- Woody Allen
The family is at once one of the most basic of human institutions and one of the most problematic for economists. Effused with human desires like love, need for security, and desire to perpetuate oneself, economics had a hard time taking into account this unpredictable and seemingly irrational entity. Yet, with pioneering efforts from noted economists like Paul Samuelson and Gary Becker, the family has finally come home to mainstream economics. This paper will address the rise and fall of families from an economic perspective. First, a general overview will be given of family economics, and then a study of the evolution of family economic theory. For purposes of focus, this paper will not address cogent but accessory themes like linkages between economics and other disciplines on the subject of the family, or the implications of family economics upon other sub-fields of economics.
General overview of family economics
The household, if viewed as a firm, exhibits the same response to comparative advantage that David Ricardo attributed to commercial entities. A two-person household is more efficient in the allocation of human capital and more productive in output than two separate one-person households. Humans exist in two spheres, the domestic and the market. If two persons choose to specialize separately in different spheres, they can “trade” and thereby increase their productivity. Although this entails a large opportunity cost for the person who chooses to exclusively specialize in the home, the resultant benefits from this arrangement are greater than the individual inputs, due to increasing returns created by human capital accumulation.
Yet, these expectations are not always met, and families often self-destruct, as expected gains from household cooperation are less than originally perceived to be (Ermisch 357). However, if expected gains are considered to be minimal in the first place, the propensity to marry will be diminished. Therefore, expected gains must be high, and real returns must be similarly elevated for marriages to last. High real returns upon marriage necessitate high specialization within the family, a phenomenon increasingly uncommon in today’s society. It logically follows that lasting marriage as a life-style would slowly diminish, and it has over the past few decades. Similarly, there is a positive correlation between women’s employment and divorce (Ermisch 358).
The effect upon children of marital disconnections can be very negative. Divorced parents allocate resources less efficiently than do married ones. Child support, for example, often proves to be more expensive for the non-custodial parent than the custodial one (given that the non-custodial parent is not shirking his/her responsibilities.) Child support is a collective obligation, as children are collective goods. One parent alone, however, does the administering of child support. This results in a lack of information for the non-custodial parent. The father (assuming he is the non-custodial parent) is unable to determine how much is actually being spent upon the child by the mother. He therefore faces a higher price for child support than does the mother, for every additional dollar he pays increases the amount spent on the child by the marginal propensity of the mother to administer child support. This higher price in turn results in a reduction of support payments. Furthermore, divorced parents do not enjoy the gains from an inter-family division of labor, and this further subtracts from the expenditures made on the child.
The evolution of family economics theories
Applying conventional economic theory to the family poses a very basic problem. Is the family to be treated as one economic unit, i.e. on the same basis as an individual? For one to draw that assumption, it first must be decided whether the family consumes goods in a collective fashion, and how decisions are made within the family. This has been at the crux of family economics for the past fifty years, and theoreticians from Paul Samuelson to John Nash have had important inputs on the issue. The key transition in economic theory here has been from the early common preference models to models of bargaining theory.
Common preference models assume that the family is a single decision-making agent, has a pooled budget constraint, and one utility function that incorporates all the leisure time and consumption preferences of the individual family member. Two important common preference models can be considered milestones in the evolution of this line of family economics theory, Samuelson’s consensus model and Gary Becker’s altruist model. Paul Samuelson assumed that when a man and a woman decided upon marriage, they replaced their individual leisure and consumption functions with one collective one, for that was the nature of marriage – the collective over the individual. Their separate incomes would therein be considered aggregately, and their separate budgets would be internalized in the household budget. By basically boiling the family unit to the individual level, comparative statics of traditional consumer demand theory could be applied directly to the family (Lundberg 142). Being an economic model as opposed to a sociological one, Samuelson did not try to explain the mechanics of consensus-building within the family, he simply assumed it as a given condition. This approach, however, has come under fire as more and more economists have argued that there can be economic explanations of bargaining and consensus-building; Samuelson’s theory, they argue, is too simplistic.
Gary Becker diverged from Samuelson on the level of consensus within the family yet stayed within the common preference framework. As opposed to Samuelson’s model family assumption where all runs smoothly and automatic consensus is an everyday fact of life, Becker viewed the family as selfish yet rational individuals lead by one altruistic parent. This altruistic parent’s utility function demonstrates a concern for the well-being of the other family members. It is this very filial altruism that encourages the other family members to rise above their selfish tendencies and act for the collective good. The altruistic parent then adjusts transfers to individually meet the needs and desires of the other family members, and acting in a rational fashion works toward maximizing family utility within the given budget constraint. The implications of Becker’s model finally rest parallel to those of Samuelson, and the simplicity and explanatory power of both lend to their persistent popularity that lasted much of this past half-century (Lundberg 140).
Rising divorce rates lead to a re-evaluation of the common preference models, and their subsequent rejection as being archaic and theoretically deficient. If consensus was so easy for Samuelson and the altruistic parent held so much sway for Becker, how would either one explain the breakdown in family structure, i.e. divorce? The advocates of cooperative bargaining models argue that the family never truly operates as one individual. Despite the rhetoric of marriage vows, a marriage remains a contract between two individuals, individuals who retain their own utility curves. However, marriage does place them in a position where they compromise their personal utility for the collective good of the family. Whereas Samuelson argued that the compromise was complete to the extent that the individual utility curve virtually disappeared, the cooperative bargaining model theorists argue that individuals use their bargaining powers to satisfy their utility functions as much as possible. Empirical evidence against the common preference model theorists’ assumption of pooling further undermined their framework (Lundberg 143).
John Nash has provided the leading cooperative bargaining model. The base of bargaining theory here is that individual utility curves of the husband and wife are not always in conjunction, and if these differences are not reconciled the payoff is a threat point. These threat points can either lead to divorce or a state of non-cooperation within the marriage. Although each argument between spouses would not include one threatening divorce, much bargaining power derives from the ability of either spouse to disengage him or herself from the relationship. This critical addition to the analysis provided by earlier theorists changes the optimization function of the family. Not only do price level and total family income matter, but so do the determinants of threat points. Underlying this addition is Nash’s observation that the higher the individual’s utility at a threat point, the higher his or her utility in the bargaining solution (Lundberg 146). In Nash’s model, the threat point is the highest attainable utility level outside of marriage. The threat points are influenced by whether family income is pooled, environmental and cultural factors, and conditions in the remarriage market. The Nash model, although seemingly more amoral, is more flexible than the earlier models in incorporating disconnections within married life and outside factors like new laws on welfare payments to divorcees.
Lundberg and Pollack provide a viable alternative to Nash’s model. Lundberg and Pollack internalize the threat point and thereby argue that non-cooperation within marriage is the more logical, and better, alternative than divorce as a threat point. This leads to a system of “separate spheres,” where the spouses remain married yet operate on their own utility functions, voluntarily providing to the collective resource pool when they wish to (Lundberg 147).
The economics of the family has come to exist at two levels. The general theory has much explanatory power and addresses a host of issues, yet it loses in depth what it gains in breadth. Much of the scholarly debate, however, takes place on the second level, where the exact cooperative relationships which exist within the family are discussed. As the evolution in family economic theory suggests, the current mainstream thought is by no means the absolute framework within which to understand the family. As new empirical evidence appears and as society continues to change, this sub-field of economics will evolve with it, and thus stay at the cutting edge of economic theory.
John Ermisch, "Familia Oeconomica: A Survey of the Economics of the Family", in Scottish Journal of Political Economy, Vol. 40, No. 4, November 1993, pp. 353-374.
Theodore C. Bergstrom, "Economics in a Family Way", Journal of Economic Literature, Vol. XXXIV, No. 4, December, 1996, pp. 1903-1934.
Shelly Lundberg and Robert A. Pollak, "Bargaining and Distribution in Marriage", in The Journal of Economic Perspectives, Vol. 10, No. 4, Fall 1996, pp. 139-158.
Shelly Lundberg, Robert Pollak and Terrance Wales, "Do Husbands and Wives Pool Their Resources?", The Journal of Human Resources, Vol. 32, No. 3, 1997, pp. 463-479.