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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.
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