A Treatise on the Family

Gary Becker, a Nobel laureate economist, analyzed marriage, births, divorce, division of labor in households, inequality, altruism and other nonmaterial behavior with the tools and framework developed for material behavior, i.e. economics. His purpose was to develop a rational choice approach to the family. In his book, “A Treatise on the Family”, Becker used basic tools of economics and derived conclusions, some of which may sound counter-intuitive.

Division of labor

Becker analyzes division of household labor in chapter 2 of the book. He argues that even if a husband and wife are intrinsically identical, they gain from a division of labor between market and household activities, with one of them specializing more in market activities and the other specializing more in household activities. What he introduced to derive the conclusion is the concept of relative advantage and human capital investment. The followings are the theorems in chapter 2 (page 33 to 36):

Theorem 2.1. If all members of an efficient household have different comparative advantages, no more than one member would allocate time to both the market and household sectors. Everyone with a greater comparative advantage in the market than this member’s would specialize completely in the market, and everyone with a greater comparative advantage in the household would specialize completely there.

Theorem 2.2. If all members of a household have different comparative advantages, no more than one member would invest in both market and household capital. Members specializing in the market sector would invest only in market capital, and members specializing in the household sector would invest only in household capital.

Theorem 2.3. At most one member of an efficient household would invest in both market and household capital and would allocate time to both sectors.

Theorem 2.4. If commodity production functions have constant or increasing returns to scale, all members of efficient households would specialize complete in the market or household sectors and would invest only in market or household capital.

These theorems would explain the fact that in many families, there is division of labor to some extent, and in some cases those who spend time for market labor also do for household labor as well. Becker’s statement also shows us that why the labor division is made based on sexual differences – it is because only a slight difference leads to division of labor and once the division is made, the comparative advantages of family members would get fixed. Note, however, that Becker did not say that biological difference is the sole reason of labor division, or “exploitation of household women”.  

Becker also mentions about the recent trends in women’s labor force participation rates, fertility, and divorce rates. The rapid expansion of the service sector enabled more women to participate into market labors. Thus, “the growth in the earning power of married women raised the forgone value of their time spent at child care and other household activities, which in turn reduced the demand for children and encouraged a substitution away from parental, especially mothers’ time. Both of these changes raised the labor force participation of married women. The gain from marriage is reduced, and hence the attractiveness of divorce is raised, by higher earnings and labor force participation of married women, because the sexual division of labor within household becomes less advantageous.” (page 55)  The same can be said for the women in the course of economic independence in developing countries.

Competition in marriage market

Chapter 3 and 4 analyze the competition for marriage partners among men and women of different incomes, abilities, education ages, family backgrounds, and other attributes.

An efficient marriage market develops “shadow” prices to guide participants to marriages that will maximize their expected well-being. These prices, central to the analysis in this chapter and the subsequent one, are responsible for the more powerful implications.

The general concept of marriage in Becker’s model is that marriage increases output of both male and female, and the marginal increase of output from an additional husband/wife is positive. In this setup, polygamy is more beneficial for both male and female, if either men or women differ significantly in efficiency (ability to generate output), or if the ratio of eligible men to eligible men and eligible women differ significantly, the conclusion that is analogous to the efficient use of resources.

Becker’s model explains under what situation people would invest more in superior skill (the skill that makes one attractive), e.g. having education, training, etc. Becker argues that, when the marginal contribution of women/men to output is greater, people have more incentive to invest to increase their efficiency. Usually, polygamy increases the expected marginal increase of output, as men/women can choose more than one mate.

This model suggests explanation of why polygyny is more common than polyandry. The situation originally begins with a small difference. If the marginal contribution of women is larger, that incentivizes men to invest more in their skills and women to invest less (as they have more expected opportunity to get married), and that raises the average efficiency and the inequality in efficiency of men relative to women. The difference of contribution for output may be coming from biological difference. Becker said that both average and standard deviation of years of schooling are usually much lower for women than men in poor countries with monogamous marriages, where presumably the marginal contribution of women to output is greater than the marginal contribution of men because of the value of having many children. (page 104)

Becker then analyzes assortative mating using the same framework. He says that correlations between intelligence, education, age, race, nonhuman wealth, religion, ethnic origin, height, place of origin, and many other traits of spouses are positive and strong. Especially the correlation between spouses by intelligence is strong – it is as high as that between siblings. On the other hand, persons who marry out of their race, religion, age cohort, or education class have relatively high probabilities of divorce, even when other traits are held constant. (page 117-118)

Becker argues that preferences could well affect the equilibrium sorting if costs were no the same in all households. For example, persons with similar preferences have an incentive to marry each other if costs are lower when the consumption patterns of mates are more similar, as they would be when some commodities are jointly consumed, when production of commodities is more efficient at a larger scale, or when specialized consumption capital lowers the costs of particular commodities. (page 123)

Love can also be understood in Becker’s framework. Love can be defined such that her/his welfare enters his/her utility function or that he/she values emotional and physical contact with her/him.

The demand for children

Becker applied the same economic framework to fertility.

One factor deeply affecting child birth rate is children’s future productivity. In the past, there was more child birth in suburban area, because having more children was more productive on farms than in cities. The reason is that agriculture in the past did not require any complex labor, and thus children at young age can contribute to enhance a family’s productivity. The contribution of farm children has declined as agriculture has become more mechanized and complex in the course of economic development.

Second factor is the value of the time of married women, because the cost of the mother’s time is a major part of the total cost of producing and rearing children. The number of children is strongly negatively related to the wage rate or other measures of the value of time of wives. Becker said that the growth in the earning power of women during the last hundred years in developed countries is a major cause of both the large increase in labor force participation of married women and the large decline in fertility. (page 140)

Third factor is education and the number of children. There are negative correlation between the number of children and the quality of education for them (see the table below). Becker points out that Jewish families have been smaller than average over the last 150 years and have invested more in human capital, and in recent decades they have had higher incomes.

Country and period	Change in birth rate	Change in schooling
US 1920 -1930	-24%	+81%
US 1960 – 1972	-38%	+33%
Japan 1950-1960	-45%	+37%
Taiwan 1960 – 1975	-51%	+100%
England & Wales 1871-1901	-26%	+21%

Becker also points out that government programs significantly affected child birth rate. The recent increase in fertility rate in France would be a good example to show that families would respond to the monetary incentives in deciding the number of children.

Inequality and Intergenerational Mobility

Becker also analyzes inequality. He argues that even if all families were basically identical, incomes would be unequally distributed because of the unequal incidence of endowment and market luck. The inequality prevails over generations, as lucky parents invest more in their children, and the increase in the children’s incomes would induce them to invest more in their own children in the succeeding generation, and soon until all descendants benefit from the initial luck (page 203). Moreover, Children’s incomes are linked to their parents not only through investments but also through such endowments as reputation, connections, knowledge, skills, goals provided by their family environment, genetically determined race and other characteristics.

Altruism

Becker’s argument about intergenerational mobility assumes that parents feel better if their children are better off, i.e. the utility function of parents are made of both their own income and the quality of children. Becker analyzes the altruism in the family in this book as well. According to Becker, “altruistic” means that one’s utility function depends positively on the well-being of others.

Say an altruist is the mother of a family and has several beneficiaries, including children, spouses, parents and siblings. Becker analyzes the situation more profoundly and proposes an interesting theorem (page 288):

Rotten Kid Theorem: Each beneficiary, no matter how selfish, maximizes the family income of his benefactor and thereby internalizes all effects of his actions on other beneficiaries.

Corollary: Each beneficiary, no matter how envious of other beneficiaries or of his benefactor, maximizes the family income of the benefactor, and hence helps those envied.

Remarks

It is surprising to see that the economic model of this book well describes the behavior of family to the large extent. Human beings may not be rational as an individual but may be very rational as a group, and frameworks of economics are very powerful tool to analyze the situation (sometimes they reveal uncomfortable truth though). That is why I believe to learn economics is valuable for everyone even for those who don’t care about economy.

Reference

Gary Becker, “A Treatise on the Family”, Harvard University Press (Enlarged edition), 1993/10/15

What matters to me the most

Sometimes it's very easy to forget who I am, but recent events reminded me of what matters to me the most.

To be innovative, to achieve cool things, or to make the world more convenient place to be, does make me happy and excited. That said, I realized that I won't be satisfied with those things, if my changes to the society do not solve such issues as poverty, violation of human rights, lack of opportunities and so on, which literally plague people even now. I may be able to create another Facebook (I know e probability is really low), but I would retrospect my life and regret it, saying that "so why did I spend my precious time just to make the world convenient?".

Now I recall what Frantz Fanon said. I don't exactly remember what he said, but it goes something like this: If the building of a bridge does not enrich the awareness of those who work on it, then that bridge ought not to be built.

Things are now crystal clear. Now I see what I need to do from now.

Summer Davos 2012

Annual Meeting of New Champions 2012 (known as Summer Davos) was held from Sep 11 to 13th. Having attended the forum, I felt it is great privilege to be invited such a session. 

I think the most valuable things in this forum is that you can meet people in the cutting-edge and ask questions in person. Granted, you can learn what is hot in every industry through internet nowadays, but to hear something directly from people's mouth and to be able to ask questions are totally different experience. Not to waste my time,  I asked questions in most of the sessions. 

A few sessions were quite interesting to me: the future of finance, education and the role of business. I would like to post separate entries if I can. 

Above all, perhaps the people amazed me the most were Global Shapers (I belong to the community as well). It was such an experience to see that people of the same generations are doing something great around the world. They gave me inspirations and motivations to continue and put more efforts on what I am doing now. 

The Condition of Postmodernity

Changes in cultures may seem to be abrupt, but the underlying social process seldom experiences the changes, argued David Harvey, a Marxist Sociologist as well as a geographer, in his book “The Condition of Postmodernity”, a book on the shift from modernity to postmodernity.

What is postmodernity

Harvey uses architectures, arts, media and so on as examples to describe the general concept of postmodernity. He concludes that postmodernity is represented by its fragmentary, ephemeral and chaotic characteristics. The table below shows the comparisons between modernity and postmodernity (detailed in the table of page 340).

Modernity	Postmodernity
Economics of scale	Economics of scope
Hierarchy	Anarchy
Homogeneity	Diversity
Detail division of labor	Socialdivision of labor
Monopoly capital	Entrepreneurialism
State power	Financial power
Trade unions	Individualism
Ethics	Aesthetics
God the Father	The Holy Ghost
Materiality	Immateriality
Blue collar	White collar
Semantics	Rhetoric
Centralization	Decentralization
Operational management	Strategic management
Narrative	Image
Utopia	Heterotopias
Function	Fiction
Becoming	Being
Epistemology	Ontology
State interventionism	Laissez-faire

For instance, a typical modern building is somewhat simple, valuing its function. On the other hands, a typical postmodern building is somewhat chaotic. An office building of postmodernity may have forests in its mezzanine floor, which represent a fictional space.

Take another example. Art of modernity is somewhat simple. For instance, the arts born during the civil revolution represented very simple enlightenment agenda. Art of postmodernity, on the other hand, is more chaotic. As a typical postmodern art, Harvey cited an advertisement of Citizen (watch), in which a naked woman wears only a watch. He says that this advertisement engages directly with the postmodernist techniques of superimposition of ontologically different worlds that bear no necessary relation to each other. (page 64)

Underlying substructure of postmodernity

Harvey uses the concept of substructure-superstructure relation proposed by Karl Marx, arguing that there only was the change in production style during the shift from modernity to postmodernity.

Substructure of modernity is organized capitalism, best typified by Fordism mass production. Concentrated and centralized production, large commercial and monopoly capital, state powers, expansion of economic empires and the others represent this capitalism. Harvey argues that modernity is the response to this production relation.

Postmodernity is not the mutant, Harvey argues. The shift from modernity to postmodernity merely represents a change in the production relation in the society, to which superstructure corresponds. The “Disorganized capitalism” is represented by de-concentration of corporate power, internationalization of capital, decline in state power, outright decline of class-based politics and institutions and so on (the contrast between organized and disorganized capitalism is shown in page 175).

The technology advancement also had significant influence on the production relations, through “compressing the time and space”. Harvey argues that time-space compression is the conspicuous characteristic of postmodernity. For instance, the development of aviation industry made the world smaller, enabling the globalized production relations. The progress of information technology brought about just-in-time production. Using the words more familiar to us, we can say that the globalization and worldwide collaboration brought about the mixture of different cultures, spontaneous activity of people around the world, and so on.

Thus Harvey argues as follows in the beginning of this book. 

“There has been a sea-change in cultural as well as in political-economic practices since around 1972.

  This sea-change is bound up with the emergence of new dominant ways in which we experience space and time.

  While simultaneity in the shifting dimensions of time and space is no proof of necessary or causal connection, strong a priori grounds can be adduced for the proposition that there is some kind of necessary relation between the rise of postmodernist cultural forms, the emergence of more flexible modes of capital accumulation, and a new round of ‘time-space compression’ in the organization of capitalism.

  But these changes, when set against the basic rules of capitalistic accumulation, appear more as shifts in surface appearance rather than as signs of the emergence of some entirely new postcapitalist or even postindustrial society.”

Consequences of postmodernity

Harvey argues that the time and space cannot be free from social affairs. They always express some kind of class or other social content, and are more often than not the focus of intense social struggle. In the developed capitalism, the time and space are more tightly connected with money.  For instance, in the postmodernity, people may seem to enjoy more liquid labor market, but that phenomenon is the reflection that time is more closely connected to capitalism. This new production relation could be the bedrock of Lassies-faire and “self-responsibility”, the shift that Harvey issued an warnings.

Remarks

Though some arguments are not logically clear to me, it is valuable to see postmodernity from the perspective of historical materialism.

The book shows us how to predict what will come next. 21th century will mark the full-fledged globalization and information technology advancement, which are changing our production relations and thus lead to the corresponding cultural changes, some of which are already in progress. 

Reference

David Harvey, “The Condition of Postmodernity”, Wiley-Blackwell, 1992/4/16

The Theory of Economic Development

Nowadays, most of people would agree that innovation is the key driver of economic growth. That idea, however, was not common 100 years ago, and it is remarkable that Joseph Schumpeter argued that innovation is the key factor of economic development and the driver of economic cycle in his book “The Theory of Economic Development” in 1911.

Circular Economic System

In analyzing economic development Schumpeter started with economic model. He thought economy as a circular system, and he argued that the way of economic investigation is to understand the causal relationship between the “unknown” economic phenomena and “known” external factors. According to Schumpeter, it is not the explanation if an economic phenomenon is explained by another economic phenomenon – as that is something like a tautology.

“When we succeed in finding a definite causal relation between two phenomena, our problem is solved if the one which plays the “causal” role is non-economic. … If, on the other hand, the causal factor is itself economic in nature, we must continue our explanatory efforts until we ground upon a non-economic bottom.” (page 5)

“The economic system will not change capriciously on its own initiative but will be at all times connected with the preceding state of affairs.” (page 9)

If we trace back production processes, we get to only two factors. One is human being, and another is nature (lands).

What is Economic Development?

According to Schumpeter, “development” has the following characteristic.

First, it comes from within the economic system and is not the result of changes of external inputs. Schumpeter strictly separated economic change due to external factors from that due to internal ones. He said: “By ‘Development’, we shall understand only such changes in economic life as are not forced upon it from without but arise by its own initiative, from within.” (page 63)

Thus economic development is accompanied by the changes in consumers’ wants, since they are the only those who bring about the change within the economic system. Schumpeter thought that the producer of new goods, or entrepreneur, initiate economic change, by educating consumers - “they (consumers) are taught to want new things, or things which differ in some respect or other from those which they have been in the habit of using.” (page 65)

Then how are the new goods created? Schumpeter argued that new goods are created through new combination, i.e. the way to combine materials and forces differently from what is done before. According to Schumpeter, there are five types of new combinations: (1) the introduction of a new good, (2) the introduction of a new method of production, (3) the opening of a new market, (4) the conquest of a new source of supply of raw materials or half-manufactured goods, and (5) the carrying out of the new organization of any industry. (page 66)

Second, development occurs disruptively, not smoothly. They cannot be understood by means of any analysis of the circular flow, although they are purely economic and although their explanation is obviously among the tasks of pure theory, Schumpeter argued.

Schumpeter said that entrepreneurs appear not continuously, because the appearance of one or a few entrepreneurs facilitates the appearance of others, and these others facilitates the appearance of more, in ever-increasing numbers (page 228), until entrepreneurial profits are eliminated. This proposition explains why we see boom and crisis. The advent of a number of entrepreneurs create new economic orders as well as booming periods, which inevitably brings about the crisis in the future by the force of equilibrium.

Third, it brings qualitative changes or “revolutions”, which fundamentally displace old equilibria and create radically new conditions and economic orders.

Schumpeter understood the economic development as a dynamic process, in which three corresponding opposites interact: “First, by the opposition of two real processes: the circular flow or the tendency towards equilibrium on the one hand, a change in the channels of economic routine or a spontaneous change in the economic data arising from within the system on the other. Secondly, by the opposition of two theoretical apparatuses: statistics and dynamics. Thirdly, by the opposition of two types of conduct, which, following reality, we can picture as two types of individuals: mere managers and entrepreneurs.” (page 83)

Will to innovate

Schumpeter said that to create new things is difficult because of three reasons.

First of all, it is impossible to survey exhaustively all the effects and counter-effects of the projected enterprise, as entrepreneurs by definition create things invisible at the beginning.

Thus Schumpeter pointed out the importance of intuition: “Here the success of everything depends upon intuition, the capacity of seeing things in a way which afterwards proves to be true, even though it cannot be established at the moment, and of grasping the essential fact, discarding the unessential, even though one can give no account of the principles by which this is done. Thorough preparatory work, and special knowledge, breadth of intellectual understanding, talent for logical analysis, may under certain circumstances be sources of failure.” (page 85)

Secondly, people tend to have conservative mindset, feeling reluctance to do something new even if the objective difficulties do not exist. “Thought turns again and again into the accustomed track even if it has become unsuitable and the more suitable innovation in itself presents no particular difficulties. The very nature of fixed habits of thinking, their energy-saving function, is founded upon the fact that they have become subconscious, that they yield their results automatically and are proof against criticism and even against contradiction by individual facts. “ (page 86)

Thirdly, the difficulty comes from the social environment against those who initiate something new. This is natural antagonism, as innovations often demolish the existing businesses or social apparatuses.

Thus, Schumpeter emphasized the importance of will to go through all the difficulties that entrepreneurs should endure. He argued that there are three wills that enable entrepreneurs to carry on.

(1) The dream and the will to found a private kingdom

(2) The will to conquer

(3) The joy of creating, getting things done, and exercising one’s energy and ingenuity

Remarks

What I learned the most in this book is that the good study comes out of solid framework. Innovation is often treated as something mystical, but Schumpeter explained the phenomena using certain framework (in his case, economic model). Although “the framework of innovation” sounds contradictory, as innovation is something that destroys the existing framework, we still need to stick to framework in the first place, to come up with something beyond the framework.  In other words, the framework ready to undergo dynamic change may be what is needed to get to brilliant idea.

Reference

Joseph A. Schumpeter, “The Theory of Economic Development”, Transaction Pub; Reprint edition, 1983/01