From crime to tuition fees, countless aspects of our lives are influenced by the late economist
In 2013 the former cabinet minister Chris Huhne had been sent to prison for evading penalty points for speeding. The story was once again in the news in May 2014 when costs were imposed on him for the case. In the same week, the Nobel economist Gary Becker died.
Why did Chris Huhne need to go to jail for dodging his penalty points for speeding? After all, as he constantly points out, hundreds of thousands of people have done this without giving it a second thought. Yet Mr Huhne would find his sentence less baffling if he reflected upon what happened the day that Gary Becker was late. And in the days after the death of the great professor, I think that’s worth doing.
A little more than forty years ago, Becker was driving to the oral exam of a student when he realised that he wasn’t going to get there in time. Not only that, but he would have to park the car and there were parking restrictions all around the building in which the exam was taking place. Finding a car park would take ages and then he would have to walk.
So here is what he did. He parked in a forbidden area, dashed to the meeting, made it on time and on his way won the Nobel Prize for Economics.
The decision about where to park had, in the end, been relatively simple. The fines for parking outside the building were modest and, more importantly, they were unreliable. In other words, he might park in the restricted area and not get a ticket. Against this was the certain cost of the car park and the professional cost of being late for an important engagement. It seemed to him that the benefit of the parking violation over legal parking was clear.
As he left the car behind, he began to reflect on what he had done. And to wonder whether others weren’t doing it too. The standard theory of criminal behaviour at the time was that criminals were mentally ill or social victims. Becker, however, realised that the decision he had made to break the law had been entirely rational. Those who break the law balance the costs and the benefits of doing it.
From this insight came Becker’s influential analysis of crime, one of the ways he transformed economics and one of the reasons he became a Nobel laureate. When his death was announced last week, Gary Becker was hailed as one of the most significant social scientists of his generation, at least the equal of giants such as Milton Friedman, with whom he worked at the University of Chicago. When awarding him the Presidential Medal of Freedom, George W. Bush described Becker as ‘without question one of the most influential economists of the last hundred years’.
Becker’s contribution was to use the traditional tools of economics – the analysis of supply and demand, the working of incentives, the weighing of costs and benefits – and, for the first time, apply it to social policy.
Take, for instance, Chris Huhne and his penalty points. The former cabinet minister thinks that he was sent to jail despite the fact that so many others commit the same crime and get away with it. In fact, a Becker-style analysis suggests that he was sent to jail precisely because so many others commit the same crime and get away with it.
If a crime is very hard to detect, the incentive to commit it is greater. The benefit of the crime outweighs the cost. As a result, you have to make the penalty greater so that, taken together, the punishment and the risk of punishment make transgression too costly to be worthwhile.
Becker’s work was very influential on sentencing policy and prevention of crime. Yet more influential still was his impact on the field of economics. Instead of being a study merely of how money moves around, it became a study of how people behave.
One of his most famous pieces of work concerned racial discrimination in the American South. He showed that you could measure the preference for discrimination of employers by looking at how far they were willing to hire less productive workers merely because they were white.
He also developed and popularised the idea of human capital, now a common term but very controversial when Becker first used it. The professor argued that education could be seen as an economic decision in which the long-term benefit of a better job could offset the short-term cost.
It is impossible now to debate student-tuition fees, for instance, without reference to Becker’s ideas. Given that students increase their earning power as a result of a university education, but also that there is a social benefit, who should pay for it? And would tuition fees put off poorer students?
Becker would not have been surprised (as others have been) that the people most willing to pay tuition fees have proved to be the least well-off, and those least likely to pay have been the middle class. The cost is the same for both groups but the least well-off gain a greater benefit because they have less to fall back on without higher education.
During his life Becker was often accused of treating human beings as factors of production and of being purely self-interested. Yet this is a complete misunderstanding. The real significance of Becker’s work is the opposite.
Becker won the Nobel prize because he demonstrated the way in which economics was about more than money. Understanding people’s incentives, and structuring social institutions in response to them, does not mean that people’s incentives are purely selfish.
People might have a preference for altruism, for example, or for community living. A market-based system takes these preferences into account. It’s quite wrong to equate markets with narrow economic selfishness.
This is relevant to the current debate on free schools or the NHS. Allowing competition and choice is not preferring self-interest over public spirit. It is simply structuring the system in line with people’s preferences, and these preferences may be charitable.
Becker’s work also shows why non-market systems struggle. People calculate the trade-off between costs and benefits. If the system gets in the way of their preferences, they work around it. That’s why tourists used to swap their jeans for hard currency behind the Iron Curtain. Then the punishments get more severe to deter such defiance of the law.
The world has lost one of its great thinkers. Fortunately we still have the power of his thought.