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Markets Everywhere

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Markets Everywhere

How economist Gary Becker changed our lives Autumn 2014
Economy, finance, and budgets
The Social Order
The Nobel Prize winner, who died earlier this year, in his University of Chicago office

The 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 influence, are usually the slaves of some defunct economist.” So famously observed John Maynard Keynes in 1936, in the conclusion of his opus The General Theory of Employment, Interest, and Money. Keynes proved prophetic, at least in his own case. “Keynesianism” as a doctrine came into its own during the 1970s, long after the man himself had disappeared; President Nixon, who declared, “I am now a Keynesian in economics,” probably had read little of the economist’s work.

Keynes’s aphorism has been reliable when applied to free-market economists, too—and some of them haven’t had to wait for posthumous vindication. Friedrich Hayek became influential while he was still alive, helping inspire the economic policies of Margaret Thatcher and Ronald Reagan. “This is because I lived too long,” quipped Hayek. Milton Friedman stuck around long enough to see the end of hyperinflation, thanks to the application of his monetary theories. A third Nobel Prize–winning University of Chicago economist, Gary S. Becker, who died this past April, may have been less famous during his lifetime than Hayek and Friedman, but his ideas lie behind some of the most striking policy innovations of the last few decades. The politicians implementing those policies probably hadn’t worked their way through The Economic Approach to Human Behavior, Human Capital, A Treatise on the Family, or other dense Becker studies. But they could easily have become acquainted with his thinking through his clearly argued Businessweek columns, collected in the 1998 book The Economics of Life: From Baseball to Affirmative Action to Immigration, How Real-World Issues Affect Our Everyday Life, or the popular blog he cowrote for several years with Judge Richard Posner, the highlights of which appeared in book form as Uncommon Sense in 2009. And some of Becker’s Chicago disciples turned his theories into recent bestsellers. Just about everyone has heard of Freakonomics, the wildly successful book by Steven Levitt and Stephen Dubner that popularized Becker’s view that criminals are like entrepreneurs, responding to market incentives. In many ways, then, Becker’s star is ascending—and that’s a good thing for economics as a discipline and, more broadly, for our public policy debate.

Becker was astonishingly ambitious, bringing market-based thinking and solutions into fields—from crime to job discrimination to medicine to traffic flows—where no economist had gone before. Becker dubbed his approach “rational action theory.” In economics, as in other sciences, theory is necessary. It will offer an imperfect description of the real world, yes, but without one, the world can’t be seen at all. Indeed, all major breakthroughs in economics have been built on new theories, Becker’s included, though he agreed that no theory was final. He spent his academic career responding to critics, often from other disciplines like sociology or psychology, who felt attacked on their own turf, and sometimes he incorporated their concerns into his own thinking. Such intellectual generosity revealed him to be a classical liberal, not an authoritarian ideologue, as he was sometimes caricatured.

Rational action theory holds that all human beings, in all civilizations, act “as if” they are rational. For Becker, this meant that they acted as if they sought to maximize their profit in a market. “Nobody ever claimed that people were perfectly rational all the time,” Becker told me in a 2009 conversation. “People make mistakes. They may get under the sway of emotions. My theory has recognized that from the beginning. What I have argued, however, is that when you put the collection of individuals together in markets, the markets perform better than any alternative that has ever been devised.”

We’re entrepreneurs in all walks of life, Becker believed, responding to incentives and behaving, more often than not, rationally. In his work on the family, to take a controversial example, Becker showed how parents tended to choose the number of children they had in order to maximize the overall welfare of the family, as if it were an economic firm. Parents invest in their children’s education as well, seeking to boost their offspring’s “human capital,” an investment that they hope will bring positive returns. Becker didn’t invent the concept of human capital—the cognitive habits, know-how, creativity, and other mental attributes that generate economic wealth in a modern economy—but he was the first economist to use it systematically, as a basis for his reasoning and policy arguments. He was keenly aware that we live in a time—in the developed world, anyway—when human capital has superseded physical capital, and he invited his fellow economists to adapt to this new reality.

Nowhere was rational action theory more persuasive than in analyzing criminality. As long ago as the late 1950s, Becker was proving that potential criminals adapt their behavior to the rewards and risks that they meet with in society. If committing crime carries little risk, wrongdoers will feel emboldened. The result will be more crime. Conversely, heavier enforced sanctions—arrests, fines, sentences—make crime appear more expensive for potential bad actors than any expected benefits that it might bring them, and thus crime is deterred. (If sanctions are too severe, however, some criminals might commit worse crimes because, in Becker’s words, “they have nothing to lose.”)

Becker’s views on crime weren’t born from his imagination but from his assembled statistical data, expressed in mathematical models. He popularized his findings in newspaper columns, conferences, and other outlets. Becker’s research has had a significant impact on crime policy, which has put far greater emphasis on the behavioral incentives that surround potential criminals—as seen in the quality-of-life policing, tougher sentencing, and other crime-fighting innovations that have helped drive crime rates down dramatically in New York and other cities over the last two decades.

Becker’s ideas—in many cases, unacknowledged—have also transformed the debate over another urban plague: traffic congestion. The planner’s old answer to congestion was to widen streets, add traffic lights, and build new tunnels and overpasses, all in the hope of making traffic more fluid. To no avail: the expensive public works actually worsened congestion by encouraging more drivers to take cars to the city, overwhelming the new infrastructure. Becker instead applied a strict market calculus to urban traffic. Any commuter or visitor who chose to enter a city center with his own car or truck, Becker explained, had an interest in doing so. The individual driver’s choice looks rational to him; he thinks that he will gain in comfort, access, and time. His choice, though, exacts a cost on other drivers in the form of greater congestion, producing what economists call a negative externality; he, too, becomes a victim of the congestion he helped cause. At the end of the day, all the drivers lose. “Time spent in traffic is an inefficient ‘price’ since it wastes the time of drivers without providing benefits to anyone else,” argued Becker. He estimated congestion’s cost to be $50 billion a year in the U.S.—a massive tax on time.

A market solution to the problem, easier to apply than any massive new road-construction project or bureaucratic regulation, would encourage drivers to make more rational choices by requiring payment for vehicle access to downtown areas and city centers. A version of such “congestion pricing,” as the idea has come to be known, was implemented in London several years ago by then-mayor Ken Livingstone; road congestion in London dropped by 20 percent, as many commuters opted for cheaper public transportation, leaving their cars at home. Former New York City mayor Michael Bloomberg tried to impose a similar entry toll in Manhattan during the mid-2000s, but the initiative, opposed by neighborhood officials and downtown shopkeepers, was defeated. Becker felt that Bloomberg had failed to explain how traffic congestion represented an economic loss for all New Yorkers. He wasn’t fully satisfied with the London system, either. Traffic congestion varies by the hour and day, he noted, so, as with airline tickets, the price of driving into the city should depend on the time—something the London plan, which had a uniform rate, didn’t take into account. But congestion pricing of some kind will be adopted by more cities in the future: mayors of large cities these days, even if they have never heard of Gary Becker, know that spending a ton of money on new arteries or underpasses to ease traffic is likely to be ineffective—a victory for Becker’s market-based thinking.

Always consistent, never afraid to appear as a provocateur, and, above all, an independent thinker, Becker was convinced that market solutions could help solve many other seemingly intractable public problems, among them devising a sensible immigration system. Immigrants know that they will find a better life in the United States. Most will work hard at achieving that better life, Becker believed, because the American welfare state today doesn’t provide all that much support for those unwilling to work (unlike in Western Europe, where many immigrants live permanently on welfare). A Mexican or Chinese immigrant working in America will usually multiply his income by five or even ten times over what it would be in his country of origin. Given that reality, Becker thought, such immigrants, legal or illegal, would be willing to pay for such an opportunity—just as students and their families pay for college, perceiving it, rightly, as an investment that will bring greater earning power. “Visa seekers,” he wrote, “are comparable to college degree seekers”: they’re entrepreneurs, investing in human capital. Thus, Becker proposed, all visas should come with a price tag attached, set by the market. For American taxpayers, Becker claimed, the benefits of such a visa-for-money system would be substantial. Border control would cost less, for starters, since some immigrants who are tempted to sneak into America illegally (which costs them time and money) could now buy their way in legally. And immigrants ready to pay for visas would have an even stronger incentive to work to recoup their investment.

In a Beckerian system, wouldn’t wealthy immigrants be favored over the deserving poor? This is already the case, he replied: the rich can often obtain U.S. residency permits if they invest in the country. Becker wanted to extend the market for visas, now enjoyed by the wealthy, to the hardworking poor. If they didn’t have the money up front, aspirational immigrants should be able to borrow it, just as American students and their families do. In Becker’s view, the only losers in an open market for visas would be the often unsavory “coyotes” paid to transport Latin American migrants across the Texas border.

A visa market would remain imperfect, Becker admitted; he wasn’t a free-market fundamentalist (a breed that exists more in the liberal imagination than on the University of Chicago campus). Not all foreign workers purchasing a visa would earn back their investments. Some might fail completely, costing American society more than what they generate. Such realities illustrate the limitations of economics as a discipline: the individual’s personal fate is hidden in the data and models that the economist proposes. On average, though, Becker predicted, his visa plan would work far better than the dysfunctional current immigration system.

Another area in need of market solutions, Becker held, was the medical availability of replacement organs. In the United States, as in other advanced societies, the law bans the outright sale of organs, part of a broader limit on the commodification of certain essential goods and services. “The prohibited transactions are prohibited because they are highly offensive to non-participants,” Becker wrote in 2006. “Why they are offensive remains to be explained.” Cultural attitudes are doubtless powerfully at work. In France, to sell one’s blood is illegal and, what’s more, culturally unthinkable: blood donation is a citizen’s duty. One result of this attitude is that French hospitals often find themselves short of fresh blood. Americans are more comfortable with the idea of selling their blood, which is currently legal to do. American hospitals, unsurprisingly, have more voluminous blood supplies.

If organs were similarly part of a legitimate market, American patients needing a new kidney or a liver would not have to wait for years to get one, as they do today, if they live long enough. “In 2012, 95,000 American men, women and children were on the waiting list for new kidneys, the most commonly transplanted organ,” Becker noted shortly before his death, in a Wall Street Journal op-ed coauthored with Julio Elias. “Yet only about 16,500 kidney transplants were performed that year.” Paying living donors for their organs—Becker estimated the going rate for a kidney to be $15,000—would swiftly eliminate the tragic gap between supply and demand. Safeguards could be built in to such a system of exchange, he pointed out, to protect against exploitation or rash or unsafe donations.

Becker recognized that many would be shocked at the notion of paying living donors and that such a system was a long shot to be adopted. A more feasible market-based idea to increase the organ supply, he suggested, would be to pay people up front to donate their organs upon death to an organ depository. The alternative to organ markets is the impaired lives and premature deaths of many patients. Moreover, those who currently benefit from rare transplants typically get chosen in secrecy by medical personnel or through black-market transactions inside and outside America, an arrangement that favors the wealthy and well connected. Becker believed that organ markets would be more transparent and efficient—and moral. He always looked beyond common wisdom when that common wisdom had negative consequences, usually for the weakest people.

Becker not only came up with market-based solutions to public problems; he also debunked government efforts to use extensive regulations and spending to address those problems. This was a critical task, since the regulate-and-spend nanny-state approach, which denies the rationality of individuals and their capacity to take care of themselves, is seductive to many politicians and even to the public, in part because its unintended negative consequences, both moral and fiscal, aren’t always evident at first.

Becker viewed the Bloomberg administration’s 2006 ban on trans fats in restaurants as a classic example of overreaching regulation. The administration presumed that New Yorkers were too ignorant to make decisions in their own health interests. But were they? Yes, the evidence suggested that trans fats contributed to heart disease—though the degree of harm remained unclear. But before the ban, half of the city’s restaurants didn’t use trans fats, so health-conscious consumers could already easily avoid them if they wished. Further, the ban likely raised the cost of eating out in the city. Could such a price increase lead some New Yorkers to eat more at home—and perhaps eat more trans fats, too? Policymakers ignored such a possibility. Some customers, of course, may really love trans fats and want to consume them, even knowing that they could have bad health effects in the future. Defenders of the ban would say that making that choice could increase the incidence of heart disease in the city, which would burden Medicare and hence the taxpayer—a negative externality. If this were true, though, why not just let insurers require individuals who want to eat unhealthily to pay higher premiums? Why should the government impose a new regulation that diminishes freedom?

Public policies that curb personal liberty, Becker argued, too often are based on insufficient data; politicians regularly put them into effect without considering all their potential consequences or exploring alternatives. And such prohibitions are politically hard to remove, he added, meaning that the sphere of freedom continues to shrink.

Becker’s rational action theory is based on facts, not wishful thinking, and this is particularly evident in its application to the problem of racism and discrimination. For Becker, government affirmative-action programs to help disadvantaged minorities were counterproductive and even destructive. If people get the idea that they’re receiving special favors thanks to their race (or gender) and not getting ahead on their own efforts or talent, they will tend to stop pushing themselves to improve. Nobody works hard if he doesn’t have to.

On the use of racial preferences in college admissions, Becker embraced the “mismatch” argument made by economist Thomas Sowell and UCLA law professor Richard Sander. “If lower admission standards are used to admit African Americans or other groups, then good colleges would accept average minority students, good minority students would be accepted by very good colleges, and quite good students would be accepted by the most outstanding universities, like Harvard or Stanford,” Becker wrote in 2005. “This means that at all these types of schools, the qualifications of minority students would on average be below those of other students. As a result, they tend to rank at the lower end of their classes, even when they are good students, because affirmative action makes them compete against even better students.” The outcome could only be higher college-dropout rates and frustration. When minority graduates of elite universities enter the job market, he continued, they often suffer from the perception that their academic achievements stem from special preferences only, not from merit, corroding their sense of self-worth. And firms may elect not to hire applicants from such groups at all, out of fear of future legal action if minority employees are not promoted frequently or rapidly enough. This is how affirmative action produces, in Becker’s words, “a less progressive economy.”

Becker worried that opposition to affirmative-action programs was too often confused with support for discrimination, which he staunchly opposed. He viewed affirmative action and discrimination as two sides of the same coin. Both give special advantages to those who have done nothing to earn them. A robust free-market economy helps defeat discrimination far more than any government social engineering, pushing racist employers to hire minorities in order to stay competitive. Even an equal-pay provision for minorities could be counterproductive in the fight against discrimination, Becker discovered in his research on job markets, published in his 1957 study, The Economics of Discrimination. An employer who preferred to hire within his majority racial or ethnic group would be more willing to hire a disadvantaged minority if it cost him less, Becker found. Joining the workforce, the minority worker would then prove that his ability was equal to that of employees from other ethnic communities. “More than half a century after Professor Becker’s landmark work on the economics of discrimination, most controversies on that subject, both in the media and in politics, go on in utter ignorance of his penetrating insights. So do laws and policies that make discrimination worse,” lamented Sowell in a tribute published after Becker’s death.

If we really wanted to help minorities, especially young black men, the decriminalization of drugs should be a priority, Becker maintained. “Trafficking in drugs,” he wrote in a 2003 Businessweek column, “attracts young blacks mainly because it offers much better pay (provided they don’t get caught) than do the legal alternatives, which tend to be low-wage jobs. Even conservatives and liberals who are reluctant to make drugs legal have to recognize that the present system does enormous damage to the black community, especially to the many black men who spend years in prison on drug charges.” A well-calibrated tax on drugs could regulate their use at a tolerable level, while not making them so expensive that an illegal market again emerged. Any illegal acts committed while under the influence of drugs would have to be severely punished, of course.

Anti–affirmative action and pro–drug decriminalization—Becker’s arguments often ran against conventional thinking. This was certainly the case with another position he took: defending the pharmaceutical industry, which he believed would improve our lives, reduce our health-care expenses, and eventually cut the Medicare deficit—if we let drug markets flourish. He gave antidepressant medication as an example. New pills cost more, he acknowledged in a mid-2000s editorial, “but hospital stays declined by so much that total spending per depressed person fell. These drugs enormously improved the quality of patients’ lives, since most people who were suffering from serious depression can now function reasonably well at work and home.”

It might be politically more effective to denounce Big Pharma than to bet on a better future thanks to its products. But Gary Becker wasn’t running for political office; he was seeking the truth, which he did tirelessly until his death, at age 85.

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