Tuesday, 6 May 2014

In memoriam: Gary Becker

One of the world's most influential economists, Nobel laureate Gary Becker has passed away this week at the age of 84. Becker was a professor at the University of Chicago, Department of Economics and Sociology. He was an active economics blogger with his last post dating from only two months ago. He held the blog together with his friend and colleague Richard Posner, also a professor at the University of Chicago. It was a very good blog and I for one will surely miss his insightful posts. 

"My teachers taught me that economics was not a game played by clever academics, but a serious subject that helped us understand the real world we lived in."

Becker received the Nobel prize in economics in 1992 for “having extended the domain of economic theory to aspects of human behavior which had previously been dealt with—if at all—by other social science disciplines such as sociology, demography and criminology.” Essentially he introduced economic thinking and reasoning into mostly sociological and psychological issues such as family, marriage, discrimination, crime or addiction. He was focused on expanding the logic of economic analysis into all fields of social science. He advocated a common approach to all social sciences. 

His Nobel prize lecture called "The Economic Way Of Looking At Life" perhaps best epitomizes this view:
"My research uses the economic approach to analyze social issues that range beyond those usually considered by economists ... Unlike Marxian analysis, the economic approach I refer to does not assume that individuals are motivated solely by selfishness or gain. It is a method of analysis, not an assumption about particular motivations ... Behavior is driven by a much richer set of values and preferences. The analysis assumes that individuals maximize welfare as they conceive it, whether they be selfish, altruistic, loyal, spiteful, or masochistic. Their behavior is forward-looking, and it is also consistent over time. In particular, they try as best they can to anticipate the uncertain consequences of their actions. 
By applying such simple yet thoughtful analyses of many of life's situations Becker was able to influence many fields and topics, even far beyond economics itself. 

His most famous papers on crime (called "Crime and Punishment") presented criminals not as socially depressed or mentally deficient, but as rational agents capable of calculating the benefits of a crime vis-a-vis the penalties that they might incur, in addition to evaluating the probability of getting caught. Tim Harford points to an interesting anecdote with Becker who told him he had parked his car illegally while rushing to meet with him. Becker explained that after carefully weighing the risks and the benefits he made a rational crime. Economists love to do things like this - not illegal parking, but applying an economic reasoning to, well, everything.

He also defined the so-called marriage market, in a very interesting paper called "The Theory of Marriage".
"It's not an organized market the way the stock market is or a bazaar is in the Middle East, but it's a market nevertheless with the property that there are different people in this who are looking to get married. Not everybody can marry the same wonderful man or woman, and they have to make choices. And they may have met somebody who they're pretty happy with. They wonder about whether if they'd waited they'd meet somebody better, and these are the kinds of choices one makes in other markets. So using market as a metaphor, but I think it's a very good metaphor for what goes on here."
His famous contributions were also in the area of discrimination - he showed that discrimination is economically costly to the discriminator more than to the discriminatee. If an employer refuses to hire a productive worker due to gender or skin color, the employer loses a valuable worker. In a fully competitive industry discrimination would be too costly since companies which discriminate would soon lose out to those who are willing to open the possibility for a productive worker regardless of such insignificancies as one's skin color or gender. However in heavily regulated industries characterized by monopolies or cartels, discrimination is more pervasive.

Today we might take some of these findings as given since we face an abundance of economic and sociological literature that likes to place things in different perspectives. But Becker was arguably the pioneer of this approach.

Becker also carried a very interesting point on inequality, linked with his arguably most important theory of human capital. He claimed that inequality in earnings was an inequality of the "good kind". We aren't all the same, some are more capable at doing certain things than others (have a higher level of human capital) and this reflects in our income. Human capital to him was just like physical capital - they both carry a rate of return and they both require investment. In an environment where knowledge is seen as an important asset that determines one's potential income, if a person doesn't invest in his/her knowledge he/she will inevitably lose out. If we allow more high-educated workers to earn more money and keep more of their income this will encourage others to get more education and thus increase the quality of human capital in general (and likely increase productivity as well). The rising trend of getting college degrees testifies to this argument, as the people who chose to invest in getting a college degree were thinking this was a sure way to prosperity in a knowledge-led economy. It has worked for many so far in the long run, despite a temporary setback of the current crisis. 

The testimonial to Becker's influence to the field was best summed up by his former student Steven Levitt, economics professor at Chicago and coauthor of Freakonomics (a great book that emulates Becker's approach to using economics to describe non-economic social phenomena):
"About ten years ago, Pierre-Andre Chiappori and I analyzed which economic theorists have had the greatest impact on empirical research by looking at the key motivating citations in papers published in top journals in recent years. Becker was by far the most influential theorist by our metric. What was most remarkable was that thirteen different works of his were cited; no one else had more than three or four. He published influential research in every decade from the 1950s to the present – incredible longevity. No one else had longevity like that."
Some of his selected and recommended books and papers are:

1958. "Competition and Democracy." Journal of Law and Economics 1: 105-109.
1962. "Irrational Behavior and Economic Theory." Journal of Political Economy 70(1): 1-13.
1965. “A Theory of the Allocation of Time.” Economic Journal 40, no. 299: 493–508.
1968. “Crime and Punishment: An Economic Approach.” Journal of Political Economy 76, no. 2: 169–217.
1971 [1957] The Economics of Discrimination. Chicago: University of Chicago Press.
1974. "A Theory of Social Interactions" Journal of political Economy, 82(6): 1063-93.
1975 [1964] Human Capital. 2d ed. New York: Columbia University Press.
1981. A Treatise on the Family. Chicago: University of Chicago Press.
1983. "A Theory of Competition among Pressure Groups for Political Influence". Quarterly Journal of Economics 98: 371–400
1988. (with Kevin Murphy) "A Theory of Rational Addiction" Journal of Political Economy. 96 (4): 700.
1992. "The Economic Way of Looking at Life." Nobel Prize Lecture
1996. Accounting for Tastes. Harvard University Press

1 comment:

  1. a true great, one of the greatest..good summary btw