Gary Stanley Becker

{draw:frame} THIS ASSIGNMENT IS WRITTEN FOR: PROF. ABDULLA LECTURER’S NAME VAISHNAVI GOPALAKRISHNAN STUDENTS NAME STUDENT ID 00114 MODULE * * : MANAGING ENVIRONMENT TITLE * * : INDIVIDUAL ASSIGNMENT *HAND-OUT-DATE : 06th* SEPTEMBER 2009 LECTURER * * : PROF. ABDULLA HAND-IN-DATE : 09*th* NOVEMBER 2009 MASTER OF BUSINESS ADMINISTRATION COHORT 14 SEM 1 ASSIGNMENT DECLARATION FORM I hereby declare that the attached assignment is my own work and understand that if I am suspected of plagiarism or another form of cheating; my work will be referred to the programmed director who may as a result recommend to the Faculty of business that my enrolment in the programmed be discontinued. SIGNATURE: _ NAME : VAISHNAVI GOPALAKRISHNAN STUDENT NO : 00114 ADDRESS : S1-12-19, SUTRAMAS APARTMENT, PUCHONG. TEL NO : 010- 2740280 SUBJECT : MANAGING ENVIRONMENT DUE DATE : 06th NOVEMBER 2009 LECTURER : PROF. ABDULLA ASSIGNMENT TITLE : INDIVIDUAL ASSIGNMENT DATE SUBMITTED : 09th NOVEMBER 2009 ACKNOWLEDGEMENTS* * * I would like to begin this undertaking by thanking GOD, the most glorified, for providing me with all the strength and courage to complete this report successfully and on time. I am also extremely grateful to my ‘Managing Environment’ lecturer, PROF. ABDULLA for his time, patience and guidance throughout the making of this report. TABLE OF CONTENTS 1. 0 BIOGR APHY OF GARY STANLEY BECKER-ECONOMIC NOBLE LAUREATE: {draw:frame} BIRTH OF GARY STANLEY AND HIS EARLY STAGES IN LIFE: Gary Stanley Becker is an American economist and a Nobel laureate. He was born on December 2, 1930 in Pottsville, Pennsylvania. He did his elementary school and high school in Brooklyn. Until age sixteen he was more interested in sports than intellectual activities, but he had to choose one among them and finally decided to choose education, although he was better at sports. BECKER’S FAMILY: His father is a business man. His father had left school in Montreal after the 8th grade because he was eager to make money. His mother also left after the 8th grade because girls were not expected to get much education. He has two sisters, Wendy and Natalie, and one brother, Marvin. He married for the first time in 1954, and has two daughters from that marriage, Judy and Catherine He married for the second time in 1980 to Guity Nashat as his first wife died in 1970. This gave him two stepsons, Michael and Cyrus, to go with two daughters. Guity is the one who overcame his reluctance to do the Business Week columns. She is an historian of the Middle East with professional interests that overlap his own: on the role of women in economic and social life, and the causes of economic growth. The personal and professional compatibility she provided has made his life so much better. ROOT CAUSE OF THE REASON WHY BECKER ENTERED INTO THE ECONOMICS DEPARTMENT: His father encouraged him with political and financial news. After his father lost most of his sight, he had the task of reading him stock quotations and other reports on financial developments. Perhaps that stimulated his interest in economics, although he was rather bored by it. He had many lively discussions in the house about politics and justice. This explains why by the time he finished high school, his interest in mathematics was beginning to compete with a desire to do something useful for society. These two interests came together during his freshman year at Princeton, when he accidentally took a course in economics, and was greatly attracted by the mathematical rigor of a subject that dealt with social organization. HIS ACADEMIC EXCELLENCE: Becker completed his B. A in economics at Princeton University in the year 1953. He took a few extra courses during degree, and he chose reading courses in modern algebra and differential equations. He completed a Ph. D. at The University of Chicago in 1955. HOW THE INVOLVEMENT IN MATHEMETHICS HELPED IN HIS PROFESSION: Till now, his heavy investment in mathematics at Princeton prepared him well for the increasing use of mathematics in economics. He began to lose interest in economics during his senior (third) year because it did not seem to deal with important social problems. He contemplated transferring to sociology, but found that subject too difficult. Fortunately, he decided to go to the University of Chicago for graduate work in economics. HIS WORK WITH MILTON FRIEDMAN: He worked with Milton Friedman in 1951 on microeconomics which was the root cause of the excitement about economics. He came to know that economic theory was not a game played by clever academicians, but was a powerful tool to analyze the real world. His course was filled with insights both into the structure of economic theory and its application to practical and significant questions. That course and subsequent contacts with Friedman had a profound effect on the direction taken by his research. He used many of the economist’s theories in his various branch of research work. BECKER’S ACHIEVEMENTS: He published two articles in 1952, based on his research at Princeton. He published an article in 1957, which was written along with Friedman and a book based on his Ph. D. dissertation. He wrote a book on human capital which was his first research project for the National Bureau of Economic Research. He also wrote frequently cited articles on the allocation of time, crime and punishment, and irrational behavior. He began a workshop at Columbia on labor economics and related subjects. Becker along with George Stigler wrote two influential papers together: a controversial one on the stability of tastes, and an early treatment of the principle-agent problem. He had published a short paper on economics of politics in 1958. In the 1980s he published two articles that developed a theoretical model of the role of special interest groups in the political process. A series of articles in the 1970s culminated in 1981 in A Treatise on the Family, and a greatly expanded edition was published in 1991. Until 1985, he had published only technical books and technical articles in professional journals. He was asked to write a monthly column for Business Week magazine in about 800 words per column without using any technical jargons which interested the business and professional readers of the magazine. BECKER’S HONOURS: He has won the Seidman Award from presidency of the American Economic Association. He has won the first social science Award of Merit from the National Institute of Health. Becker won the John Bates Clark Award of the American Economic Association in 1967 and was president of that association in 1987. He was awarded the Nobel Prize in Economics in 1992 He received the United States' Presidential Medal of Freedom in 2007. HOW DID HE APPLY ECONOMICS TO THE SOCIAL ISSUES? The book which was published in 1957 contains the first systematic effort to use economic theory to analyze the effects of prejudice on the earnings, employment and occupations of minorities. It started him the path of applying economics to social issues, a path that he has continued to follow. The book was very favorably reviewed in a few major journals, but for several years it had no visible impact on anything. Most economists did not think racial discrimination was economics, and sociologists and psychologists generally did not believe he was contributing to their fields. However, Friedman, Lewis, Schultz, and others at Chicago were confident that he had written an important book. The reason for him to continue in economics was the people who supported him with willingness. HIS FIRST STEP IN TO THE PROFESSIONAL LIFE: After his third year of graduate study he became an Assistant Professor at Chicago. He had only few classes of teaching, so he could concentrate mainly on research. However, he felt that he would become more independent if he left the institution and concentrate only on the research. After three years in that position, he withdrew much larger salary from Chicago to take a similar appointment at Columbia combined with one at the National Bureau of Economic Research. For twelve years he divided his time between teaching at Columbia and doing research at the Bureau. HIS EXPERIENCE DURING THE DOCTORATE DEGREE IN CHICAGO UNIVERSITY: The workshop on labor economics and related subjects involved transplanting the workshop system of supervising doctoral research from Chicago – where it originated. After a few years, Jacob Mincer joined the Columbia department and became co-director of the workshop. They had a very exciting atmosphere and attracted most of the best students at Columbia. Both Mincer and Becker were doing research on human capital before this subject was adequately appreciated in the profession at large, and the students found it fascinating. They were also working on the allocation of time, and other subjects in the forefront of research. HIS FOCOUSED AREA OF WORK: Mainly he worked on the family after returning to Chicago. He had much earlier used economic theory to try to understand birth rates and family size. He now began to consider the whole range of family issues: marriage, divorce, altruism toward other members, investments by parents in children, and long term changes in what families do. He has tried not only to understand the determinants of divorce, family size, and the like, but also the effects of changes in family composition and structure on inequality and economic growth. Most of his research on the family, and that by students and faculty at Chicago and elsewhere was presented at the Workshop in Applications of Economics that Sherwin Rosen and Becker run. WAS HIS WORK BEEN RECOGNISED BY OTHER ECONOMISTS? For a long time his type of work was either ignored or strongly disliked by most of the leading economists. He was considered way out and perhaps not really an economist. But younger economists were more sympathetic. They may disagree with his analysis, but accept the kind of problems, studied as perfectly legitimate. HIS SECOND STEP IN TO THE PROFESSIONAL LIFE: In 1983, the Sociology Department at Chicago offered him a joint appointment. He was happy to accept because this was an outstanding department. James Coleman and Becker shortly thereafter began an interdisciplinary faculty seminar on rational choice in the social sciences that has been far more successful than they anticipated. 2. 0 * *BECKER’S CONTRIBUTION TO ECONOMICS: MAJOR APPLICATION OF BECKER’S MODEL TO DIFFERENR TYPES OF HUMAN BEHAVIOUR: Investments in human capital; Behavior of the family (or household), including distribution of work and allocation of time in the family; Crime and punishment; and Discrimination on the markets for labor and goods. INVESTMENTS IN 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 wages 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. 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 â€Å"small factory† which produces what he calls basic goods, such as meals, a residence, entertainment, etc. , using time and input of ordinary market goods, â€Å"semi-manufactures†, which the household purchases on the market. In this type of analysis, prices of basic goods have two components. st is comprised of the direct costs of purchasing intermediate goods on the market. 2nd is the time expenditure for production and consumption of the good in question for a specific good, Time expenditure ? wages ? 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. 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. Gary Becker's ideas have dominated research in the economics of the family, shaping the tools we use, the questions we ask, and the answers we give. The foundational assumptions of Becker's economic approach to the family — maximizing behavior and equilibrium — as well as such primary auxiliary assumptions as household production and interdependent preferences, are now widely accepted not only by economists but also by family sociologists, demographers, and others who study the family. Yet the interesting and provocative implications of Becker's economic approach to the family do not follow from the foundational assumptions or from the primary auxiliary assumptions. Instead they depend on contested auxiliary assumptions to which neoclassical economics has no commitment and which lack empirical support. CRIME AND PUNISHMENT: The third area where Gary Becker has applied the theory of rational behavior and human capital is â€Å"crime and punishment†. A criminal, with the exception of a limited number of psychopaths, is assumed to react to different stimuli in a predictable (â€Å"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. Becker's analysis of time allocation is by no means confined to legal activities; it includes various forms of crime. In a seminal paper (Becker, 1968) it was argued that crime is not an aberration outside the scope of rational analysis, but rather the predictable outcome of opportunities for gain. He argues that a decision to engage in illegal activity is the outcome of an individualistic calculus; benefits and costs (both monetary and non-monetary) are weighed up, and the individual makes a decision which reflects the expected balance of them. One way to conceptualize decisions of this kind is as a rather special kind of investment activity. Many of the crucial decision variables-probability of apprehension and conviction, likely punishment, alternative earnings possibilities in legitimate occupations – are empirically observable, and hence their effect on observed crime rates can in principle be tested. As usual Becker's contribution has mainly been to analyze and suggest possibilities for hypothesis testing, but his graduate students and other interested economists have been quick to pick up the challenge. In the last decade a good deal of evidence has been accumulated to support the plausibility of Becker's contention that criminal behavior responds to changes in costs and benefits. Unusually for Becker, the argument is couched throughout in normative terms. The model of criminal behavior put forward is devised to be used in conjunction with cost functions for law enforcement and a simple social welfare function in order to generate conclusions about the optimal levels of policy variables such as the extent of enforcement, type of punishment and perhaps even what should e a crime. Becker is not, however, arguing for major policy changes. Given the behavioral responses to legal and illegal incentives which he discerns, and given the costs and benefits of enforcement and punishment programs, he suspects that the authorities, at least in the USA, get things roughly right – perhaps a surprising conclusion, given his scepticism of the efficacy of the government action in other spher es. There seem to be two main weaknesses to Becker's arguments. The first is the assumption of social homogeneity implicit in the notion of a social welfare function, when it is widely held (not least among economists) that some groups of the population have greater political power than others, leading to legislation and enforcement patterns which reflect the influence of sectional interests. Secondly, it is difficult not to feel that Becker's enthusiasm for the economic approach does tend at times to run away with him. Although differences in incomes and assets, alternative earnings possibilities, probabilities of conviction and so forth are much more important in determining behavior than they are often given credit for, there are surely variations in attitudes and degrees of honesty which affect the propensity to commit crimes even among individuals facing similar economic circumstances. While Becker would accept this, by implication he regards them as not particularly significant, possibly assuming that such variations in ‘tastes' are randomly distributed. 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 â€Å"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. Although Becker's writings range far and wide; we can trace a logical development and a methodological consistency in his work. The signs are there in his first major publication, The Economics of Discrimination (Becker, 1957, 1971). This monograph, based on his doctoral thesis, appeared when Becker was 27. By his own account, it was ‘greeted with indifference or hostility' by fellow economists. Given the intellectual atmosphere of the mid-1950s this is probably explicable. The book starts from the position that economic inequality between two groups – blacks and whites, women and men or whatever -is not of itself evidence of discrimination in a market economy. In such an economy, variations in earnings, for instance, can be expected to occur between individuals or groups on a systematic basis, reflecting variations in marginal productivity and hours worked. What is needed is to separate out differentials due to variations in such factors as education, skills and job experience, in order to leave a residual due to ‘pure' discrimination, Becker's primary concern. To this end, Becker defines a ‘market discrimination coefficient', Which in principle would measure the extent of this residual? What Becker is attempting to show is that ‘pure' discrimination is simply a special kind of taste which, like the taste for apples or (Becker's pre-Women's Lib example) Hollywood actresses, can be analyzed in economic terms. As with these other commodities, ‘pure' discrimination's consumption is conditional upon variables such as income and price. The – highly controversial – point that Becker is making is that discrimination in this sense is not, as is usually assumed, a means of raising the discriminator's money income, but actually imposes costs on the discriminator as well as the party discriminated against. Where discrimination exists, then, the discriminator is evidently willing to pay these costs in exchange for the benefit of indulging a taste. The argument rests on a clever analogy with international trade. Suppose there are two economies, Whiteland and Backland, which initially do not engage in trade. Within each country, however, perfect competition is the rule. This means, as the neoclassical textbooks tell us, that the incomes of owners of factors of production will reflect relative factor scarcities. Thus in Whiteland, where labor is assumed to be scarce and capital abundant, wages will be relatively high and rates of profit will be relatively low. By contrast, Backland (where labor is abundant and capital scarce) is characterized by low wages and high rates of profit. If trade and factor mobility are now permitted, theory predicts that labor and capital movements will occur, so that the long-run result is that profit rates and wage rates will each be equalized in the two economies. As a result of resources moving from areas where their marginal productivity is low to those where it is high, total ‘world’ output is increased. The analogy is obvious, and the conclusion important: just as both of these ‘countries' can in principle gain from trade and mobility, so can both blacks and whites in an economy gain from the absence of discrimination, which in this context seems equivalent to some form of trade barrier, 3 or, to put it differently, both blacks and white can lose from discrimination. Lack of space precludes the detailed examination of the implications of Becker's argument, and indeed of the many objections which have been raised to it. Most of these objections have centered on the assumption of perfect competition in his model: if such a condition is dropped, optimal tariff theory suggests that in some cases discrimination (while reducing total output) could increase the income of the discriminating group, which would undermine Becker's whole analysis. Becker, however, is clearly aware of this criticism, and it is instructive to see why he must reject it. He believes that so pervasive a phenomenon as discrimination cannot be adequately explained by market imperfections – for market imperfections, most Chicago economists agree, disappear in the long run. In Becker's first important publication, two central features of his work: the insistence on using given preferences, costs and incomes to define a situation where individuals make decisions, and the concern with long-run equilibrium. THE ECONOMIST AS EMPIRE-BUILDER: Few contemporary economists have done as much to extend the generality and range of economic theorizing as Professor Gary S. Becker of the University of Chicago. With the exception of one or two papers written as a graduate student, all Becker's publications have applied economic reasoning to aspects of human behavior which have usually been classified as outside the scope of economics, at least since the discipline started to give itself scientific airs in the latter years of the nineteenth century. These scientific pretensions were associated with the introduction of mathematical techniques from the fields of physics and mechanics, often by professionals trained in those disciplines; many economists then, and not a few since, resented the intrusion of these alien elements. Similarly, Becker's intrepid expeditions into the jealously-guarded territories of sociology, political science, demography, criminology and biology have encountered considerable resistance. While it is too early to forecast the ultimate outcome of these imperialistic excursions, the increasing numbers of economists eager to join Becker in search of plunder have already forced some of the initially-scandalized natives to come to a modus Vivendi with the intruding barbarians. Areas for co-operation rather than conflict are earnestly being sought, as we shall note later. FERTILITY: Becker's next important foray into sociological country was to be a paper on the economics of fertility written for the National Bureau of Economic Research (1960b). Although political economy was once closely involved with demography (witness Malthus's famous essay), for much of this century the study of population was firmly in the hands of sociologists and un-theoretical number-crunchers. A few tentative attempts had been made to relate birth rates to economic variables, but Becker's paper went way beyond this. Here the decision to have children is firmly incorporated within the familiar framework of neoclassical economics. More particularly, Becker adopts the startling and controversial position that children are in important respects analogous to consumer durables such as automobiles, TV sets and dishwashers; thus the economic theory which has proved fruitful in relation to these commodities can be applied equally to human beings. He argues that, at least under modern conditions, the raising of children involves a net cost to their parents. Yet people do continue to have children, despite the availability of effective contraception. Thus if people choose to have children it is because they obtain sufficient utility to compensate for the costs involved. These costs include such obvious things as food, clothing and schooling. Perhaps more importantly, however, they also include costs in terms of parental time, a scarce commodity which has alternative uses. Indeed, if one alternative is to use this time in the labor market, a value (its ‘opportunity cost' in the jargon) can be put on it which will indicate that a very large proportion of the total costs of childrearing is accounted for by parental time. The existence of these net costs indicates that children are some form of consumer good; their spread over time indicates we are dealing with a consumer durable. They therefore have to compete with other consumer durables for a limited share of the household budget: more children means less hi-fi equipment or a smaller car. Once this rather bizarre comparison is admitted, it opens up the likelihood that decisions to have children will be affected by such variables as their ‘price' (in terms of alternatives foregone) and the size of the household budget. As we have indicated, Becker accepts Friedman's view that the usefulness of a hypothesis depends on its ability to explain or predict. So how does Becker's approach fare in this respect? Straightaway we are confronted with a problem. Broadly speaking, the demand for consumer durables tends to rise with income; on Becker's reasoning we might expect the demand for children to follow a similar pattern. Yet there is much evidence to suggest that family size declines with income. How does Becker handle this apparent refutation of his approach? Are babies’ inferior goods? One argument Becker offers in order to resolve this difficulty is interesting in the light of his later work. This is the argument that the cost of rearing children tends to rise with family income, largely as a result of the higher opportunity cost of parental time. At any particular moment better-off families tend to be better educated and thus to have greater earning power; over time, all earnings tend to rise as income rises. The argument can be illustrated diagrammatically. In Figure 1, an increase in income-illustrated by a parallel outward shift of the budget constraint -leads to increases in the ‘consumption' of both competing consumer durables and babies, if the relative price of these commodities remains constant. At the point of tangency between a new (higher) indifference curve and the new budget constraint, more babies (B2) are chosen. If, however, the increased income results largely from higher wages paid to family members (a highly plausible assumption), this will raise the opportunity cost of time spent on rearing children, and thus increase their relative price. The budget constraint pivots, as in Figure 2, and the new preferred combination of babies and other consumer durables may involve a smaller desired family size. draw:frame} It is ingenious, if not altogether convincing There is a suspicion that evidence Becker uses to support his arguments is highly selective, and moreover some of the generalizations he makes are amenable to alternative interpretations: for instance the observed inverse relation between education and family size could have nothing to do with the opportunity cost of parental time, but a lot to do with the different values and attitudes education might be expecte d to inculcate. However Becker's approach is more plausible in relation to short-term variations in fertility; economic factors seem far more significant here than ad hoc changes of tastes. In his approach empirical generalizations are linked to a broader theoretical framework; this is why, like it or not, it has stimulated so much further work in this field. THE ALLOCATION OF TIME: We have seen something of the emphasis which Becker places on the value of time in his analysis of economic behavior. This concern led to an important article which generalized the question of time allocation and simultaneously provided a basis for the reformulation of standard Consumer theory (Becker 1965). Before Becker, the established way to deal with time in the context of consumer theory was to concentrate on a simple dichotomy between work and leisure. Work meant paid work in the labor market, by means of which individuals were able to obtain market-produced goods and services, which were the objectives of economic activity. In this context, leisure clearly has an opportunity cost, the goods and services foregone by not working. If individuals choose not to work all the hours they could, this must be because leisure itself is a ‘good', some of which is consumed in preference to other goods. Thus leisure can be incorporated into standard analysis very easily, and from the time spent on leisure, we can deduce its complement, the time spent working. Thus the supply of labor is linked to the demand for goods. Becker however takes the view that time has more than two uses. Certainly, as in the traditional approach, time can be used in the labor market. It can also, however, be used in many types of non-paid work (housework, do-it-yourself etc. . Furthermore all consumption takes time too. He suggests therefore that we abandon leisure as a separate category: all ‘leisure' involves some ‘consumption' and all ‘consumption' involves some ‘leisure'. Instead of a choice between consumer goods and leisure, the relevant choice is taken to be that between various ‘consumption activities ' which use different combinations of market-produced goods and services (which have to be purchased with funds largely acquired through the sale of labor time in the market) and time spent in â€Å"household production†. Becker argues that instead of a choice between paid work and leisure we should analyze a choice between ‘high time' activities (like a home-prepared meal) and ‘low time' activities (like the purchase and consumption of a hamburger). The choice set is ultimately constrained by the limited time we have available, and the productivity of this time in its various uses. If all our available time were to be allocated to paid work, the value of the time in this use is termed (on Friedman's suggestion) ‘full income'. Some of the ‘full income', however, will normally be used for consumption and domestic production, using as complementary inputs in the domestic production process goods which are purchased with the proceeds of paid work. All the predictions obtained from the standard theory can be obtained in this framework as well; for instance changes in the wage rate alter the slope of the full income budget constraint, while increases in non-work income shift the constraint outwards – in each case we would expect the allocation of time to be affected whether we apply the Becker analysis or the traditional approach. But in addition Becker's method allows further influences to be incorporated. Thus a change in the technology of household production – the development of labor-saving gadgets -economizes on time spent in domestic work. People buy more gadgets and ‘spend' less time on housework; the gadgets can of course be purchased by ‘spending' some of the time saved working in the labor market. The relevance of this analysis to such phenomena as the rising labor-force participation of married women should be clear. Similarly transport improvements economize on time and can be expected to affect labor supply. The approach also has the incidental benefit of providing a theoretical basis for the classification of goods as substitutes or complements: when goods are no longer seen as the final sources of utility but rather as inputs in a household production process, it is rather easier to see why the consumption of certain commodities is linked. {draw:frame} Figure 2: The ends-means spectrum reflected by Becker’s work Becker’s theory of time and consumption does establish new theory, in that it proposes an alternate model to the then-accepted economic model of consumption (Becker proposes consumption be treated as a form of production). In this regard, Becker breaks the ground for new theory. MARRIAGE: Another of Becker's path breaking ventures is his development of an economic theory of marriage (1973, 1974), part of a growing literature on the economics of the family stimulated by his work and that of Theodore Schultz-on fertility and human capital. Once Becker's method is understood, the relevance of his approach to the institution of marriage becomes apparent. Here is a major and persistent phenomenon with ramifications in every economy. Whatever the precise legal arrangements, the majority of adult humans have ‘married' throughout recorded history. Individuals (or their parents in some cultures) choose amongst competing potential spouses in an attempt to maximize utility, measured in Becker's terms by the consumption of household-produced commodities of the kind discussed earlier. The ubiquity of marriage suggests to Becker that male and female labor is complementary in certain types of household production, notably the rearing of the partners’ own children. An individual marries when the expected gain from a partnership exceeds the expected cost of marriage in terms of the alternatives foregone (staying single or marrying the next best alternative spouse). Because of imperfect information, individuals engage in search. This is costly, and therefore individuals may eventually settle for spouses with less than ideal characteristics. Or they may engage in bargaining to achieve compensatory concessions; these may include sums of money (dowries etc. ) or behavioral commitments (promises to give up fishing). In Becker's view, however, there is sufficient freedom of choice and sufficient information to ensure an equilibrium where there is a Pareto-optimal sorting of partners (any rearrangement of couples could only increase some individuals' utility at the cost of reducing that of other individuals). The use of the household production approach as an analytical framework may seem simply an economist's joke, an intellectual game; certainly some of its conclusions seem banal. But it does throw up interesting predictions which other methodologies do not. For instance the approach predicts that gains from marriage-and therefore, presumably, the probability of marriage -will be greater for couples between whom there is a considerable variation in earning power, basically because there are greater ‘gains from trade' within such a marriage if one partner specializes in paid work and the other in household production. The analysis is developed further to incorporate non-selfish motives for entering marriage. ‘Caring' for the partner is introduced: in the model this means that the individual's utility function includes the partner's consumption as well as his or her own. This is shown to affect the allocation of output produced by the marriage and increase the potential gains from it. The analysis is also linked to earlier work Becker produced on charity and social interaction. Again the model is not tested in a systematic way and we occasionally get the impression that the anecdotal ‘evidence' adduced is of slight value. However Becker has produced another paper which tests some of the ancillary predictions of the theory with reference to data on marital instability. For instance, the approach suggests that major changes in the variables on which potential spouses make their decisions to marry will make them reconsider their decisions; if divorce is cheap, marital dissolution may follow. This appears to be the case. For example, where earnings are unexpectedly higher or lower than originally anticipated, the probability of divorce increases. The amount of time spent in search is also related to marital instability; those marrying young, on the basis of limited information about the characteristics of their partner and available alternatives are particularly liable to divorce. There is, then, something to be said for the approach. While it cannot explain all aspects of marriage, it does at least suggest that human mating behavior is less tightly constrained by biological and institutional factors than is often suggested. THE METHODOLOGY: From the material surveyed so far it is possible to infer the common elements of Becker's methodological program. He has however provided us with an essay (Becker, 1976b) which spells out his approach and offers a vigorous defense of it. In his view, his method is applicable to all human behavior; its core is ‘the combined assumptions of maximizing behavior, market equilibrium and stable preferences, used relentlessly and unflinchingly' (Becker, 1976b, p. 5). Consider these assumptions in turn. MAXIMISATION: The individual, we have seen, is assumed to maximize utility subject to a budget constraint which, although taking a different form to the traditional one, is nevertheless closely related to it -indeed, subsumes it as a special case. It is important to note that this is not necessarily ‘rationality' in the everyday sense of the term: it is not necessarily self-interest, nor are the sources of utility necessarily market goods and services. Becker has suggested that social distinction can be a source of utility, and he has gone so far as to claim (Becker, 1962) that even apparently random behavior by individuals can lead to the basic prediction of downward-sloping demand curve which is at the heart of economic reasoning. Behind the maximizing impulse, Becker has suggested, there ultimately lies the principle of natural selection. In a paper (Becker, 1976a) concerned with the origins of altruism he has expressed approval of the new science of sociobiology, arguing that a synthesis of economic reasoning and natural selection can explain the dominance of maximizing behavior. He also suggests that the basic tastes which determine preference patterns can be attributed to natural selection. The principle of maximization must be maintained as a central analytical device. ‘When an apparently profitable opportunity †¦ is not exploited' we should not ‘take refuge in assertions about irrationality, contentment †¦ r convenient ad hoc shifts in values' (Becker, 1976b, p. 7). Instead we should look for hidden costs -such as transaction costs, or costs of acquiring information-which render such opportunities unprofitable. This seems dangerously close to tautology, but the test, as good Chicago economists always tell us, is the predictive power of the hypotheses generated and Becker is optimistic on thi s score. _MARKET EQUILIBIRIUM: _we have already seen the importance of this in Becker's approach. Even where explicit markets do not exist-as in the case of marriage – Becker insists that we operate on Chicago ‘as if principles. Note that Becker's approach throughout is to use partial equilibrium analysis. He has written with approval of Marshall's development of this apparatus for taking one problem at a time for analysis. This is revealing when we consider his usual reluctance to enter the arena of normative economics. The tradition of general equilibrium analysis instigated by Walras is associated with the normative position that unfettered competitive capitalism tends to produce an optimal allocation of resources. To do this it paints a grossly oversimplified picture of an economy without any of the subtleties of Becker's approach. Once we admit Becker's contention that preferences are based on home-produced commodities which are not sold in a market of the normal kind, it is less obvious that the traditional prescription of generalized laissez-faire is the appropriate one. The implications of Becker's approach for general equilibrium remain to be determined. STABLE-PREFERENCES: We have seen how fixed ‘tastes' play an important role in Becker's analysis. Such tastes are tastes for consumption activities rather than goods themselves, however, and this is a considerable step forward from the traditional view. Becker has, though, gone further than this, and in a paper written with George Stigler (Becker and Stigler, 1977) has tentatively sketched a theory of taste formation. As already suggested, some basic ‘tastes' are probably biologically determined, but the behavioral form they take in a complex society needs further explanation. Becker and Stigler introduce an interesting model where tastes are learnt by exposure to new xperiences – a special form of ‘learning by doing'. Individuals repeatedly exposed to a stimulus acquire, as it were, ‘consumption capital', a body of knowledge and attitudes which raises the ‘marginal productivity' of consumption of the good in question, thus increasing demand for it. Within this framework the success of advertising can be rationalized and some kind of explanation can be offered for the increasing stability of tastes as people get older -they are ‘locked into' their accumulated consumption capital, and their reduced ‘pay-off period' (life expectancy) discourages further ‘investment'. Again, this is all rather fanciful, but it illustrates once more the tenacity of Becker's commitment to the economic approach and his refusal to concede that economics might not have anything to say about some social phenomenon. ROTTEN KID THEOREM: Gary Becker’s rotten kid theorem suggests that family members, even if they are selfish, will act to help one another if their financial incentives are properly linked. Gary Stanley Becker (born December 2, 1930) is an American economist. †¦ Becker creates a hypothetical situation in which children will receive gifts of money income from a wealthy, altruistic parent in order to make them happy. One of the kids is a selfish, â€Å"rotten† kid who would take pleasure in harming his sibling. The theorem posits that the rotten kid has an incentive to avoid hurting his sibling, and will in fact behave in such a way as to increase her happiness, because her happiness has a direct effect on the amount of money he will receive. Without creating any formal incentive structure, the altruistic parent can induce the rotten child to behave benevolently by making his welfare contingent upon the welfare of his sibling. Altruism is alternately a belief, a practice, a habit, or an ethical doctrine. †¦ The theorem suggests that parents should delay gifts of money to their children until they are older, or possibly until after they die. If parents plan to will their children money in accordance with their needs, each child will have an incentive to help his siblings maximize their income, because higher earnings by the other siblings will mean that more of the money will be given to the rotten sibling. ORGAN MARKETS: An article by Gary Becker and Julio Elias on â€Å"Introducing Incentives in the market for Live and Cadaveric Organ Donations† said that a free market could help solve the problem of a scarcity in organ transplants. Their economic modeling was able to estimate the price tag for human kidneys ($15,000) and human livers ($32,000). It is argued by critics, that this particular market would exploit the underprivileged donors from the developing world. This view was endorsed by the National Kidney Foundation in a testimony to the US Congress where Dr Francis Delmonico argued that â€Å"†¦ a US congressional endorsement for payment would propel other countries to sanction unethical and unjust standards†¦ Another concern is that, if a market for organ donations were introduced, then organs would oftentimes go to the patients most able to afford them, rather than patients who may have more need for them medically. POLITICAL VIEWS: Successful social economy organizations can play an important role in helping deliver many key governmental policy objectives by: helping to drive up productivity and competitiveness; contributing to socially inclusive wealth creation; enabling individuals and commu nities to work towards regenerating their local neighborhoods; showing new ways to deliver public services; and Helping to develop an inclusive society and active citizenship. CONTROVERSY: The horizontal axis: On the horizontal axis each enterprise / organization is categorized by its ownership. On the left side the ownership lies with the public authorities whereas on the right side the ownership lies with private people. So the distinctive feature is the ownership of the enterprise. Is it private? Def. : The term â€Å"private industry† contains all economic activity that deals with the capital of one or many private owners with a view to making profits. The capital owners bear the risk. Or is it public? Def. The term â€Å"public authorities† contains all economic activity where the public authorities possess the capital on either European, federal, regional or local level. That includes all nationalized and public industries. The vertical axis On the vertical axis, each enterprise / organization is categorized by the primary objective of the enterprise. The dimensions range b etween social purpose on the top and commercial purpose at the bottom of the axis. On the vertical axis an organization reaches the top, i. e. the social purpose is the primary objective of the enterprise, if you fulfill the following criteria: A Ethical concept** core definition for enterprises / organizations of the social economy) This core definition is the ideal of an enterprise / organization. Only these enterprises / organizations belong to the social economy whose ideal is a clearly defined ethical concept. B Mission The primary objective of the enterprise is the improvement of the life situation and the chances of disadvantaged people as well as social cohesion and support. C Social economic creation of value and appropriation of earnings the profits and the resources are verifiably reinvested for the benefit of disadvantaged people. If the criteria A, B and C are totally fulfilled, an organization can locate itself on top of the vertical axis. There is one last criterion which is not definitional but a describing feature: D Intermediary function Social economical enterprises / organizations have an intermediary function between public and private. If none of the criteria above is fulfilled or the primary object of the enterprise is the commercial purpose then an enterprise / organization is located on the bottom of the vertical axis. Location between social and commercial purpose If the criteria above are only partly fulfilled the enterprise is located between the top and the bottom of the vertical axis according to its self-definition. 3. 0 EFFECT OF GARY BECKER’S CONTRIBUTION TO THE PAST AND CURRENT WORLD ECONOMY: An important step in extending the traditional analysis of individual rational choice is to incorporate into the theory a much richer class of attitudes, preferences, and calculations. This step is prominent in all the examples that Gary Becker consider. The analysis of discrimination includes in preferences a dislike of – prejudice against – members of particular groups, such as blacks or women. In deciding whether to engage in illegal activities, potential criminals are assumed to act as if they consider both the gains and the risks – including the likelihood they will be caught and severity of punishments. In human capital theory, people rationally evaluate the benefits and costs of activities, such as education, training, and expenditures on health, migration, and formation of habits that radically alter the way they are. The economic approach to the family assumes that even intimate decisions like marriage, divorce, and family size are reached through weighing the advantages and disadvantages of alternative actions. The weights are determined by preferences that critically depend on the altruism and feelings of duty and obligation toward family members. Since the economic, or rational choice, approach to behavior builds on a theory of individual decisions, criticisms of this theory usually concentrate on particular assumptions about how these decisions are made. Among other things, critics deny that individuals act consistently over time and question whether behavior is forward-looking, particularly in situations that 52 Economic Sciences 1992 differ significantly from those usually considered by economists – such as those involving criminal, addictive, family, or political behavior. This is not the place to go into a detailed response to the criticisms, so Gary Becker simply assert that no approach of comparable generality has yet been developed that offers serious competition to rational choice theory. While the economic approach to behavior builds on a theory of individual choice, it is not mainly concerned with individuals. It uses theory at the micro level as a powerful tool to derive implications at the group or macro level. Rational individual choice is combined with assumptions about technologies and other determinants of opportunities, equilibrium in market and nonmarket situations, and laws, norms, and traditions to obtain results concerning the behavior of groups. It is mainly because the theory derives implications at the macro level that it is of interest to policymakers and those studying differences among countries and cultures. None of the theories considered in Gary Becker’s lecture aims for the greatest generality; instead, each tries to derive concrete mplications about behavior that can be tested with survey and other data. Disputes over whether punishments deter crime, whether the lower earnings of women compared to men are mainly due to discrimination or lesser human capital, or whether no-fault divorce laws increase divorce rates all raise questions about the empirical relevance of predictions derived from a theory based on individual rationality. A close relation between theory a nd empirical testing helps prevent both the theoretical analysis and the empirical research from becoming sterile. Empirically oriented theories encourage the development of new sources and types of data, the way human capital theory stimulated the use of survey data, especially panels. At the same time, puzzling empirical results force changes in theory, as models of altruism and family preferences have been enriched to cope with the finding that parents in Western countries tend to bequeath equal amounts to different children. Gary Becker has been impressed by how many economists want to work on social issues rather than issues forming the traditional core of economics. At the same time, specialists from fields that do consider social questions are often attracted to the economic way of modeling behavior because of the analytical power provided by the assumption of individual rationality. Thriving schools of rational choice theorists and empirical researchers are active in sociology, law, political science, history, anthropology, and psychology. The rational choice model provides the most promising basis presently available for a unified approach to the analysis of the social world by scholars from the social sciences. Becker's economic approach to the family is often believed to imply that certain types of targeted government policies cannot affect allocation within families because they will be fully neutralized by individuals' responses. For example, the altruist model and the Rotten Kid Theorem imply that which parent receives the child benefit must be irrelevant. But I would like to argue earlier that the interesting implications of the economic approach to the family do not follow from maximizing behavior and equilibrium, the foundational assumptions of the economic approach, but depend on contested auxiliary assumptions. For example, the conclusion that parents will neutralize the child benefit depends on the assumption that family collective choice is determined by the altruist model and that preferences exhibit transferrable utility. Whether these auxiliary assumptions are described as primary, secondary, or tertiary, is a matter of taste. Becker's influence on welfare reform and other specific policies is difficult to assess. In the final paragraph of the General Theory, Keynes famously asserted that, in the long run, ideas are more important than vested interests in public policy: †¦ he ideas of economists and political philosophers, both when they are right and When they are wrong, are more powerful than is commonly understood. Indeed, the World is ruled by little else. Practical men, who believe themselves to be quite exempt From any intellectual influences, are usually the slaves of some defunct economist? Madmen in authority, who hear voices in the air, are distilling their frenzy from s ome academic scribbler of a few years back. Becker's influence on the economics of the family has been pervasive. His ideas have dominated research in the economics of the family, shaping the tools we use, the questions we ask, and the answers we give. I can testify to their influence on my own thinking, work, and career. The foundational assumptions of the economic approach –maximizing behavior and equilibrium — as well as such primary auxiliary assumptions as household production and interdependent preferences are now widely accepted not only by economists but also by family sociologists, demographers, and others who study the family. Some of the differences between Becker's original vision and the current state of the economics of the family reflect the evolution of Becker's ideas, sometimes in response to his critics. Other differences reflect ongoing and often vigorous debate. For example, Becker jettisoned stable preferences, which he originally presented as a foundational assumption and dropped his insistence on deferential preferences (â€Å"altruism†), acknowledging the importance of merit goods. With household production, the basic concept is now generally accepted but the secondary and tertiary auxiliary assumptions about household technology are contested. More specifically, Becker's formulation of the household production model assumes the absence of joint production, and some of his most striking conclusions depend on this assumption, yet joint production is present whenever individuals care how they spend their time. No one can predict with confidence the irection the economics of the family will take over the next twenty-five or fifty years. After all, economists took nearly two centuries to unpack Adam Smith's contributions and establish the conditions under which the conclusions of the invisible hand theorem hold. Perhaps economists unpacking Becker's contributions will move more quickly. Those who complete the task will surely honor Gary Becker for laying the foundations of the economic approach to the family. Organ market view was endorsed by the National Kidney Foundation in a testimony to the US Congress where Dr Francis Delmonico argued that â€Å"†¦ a US congressional endorsement for payment would propel other countries to sanction unethical and unjust standards†¦ † Another concern is that, if a market for organ donations were introduced, then organs would oftentimes go to the patients most able to afford them, rather than patients who may have more need for them medically. 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