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Why 'The Family' Matters in Economics

August 13th, 2013 | 5 min read

By Michael Hendrix

Nick Schulz is frustrated. He’s frustrated that economists talk about the role of institutions in the American economy, yet ignore the most fundamental one of them all: the family. With a career built on writing about the roots of economic growth, Schulz has realized that you can’t understand today’s economy—from the need for human capital to rising inequality— without considering the platoons of moms, dads, and children that form the backbone of American society. And the situation is not pretty. The American family is in a state of crisis, which in turn is having a profound impact on the economy.

Yet too many experts remain silent for fear of becoming collateral damage in America’s culture wars. Nick Schulz wrote Home Economics bookHome Economics for these silent ones who have ignored the family’s role in the economy. He concludes as former Secretary of Education Bill Bennett did, finding that the “family is the original and best Department of Health, Education, and Welfare.”

Looking across 50 years of history, Schulz provides an introductory analysis of the forces buffeting the American family, but he doesn’t dwell on the root causes. They are far too complex, ranging from changes in technology, culture, habits, morality, religion, and economic forces, among others. The point is that America’s customs concerning the family and, more specifically, marriage, have shifted dramatically. Out-of-wedlock births are increasingly common, as are parents who never marry. For those who do walk down the aisle, they face long odds of remaining together “‘til death do us part.”

For those tempted to say, “So what?”, rising income inequality, wealth disparities, and disproportionate health outcomes are all impossible to understand without taking a hard look at families. As Jason DeParle wrote last year in The New York Times that “changes in marriage patterns — as opposed to changes in individual earnings — may account for as much as 40% of the growth in certain measures of inequality.” David Leonhardt, also of the Times, noted a recent finding that “family structure was one of the four factors with a clear relationship to upward mobility.” As Schulz himself found, only 5% of married families were poor at any point this year, while 30% of single-parent households felt the blow of poverty. These data points paint a bleak portrait; those being raised without a mother and a father will face immense social and economic barriers.

The end result is that American families now seem to follow two tracks: those of the upper-middle class, where family institutions remain relatively strong, and those of the lower-middle class, where family instability is distressingly common. Charles Murray’s Coming Apart, in particular, provides a detailed picture of this growing disconnect.

Many people can and do succeed in the midst of family brokenness, of course. Yet the risks of failing are far too high when kids are raised in the context of relational instability. Socioeconomic mobility and multigenerational poverty are empirically linked to family stability like never before.

Family is society writ small, where one builds basic human capital, social capital, and skills. In Schulz’s calculation, family is a basic, vital economic unit—the X factor. Family builds empathy and self-control, which in turn shapes character. Character fosters human capital (“knowledge, education, habits, willpower”) and social capital (assets “created and maintained by relationships of commitment and trust”), which ultimately generates economic growth. You could practically build a formula out of it.

Empathy in particular is linked to social capital, while self-control informs much of human capital, allowing individuals to be invested in the long-term good rather than short-term gain. We also see this influence in an assortment of non-cognitive skills, such as delayed gratification, which, as Walter Mischel established around 1989, is a core factor in individual success.

It’s important to remember that developed countries—especially the United States—are wealthy because of their institutions, family included. As economies move from agriculture to manufacturing and then to services, human and social capital play increasingly important and complimentary roles in shaping how people contribute to the economy as employees. Yet as Schulz says, “At the same time one of the chief mechanisms for inculcating soft capital, the family, has weakened for millions of people.”

It turns out that, to answer a question posed previously by Matthew Lee Anderson, a lot of entrepreneurial creativity is in fact motivated and grounded in a strong family structure. When viewed through the lens of human and social capital as Schulz does, “Taking entrepreneurial and business risks is a lot easier if we are operating in a context of relational stability.” Free enterprise flourishes when immersed in the deep pools of virtuous talent that family nurtures. Liberty fades and government grows in the absence of strong families.

What are we to do then to mend the broken American family? We should approach in the spirit of humility, first and foremost. To answer in the form of a question, what can policy do to change the broken human soul? When robbed of the social mores that work to temper mankind’s nature, sin is left unfettered to darken the reflections of God’s nature seen in marriage and family. Moreover, as E.O. Wilson rightfully pointed out, “How might the government of a free society reshape the core values of its people and still leave them free?”

Virtue stands before policy in order to secure our liberty. We should then desire social order, grounded in familial stability, and a politics that speaks to it.

Yet we cannot sit back and wait. Improving the incentive structure behind family formation should be the utmost priority of any coherent political platform. Early childhood intervention, for one thing seems to work at countering the effect of family instability and fostering a next generation that’s less susceptible to the ills of their parents. Taken with a dose of humility, we also see that these interventions are fragile things, especially once the teenage years arrive. Schulz also mentions a number of tax incentives that have been proposed along these lines. They spur those on the margins of getting married or having kids by removing barriers, like cost (weddings and children have never been cheap). Pascal-Emmanuel Gobry summarizes this approach well:

From a free market perspective, most free market economists agree that tax policy should encourage investment in capital, and forming a family and raising children are (costly, in the latter case) investments in human capital. Libertarian economist Evan Soltas, recently making the case for the lower tax rate on capital gains, notes that if one believes we should subsidize investment in financial capital, we should also subsidize investment in human capital. And finally, if people are the ultimate resource (and we are), encouraging more people to be brought up in better conditions will increase overall prosperity.

The decline of the American family is the most pressing challenge of the 21st century. As Nick Schulz has so rightly shown in his new book, our economy needs strong families—and our society depends on them. We should stop ignoring this reality.