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”.