Monday, November 24, 2014

An Economist for the Ages

STANFORD – Like many others, I first met the Nobel laureate economist Gary Becker, who died earlier this month, by reading his seminal works Human Capital and The Economics of Discrimination. Several dozen outstanding economists have won the Nobel Prize in Economics since Sweden’s central bank began awarding it in 1969, but Becker is among the handful who have fundamentally transformed how economists (and social scientists more generally) think about a wide array of important economic issues.

Becker was remarkable for applying his penetrating insights, especially concerning economic incentives, to issues that had been mostly underexplored by economic analysis. This included viewing education as an investment, asking who gained and lost from discrimination, examining how families allocated their time, and explaining women’s fertility decisions.

His research on any one or two of these issues might well have won him a Nobel Prize on its own; to develop important insights into such a wide range of questions is truly remarkable. He amply deserved the rare accolade accorded to him by his long-time mentor and friend, the late Milton Friedman (himself a Nobel laureate who, like Becker, transformed economists’ thinking in many areas). Becker, declared Friedman, was “the greatest social scientist who has lived and worked in the last half-century.”

Becker’s constant focus was on the main forces driving human behavior and people’s interaction both in markets and in non-market activities. Early in his career, his work was often criticized for being overly dependent on economic analysis in dealing with big social problems, sometimes touching raw nerves on very sensitive issues.

For example, the notion of modeling children as a durable good seemed crass to some but led Becker to analyze the allocation of parental time and financial resources. He showed how this insight could predict trends in female labor-force participation and birth rates, and led to the policy conclusion that the best way to lower high birth rates in poor countries was to educate women. Better education would raise women’s wages, making staying at home more costly, and would lead to higher female labor-force participation and a voluntary decline in birth rates.

This analysis reflected Becker’s deep belief in the power of incentives to lead people, in pursuit of their own interest and interacting within and outside markets, to achieve great things with minimal government input. In this sense, he was very much in the tradition of the great eighteenth-century Scottish economist Adam Smith, whose writings Becker regarded as one of the greatest influences on his career.

Equally off-putting to some was the notion that education was an investment – that an important reason to pursue post-secondary schooling, for example, was to raise one’s future earnings. The education establishment recoiled at what it considered a less-than-noble reason to seek higher education.

And the idea that one could model the economics of racial discrimination as rational, if deplorable, behavior and trace out the implications was sometimes misconstrued as paying insufficient attention to the character and behavior flaws of those who discriminate.

Truth will out, as Shakespeare reminds us, and eventually even Becker’s harshest early critics came around to appreciating his deep insights and conclusions. For example, the education industry now touts the economic value of a college degree. And governments around the world conduct vast surveys of households’ time use.

Few economists today work on these and related problems without building on Becker’s foundations or laboring under his strong influence. On a personal note, some of my early research on the best way to tax families and on the effects of taxes on human-capital investment built on Becker’s insights.

Becker was a rarity among economists in recent decades. He often looked at broad, long-range trends and data, comparing things like family structure, number of children, and women’s roles in the home and the market across many decades and even from one century to the next, or across very different societies. Cumulatively, his work yielded powerful conclusions, not only explaining trends in birth rates, but also showing that preferences for discrimination led to a tradeoff with profits. Workers who did not face discrimination in sectors where animus was rife would win, while the losers would include not just those directly being discriminated against, but also workers forced to compete when those workers sought employment elsewhere.

Becker relied on rigorous standards in evaluating government policy. He knew, and documented, that government solutions to market failures could themselves fail, with the cure turning out to be worse than the disease. He sought to compare what was likely to be the actual government program, tax, or regulation to the problem it purported to solve, not to the idealized textbook solution academics favor but that is rarely adopted.

The basic economic analysis that Becker developed was applicable everywhere, for everyone, and for all time. Conditions in the US in the nineteenth and late twentieth centuries – or in North America and Europe and developing Asia, Africa, or Latin America – might differ; but the same economic models could be used to understand changing events and circumstances.

In this sense, Becker was a great economist and a truly remarkable social scientist. His work stands as a testament to the power of deep thinking and the courage to follow it to its logical conclusions. That seems especially relevant in today’s world, in which technology tempts us merely to scratch the surface of so many issues. He was a tremendous colleague at the Hoover Institution, a true and supportive friend, and admirably humble despite his incredible intellectual influence. He will be sorely missed.

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    1. CommentedDavid Lang

      Becker's "Human Capital" is still as relevant as was when it was published back in 1967

    2. CommentedProcyon Mukherjee

      Gary Becker, if not for anything else, would be remembered for his Rotten Kid theorem; incentive pay structures of our societies could derive so much from this. Becker's thesis on investment in worker skills (both on the job and specific skills) have been replicated by the Japanese so very well; for the betterment of the overall system "the hire and fire" policy has been found to be of less use for the society therefore.

        CommentedYoshimichi Moriyama

        Mr. Mukherjee,
        I do not have enough knowledge to argue with you. Japan's economic success owes a lot to education, and education starts within a Japanese family, and it is also a reflection of or conditioned by Japanese society and culture, which determine a Japanese family and upbringing of children.

        Western Japanologists once jokingly called Japan a only communist country that made success, success in the sense that most ideals of a communist society were best realized such as freedom of speech, a high level of living standard with no big income devide, a political system of plural parties, etc., owing all to education. But this is not because Japanese learned from Becker's Rotten Kid. A Japanese family was a communist family. A rotten child was usually encouraged to behave well.

        I agree that the hire and fire system would not have worked very well, but Japanese economy has been increasingly enmeshed in 'globalization,' where old virtues are being broken and I feel more Japanese people live in more confusion and frustration

        CommentedYoshimichi Moriyama

        Hum? Hum. Here is an Indian sheep astary. By the way, aren't you interested in Hirohito? If you are, I would like you to read my comments to Nouriel Roubini/Global Ground Zero in Asia/

    3. CommentedYoshimichi Moriyama

      Throwing light of ecnomics thinking on a thing reveals an image that would have been invisible, but one major trouble with this ray of tremendous resolving power is that it is dangerously radioactive for a layman to use if he/she does not have enough knowlidge. I am sorry I am one such layman as has hardly any knowledge of economics and I know I am entering a dangerous zone, but as economy is too serious a matter to be left entirely to economists alone, I will venture into the off-limits zone.

      A doctor I knew was so popular with people that he had to take in so many outpatients daily that he said he did not want money but more time for himself. Henry Ford had worked hard and earned billions of dollars but suffered from chronical stomach ache and his doctor told him to eat only bread and milk. Ford said, "I don't want money. I want to eat steak."

      Clark Kerr, president of California University came to Japan a few decades ago. He was emphatic in a discussion in Japan on the importance of education in classics. He said that we lived in a difficult time but that classics would help us to alleviate it at least a little.

      We once thought that the wealthier we would be, the more freedom we would have liberated from the need of toil. The fact is that the richer we are, the more stressful life we are leading and the more painful stomach ache we suffer from like Henry Ford, with the result that economics thinking and calculaition have more insidiously taken hold of all aspects of our life.

      Education has become so much a means of income calculation. A lower birth rate can be seen in terms of economic benefit, but it can be seen also in terms of intellectual enlightenment or/and liberation of social prejudice and application of contraceptives. There are women who do not want to work outside home but to stay home if possible, and they should not be blamed for that, though I admit at the same time that some women should be encouraged to take job training.

      One taint with this article is, if a layman is allowed to say anything he/she likes to say whimzically, that Prof. Milton Friedman was quoted in a positive context.