The Follies of First-Year Economics, Part I
Families are really not that much like economies
For reasons not worth going into now, I’m reading an introductory economics textbook. For this exercise, I chose Principles of Economics by N. Gregory Mankiw because it seems to be one of the more popular ones, if not the most popular. (I can’t remember what I used in Ec 10 in college; when I took graduate micro at Berkeley, we used Microeconomic Analysis by Varian and — I think — Game Theory by Fudenberg and Tirole, but those are hardly introductory.)
This is how chapter 1 begins:
“The word economy comes from the Greek word oikonomos, which means ‘one who manages a household.’ At first, this origin might seem peculiar. But in fact, households and economies have much in common.
“A household faces many decisions. It must decide which members of the household do which tasks and what each member gets in return: Who cooks dinner? Who does the laundry? Who gets the extra dessert at dinner? Who gets to choose what TV show to watch? In short, the household must allocate its scarce resources among its various members, taking into account each member’s abilities, efforts, and desires.
“Like a household, a society faces many decisions. …”
The narrow point Mankiw is trying to make is pretty simple, and correct: both households and societies have to allocate scarce resources. But his pseudo-etymological point makes no sense. He might be saying one of two things: either economics can illuminate what goes on in a household, or economic thinking can make a household run better. But neither is true except in the most high-level, meaningless sense.
First, does economics explain household behavior? Yes, in the tautological sense that economics is the study of allocating scarce resources and households allocate scarce resources. But the principles that Mankiw covers in his textbook provide only the fuzziest picture of household relationships possible. Can the division of household labor within married couples really be explained by comparative advantage (Jane is twice as good at cooking as Dick, but only 50 percent better at cleaning, so Jane cooks and Dick cleans) and opportunity cost, without bringing in things like culture, tradition, and power relationships?
I doubt it — and, in fact, it’s likely that Jane cooks and cleans, even if she has the higher-paying job.
Do I “invest” in my children’s development because I am rationally maximizing some stream of benefits I expect to get from my children in the future? Of course not. (I don’t need my children to support me financially in old age.) Sure, you could say that my investments in child-rearing are utility-maximizing because they bring me psychic and emotional benefits — but you could make the exact same assertion about everything that I do.
Second, would the introduction of economic thinking make a household run better? I’ll let you answer that one. Just imagine going home to your spouse and announcing that you are going to create a market for cooking dinner, doing the laundry, dessert, and TV shows (the things mentioned by Mankiw). Let me know how that works out.
Why am I picking on these few paragraphs? As I said, I agree that households have to allocate scarce resources. The problem is that the household-society analogy actually highlights one of the major failings of introductory economics: it doesn’t do a good job explaining some very important realms of human behavior — like living in families — nor is introductory economics much help if you want to improve those realms of behavior. (Yes, there is this thing called behavioral economics, but that’s largely empirical psychology.) Households don’t allocate scarce resources in anything like the way simple economic models would predict: feeding my toddler son will never work out to my benefit unless you start assigning utils to love —
but because we can’t quantify love, the whole exercise becomes meaningless at that point.
Yet, because households allocate scarce resources, we are supposed to think that supply and demand, rational utility maximization, and trade theory can explain how families work. At the end of the day, the simple approaches taught in first-year economics can explain some types of behavior moderately well (commodity pricing in competitive markets) and others rather poorly. It’s important to know which domain you’re operating in. And in this case, the differences between families and economies vastly outweigh the similarities.