Saturday, October 27, 2007

The Microeconomics of Fertility

The carrying capacity of the earth is continually increasing, due to technology enhancements and advances in gene selection, such as the Green Revolution of the 1970s. The earth can carry much more people than was thought by Thomas Malthus, who assumed that populations grow at a rapid rate unless checked by limited supplies of food and other subsistence goods. The notion that subsistence goods increase arithmetically and population increases exponentially needs to say something about the increase in the carrying capacity which in turn increases the human populations which are able to scavenge the earth.

Jan van der Veen's work (drawing on other work) shows that population is now increasing at a decreasing rate since the 1985—1990 period. Moreover, there is a 15% probability that in a hundred years population will be less than that of today.

Population growth has some obvious positive impacts on the economy. First of which is the contingent growth in the labor supply, and the even more contingent growth in gross domestic product. Labor supply growth is merely a means to economic growth, which is merely a means to rising standards of living. At each point there are contingencies involved, and we should be doubtful about any “necessary” connections implied in the pro-natalist argument. There is also the argument that each person added to the population has the potential for genius, and that increases in population increases the number of baby-geniuses in the world.

On the other hand there are profound negative macroeconomic consequences of the microeconomic decisions made in the sphere of the family. The economics of the family can for example give rise to environmental degradation problems, strains on public services such as health and education, decreasing savings rates, and various other externalities on, say, negative externalities on other members of the totem or joint family, negative externalities on members of the community, and wage depression due to an overabundance of labor. And to state the obvious, children necessarily consume resources, drawing on the family’s income and societies’ natural capital. These points make clear that the family’s private cost and benefits do not match up with social and natural costs and benefits.

Diagrammatically, this is captured by the fact that the social cost is graphed steeper than the private costs. It may also be possible that there is no difference in costs, yet social and private benefits diverge greatly. The negative impacts of population growth are much more sufficient for negative outcomes than the positive impacts are sufficient for positive outcomes.

The microeconomic theory of fertility is useful here because it asks the question why a family would decide to rear children in the first place. The economics of the family asks what kinds of incentives are involved. After all, the decisions being made are often not based on society’s natural capital, or local wage levels. Family decisions are often made at the microeconomic rather than the macroecnomic level.

These are salient microeconomic behaviors based on things like private prices, tastes and preferences, incomes, and especially the expected marginal benefit from having children and so on. To frame this discussion, children in regions of high-income (correlated with low fertility) often are considered “consumption goods”, whereas in regions with low-income (correlated with high fertility) they are often considered “investment goods”. The difference will be clear in a moment.

We can also ask lots of other interesting economic questions about fertility. Such as whether children are substitute goods or complimentary goods for any other good or activity. Or, dare we ask the striking question of whether children are normal or inferior goods. That question is actually quite relevant, since if a child were an inferior good, it would imply that the family that there are clear substitutes to having children that are available—such as owning a boat or a helicopter if children are consumption goods, or such as viable savings or insurance markets if children are investment goods.

We can use the micro theory to explain the behavior of families in developing countries, where children are seen as an investment good, in the absence of markets for insurance and institutions like social security schemes. The first calculation is, of course, the direct costs of rearing children, i.e. the private costs in this activity, first of which are the costs of food and other subsistence goods. The other sort of costs is, more obviously, the opportunity costs. The family must reach a verdict on the trade-off between, say, raising children or enrolling in community college.

The opportunity costs, however, pervade the decision-making process at every level, even down to the trade-off between sleep and sleeplessness. We can also identify methods of decision-making in relation to certainties about life expectancy. If children are expected to die in infancy, and 15% of infants die within a year in developing countries, the parents may be expected to target children, choosing to wait until the child lives to have another child. If the uncertainty resides in the overall probability that a child will look after the parents in old age, they may be expected to hoard children as an appropriate insurance policy.

It is often assumed that the reason why families in developing countries have so many children is due to the lack of education. This seems to be a blatant myth, and the microeconomic theory spells this out in terms of the rational decision-making that a family goes through. In non-welfare states, families often prefer to invest in children as a form of old-age security and insurance rather than rely on money savings or social security programs that provide these benefits in other societies.

Families will often engage in mutual insurance networks, such as marrying off their children in distant villages, to minimize the risk of flood or disaster and thus of not having anyone provide for them in their old age. This is the problem of missing markets in developing countries, which need to develop in order for strong negatively external micro fertility issues to be mitigated. These can easily be provided in the market -- and developing countries have clear examples in developed countries and access to capital to achieve these ends.

However, there are some problems with the microeconomic theory of utility that I wish to briefly explain. It is arguably too simplistic, although it dispels the simplicity of earlier scholarship. If women do not have reproductive rights in these societies, then arguably there is no basis for the calculation. If decisions are made unequally in the households, then there is going to be some obvious bias that will tend toward having more children than the micro calculations would deem rational. These can also be explained by gender biases and social norms that are not accounted for in the model.

However, this problem is much more a case for a welfare state approach rather than a problem of the market itself. Markets do in fact provide these programs, yet developing countries often lack the infrastructure involved. For example, a functioning legal system is integral to the development of an insurance scheme, in order to validate claims made by injured parties.

1 comment:

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