13 October 1992
THIS YEAR's LAUREATE HAS EXTENDED THE
SPHERE OF ECONOMIC ANALYSIS TO NEW AREAS OF HUMAN BEHAVIOR AND
RELATIONS.
The Royal Swedish Academy of Sciences has decided to
award the Bank of Sweden Prize in Economic Sciences in Memory of
Alfred Nobel, 1992, to
Professor Gary S. Becker, University of
Chicago, USA,
for having extended the domain of microeconomic analysis to a
wide range of human behavior and interaction, including nonmarket
behavior.
Gary Becker's research contribution consists primarily of
having extended the domain of economic theory to aspects of human
behavior which had previously been dealt with - if at all - by
other social science disciplines such as sociology, demography
and criminology. In so doing, he has stimulated economists to
tackle new problems.
Gary Becker's research program is founded on the idea that the
behavior of an individual adheres to the same fundamental
principles in a number of different areas. The same explanatory
model should thus, according to Becker, be applicable in
analyzing highly diverse aspects of human behavior. The
explanatory model which Becker has chosen to work with is based
on what he calls an economic approach, which he has applied to
one area after another. This approach is characterized by the
fact that individual agents - regardless of whether they are
households, firms or other organizations - are assumed to behave
rationally, i.e., purposefully, and that their behavior
can be described as if they maximized a specific objective
function, such as utility or wealth. Gary Becker has applied the
principle of rational, optimizing behavior to areas where
researchers formerly assumed that behavior is habitual and often
downright irrational. Becker has borrowed an aphorism from
Bernard Shaw
to describe his methodological philosophy: "Economy is the art of
making the most of life".
Becker's applications of his basic model to different types of
human behavior can be accounted for by distinguishing among four
research areas: (i) investments in human capital; (ii) behavior
of the family (or household), including distribution of work and
allocation of time in the family; (iii) crime and punishment; and
(iv) discrimination on the markets for labor and goods.
Human Capital
Gary Becker's most noteworthy contribution is perhaps to be found
in the area of human capital, i.e., human competence, and
the consequences of investments in human competence. The theory
of human capital is considerably older than Becker's work in this
field. His foremost achievement is to have formulated and
formalized the microeconomic foundations of the theory. In doing
so, he has developed the human-capital approach into a general
theory for determining the distribution of labor income. The
predictions of the theory with respect to the wage structure have
been formulated in so-called human-capital- earnings functions,
which specify the relation between earnings and human capital.
These contributions were first presented in some articles in the
early 1960s and were developed further, both theoretically and
empirically, in his book, Human Capital, written in
1964.
The theory of human capital has created a uniform and generally
applicable analytical framework for studying not only the return
on education and on-the-job training, but also wage differentials
and wage profiles over time. Other important applications,
pursued by various economists, include a breakdown into
components of the factors underlying economic growth, migration,
as well as investments and earnings in the health sector. The
human-capital approach also helps explain trade patterns across
countries; in fact, differences in the supply of human capital
among countries have been shown to have more explanatory power
than differences in the supply of real capital.
Practical applications of the theory of human capital have been
facilitated dramatically by the increased availability of
microdata, for example, panel data, on wages and different
characteristics of labor. This development has also been
stimulated by Becker's theoretical and empirical studies. It is
hardly an overstatement to say that the human-capital approach is
one of the most empirically applied theories in economics
today.
Household and Family
Gary Becker has carried out an even more radical extension of the
applicability of economic theory in his analysis of relations
among individuals outside of the market system. The most notable
example is his analysis of the functions of the family. These
studies are summarized in his book, A Treatise on the
Family, written in 1981.
A basic idea in Becker's analysis is that a household can be
regarded as a "small factory" which produces what he calls basic
goods, such as meals, a residence, entertainment, etc., using
time and input of ordinary market goods, "semi-manufactures",
which the household purchases on the market. In this type of
analysis, prices of basic goods have two components. The first is
comprised of the direct costs of purchasing intermediate goods on
the market. The second is the time expenditure for production and
consumption of the good in question for a specific good, this
time expenditure is equivalent to wages multiplied by the time
spent per unit of the good produced in the household. This
implies that an increase in the wage of one member of the
household gives rise not only to changed incentives for work on
the market, but also to a shift from more to less time-intensive
product on and consumption of goods produced by the household,
i.e., basic goods. Instead of an analysis in terms of the
traditional dichotomy between work and leisure, Becker's model
provides a general theory for the household's allocation of time,
as exemplified in the essay, A Theory of the Allocation of
Time, from 1965. This approach has turned out to be a highly
useful foundation for examining many different issues associated
with household behavior.
Becker has gone even further. He has formulated a general theory
for behavior of the family - including not only the distribution
of work and the allocation of time in the family, but also
decisions regarding marriage, divorce and children. As real wages
increase, along with the possibilities of substituting capital
for labor in housework, labor is released in the household, so
that it becomes more and more uneconomical to let one member of
the household specialize wholly in household production (for
instance, child care). As a result, some of the family's previous
social and economic functions are shifted to other institutions
such as firms, schools and other public agencies. Becker has
argued that these processes explain not only the increase in
married women's job participation outside the home, but also the
rising tendency toward divorce; see his article, Human Capital
and the Rise and Fall of Families (coauthored by N. Tomes),
1986.
Alongside Becker's analysis of the distribution of labor and
allocation of time in the household, his most influential
contribution in the context of the household and the family is
probably his studies on fertility, which were initiated in an
essay entitled, An Economic Analysis of Fertility, 1960.
Parents are assumed to have preferences regarding both the number
and educational level of their children, where the educational
level is affected by the amount of time and other resources that
parents spend on their children. Investments in children's human
capital may then be derived as a function of income and prices.
As wages rise, parents increase their investments in human
capital, combined with a decrease in the number of children.
Becker uses this theory to explain, for example, the historical
decline in fertility in industrialized countries, as well as the
variations in fertility among different countries and between
urban and rural areas. In particular, the highly extensive family
policy in Sweden, to which Becker often refers, suggests the
merits of an economic approach to the analysis of these
issues.
Crime and Punishment
The third area where Gary Becker has applied the theory of
rational behavior and human capital is "crime and punishment". A
criminal, with the exception of a limited number of psychopaths,
is assumed to react to different stimuli in a predictable
("rational") way, both with respect to returns and costs, such as
in the form of expected punishment. Instead of regarding criminal
activity as irrational behavior associated with the specific
psychological and social status of an offender, criminality is
analyzed as rational behavior under uncertainty. These ideas are
set forth, for example, in Becker's essay, Crime and
Punishment: An Economic Approach, 1968, and in Essays in
the Economics of Crime and Punishment, 1974.
Empirical studies related to this approach indicate that the type
of crime committed by a certain group of individuals may to a
large extent be explained by an individual's human capital (and
hence, education). These empirical studies have also shown that
the probability of getting caught has a more deterrent effect on
criminality than the term of the punishment.
Economic Discrimination
Another example of Becker's unconventional application of the
theory of rational, optimizing behavior is his analysis of
discrimination on the basis of race, sex, etc. This was Becker's
first significant research contribution, published in his book
entitled, The Economics of Discrimination, 1957.
Discrimination is defined as a situation where an economic agent
is prepared to incur a cost in order to refrain from an economic
transaction, or from entering into an economic contract, with
someone who is characterized by traits other than his/her own
with respect to race or sex. Becker demonstrates that such
behavior, in purely analytical terms, acts as a "tax wedge"
between social and private economic rates of return. The
explanation is that the discriminating agent behaves as if the
price of the good or service purchased from the discriminated
agent were higher than the price actually paid, and the selling
price to the discriminated agent is lower than the price actually
obtained. Discrimination thus tends to be economically
detrimental not only to those who are discriminated against, but
also to those who practice discrimination.
Becker's Influence
Gary Becker's analysis has often been controversial and hence, at
the outset, met with scepticism and even distrust . Despite this,
he was not discouraged, but persevered in developing his
research, gradually gaining increasing acceptance among
economists for his ideas and methods.
A not insignificant influence may also be discerned in other social sciences. Various aspects of demography constitute one example, particularly in regard to fertility, parents' efforts to ensure their children's education and development, as well as inheritance. Additional examples are research on discrimination in the labor market, and crime and punishment. But Becker has also had an indirect impact on scientific approaches in social sciences other than economics; more frequently than in the past, sociologists and political scientists work with models based on theories of "rational choice".