The Impact of Gary Becker’s Work

The Impact of Gary Becker’s Work
James J. Heckman
The University of Chicago
A Celebration of the Life and Work of Gary S. Becker
The University of Chicago
October 31, 2014
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Gary Becker’s Work
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Gary Becker’s Work
Becker Receiving Nobel Prize (1992)
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Becker Receiving Medal of Freedom (2007)
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Jacob Viner
“Becker is the best
student I ever had.”
– reference letter on Becker’s
application to Chicago, 1951
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Gary Becker’s Work
“Becker has a brilliant,
analytical mind;
great
originality; knowledge of
the history of economic
thought and respect for its
importance; a real feeling
for the interrelationships
between economic and
political issues; and a
profound understanding of
both the operation of a
price system and its importance as a protection of
individual liberty.” (1953)
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Milton Friedman
Gary Becker’s Work
H. Gregg Lewis
“It is hard to write to you about
Mr. Becker without sounding overenthusiastic. He is an exceedingly
intelligent and imaginative young
man and certainly, I think, will become really outstanding in the economics profession. He is honest in
all matters, has the highest character, and I am confident, is exceedingly trustworthy. I recommend
him to you without any reservations. ”
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Milton Friedman
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“Gary Becker was the most influential social scientist of the past
half century.” – Milton Friedman, 2001
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Gary Becker’s Work
“It [economics] is judged ultimately by
how well it helps us understand the world,
and how well we can help improve it.” –
Gary Becker
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A Brief Biography of Becker
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Becker at Princeton
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Becker as a Grad Student at Chicago
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Becker at Columbia
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Becker on Leave at Chicago (1969)
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Gary Becker’s Work
The Long and Short of the Chicago School: Early 1970s
Friedman & Stigler
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Gary Becker’s Work
Chicago 1972 Poster (After “The School of Athens” by Raphael)
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Gary Becker’s Work
Developments in Economics 1950–2014
Becker
Developments in
Economic Theory
1950
Economics of
Discrimination
Babies as Consumer 1960
Durables
First round of game theory;
decision theory; uncertainty;
operations research
Macroeconomics
Developments in
Econometrics
Simultaneous equation models;
computers enter;
macro econometrics
(Keynesian)
Developments in
Data Analysis
Computation; national accounts
Development of large
scale macro models
Policy
Issues
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Gary Becker’s Work
Developments in Economics 1950–2014
Becker
Developments in
Economic Theory
1950
Economics of
Discrimination
Babies as Consumer 1960
Durables
First round of game theory;
decision theory; uncertainty;
operations research
Developments in
Data Analysis
General equilibrium
Optimal growth
Keynesianism Dominant Era
Macroeconomics
Developments in
Econometrics
Human Capital
Irrational behavior
Time use & Household
Productivity
Crime
Simultaneous equation models;
computers enter;
macro econometrics
(Keynesian)
Computation; national accounts
Refinement of multiple regression
measurement error
(Theil, Zellner, Goldberger)
Collection & analysis
of microdata
Development of large
scale macro models
Policy
Issues
War on Poverty
(Discrimination, schooling, inequality)
Coleman Report
(Importance of Family)
Crime and Urban Riots
(Koerner Comission)
Growth of Welfare and Single Headed Families
(Moynihan Report)
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Gary Becker’s Work
Developments in Economics 1950–2014
Becker
Developments in
Economic Theory
1950
Economics of
Discrimination
Babies as Consumer 1960
Durables
First round of game theory;
decision theory; uncertainty;
operations research
Developments in
Data Analysis
Simultaneous equation models;
computers enter;
macro econometrics
(Keynesian)
Computation; national accounts
1970
(Brookings Model)
Refinement of multiple regression
measurement error
(Theil, Zellner, Goldberger)
Collection & analysis
of microdata
Microeconometrics
(Discrete Choice; Selection
Bias; Accounting for individual;
heterogeneity)
Computational Economics
Information on individual actors
Panel surveys
Development of large
scale macro models
Policy
Issues
Family Economics
Law and Economics
Incentive models
Economic Analysis of Tastes
Moral hazardAdverse selection
models of incentives
Game theory
Era of Rational Expectations and Micro-based Macroeconomics
General equilibrium
Optimal growth
Keynesianism Dominant Era
Macroeconomics
Developments in
Econometrics
Human Capital
Irrational behavior
Time use & Household
Productivity
Crime
Experiments (Lab and Field)
War on Poverty
(Discrimination, schooling, inequality)
Coleman Report
(Importance of Family)
Crime and Urban Riots
(Koerner Comission)
Growth of Welfare and Single Headed Families
(Moynihan Report)
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Gary Becker’s Work
Developments in Economics 1950–2014
Becker
Developments in
Economic Theory
1950
Economics of
Discrimination
Babies as Consumer 1960
Durables
First round of game theory;
decision theory; uncertainty;
operations research
Simultaneous equation models;
computers enter;
macro econometrics
(Keynesian)
1970
Family Economics
Law and Economics
Incentive models
1980
Economic Analysis of Tastes
AddictionFamily models
Dynamic
Fertility
Growth and Spillovers
Habits,
1990 Preferences, 2000
Health
Auction models; Incentive
Moral hazardcompatibility; Contract theory
Adverse selection
models of incentives
Game theory
Era of Rational Expectations and Micro-based Macroeconomics
General equilibrium
Optimal growth
Keynesianism Dominant Era
Macroeconomics
Developments in
Econometrics
Human Capital
Irrational behavior
Time use & Household
Productivity
Crime
(Brookings Model)
Refinement of multiple regression
measurement error
(Theil, Zellner, Goldberger)
Microeconometrics
(Discrete Choice; Selection
Bias; Accounting for individual;
heterogeneity)
Panel data models
Experiments
Computational Economics
Big Data
Developments in
Data Analysis
Computation; national accounts
Collection & analysis
of microdata
Growth
Panel surveys
Development of large
scale macro models
Policy
Issues
Information on individual actors
Experiments (Lab and Field)
War on Poverty
(Discrimination, schooling, inequality)
Growth in worldwide inequality
Coleman Report
(Importance of Family)
Crime and Urban Riots
(Koerner Comission)
Growth of Welfare and Single Headed Families
(Moynihan Report)
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Gary Becker’s Work
Becker as an Innovative Force in the World of Ideas
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POWER OF INCENTIVES
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[Video clip on incentives]
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His organizing principles
• People pursue self-interest (broadly defined and increasingly
broadly defined over his lifetime)
• Stable preferences
• Equilibrium in market
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“ ‘The Easterlin theory is all the more valuable for its scarcity
among economic theories, standing out in welcome relief from the
rather sterile verbalizations by which economists have tended to
describe fertility decisions in terms of the jargon of indi↵erence
curves, thereby tending to intimidate non-economists who have not
mis-spent their youth in mastering the intricacies of modern utility
theory.”’ – Paul Samuelson (1978)
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(1957)
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Human Capital Lecture
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Frameworks for Measuring Rates of Return
“Mincer Equation”
• Initially used IRR
• Developed a simpler method in Becker and Chiswick (1966)
• Expanded and extensively applied in Mincer (1974)
ln yi = ↵i +
|{z}
Earnings
of person i
⇢i
|{z}
si + i (xi )
|{z}
| {z }
“Rate of return” Schooling
to i
of i
Experience
of i
⇢i : “rate of return to schooling for person i.”
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(1)
Good Vs. Bad Inequality
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Becker Teaching Household Production Model
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JPE, 1973
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Tastes, Preferences, and Habits
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(1996)
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Irrational Behavior: (1962)
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Becker 1962 Theory of Irrational Behavior
Amount of x1
if spend entire
budget on x1
Preferences
Old Budget Set
Initial choice selected
x1
x2
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Amount of x2
if spend entire
budget on x2
Gary Becker’s Work
Becker 1962 Theory of Irrational Behavior
Amount of x1
if spend entire
budget on x1
Preferences
New Budget Set
x1 more expensive
x1
Choice point
selected in
new regime
x2
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Amount of x2
if spend entire
budget on x2
Gary Becker’s Work
Becker 1962 Theory of Irrational Behavior
Amount of x1
if spend entire
budget on x1
Preferences
Old Budget Set
Initial choice selected
New Budget Set
x1 more expensive
x1
U1
Choice point
selected in
new regime
U0
x2
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Amount of x2
if spend entire
budget on x2
Gary Becker’s Work
A Lot of Basic Propositions in Economics Do Not Need Rationality:
Constraints are Basic
Amount of x1
if spend entire
budget on x1
Old Budget Set
Mean of Cloud of
Irrational Agents
x1
x2
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Amount of x2
if spend entire
budget on x2
Gary Becker’s Work
A Lot of Basic Propositions in Economics Do Not Need Rationality:
Constraints are Basic
Amount of x1
if spend entire
budget on x1
Mean of Cloud of
Irrational Agents
New Budget Set
x1 more expensive
x1
New Position of Cloud
of Irrational Agents
x2
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Amount of x2
if spend entire
budget on x2
Gary Becker’s Work
A Lot of Basic Propositions in Economics Do Not Need Rationality:
Constraints are Basic
Amount of x1
if spend entire
budget on x1
Old Budget Set
Mean of Cloud of
Irrational Agents
New Budget Set
x1 more expensive
x1
New Position of Cloud
of Irrational Agents
x2
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Amount of x2
if spend entire
budget on x2
Gary Becker’s Work
Habit Formation
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(1988)
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Crime and Punishment
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Crime and Punishment: An Economic
Approach
Gary S. Becker*
ColumbiaUniversity
JPE, 1968
I. Introduction
Since the turn of the century, legislation in Western countries has expanded
rapidly to reverse the brief dominance of laissez faire during the nineteenth
century. The state no longer merely protects against violations of person
and property through murder, rape, or burglary but also restricts "discrimination"
Heckman against certain minorities, collusive business
Garyarrangements,
Becker’s Work
"jaywalking," travel, the materials used in construction, and thousands
Law and Economics
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Incentives
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(1958)
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Contributions to Sociology
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Becker’s Impact on Sociology
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Becker Contributed to and Extended the Chicago Tradition
in Economics
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Becker and Murphy at Blackboard
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Chicago Economics:
Disagreement at a High Level of Originality and Rigor
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James Laughlin
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Thorstein Veblen
Henry Simons
Gary Becker’s Work
Jacob Viner
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Frank Knight
Henry Schultz
Gary Becker’s Work
Paul Douglas
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Oscar Lange
H.G. Lewis
Gary Becker’s Work
T.W. Schultz
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Marschak
Gary Becker’s Work
Koopmans
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Haavelmo
Friedman
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Three Ground Rules for Chicago Economics
1
The first ground rule is that its faculty know and
understand the corpus of economic theory — not just
their specialty within the field. That we insist that
students and faculty speak a common language — the
language of basic price theory and the economics of
incentives — and that participants communicate these
ideas clearly.
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2
The second ground rule is that it views economics as a
serious subject, tackling serious problems.
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3
The third ground rule is that Chicago economists move
beyond selective and self-serving appeals to “stylized
facts” to “illustrate” their theories and instead engage
and promote the serious scientific task of creative
collection and analysis of hard data, analyzing it with
care, and linking the theory and evidence. Chicago does
not devalue the hard empirical work that produces hard
evidence and rigorous economic theorizing.
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The Chicago School of Economics
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Milton Friedman, George Stigler, and Aaron Director
at First Mt. Pelerin Society Meeting (1947)
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Becker’s Contributions to Empirical Economics
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Contributions to Public Policy & Economic Literacy
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Lyndon Johnson
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Intergenerational Mobility and Inequality:
The “Gatsby Curve”
IGE: ln Y1 = ↵ + ln Y0 + "
|{z}
|{z}
Income of
parents
.5
Income in current
generation
Italy
UK
USA
Intergen. Elasticity of Earnings (IGE)
.1
.2
.3
.4
France
Japan
Germany
NZ
Sweden
Finland
Australia
Canada
Norway
0
Denmark
.2
.25
IGE
.3
OLS Slope=2.05,
.35
p-value=.001
Source: Bradley J. Setzler (2014)
Note:
Inequality is measured after taxes and transfers.
Gini index defined on household income.
IGE measured by pre-tax and transfer income of individual fathers and sons.
•
•
•
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Gary & Guity Becker
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UNCOMMON
SENSE
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Impact of Gary Becker – Summary
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“It [economics] is judged ultimately by
how well it helps us understand the world,
and how well we can help improve it.” –
Gary Becker
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Gary Becker’s Work