14 February 2020

The economics of Valentine’s Day

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It’s Valentine’s Day, which means couples all around the world will be giving each other gifts, going out for dinner, and sending cards containing nauseating messages. The rest of us sad singletons will be filled with bitter resentment that everywhere is booked up and that it’s marginally more difficult to get served at the local watering hole.

And what better day to look at how public policy is affecting our love lives. Take the planning system for example, as I wrote on this site last year, it might not just be your appearance or personality that is to blame for your inability to find love – it could also be the plethora of regulations about what can be built and where, all of which makes housing unaffordable for so many of us.

The evolution of Valentine’s Day itself also offers some interesting lessons about economics.

First, it’s quite remarkable that so many people will be celebrating Valentine’s Day at all (or at least writing articles about the economics behind it). A few hundred years ago Valentine’s Day was the preserve of the very wealthy. They were the only ones who could afford to buy their loved one’s gifts and to have enough leisure time to go out for dinner or even a romantic stroll.

Thanks to the labour-saving genius of market capitalism we not only have a lot more free time than our forebears, but we can generally afford to buy them a nice trinket or too to express our affection.

What’s more, thanks to advances in technology and increased mobility, people now have more choice about who they spend Valentine’s Day with. A relatively short time ago, a person’s romantic options were incredibly limited. They would likely stay in the small town or city in which they were born, and would get married at a young age to somebody from the same area.

Compare that to the mobility and technological advances most of us enjoy today, all of which mean the pool of potential partners is far greater.

Not only can you (hopefully) spend Valentine’s Day with who you want, you can also spend it doing what you want. Even a few generations ago the idea of dining out was a luxury to be enjoyed by the affluent, not something most of us can do with a degree of regularity. Equally, if staying in is more your thing, the profusion of apps and delivery services means a previously unimaginable quality of food is available at the touch of a button – that too is an incredibly recent development in the grand scheme of things.

And if you want a romantic city break, the enormous democratisation of travel in the last few decades means going abroad is no longer a huge treat or once-in-a-lifetime experience, even for those on modest incomes.

Beyond all this marvellous progress, how we go about Valentine’s Day tells us something about the concept of signalling. Say you’ve been on a few dates with someone, but you’re in that awkward situation where you’re not sure if you’re just dating or if it’s become something more serious. If the person were to just give you money (economically efficient, sure, but an odd gift for a romantic partner), you would have little clue as to how they really feel about you. However, if they were to get you a first edition of your favourite book, or tickets to see that bande you mentioned you liked on date three, that signals information about their feelings towards you.

Signalling is a concept originally developed in contract theory and shows the importance of the credible conveying of information by one party about itself to another. Whether this is on the job market, a company brand, or an IPO, signalling is incredibly important. It helps match businesses with workers and ensures that they are paid a salary based on their skills and experience, it also helps consumers make choices about what to buy, and investors when deciding where best to put their money.

Without signalling, it would be difficult for the economy to function, in much the same that it would be for romantic relationships to develop. Again, we can thank the free market for improvements in this area. Due to technological advances, parties now have more ways available to them to reduce information asymmetry between them. That means businesses can find suitable workers and workers can find a job which matches their skills and pays them what they’re worth, consumers have more information about the products they’re buying, and businesses receive investment.

The final lesson Valentine’s Day teaches us is about gift-giving. As I mentioned above, giving money is much more efficient than buying someone a gift. This is because there is a lot of research that shows we are generally pretty lousy gift givers. This is the case even when it comes to spouses and parents and children.

Obviously, there is more to gift-giving – sentimental value, for one thing, not to mention the signalling element. I would certainly advise getting your significant other a gift rather than bunging £50 and a card signed, ‘yours, efficiently. Happy Valentine’s.’

If our romantic partners don’t always know what we want, what hope do politicians and civil servants have? The Government takes our money in the form of taxation, and then spends it on services for us. It would be altogether more efficient if the government allowed people to keep more of their money and spend it as they see fit. What’s more, rather than providing public services itself, it should just give people money in the form of health insurance and education vouchers.

So, however you’re spending today, remember the important lessons it teaches us: free markets have given us more time and money so that we can enjoy the day how we want and with who we want; signalling is important and the free market plays an important role; and you know your preferences better than the government. Happy Valentine’s Day!

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Ben Ramanauskas is a research economist at Oxford University