Wednesday, September 14, 2011

The Family Business

The classic entities of businesses, households, and governments might be useful constructs for conceptualizing market operations, but, really, like planets, meteors, and stars, they all must obey the same same general laws – and distinctions among them can be blurred easily. In fact, every family is a business. The most successful family businesses are those that perceive themselves as such.  Academic economics - even from "free market" professors - teaches from false assumptions.

"Households produce goods and services for their own consumption and not for the market."
Firms have internal accountants, rather than hiring accounting firms – which they also do. Shipping and receiving, sales, etc., all could be contracted but are produced internally. If nothing else, households export labor – and capital goods such as the lawn mower and dishwasher enable that. Hans Rosling's TED Talk, "The Magic Washing Machine" (here) praises the liberating power of this capital good. We just moved from Ann Arbor to Austin. I have no idea how many fractional horsepower motors I packed – drills, sander, saber saws; mixer, blender. We have several computers networked here. I did not count the obsolete 5.25-inch diskettes I dumped. (My Carmen Sandiego and SimAnt were still pretty fresh.) The tax laws that allow businesses to write off obsolete capital do not apply to households, but they should.

"Households do not exist in an environment that could meaningfully be called competitive."
The Capulets and Montagues would disagree, as would the Rothschilds and Warburgs. They competed against each other and cooperated in joint ventures. Even the families that do not understand this at least must export labor. In that, they compete.

The two axioms in bold come from a paper by Steven Horwitz and Peter Lewin, "Heterogeneous human capital, uncertainty, and the structure of plans: A market process approach to marriage and divorce," in The Review of Austrian Economics (2008; 21:1-21; available here.) The paper offers much to consider. It nonetheless repeated many of the basic flaws of academic economics, and did so from a middle American point of view. 

 It is true that the institution of marriage in modern America has changed over the past 100 years. However, the authors over-reached by ignoring the many folkways that define "family" and "family business" in other cultures. Dowery and bride price are real and functional economic considerations. In ancient China, a woman’s production of silk cloth was the creation of household savings – and she knew it. In rural America of the 19th-20th centuries, cash income from the sale of butter and eggs was the wife's own.

Feminists rightly pointed out that "women's work" i.e, housework is undervalued: washing, cooking, shopping, caring for children, cleaning, gardening, and all the other tasks are not income; and their costs of production are not tallied. Neither is "man's work." Mowing the lawn, cleaning the gutters, and the other chores are invisible to economists.

This reflects another error in academic economics: confusion about consumer goods and capital goods. Easily, capital goods are tools that are employed to create other goods or services. Of consumables, food is perhaps the paradigm. But food is also the primary capital good.

Capital goods such as machineries wear out; they are abandoned when obsolete.  Also, they can be reconfigured, recombined, or redeployed to other ends. A factory worker may require protective clothing, a capital good. But an office worker also requires special clothing. Yet, the prints and patterns, styles, fads, and fashions are not recognized for their productive power.

We all produce... and consume... The laws of economics are not to be ignored, no matter what convenient labels allow us to isolate actors and their actions.  Governments, businesses, and families are helpful concepts when considering markets, but they are not essentially different from each other in any economic sense.


  1. Brilliant. I could not agree more. There is a huge amount of wealth created in private households that goes unseen and unrecorded.

    There is a significant difference, however. Wealth produced in a home is not designed to be valued by others; the time I spend picking furnishings, installing lights and artwork, caring for pets and houseplants, etc, are all tailored for my own benefit. Goods designed and created for trade with others, the stuff we measure as GDP (new wealth), is tailored specifically to benefit others' needs and wants.

    The way to massive wealth accumulation is in mastering the art of pleasing thousands or millions of others. The wealth created in homes is less able to generate large amounts of wealth only because it is designed to improve the lives of a few specific people.

    Have you ever heard the saying "Sell to the masses, live with the classes; sell to the classes, live with the masses?" Learn how to please millions of average people, like Sam Walton, Bill Gates, or Ray Kroc and you become very wealthy. Learn how to please a few specific rich people and you may become wealthy, but significantly less so than the men who pleased the desires and needs of millions.

  2. I understand and agree. The distinctions among households, businesses, and governments are useful. I agree also, that primarily, the business of houseolds is to export labor. What, then, is Bill Gates's lanwmower?

    I just think that the tax code should recognize this. ... as should we all...

    BTW: What would you call Tiffany's? Today, I passed an "upscale mall" (itself a contradiction in terms) that had a JimmyJohns sub shop.