The Economic Approach: Unpublished Writings of Gary S. Becker

By Gary S. Becker, Casey B. Mulligan, Kevin M. Murphy and Edward L. Glaeser

A revealing collection from the intellectual titan whose work shaped the modern world.

As an economist and public intellectual, Gary S. Becker was a giant. The recipient of a Nobel Prize, a John Bates Clark Medal, and a Presidential Medal of Freedom, Becker is widely regarded as the greatest microeconomist in history.

After forty years at the University of Chicago, Becker left a slew of unpublished writings that used an economic approach to human behavior, analyzing such topics as preference formation, rational indoctrination, income inequality, drugs and addiction, and the economics of family.

These papers unveil the process and personality—direct, critical, curious—that made him a beloved figure in his field and beyond. The Economic Approach examines these extant works as a capstone to the Becker oeuvre—not because the works are perfect, but because they offer an illuminating, instructive glimpse into the machinations of an economist who wasn’t motivated by publications. Here, and throughout his works, an inquisitive spirit remains remarkable and forever resonant.

• Language: English
• Publisher: University of Chicago Press
• Release date: Aug 16, 2023
• ISBN: 9780226827216

Book preview

Cover Page for The Economic Approach

The Economic Approach

The Economic Approach

Unpublished Writings of Gary S. Becker

Edited by

Julio J. Elias, Casey B. Mulligan, and Kevin M. Murphy

The University of Chicago Press

Chicago and London

The University of Chicago Press, Chicago 60637

The University of Chicago Press, Ltd., London

© 2023 by The University of Chicago

All rights reserved. No part of this book may be used or reproduced in any manner whatsoever without written permission, except in the case of brief quotations in critical articles and reviews. For more information, contact the University of Chicago Press, 1427 E. 60th St., Chicago, IL 60637.

Published 2023

Printed in the United States of America

32 31 30 29 28 27 26 25 24 23    1 2 3 4 5

ISBN-13: 978-0-226-82720-9 (cloth)

ISBN-13: 978-0-226-82721-6 (e-book)

DOI: https://doi.org/10.7208/chicago/9780226827216.001.0001

Library of Congress Cataloging-in-Publication Data

Names: Becker, Gary S. (Gary Stanley), 1930–2014, author. | Elias, Julio J., editor. | Mulligan, Casey B., editor. | Murphy, Kevin M., editor.

Title: The economic approach : unpublished writings of Gary S. Becker / edited by Julio J. Elias, Casey B. Mulligan, and Kevin M. Murphy.

Description: Chicago : The University of Chicago Press, 2023. | Includes bibliographical references and index.

Identifiers: LCCN 2022053757 | ISBN 9780226827209 (cloth) | ISBN 9780226827216 (ebook)

Subjects: LCSH: Economics.

Classification: LCC HB171 .B335 2023 | DDC 330—dc23/eng/20230127

LC record available at https://lccn.loc.gov/2022053757

This paper meets the requirements of ANSI/NISO Z39.48-1992 (Permanence of Paper).

Contents

Foreword by Edward Glaeser

1. Just the Beginning

Acceptance Speech at Bradley Award Ceremony, June 4, 2008

The Spirit of the University of Chicago, September 14, 2010

2. Accounting for Tastes

Preference Formation within Families, June 1992

Rational Indoctrination and Persuasion, March 2001

Some Notes on Drugs, Addiction, Families, and Public Policy, May 2000

Promotion Tournaments, Power, Earnings, and Gambling, July 1991

3. Household Production and Human Capital

Should the Military Pay for Training of Skilled Personnel? August 15, 1957

Further Reflections on the Allocation of Time, February 2014

The Insurance of Market and Nonmarket Human Capital, November 1980

On Whether Intergenerational Mobility Has Declined in US While Inequality Has Increased, March 2012

Derivation of Relation Between Schooling of Parents and Children and Inequality, April 2012

4. Income Inequality and the Public Sector

A Positive Theory of the Redistribution of Income, April 1978

A Note on Optimal First Best Taxation and the Optimal Distribution of Utilities, 1982

5. Family Economics

Economics and the Family, September 21, 1999

Chronological Academic Life of Gary S. Becker

Selected Writings about Gary S. Becker

Bibliography of Gary S. Becker

Dissertations Chaired by Gary S. Becker at Columbia University and the University of Chicago

Acknowledgments

Notes

Index

Foreword

Edward Glaeser

Gary Becker was a dazzling economist. His presence brought intellectual light to every room that he entered. His work transformed economics. His teaching and advising shaped countless lives, including my own.

This volume contains a fascinating collection of Becker’s unpublished writing. Some of these works are polished, such as the two speeches contained in part 1. Others give us Becker unvarnished, such as his Some Notes on Drugs, Addiction, Families, and Public Policy, which is contained in part 2. The raw pieces may be more valuable for many readers, because they provide a clearer view of Becker’s thinking process. They are the closest that the written word can come to duplicating the experience of listening to Becker in a workshop, where his responses to research papers taught generations of Chicago PhD students how to think.

Gary Becker was the most important intellectual influence on my life. His course on price theory taught beginning graduate students how to craft their own economic models, rather than simply consuming models produced by others. The problem sets, which gave verbal queries but required mathematical formalism in response, forced incoming PhD students to create their own algebraic representations of the messy world around us. I have spent the past twenty years at Harvard doing my best to provide a similar experience for our first-year PhD students and for a modest number of our most intellectually ambitious undergraduates. That path was set for me at the University of Chicago in 1988 by Gary Becker.

Becker’s price theory class was so exhilarating because it empowered us to create our own models, but also because it broke down all subject barriers that could limit our imagination. One final exam question asked whether parental transfers to children should be expected to rise or fall after a divorce. Becker has been called a conquistador among economists, colonizing other fields, and George Stigler himself used Becker’s work to illustrate his claim that economics was an imperial science.

But Becker is better seen as a liberator, who broke down the barriers that had limited economists’ imaginations. Becker was no Cortez leaving havoc in his wake. His work has done no harm to sociology, political science, or anthropology, which continue to move along using their own methods, borrowing what they see fit from economics. All social science benefits when members of different fields look for links across disciplines.

In this foreword, I will do my best to provide a sense of Becker’s significance, by situating Becker in two very special trinities of economists. One of these triads had a distinct policy orientation, and also includes his advisor, Milton Friedman, and his friend and coauthor George Stigler. This Chicago School threesome collectively made the case for rethinking the embrace of public interventions in the economy that had been endorsed by both Keynesians, such as Paul Samuelson and Alvin Hansen, and earlier progressive economists, such as John Bates Clark and Richard Ely. The second triad is defined by the great methodological innovators of the postwar decades, and it also includes Kenneth Arrow and Paul Samuelson. This group transformed economics into a discipline that spoke using the language of mathematics and that applied that language to virtually all aspects of human existence.

This preface will attempt to do three things. First, I will attempt to explain Becker’s place in the pantheon of methodological innovators in economics. Second, I will discuss the policy perspectives implied by his work. Finally, I will give my own reactions to the fascinating essays contained in this volume.

Becker as Methodological Innovator

Paul Samuelson’s 1941 PhD dissertation, published in 1947 as Foundations of Economic Analysis, gave economics a mathematical coherence that the field has embraced ever since. No single work and no other economist had changed the field’s basic methods more completely. Before Samuelson, economists took a plethora of approaches to describing markets. The meaning of Keynes’s General Theory of Employment, Interest, and Money, published in 1936, has been debated ever since, partially because its author preferred a literary rather than a formal presentation of his ideas. After Samuelson, the field inexorably moved to mathematics, complete with ubiquitous comparative statics and widespread use of optimization tools. It became increasingly expected that when economists chose to present ideas with words rather than algebra, the presenter would know how to translate the ideas into the language of formal symbols.

I have chosen to include Kenneth Arrow in these trios of methodological heroes. The citation for Arrow’s 1972 Nobel Prize emphasized his role as one of the two parents of general equilibrium theory and his formulation of the associated welfare theorems. These are indeed indispensable tools for economists, especially for modern macroeconomists who try to grasp how economic or policy shocks ripple through the entire system. Economics has no comparative advantage in understanding the actions of any lone individual. Our field’s strength lies in understanding the system as a whole, and Arrow took the building blocks provided by Samuelson and derived their implications for a complete economy.

Arrow also deserves credit as one of the innovators who brought informational questions into economics. In the 1960s, he introduced what is now called Arrow’s Information Paradox, which describes settings in which describing an idea to a prospective buyer requires disclosing the critical elements of the idea. In the 1970s, along with Edmund Phelps, he introduced the idea of statistical discrimination, which suggests that race or class may be used as a signal for unobserved individual attributes. He also supervised Michael Spence’s PhD dissertation on labor market signaling, which was itself a signal event in the study of asymmetric information. Arrow’s own breathtakingly brilliant PhD dissertation describes the difficulty of translating individual preferences into community-wide rankings. This Impossibility Theorem can be seen both as a reflection on the difficulties of aggregation and as an early foray of economists into the study of politics.

Becker did not introduce formal optimization techniques into economics, and he did not develop new mathematical tools. His methodological contribution was nonetheless field-defining. He scrapped any attempt to limit economics to a finite set of topics or questions. In the first paragraphs of the introduction to The Economic Approach to Human Behavior, which is something of a manifesto for the Beckerian revolution, he rejects definitions of the discipline such as the allocation of material goods to satisfy material wants, or the market sector, or the allocation of scarce means to satisfy competing ends. Instead, he writes that the combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly, form the heart of the economic approach as I see it (Becker 1976, 5).

Those assumptions can be used to understand financial markets, but they can also be used to make sense of divorce or homicide or racial discrimination. In the decades since Becker wrote those words, economists have indeed wandered happily across different topics. Eli Berman and Laurence Iannaccone, among others, have explored religious sects and signaling one’s devotion to the deity. Steven Levitt has looked at cheating among Sumo wrestlers and Chicago teachers. When economists study nontraditional topics, such as suicide, addiction, riots, warfare, charity, and identity, they are all ultimately following the path that Gary Becker blazed.

In a sense, Becker has two clear antecedents: Paul Samuelson and Milton Friedman. Becker’s debt to Samuelson should be clear from his emphasis on maximizing behavior and market equilibrium. Samuelson’s Foundations enshrined the mathematics of optimization at the heart of economic theory, and maximizing behavior became intrinsic to almost all post-Samuelson economic theory. Samuelson also worked through the economics of market equilibrium, and Arrow took this even further.

But Becker had a more empirical side to his work than either Samuelson or Arrow, and this connects more closely to Milton Friedman. Friedman was the central figure in Becker’s formation as an economist, and Becker was Friedman’s greatest student. In 1953, while Becker was in the midst of his graduate school career, Friedman published The Methodology of Positive Economics, which serves as his own methodological manifesto, comparable to Becker’s introduction to The Economic Approach to Human Behavior. At the end of this essay, Friedman (1953) concludes that economics as a positive science is a body of tentatively accepted generalizations about economic phenomena that can be used to predict the consequences of changes in circumstances and that progress in positive economics will require not only the testing and elaboration of existing hypotheses but also the construction of new hypotheses (39).

Here Friedman seems to be channeling the ideas of Karl Popper’s Logic of Scientific Discovery, which taught that all science proceeded through the formulation and rejection of hypotheses. Friedman would later tell an interviewer, one of the major benefits that I personally derived from the first meeting of the Mont Pelerin Society in 1947 was meeting Karl Popper and having an opportunity for some long discussions with him, not on economic policy at all, but on methodology in the social sciences and in the physical sciences, and that conversation played a not negligible role in a later essay of mine, ‘The Methodology of Positive Economics’ (Levy 1992). This story illustrates how breakthroughs can come from almost random face-to-face meetings. It also shows how Friedman was coming to view economics as defined by its scientific methods rather than by its topic.

But Friedman himself would continue to work primarily on topics at the heart of economics, such as monetary policy and consumption. It was Becker, the twenty-three-year-old graduate student, who grasped that if economics was defined by its methods, not by its topics, then a whole new world had opened up. In 1952, Becker had already penned an early version of Competition and Democracy, which used the tools of industrial organization to think about the functioning of democracy. This paper did have a major precedent. Hotelling (1929) used his model of market competition to predict that the competition for votes between the Republican and Democratic parties, leads each party to make its platform as much like the other’s as possible (54).

Yet Hotelling was really just trying to show the widespread applicability of his model, not to make serious predictions about the functioning of the political system. Becker (1958, 109) presented a logically coherent argument about how free competition among parties and candidates would generally lead to policies that appealed to a wide number of voters, but monopoly and other imperfections are at least as important, and perhaps substantially more so, in the political sector as in the marketplace. As I will discuss later, this conclusion helped shape Becker’s contributions to the policy perspective of the Chicago School. At this point, I just want to emphasize that Becker was groping toward applying economic tools to the understanding of politics.

Becker’s PhD dissertation on racial discrimination provided an even greater break with traditional economic topics. Economists were not publishing papers about racial discrimination in their journals, despite the fact that terrible racial divisions and inequities were among the most striking and troubling facts about America in the 1950s.

Becker grasped the importance of the topic and that the tools of economics could make predictions about discrimination and its future. He started by assuming that discrimination reflected racist tastes on the part of white employers, workers, and customers. Nonstandard preferences become a signature part of Becker’s work. He would start with homo economicus and then add on racism or altruism or a taste for being in the same place as the cool kids.

By contrast, Becker showed little interest in the frailties of human cognition and typically assumed faultless maximization. With decades of hindsight, I am less sure that permissive attitudes toward modeling preferences combined with absolute strictness about human reasoning yield better predictions than a more parsimonious approach to preferences combined with a greater openness to intellectual error. While Becker’s model yields predictions that are sharply different from those of a statistical discrimination model in which employers refuse to hire African Americans because they rationally and correctly believe that there is a productivity gap, the data rule in Becker’s favor if the marginal African American worker hired is more productive than the marginal white worker hired.

Yet employers who just don’t like African Americans, as in Becker’s model, are behaviorally identical to employers who believe incorrectly that African Americans create problems in the workplace. In that case, a new African American employee may indeed be more productive than her white counterpart. Unlike Beckerian taste-based models, an erroneous belief-based model demands an explanation for why profit-seeking firms don’t bother to learn the truth. Yet even that criticism can be a strength because this generates an added falsifiable prediction for error-based models of discrimination: discrimination will be far less common when erroneous beliefs are more expensive. Consequently, discrimination based on the beliefs of workers or customers may be more durable than discrimination based on the beliefs of employers.

This very logic, of course, is just a slight permutation on Becker’s own analysis of discrimination by employers, workers, and customers. The basic mathematics of optimization mean that employers who maximized profits without considering race would earn (weakly) higher profits than employers who maximized profits and some other discriminatory objective. In a hypercompetitive environment, this should lead the racist employers to go bankrupt, but employer racism could easily persist if employers own physical or entrepreneurial capital and are willing to accept a lower return on that capital. Racist preferences among employees and customers are more likely to lead to segregated workplaces and stores and may persist indefinitely in equilibrium unless there is legal action to forbid such segregation.

It is not that economists had never thought about segregation. Gunnar Myrdal published his monumental An American Dilemma: The Negro Problem and Modern Democracy in 1944. Myrdal had a PhD in economics and wrote significant papers in economic journals, but to him economic viewpoint was more a synonym for pecuniary viewpoint rather than suggesting any particular methodological approach (e.g., Myrdal 1938). Consequently, while An American Dilemma was and is recognized as a magisterial work of social science that opened people’s eyes to the evils of segregation, few reviewers even described the book as a work of economics.

Becker’s work on segregation was followed by seminal papers on education, fertility, marriage, the allocation of time, and crime and punishment. In later years, he would turn to addiction, persuasion, fads, and the endogenous formation of preference parameters. The range of his work is illustrated also by the essays contained in this volume. He encouraged students to work on anything that seemed interesting and important, and the profession came to widely accept a Beckerian framework that accepted methodological but not topical limits on economists.

While Becker was principally a theorist, his major works all confront the real world and many of them contain data. His masterpiece on education, Human Capital, published in 1964, is full of facts that serve to both motivate and test his theory. His An Economic Analysis of Fertility, published in 1960, contains five data tables and confines his model’s maximization problem to a footnote. Becker never wavered in his view that the point of economic theory was to make sense of the human condition.

A second common feature of many of his most important papers is that they examine the implications of altering the budget set. Most important, Becker embraced a time budget set that accompanied the more common financial budget set. After applying Walras’s Law, this yields a single budget set where the purchase of goods and the use of time outside the workplace must be less than the income that could be earned by spending all of one’s time working. His work On the Interaction between the Quantity and Quality of Children highlights that the effective price of children increases with the amount the parents want to invest in those children. Consequently, increased demand for better-educated progeny will tend to reduce the number of those progeny.

One of my favorite examples of Becker’s wizardry with budget sets comes in his analyses of commuting costs, which will rise with income because the opportunity cost of time rises with wage levels. This produces his famous conclusion that an increase in income increases the time spent commuting if and only if [the income elasticity of demand for housing] > 1. Becker (1965) then took the fact that in metropolitan areas of the United States higher-income families tend to live further from the central city to imply that outdoor space is a ‘luxury’ (512). Subsequent work has typically found that the elasticities of land owned with respect to income are typically far less than one. Becker’s insights are vindicated, however, within a model that includes different transportation modes (e.g., cars and buses), and when we note that the rich actually typically live closer to the city center and control for the means of getting to work.

There is a final, more elusive aspect to Becker’s classic work that is particularly hard to reproduce. The basic structure of a Samuelson-inspired model starts with assumptions about maximizing agents, imposes equilibrium conditions, and then generates predictions by taking comparative statics. Becker’s papers do this, of course. Human Capital contains a particularly charming footnote about how the implication that human capital investment should rise with expected lifespan explains why circuses have been known to spend a great deal of time training elephants. Yet these papers often grasp an insight from the model that does not come from a comparative static.

The insight that employers with discriminatory tastes will always earn less than employers who just try to maximize profits is one example of such an insight. Another example of Becker’s insights based on logic rather than differentiation is his lengthy advocacy of replacing prison time, which represents pure social loss, with fines, which are a transfer, in Crime and Punishment: An Economic Approach. The Rotten Kid Theorem, put forward in Becker’s Treatise on the Family, provides another example. This theorem demonstrates that if parents are sufficiently altruistic toward their child, then even the most selfish child will care somewhat about the well-being of his parents, because their wealth translates into that child’s well-being.

In Becker’s hands, the algebra took life and became a full-blooded representation of human interaction. He got so much out of that algebra because he never thought of it as algebra. These were people in his models, and he never stopped thinking about how they would attempt to improve their own situations. His methodological greatness lay in his grasping the full power of economic model-building to add to our understanding of every facet of human existing.

The Normative Gary Becker

In the decades after World War II, the Chicago economics department became known both as a place of remarkable intellectual creativity and as a bastion of support for free markets. Becker was also one of the trio of economists who built and maintained that reputation for decades along with Milton Friedman and George Stigler. Friedman was the public face of Chicago economics, whose columns, books, and television shows were read and seen by millions. Becker and especially Stigler contributed more to the economic analysis of actual government behavior.

Since at least Adam Smith, the case for economic freedom has been made by praising the virtues of markets and noting the failures of the public sector. Smith famously wrote that every selfish, ordinary person is led by an invisible hand to promote an end which was no part of his intention, and consequently "by pursuing his own interest he frequently promotes that of