Written by Gor Mkrtchian for Mises.org

Sources: How Families Fuel Economic Development, The Economics of the Extended Family: From Risk Management to Human Capital

The family provides enormous economic advantages to daily life and civilization as a whole.

But the extended and even nuclear family have been eroding thanks to changes in government policy, economic trends, and culture. In this article, I highlight how the nuclear and especially extended family supercharge human productivity thanks to the specialization and division of labor found within them.

Every household, whether it consists of one adult or many, has a long list of challenges it needs to constantly meet: earning income, taking care of children, house repairs, cooking, cleaning, doing laundry, etc.

People can achieve a level of productivity beyond the sum of their individual productivities by coming together to form families. One reason is because specialization and division of labor increase efficiency through a variety of mechanisms. Robert Murphy’s excellent textbook Lessons for the Young Economist details these mechanisms.

Natural and Acquired Aptitude

One mechanism is called “natural aptitude.” Some people are just born better at performing some tasks than other people. We have different talents. When people live separately, while they only have to cook for one person, earn income for one person, do the laundry for one person, etc., they must learn to do a little bit of everything.

Contrariwise, in a family where one spouse is better than the other at earning money, making repairs, or teaching the children algebra, etc., total productivity is maximized by having that spouse exploit their natural aptitude to the fullest by focusing on the tasks they’re better at, as opposed to everyone performing a bit of every task irrespective of talent.

Similarly, specialization also increases productivity because of “acquired aptitude.” The more you work at something, the better you get at it. It’s difficult for a person living alone to achieve as much skilled specialization because they have to divide their efforts over a larger number of responsibilities. However, a family can exploit acquired aptitude by dividing the responsibilities among themselves and diving deep into their respective portion of the duties.

Time between Tasks and Economies of Scale

The next advantage of specialization and division of labor is that, because each individual sticks to a smaller quantity of tasks, they spend less time transitioning between various tasks. Murphy explains: 

Picture something as simple as three children cleaning up the table after dinner. Most likely, the kids can get the job done more quickly if they divide up the tasks and specialize, for the simple reason of cutting down on unnecessary walking. For example, one child can scrape the plates off into the garbage and carry the dishes to the sink. The second child can wash, and the third can dry. This system is much more efficient—they will all be done much sooner—than if each child grabbed a dish, scraped it into the garbage, then carried it over to the sink and washed it, then stepped to the right to dry the same dish and finally put it away. The same principle applies to other productive operations.

Beyond washing the dishes more quickly, another way that many families reap this benefit is by saving on commutes, which in the dishwashing example above is the unnecessary walking.

Two individuals living apart both have to both perform household tasks and commute to work. However, when two people form a family, having one devote themselves to housework and the other to earning an income outside of the home can reduce the total time spent commuting, the number of cars needed, and the amount spent on fuel.

Yet another benefit of the division of labor available to families but out of reach of people living on their own is economies of scale, which means that “a doubling of inputs more than doubles the output.” Cooking spaghetti for a clan of thirty takes longer than cooking for a lone man in his apartment, but it doesn’t take thirty times longer, and in this way is more efficient.

Murphy provides an additional example of this principle, “Whether you want to make one cup or four, the prep work is largely the same, which is why people often ask, ‘I’m making coffee, anyone else want some?’”

We’ve outlined a number of ways families increase economic productivity: natural aptitude, acquired aptitude, less time lost alternating between activities, and economies of scale. Before moving on, note that in each of these cases, the benefits tend to intensify as the number of people in the family increases, because with more people, each person can specialize more deeply in a smaller quantity of tasks. The real-world takeaway is that extended families tend to benefit from the division of labor even more than nuclear families.

Divorce versus Specialization

Societies with an increased likelihood of divorce work against these benefits of specialization and the division of labor. That is, in a setting where divorce is regarded as unlikely, it is more likely the benefits of specialization will persist over time. 

This can affect the perceptions of married persons and can affect how each person sees the potential value of “investing” in specialization within the family. On the other hand, in a setting—either general to society or specific to the marriage—where a spouse anticipates that a marriage is more likely to end (especially during childrearing years) the risk of overspecializing rises. In these cases, it is more likely that a spouse will avoid the same degree of specialization, because in the event of divorce, both spouses will need to be ready for a life of relative autarky. As divorce courts have long acknowledged, a spouse who gives up a wage-earning career to pursue domestic pursuits can end up in a more precarious economic position. 

It has long been known there is a correlation between single parenthood and poverty. Moreover, the United States has one of the world’s highest rates of children living with single parents. And this share of single parent families has tripled since 1965. The cultural impacts of these trends are, of course, significant. But we almost must consider the economic effects. A society that places little emphasis on building families is also a society that abandons the many economic benefits of family life derived through the division of labor and economies of scale.

When we think of analyzing economic organizations, we generally think of firms and corporations.

But there is another organization that is just as critical to economic development: the extended family. Indeed, the advantages offered by this institution are numerous and include risk sharing, mutual aid, human capital building, social capital building, and resource complementarity and coordination.

Risk Sharing and Mutual Aid

One of the most important roles of the extended family is to act as a risk-sharing organization. Life is unpredictable. In a nuclear family separated from the extended family, the parents only have one another to rely upon. A single accident, sudden illness, job loss, etc. reduces half of the productive capacity of this unit and can spell disaster for both spouses and their dependent children.

This is where grandparents, uncles, aunts, and even family friends and close neighbors serve a crucial societal function. The members of this large group can chip in when things are going well for them to help their family members who are going through hard times.

And those who contribute know that if one day it’s their turn to go through a rough patch, the rest of the extended family, with its large collective pool of resources, will be there to get them through it, too. This works like and is a supplement to insurance purchased on the market, except that in the extended family there’s an affectionate thumb on the actuary’s scale.

Moving from a small group like the nuclear family to a larger group like the extended family protects against risk, because while it only takes one misfortune for half of a nuclear family to be debilitated, it would be an unlikely coincidence for half of a thirty-person extended family to simultaneously be stricken by misfortunes.

The mutual-aid capacity of the extended family doesn’t just apply to extraordinary cases such as sudden illness, unemployment, or death, but also to everyday matters such as taking care of the very young and the very old members of the family. We see this, for example, in the familiar case of grandparents caring for and instructing their grandchildren when the parents are at work or running errands.

The extended family is like a company that provides health insurance, unemployment insurance, life insurance, childcare, and eldercare all in one and in which everyone on the board of directors loves you.

Human and Social Capital

The benefits hardly stop there. The extended family is also an engine of human and social capital, that is to say skills and connections that boost the career opportunities of its members.

Imagine a young man, Smith, who in addition to his parents has a grandfather who runs a vineyard, another grandfather who’s a carpenter, an uncle who owns a mechanic shop, another uncle who’s a lawyer, an aunt who’s a nurse, and older cousins with their own occupations and businesses. 

To an outsider with no such relatives, each one of these occupational or entrepreneurial paths is to varying extents a black box. Is this the right path for me? What skills do I need? How do I get started? Who do I need to talk to? And so on.

But for Smith, each of his relatives can provide an apprenticeship opportunity and be a fountain of insider knowledge and connections. The extended family members in question can offer advice, describe what the occupation is like, take him in as an intern and teach him the craft, recommend him for job openings, or hire him themselves. All of this can save Smith a world of time, money, and anxiety and missteps.

According to Julia Fisher, the director of education research at the Clayton Christensen Institute, “Research shows that 70% of all jobs are not published publicly on jobs sites and as much as 80% of jobs are filled through personal and professional connections.” This shouldn’t come as much of a surprise. Parents pay large sums of money for their children to make the social connections provided by elite universities, for example.

Having a devoted extended family presents many of the advantages of a vocational school, country club, or recruitment agency. 

Complementarity of Resources

In a prior article I discussed how specialization and the division of labor make the family a powerful economic unit. Jörg Guido Hülsmann provides an insight about resource complementarity within the family that extends this analysis:

The generations are also different; they also complement each other. Young people typically have a large work capacity and creativity, but less experience and money. The cooperation between the generations of a family is also favored by trust and affection that has grown over many years, which still has to be built up in relation to people who are not family members.

The young and the old tend to have complementary resources within the family: energy and money, respectively. There may be plenty of people in the world ready to offer money to finance investments, and there may be plenty of people in the world ready to execute business plans once they have the money for it, but solving the coordination problem of bringing together these groups of people and fostering enough trust between them to breathe life into these potential investments is a herculean task. It’s part of the reason why there’s a multitrillion-dollar global banking industry.

Within extended families, the fact that the young and the old develop affection toward, trust in, and knowledge of one another helps solve this resource coordination problem. Consequently, investment ideas become actual investments.

Conclusion

These benefits can’t be taken for granted, however. Merely having biological grandparents, aunts, uncles, cousins, etc. is not the same as being a part of a functioning extended family if this group of people is scattered across different states, or doesn’t labor to maintain warm relations and fulfill their reciprocal obligations toward one another. That’s up to us.