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The Economics of Valentine’s Day

It’s Valentine’s Day, and there’s nothing that Prof. Chris Coyne loves more than free markets. In fact, our ability to appreciate and enjoy Valentine’s Day is the direct result of the wealth created by markets.

Before getting into the specifics, there are three economic principles that are illustrated by Valentine’s Day:
  1. The importance of free markets and wealth creation
  2. The logic of gift giving and signaling
  3. The seen and the unseen
As mentioned above, Valentine’s Day is only possible because of free markets. Prior to the rise of capitalism in the 1700s and 1800s, only wealthy individuals were capable of buying gifts or spending leisure time with their significant others. Today, the average citizen can accumulate enough savings to buy a gift or engage in leisure activities on Valentine’s Day.
What gift should you give? Economists often argue that cash is the most efficient gift, as it can be used by your significant other to purchase whatever they desire. However, an important economic concept called signaling explains how purchasing gifts for someone else is actually a signal that proves that you’ve spent time thinking about them.
Is Valentine’s Day an economic stimulus? Many pundits argue that it is. However, using the concept of opportunity cost, economists argue that all the money spent on Valentine’s Day could just as easily have been spent on something else or saved. When money is saved, it is loaned out to others for productive uses like expanding a factory or building a machine. The right way to think about Valentine’s Day is the opportunity to find a gift that matters for the person you care about.

The Economics of Valentine's Day

It’s Valentine’s Day, and as an economist there’s nothing I love more than free markets. There are three economic principles that are illustrated by Valentine’s Day: the importance of free markets and wealth creation, the logic of gift giving and signaling, and the seen and the unseen.

When we think about Valentine’s Day, one of the things we need to realize is our ability to appreciate and enjoy the holiday is the direct result of the wealth created by free markets. Prior to the rise of free markets in the 1700s and 1800s, only the wealthiest people in society, the elites, could even think about such things as giving gifts or spending leisure time with their significant others.

But with the spread of markets, the average citizen accumulated enough wealth in savings that they could afford to engage in leisure activities such as going out to dinner, going to a movie, or taking a vacation with their significant other. Moreover the average citizen can afford to purchase gifts and therefore signal their affection to the people they care about.

Gift giving for Valentine’s Day serves as the perfect illustration of the economic concept of signaling. Signaling involves one person providing information to another who doesn’t have that information. To provide an illustration of the importance of signaling, consider a case where two people have just started dating. The boy is considering what gift to get the girl. Now, on the one hand, the boy could give the girl cash. She could then use this cash to purchase something that she values. But this signal would be worthless. In other words, by the boy simply handing the girl cash, he doesn’t reveal any real information about how much he likes her.

Alternatively, he could get her the gift of the teddy bear that she’s been looking at in the store for the past several weeks. By getting this gift, what the boy does is reveal that he has paid attention to what the girl values and went out of his way not just to pay attention but to actually purchase it for her because she values it so much. By doing this he has sent a signal that he truly cares about what the girl values and what she likes.

Another economic concept illustrated by Valentine’s Day is the notion of the seen and the unseen. Many pundits point out that Valentine’s Day is somehow a stimulant for the economy, because people are spending large sums of money around Valentine’s Day. And it’s true that people do spend significant amounts of money on things like flowers, chocolates, going out to dinner, or going out to movies with their spouse or significant other. But what this neglects is that people would have spent that money otherwise. Or alternatively, perhaps they would have saved the money, and those savings could then be used by other people to engage in productive behaviors.

So when it comes to Valentine’s Day, pundits are wrong to think that somehow Valentine’s Day spending stimulates the economy. The right way to think about Valentine’s Day is the opportunity to find a gift that matters to the person that you care about. And in doing so, you can express your affection for that person.

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