Toward an Economics of Stewardship: Family Failure and the Theory of the Nonprofit Sector

1. Toward an Economics of Stewardship:Family Failure and the Theory of the Nonprofit Sector March 2010 Eleanor Brown Department of Economics Pomona College ebrown@pomona.edu

2. Overview Concept of Stewardship The family as an economic unit What economists think families do well What might constitute �family failure�? Stewardship and the theory of the nonprofit sector

3. Stewardship �A fourth duty of government� is the duty to protect members of the community who cannot be regarded as �responsible� individuals� Freedom is a tenable objective only for responsible individuals. We do not believe in freedom for madmen or children.� Milton and Rose Friedman, Free to Choose The first three duties of government are those asserted by Adam Smith: (1) national security; (2) a system of justice; (3) the provision of public goods (public works and institutions not profitably provided privately but of benefit to society).The first three duties of government are those asserted by Adam Smith: (1) national security; (2) a system of justice; (3) the provision of public goods (public works and institutions not profitably provided privately but of benefit to society).

4. What is a Ward? Society cares about the well being of some person (or place or thing) that cannot reasonably be expected to pursue effectively his or her (its) own well being. Society recognizes the importance of the person�s well being by restricting his or her rights to liberty in order that his or her well being may be pursued by another party. When such caretaking is undertaken, the restricted and cared for party is a ward. Other words for what I mean by stewardship are guardi Other words for what I mean by stewardship are guardi

5. Who Might be Considered a Ward? Circumstances under which a person might be judged incapable of effectively pursuing his or her own well being: Failure to be rational (�madmen and children�) Failure to be reasonable (anorexic) Failure to garner sufficient resources (pauper) The first of these is Milton Friedman�s category. The distinction between being �rational� and being �reasonable� is one that philosophers make when rolling their eyes at economists� minimalist notions of rationality, which do not extend beyond internal consistency in choice. Reasonable choices are consistent with some external standard of well being. A person with an eating disorder might behave rationally but not reasonably. Finally, one cannot effectively pursue one�s well being if one has no resources to allocate to it. In modern America, land of liberty, we tend to correct the third case by handing people money and services, although we have a long tradition of blaming the poor for poverty, suggesting that their utility functions are reprehensible and perhaps unreasonable.The first of these is Milton Friedman�s category. The distinction between being �rational� and being �reasonable� is one that philosophers make when rolling their eyes at economists� minimalist notions of rationality, which do not extend beyond internal consistency in choice. Reasonable choices are consistent with some external standard of well being. A person with an eating disorder might behave rationally but not reasonably. Finally, one cannot effectively pursue one�s well being if one has no resources to allocate to it. In modern America, land of liberty, we tend to correct the third case by handing people money and services, although we have a long tradition of blaming the poor for poverty, suggesting that their utility functions are reprehensible and perhaps unreasonable.

6. The Case of Insufficient Resources Stewardship: Pay someone to put members of indigent families to work, providing for their sustenance? OR Self-determination: Provide the poor with income sufficient to meet their needs? OR Middle ground: Provision of basic services, some cash, supervision by social workers

7. Defining Stewardship A stewardship relationship exists when one agent, the steward, is given authority to make decisions on behalf of and not at the behest of another person, the ward, whose decision making capacity has been judged to lack sufficient congruence with some external standard of his or her well being.

8. External Standards of Well Being? �Human beings are not by nature kings, or nobles, or courtiers, or rich. All are born naked and poor. All are subject to the miseries of life, to frustrations, to ills, to needs, to pains of every kind. Finally, all are condemned to death. That is what is really the human being; that is what no mortal can avoid. Begin, then, by studying what is the most inseparable from human nature, that which most constitutes humanness.� Jean Jacques Rousseau, Emile

9. A List of Core Human Capabilities Life (normal length and functioning) Bodily health Bodily integrity (freedom from violence) To sense, imagine, and reason Ability to form emotional attachments Practical reasoning (ethical reflection) Affiliation (incl. social bases of self-respect) Connection to nature Play Control over one�s environment (material, political)

10. Effective Stewardship Effective stewardship has two requirements: 1. Expertise/information --A steward needs an understanding of what actions are in the ward�s best interests; 2. Other-regarding behavior--Information understood to be in the ward�s best interest leads to effective action on the ward�s behalf.

11. Effective Institutions of Stewardship A third criterion applies to a societal institution of stewardship: 3. Monitoring/oversight of stewardship: Having abridged a citizen�s rights in pursuit of that citizen�s well being, the state has a duty of oversight.

12. Institutions for Stewardship

13. What do Economists Think About the Family as an Economic Unit? Consumption unit: Economies of scale, local public goods Production unit: gendered division of labor and comparative advantage Redistribution unit: love and heredity as motives for intra-family redistribution --good for stewardship Efficiency and fairness have both been heralded as laudable traits of the family as an economic institution. Altruism is generally associated with care and sharing within the family, but Becker asserts that it may also account for the efficiency of family-based production in small businesses, essentially overcoming principal-agent problems.Efficiency and fairness have both been heralded as laudable traits of the family as an economic institution. Altruism is generally associated with care and sharing within the family, but Becker asserts that it may also account for the efficiency of family-based production in small businesses, essentially overcoming principal-agent problems.

14. Modeling the family: Malthus 1798 �Harder fare and harder labour [the labourer] would perhaps be willing to submit to for the sake of living with the woman he loves; but he must feel conscious that should he have a large family and any ill fortune whatever� no possible exertion of his manual strength, would preserve him from the heartrending sensation of seeing his children starve�� Essay on the Principle of Population Malthus thought families were formed in order to channel men�s sex drive, and that the misery of life among �the lower classes� was due to their failing to limit the numbers of children born into their families. Parents were loving, in his view, but they were poor decision makers. Not a model of excellent stewardship. This quote continues, ��or of being obliged to the parish for their support. The love of independence is a sentiment that surely none would wish to see eradicated; though the poor-laws of England, it must be confessed, are a system of all others the most calculated gradually to weaken this sentiment, and in the end will probably destroy it completely.� Malthus thought families were formed in order to channel men�s sex drive, and that the misery of life among �the lower classes� was due to their failing to limit the numbers of children born into their families. Parents were loving, in his view, but they were poor decision makers. Not a model of excellent stewardship. This quote continues, ��or of being obliged to the parish for their support. The love of independence is a sentiment that surely none would wish to see eradicated; though the poor-laws of England, it must be confessed, are a system of all others the most calculated gradually to weaken this sentiment, and in the end will probably destroy it completely.�

15. Modeling the Family, Smith 1759 �Every man feels his own pleasures and his own pains more sensibly than those of other people � After himself, the members of his own family, those who usually live in the same house with him, his parents, his children, his brothers and sisters, are naturally the objects of his warmest affections.� Adam Smith, Theory of Moral Sentiments

16. The Role of Proximity �Among well-disposed people, the necessity or convenience of mutual accommodation, very frequently produces a friendship not unlike that which takes place among those who are born to live in the same family. Colleagues in office, partners in trade, call one another brothers; and frequently feel towards one another as if they really were so. Their good agreement is an advantage to all; and, if they are tolerably reasonable people, they are naturally disposed to agree. We expect that they should do so; and their disagreement is a sort of a small scandal.�

17. Superior Production Technology �The education of boys at distant great schools, of young men at distant colleges, of young ladies in distant nunneries and boarding-schools, seems, in the higher ranks of life, to have hurt most essentially the domestic morals, and consequently the domestic happiness, both of France and England. Do you wish to educate your children to be dutiful to their parents, to be kind and affectionate to their brothers and sisters? Put them under the necessity of being dutiful children, of being kind and affectionate brothers and sisters; educate them in your own house. From their parent�s house they may, with propriety and advantage, go out every day to public schools.� We generally consider it superior information when a firm has a production technique that others cannot successfully mimic. That is the essence of this claim by Smith: in the essential task of raising persons with proper moral and social sentiments�the two are entertwined in Smith�the family has great advantage.We generally consider it superior information when a firm has a production technique that others cannot successfully mimic. That is the essence of this claim by Smith: in the essential task of raising persons with proper moral and social sentiments�the two are entertwined in Smith�the family has great advantage.

18. Modeling the Family, Becker 1981 �Apparently households have preferred their own children to those available from others, for practically all households choose to have their own�One reason is that own children can reduce the uncertainty of parents, who have more information about the genetic constitutions and early environmental experiences of their own children than of those obtainable from others.� Gary Becker, A Treatise on the Family, 1981 Becker�s perspective of the parent as consumer is a bit disturbing, but his task is positive�he�s explaining why children are most often raised by their birth parents�whereas ours is normative: should children be raised by their birth parents, or if not by their birth parents then in another family setting. The informational advantages of the family work both ways, providing the parents with information necessary for good stewardship. Note that the informational advantages of 24/7 contact are not restricted to birth families. Becker doesn�t seem to consider the case of negative information.Becker�s perspective of the parent as consumer is a bit disturbing, but his task is positive�he�s explaining why children are most often raised by their birth parents�whereas ours is normative: should children be raised by their birth parents, or if not by their birth parents then in another family setting. The informational advantages of the family work both ways, providing the parents with information necessary for good stewardship. Note that the informational advantages of 24/7 contact are not restricted to birth families. Becker doesn�t seem to consider the case of negative information.

19. Modeling Family: Samuelson 1956 ��[E]ach person consumes his own goods and has indifference curves ordering those goods, and his preferences among his own goods have the special property of being independent of the other members� consumption. But since blood is thicker than water, the preferences of the different members are interrelated by what might be called a �consensus� or �social welfare function� which takes into account the deservingness or ethical worths of the consumption levels of each of the members. The family acts as if it were maximizing their joint welfare function� But note that this formulation does conform to the special requirement that each member�s separate tastes are to count. (Obviously, this must be a family of adults, or at least of very unusual children.)� Samuelson focuses on the potential of the family as a locus for redistribution. He admits that he�s not dealing with family members who cannot make their own decisions. Not a stewardship model. Samuelson, Paul A., �Social Indifference Curves,� Quarterly Journal of Economics, vol. 70 no.1 (Feb. 1956), 1-22.Samuelson focuses on the potential of the family as a locus for redistribution. He admits that he�s not dealing with family members who cannot make their own decisions. Not a stewardship model. Samuelson, Paul A., �Social Indifference Curves,� Quarterly Journal of Economics, vol. 70 no.1 (Feb. 1956), 1-22.

20. Modeling Family, Samuelson 1958 �Let us assume that men enter the labor market at about the age of twenty. They work for forty-five years or so and then live for fifteen years in retirement. (As children they are part of their par-ents' consumptions, and we take no note of them.) Naturally, they want to consume in their old age�� Paul Samuelson, �Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money,� JPE 66:6 (Dec. 1958), pp 467-482.

21. Modeling the Family, Barro 1974 �[A] bequest provision � is motivated by a concern for a member of generation i+1. This concern could be modeled by introducing either the (anticipated) consumption levels or attainable utility of a member of generation i+1 into the utility function for a member of the ith generation. For the purpose of the present analysis, the crucial condition is that this utility depend on the endowment of a member of the generation i+1 rather than per se, on the gross bequest�� Robert Barro, �Are Government Bonds Net Wealth?� JPE 82:6, 1095-1117. Here the distribution problem is solved by a quasi-family, still no children but love for a member of a younger generation.Here the distribution problem is solved by a quasi-family, still no children but love for a member of a younger generation.

22. Family as Stewards, Friedman 1980 �[T]he assignment of responsibility for children to their parents is largely a matter of expediency rather than principle. We believe, and with good reason, that parents have more interest in their children than anyone else and can be relied upon to protect them and to assure their development into responsible adults. However, we do not believe in the right of the parents to do whatever they will with their children�to beat them, murder them, or sell them into slavery. Children are responsible persons in embryo. They have ultimate rights of their own and are not simply the playthings of their parents.�

23. Science on the Side of Smith �[O]xytocin levels at early pregnancy and the postpartum period were related to a clearly defined set of maternal bonding behaviors, including gaze, vocalizations, positive affect, and affectionate touch; to attachment-related thoughts; and to frequent checking of the infant.� [S]tudies have shown that following birth, mother-infant touch and contact stimulate OT release��

24. Other-Regarding Behavior IN SUM: 2. Ward-regarding behavior: The family has unique advantages in generating intrinsically motivated other-regarding behaviors, among them maternal bonding supported by the brain�s reward centers and distress response mechanisms.

25. Monitoring the Family In the U.S., two types of intervention: Legal intervention by police, lawyers, judges --focus on parental accountability Societal intervention by social workers, mental health professionals, teachers --focus on ward�s well being

26. The Law: A Right to Privacy and Idealizing the Parent-Child Relationship �The law�s concept of the family rests on a presumption that parents possess what a child lacks in maturity, experience, and capacity for judgment required for making life�s difficult decisions. More important, historically it has recognized that natural bonds of affection lead parents to act in the best interests of their children.� Parham v. J.R., 442 U.S. 584 (1979) The Supreme Court in 1979 wrote essentially that the law presumes that parents will be effective stewards. This is a difficult starting point for monitoring the family, especially when coupled with the concept of a family�s right to privacy: privacy lends a reluctance to intervene, and the romanticization of the parent-child bond downplays the need for intervention.The Supreme Court in 1979 wrote essentially that the law presumes that parents will be effective stewards. This is a difficult starting point for monitoring the family, especially when coupled with the concept of a family�s right to privacy: privacy lends a reluctance to intervene, and the romanticization of the parent-child bond downplays the need for intervention.

27. Family Failure �In 2003, there were 717 reported homicides [in the U.S.] of children between zero and four years of age� [R]esearch suggests that the vast majority of perpetrators of infant/child homicide are female, most often the mother.� M. D. Bennett, Jr. et al., Injury Prevention 2006 Not all mothers respond the same way to their young children. In particular, signals of infant distress activate primarily the reward centers in some mothers and in other mothers activate primarily stress responses.Not all mothers respond the same way to their young children. In particular, signals of infant distress activate primarily the reward centers in some mothers and in other mothers activate primarily stress responses.

28. Family Failure, Continued More than 1.25 million children in the U.S. were demonstrably harmed by abuse or neglect in 2006, representing one in every 58 children. In FY 2008, 748,000 children went through the foster care system. The year ended with 463,000 children in foster care. NIS-4 Fourth National Incidence Study of Child Abuse and Neglect; Who is conducting the NIS-4?The Office of Planning, Research, and Evaluation (OPRE) in the Administration for Children and Families, U.S. Department of Health and Human Services (DHHS), issued Contract No. GS23F9144H to Westat to conduct the NIS-4. Westat is a large, employee-owned research company headquartered in Rockville, MD. Westat also conducted all three previous NIS cycles for DHHS. USDHHS Children�s Bureau, Trends in Foster Care and Adoption�FY 2002-FY 2008, at http://www.acf.hhs.gov/programs/cb/stats_research/afcars/trends.htmNIS-4 Fourth National Incidence Study of Child Abuse and Neglect; Who is conducting the NIS-4?

29. Difficulty of Monitoring the Family In 2002, 1.8 million investigations were launched into the well being of 3.2 million children; 986,000 were determined to have been abused or neglected. The methodology of the NIS-4 assumes that investigated cases are �the tip of the iceberg.� Duke law professor Doriane Coleman�s interpretation of the first point on this slide: �States ultimately cause more harm to many more children than they ever help.� �Storming the Castle to save the children: The Ironic costs of a child welfare exception to the Fourth Amendment,� William and Mary Law Review pp413-540. 2005-2006.Type I error is rejecting a true hypothesis; type II error is accepting a false hypothesis. NIS-4 = Fourth National Incidence Study of Child Abuse and Neglect Duke law professor Doriane Coleman�s interpretation of the first point on this slide: �States ultimately cause more harm to many more children than they ever help.� �Storming the Castle to save the children: The Ironic costs of a child welfare exception to the Fourth Amendment,� William and Mary Law Review pp413-540. 2005-2006.Type I error is rejecting a true hypothesis; type II error is accepting a false hypothesis. NIS-4 = Fourth National Incidence Study of Child Abuse and Neglect

30. Stewardship: Rating the Family 1. Information/expertise: potentially VERY GOOD 2. Other-regarding behavior: potentially VERY GOOD 3. Monitoring/transparency: VERY POOR

31. Profit-Seeking Stewards? 1. Information/expertise Potential for general expertise�professionalism Less ward-specific information than the family Market discipline to weed out under-performing stewards

32. For-profit Firms as Stewards? 2. Other-regarding behavior Primary obligation to shareholders Lack of intrinsic motivation does not preclude extrinsic incentives, e.g. reputation effects.

33. For-Profit Stewards? 3. Monitoring/Transparency Boards of directors Licensing Accounting, other regulatory structures and reporting requirements

34. Stewardship: Rating Profit-Seeking Firms 1. Expertise/information: VERY GOOD to FAIR, depending on the importance of ward-specific information 2. Other-regarding behavior: POOR, except in circumstances where externally motivated 3. Transparency: VERY GOOD

35. Constructing Institutions of Stewardship Families with reduced rights to privacy --foster families, adoption regulations Firms without owners to claim residual profits --the nondistribution constraint and the not-for-profit firm

36. Theory of the Nonprofit Sector Provision of public goods (government failure) --political process satisfies median voter; unmet demand served by a nonprofit firm akin to a club (opera, neighborhood watch) Provision of trust goods (market failure) --quality is difficult to observe, as when the demander is not consumer (international aid) Provision of stewardship services (family failure) Claremont Educational Foundation trying to raise the quality of the public schools in the face of budget cuts. Claremont Educational Foundation trying to raise the quality of the public schools in the face of budget cuts.

37. Conclusion The family is seen as a natural institution for stewardship. One important aspect of �family failure� is the failure effectively to care for all its members. While the nonprofit sector is generally thought of as designed to provide goods and services in circumstances in which for-profit firms would shirk on quality or government would under-provide public goods, the case of stewardship shows that the structure of the nonprofit firm positions it to step in when families fail to provide effective stewardship.

38. Toward an Economics of Stewardship:Family Failure and the Theory of the Nonprofit Sector March 2010 Eleanor Brown Department of Economics Pomona College ebrown@pomona.edu