Why Households Matter for Understanding the Macroeconomy

by Johnna Montgomerie and Ryan Davey

Almost all of us live in a household. Yet there is surprisingly little agreement about what actually constitutes a ‘household’, and even less consideration about how they might matter for macroeconomic outcomes. Indeed, the macroeconomic orthodoxy is partly defined by its micro-foundations, which employs almost exclusively either a representative individual agent or representative individuals in different circumstances.

These benchmark macroeconomic models do not include the household as a unit of analysis in any real sense. Our combined two projects for Rebuilding Macroeconomics seek to make the case that this is a shortcoming – especially for the important task of understanding macroeconomic outcomes. Households are a living institution, an historical and changing way of organising people. In short, the household is a set of recognisable social relations, which mediate individuals’ integration into markets and society. It is at the scale of households that income and wealth inequality occur, thus, the unit of study to understand its economic consequences.

The orthodox theory of households is based on the pioneering work of Gary Becker which is built on interdependent altruistic preferences and household production. Later, intra-household bargaining models were develop to account for conflict or cooperative in decision-making about resource allocation. Understanding the household as an institution introduces heterogeneity into the heart of any economy, both because of their varying shapes and sizes and because of the different ways in which intra-household decision-making and resource allocation and sharing is conducted.

Contemporary macroeconomic models treat the household as a well-defined optimisation problem and not a complex institution embedded in real, lived economies. Without an anthropological lens through which to examine theses decision making rights and flows of money, as are enacted within and across households, we remain blind to the economy’s real micro-foundations. For example, it is at the scale of the household (not the market or the firm) that intensifying income and wealth inequality occurs and so where inequality must be studied to understand its macroeconomic expressions.

Our projects will take economic anthropological approaches to livelihood and labour to make households conceptually and empirical visible and, therefore, deployable in economic policy analysis. If successful, we hope that this will lead to step-change improvements in economic thinking and policy.

Recognising households as real, lived institutions will make visible overlapping forms of inequality. For example, the effects of gender and racial dynamics on income and wealth inequalities and its impact on macroeconomic performance. Analysis of household debt consisting of mortgages, consumer credit, other loans and student debt varies systematically with intersectional differences among households. Income and wealth inequality across households maps closely to rising levels of short-term consumer and student-loan debt, thus contributing further to individual financial precarity but also economic instability. These are relevant factors to consider when designing prudential management of the macroeconomy.

Our project seeks to unpack the household as an economic institution through two parallel qualitative investigations. Studies conducted in tandem by Johnna Montgomerie (KCL) and Ryan Davey (Bristol) will examine households as an evolving economic institution from both a top-down and bottom-up perspectives. The importance of households’ market behaviour has been recognized in recent efforts to restructure governmental approaches to prudential regulation of the economy and financial institutions.

Johnna Montgomerie (King’s) will explore how macroeconomic policy-makers at the Bank of England and Financial Conduct Authority understand the household in their organizational knowledge production and policy-making. Using qualitative methods to investigate what ideas about the household exist within the cultures of expertise across different institutional landscapes. This project will develop a conceptual frame for understanding how the real-life everyday economic activities of the household can be used to configure a Toolkit to enhance policy makers analysis of the household.

Ryan Davey will explore how the stability of the financial system is currently believed to depend on balancing the healthy growth of consumer credit markets against the systemic risk posed by household indebtedness. In the post-crisis economy, household indebtedness is growing, posing risks to financial stability. This investigation examines the effects of consumer protection and financial stability practices on economic inequality. Using ethnographic methods it will focus on financial debt relations in low- and middle- income households and these have implications for systemic risk.

Taken together, these projects will suggest ways to link household processes ‘on the ground’ with empirical and theoretical investigations of macroeconomic policy. It is the links between households’ diverse structures, changing empirical patterns of inequality, and government policy choices that needs to be analysed. A conceptual framework that pays attention to shifts in distribution within the household, as well as redistribution across households, can show how governmental policies, financial institutions’ practices, the state of labour markets, and other forces affect households’ contingent behaviour and thus will feed back on macroeconomic outcomes.