Kids as Production or Consumption Goods?
- Kruxi
- Sep 23, 2020
- 3 min read
Gary Becker thought about demographic transitions in the 1960s. The West has witnessed a massive drop in fertility from having about 6 children in 1860 to about 2.5 children in 1960. This trend continued to this day where the western average is about 1.8 kids per women today. This is called the demographic transition. Prior to Becker, most sociologists and demographers explained this shift by changing cultural and moral norms, as well as better contraception. This is where the puzzle lies: Why if contraception and access to information is so cheap in 2020 do central African states still have a fertility of above 5? Becker argues that norms and contraception are a result of economic incentives. The shift can be explained by parents viewing their children as consumption goods rather than production goods.
Becker argues that a family makes decisions in order to maximize household consumption. Before the industrial revolution in Europe most people were farmers, using physical labour to earn wages. Children of age 7 could already participate in such labour, sorting food, selling consumer goods made of agricultural material. The more children a family had, the more workers it had. Children are seen as a production good. They can produce stuff, which one can sell, and thus earn more money and consume more. Thus, having children as production goods maximizes household consumption pre-industrial revolution.
Along comes the industrial revolution and three main things change:
1) Child Labour laws increase the price of having children
By prohibiting children from participating in industrial labour, kids were not a good means of production anymore. Beforehand one could expect an investment of about 7 years’ worth of feeding and caring, 3 years of breakeven compensation, and another 6 years of positive revenue from the kid. Now its just investment. The kid isn’t allowed to work until its 14. That makes it very expensive to have children. If something becomes expensive, less of it is consumed. The same happened with the demand for the quantity of children.
If that is the case, would we expect that rich people had a lot of children? Becker argues that this is not the case. Imagine having one 5-year-old child as a factory working family. You have been living in bad conditions for the last years but now get a pay raise. You could afford a second child now. But do you want to live in poverty for the next few years until the next pay raise? The answer was no for most people. Instead they invested in the quality of their kid rather than in the quantity of children. Those two things are substitutes and the quality of children being more income elastic than the quantity. Thus, if income and productivity rises the quality of children rises rather than the quantity. This is the definition of an inferior consumer good. Take golf memberships for example. If you don’t have much money you will opt for the cheap course membership. If you have a positive income shock you won’t increase your number of cheap golf memberships. You will cancel your cheap membership and upgrade to a better one. Thus, you will substitute the cheap golf membership with a better golf membership. The same thing is true for children post industrialization. If you earn more money you will consume a higher quality child instead of two lower quality children. You substitute two low quality children for one high quality child. Thus, investing into one child’s quality maximizes household consumption.
2) The time of women is more valued in the labour market.
Another factor that Becker (and his friend Jacub Mincer) point out is the opportunity cost of women. Women post-industrial revolution participate in the labour market and earn wages. Having children means time off work, which means less pay. This is another incentive to not have children. As the pay of women increases, we expect less fertility. This has in fact occurred since 1970, when Becker formulated this theory.
3) Medicine improves, mortality of children decreases.
Another argument by Becker is that “fertility hoarding” makes little sense if child mortality decreases. “Bearing extra children in anticipation of mortality” was not necessary any longer. Having two children gives a high enough likelihood of consuming at least one of them until the rest of the parents’ lives. Having an extra third child only slightly increase that chance while being hugely costly. Thus, no reason to have more children.
The transition can be explained by changing incentives of parents. Children are now seen as production goods rather than consumption goods. They are thus consumed at high quality and low quantity. Becker has a unique approach to sociological issues. He calls it the “Economic Approach”. I have previously written about his work on marriage and microeconomics.
Summery of Becker's consumption vs production discussion:
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