Gary s Becker The Economic Approach to Human Behavior The University of Chicago Press ^ Chicago and London Γ iJ ΙΠ Γ ΓΊ d Π IÜ "Ί Π I J f l iX l r u n I Id r ir r r n ^ n To Milton Friedman, H Gregg Lewis, T W Schultz, and George J Stigler, from whom learned about the economic approach Gary S Becker is University Professor in the D epartm ent o f Economics, University of Chicago, and Research Policy Adviser to the Center for Economic Analysis o f Hum an Behavior and Social Institutions o f the National Bureau o f Economic Research» Among his previously published books are The Economics o f Discrimination (1957, rev» ed 1971) and Human Capital (1964, rev ed 1975) The University o f Chicago Press, Chicago 60637 The University o f Chicago Press, L td., London © 1976 by The University o f Chicago All rights reserved Published 1976 Printed in the United States o f America 80 79 78 77 76 987654321 Library of Congress Cataloging in Publication D ata Becker, G ary Stanley, 1930The economic approach to hum an behavior Includes bibliographical references and index L Economics—Addresses, essays, lectures Z Social sciences—Addresses, essays, lectures L Title HB71.B43 330 75-43240 ISBN 0-226-04111-5 Contents Part Introduction 1 The Economic Approach to Human Behavior - · ^ Part Price and Prejudice 15 Effective Discrimination 17 Part Law and Politics 31 Competition and Democracy 33 Crime and Punishment: An Economic Approach 39-fcS" Part Time and Household Production 87 (5^) A Theory of the Allocation of Time 89” λλΗ The Allocation of Time and Goods over Time ΙΙδ-Λ'&Ο On the New Theory of Consumer Behavior (with Robert T Michael) 131 -/UH Part Irrational Behavior 151 Irrational Behavior and Economic Theory 153 -}$& Part Marriage, Fertility, and the Family 169 JIPGO (5 ) An Economic Analysis of Fertility 171 (jo) On the Interaction between the Quantity and Quality of Children (with H Gregg Lewis) 195-?β?Λ 11 A Theory of Marriage: The Economics of the Family 205 " 2SO Contents Part Social Interactions 251 12 A Theory of Social Interactions 253 13 Altruism, Egoism, and Genetic Fitness: Economics and Sociobiology 282 ~ 2AH References 295 Index 310 Part Introduction The Economic Approach to Human Behavior Economy is the art o f making the most o f life George Bernard Shaw The following essays use an “economic” approach in seeking to under­ stand human behavior in a variety of contexts and situation?; Although few persons would dispute the distinctiveness of an economic approach, it is not easy to state exactly what distinguishes the economic approach from sociological, psychological, anthropological, political, or even genetical approaches* In this introductory essay I attempt to spell out the principal attributes of the economic approach Let us turn for guidance first to the definitions of different fields* At least three conflicting definitions of economics are still common Economics is said to be the study of (1) the allocation of material goods to satisfy material wants,1 (2) the market sector,2 and (3) the allocation of scarce means to satisfy competing ends.3 For very helpful comments I am indebted to Joseph Ben-David, Milton Friedman, Victor Fuchs, Robert T Michael, Jacob Mincer, Richard Posner, and T W Schultz I am especially indebted to George J Stigler for many discussions, comments, and much-needed encouragement, and to Robert K Merton for a very helpful and lengthy response to an earlier draft that provided a sociologist's perspective on the issues covered in this essay The usual disclaimer to the effect that none of these persons should be held responsible for the arguments made in this essay is especially appropriate since several disagreed with the central theme “[Economics] is the social science that deals with the ways in which men and societies seek to satisfy their material needs and desires," Albert Rees (1968); "[Econom­ ics is the] study of the supplying of man's physical needs and wants," art “Economics»” The Columbia Encyclopedia, 3d ed p 624; and see the many earlier references to Marshall, Cannan, and others in L Robbins (1962) A C Pigou said “[Economic welfare is] that part of social welfare that can be brought directly or indirectly into relation with the measuring rod of money” (1962, p 11) “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses," Robbins (1962, p 16); “Econom­ ics is the study of the allocation of scarce resources among unlimited and com­ peting uses," Rees (1968) and many other references Introduction The definition of economics in terms of material goods is the narrowest and the least satisfactory It does not describe adequately either the market sector or what economists “do.” For the production of tangible goods now provides less than half of all the market employment in the United States, and the intangible outputs of the service sector are now larger in value than the outputs of the goods sector (see Fuchs 1968) Moreover, econo­ mists are as successful in understanding the production and demand for retail trade, films, or education as they are for autos or meat The persis­ tence of definitions which tie economics to material goods is perhaps due to a reluctance to submit certain kinds of human behavior to the “frigid” calculus of economics The definition of economics in terms of scarce means and competing ends is the most general of all It defines economics by the nature of the problem to be solved, and encompasses far more than the market sector or “ what economists do.”4 Scarcity and choice characterize all resources allocated by the political process (including which industries to tax, how fast to increase the money supply, and whether to go to war); by the family (including decisions about a marriage mate, family size, the frequency of church attendance, and the allocation of time between sleeping and waking hours); by scientists (including decisions about allocating their thinking time, and mental energy to different research problems); and so on in endless variety This definition of economics is so broad that it often is a source of embarrassment rather than of pride to many econo­ mists, and usually is immediately qualified to exclude most nonmarket behavior.5 All of these definitions of economics simply define the scope, and none tells us one iota about what the “economic” approach is It could stress tradition and duty, impulsive behavior, maximizing behavior, or any other behavior in analyzing the market sector or the allocation of scarce means to competing ends Similarly, definitions of sociology and other social sciences are of equally little help in distinguishing their approaches from others For example, the statement that sociology “ is the study of social aggregates and groups in their institutional organization, of institutions and their organization, and of causes and consequences of changes in institutions and social organization” (Reiss 1968) does not distinguish the subject matter, let alone the approch, of sociology from, say, economics Or the statement that “comparative psychology is concerned with the behavior of different species of living organisms” (Waters and Brunnell 1968) is as general as the definitions of economics and sociology, and as uninformative Boulding (1966) attributes this definition of economics to Jacob Viner * Almost immediately after giving the broad definition of economics, Rees (1968) gives one in terms of material needs, without explaining why he so greatly reduced the scope of economics Even Robbins, after an excellent discussion of what an economic problem is in the first chapter of his classic work on the nature and scope of economics (1962), basically restricts his analysis in later chapters to the market sector The Economic Approach to Human Behavior Let us turn away from definitions, therefore, because I believe that whatx most distinguishes economics as a discipline from other disciplines in the social sciences is not its subject matter but its approach Indeed, many kinds of behavior fall within the subject matter of several disciplines: for example, fertility behavior is considered part of sociology, anthropol­ ogy, economics, history, and perhaps even politics I contend that the economic approach is uniquely powerful because it can integrate a wide range of human behavior Everyone recognizes that the economic approach assumes maximizing behavior more explicitly and extensively than other approaches do, be it the utility or wealth function of the household, firm, union, or government bureau that is maximized Moreover, the economic approach assumes the existence of markets that with varying degrees of efficiency coordinate the actions of different participants—individuals, firms, even nations—so that their behavior becomes mutually consistent Since economists generally have had little to contribute, especially in recent times, to the under­ standing of how preferences are formed, preferences are assumed not to change substantially over time, nor to be very different between wealthy and poor persons, or even between persons in different societies and cultures Prices and other market instruments allocate the scarce resources within a society and thereby constrain the desires of participants and coordinate their actions In the economic approach, these market instruments perform most, if not all, of the functions assigned to “structure” in sociological theories.6 The preferences that are assumed to be stable not refer to market goods and services, like oranges, automobiles, or medical care, but to underlying objects of choice that are produced by each household using market goods and services, their own time, and other inputs These underlying preferences are defined over fundamental aspects of life, such as health, prestige, sensual pleasure, benevolence, or envy, that not always bear a stable relation to market goods and services (see chapter below) The assumption of stable preferences provides a stable foundation for generating predictions about responses to various changes, and prevents the analyst from succumbing to the temptation of simply postulating the required shift in preferences to “explain” all apparent contradictions to his predictions The combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly, form the heart of the economic approach as I see it They are responsible for the many ‘ theorems associated with this approach For example, that (1) a rise in price reduces quantity demanded,7 be it a rise in the market price of eggs reducing the demand for eggs, a rise in the “shadow” price of children* * An excellent statement of structural analysis can be found in Merton (1975) That maximizing behavior is not necessary to reach this conclusion is shown below in chapter f f I * Introduction reducing the demand for children, or a rise in the office waiting time for physicians, which is one component of the full price of physician services, reducing the demand for their services; (2) a rise in price increases the quantity supplied, be it a rise in the market price of beef increasing the number of cattle raised and slaughtered, a rise in the wage rate offered to married women increasing their labor force participation, or a reduction in "cruising” time raising the effective price received by taxicab drivers and thereby increasing the supply of taxicabs; (3) competitive markets satisfy consumer preferences more effectively than monopolistic markets, be it the market for aluminum or the market for ideas (see Director 1964, Coase 1974); or (4) a tax on the output of a market reduces that output, be it an excise tax on gasoline that reduces the use of gasoline, punishment of criminals (which is a "tax” on crime) that reduces the amount of crime, or a tax on wages that reduces the labor supplied to the market sector The economic approach is clearly not restricted to material goods and wants, nor even to the market sector Prices, be they the money prices of the market sector or the "shadow” imputed prices of the nonmarket sector, measure the opportunity cost of using scarce resources, and the economic approach predicts the same kind of response to shadow prices as to market prices Consider, for example, a person whose only scarce resource is his limited amount of time This time is used to produce various commodities that enter his preference function, the aim being to maximize utility Even without a market sector, either directly or indirectly, each commodity has a relevant marginal “shadow” price, namely, the time required to produce a unit change in that commodity; in equilibrium, the ratio of these prices must equal the ratio of the marginal utilities.8 Most importantly, an increase in the relative price of any commodity—i.e., an increase in the time required to produce a unit of that commodity—would tend to reduce the consumption of that commodity The economic approach does not assume that all participants in any market necessarily have complete information or engage in costless transactions Incomplete information or costly transactions should not, however, be confused with irrational or volatile behavior.9 The economic approach has developed a theory of the optimal or rational accumulation * He maximizes U «* U(Z, Zm) subject to Zi = M id and Σ'ι = Λ where Z , is the ith commodity, / the production function for Z t, and u is the time input into Z t The well-known first-order equilibrium conditions for the allocation of his scarce resource, time, are: — = Λ— i —- - i - dZ, “ dZi dZJdt, m MP„ * where X is his marginal utility of time * Schumpeter appears to confuse them, although with considerable modification (1930, chap 21, section “Human Nature in Politics”) 300 References Friedman, M 1953 “The Methodology o f Positive Economics.” In Essays in Positive Economics Chicago: University of 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New York: Holt Index Africa, polygamy in, 240-41 Alchian, A A., 164,167 n, 235 n, 284 a Allport, G., 19 n Alstrom, C H., 224 Altruism, 283*93 Artistic services, 11 Bajema, C J., 214 n Bandwagon effect, 155 n, 255 Barro, R J., 266 n, 267 n Becker G S., 8,12 n 13,35 n, 37 n, 50 n, 61,89 n 93 n 96 n, 121 n, 130 n, 137 n, 142 n, 189 n 195,1%, 197,234 n, 235 n, 237 n, 244 n, 266 n, 277 n, 284,294 Beckman, M., 216 n Bendix, R., 273 n Benham, L., 141,225,225 n, 241,248 n Bentham, J., n, 8-9,55 n, 61 n, 63 n, 64 n, 137,137 n, 254,256,279o Ben-Porath, Y., 122 n, 129 n, 144 Ben*Zion, IK, 116 n, 220 n Bequests, 267-68,271,277 Black, J D ,2 l8 n Blau, P M ,257n, 288n Bodmer, W F „ 225,241,242 n Business cycles See Children, the effect of income on the demand for Cagan, P., 42 n Cavalli-Sforza, L L„ 225, 241,242 n Charity, 273-75,283-93 Children: child labor laws and, 190; cost of, 175-78,189-90,195-204; as durable 310 goods, 172-73,175,188-89,195-204, 226; education and, 199; effect of income on the demand for, 173-77,179-90,19699; quality and quantity components of, 173-74,176-91,195-204; role of, in mar­ riage, 210-14,225-27,241-44; stock-flow relationship of, 191; supply of, 178-79; uncertainty and the demand for, 178, 188-89 Chow.G C., 174 n Coale, A S., 242 o Coase R., n, 11,283 n 288-89 Collusion See Monopoly Commodity, 6,91-94,99-100,134-35,2078,216,226,234-36,256-57; children as a, 105-6,172-79, 226; genetic fitness as a, 289-90; travet activity as a, 106-8, 141-42 Commuting costs, 106-8 Conrad, A H f 175 n Consensual unions See Marriage Consumer demand: household production approach to, 134-48; irrational, 156-63, 158 n; traditional approach to, 131-34, 1S3-56,157-58 See also irrational behavior Consumption of commodities over time, 118-20,125-26,129-30 Corbett, W I., 101 n Cote solution, 215-16 Cramer, J S.v 132-33 Crime: apprehension and conviction costs of, 44-46,50-55,57-63,75,76.79-85; as 311 Index an income transfer, 41,43,44,278; damages imposed by, 42-44,50-55, 79-85; economic definition of, 40,43; expenditures on, 41, 70-71; punishment of, 49-50,54,56-85; recent trends of, 42; risk preferences and, 48-49,53-54,73, 79-85; social costs of, 41,50-55,59,63, 72,74-75, 79-85; supply of, 46-49,5355,59-63, 75, 79-85 ; Cross section analyses, 103 Dean, E ,90 De Grazia, $., 99 n, 100 n Demand curves, 154-63 See also Consumer demand Democracy, 34-36 Demsetz, H., 235 n DeTray, D., 195,199-200,268 n Director, A„ 6,11 Discrimination: against women, 241 n; economic minorities and, 21-22; effective (MDC), 20-21; effects of, on income, 1718,23,25, 25 n, 27-29; numerical minori­ ties and, 21-22; in South Africa, 24-25; tariffs and, 18 n; in the United States, 22-24 Divorce See Marriage, life cycle patterns of Donne, J., 253 Dorjahn, V R ,239n,240 Downs, A., 31 Economic, definitions of, 3-5 Education, 145; contraception information and, 183-88 See also Human capital; Marriage, effects of education on; Mar­ riage, choice of mate Egoism, 283-93 Ehrlich, I., 46 n, 56, 116 n, 143, 220 n, 237 n, 266 η, 278,279 η Elasticityof substitution: 100-112,118-25, 139-47,198-204, 209, 217,223,231 Envy and hatred, 278-80 Family: interactions within, 264-73; re­ source allocation within, 108,130,26673 See also Income, intrafamily alloca­ tion of Family size, income and, 105-6,173-77, 179-92; mortality rates and, 174-75,189 See also Children, quality and quantity components of Fertility, 143-44,171-93; contraception and, 172,178-92; mortality and, 174, 189-90; urban-rural effects on, 190-91 See also Children, quality and quantity components of Finnegan, A., 103 n Firms, households and, 141; survival theory of, 164 Fisher, Irving, 118-20,119 n, 242 n, 255 Foregone earnings See Shadow prices Freedman, R., 182 n Freiden A., 143-44,225,230 n, 243 Friedman, M., n, 93 n, 164 n Fuchs V ,4 ,103 n Full costs See Shadow prices Galbraith, V.L., 185n Genetic fitness, 283-93 Genetic traits, 240-42,283 Ghez, G., 121 n 130 n, 137 n, 142 n Glass, D.V , 178 n, 182 n Goldberg, D., 182 n Goode, W ,206n, 211,240 Government intervention, 33,37 Grebenik, E., 178 n, 182 n Griliches, ZM14,138 Gronau, R„ 141,224 n Grossman, M., n, 10 n, 136 n, 143,208 n, 226 n Guttentag, J., 188 n Hague, D C , 101 n Hall, E T , 110 n Hammermesh, D., 10 n Harper, F V., 68 n 69 n Heckman, J J., 142 n, 143,224 n Henderson, J Μ., 98 n Hicks I R.,218n Higgins, J V«, 214 n Himes, N A., 179 n, 180 Hotelling, H., 169 n Houghton, D H., 25 n Houthakker, H., 110 n, 178 n, 192 n, 196 Human capital, 89*90,101; investments in, 122-25,127-30,142-43,271-73; life cycle consumption and, 126-28; produc­ tion function for, 122; as production shifter, 126-29,142-43; return to, 12324,127-28,142-43,145-46 Huntington, E., 183 n Income: contraception information and, 180-87; distribution of, 241-42; effects of tax on, 101; effects of a change in, 155, 156; effects of a change in full, 97,10112,141; elasticities, 104-6,174-77,26063,274-75; elasticities, biases in, 192, 312 Index 197-99« 201-3; family size and» 105-6« 195-203; full, 93-95» 105» 135-37,197203,208,235-36,257-80,285, 290; intrafamily allocation of, 215-16,226-32, 235-38» 248-50, 264-73; psychic, 94, 172-73; social environment and, 257-80, 285-93 Innovation, 73-74 Inputs, the demand for productive, 163-66 Intellectual services, 11 Irrational behavior, 145,156-66; by firms, 163-66; by households, 156-63 James, R , 68 η» 69 n Jencks, C., 12 n Johnson, G Z., 180 n Johnson» T., 75 n Joint production, 91 n, 140 n, 208 n, 226 Juster, T., 143 n, 183 n Keetey, M., 11,212 n, 213,243 n Kessel, R.» 167 o Keynes, J M., 12,138 Kirk, D.t 185 n, 186 n Kiser, C V 180 n, 181 n, 182 n, 193 Knight, R , 102 n Kogut, E L., 212 Komasar N K „ 143 Koopmans, T C , 216 n Kuratanti, M., 218 n Lamson, H D., 183 n Lancaster, K., 134 n, 140 Undes, W.,41 n ,7 n Leibenstein, H., 176 n Leibowitz, A S., 143, 225,241 Leisure, 98-106,109,118; definition of, 99-100 See afro Time, allocation of: Time, determination of work Leontief W „ 138.139 Lewis, H G „ 195-204,224,246 n Life expectancy, 9-10,143 Linder, SM142 n Lipset, S M., 273 n Maitland, F W., 63 n, 65 n Malthus, T., 171,174 Marital status, 10-11,205-50; sex ratios and 228-32 Market goods, demand for, 108-12,119-22 Marriage, 143-44,205-50; caring and, 23738; choice of a mate in, 214-32» 23440,245-50; costs of, 212,235-36; gains from, 207-14,217-28; k>ve and, 210,233; patterns over the life cycle, 242-44; polygamy and, 211-12,338-41; presence of children and, 210-14,216.225,24144 Marris» R L , 158 n Marshall, A., 40 n, 131,137,254,256, 282 n, 284 n Marx, K., Marxist economic approach, Maybuty-Lewis, D., 240,240 n McCall, J J , 243 n McNeil, D R ,2 n Merit goods, 271,275-77 Merton, R K., n, 11 n Meyer, J R., 175 n Michael, R., 12 n, 126 n, 131-49,146 n, 294 n Milk services, 110-11 Mincer, J., 12 n, 90,103 n, 104 n, 106 a, 141.272 η Mitchell, W C n , 138 Monopoly, 68-69, 73; maintenance of a, 75-77; in market sector, 33,165-66; in political sector, 37 Mormons, polygamy and, 239-40 Mortensen, D Τ», 243 n Muth R., 109 n, 134 o, 140 n Neel J V.» 240.240 η Nelson, P J., 12 n, 243 n Nerlove, M., 230 n Ofek, Η.» 143,220,223 η Okun, Bernard, 177 n Owens, J., 90,101,142 Panteleoni, M., 255 Pareto optimality, 112 n Parson, D., 267 n Peltzman, 267 n Philcox, D., 25 n Pigou, A C., n, 255 Pleasure-pain calculus, Pollock, R , 63 n, 65 n Polygamy, 211-12,338-41 Portfolio management, 220-21 Potter, R G v 182 Prais, S J., 110 n, 192 n Preferences, 133,144-46,155,173; forma­ tion of, 14,133,173; revealed, 160 President's Commission on U w Enforce­ ment and Administration of Justice, 41, 42.44 n, 58 n, 66.286n Price ceilings, 111-12 313 Index Price elasticities, 161-62,176-77; biases in measurement of, 111-12 Prices: changes in market, 101,109-12, 155-63; changes in relative factor, 13940,163-66; market, 6,104 Production function, 22, 26-30,144-47, 217-22; age and, 125-26; and human capital, 122,126-28; household, 91-93, 116,134-35, 210-11,217-22,256, 289-90 Productive consumption, 99-100 Punishment S e e Crime, punishment of Quality, income elasticities for, 105,110 S e e a ls o Children, quality and quantity components of Quandt, R E v98 n Quantity, income elasticities for, 105 S e e a ls o Children, quality and quantity components of Queue, 111-12 Radzinowicz, L., 54 n Rationing, 111-12 Reed, S.C , 214 n Reed, W E ,214n Rees, A ,3 n ,4 n Reid, M., 108,110-11,138 Reischauer, R., 225,230 n Reiss, A I., Risk preferences, 48-49,53-54,73 Rivets, W H., 239 n Robbins, L., n, n Roper, E.t 24 n "Rotten kid" theorem, 270,286-89,293 Saenger, G., 19 n Salzano, F M», 240 n Samuelson, P., 156 n, 164 n, 269,277 n Santos, F P., 225, 230 n Savings, 116 n Schilling, T C., 77 n Schoeck, H., 279n, 280n Schultz, T W „ 14, 89 n, 142 n, 144, 230 n, 239 n Schumpeter, J., n, 31, 34,69 Schwartz, R., 274-75 Segregation, 19-21 Seneca, 253 Senior, N., 137-38,254,256-57,282 n Separability, 138,140,147 Service sector, productivity in, 103-4 Shadow prices, 6.65.99,136.209-14,221, 258,290-93; changes in , 97-112,139; components of, 93,95-96,104-12,118, 123-25,127-28,209; relation between quality and quantity, 195-204; social environment and, 263-80,290-93 Sharp, H., 182 n Shaw, G B ,3 ,8,241 η Shawness, Lord, 46 n, 47 n, 56 Simons, H., 33 Smigel, A., 46 n, 47 n, 56 Smith A., 8,12,279-80,282 n, 283 n Smith, I P , 143,220,223 η Snob effect, 155 n, 255 Social income S e e Income, full; Income, social environment and Social interactions, 256-81,283-93 S e e a lso Marriage, love and; Marriage, caring and Sociobiology, 283-93 Soss.N.M., 10 η South Africa, discrimination in, 24-25 South America, polygamy in, 239-40 Stable preferences, the rote of, 5,7 Stigler, G„ 7n, 11 n, 12,13,75 n, 138, I90n, 243 n, 277 n Sutherland, E H., 46,64 n Tarver, J D„ 175 n Tastes S e e Preferences Taussig M., 274-75 Theil, H 177n-78n, 196 Thomas, D S.v 185 n Time, allocation of, 93-95,119-26,142; determination of work, 96-106,109,143; intrafamily allocation of, 209-14,220-28; marginal importance of, 97,99; produc­ tivity of, 101-6,109,124-25 S e e a lso Shadow prices, components of Time series, 103 Tobin, J., 93 n Tomes, N., 284 Torts, law of, 68,71 United States: charity in, 280; fertility in, 179-90; marital status in, 213-14; mobil­ ity in, 273 n; racial discrimination in, 2224 Vance, R„ 197 Variable proportions, 108-9 Veblen, T., 255,279-80 Wages: determination of, 123-24,128-29; effects of change in, 97-98,100-112,11830,213-14 See a lso Human capital, investments in Walsh, B.M , 230 o 314 Index Wealth, full 117 Whelpton, P K 181 n, 182 n 193 Whitney, L F 183 n Wilkerson, D A 19 n Willis, R., 144,195, 196, 199n Wilson, E O., 283,288 n, 290-93 Winch R E„ 211, 217n, 224n Young, K., 239 n, 240 n ... Introduction The Economic Approach to Human Behavior Economy is the art o f making the most o f life George Bernard Shaw The following essays use an economic approach in seeking to under­ stand human behavior. .. reduces the labor supplied to the market sector The economic approach is clearly not restricted to material goods and wants, nor even to the market sector Prices, be they the money prices of the. .. on this work and the rapidly growing body of related work by others did I conclude that the economic approach was applicable to all human behavior The economic approach to human behavior is not