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the production of further knowledge) and the latter with applied
research (whose output is an input in the production of goods and
services), interprets the two in terms of differences in their
products. The viewpoint being advanced here, of regarding Science
and Technology as institutions, seems to be me to be deeper. It helps
to explain why their outputs would be expected to differ.

Today, we take it for granted that Science has in place incentives for
scientists to disclose their ¬ndings. But the emergence of the social
contrivances that embody those incentives was not inevitable. Nor
did they emerge easily, for it required the collective efforts of
scientists and their patrons. The role of Academies in subjecting
claims to independent scrutiny, in adjudicating between rival
claims for priority and in overseeing the quality of those who enter
Science, has been substantial. Peer-group esteem, medals, and
scrolls, being the currency in which scientists are rewarded, are

remarkable innovations because they don™t involve too many
resources. In order that those social contrivances are effective, a
good part of a scientist™s education involves developing a taste for
non-pecuniary rewards. That taste has enabled Science to produce
knowledge on the cheap. Increasingly though, the taste for those
social contrivances has to compete against the pecuniary rewards
available in Technology. If the pecuniary rewards increase “ and
they have increased greatly in recent years “ the taste for the mores
in Science becomes more and more of a luxury to the research
worker. Science embodies a set of cultural values in need of constant
protection from the threat posed by its rival, Technology. That
threat has proved to be so real, that in recent decades the two
institutions have begun to blur into each other. Scientists
increasingly behave like technologists, while technologists enjoy
both the pecuniary rewards of Technology and the medals and
scrolls that Science has to offer.

Despite the tensions, Science and Technology continue to progress
in Becky™s world. Today, expenditure on R&D amounts to 2.5% of
the GDP of rich nations, while the corresponding ¬gure in poor
nations is a good deal less than 1%. Given that the GDP of rich
nations is six times that of poor nations, we shouldn™t be surprised
that the bulk of scienti¬c and technological advances are taking
place in Becky™s world, nor that Desta™s world manages at best to be
a limited user of those advances. And I haven™t even mentioned the
relative expenditures on education in the two worlds.

The institutional innovations in Science and Technology that I have
just sketched, all too brie¬‚y, took place in Europe and emerged
during the period historians refer to as the Age of Enlightenment.
The latter term can grate if it is interpreted in an epistemological
sense. And it does grate among intellectuals, because that™s how the
term is usually interpreted. They bristle at the suggestion that the
analytic-empirical basis of knowledge “ which is what both Science
and Technology are built on “ is a European invention. And they
ask: ˜what about those civilizations at earlier times, in other places,

that nurtured scholars who made enduring contributions to

Let it be acknowledged, once and for all, that the analytic-empirical
basis isn™t an invention of Becky™s world, and that the mystical-
revelatory route to the acquisition of knowledge isn™t restricted to
Desta™s world. Every society that I am even dimly familiar with has
¬elded both, often at the same time. Which may explain why people
today from all parts of the globe are able to practise Science and
Technology with ease when given half a chance; their ˜cultural™
background doesn™t seem to be an intellectual bottleneck.
Brandishing texts to show that scienti¬c and technological progress
was made in Desta™s world at a time when Becky™s was covered in
darkness doesn™t advance knowledge, it merely reiterates the

Science and Technology as institutions
commonplace. What Europe achieved during the Age of
Enlightenment was far more remarkable than a revolution in
epistemology, in that no place had managed to do it before. It
created institutions that enabled the production, dissemination,
and use of knowledge “ in effect, the entire knowledge industry “ to
be transferred from small elites to the public at large, a transfer that
so sharpened the analytic-empirical mode of reasoning that it
became routine. That achievement explains a good deal of the
macroeconomic statistics I reported in Chapter 1

Chapter 6
Households and ¬rms

Communities and markets are overarching institutions. People
operate in them not only directly, but also through a number of
smaller institutions, of which households and business enterprises
are the most prominent. In exploring these institutions it will pay to
ask what it is that people seek to achieve through them. Admittedly,
the household is so deeply rooted in humankind that it may seem
odd to enquire after its economic purpose. But even that most
ubiquitous of institutions has been known to undergo changes in
response to resource scarcities. I shall not elaborate on the more
obvious roles households and business enterprises play in enabling
people to survive and, if they have coordinated well with one another
and have been lucky, even to prosper. Instead, we will study some of
their more distinctive features so as to get a better understanding of
the huge differences between Becky™s and Desta™s lives.

Among sedentary communities, the family is the institution that
has traditionally harboured the strongest personal ties. Economists
and statisticians ¬nd it useful to work with a more contemporary
notion “ the household “ which is a smaller unit than the family.
The household is usually taken to mean a unit of housekeeping or
consumption. Its members eat meals together or share meals that
are derived from a common stock of food.

We assume that parents wish to protect and promote household
well-being, by which I mean the well-beings of its members, taken
together. But the parents may have different notions of what ˜taken
together™ means. In Desta™s world, where the extended family
in¬‚uences household decisions, not only do the parents matter,
grandparents (even the wider network of kin) also in¬‚uence
household decisions.

Social scientists have discovered that the allocation of basic needs “
leisure, food, health care, and education “ are distributed unequally
within households in Desta™s world. Some of those inequities are
borne out of sheer necessity. Consider the allocation of food. About
60“75% of the daily energy intake of a person in nutritional balance
goes toward maintenance (blood circulation, brain activity, tissue
repair, metabolism, and so forth), while the remaining 25“40% is
spent in discretionary activities (work and leisure). The 60“75% is

Households and ¬rms
rather like a ˜¬xed™ need: over the long run people need it as a
minimum no matter what they do. We should therefore expect food
to be distributed unequally in very poor households, even though it
would have been distributed equally in those same households had
they been rich. To see why, suppose the energy requirement for daily
maintenance is 1,500 kilocalories (kcal). Consider a household of
four that has access only to 5,000 kcal. Equal sharing would mean
that no one would have suf¬cient energy to spare. Sharing food
unequally enables the most productive member to work and
increase the chances that the household™s future will be better. On
the other hand, if the household had access to a lot more than 6,000
kcal, it would be able to share food equally without jeopardizing its
future. When food is very scarce, the younger and weaker members
of Desta™s household are given less to eat than the others, even after
allowance is made for differences in their age. In good times,
though, Desta™s parents can afford to be egalitarian. In contrast,
Becky™s household can always afford enough food. Her parents
allocate food equally every day “ again, allowing for differences in
nutritional needs.

Gender inequalities

The considerations I have just outlined can™t on their own explain
the persistence and magnitude of household inequalities in the poor
world. In a notable article, the demographer Pravin Visaria
observed that the female“male ratio in India had shown a decline
since the Indian Census of 1901; worse, it has been considerably less
than 1. According to the most recent census, there are 93 women to
every 100 men in India. In the rich world today, the ratio is 106 to
100. In answering a question the epidemiologist Lincoln Chen
posed in response to Visaria™s ¬nding, namely, ˜Where have the
women gone?™, he and his collaborators collected gender-based
mortality and anthropometric statistics from villages in the Indian
sub-continent and discovered male bias in the allocation of food
and health care in poor households. The suspicion is that parents
not only practise female infanticide, but also withhold postnatal
health care so as to reduce the number of girls in the household.

Health discrimination against girls isn™t limited to the Indian
sub-continent; it exists in China too. When social norms insist that
parents pay crippling dowries and that sons look after their elderly
parents, a preference for male children is inevitable among poor
households. However, if we suppose that mothers are likely to have
greater empathy than fathers have with daughters, we should
expect discrimination against female children over food and health
care to be less in households where women are educated, or have
access to paid employment, or control the household budget, other
things being equal. There is evidence that this is so, both in the
Indian sub-continent and in sub-Saharan Africa.

The ratio of females to males in sub-Saharan Africa is 102 to 100,
which means the female“male imbalance in India isn™t exclusively a
re¬‚ection of poverty. The demographer Esther Boserup observed
that women have a prominent role in agriculture involving hoe
farming (such as in sub-Saharan Africa), in contrast to regions
(such as the Indian sub-continent) where plough farming is

predominant. Boserup drew a connection between the technology
of food cultivation and the position of women. Gender
discrimination in the Indian sub-continent varies across ecological
zones. Women are much involved in paddy cultivation, where
manual dexterity, not so much brawn, is needed. Women are less
involved in wheat cultivation, where brawn is an essential input
(working with the plough requires physical strength). In India the
female“male ratio is higher in rice producing states (they are in the
south and east) than in wheat producing states (they are, in the
main, in the north).

Gender imbalances in health within households in the poor world
are related to fertility choice. Since women bear the far greater cost
in bearing and rearing children, we should expect men to desire
more children than women. On the other hand, if women are
economically more vulnerable than men, they would desire more

Households and ¬rms
children than men because children offer an insurance against
particularly bad circumstances. Either way, birth rates would be
expected to be lower in societies where women are more
empowered. Data on the status of women in Desta™s world display
an unmistakable pattern: high fertility, high rates of female
illiteracy, low women™s share of paid employment, and a high
percentage of women working at home for no pay, go hand in hand.

Property rights and fertility
We have now studied two factors that shape fertility behaviour:
conformism and gender relations. The two together go some way
toward explaining the striking differences in fertility rates
between Becky™s and Desta™s worlds. But there are signi¬cant
differences in fertility behaviour between the Indian
sub-continent and sub-Saharan Africa also, owing probably to
differences in property rights in the two regions. (In recent
decades fertility rates there have differed by about 2.) Parental
costs of procreation are lower when the cost of rearing the child
is shared among the kinship (another case of strong ties). In
sub-Saharan Africa fosterage within the kinship is a commonplace.

Children are not raised solely by their parents; the responsibility
is more diffuse within the kinship group. Fosterage in the African
context doesn™t break ties between parents and children. The
institution affords a form of mutual insurance protection
(see below). Because opportunities for saving are few in the
low-productivity agricultural regions of sub-Saharan Africa, it
may be that fosterage also enables households to smooth their
consumption across time. In parts of West Africa up to half the
children have been found to be living with kin at any given time.
Nephews and nieces have the same rights of accommodation and
support as do biological offspring. If the parents™ share of the
bene¬ts from having children exceeds their share of the costs, the
arrangement creates a free-rider problem. From the point of view
of parents, taken as a collective, too many children would be
produced in these circumstances.

In sub-Saharan Africa, communal land tenure within the lineage

social structure has in the past offered further inducement for
households to procreate. Large families are (or, at least were, until
recently) rewarded by a greater share of land belonging to the
lineage or clan. Communal land tenure and a strong kinship
support system of children, taken together, are a source of
reproductive externalities, stimulating fertility. In contrast,
agricultural land is not held communally in the Indian
sub-continent, which is probably a re¬‚ection of greater land
scarcity there. Large family size leads to fragmentation of
landholdings, which dampens the incentive to procreate.

Transaction needs of households

(i) Insurance
To insure oneself against a risk is to act in ways to reduce the risk.
People do that by exchanging goods and services across uncertain
contingencies, paying small sums no matter what (the premia) and
receiving compensation in case of bad luck. Avoiding risk would
seem to be a universal urge. If Desta™s parents had a choice

between $5,000 for certain and an even chance of either
$4,000 or $6,000, they would choose the sure income. Although
the mean income in the two alternatives is the same ($5,000),
the latter involves risk while the former doesn™t. But what if they
were offered a choice between $5,000 for sure and an even
chance of either $3,000 or $11,000? The latter option is risky,
but its mean (or average) is $7,000 (namely, $(3,000 + 11,0000)/
2), which is a lot higher than $5,000 dollars. Which option they
would choose isn™t clear. Risk-averse people do take risks, but
only if those risks offer correspondingly higher expectations
of income. In the present example, the lower value, $3,000,
could compromise the household™s future. In which case the
risky option would be rejected. Similarly, people pay to lower
the risks they face, but only if what they have to pay isn™t too

Households and ¬rms
Households in Desta™s village have no access to insurance
companies; nor does the government offer insurance against
calamities. Villagers insure one another by practising reciprocity
(Chapter 2). The problem is that communities are able to offer
individual households very little cushion against risks. When
Desta™s father™s crops fail because the rains have let him down or
because there has been an infestation of pests, the crops in
neighbouring ¬elds don™t do well either. Desta™s household needs
help precisely when others in their community need help. Similarly,
when Desta™s household has enjoyed a good harvest, other
households have, too. In statistical language, agricultural risks
within the village are ˜positively correlated™. So, although
communities are essential for survival in Desta™s world, they are
unable to offer households much opportunity to improve their lot.
Because people can™t insure themselves suf¬ciently against failure,
they are reluctant to undertake activities offering a chance of huge
success if there is also an accompanying chance of large failure.
Desta™s world has remained poor in part because they haven™t
created institutions that enable people to engage in productive, but
risky activities.

As the insurance they are able to obtain against crop failure is
very limited, households in Desta™s village adopt additional
risk-reducing strategies, such as diversifying their crops. Desta™s
parents plant maize, teff, and enset (an inferior crop), with the hope
that even if maize were to fail one year, enset wouldn™t let them
down. That the local resource base in Desta™s village is communally
owned could well be in part due to a mutual desire to pool risks.
Woodlands are spatially non-homogeneous ecosystems. In one year
one group of plants bears fruit, in another year some other group
does. If the woodland were divided into private parcels, each
household would face a greater risk than it would under communal
ownership. The reduction in individual household risks owing to
communal ownership may be small, but as average incomes are very
low, household bene¬ts from communal ownership are large.

Many social practices in the poor world re¬‚ect the common desire
to reduce risks. For example, patrilocal residence and patrilineality

enable men to exploit the knowledge they have gained from
childhood of the idiosyncrasies of their soil. Both practices are the
established norm in most agrarian cultures that are based on the
plough. Relatedly, the larger is the distance between a pair of
villages, the smaller is the likely correlation between their
agricultural outputs. We should expect rural households facing
greater risks of crop failure to form marriage alliances with
households in villages located at greater distances. There is
scattered evidence of this as well.

Becky™s parents, in contrast to Desta™s, have access to an elaborate
set of insurance markets that pool the risks of hundreds of
thousands of households across the country (even the world, if the
insurance company is a multinational). Moreover, the government
comes to the rescue if there are uninsured emergencies
(earthquakes, ¬‚oods). This helps to reduce individual risks a lot
more than Desta™s parents are able to realize. Why? First, spatially
distant risks are more likely to be unrelated to one another than
risks nearby. Second, Becky™s parents can pool their risk with many

more households. With enough households and enough
independence of risks from one another, mutual insurance can
pretty well guarantee each household a low risk outcome. This is an
implication of the famous Law of Large Numbers in probability
theory. Bad luck experienced by one household is almost surely
matched by good luck in another household living far away under
different circumstances. What the Law of Large Numbers says is
that if insurance ¬rms are made to compete against one another,
the premia that households would be charged would equal the sum
of the average liability and the cost of administering insurance. Of
course, those costs can be large, for they include not only the time
and resources spent in the inevitable paper work, but also the
resources needed to screen out bad risks (protection of the
insurance ¬rms against adverse selection) and monitoring that due
care has been taken by insurees against bad outcomes (protection
against moral hazard). By being able to take advantage of the Law

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