In today's AFR, I have an obituary for the late Gary Becker.
The man who looked at the economics of everything, Australian Financial Review, 6 May 2014
Gary Becker began to apply economics to crime when he was running late for a meeting, and had to choose whether to spend extra time parking legally – or park illegally and risk getting a ticket. After considering the size of the fine and the chance of getting caught, he decided to take the risk and park illegally. (He didn’t get a ticket.)
In the 1960s, applying economics to crime was a radical thing to do. Economics then was focused around a narrower set of questions, such as trade, inflation, wages, competition and savings. Crime was the domain of other social sciences, such as psychology and sociology, which saw criminals as having quite different motivations from the law-abiding.
Becker didn’t dismiss morality, but also argued that it was important to see criminals as being affected by the chance of being caught and the size of the punishment. His work led economists to study how crime might be affected by prison terms and police numbers, as well as by unemployment rates and inequality.
In 1976, Becker summed up his style of economics as ‘maximizing behaviour, market equilibrium and stable preferences, used relentlessly and unflinchingly’. It was an approach that he began in his 1955 PhD thesis, which was on the economics of discrimination. Becker argued that the level of discrimination we observe depends not only on people’s prejudices, but also on the market.
For example, suppose prejudiced employers are refusing to hire members of a particular group. In a competitive market, what is to stop a new firm from employing the most productive members of that group, and making more profit? Subsequent studies validated Becker’s theory by showing that as industries became more competitive, the level of racial and gender discrimination fell.
Becker’s work not only won him the Nobel Prize – it encouraged other economists to embark on what its proponents called ‘the economics of everything’ and its critics dubbed ‘economic imperialism’. Popularised in Steven Levitt and Stephen Dubner’s Freakonomics books, the economics of everything has seen economics confidently pushing into topics that were formerly the exclusive domain of sociologists, education researchers, and political scientists.
In my own work as an economist at the Australian National University, Becker’s example was extraordinarily influential. During that time, I wrote papers that looked at the impact of child gender on divorce, the Baby Bonus on birth timing, and obesity on wages. With a suite of co-authors, I looked at trust, media bias, political betting markets and ethnically-identifiable names. Indeed, I even analysed whether beauty affected the electability of federal politicians, a study that makes me uneasy now that I’m a datapoint rather than a datacruncher.
The strength of modern microeconomics as a discipline comes from a marriage of two things: a Becker-like willingness to apply theory to new areas, and the explosion in new data. Chat to empirical researchers in the world’s top economics departments, and they’ll tell you how they’re coding up uncommon surnames to look at social mobility, satellite imagery to look at growth in Africa, or wine magazines to see whether those who advertise get better reviews.
Becker won his Nobel Prize in 1992 not merely for providing insights into the discipline, but for expanding its scope. As well as crime and discrimination, he peered into the family – using economic analysis to consider how families share the work, choose how many children to have, and decide how much to invest in their children. In 1964, he posited the then-controversial notion that we should think of education and skills as a form of capital, productive in the same way as factories and tools. If you’ve ever used the term ‘human capital’, you’re channelling Gary Becker.
As a pivotal member of the University of Chicago’s economics department, Becker’s political preferences were a touch to the right of mine. But only a fool listens solely to people on his side of politics. I found it hard to read anything by Becker without gaining new insights – even where I disagreed.
For the past decade, Becker co-wrote a public policy blog with a fellow economist, judge Richard Posner. In his final three entries (written in February and March of this year), Becker argued that the US should end its embargo on Cuba, that America should adopt a HECS-style system of income-contingent university loans, and that marijuana should be decriminalized. Each bears the trademark Becker approach: big issues, lucidly articulated, with a controversial conclusion.
Andrew Leigh is the federal member for Fraser, and a former professor of economics at the Australian National University. He is the author of The Economics of Just About Everything (forthcoming, Aug 2014).
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