The analytical intransigence of the real world: Gary Becker (1930-2014)

Economists owe a debt of gratitude to Gary Becker, who passed away on 3 May 2014. In the words of his Nobel Prize citation, Becker 'extended the domain of microeconomic analysis to a wide range of human behavior and interaction, including non-market behavior'. Put more informally, he took economics into new places that are more fun, more popular and sometimes more relevant than much of mainstream economics.

Becker moved economics beyond the dry areas of national accounts and the balance of payments, applying its rigorous analytical techniques to both everyday problems such choosing a parking spot and to more important issues like discrimination. In doing this, he widened the range of issues where economists had something to say.

For him, incentives were the driver of behaviour, and people made rational decisions in order to maximise their own welfare, widely defined. He accepted the analytical intransigence of the real world:

Behavior is driven by a much richer set of values and preferences….individuals maximize welfare as they conceive it, whether they be selfish, altruistic, loyal, spiteful, or masochistic...the past can exert a long shadow on attitudes and values.

He took on issues which seemed to be deeply embedded in social norms rather than economics. His work on crime and punishment illustrates this approach. Triggered by his own experience of taking a chance on being booked for parking illegally, he argued that criminals make a rational calculation about the probability of being caught, the severity of the likely punishment and the benefit from the crime.

This illustrates both the strengths and weaknesses of his methodology. [fold]

Yes, economics has something to say about decisions to commit a crime. But it's not possible to put all the complex motivation of serious crime (say, murder or rape) into the rational welfare-maximising framework.

He didn't argue that upbringing and different standards of morality were unimportant — only that economic tools had something to offer on the subject. Economics could inform public policy decisions about whether to spend more money on enforcement or to raise penalties. Economics suggested that fines are often better than jail, as they helped government revenue rather than being a costly drain. But economics has little to say on important behavioural questions (does jail deter murderers and rapists?).

Becker brought this same approach to a wide range of social issues, inserting economics into family affairs: births, marriages, and divorces could all be analysed in terms of incentives and rational maximisation of individual welfare. He wasn't the first to apply economics to the family. Malthus' pessimistic take on population was based on simple economics: fertility would rise and fall depending on income. Undeterred by the failure of Malthus' predictions, Becker brought the family back into the economic fold. Families were smaller now because the opportunity cost of child raising had risen. Families held together (or not) depending on the economic incentives.

Like most pioneers and proselytisers, Becker went too far in applying hard-edged market-oriented economics to areas which are deeply embedded in non-economic issues. Immigration, divorce, human capital formation, and crime all have elements that can be analysed in terms of rational decision making, but it is an incomplete and sometimes trivial narrative.

He worked in the sharp-edged world of the University of Chicago, where the 'magic of the market' is gospel. This viewpoint (some would say bias) coloured some of his work. He argued that an efficient tax might turn out to be inefficient for society, because it encouraged inefficient government expenditure. Whatever its analytical merits, this view is reflected in the opposition of the US Republicans to a VAT (what Australians call a GST), on the grounds that it is too efficient in shifting resources to the government.

His greatest legacy for economists might have been to shift economics onto the popular stage, opening up all sorts of entertaining topics like the incentives for cheating (not just in sumo wrestling, but in econometric regressions). Others followed. Steven Levitt and Stephen Dubner produced Freakonomics and Superfreakonomics. The Undercover Economist (Tim Harford) followed suit, using economic principles to address problems such as the high cost of popcorn in cinemas.

Paradoxically, Becker's interests created a link to a branch of economics which emphasises the stunning complexity of human motivation and refutes the relevance of simple-minded rationality-based economics: behavioural economics. One of the leading practitioners, Daniel Khaneman, author of Thinking Fast and Slow, was on the board of Levitt's consulting company alongside Becker. They found common ground in being intrigued by the infinite variety of human behaviour. One huge difference remained: Becker used the precise tools of mathematical economics to analyse situations which the behaviourists categorised as too complex, too inconsistent, too dependent on context or simply too quirky to be amenable to welfare-maximisation analysis.

Often society was just not ready for the insights he offered. Are we ready to auction off migration rights? Can higher divorce rates among poor people be satisfactorily explained in terms of the larger income losses faced by rich divorcees? Is theft bad just because it takes resources (guns and time) to steal, without adding to output?

It almost goes without saying that Becker trod on toes by trespassing on other disciplines and overstating the power and relevance of his approach. His analysis of family formation (why women bring up the kids while men earn the main income) might have been logically impeccable, but was seen as politically incorrect.

Society often resists rational ideas such as higher prices when demand is strong ('surge pricing' for taxis on Friday night) or market clearing prices for football tickets ('scalping'). Some saw Becker's take on human capital (where education is undertaken to improve income, rather than to elevate the mind) as another justification for salary income inequality on the basis that these differentials are merit-based.

Market failure was never part of the Becker analysis. But there is little doubt that his effort to bring precision to the fuzzy world influenced not only economics but other disciplines, and helped to illuminate the complexity of human behaviour.

Stephen Grenville