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The Economics of the Extended Family: From Risk Management to Human Capital

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.

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Gor Mkrtchian
Gor Mkrtchian is a research assistant at the Free Market Institute and a PhD student in the Department of Political Science at Texas Tech University. He received a BA in political science and theater studies from Yale University.
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