Economic models in the “service” of social policy The author of the economic approach to viewing life through which we can analyze social problems in broad areas of life is the Nobel laureate in economics Gary S. Becker (* 02.12.1930 - † 03.05.2014). The economic view of life and human behavior is based on the full acceptance of the premise that individuals do not act exclusively selfishly with an emphasis on profit, but their decisions and preferences are influenced by many factors such as the past, family, altruism, selfishness, education, health, income, the ability to predict the consequences of their own decisions, life opportunities, and so on.
An individual acts as a rational being in all life situations (including the commission of crimes) with the purpose of maximizing personal utility based on a comprehensive “bundle” of own preferences. By human preferences we mean the axioms of human behavior expressed through the satisfaction of specific individual desires. Many economic theories assume that the basis of human preferences depends on the biological needs of the individual. However, this does not correspond to reality in economically developed countries. In many cases, preferences go far beyond ensuring essential needs such as hydration, shelter, food, or space for recovery and rest. A significant part of the preferences of an individual living in a world of “unlimited access” to services and commodities is based on prior personal experience, social interactions, influences from reference groups, parents, advertising, affection, guilt, hatred, childhood experiences, and many other factors. The individual makes consumption choices by maximizing the utility of own preferences, which are endogenous and dependent on past, current, and future consumption. Utility maximization is not just about the use of goods and services at a particular time, but includes the entire range of habit, social, cultural, and political behavior.
An individual may feel aversion toward their actual preferences and wish they were otherwise; that is, they will try to correct and adjust them into desired preferences, or at least shift them into an acceptable range. Dissatisfaction with one's own preferences stems from the limits of actual capital accumulated in the past, which constrains utility-maximizing choices regardless of how strongly one rejects the size and type of “inherited” capital. A significant influence on an individual’s choices or preferences arises from the mismatch between desired and actual capital. The individual will seek to devalue the effects of capital that reduces utility and to increase the effects and investments in utility-maximizing capital. It is true that preferences influence outcomes and are, in turn, influenced by them. The ability to rationally distinguish individual forms of capital and their effects is shaped by various factors, such as habits of certain behaviors, childhood experiences, pressure from reference groups, and many other social interactions. The attitudes and behavior of close people have a strongly limiting effect on individual choices. Rationality is characterized differently from that in other economic models. Individual rationality is affected by the factors above, while the individual acts insightfully and consistently over time in order to make their own utility profitable through maximizing behavior.
Social, personality, and cultural factors shape preferences through personal and social capital. Both types of capital are only a segment of the individual's total human capital, and in many cases have a larger impact on future incomes and utilities than their acquired education or labor preparation. We influence our future through regulation of investments and stocks of personal capital. Current behavior can increase the future value of personal capital. Over time it decreases due to psychological and biological depreciation of the individual and the effects of past decisions. Demand for goods and experiences that increase future personal capital is stimulated when this capital increases the individual's utility, and on the contrary is constrained when utility decreases. The individual will invest more in their own personal capital (e.g., health, education) the more they expect these investments to yield returns in the future. Unemployment, divorce, poverty, and other life experiences contribute to the formation of preferences by affecting future accumulation of personal capital. Current preferences are influenced by the past, which the individual can no longer change (childhood, family, parents), but also by their own wrong decisions. Errors made through one's own decisions can be mitigated by the individual’s ability to imagine their effects or to imagine the shape of future utilities from their own decisions.
Imagination capital pre-determines the amount of goods and preferences of the individual, as well as the overall distribution of future utility. Harmful habits such as drugs or alcohol reduce an individual’s utility by constantly lowering the ability to adequately anticipate the consequences of one’s own decisions. The more an individual orients decisions toward the present, the more they create habits and other preferences that reduce future usefulness, and vice versa. The more behavior is oriented toward the future, the more it increases future usefulness, even at the cost of some immediate sacrifice. “Short-sighted individuals” cannot weigh the impact of current consumption on future utility and future consumption. Uncertainty arising from not knowing the consequences of one's own decisions is one reason why individuals are only partially the authors of their own “happiness and destiny.” The more an individual prefers immediate consumption and the advantages derived from it, the lower the returns from such investments. For people marked by long-term poverty, impatience and life strategies oriented toward the present are characteristic. By contrast, “middle classes” or “social elites” prefer long-term investments (education, career, health, contacts, etc.) and thereby increase the return on their investments manyfold. If the real goods of an individual do not cover basic needs, then only with great difficulty will they be able to allocate capital to future investments, which substantially lowers their ability to prefer future advantages and joy from the resulting returns.
A significant part of an individual’s capital is social capital. It primarily does not depend on decisions made by the individual, but on the choices and behavior of the reference group to which the individual belongs, or of other persons in their social network (family, neighbors, friends, etc.). Once the social network is firmly set, an individual has very limited possibilities to influence the development of their own social capital. For this reason, the individual has reduced ability to influence this type of capital compared to personal or imaginative capital. Investments in social capital can increase its yielded utility, yet also reduce it. The dependence of social capital on the behavior of others (e.g., reference group, social network, family members) can create major externalities, meaning that the effects and consequences of decisions by other people are transferred to the individual through contacts and interactions.
Habits, Traditions, and Culture
Habits developed in early life continuously influence behavior, even when the external, external environment changes fundamentally. Childhood habits change with great difficulty, especially when such change may not be advantageous for the individual. Parents and relatives, through upbringing and care of a child, create an environment in which they decide what the child will eat, what to read, what interests they will have, their attitude toward divorce, political orientation, and many other matters. Traditions and habits are directly dependent on choices from the past, which at the same time creates room for “forecasting” future choices and behavior of the individual.
Habits developed in early life continuously influence behavior, even when the external environment changes fundamentally. Childhood habits are very difficult to change, especially when such change may not be advantageous for the individual. Parents and relatives, through upbringing and care of a child, create an environment in which they decide what the child will eat, what to read, what interests they will have, their relationship with divorce, political orientation, and many other things. Traditions and habits are directly dependent on choices from the past, which at the same time creates room for “forecasting” future choices and behavior of the individual.
Culture and traditions are jointly shared values and preferences transmitted from generation to generation through family, ethnic group, reference group, social class, and others. Cultural differences create pronounced differences in preferences and in the consumption of their carriers. Culture can be understood as a set of guidelines, control mechanisms, rules, instructions for managed behavior in that society, while the control mechanisms mentioned earlier can be changed by an individual only with great effort. Culture can change over time, but much more slowly than other components of social capital, on which individuals have greater influence than on culture itself. Culture has a strong influence on individual behavior, while behavior itself has only a very limited influence on culture.
Fertility and Divorce
Economic analyses do not avoid such a serious topic as fertility and fertility growth trends. This topic is current in almost all industrial and economically developed countries. In the past, the preferred theory of fertility was Malthus’s fertility model, which was based on the assumption that a rise or fall in a country’s fertility is dependent on incomes in that society. If incomes rise, fertility will increase, and conversely, the lower the income, the lower the fertility. The mentioned model cannot adequately explain the increasingly strong social phenomenon of continuous fertility decline in economically advanced countries. Malthus’s fertility model places minimal emphasis on time and its cost that parents must invest in child upbringing and care. In economically developed countries, the value of time is continuously increasing and time is becoming increasingly expensive. The value of time raises the costs of raising children and therefore lowers parents’ demand for large families with a higher number of children. The price of invested time is only one reason for declining fertility. The constant social pressure for increasingly expensive and time-intensive investments in children’s education and qualification stimulates parents to prefer strategies with fewer children, but “better” prepared for life. On the opposite side, for low-income families marked by poverty and long-term unemployment fertility decline will not have such a dramatic scale. In families with low time value and low costs of education and future qualification enabling better labor-market integration of their own children, fertility will stagnate or rise, independent of income level. That means that lowering material-assistance benefits for families living in poverty will not automatically mean a reduction in fertility in such families. Following the applied “social reforms” in benefits for the poor in 2004 and the persistent trend of reducing them to this day does not produce the desired effect. The legitimacy of these reforms is often defended in society as a way to lower fertility among people living in the most backward slums known as “Roma settlements.” Another factor increasing fertility in low-income families may be an increase in family income dependent on the number of children. Children become relatively, even at a young age, income providers for the family, whereas in families with a higher economic status it is the opposite. Here children represent progressively rising expenses and time costs (education, hobbies and interests, leisure activities, health, etc.). In poor families, children “provide income” through their own work, for example by helping gather raw materials for secondary processing, begging, small helper jobs in the neighborhood, theft, as well as through state social benefits and hardship contributions. The costs of poor parents for child care are relatively low and are, in addition, compensated by children’s income. Fertility in poverty-hit localities can naturally be reduced by increasing women’s time value, paradoxically not men’s. The thesis of increasing women’s time value partly derives from their discrimination and from the “relative” small biological differences in skills in child-rearing, which naturally lead to a division of labor within the family. It is expressed in women’s specialization in child-rearing and men’s specialization in economic activities, but if a man is unemployed or unemployable this means providing a negligible income to the family, and because the woman remains in economic seclusion due to “specialization,” it also means unplanned growth in the number of children. Employment-supporting programs and additional education must be much more strongly focused on women and mothers (as early an age as possible), thereby increasing the value of their time and simultaneously ensuring income necessary for further possible family investments.
Analyzing family behavior and preferences is based on maximizing behavior, investments in human capital, allocation of time, and discrimination against women. A man and a woman decide to marry, start a family, or divorce as a result of a well-considered comparison of returns and costs with the aim of maximizing their own utility. The decision to marry is made definitively only after the comparison of pros and cons tilts the balance in favor of marriage. For this reason, many poor women and men prefer cohabitation outside marriage. Very few advantages result from getting married in this “bizarre economic world” of poor men and women.
Very similarly, the decision about divorce will also proceed. In the case where one spouse ensures increased personal well-being through divorce, they will certainly be more inclined to decide to terminate that marriage. In affluent families, the probability of divorce is lower than in families living in poverty. It is evident that continued marriage in wealthy couples brings higher utility to both than it does in poor couples. A woman living in a marriage marked by permanent poverty with a chronically unemployed man will be more inclined to consider the advantages and disadvantages arising from that marriage.
The Economic View of the Family
The functioning of relationships and interactions occurring in the family can also be sketched through a certain pattern of income and welfare distribution among its members. Family income does not consist only of monetary income, but also includes substantial value of time set aside for the household. The care by the head of household for family members’ well-being generates a certain level of protection against unfavorable and unexpected events for all family members (including the head). If, as a result of unfavorable circumstances, income decreases for even one family member, the household head will respond by reallocating income within the family. Through reallocation, they will try to compensate the affected member’s loss by increasing their contribution by roughly the amount equal to the loss. This internal redistribution will reduce consumption by the household head as well as reduce contributions to other family members. In essence, the whole family bears the consequences of one member’s adverse situation. If the income from the family of this adversely “fated” member is negligible, this person can rely on “family insurance,” because a reduction in their own income will not affect family income and the new redistribution of income among members will only marginally reduce the consumption of all family members. The share contributed by a household member to the budget is inversely related to family size. Sufficiently large families can produce “adequate insurance” for their own members, but only if internal family redistribution occurs freely and without direction. The loss of non-standard and undervalued work by one household member does not automatically lead to collapse of the household financial system because of the existence of “family insurance.” For this reason, even the motivation to keep a specific family member employed may have limits.
In families receiving hardship benefits and supplements to hardship support, loss of non-standard and highly precarious employment will have only a low perceived value of “loss.” The impact on large families will be mitigated through family insurance. The key factor is not so much employment itself and its possible loss, but the combination of stable employment and the level of real incomes distributed through the employed family member toward the family, so that loss of a better-paying job increases the impact on the family through reduced consumption and overall welfare. In cases of time-limited and highly precarious jobs, family members will favor stable income through social transfers over unstable and uncertain income, even if somewhat higher.
Other family members who are not heads of the family will also be motivated to maximize family income and consumption even when they are not altruistic toward the rest of the family. A selfish family member who obtains resources from parents will account for their own behavior and the resulting consequences for the family. If the consequences are negative, the family head will automatically reduce the amount of pre-distributed consumption, gifts to that family member, which will result in lower consumption and overall well-being for that person. For this reason, even a selfish family member will behave altruistically because of eliminating the family’s sanctioning mechanism, thereby increasing their own well-being. For this reason, children from wealthier families are less “inclined” toward criminal behavior, as well as toward other socio-pathological phenomena, because income from such activities in no way offsets the income lost from one’s own family. This mechanism ensures a more favorable position for socialization and for correcting household members’ behavior to a more or less socially acceptable level.
Families that do not have sufficient income or live in poverty are deprived of this type of mechanism. A selfish family member has no reason to behave altruistically or exploitatively toward the family because there is no risk of income loss from the family due to the fact that no such redistribution of income exists or it exists only in minimal form. If a family member harms the family through their behavior (e.g., by committing crimes, truancy), possible gains from that activity remain in their own benefit (income from crime, time spent outside school with friends), while negative impacts (e.g., bad family reputation) fall on all family members. Any reductions in hardship benefits and supplements to families linked to crimes and offenses committed by their members (especially juveniles) do not significantly affect the frequency or severity of future crimes committed by individual family members. Parents of poor families will “pull at the shorter end” in raising their own offspring, precisely because of insufficient incomes and the subsequent possible redistribution of consumption and welfare toward other family members.
Author: PhDr. Martin Brňak, PhD. Bibliographic References
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