Do non-market gift economies tend towards Pareto optimality?

External question — Economics Stack Exchange Author: Vlad Original post: https://economics.stackexchange.com/questions/48608 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. A gift economy is a system of exchange characterised by delayed exchange on the basis of the principle of reciprocity. I.e. where a market seeks to exchange goods in immediate transactions without further obligations, in a gift economy goods are "gifted" with the social expectation of reciprocation at a specified or unspecified time in the future. Failure to reciprocate adequately results in lower social prestige, and vice versa with reciprocating even more than what was received. Interestingly, this is the mode of exchange that dominated most of human history, in particular prior to the agricultural revolution. Even more interestingly, case studies with the "moka exchange" system in the highlands of Papua New Guinea have shown that gift economies suffer from boom-bust debt cycles, just like market economies. This has led me to wonder, do gift economies tend towards Pareto efficiency as is characteristic of market economies with efficient supply, demand and exchange, and if yes, are the prerequisites for such Pareto efficiency different in gift economies? The only studies I could find that remotely attempt to answer the question unfortunately primarily dealt with altruistic "pure gifts", not "reciprocal gifts".

External answer — Economics Stack Exchange Author: B T Original post: https://economics.stackexchange.com/a/56234 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Any market will always come to a Pareto optimum for that market. Free exchange will always do that. Pareto optimal states are states where no trade can make an actor better off without making the counterparty worse off. There are states where one actor gains more than another loses, but a market of utility-seeking actors will not cause that transfer to happen because all market transactions are consensual. As an example, neither monopolies and externalities prevent reaching a Pareto optimum, however they may prevent reaching a state more optimal than any Pareto optimum. The question is not whether it will get to a Pareto optimum, but whether there are more optimal states than the Pareto frontier that can't be reached by the market rules. In a gift economy, people give gifts and expect unspecified gifts in return in the future. What this mean is that it is an exchange, but one with high error bars. You might not know when or how much you'll be compensated, but you only participate because your expected value is positive. Much of this value comes from social ties, but the point still stands. Therefore you should expect that a gift economy will be able to achieve approximately as optimal a state as a monetary economy. However, you should expect this process to take enormously longer because of the high degree of uncertainty and time lag that reduces the number of "trades" that will end up economically positive, and fogs the information necessary to optimize the efficiency of trades. As a side note, gift economies are absolutely not the same as barter economies. You could think of them as barter where the goods in question are vague statistical expectations of what will be received in return, but this isn't really a standard way to think about it. In gift economies, people give gifts with the expectation of unspecified gifts in return while in a barter economy people decide what to trade up front. They are very clearly not the same.