Why Family and Business Don’t Mix: A New Marketplace Podcast

(Photo: Isabell Schulz)

Our latest Freakonomics on Marketplace podcast is called “Why Family and Business Don’t Mix.” (You can download/subscribe at iTunes, get the RSS feed, listen via the media player above, or read the transcript.) It’s based on a recent paper by Alberto Alesina and Paola Giuliano called “Family Ties.” It argues that strong family ties bring a lot of benefits, but  may also depress economic activity:

We study the role of the most primitive institution in society: the family. Its organization and relationship between generations shape values formation, economic outcomes and influences national institutions. We use a measure of family ties, constructed from the World Values Survey, to review and extend the literature on the effect of family ties on economic behavior and economic attitudes. We show that strong family ties are negatively correlated with generalized trust; they imply more household production and less participation in the labor market of women, young adult and elderly. They are correlated with lower interest and participation in political activities and prefer labor market regulation and welfare systems based upon the family rather than the market or the government. Strong family ties may interfere with activities leading to faster growth, but they may provide relief from stress, support to family members and increased wellbeing. We argue that the value regarding the strength of family relationships are very persistent over time, more so than institutions like labor market regulation or welfare systems.

You’ll hear from Giuliano in the podcast and we also take a quick look back at our “Church of Scionology” podcast, about family-owned businesses, in which we discussed the long history of Anheuser-Busch. If you’re interested in further reading on this topic, check out Dethroning the King: The Hostile Takeover of Anheuser-Busch, an American Icon by Julie MacIntosh and “The Role of Family in Family Firms” by Marianne Bertrand and Antoinette Schoar.

Audio Transcript

Kai RYSSDAL: Time now for a little bit of Freakonomics Radio, that moment every couple of weeks we talk to Stephen Dubner, the co-author of the books and the blog of the same name. It is -- all together now -- “the hidden side of everything.” Dubner, how are you man? 


Stephen J. DUBNER: I’m doing great, Kai.  How about you?


RYSSDAL: I’m good.  I’m good.  I’m good.


DUBNER: Let me ask you this: If I were to ask you to name, let’s say, the most influential institution in society, what would you say?  I’m curious.


RYSSDAL: Marketplace and American Public Media, dude.  Bar none.


DUBNER: Excellent guesses.  Let me suggest a different one: the family. We all know that our families shape each of us. We also know that family differs a lot from culture to culture. So a couple of economists decided to analyze how our family ties affect economic outcomes around the world. Here’s Paola Giuliano at the UCLA Anderson School of Management:


Paola GIULIANO: “People who rely on the family tend to trust, mostly, the family and less the outside world.  Therefore, they tend to be more inward-looking and they develop a lower level of social capital or political participation.”


RYSSDAL: All right, let me decipher here for a minute. People with strong family ties being “more inward-looking” -- that I get. But the whole “lower level of social capital or political participation” thing, what does that mean?


DUBNER: In a country like Italy, where Giuliano is from, family ties tend to be very strong. Which brings a lot of good things, to be sure. You get love from your family, support, trust. But relying on your family will make you less likely to trust other institutions – like the government and big companies.  And, if you want to do business, you need to trust institutions. So what her research found is that cultures that have strong family ties tend to have weaker economies.


RYSSDAL: Yeah, but what about family-run businesses, right?  Are you necessarily saying that a family-run business is less profitable than a non-family business?


DUBNER: Actually, I am necessarily saying that!  There’s a lot of research showing that a family firm – let’s say where the founder hands off the reins to a relative – that that firm will do worse than if they bring in an outside CEO. I mean, just think about it for a minute, what are the odds that the best person to run my company happens to be blood-related to me?  That said, family business is still very common in many parts of the world -- Latin America, parts of Asia and western Europe.  Especially where institutions are not as strong.  The U.S. actually has a pretty low incidence of family firms -- and seemingly getting fewer all the time. You’ve heard of Anheuser-Busch, I assume?


RYSSDAL: Yes, they make what they like to call “beer” -- Budweiser and some other stuff.


DUBNER: This company was an amazing American success story for five generations of Busches – until the last one, August Busch IV, who was CEO when the company got bought out by InBev. A former company executive named Bill Finnie told us just how strong family ties were for the Busches.  This included a rather peculiar custom that August IV participated in:


Bill FINNIE: “I don’t think August would have become the CEO of the company, but the fact that from day one, from the hour that August was born, and his father puts five drops of Budweiser in his mouth when he was one hour old, he was indoctrinated into the core values and the culture of Anheuser-Busch.”


RYSSDAL: All right.  So that’s a little weird, dude.  I’m just sayin’.


DUBNER: I think that is a sensible response to that cut.  Here’s the real interesting takeaway for me from this new research about how family ties affect broader economic outcomes. And that’s this -- it’s a broad conclusion -- how much our lives are shaped by an institution or an event that we really don’t have much control over. We like to tell ourselves – each of us -- that every decision we make is our own.  But, to some degree, we are all accidents of history.  I’ll give you an example of this. Anheuser-Busch sells alcohol which, in this country, is legal.  Marijuana, meanwhile, is mostly still illegal. Here’s my Freakonomics co-author Steve Levitt talking about that weird state and why that is:


Steven D. LEVITT: If you think about why is it that alcohol and cigarettes are legal and marijuana is not, I think that is mostly accident. If people had been smoking marijuana regularly for the last 300 years and alcohol had just kind of come along and been on the fringes, there’s no way we’d say, you know, alcohol should be freely consumed by everyone all the time.  So it’s kind of a historical accident that you live with.


RYSSDAL: You can just see that world, after 300 years of marijuana consumption, right?  “Whoa!  Duuuuude!” 


DUBNER: And August Busch would have had to been tokin’ a joint when he was born instead, then, I guess.


RYSSDAL: (Laughs) Yeah.  Accidents of history.  Stephen Dubner.  Freakonomics.com is the web site.

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  1. mhenner says:

    The conclusion in the headline that strong family ties impede economic growth may have gotten it backward,

    Could it be instead that societies with poorer economies, less trust, etc. make family members more dependent on each other, promoting stronger family ties.

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  2. chris says:

    what’s the song playing at the outro?

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  3. thoughtso says:

    I also think that strong family ties reduces exploration of other cultures, intellectual curiosity and exposure based on fear of the unknown.

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  4. rationalrevolution says:

    It’s always amusing to see on how many topics today’s researchers are “discovering” and confirming basic theories laid out by Karl Marx 150 years ago, it seems to happen quite a bit.

    But really, this shouldn’t be a surprise. In fact, I’ve been slowing compiling material for a book called “The New American Family” for quite a while that relates to much of this.

    Basically, the “family” is one of the oldest economic units. Families were essentially like businesses for thousands of years. The basis of the family is economic, it is an economic structure to begin with.

    This is why Marx said that the traditional family structure would be undone by capitalism and industrialization, and be further dissolved via a transition to socialism.

    Corporations are the new “family”. In capitalist countries, corporations have taken on the role of family and stand as the biggest disruption to traditional family structure.

    The family was originally one of the most fundamental units of economic production. This was when production was home based. Much of how and why families existed had to do with business and personal economics. A family was essentially a business unit that held together for economic security, certainly this was true for women. Children prior to industrialization basically became family employees starting around age 5-7. Having children was a way of “increasing productivity” and growing your business in those days. Today, however, having children is a massive economic burden.

    Today it costs roughly $250,000 to raise a child to age 18, and there usually is no economic payoff for this, whereas in a pre-industrial economy having a child generally means increased family income and net income gain by around age 10.

    In an industrial capitalist economy, the “profit” of raising children goes to corporations, not to the parents that raised them.

    Likewise the role of shaping morals and values has been increasingly challenged by corporations over recent generations. By the 1950s corporations were overtly competing with parents to be the sharpers and definers of youth values and morals, both as consumers and future workers.

    A lot of this also has to do with “zoning”, especially in America. Starting in the early 1900s, in large part due to the effects of industrialization, people began calling for and governments began implementing, zoning rules to separate residential areas from commercial and industrial areas. This accelerated the decline of home based production and contributed to the overall decline of neighborhood and family cohesion.

    Under traditional structures people lived and worked together geographically, such that people typically worked with their family members and neighbors, and this collective labor was foundational to community structure and cohesion (much like it still is among the Amish).

    With the rise of corporations and industrialization, people no longer worked with their family and neighbors, they traveled from their home to a place far away, where they worked with people from disparate geographic locations, whom they interacted with only at work. They then traveled back to a family that they didn’t share labor with, among neighbors that they rarely interacted with, and among whom they didn’t share common economic goals.

    Under the pre-industrial system, neighborhoods were people who worked together and shared common economic objectives. Capitalism and industrialization eliminated that, and thus atomized the social structure. In other words, under capitalism, corporation became the focus social structure instead of the family and neighborhood.

    So, this study’s findings make perfect sense and should were easily predictable. Strong family structure increases self sufficiency, and industrialization and capitalism weaken family structure, which leads to less self sufficiency, which, in turn, lead to increased economic “activity”.

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  5. ? says:

    I can see some truth in it here in the US, The Protestant Ethic makes profit an end in itself and personal relations not to be trusted in the sense of the ethic of trusting only one’s self. But the more we know, the more there’s a choice one can make. Tradition i.e., the authority of preserving relations as they have been has a side that’s free of all encumbrances. In Italy, it has made for rather creative folks (like the Gucci’s, the Nervi’s…)

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  6. Jon Heston says:

    I listened to your podcasts about nation levels correlations between familial structure and economic “status” (a better term is escaping me at the moment). The way it was pitched seemed to imply that facial structure dictates economy rather than the other way around. You are typically pretty cautious about mistaking correlation with causality so I was curious what led to you conclusion rather than the interpretation that economic status dictates familial structure.

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  7. Jason says:

    Why not just ask your family to remain business like when things get tough?

    last paragraph:

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