetary growth rule will immediately impact expectations such that no deleterious real Macro effect is suffered.
Rational Expectations means everyone uses the correct Economic theory to formulate their expectations. We expect people to spend more on gifts during Xmas. It is what the correct Economic theory- viz. that relating to Schelling focal solutions to coordination problems- predicts. Suppose there is 'fiscal stimulus of Xmas gift spending'- e.g. the Govt lowers expenditure taxes on typically gifted items or else raises income taxes allowances for families with kids over the Festive Season- then gift producers will correctly predict greater demand and boost output over that period. No economist- apart from Varoufakis who is not Rational- has ever suggested that entrepreneurs won't boost output to take advantage of a seasonal increase in demand just because they know that the increase in demand is seasonal. If Varoufakis were right entrepreneurs would avoid seasonal markets which, in consequence, would not exist. This is crazy. Suppose Greek entrepreneurs turned up their noses at the Xmas gift market. Then, Hindus or Jews or Confucians would turn up in every corner of Greece to sell the types of gifts which appeal to the Christian Greeks.

Perhaps Varoufakis, in his crazy way, is referring to 'Ricardian Equivalence'- the notion that if the Govt. borrows to boost Aggregate Demand today, then Rational agents will know that they will have to raise taxes tomorrow so Aggregate Demand will fall. However, even in this case, the entrepreneur will boost output when the going is good and cut it before the day of reckoning hits. He will be careful to take his profits out of the country because he knows that sooner or later the spendthrift Government will be forced- as Greece was forced- to impose a 'haircut' on its creditors as well as capital or exchange controls and higher taxes and so on.

Austrian School libertarians: Supporters of Friedrich von Hayek and Ludwig von Mises have two major objections to Christmas. First, there is the illiberal aspect of the holiday season: the state has no right, and no reason, to force entrepreneurs to close down, against their will (for four days December 25 and 26, and January 1 and 2) over the course of a fortnight. Second, the ever-lengthening pre-Christmas consumption boom tends to expand credit, thus causing bubbles in the toy and electronics market during the fall that will burst in January, with potentially damaging consequences for the rest of the year.

Scrooge could buy a Goose on Christmas Day in Charles Dickens's story. This poses no scandal for Liberalism of any sort. The market for Geese was seasonal but this caused no 'damaging consequences' for the rest of the year to anybody. It is not the case that a 'consumption boom' can 'expand credit' by itself. Neither Austrians nor Libertarians believe in Magic.

Empiricists: Convinced that observation is our only tool against economic ignorance, empiricists are certain that the only defensible theoretical propositions are those derived from discerning patterns whereby changes in exogenous variables constantly precede changes in endogenous variables, thus establishing empirically (for example, through Granger tests) the direction of causality. This perspective leads empiricists to the safe conclusion that Christmas, and a spurt in gift exchanges, is caused by a prior increase in the money supply and, ceteris paribus, a drop in savings.

No Empiricist was ever so foolish as to use seasonally unadjusted data for a Granger test.  There is no 'prior increase in the money supply' or 'drop in savings' once seasonal adjustments are made. Where did Varoufakis go to School?

Marxists: In societies in which profit is derived exclusively from surplus value “donated” (as part of the capitalist labor process) by workers, and which reflects the capitalists’ extractive power (bequeathed to them by one-sided property rights over the means of production), the Christmas tradition of gift exchange packs dialectical significance.

How is 'profit' connected to 'the Christmas tradition of gift exchange'? Was Marx under the impression that Capitalists made a connection in their brains between accumulating profits and giving pressies to everyone?

On one hand, Christmas gift giving is an oasis of non-market exchange that points to the possibility of a non-capitalist system of distribution. On the other hand, it offers capital another opportunity to harness humanity’s finest instincts to profit maximization, through the commodification of all that is pure and good about the festive season. And purists – those who still defend the “law of the falling (long-term) rate of profit” – would say that capital’s capacity to profit from Christmas diminishes from year to year, thus giving rise to social and political forces which, in the long run, will undermine the festive season.

Marx was not proposing 'non-market' exchange as a panacea for present woes or a paradigm for a future Socialist Society. He considered such 'Utopian' projects to be a product of 'false consciousness' or, more simply, bad faith.  Marx says that commodification precedes Capitalism. The commodification of the proletariat (the word means 'child bearing' and refers to Labour's ability to biologically reproduce itself) unveils the true labour theory of value which previous philosophers had sought for in vain.
Marx thought that competition between Capitalists would drive down profits. So what? How does this affect Christmas? Is Varoufakis under the impression that proles only celebrate Xmas because they are given a lot of presents by the Capitalists and then forced to make merry on pain of the sack?

Perhaps. Varoufakis describes himself as a 'Hayekian-Marxist'. His misunderstanding of both Hayek (whom he says would want to abolish Christmas!) and Marx (who, he says, believed that Christmas would disappear along with the Capitalist class) is quite extraordinary. Greece- as predicted by 'Ricardian Equivalence' based Rational Expectations- has paid a terrible price for this man's imbecility.
Hopefully, he'll be a good boy in this coming year and so Santa can at last reward him with some understanding of Economics.