(This essay was published in Hong Kong Economic Journal on 21 May 2014)
Professor Gary Becker was recognized in 1992 with the Nobel Memorial Prize in Economic Science “for having extended the domain of microeconomic analysis to a wide range of human behavior and interaction, including nonmarket behavior.” In this essay I discuss his specific contributions, his unifying approach, the significance of his work, and the consequences for economics and the social sciences. At the end I would like to speculate why I think his influence will continue to grow in the future.
Becker in his late twenties: 1955-1960
Becker received his Ph.D. in 1955. Upon graduation he stayed at the University of Chicago for five years before moving to Columbia. During this period he did original work in four different areas: (1) discrimination, (2) competition and democracy, (3) fertility, and (4) consumption theory.
The last area was joint work with his mentor Milton Friedman. Although Friedman is well known for his contribution to monetary theory and policy, most economists regarded his best academic work to be in consumption theory. Becker participated in this important research in a central way and jointly published a paper with Friedman entitled “A statistical illusion in judging Keynesian Models”.
Working on Friedman’s theory of consumption was a great learning experience for Becker. It exposed him to key elements of the research style that is the hallmark of the Chicago School.
The first of these is that it is not possible to interpret an empirical or statistical relationship correctly without a theory. Second, a good piece of economic work entails developing a model with many empirically testable predictions that are rigorously tested. And third, a good economic model does not depend on the assumptions it makes about how people behave, but whether the model and its assumptions can make correct predictions. If it contains each of these elements, then it is a “useful” theory. Becker’s subsequent work in economics always followed this style.
Becker’s doctoral dissertation was on the “Economics of Discrimination.” He developed a model of discrimination using economic theory to show that an employer who discriminated against minorities, say Black employees, would only be willing to hire Black employees, if at all, by offering a lower wage rate compared to equally productive White employees.
Before Becker’s analysis, everyone simply assumed that Black employees were victimized by employer discrimination. What Becker showed was that an employer who practiced discrimination would also suffer for so doing because he would lose the Black employees to other employers who did not discriminate. If the employers competed with each other in a highly competitive industry, then in the long run those who discriminated against Black employees would go out of business. They too would be suffered.
What Becker did was to apply an analysis of the effects of salary tax to show that discrimination, like a tax, hurts both employers and employees. He tested his model using data on wage differences between Black and White workers in different industries and found that the gap was greater in less competitive industries, indicating more competition led to less discrimination. His insight was refreshing and iconoclastic. It was also a straightforward application of economics. His dissertation was published in 1957, but attracted little notice in the profession. He mentioned this poor initial reception when he republished it in 1971 as a second edition.
In “Competition and Democracy,” Becker applied economic reasoning to compare competition in the market place and in democratic politics. He viewed democracy as political competition among political parties who try to capture political office by competing for voter support. Voters generally have low incentives to vote. Special interest groups have incentives to lobby for favorable policies and are often major sources of funding for political parties. Political parties, in turn, have to spend considerable resources to convince voters to show up and vote in their favor.
He reasoned that political competition was characterized by enormous economies of scale so that surviving political parties would necessarily be very large ones. This is also a result of the fact that the prizes of political competition are relatively few in number, unlike competition in economic markets. He concluded that politics in democracies were more akin to monopoly markets where there is competition among the few, rather than economic markets with many competitors. The funding of political parties also led to side payments and corruption becoming common practices.
His work in this area was a more systematic precursor to Anthony Downs pioneering study An Economic Theory of Democracy. But Becker’s paper was rejected by the Journal of Political Economy for publication and later appeared in the Journal of Law and Economics. The application of economic theory to the study of politics, however, would soon grow from strength to strength, especially under the leadership of William Riker at Rochester University. The rational school of politics is one of the most important intellectual influences in the study of politics today, to which Becker was an early contributor. While he continued to research political behavior from time to time, other forms of social behavior would take up most of his research attention.
In “An Economic Analysis of Fertility”, Becker applied economic reasoning to the demand and supply of children. He treated children as durable goods and reasoned that the most important element influencing demand was parents’ time, especially a mother’s time. Becker’s key insight was that raising children was a very time-intensive activity. So as women’s labor market opportunities grew with better schooling and economic development, the birth rate fell because women’s time became more expensive.
Becker made an important distinction between two effects of economic development here. The first was that rising prosperity produced an income effect that increased the demand for children. Second, rising prosperity also raised the price of having children because a mother’s time became more expensive and produced a substitution effect that reduced the demand for large families. He showed empirically that the substitution effect was more powerful than the income effect, so rising prosperity led to a decline in fertility.
Becker’s theory of fertility was again not well received by the economics profession. Folklore has it that when he presented his idea of durable babies at Harvard in James Duesenberry’s economics seminar, there was a great deal of hostility. Becker was now beginning to gain a reputation as a brilliant young economist working on odd subjects. People were saying, “Come on Gary, move onto something more real!”
Becker at Columbia: 1960-1969
Becker became professor at the age of thirty at Columbia University. He stayed for nine years and returned to Chicago afterwards. During his time at Columbia he worked with Jacob Mincer, and also William Vickrey (Nobel Laureate 1996) and Kelvin Lancaster. His intellectual creativity and sharpness attracted the best students and he trained an army of them on the applications of economics and labor economics. He pioneered work in five areas: (1) human capital theory, (2) theory of the allocation of time, (3) personal distribution of income inequality, (4) irrational behavior, and (5) crime and punishment.
Becker took T. W. Schultz’s (Nobel Laureate 1979) ideas on the broad significance of human capital, and H. Gregg Lewis’s early analytical approach to labor economics, to new heights. He developed a systematic theory of human capital grounded in the theory of investment. This said that people augmented their human capital by applying purchased market inputs (like lessons, books, equipment, etc.) and applying their own time in studying. Own time was an essential input with, for example, education requiring studying and health requiring exercise.
Time is a costly input whose value equals the foregone earnings that one could make from working on a paid job instead of investing in human capital. People would invest as long as the expected return exceeded the costs of doing so. Empirically, Becker studied schooling as a form of human capital investment and found the rates of return were significantly higher than those obtained from investing in other forms of capital.
His work had many implications. Investing in health prolonged a person’s life expectancy and increased the return on education investments. Health and education were complementary. If a person became more productive with more human capital, then he would also become more productive at learning the more he invested in learning. The value of one’s time rises as one keeps learning, which is why earnings rise with age, but earnings will eventually fall at some point as the effects of depreciation set in.
One important way of increasing the efficient allocation of human resources is to lower the barrier for people to migrate between regions and across countries. Allowing people more choice as to where to work and what jobs to take improves the efficient allocation of human resources and encourages people to invest in themselves and their children. One of the reasons why China was able to grow so rapidly over the past 30 years was the greater choice allowed in the labor market.
Becker was the first economist to develop a framework for studying the personal and household distribution of labor income inequality. He showed that variations in the incomes of individuals were the result of their human capital and the variables that determined how much they invested in themselves. Because slavery is prohibited in a free society, a person born in a poor family cannot easily offer himself as collateral to borrow money to finance his own education. There is therefore a justification for government intervention to correct capital market imperfections.
Subsidized education is not only an equity matter, but also an issue of economic efficiency. The existence of talented poor people who underinvest in education is evidence that society has not made full use of its talent pool. Becker recognized that the individually optimal amount of investment a person would make depended on both ability and opportunity. A more able person would be able to benefit more from human capital investment and should invest more. A person from a poor family or a poor country would have less opportunity because the borrowing cost to finance human capital investment would be higher. A poor person would therefore invest less in human capital. The socially optimal policy should be focused on equalizing opportunities, but not on outcomes.
In his “Theory of the Allocation of Time”, Becker developed a new theory of household production with numerous applications to understanding non-market behavior. For example, to the extent church attendance is to honor God, it is not possible to pay someone to attend on one’s behalf in the same way as one can ask a helper to buy groceries. Just as the value of time varies enormously among different groups of people, so do their church attendance rates. Some groups attend church for reasons other than just honoring God, so their attendance rates will rise. The young, elderly, and women are be more likely to attend because their value of time is lower.
By bringing time as a central element into decision-making, Becker opened up for economic analysis an opportunity to explain a wide range of human behavior. Instead of concluding that women were more devout at honoring God than men, he had only to point to the differences in their value of time. He could also explain why women tended more often to study languages and arts subjects than men do, because it was more likely to be valuable for their future activity in raising children. His students began to take his theory and apply it to an explosive range of subjects, employing novel data sources and sophisticated econometric methodologies.
Becker also showed that time not spent at work did not fetch a market or monetary return, and was not recorded in the national income accounts, but it was still productive. Even sleeping time was productive. Just test your performance level the day after staying up all night. His theory of the value of time implied that a better measure of productivity is not the amount or income a person collects, i.e., the wage rate times the number of hours worked in a year. He showed that the correct amount of labor output in an economy should be the wage rate times 24 hours per day and 365 days a year. Women who did not work in the market place were still productive and their contribution should be measured by the wage rate they would have been able to get had they worked for pay. Becker called his concept “full income” or income that could have been obtained if a person worked “full time”.
People who live longer have higher lifetime incomes, therefore the rich have higher lifetime incomes than the poor because they not only have higher wages but also longer lives. Another insight from Becker’s analysis is that worsening world income inequality due to globalization is probably exaggerated. Life expectancies in poor countries have risen as their economies have prospered. As a consequence, the lifetime incomes in poor countries have increased much more than in rich countries and improved world income inequality.
Becker’s complete view of economics and the economic approach first appeared in his “Irrational Behavior and Economic Theory”. Economic theory has always assumed that individuals seek to maximize their utility subject to available resources, and that human behavior can be explained by either changes in preferences or changes in the available resources. Economics is the science of the allocation of scarce resources to competing goals. This model of human behavior is applied to account for market and non-market behavior.
While Becker does not dispute the influence of changes of individual preferences in determining behavior, he argues that this is not a very fruitful yardstick because unless we have a theory of how preferences change, we have not explained anything. For example, why are women more devout than men in honoring God? Since the tools of economic theory are much better developed in analyzing changes in scarcity and their tradeoffs, economists should instead assume that preferences are stable and focus on analyzing the effects on changes in scarcity, i.e., women’s value of time being lower than men’s.
Let me give another example. To explain why apple consumption has increased over time, Becker would show that it is the result of rising income and falling prices due to increased productivity in growing apples, and not claim that people have become more fond of apples unless we can explain why and how their fondness has changed. This approach is uniquely Beckerian. It embodies a way of analyzing all phenomena using the sophisticated tools of economic analysis without getting bogged down in assumptions about ad hoc individual preferences and the changes happening within them.
Becker’s research on “Crime and Punishment: An Economic Approach” applied the economic model of incentives to crime deterrence and argued that criminals also behaved rationally and responded to incentives. He revived the case for capital punishment and challenged theories of criminality that assumed various forms of “irrational” behavior. A large new area of research in law and economics was thus born.
Becker at Chicago Again: 1969-2014
Becker continued his earlier work after he returned to Chicago and embarked into new areas. He led the Workshop on Application of Economics and later the Rational Choice Workshop together with Richard Posner. During this era he focused on (1) the family, (2) intergenerational mobility, (3) social interactions and preference formation, (4) pressure groups in politics, and (5) health as human capital.
I became an undergraduate student at Chicago in 1970, a year after Becker had arrived. But he never taught undergraduate classes in his whole career so I only knew him after taking his Price Theory course in 1973. At that time, I heard some fellow students say that Becker was wasting his time on unimportant subjects. And yet his research agenda was blossoming and exploding.
Becker’s enormous influence was achieved not by publishing, but by creating a literature in all the subjects he touched. His students and colleagues spread his influence through their own work. That he was doing controversial things and was brilliant at it finally began to catch people’s attention. I remember taking a graduate seminar course from Duncan Black, who was a pioneer in the new theory on social and public choice and a visitor at Chicago. He told me with great emphasis that his view was very different from Becker’s. It was obvious Becker was controversial and he was getting attention.
Becker’s theory of the family provides a complete framework for organizing our understanding of marriage, fertility, divorce, mortality, investment in health, social security, inequality, intergenerational investment, and so on. Becker also extended the study of the family to broader issues affecting the economy, law and the state. More importantly, he cut to the core reasons why families have been so central to human social organization and why they have remained so strong an institution through the millennia.
Becker found that the only indispensable feature of the family is its central role in nurturing one’s own children. Human beings develop slowly and make intense time demands on parents. The parents’ incentive to care for their children might well have been a survival trait from the evolution of the human species. He believed the reason why the market for adopted children has not developed well in every society speaks to the importance of the family as an institution for nurturing children. There is too much uncertainty in the quality of adopted children to make it worthwhile for parents to invest their time, except for those who cannot have their own children or adopt for altruistic reasons.
The family has a far greater comparative advantage in sustaining humankind as a species than any other institution humans have invented, including the rule of law and the state. I suspect that Becker privately believed that understanding the family was of even greater value than effort invested in other social science subjects. He probably believed that the family was the most resilient and therefore most crucial institution in the evolution of human society.
Becker also spent a lot of time studying other types of behavior, often deemed to be irrational behavior. He studied altruism, addiction, fads and fashions, and also fears. Through this work, he began to study how preferences were formed and sought to give form and shape to why preferences differed and how they become settled. He looked at preference formation and social interactions as the result of optimizing behavior in managing resource use under scarcity and as responses to changes in scarcity.
Professor George Stigler (Nobel Laureate 1982) once said, “Gary Becker may well go down in history as the chief architect in the designing of a truly general science of society.” Milton Friedman described him as “the greatest social scientist who has lived and worked in the last half-century.” Becker’s work also contributed to defining the work of the Chicago School.
In 1988, the UK magazine The Economist named eight of the most promising young economists, an exercise it has undertaken every decade since. The eight young stars of 1988 all made their contributions in traditional economic subjects. But in 1998, five of the eight were working in non-traditional economic subjects and one of them, Steve Levitt (of Freakonomics and Super Freakonomics fame), started a trend among economists to popularize applications of economics to the public. The Economist concluded that young economists were following Becker’s lead into subjects traditionally studied by sociologists, political scientists, educationalists, epidemiologists and even criminologists.
In 2008, another five of the eight were working on non-traditional economic subjects or using non-traditional methods to study traditional economic subjects. The Economist concluded that economists were continuing to nose into new fields of social behavior. They have been doing so at least since Becker wrote about crime and the family in the 1960s and 1970s. What unites these young stars and the discipline of economics? Economists still share a taste for formal mathematical accounts of the behaviors they observe. And they pride themselves on the sophistication of their investigative methods. They are usually better at teasing confessions out of data than their rivals in other social sciences. What defines economics today? Economics is what economists do –– the best of them, anyway. This is the influence of Gary Becker and the Chicago School.
Becker’s influence will inevitably rise for another reason. As society continues to prosper with the rise of capitalism and global markets the fraction of time humans spend in working to support their livelihoods will continue to decline. The fraction of the day we spend making money will also decline with rising productivity. Moreover we shall live longer and the fraction of our lives spent working will fall. In other words, prosperity means a rising proportion of our available time will be spent in non-market activity. Professor Becker’s relevance can only grow with time, as economic analysis will be increasingly applied to non-market analyses.