I have tried [here and here] and largely failed to explain how the classic free-rider problem in economics applies to child rearing in the modern world, so I thought I would give it one last stab. In reading through the 300+ comments on the issue it became clear to me that the use of the word “child” and the phrase “free rider” caused many people to loose the capacity for abstract thought.
To avoid this mental shutdown on the part of many, we’re not going to talk about children and the problem of free riders but instead talk about horses and the problem of the “gratis giddyup.”
Let’s perform a thought experiment in which horses still occupy the same critical economic role as they did in 1850s. The economy must have tens of millions of new horses of many different specialized breeds in order to function. Horses are so important that if a plague wiped out all the horses, the economy would collapse.
Now economically useful horses don’t just fall from the sky. Wild horses are useless for most purposes and even then they must be caught and trained. Domestic horses must be breed, foaled, provided with food, shelter and veterinary care and, most importantly, trained to saddle, yoke or pack. It takes four years from the point of conception to produce an adult horse. All this costs money up front. A lot of resources must be invested in a horse years before it matures to the point that it produces more than it consumes.
Fortunately, there is plenty of money available because horses are private property and every breeder knows that he has a right to recoup whatever he spends on raising the horse when he sells it. Bankers and investors know that as well. So do the customers who buy the horses from the breeders. Everyone just expects that the cost of using a horse automatically entails compensating the breeder for all the costs incurred in raising the horse in the first place, in addition to the day-to-day cost of maintaining the animal.
As a result, the free market works efficiently to channel resources into the production of the horses that the economy needs to function. Many people make a good living breeding horses, investors get good returns and people who need horses to perform work have a steady, high-quality supply.
Now let’s pretend disaster strikes. Animal-rights activists push through a law saying that animals are no longer private property that can be bought and sold. People can still breed and keep horses and use them for work (indeed the economy still needs large numbers of horses) but they can no longer sell them. Horse breeding stops being a business.
Many people continue to breed horses because they love doing it. However, the free market has ceased to allocate resources to horse breeding. Horse breeders support what is now a hobby by other non-related economic activities. When the horses reach adulthood they just give them away to anyone who promises to spend money to take care of them. Now the assumption is that if you need a horse the only cost is the cost of the horse’s day-to-day upkeep. Over time, people forget that they ever had to pay for horses in the first place.
A shortage of horses soon develops that prompts a political response. In order to insure a supply of horses, the state begins to subsidize hobbyist-breeders by providing free grazing land, horse trainers and veterinary care. The subsidies are funded by taxes paid by everyone whether they breed horses or not.
Soon a backlash develops. People who don’t breed horses resent having to pay taxes to subsidize other people’s hobbies. They point out that becoming a horse breeder is purely voluntary and that horse breeders derive great pleasure from the activity which more than compensates them for all the time and money they voluntarily chose to spend. Further, non-breeders say they already support horses when they pay for the day-to-day upkeep of the horses that they personally use. They argue that breeders should be grateful that somebody is out there providing upkeep for the horses they so enjoyed raising. Non-breeders claim that since they derive no personal benefit from the subsidies, they shouldn’t have to pay them and then they get on their horses and ride off.
Then a blogger points out that even with the subsidies included, non-breeders were not paying anything close to the total life-cycle cost of their horses. In effect, they were getting their giddy-ups pretty much gratis. More importantly, they never paid any amount equal to or greater than an otherwise identical horse-breeder. This meant that economically, raising horses is a sucker’s bet and that we could expect that, as in all other similar circumstances, the gratis-giddyup problem would cause the affected economic product, in this case horses, to vanish from the market.
Non-breeders were outraged. Didn’t everyone know that they rode their horses to many important jobs or used their horses to accomplish many important economic tasks? The blogger pointed out that the only thing that mattered economically was that the true life-cycle cost of the horses was actually paid by those who benefited from the labor of the adult horses. Any other arraignment would be economically unstable and would eventually lead to a possibly fatal horse shortage. Most non-breeders didn’t listen.
Let’s say our little thought experiment has a happy ending. The animal-rights activists, who were all radical vegans, all eventually died of vitamin B12 deficiency and horses become private property again. The non-breeders were shocked to rediscover the true cost of horses, but the free-market kicked in and everyone had all the horses they needed. Everybody, including the horses, lived happily ever after. The End.
Many people simply will not apply basic economic concepts to child rearing. They think that once the subject becomes children the laws of economics suddenly no longer exist. People who can immediately see that asking people to raise horses without any compensation would lead to a sharp drop in the number and quality of horses produced can’t see that asking people to raise children without compensation causes a steep drop in the number and quality of children produced. People who would never think of making use of a horse without compensating the horse breeder nevertheless have no qualms (even in principle) about using the labor of adults without compensating the parents who raised them. People who would never argue that we could depend on hobbyists to produce sufficient horses (or steel or food or software) out of sheer love of doing so have no problem believing that we can depend on hobbyist parents producing enough productive adults. People who can instantly identify a free-rider problem in virtually any other context cannot see it in child rearing.
The sad truth is that the laws of economics apply to every economic activity, including child rearing. Pretending that they don’t and that a shrinking subset of the population will sacrifice more and more in order to provide the trained labor that the rest of population needs is a fool’s bet. We don’t expect horses, steel, food, antibiotics or any other economic goods to just appear when we need them, without cost, and we shouldn’t expect children to do so either.
[update 2006-03-10 18:24:00: I think a lot of people let their fear of what they imagine the political response will be if a certain model of problem is accepted as true effect how they evaluate the accuracy of the model itself. (Its like people who can’t tolerate any suggestion that males and females might have different cognitive strengths and weaknesses because they think that politically that automatically will lead to second class status for women.)
I see that a lot in the comments on this issue. People go to silly extremes trying to invalidate the free-rider model because they image that accepting the model automatically mandates socialized subsidies as a solution. Well, it doesn’t and it certainly isn’t the solution I would support.
The first requirement of solving any problem is to get a good model of the problem. You should evaluate the model on its own merits first and then worry about the political fallout later. If you let political concerns drive you analysis you will end up in a functionally delusional state.]
Give it up already. We get it — people who have kids are God’s gift, and people who don’t are bloodsucking leeches. Fine. Whatever. I’m off to have a vasectomy.
You say, on one hand, that people won’t raise horses unless they can get money for it (be compensated) but then you turn around and say that horses are raised as a hobby.
The fact is that hobbyists and parents like do what they do because they get real value from their hobby/children.
A couple will increase its child output as long as the marginal value of another child is greater than the total cost. Subsidies will increase output, but at what cost, and who is supposed to decide the optimum level?
A solution would be for parents to demand compensation from their children once these grow up (for there to be a legal obligation) and children could then just pass this on to their employers via salary arrangements.
I’m with you Shannon. I’m hereby announcing that the 3 kids I am raising will not be paying into anybody’s pay-as-you-go Social Security program. I’m paying for their upkeep so I can probably convince them to help me when I’m old but the rest of you choldeless folks can eat cat food.
Gabriel Mihalache,
You say, on one hand, that people won’t raise horses unless they can get money for it (be compensated) but then you turn around and say that horses are raised as a hobby.
The important idea here is that people who produce things as a hobby won’t produce at levels as signaled by the market but rather based on their own time, income and inclination. Hobbyist will produce either to much or to little. For example, I image far more model airplanes get produced than the economy actually needs. In the case of very expensive items, hobbyist will produce far less than needed. think about it. Would you want you antibiotic supply to be dependent on highly skilled chemist going home on the weekend and cranking out a few CCs in their basement lab with reagents they paid for out their own pocket.
The fact is that hobbyists and parents like do what they do because they get real value from their hobby/children.
Yes, and that is what the free-riders depend on but it is in fact an extremely stupid way to run an economy. Just because someone enjoys their work doesn’t mean they don’t deserve to be paid for it. Another extremely important point is that paying for products is what actually provides access to the material components and labor that go into the product. Even if people are will to provide their time for free it doesn’t mean they will have the physical items they need without some form of pay.
Again, would you like your supply of medicine based on such a system. Would you think it wise for us to plan on having adequate supplies of anything based on fact that somewhere, somebody enjoys making it?
A solution would be for parents to demand compensation from their children once these grow up (for there to be a legal obligation) and children could then just pass this on to their employers via salary arrangements.
I agree completely and I am working on post outlining how that would work right now.
As a Chicagoboy you should appreciate the difference between the collective and the individual. I put up a longer argument over here but in short:
In an individualistic western society not having children isn’t being a free rider if you aren’t stealing from people that do have children. Because ideas don’t die, the people that hold them do, having narcicistic non-breeders end the line is self correcting. The problem is real free loading – when a childless person derives benefits from other people’s children. This is a real problem, but you didn’t hit the particulars. Social security and medicare (god forbid nationalized health care) are paid for by the children (anyone’s children) for anyone that is currently old. That is a real generational taking, and and argument you haven’t made (but which I obviously would support).
OK, a couple of observations: (1)This is what happens when you have an economic- driven system and a political- driven system running in parallel. (2)Raising horses IS a sucker’s bet. Know from experience. This is why when a viable alternative to them came along, horses largely disappeared from day to day life.
As to the free rider point, I guess I’m about 10% free rider…stopped at two kids. (Less than the necessary rate for population replacement. It comes in varying levels.)
I posted the 2006-03-10 18:24:00 update at this point in thread.
Jack Diederich,
“In an individualistic western society not having children isn’t being a free rider if you aren’t stealing from people that do have children.”
Unfortunately, this is only true on a moral level. Despite its inflammatory name, the free-rider problem is better thought of as describing the optimal strategy for individuals to follow in a particular set of circumstances. The individuals do not even have to understand all the consequences of their choices but need merely to respond to immediate market signals. In this case, people become free-riders by accident when they make the economically rational decision not to rear children based on the signals the market send them.
Because ideas don’t die, the people that hold them do, having narcicistic non-breeders end the line is self correcting.
To some degree but the real problem is that the broken market system keeps signaling that it doesn’t want children. The narcissistic non-breeder is most likely simply rationalizing their own economic self-interest. The market will keep signaling each new generation. Cultural inertia will only get us so far.
Social security and medicare…
This is true but it is important not to get hung up on the socialized programs. The same effect occurs in private investment as well. Long term savings and investments are really just legal claims on the future productive output of the private entities the investments are made in. If the productivity of those entities fails because they have insufficient manpower in the future then the investments fail as well.
Again, the problem is extremely fundamental. The market cannot accurately allocate a resource that cannot be made into a form of property. If a resource isn’t property it will be affected by some kind of Prateo complete phenomenon like a free-rider effect or a tragedy of the commons.
[jack] “In an individualistic western society not having children isn’t being a free rider if you aren’t stealing from people that do have children.”
[Shannon] Unfortunately, this is only true on a moral level. [big block snipped, see above] .. Cultural inertia will only get us so far.
I’m a Christian so I believe virtue is an unenforcible individual quality (which by a short two-step makes me a political libertarian). It is unsustainable to advocate virtue by law. The people that choose childlessness in order to buy the newest iPod every year are irredeemable. We don’t want them. To say they are free riders isn’t quite right, they are just dead enders. Let them go and a new equilibrium will emerge.
You are arguing that not having children is an unsustainable ethos. I agree. Let them go and let them die with no heirs. To argue that all men of the west must have a second generation despite their merits is foolishness – though many of the [planned] childless are my friends and business partners – I wouldn’t mind at all if my children never met someone like them.
nb, entering the number from the is-he-human on every preview is bothersome and it only remembers my info if I post without previewing.
I know of one example of a closed society that had no (or, at least, very few children) and did quite well for themselves.
I don’t think this cult would reflect society at large, and is no threat to Shannon’s thesis, but it is quite interesting.
South of Fort Myers, FL is Koreshan State Park. It is named for a group of late 19th and early 20th century pioneers and the grounds of their settlement comprise a large part (probably 10 acres) of the state park.
The Koreshans eschewed sex (although I think the leader did take some sisters under his wing, so to speak) and so there were very few children around, adopted or conceived before joining, I suppose. The youngest -and last- of the
Koreshans died a couple years ago. They believed- or at least their creed espoused – the belief that we humans are living on the inside shell of the earth.
1900s Florida was jungle. These 200 (?) folks created a small community. For all their odd beliefs they had (1910/15?) a sophisticated machine shop, elecrical generation, and air conditioning piped underground to the main buildings.
Way off topic but I worte it now, so there it is.
I think your argument comes down to the claim that producing and rearing a child produces a positive externality–the mirror image of the once popular claim that it produces a negative externality, and that we were therefore producing too many children. I tried to investigate the question in a piece I wrote and published (a pamphlet commissioned by the Population Council)more than thirty years ago. I concluded that there were both positive and negative externalities, and I couldn’t tell whether the sign of the sum was positive or negative.
The piece is webbed at:
http://www.daviddfriedman.com/Academic/Laissez-Faire_In_Popn/L_F_in_Population.html
You might find it of interest.
One point you should remember is that the relevant equalities involve marginal costs and benefits, not average costs and benefits. The question is not what the effect would be on me of nobody having children but what the effect would be of one fewer or one more child being born and reared.
Shannon,
The important idea here is that people who produce things as a hobby won’t produce at levels as signaled by the market but rather based on their own time, income and inclination. Hobbyist will produce either to much or to little.
In the absence of a market price there’s no “signal”. What you can do is look at the production technology and how many aggregate children are needed for a certain output (GDP?) but that soon leads you to full-on economic planning. (If you start setting a target GDP and then move industry around.)
Let’s not forget that market efficiency is, in the end, about having people achieve their preferences under budget and technological restrictions.
Parents act on their preferences but there is no credible way for the rest of society to incent them to more children with strictly private means (at this point).
I’m looking forward to your post on the legalisation of explicit child-parent debt.
Jack Diederich,
You are arguing that not having children is an unsustainable ethos…
I’m not making an argument paced on beliefs but on economics. What people want to do and what the economy will let them do are two different things.
Suppose that no subsidies currently existed. The cost per year of raising a child to a productive adult would be around $15,000. Anyone who didn’t have an income of at least $15,000 a year couldn’t even to begin successfully raise a child regardless of their beliefs.
Worse, people tend to rationalize their own economic self-interest. I think most of the actively child-hostile attitudes we see in a minority of the childless result from them trying to create a moral justification for behavior that produces the best economic return. Economic disincentives can, over time, erode beliefs.
In the absence of a market price there’s no “signal”.
Market signals exist whenever any free-market transaction takes place. In the case of a product, there are two signals: an input signal which communicates the cost to the producers of creating the product and an output signal, the price that others will pay for the product.
In the case of children, the input signal works largely in the free-market (minus subsidies) but the output signal is completely broken. This means that the market is signaling that child rearing consumes resources but produces nothing in return. Essentially, the current market thinks that child rearing is an wholly destructive act, that it is pure consumption. (Indeed, this is what most of my critics argue.)
The market signals people that no one else has any economic interest in whether a person raises a child into a productive adult or not. People who respond only to the market signal will not raise children.
This analogy breaks down even more quickly than your previous arguments on this subject (which, frankly, is saying something).
The “upkeep” cost of hiring workers includes the cost of childrearing, since the workers (generally — the various subsidies distort the situation somewhat) rear children out of their salaries, and this fact affects the labor market by increasing the minimum pay people will accept. You have separated out this factor by having horses transferred away from “breeders” (humans who control which horses breed and when) to “nonbreeders” (people who use the labor of horses while determining that they won’t breed).
“Hobbyist will produce either to much or to little.”
Er, no. As determined by the hobbyists themselves, they are obviously producing precisely the correct amount.
As determined by someone’s Vision Of The Anoitned, this may not true — but that’s irrelevant.
steveB,
The “upkeep” cost of hiring workers includes the cost of childrearing…
No, it doesn’t. There is no market linkage of any kind between the cost of rearing a child into a productive adult and the cost of employing that adult.
For example, its very expensive to raise and train someone to be a doctor. That doctor might go to work as a beverly hills plastic surgeon or as a peace corp volunteer in Africa. If the parents footed the entire bill, how would they recoup their investment contractually?
As the saying goes, “follow the money”. When a resource in the form of property is utilized, money flows from the terminal consumer (the one who destroys the resources) all the way to down the production chain as far as you care to follow it. Compensating resources flow the other way. Every “–>” represents a legal obligation to pay money.
So with horses the money flows like this:
Purchasing the horse: buyer–>breeder–>breeders supplies–>etc
Maintaining the horse: buyer–>buyers horse maintenance suppliers.
With children the supply of money flows like this:
Raising a child: Parents–>suppliers of child rearing resources–>their suppliers–>etc
When a person is employed: employer–>employee–>employees lifestyle suppliers–>etc.
Notice that no “–>” ever link the parents to the employer. If there was a linkage then parents you could borrow money against their children’s future earnings to support raising them. This fact alone should tell you that the market does not support child rearing.
Student loans would be the template for this kind of borrowing. With student loans, the government enforces payment out of the students future earnings. People will advance money towards the education of others because the student loan gives them a property interest in student’s future earnings. When an employer hires someone with student loans they are paying part of the true cost of rearing that individual into a productive adult. Otherwise, they don’t.
It is precisely the legal/contractual break between the cost of raising a child into a productive adult and the cost to utilities the labor of that adult that creates the free-rider problem.
As determined by the hobbyists themselves, they are obviously producing precisely the correct amount.
The question you should be asking is if they will produce the amount that YOU think you need to consume at the price YOU would be will to pay for it, if you could.
Would you feel comfortable with the idea that your medicines, steel, oil, computers etc were all produced and paid for by hobbyist and that you had no means of signaling them that you needed more of their output and no means of transferring material resources to them so that they could actually afford to do so? Would you like to have no influence whatsoever on the production of the material goods you need to survive? If not, why are so cavalier about not having any influence on the production of the skilled labor you also need to survive?
A properly functioning free-market provides incentives for people to chose to produce what other people want. It is inherently fair because it compensates producers for time and material they must expend to create the product while at the same time providing the product at a cost to the buyer they are willing to pay.
I think you are so terrified that recognizing a free-rider problem will lead to a socialized solution that you can’t even recognize that the current system prevents YOU from making choices that YOU believe to be in your self-interest.
If you decided that you would need certain types of labor 30 years down the road, how could you possibly go about trying to insure that using a solid free-market mechanism. YOU could not.
The best that YOU could do at present would be to make some kind of charitable contribution to the raising of some children and hope that non-economic and non-contractual factors would cause the eventual adults to return your kindness.
I’m pretty sure, however, that if YOU saw other people benefiting from the labor of those children as adults, you would feel pretty damn free-rided.
Vision Of The Anointed
Had you actually read Sowell, you wouldn’t be advancing the airheaded, collectivist idea that people will be permanently willing and capable to personally expend great economic resources for which they can get no return.
At one point, having children amounted to buying a combination annuity/insurance policy – your children would support you in your old age, and your family (children and wider kin) would kick in resources if you had a bad emergency. This implicit contract was upheld by societal norms.
Then the state got into the act and took over much of the burden the children were carrying. Effectively, the bilateral parent/child relationship was turned into a trilateral one: parents paid for child rearing; children paid taxes to the state; and the state paid for parents’ old age and emergency support.
I think much of the disagreements you’re hearing comes from people’s different assessment of the parent/child post-rearing obligations. If indeed children have no practical obligation to their parents upon maturity, then your argument is valid on its face, in that non-child-rearing people should not be entitled to the child-equivalent support payments.
EXCEPT that in the meantime, these support payments have been politically recast as in lieu not of childrens’ support, but of taxes paid by adults, which explains the sense of universal entitlement regardless of child rearing status. In effect, there’s two stories colliding as to where (or why) there’s government payments for old age pensions and catastrophic insurance.
Alongside this is the dynastic angle. Many families consider themselves as onging concerns, with each family member “paying into” it and drawing from it. A family limited partnership, if you will. For those people, the government’s intercession is both unwelcome and fairly useless – they expect to continue the familial contract and enforce it upon their offspring.
So perhaps you should explicitly call out, in your economic model, what pseudo-contractual obligations exist (and should exist) between parents, children, and famly groups. It might help unravel the cacophony of different viewpoints that’s mired your efforts so far.
Cheers
— perry
“There is no market linkage of any kind between the cost of rearing a child into a productive adult and the cost of employing that adult. For example, its very expensive to raise and train someone to be a doctor.”
Unless you can come up with some explanation *that in completely independent of training cost* for why it costs more to hire a doctor than it does to hire a janitor, you’ve pretty much killed your own argument.
“If you decided that you would need certain types of labor 30 years down the road, how could you possibly go about trying to insure that using a solid free-market mechanism. YOU could not.”
That is true of pretty much every economic good. If (for example) steel is dirt cheap at the moment, to the point where steel mills are folding right and left, and I think I’m going to need more steel than the market produces thirty years from now, how exactly do I exert any inflence in the matter? I can buy up all the steel-in-thirty-years futures I can afford, but even if I’m a millionaire that just isn’t going to have any discernable impact on the overriding steel-is-a-glut-on-the-market signal being sent at the moment.
“you wouldn’t be advancing the airheaded, collectivist idea that people will be permanently willing and capable to personally expend great economic resources for which they can get no return”
You are claiming that childrearing is a personal expenditure of great economic resources from which the expender can get no return.
Unless my senses deceive me greatly, childrearing keeps occurring, decade after decade.
I suppose I’ll have to either cling to my “collectivist idea” that such a thing is in fact possible, or reject your premise that it produces no return.
Hello Shannon:
The Gratis-Giddyup Problem is an interesting post. I’ve been mulling it over all weekend. It’s such a huge topic that basically touches everything in our society. I agree with your underlying observation that in today’s society, from an individual’s standpoint, it makes perfectly good economic sense not to have children. They DO cost a lot and we don’t expect them to pay us back the cost of raising and educating them. But this is just one part of the overall economic pie. During our productive lifetime we also must save/invest for our retirement.. I’ve come to the conclusion that the gratis-giddyup problem and retirement savings situation are really interrelated. It’s really a lack of a total lifecycle approach our society has when dealing with our social/economical polices. It pits the child related issues against senior population related issues. We often are forced to reduce our education budget in order to support other programs.
I’ve come to the conclusion that relying on government treasury to invest in our children ultimately doesn’t work. We really need to develop other market mechanisms to insure an adequate child development investment (I really am focusing in on education).
I won’t take up more space in your comments on my education investment thoughts unless you want me to. But I agree the current market signals regarding our children will ultimately harm the overall vitality of our society.
I am not sure if this is relevant but it may lend a little support to the argument. In agrarian societies where children start working on the family farm at young ages, they have more children per capita. In poor countries where child labor is permitted, they have more children per capita. This suggests that people have more children when they get economic returns from them.
All quotes are from the original article:
This is probably for the same reason why our society finds it perfectly acceptable to euthanize a horse with a broken leg, but not a human in far worse health. I think of your observation above as the flip side of the notion that not only human life generally, but each individual human life is uniquely sacrosanct. I suspect this notion of “human exceptionalism” is why so many people balk at the idea of reducing any aspect of the human experience to an abstraction, economic or otherwise.
It’s not necessarily even the political implications that put people off – the philosophical ones do just fine in that regard. Whether it is your intent or not, the implication of your argument is that deep down, humans are merely a bunch of Pavlov’s dogs responding to the sound of a bell called “market forces.” Most people like to think they have more free will than that (which gets us back to the aforementioned notion of human exceptionalism).
Ah, there’s the rub. Unfortunately, it’s pretty safe to say that in the minds of most American politicians nowadays, accepting the model does indeed automatically mandate socialized subsidies as a solution. Big-government solutions have long been the default option for Democrats, and that is quickly becoming true of Republicans as well.