Monday, 11 June 2012

The family as a firm

Given the discussion in the previous post, a question that occurred to me is, To what degree is the family a firm? After all in many cases families and firms look very much alike. If Mr and Mrs Hayek were to go home and make a meal for the Hayek family, haven't they just turned themselves into Cafe Hayek?

The answer, if we follow Harold Demsetz, is no. For Demsetz a firm is an organisation which produces for those, and only for those, outside the organisation, whereas the family is an organisation which produces for those inside the organisation. But it is also possible for the family to produce for those outside the organisation -they can have friends over for dinner, for example. This makes the family look more "firm-like". For the Grossman-Hart-Moore approach to the firm, on the other hand, the firm is a collection of asserts over which an agent (or agents) has property rights or control. But doesn't this also apply to a family? Assets such as the house and the car and the microwave and the television and computer etc are controlled by agents, normally the parents, in the family. Are there not "quasi-rents" created in a relationship for which the use of vertical integration - the forming of a family in this case- is just a way to avoid hold-up problems?

Of course if you look at the neo-classical model of the firm and the household they are the same. As Kenneth Boulding once point it "[t]his type of analysis [the theory of the firm] is exactly analogous to the analysis of the reactions of a consumer by means of indifference curves. Indeed, a consumer is merely a "firm" whose product is “utility.” The indifference curves are analogous to the isoquants, or product contours, the only difference being that they cannot be assigned definite quantities of utility. The utility surface, whose contours form the system of indifference curves, is a “mountain” whose shape we theoretically know, but whose height at any point probably cannot be known; by contrast, we can assume that both shape and height of the production surface are known. The "substitution effect" and the 'scale effect" are likewise known in consumption theory, where the scale effect is usually called the “income effect.” Thus, a rise in the price of a single object of consumption will have a substitution effect tending to reduce the consumption of that object as cheaper alternatives are substituted for it. There will also be an “income effect” tending to reduce all consumption, as the higher price makes the consumer poorer. The effect of a given rise in price, therefore-i.e., the elasticity of demand-depends first on the substitutability of the commodity concerned, and, secondly, on its importance in the total expenditure. This is true either of a consumption good or of a factor of production".

So do we need any additional theoretical tools to analyse the family over and above those provided by the theory of the firm? If so, What and why?


Eric Crampton said...

Agree on the spousal arrangement potentially usefully being modeled as a firm. But harder to work kids in. In one obvious way, they're a product. In another, they're a consumption good for the spousal couple. In a third, they're an investment good that yields non-financial rewards after a period of time. And, they're also a costly, not easily alienable liability. The value of the flow of consumption benefits and of the future investment returns is heterogeneous across couples and, in some cases, isn't enough to produce the maintenance flow sufficient for keeping the stock up to a socially acceptable standard; in worse cases, the couple gets utility from running down the capital stock.

I still like Becker's rotten kid theorem and reckon it's far more generalizable that commonly realized: it's just the Coase theorem applied to families, with equal potential applicability to rotten parents.

But it's hard to say whether you should even start by having kids as labour, long term (mostly non-pecuniary) investment, consumption goods, or something else....

Paul Walker said...

If kids are a consumption good or an investment good isn't the family just a vertical integrated firm which is making either a final product or an intermediate production.