Economic Theory

Gary Becker showed us the power of economics

Gary Becker was one of the giants of economics. During his lifetime his contribution to the profession remained unsurpassed – and it will probably stay that way for a very long time.

Becker’s work over the last 50 years or so traversed at least a dozen separate areas of economics, including (but not limited to) the economics of the family and child-rearing; marriage and divorce; time use and household production; the economics of crime and punishment; the theory of ‘irrational’ or impulsive consumers; the theory of human capital and labour market earnings; discrimination against minorities in the labour market; competition for political influence; the effect of the (in)efficiency of the tax system on the growth of government; the influence of peer and social effects on market and non-market behaviour; rational addiction; and the analysis of markets for illegal goods and services.

The depth and breadth of Becker’s work demonstrates his conviction that the basic principles of economics could and should be used to help us understand and predict almost any aspect of human behaviour and social interaction.

When Becker began working in these areas in the 1960s, economics had already developed an analytical framework and a set of tools that other fields such as political science, sociology and criminology simply did not possess at the time. Questions that were constantly debated back and forth and which remained unresolved in these disciplines could be examined relatively easily and precisely with the standard tools of microeconomics. Becker’s genius was to draw on these tools, and to have the analytical courage to employ them where they had never been previously applied.

Because Becker’s contributions are so vast, it is impossible to do justice to his entire body of work in a single short blog post. So let me just focus on one of his most important contributions: the economics of crime and punishment.

Becker’s (1968) paper (which was cited by the Royal Swedish Academy of Sciences when it awarded Becker the Nobel Prize in Economics in 1992) assumed – contrary to the usual approach of sociologists and criminologists  ‑ that criminals were rational, purposive actors, and that they maximise expected utility subject to constraints. In other words, analytically speaking, far from being irrational agents whose behaviour would not tend to follow systematic laws and was not amenable to empirical analysis or prediction, Becker assumed that criminals were just like the hypothetical consumer and producer we encounter in standard microeconomic theory. Thus was born the modern economic approach to analysing criminal behaviour.

Taken to its logical conclusions, the simple ‘rational choice’ assumption has a number of interesting consequences. One of the simplest but most profound insights of Becker’s pioneering approach is that the ‘price’ that a criminal faces is determined by the penalty he expects to face: the probability of being punished, multiplied by the subjective disutility of the punishment (which could include the disutility due to the imposition of a monetary fine, imprisonment term, or both).

Measures which increase expected punishments ‑ such as higher monetary fines, longer imprisonment terms, or greater probability of detection – will increase this ‘price’. Standard principles of economics then suggest that as this price rises, potential criminals will substitute out of crime and into other (legal) activities. This is the ‘deterrence effect’.

A twist on the standard deterrence story is that criminals’ attitudes towards risk will matter. For example, if criminals are risk loving, then ‑ holding expected punishment constant ‑ the subjective ‘price’ that they will face will rise if the variance of the punishment falls. Hence economic analysis can inform the design of detection and imprisonment policies that are aimed reducing crime rates.

There is a lot more to Becker’s (1968) analysis than the simple deterrence effect, but the basic idea – that criminal activity would tend to respond in a systematic, negative way to increases in the size of the expected punishment ‑ inspired a huge wave of theoretical and empirical research, which is still ongoing.

Simply put, Becker extended the frontiers of economics. Economic theorists now routinely analyse criminal behaviour in a wide range of settings, and applied econometricians now routinely estimate the effect of changes in expected punishment on crime rates. The deterrence effect has been confirmed empirically in many studies across several countries. One of the more interesting and controversial applications is the empirical analysis of the effect of the death penalty on murder rates. Such research would have been impossible without Becker’s insights.

The deterrence idea can also be extended and applied to an entire range of situations in which governments attempt to enforce laws in an imperfect way, including regulation in labour markets, financial markets, and laws against cartel formation and price fixing in competition policy.

Overall, perhaps Becker’s main legacy relates to the methodology of social science. These days you will never find economists shying away from applying their analytical tools to any aspect of human behaviour ‑ everything is up for grabs. As a result, today the very best researchers in fields such as criminology and sociology simply apply the methodological approach originally developed by Becker, and which has been extended and refined by other economists and econometricians. The methodology of economics is pervasive and dominant.

In other words, thanks to Gary Becker, the imperialism of the economic way of thinking has come full circle. If we could summarise his main contribution in a single phrase, it would be that he showed us all the sheer power of economics. He will be sadly missed.

Watch Gary Becker’s 2010 IEA Hayek Memorial Lecture on iea TV.

Read Gary Becker’s IEA monograph, The Challenge of Immigration.