The central tenet of economics is to allow for the optimal functioning of the society and an improvement in economic performance. One way that this can occur is by understanding how various institutions work and contribute to economic performance. In neoclassical economic theory there are two main types of institutions; families and businesses. Families contribute the inputs to production in terms of socialising children to work well in businesses, providing land for business use etc, whereas firms give the outputs like products and commodities for the market. This is the basic two stage cyclical flow of income model. Families were always treated as the groups that provide the inputs of production, and this idea of families dominated economic analysis.
However, now the subject of economics is evolving. There are many new disciplines coming forth, which attempt to improve the ideas of neoclassical economics to make it more relevant in the contemporary society. This implies a change in how certain groups are viewed as well as a change in the functionality of these groups. Thus, there has been a modification in how families are now viewed. Families are now seen in a broader perspective which not only looks at them for inputs to the production process but as a social institution with its own economic framework.
The family works as a social institution because it is a set up that is constant in the society and plays a major role in influencing the behaviour and functioning of its members, just like the institution of a business. The family as a social institution is a unit created by blood, marriage or adoption and can be described as nuclear (parents and children) or extended (all other relatives), The institution of the family has three major functions; to provide for the rearing of children, to provide a sense of identity among its members and to transmit culture between generations.
Transaction cost analysis and families
Since we consider families to be the form of an institution, they would thus be faced with transaction costs. Transaction costs are the costs incurred by an institution, that are not with its functioning. The activities that families indulge in and the effort that they put, which are not related to its three major functions, come under the transaction cost analysis. The transaction cost approach was initially meant for firms, but it can be applied to the family unit, if the family is treated as a governance structure. When something is made a governance structure it means it is a regulatory body which must regulate its members. It does this by providing incentives, monitoring its members and allowing for loyalty and altruism.
Let us now look at the incentive notion in families. Incentives can be understood as individual claims on the family’s resources and wealth. Individual actions influence family wealth. Successful actions increase family wealth, which during times of crisis is negatively affected. Family wealth is also affected by the number of individuals in the family and how resources are shared among them. This incentive is the weakest in large families with equal sharing, and strongest in small ones with sharing rules conditioned on individual behaviour. Since families are lifelong units, individuals would be reluctant to sacrifice long run benefits for short run gains. If they choose short term gains over the family, it could result in families not honouring individual claims in the future. Furthermore, individuals may value family consumption and income beyond their own lifetimes because of the concern for the welfare of their own children or grandchildren. Since, economic relationships are entwined with significant personal ones, the family commands rewards and sanctions that are not present in other institutions. Severe misconduct involves not simply the risk of dismissal from a job but also the risk of ostracism or expulsion from the family which can be an effective deterrent to non-conforming behaviour.
The monitoring aspect of family members’ behaviours is easily fulfilled due to the intertwining nature of economic and personal relationships. Many of the kinds of behaviours that would be needed at the workplace are also seen at homes. For instance, the diligent work and contributions of the family members can be extrapolated to diligent and work efforts at the workplace. The same goes for consumption and lifestyle, all of which can be seen at the home. Furthermore, family members also have informational advantages because in most cases members live together, which adds to the ease of monitoring behaviour.
Altruism, love and affection are also other behaviours that occur in families. These behaviours are significant as they limit opportunistic behaviour on part of the individuals. The love and affection results in families supporting and caring for one another and utilisation of one’s own resources for others. This includes parents providing education to their children and taking care of them when they sick. Similarly, children also take care of parents when they old and weak.
Lastly with respect to loyalty, it can be understood with how members behave with each other and the treatment of members by other members of the same unit. Members that fulfil family obligations get respect and esteem from other members. The ones that do not are at times ostracised by other members and can even be punished and reprimanded. Fulfilling family obligations and family duties are additional aspects of loyalty.
The dynamic role of families now
Families are not simply household units that just provide the factors of production as initially stated in economic analyses. Rather now, this institution has evolved to become a system of governance. Treating the family as a governance structure make sense because of the activities of incentives, loyalty, altruism and monitoring that family units perform. However, there are some limitations with this notion. First, there is the possibility of conflict among members. This can spill over from one sphere into the other. Although the family may function harmoniously, bound together by ties of affection and interest, there is always the possibility of discord. Conflicts between parents and children centring on the desire of children for independence and of parents to retain control may be continual sources of friction, which affect the governance integrity of the family structure.
The transaction cost approach provides a new perspective on families and households which was not seen in previous mainstream economic literature. The transaction cost approach also recognizes the importance of household organization and family structure and draws attention to the additional tasks performed by the families, which are a deviation from its primary functions, which are, to provide for the rearing of children, to provide a sense of identity among its members and to transmit culture between generations. These additional behaviours and schemes add to the transaction costs incurred by the family and make this unit much more than a group providing inputs in production, while bringing it closer to a system of governance.
Picture Courtesy- American Greatness