The Nobel Series: A real-world economist

The Nobel Prize in Economic Sciences in 1992 was awarded to Professor Gary S Becker of the University of Chicago for "for having extended the domain of microeconomic analysis to a wide range of human behaviour and interaction, including non-market behaviour".

Becker's main contribution was in expanding the boundaries of economics to apply its tools to problems in other social sciences such as sociology, political science and demography. More specifically, he extended the application of the rational choice model to other social sciences, on the grounds that individual behaviour is fundamentally the same.

Becker did his undergraduate studies at Princeton University in 1951. He finished his PhD at the University of Chicago in 1955, where he was greatly influenced by Milton Friedman. Becker called Friedman 'the greatest living teacher'. His thesis titled 'The Economics of Discrimination was something very novel, having used the tools of economics to analyse an essentially non-economic problem. After his doctorate, Becker worked as an assistant professor at Chicago and then moved to Columbia University in 1957. In 1970, Becker returned to the University of Chicago and, in 1983, he was offered a joint appointment by the Sociology Department of Chicago.

Becker applied three principles of microeconomics to his works relentlessly: (a) Rational and maximising behaviour (b) stable preferences and (c) markets are in equilibrium (both formal markets and informal non-market settings, using explicit and implicit "shadow" prices respectively). Using these basic principles, Becker proposed possible hypotheses which could be tested with data.

Becker covered a large area in his research, displaying a wide range of topics in his scholarship and an ability to cover new areas, mostly outside of mainstream economics. Broadly, his research covered the following areas: discrimination, human capital, criminology and economics of the family. In this article, we shall cover the main works of Becker and review how they have been applied to public policy over the years.

Main works

       Human Capital

The theory of human capital is the most well-known work of Becker. While he is not the first one to talk about human capital, his treatment of the subject was novel. He applied tools of microeconomic theory such as rationality and marginal utility to the value of labour and wage structure. Before Becker, it was Theodore Schultz who had developed the theory of human capital.

Becker's book 'Human Capital' — published in 1964 — was the result of the work he had been pursuing since the 1950s and the papers he wrote in 1960 and 1962. Becker was inspired by Schultz's work on the same subject. While Schultz, who was also at Chicago, spoke explicitly of the human capital, Becker saw it more through education and training perspective. He spoke of investment in these areas and the income differentials that different levels of education and training would lead to. He defined human capital as "activities that influence future monetary and psychic income by increasing resources in people" (Becker 1994); and its main forms were schooling and on-the-job training, although he also considered medical care, migration, and information-seeking about prices and incomes.

Becker discussed the rate of return to the investment in human capital and the importance of specific and general training. He focused on the case of general training (assuming that the case of specific training could be done in a similar way) by analysing the way in which human capital costs and returns could be incorporated into an equation representing the present value of lifetime net earnings. This approach was however hindered by the fact that the specification of the investment period was not straightforward and, by the existence of imperfect knowledge, of foregone earnings.

       Household and Family

Continuing with his penchant for extending the realm of economics, he applied tools of economics to the household and family areas. His efforts in this area were published in a book, 'A Treatise on the Family' (1981). Becker regarded family as a 'factory' and assumed that decisions such as division of labour within the family as well as the allocation of time are taken on principles of economics. Thus, a family 'produces' goods such as meals, residence, education of the young ones etc. and the inputs used are the time and resources of family members and other market goods. Earlier, Becker (with Kevin Lancaster), had developed the concepts of a household production function, the importance of division of labour within a family and gains from specification.

One outcome of Becker's work was the famous Rotten Kid Theorem. The theorem had to do with the interaction between an altruistic parent and a selfish child. Becker pointed out that a parent foregoes higher income by focusing on family work commitments in order to maximise a well-meaning objective. Becker also theorised that even if a child is selfish, he will choose actions that maximise a family's income. A corollary is that an altruist parent will also be happy to transfer income to a child.

In 1991, Becker published an expanded version of his 1981 work on the family where he had applied basic economic assumptions such as maximising behaviour, preferences, and equilibrium to the family. He analysed determinants for marriage and divorce, family size, parents' allocation of time to their children, and changes in wealth over several generations. For example, Becker showed that as market wages rose, the cost to married women of staying home would rise. They would want to work outside the home and economise on household tasks by buying more appliances and fast foods. This publication was an extensive overview of the economics of the family and helped unite economics with other fields like sociology and anthropology.

       Crime and punishment

The third area where Gary Becker applied the theory of rational behaviour and human capital is "crime and punishment". In his works in the late 1960s, he assumed that the decision to commit a crime is a function of the costs and benefits of crime. He concluded that the way to reduce crime is to raise the probability of punishment or to make the punishment more severe. Becker basically applied the neoclassical framework of rationality and net expected utility to the act of committing a crime. He suggested that committing a crime was rational behaviour and the criminal would weigh the expected costs with the expected returns and take a decision accordingly. Becker's essay, 'Crime and Punishment: An Economic Approach' (1968) and 'Essays in the Economics of Crime and Punishment' (1974) captured much of these ideas.

        Economic discrimination

One of the unconventional areas which got Becker's attention was discrimination on the basis of race, class, gender etc. In his book published in 1957, 'The Economics of Discrimination, Becker showed that it was irrational to discriminate in such a manner. Rationality would drive a person not to discriminate because discrimination would lead to a wide divergence between private and social returns. Hence, if an employer were to hire a certain race/caste/gender/class in favour of the other, he would have to pay a higher wage, leading to a rise in cost. Not discriminating is therefore the optimal decision for both parties to the transaction.

Becker showed that discrimination will be less pervasive in more competitive industries because companies that discriminate will lose market share to companies that do not. He also presented evidence that discrimination is more pervasive in more regulated and, therefore, less competitive industries. In this work, Becker analysed discrimination by using a neoclassical framework and producing quantified indications of the importance of this phenomenon, measured by what he called the 'discrimination coefficient'.

  Application and public policy

The theory of human capital has been applied for studying the return on education and on-the-job training. It has also been used to study wage differentials and wage profiles over time. Other areas of application include economic growth, migration and trade. As the Nobel website tells us:

Other important applications, pursued by various economists, include a breakdown into components of the factors underlying economic growth, migration, as well as investments and earnings in the health sector. The human-capital approach also helps explain trade patterns across countries; in fact, differences in the supply of human capital among countries have been shown to have more explanatory power than differences in the supply of real capital.

Practical applications of the theory of human capital have been facilitated dramatically by the increased availability of microdata, for example, panel data, on wages and different characteristics of labour. This development has also been stimulated by Becker's theoretical and empirical studies. It is hardly an overstatement to say that the human-capital approach is one of the most empirically applied theories in economics today.

Gary Becker's work found application in unlikely areas such as organ donation. A 2007 article by Gary Becker and Julio Elias suggested that a free market could help solve the problem of scarcity in organ transplants. Their economic modelling was able to estimate the price tag for human kidneys and human livers. The work was of course criticised on grounds of equity.

Becker's work on crime was praised by many jurists. For example, Richard Posner, a well-known jurist, stressed the enormous influence of Becker's work which "has turned out to be a fount of economic writing on crime and its control".

Becker's 'A Treatise on the Family' (1981), analysed the household as a sort of factory, producing goods and services such as meals, shelter, and child care. Applying theories of production to household behaviour, he was able to make predictions about family size, divorce, and the role of women in the workplace.

Becker's work on economic discrimination has also been used in explaining the rise in the participation rates of women and blacks in the American job market. In 2013, responding to a lack of women in top positions in the United States, Becker commented that "a lot of barriers to women and blacks have been broken down. That's all for the good. It's much less clear what we see today is the result of such artificial barriers. Going home to take care of the kids when the man doesn't: Is that a waste of a woman's time? There's no evidence that it is."

Conclusion

Becker was an unusual economist who expanded the use of economic tools to new frontiers. He forayed into political science and sociology and successfully (though controversially) applied concepts such as rationality and maximisation to such problems. Because of this, his work influenced research in the other social sciences as well.

Friedman said, unequivocally, "Gary Becker is the greatest social scientist who has lived and worked in the last half-century." Larry Summers called him a real-world economist.

Becker was criticised for his 'economic imperialism'— meaning that he applied economic tools to non-economic matters such as crime and family issues without careful consideration. Some even called his thinking 'blinkered'. Many critics came from within the very discipline of economics, those that questioned the rationality assumption. However, despite all the shortcomings, Becker remains an influential force, not only in economics but also in other social sciences such as sociology and political science as well. Becker's response to his critics came in his Nobel lecture:

My research uses the economic approach to analyse social issues that range beyond those usually considered by economists. This lecture will describe the approach, and illustrate it with examples drawn from past and current work.

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. Along with others, I have tried to pry economists away from narrow assumptions about self-interest. Behaviour is driven by a much richer set of values and preferences.

The analysis assumes that individuals maximise welfare as they conceive it, whether they be selfish, altruistic, loyal, spiteful, or masochistic. Their behaviour 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. Forward-looking behaviour, however, may still be rooted in the past, for the past can exert a long shadow on attitudes and values.

The writer is an IAS officer, working as Principal Resident Commissioner, Government of West Bengal. Views expressed are personal