Part 2: New Economic Approaches to Fertility || The Value of Children: An Economic Perspective

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  • The Value of Children: An Economic PerspectiveAuthor(s): Theodore W. SchultzSource: Journal of Political Economy, Vol. 81, No. 2, Part 2: New Economic Approaches toFertility (Mar. - Apr., 1973), pp. S2-S13Published by: The University of Chicago PressStable URL: http://www.jstor.org/stable/1840410 .Accessed: 22/06/2014 17:15

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  • The Value of Children: An Economic Perspective

    Theodore W. Schultz University of Chicago

    In bringing economics to bear on procreation and children, a new dialogue between data and theory has begun. The studies that follow are a part of that dialogue. Whereas Malthus assumed that the price of children would remain constant, these studies argue that the cost of children increases with the rise in price of human time. We now see that fertility is affected by prices as well as by income and by the formation of human capital in children. We also see that the human capital embodied in adults, especially in women, affects fertility and the supply of labor. Recent developments in economic analysis provide some testable hypotheses. The empirical en- deavors, as expected, disclose important new unsettled questions under- scoring the fact that the work has just begun in understanding the mech- anisms that account for changes over time.

    In assessing the contributions of these studies, it would be premature to look for policy implications. The implications that matter at this stage of this work are primarily analytical. To see the setting of the problems that are on the agenda calls for an economic perspective which entails some elementary, albeit fundamental considerations. Although these considera- tions might be taken for granted, I shall elaborate on them to make sure that they are not overlooked. Fertility means children, and children are an important part of the standard of living of most families. Most married couples want their own children, and they proceed to bear and rear them. What is not clear is that parents derive satisfactions and productive services from their children and that the sacrifices made by parents in bearing children and in the investment they make in the care, health, and education of their children are in substantial part deliberate family de- cisions.

    I anticipate that many sensitive, thoughtful people will be offended

    I am indebted to Gary S. Becker, Yoram Ben-Porath, Dennis De Tray, Gregg Lewis, Marc Nerlove, Margaret Reid, T. Paul Schultz, and Robert Willis for their helpful suggestions to gain clarity and cogency.

    S2

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  • ECONOMIC VALUE OF CHILDREN S3

    by these studies of fertility because they may see them as debasing the family and motherhood. These highly personal activities and purposes of parents may seem to be far beyond the realm of the economic calculus. I repeatedly expressed the same concern about this sensitive issue when I began to apply the concept of human capital to education. It, too, could be viewed as debasing the cultural purposes of education. I pointed out with care and at length that investment in education is fully consistent in serving cultural purposes in acquiring future cultural satisfactions along with the earnings associated with schooling and higher education. The same basic logic is applicable in this endeavor in explaining the sacrifices that parents make in acquiring the personal satisfactions and productive ser- vices that they derive from their children.

    The analytical core of these studies rests on the economic postulate that the reproductive behavior of parents is in large part a response to the underlying preferences of parents for children. Given the state of the birth control technology and the various classes of uncertainty associated with contraception, infant mortality, the health and fecundity of the parents, and the income and wage rates parents expect to realize over their life cycles, these preferences are constrained by the parents' resources and the associated alternative economic opportunities in using their resources. In turn, these resources imply sacrifices, measured in terms of opportunity costs that parents must be prepared to make in acquiring the future satis- factions and productive service they expect to realize from children.

    It could, of course, be argued that parents are nevertheless indifferent to these and all other economic considerations when it comes to having children, on the grounds that children are in considerable part the un- intended outcome of sexual activity, that parents in general do not engage in any practical family planning, and that the lifetime resource constraints are not known to parents with enough certainty to influence their decisions at the time they bear their children. I shall not, at this point, enter upon the reasons for not accepting this line of argument because of the evidence to the contrary that emerges from these studies. I shall instead proceed on the postulate that parents respond to economic considerations in the children they bear and rear and that parents equate the marginal sacrifices and satisfactions, including the productive services they expect from children, in arriving at the value of children to them. Thus, in thinking about the economics of fertility, social cost and benefits aside, the analytical key in determining the value of children to their parents is in the interactions between the supply and demand factors that influence these family decisions.

    Growth economists, to the extent that they have dealt with fertility, have featured the gross economic effects of population growth, leaving to biologists, sociologists, and demographers the task of explaining the in- creases in the size of the human population. This concentration on such

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  • S4 JOURNAL OF POLITICAL ECONOMY

    gross effects is understandable in view of the fact that the factors determin- ing population growth have been a major unsettled part of economic theory. The concept of an optimum population has not been fruitful. Modern growth theory, with some notable exceptions, treats increases in the size of the population as an exogenous variable, although in classical economics it was (following Malthus) an endogenous variable. The Alalthusian assumption about bearing and rearing children in response to economic growth led, of course, to the long-standing dismal economic perspective with respect to the population consequences of the accumulation of capital and of any advances in the techniques of production. While economists no longer accept the subsistence standard of living as invariant over time in view of the widely observed rise in standards of living that has occurred with the rise in real family income associated with economic growth, the recent proliferation of doomsday literature featuring the population bomb, produced mainly by a few biologists, rests basically on the early 1\Ialthu- sian notions of reproductive behavior.

    Meanwhile, demographers have done much in clarifying the complexity of population data and in examining in depth particular differences among classes of parents in their fertility behavior (Ryder and \Westoff 19711 and others). Moreover, demographers know that the population projections that are based on their well-standardized data are tenuous projections even for the short run, for they know that these projections do not rest on any theory of population growth. Demographers are asking key questions, however, on which the economist would be well advised to ponder: What is the explanation of the rapid adoption of the pill? What accounts for the fluctuations in the birth rates in countries in which the economy is highly developed?' Tn my view, the most important question they are asking is: What is the explanation of the demographic transition, that is, hew do we explain the economic and social processes and family behavior that accounts for the marked decline from very high birth and death rates to modern very low birth and death rates? It is obvious that the theory which treats population growth as an exogenous variable is of no help in answering these questions.

    I shall restrict the rest of my comments first to the recent advances in economic analyses that have made these new approaches possible. The economic picture that emerges will then he sketched briefly, and finally I will consider some of the implications of these studies for future eco- nomic thinking and work.

    I. Advances in Economic Analysis

    There are four developments in economic analysis that are relevant here: the investment in human capital; the theory to treat a heretofore neglected

    1 This question has been mainly on Richard Easterlin's research agenda (1968, 1969).

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  • ECONOMIC VALUE OF CHILDREN S5

    basic attribute in the allocation of human time; the household production function; and a view of the family that encompasses both consumer choice and household production decisions, including the bearing and rearing of children.

    Investment in human capital, as we know, rests on the proposition that there are certain expenditures (sacrifices) that are made deliberately to create productive stocks, embodied in human beings, that provide services over future periods. These services consist of producer services revealed in future earnings and of consumer services that accrue to the individual as satisfactions over his lifetime.2

    Children are here viewed as forms of human capital. From the point of view of the sacrifices that are made in bearing and rearing them, parents in rich countries acquire mainly future personal satisfactions from them, while in poor countries children also contribute substantially to the future real income of their parents by the work that children do in the household and on the farm and by the food and shelter they provide for their parents when they no longer are able to provide these for themselves. Children are in a very important sense the poor man's capital. It is becoming clear that the investment in children is in many ways akin to the investment in home- grown trees for their beauty and fruit. A very young child is highly labor- intensive in terms of cost, and the rewards are wholly psychic in terms of utility. As a child becomes a teen-ager, the additional cost borne by the parents involves less labor intensiveness and the rewards, especially in poor countries, consist in increasing part of useful work that the teen-ager performs.

    The second important advance in economic analysis is in the treatment of human time in allocative decisions with respect to both market and non- market activities (Becker 1965). The linkage between human capital and this concept of time allocation is strong and clear. The usefulness of

    2 Professor Harry Johnson has summarized the producer attributes of human capital succinctly as follows: "The contribution of human capital to the productive process is developed by a process of investment (which means simply the sacrifice of current resources for future returns) incurred in the formal education system and through on-the-job training, and that this investment yields its returns over the life- time of the individual concerned. . . . The concept of human capital has tremendous integrative power, in that it provides a unifying principle for the consistent explana- tion of many phenomena of the labour market. Perhaps its most fundamental implica- tion, from the point of view of social thought, is that the worker in an advanced industrial economy is typically a very considerable capitalist. . . . A second implication, which is extremely relevant to the broad question of social and economic inequality is that the economic rewards for alternative occupations and careers need to be compared in terms of lifetime income profiles, and not in terms of the highest annual income earned in the course of the career.... A third implication, also relevant to the question of inequality, is that in their choices among alternative possible careers, new entrants to the labour force face the same problems of assembling information, assess- ing risks, evaluating returns, and obtaining the resources for investment, as do prospec- tive investors in material capital equipment or in stocks and shares" (Johnson 1968, pp. 7-8).

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  • S6 JOURNAL OF POLITICAL ECONOMY

    the new concept of human time is not restricted to work in the labor market for it is also applicable to work in the household. With respect to the household the individual, predominantly the housewife, allocates her time in part in choosing and shopping for consumer goods and in part in using them in household production leading to consumption. Then, too, consumption per se also requires time. The central principle of this advance in analysis is that in reality each consumer service has two prices attached to it: (1) a money price, as in traditional theory of consumer choice, and (2) a time cost of acquiring the consumer goods and processing them in the household; and the time cost that is involved in consuming the services obtained from this household activity.

    It is obvious that bearing a child and caring for the infant child are normally highly labor-intensive activities on the part of the mother. What has not been clear is the difference in the value of time of mothers in bearing and rearing children asssociated with the difference in the hum...

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