Photo:Bloomberg
Photo:Bloomberg

Gary Becker | The first economic imperialist

Gary Becker was an economist with rare imagination. He extended the domain of economic rationality to explain complex social behaviours

Gary Becker, a Nobel laureate in economics, died last week. With him ended a distinctive style of modelling behaviour, reminiscent of the insights of an Alfred Marshall blended with modern microeconomics. This is perhaps an extreme characterization. The Chicago economist continues to inspire others to think imaginatively about the complexities of the modern world.

Becker’s oeuvre was formidable. In sheer volume of output and diversity of topics, he matched other prolific economists such as Joseph Stiglitz, another Nobel laureate but with very different tastes. But then, as Becker would have said, De gustibus non est disputandum (let us not talk about tastes). In his later career he did a lot to explain tastes.

Broadly, this scholar’s intellectual trajectory can be mapped into two phases. The first from roughly 1952 to 1965 and the second from 1965 till the end. In the first phase he wrote the standard papers of economists of that time—on trade theory, monetary theory, economic irrationality and the like. The paper that marks a change in flavour was A theory of allocation of time, published in 1965. It was a harbinger of his later application of economic theory to observed behaviour ranging from crime, marriage, fertility, demand and supply of children and much more. It was in the second phase that he published brilliant papers, extending the reach of economic rationality to domains where it was thought to be limited or non-existent.

Two papers stand out. In Altruism, Egoism, Genetic Fitness: Economics and Sociobiology (Journal of Economic Literature, September 1976), he took a huge leap and analysed something as complicated as altruism from the perspective of rational economic behaviour. Edward O. Wilson’s landmark Sociobiology had been published just a year before. In that book, Wilson explored the biological origins of social behaviour, sparking a controversy that has not died till date. Becker married the genetic explanations for altruism with a rational explanation. He showed, for example, that an altruistic person could reduce his income and yet increase his utility and consumption, a result that seems paradoxical on first sight.

The second paper, published jointly with Casey Mulligan, The Endogenous Determination of Time Preference, (The Quarterly Journal of Economics, 1997) showed how factors such as wealth, mortality, addiction and uncertainty affected the discounting of future utility by a consumer. Basically, discount factors are a measure of how patient or impatient a consumer is.

The higher a discount factor, the greater the impatience. They go a long way in explaining complex behaviour such as cheating, honesty and cooperation. In financial markets, discount factors are generated by bits and pieces of information about companies, changing economic conditions and other high-frequency information. In social settings, education, the ability to imagine a better or a worse future, have a bigger role to play how one behaves. If one were to name one paper that took what formidable economists such as Irving Fisher and Eugen von Böhm-Bawerk could only dimly imagine, it is this 1997 paper.

Seen from the vantage of the 1960s, these papers are scarcely imaginable. In that age, these were matters of ill-informed sociological speculation and defied any rational explanation except cumbersome verbal descriptions. From today’s perspective, they inform the normal assumptions that economists make about human behaviour.

Becker was, thus, the founder of what was later uncharitably called the imperialism of economics. But was it really imperialism? One could say this is a matter of taste. But in reality, it is an issue of human resistance to rationality. Consider marriage and divorce—both emotional domains considered exempt from any rational calculation. It is difficult to imagine even today, when detailed optimization exercises are normal in economics courses, to understand marriage in this way.

This is what Becker had to say on the subject: “If an important set of commodities produced by households results from ‘love’, the sorting of mates that maximizes total commodity output over all marriages is partly determined by the sorting that maximizes the output of these commodities." (A Theory of Marriage: Part II, Journal of Political Economy, Vol 82, number 2, page S12, 1974). Now imagine the indifference curves for the male and the female in a marriage and check the equilibrium based on the resources they can devote in this sharing arrangement. A lot, perhaps even love, becomes explicable. There cannot be a clearer explanation of the factors involved.

The great and seductive appeal of microeconomics lies in its ability to explain a large array of behaviour using simple assumptions. Becker’s insightful papers are examples of clarity in modelling these behaviours. Admittedly, over the decades much more refined models have become available and the empirical testing of these phenomena has grown by leaps and bounds. But the world and economics in particular would have been much poorer without Becker’s imaginative work.

Siddharth Singh is Editor (Views) at Mint. Reluctant Duelist will take stock of matters economic, political and strategic—in India and elsewhere—every fortnight.

Comments are welcome at siddharth.s@livemint.com. To read Siddharth Singh’s previous columns, go to www.livemint.com/reluctantduelist

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