Note: The following post is a paper I wrote this semester for a History of Economic Thought course. We were asked to write about the economic contribution of a Nobel Laureate. Though it is not directly related to the education topics I normally write about, after getting the paper back today I felt sad to think I had put effort into something that would likely never be read again. So, I am posting it to the blog.
By Jarod Apperson
Much like an aggressive first date, Gary Becker extended the invisible hand of economics into a host of uncharted territories. From early theories framing racial discrimination through an economic lens to later work on drug addiction, most of Becker’s writings serve to expand the scope of economic theory beyond its original home in the world of production, demand and trade. Today, believers in the supremacy of rational individual choice need no longer limit their faith to the banality of labor negotiations and the like, for Becker’s body of work develops a host of economic theories rationalizing the decisions individuals make through all aspects of life. Over a prolific six-decade career, Becker’s contribution served to further establish the assumptions underlying neoclassical economic theory as natural laws, governing not just trade but all choices, laws which persist independently of context, culture, and time.
Becker’s own telling of his personal history, as published in Les Prix Nobel 1992, betrays a faith in the malleability of life and the extent to which its course is dependent on an individual’s personal choices. He chooses to highlight the “up-by-the-bootstraps” anecdotes commonly shared by tea-party members and other neoclassical enthusiasts as evidence that their current circumstance was mostly earned through their own grit and perseverance. Present are references to the fact that his parents both dropped out of school in the eighth grade while he went on to earn a Ph.D. from one of the nation’s most respected economics programs (Becker 1992). However, scant recognition is made of the comparative early advantages afforded Becker by a literate father who owned his own business, a family that could afford to live in a respectable school district, and the famously successful New York Jewish community to which the Beckers belonged, providing consistent examples of achievement that could be modeled. Rather than a life largely determined by these circumstances with marginal augmentations the result of his decisions, Becker understands his personal history as largely determined by a series of his own actions, a perception consistent with the neoclassical theory underlying much of his economic contribution.
Just fourteen months after the 1929 Black Tuesday stock market crash ushered in the Great Depression, Becker was delivered to two immigrants, an eastern European mother and a Canadian father. Though born in the small town of Pottsville, Pennsylvania, Becker spent the majority of his childhood in Brooklyn, New York where his family moved before he reached school age. Becker’s early education failed to garner his full attention. Instead, the young boy’s interests leaned more toward athletics. Meanwhile, Becker’s father was an avid reader of newspapers on politics and other current events. As his vision began to erode, he enlisted Gary to read articles aloud. This experience laid the foundation for Becker to build his understanding of social interactions. By the time he reached high school, Becker had developed a more keen interest in academics and was particularly drawn to the study of mathematics, having joined the math team at age 16 (Becker 1992).
Becker went on to attend Princeton University before earning his Ph.D. in Economics from the University of Chicago where he studied under Milton Friedman. Upon completing his dissertation, Becker remained at Chicago for three years before moving to Columbia University. While at Columbia, Becker earned the John Bates Clark Medal. Following a distasteful observation of the 1968 student riots at Columbia, Becker decided to return to Chicago where he remains as a professor today.
Becker married the mother of his two daughters while completing his doctorate. Following her untimely death in 1970, he spent a decade single before marrying Guity Nashat, a historian of the Middle East, whom he continues to be partnered with today. Guity eventually convinced Becker to begin writing a monthly column for Business Week that he credits with helping him develop the capacity to refine his ideas and explain them to non-academic audiences (Becker 1992).
Major Contributions to Economic Theory
In 1992, Becker was awarded the Nobel Prize in Economic Sciences for his work in the fields of discrimination, crime, family behavior, and human capital (Becker 1993). The first three each represented a new realm into which economic foundations could be applied to develop theoretical frameworks for understanding individual choices. The last represented an augmentation of theory underpinning the economics of labor. The remainder of this paper will focus on the contributions Becker made to these four fields.
Prior to the 1957 publication of Becker’s The Economics of Discrimination, racism was not widely seen as the sort of topic appropriate for economic analysis. To an observer of the world, the choice of whether to discriminate or not might seem binary. Businesses either set race-based criteria for the customers they would serve or they did not. Neighborhoods were either segregated or they were not. Schools either had rules prohibiting attendance by blacks or they did not. The framing of these decisions began to change with the publication of Becker’s first book, which was an expansion of his University of Chicago dissertation and extended marginal analysis to racism.
In understanding and evaluating Becker’s theory, it is relevant to consider the personal context from which he approached the topic. During the years of Becker’s childhood, Brooklyn was home to immigrants from a variety of backgrounds; however, the communities were almost exclusively European, and 97.2% of the county’s residents were white according to the 1930 census. The lack of racial diversity in Becker’s immediate surroundings provides an interesting backdrop to his work on discrimination, suggesting that, despite any empathy he may have genuinely felt for those being analyzed, the theories are likely more informed by deductive conjecture than induced by personal relationships or observations from his own experience.
Rather than establishing racism as a binary choice, Becker theorized that racism existed on a continuum. As such, individuals harboring racist attitudes require compensating differentials in order to conduct business or otherwise interact with groups they would prefer to avoid (Becker 1957). These individuals can then maximize their total well being by considering the race-adjusted marginal utility of a choice. If the differential compensation were high enough, individuals would choose to conduct business despite their racist attitudes. For example, one hiring manager might be considered a 25-cent racist, while another more bigoted manager, could be viewed as a 75-cent racist, requiring employees of a certain race to work for a wage at least 75 cents less than other similarly skilled workers in order to compensate the manager for his “distaste” for integrated working conditions.
While this theory has some appeal and Becker was able to develop an interpretation of empirical wage data in a way consistent with the notion, it also seems to have a significant weakness when viewed in the historical context of the time Becker was writing. Princeton University historian Kevin Kruse’s book White Flight: Atlanta and the Making of Modern Conservatism chronicles the process of racial desegregation in the 1950’s and 60’s. One finding that stands out from his work is the extremity of outcomes. For example, Collier Heights in west Atlanta went from 100% white to 100% black within a few months (Kruse 2005). At the same time, housing prices plummeted. This outcome was not limited to a single neighborhood, but instead was a pervasive occurrence across the South. Were Becker’s theory accurate, one would expect new whites who required lower compensating differentials to have been attracted to the neighborhoods as prices fell. However, the reality is that such interest never materialized, and now 70 years later the neighborhood remains almost 100% black. While some bigots may exist on the continuum described by Becker’s work, the empirical evidence from the period instead seems to expose Becker’s model as the exception with fully elastic demand as the rule.
Whether the work holds up under scrutiny or not, Becker’s first attempt at publication successfully shifted the conversation around discrimination and expanded the creed of rational choice to a new realm, an accomplishment that in itself is remarkable. Much like Becker’s work on discrimination sought to develop a rational lens through which the decisions of racism could be understood, his later work on crime and punishment attempted to rationalize the choices of criminals.
Imagine a tall, muscular man who has placed a gun to the head of over 200 individuals and, with the threat of death, demanded their belongings. One Sunday morning, after steeping himself a cup of Earl Grey, he sits down to read The New Yorker, as is his weekend ritual. Coming to an article filed under “Annals of Crime,” he learns that many states, including his own, have raised both the punishment for committing robbery and the likelihood of being caught. After opening an Excel spreadsheet entitled “Tradeoffs and Benefits to My Criminal Activity” and making the appropriate adjustments for new information gleaned from the article, he learns that the expected, risk-adjusted return on his career path is now negative. Aghast, he decides to set aside all criminal activity and applies for a job as a cashier at McDonalds, where he lawfully spends the remainder of his existence. Such is the theoretical life of a criminal in Becker’s conception.
Delivering his Nobel Lecture, Becker reflected on the motivation that led him to pursue the field of criminal choices, citing a mid-century academic climate where behavior of criminals was largely attributed to factors outside the criminal’s control. He “was not sympathetic to the assumption that criminals had radically different motivations from everyone else” (Becker 1993). With an intent to counter this paradigm, Becker published “Crime and Punishment: An Economic Approach” in 1968. The paper examined a wide range of criminal activity from vehicle theft to the violation of anti-trust laws, and it examined appropriate responses. Again, the impetus for the work is relevant. Becker had a personally held belief—not based on empirical evidence—that criminals were rationally motivated and he chose to develop a theory formalizing that faith out of frustration that an alternate perspective dominated the prevailing academic discourse.
Broadly, Becker’s work suggests that the penalties levied for crimes should reflect the damages resulting from the action with additional consideration given to the cost of enforcement and the possibility of shifting some of this cost to criminals themselves through higher penalties (Becker 1968). In this effort, the argument succeeds when readers accept the basic premise that criminal choices flow from rational evaluations of risk and reward, but it falls short should the reader find this foundation implausible. The approach appears informative for civil damages, where judges must determine how much to award the injured party in the case of patent infringement or negligence as these parties are often highly educated and it can be shown that significant amounts of thought have gone into their business decisions. However, empirical evidence calls into question whether the theory can realistically be extended to wider criminal activity. For example, work by Becker’s colleague Steven Levitt and Columbia University’s Sudhir Venkatesh evaluated a Chicago gang and showed that the typical member earned just $3.30 per hour, significantly less than the minimum wage (Levitt and Venkatesh 2000). Not rocking the boat, the two authors explained their finding as confirmation that people work diligently toward the possibility of large payoffs, whether those payoffs are likely or not. Yet, less zealous neoclassical adherents may consider it equally compelling evidence that criminal choices are often irrational, calling into question the broad applicability of Becker’s theory.
Continuing his expedition through life’s major decisions, Becker next tackled marriage and the family unit. He published A Treatise on the Family one year after the consummation of his second marriage. Forestalling any possibility this event might cause some to misconstrue him as a hopeless romantic, Becker’s contribution to the evaluation of family was “the assumption that when men and women decide to marry, or have children, or divorce, they attempt to raise their welfare by comparing benefits and costs” (Becker 1993). The astute reader will notice the similarity between this work and Becker’s contribution to crime. Essentially, it is yet another extension of the idea that individuals make life decisions by determining the actions that will maximize their expected utility.
One unique aspect of Becker’s work on the family is the incorporation of altruism into utility functions. Family members often make choices that are beneficial to another member with no observable value flowing to the individual taking action. A husband opening the car door for his wife might seem irrational under a standard utility function unless he somehow derives personal satisfaction from the process. Recognizing this weakness in the theory, Becker developed a utility model which incorporated a measure of altruism (Becker and Barro 1986). Consider the following utility function:
U0 = v(C0) + αU1
In this model developed by Becker, the utility function of person zero is said to incorporate altruism because her/his wellbeing is dependent not only on consumption but also on the utility of person one. The α represents the extent to which the individual is altruistic. So someone like Mother Theresa may have an α above one, indicating that she values the utility of others more than she values utility from her own consumption while Justin Bieber would likely have an α closer to zero.
Starting from this interesting foundation, Becker developed a theory wherein families choose the optimal number of children by maximizing such an equation. Conceptually, the idea is compelling, and it helps explain why fertility rates vary across countries depending on the level of economic opportunity. However, despite Becker’s claims to the contrary, the model’s construction seems to still be focused on rational self-interest, missing what some might call the whole point of altruism. Yes, the utility of person zero is dependent on the utility of person one, but that alone doesn’t make person zero altruistic. Instead, he/she could be fully selfish, yet recognize that his/her personal utility improved when the needs of others were met. In contrast, the historical and philosophical concept of altruism connotes selflessness. With this in mind, it seems that Becker’s contribution to family choices explained some facets of fertility observed in the real world, but the theoretical framework employed to achieve this end conflates standard concepts of selfishness and altruism.
The final area of contribution explored in this paper differs from the previous three. While each of those expanded economic theory along the extensive margin and entered what were historically considered the province of other social sciences, Becker’s contribution to human capital more intensively tilled the fertile ground of labor market theory. Prior to Becker’s contribution, most labor market theory rested on a foundation of homogeneous agents. With the publication of “Investment in Human Capital: A Theoretical Analysis,” Becker posited that the theory could be amended to introduce heterogeneity of workers through the incorporation of human capital (Becker 1962).
Becker’s early work on human capital primarily focused on investment in the training of a workforce. He identified several facts about the real world which did not seem to be consistent with the theoretical models accepted at the time. Two facts were: earnings typically increase with age, and unemployment rates are negatively correlated with the level of skill. Unless heterogeneity of marginal productivity could be established, the variation observed in wages and likelihood of experiencing unemployment might seem to contradict John Bates Clark’s work showing that under a competitive, capitalistic structure wages are determined by the marginal productivity of labor (Becker 1962). Expanding Clark’s theory, Becker showed that when workers have accumulated greater levels of human capital they become more valuable to firms because they produce more than other workers. Thus, in order to maximize profitability, firms should augment the standard MPL = W equation, replacing it instead with MPL + G = W + C, where G is the return to the firm from training and C is the opportunity cost and outlays from the worker in order to become trained.
While Becker’s contribution to human capital opened the door to better understanding some of the factors underlying disparate wages that workers in the real world experience, it seems to fall short in its focus on adulthood as the primary time when human capital is developed. Evidence shows that by the time individuals reach adulthood and are able to take personal responsibility for their choices, human capital may be largely immovable. In 2012, Paul Tough published the book How Children Succeed which reviewed a wide array of research on the development of skills in young children. One finding he illustrated was the extent to which traumatic experiences in early childhood can have long-lasting impacts on brain chemistry. Specifically, the book cited a study by McGill University Neuroscientist, Michael Meaney, which monitored rat pups and showed that parental responsiveness to trauma, or lack thereof, altered brain chemistry (Tough 2012). Similarly, children who are raised in stressful environments, and are not appropriately attended to by parents, have higher levels of cortisol which significantly inhibits their capacity to focus, a skill essential for developing human capital.
While firms may be able to maximize productivity by investing in human capital at levels consistent with Becker’s calculations, the larger question seems to be whether or not society is properly endowing future generations with the basic set of skills they need to develop more complex human capital once they reach the workplace. If outcomes are largely predetermined by the environment in which children are raised, human capital is no longer a rational choice within their control, and even if Clark’s MPL = W equation can be saved, it could scarcely be considered equitable.
Over an illustrious career, Gary Becker contributed to a wide variety of topics often expanding the borders of what would have previously been considered appropriate work for an economist. Some of his most influential publications applied the economic principle of rational individual choice to topics previously dominated by sociologists and psychologists. A missionary for the economic faith, Becker colonized the fields of discrimination, crime, and family choice, converting many to the belief that behavior is primarily motivated by a rational weighing of costs and benefits. While the jury is still out on this theory’s validity, the social sciences have certainly become infatuated with the concept, and hundreds of economists have migrated to the academic colonies founded by Becker. Time will tell whether they have settled in Jamestown or Plymouth.
- Becker, Gary S. and Barro, Robert J. “Altruism and the Economic Theory of Fertility.” Population and Development Review, 1986, 12(Supplement), pp. 69-76.
- Becker, Gary S. “Crime and Punishment: An Economic Approach.” Journal of Political Economy, 1968, 76(2), pp. 169-217.
- Becker, Gary S. The Economics of Discrimination. University of Chicago Press, 1957.
- Becker, Gary S. “Investment in Human Capital: A Theoretical Analysis.” Journal of Political Economy, 1962, 70(5), pp. 9-49.
- Becker, Gary S. Editor Tore Frängsmyr. Les Prix Nobel. The Nobel Prizes 1992. Stockholm, 1993.
- Becker, Gary S. “Nobel Lecture: The Economic Way of Looking at Behavior.” Journal of Political Economy, 1993, 101(3), pp. 385-409.
- Becker, Gary S. A Treatise on the Family. Cambridge, Mass.: Harvard University Press, 1981.
- Levitt, Steven D. and Venkatesh, Sudhir Alladi. “An Economic Analysis of A Drug Selling Gang’s Finances.” Quarterly Journal of Economics, 2000, pp. 755-789.
- Kruse, Kevin M. White Flight: Atlanta and the Making of Modern Conservatism. Princeton University Press, 2005.
- Tough, Paul. How Children Succeed: Grit, Curiosity, and the Hiden Power of Character. Mariner Books, 2012.
 United States Census, 1930. As retrieved from SocialExplorer.com on April 10, 2014.