Gary Becker's singular contribution has been to broaden the reach of economics into spheres it previously ignored and to thereby transform both those fields and economics itself. Crime, the family, addiction, preference formation and discrimination are a few of the areas to which he has applied the analytic tools of microeconomics. Becker has explored each of these phenomena with the underlying assumption that humans behave rationallyattempting to maximize their utility, however they define it, under whatever constraints they may face.
In the early years, this scrutiny was often unwelcome. Many economists believed he was going too far afield. Social scientists in other disciplines dismissed his views as overly mechanistic. How could economics possibly contribute to an understanding of something as deeply personal as intrafamily relations or as complex as crime? But Becker's elegant theoretical models, testable hypotheses and uncannily accurate predictions eventually won the respect of his critics. Over time, his initially controversial views became part of the canon of modern microeconomics and his methods of analysis are now common practice in law, criminology, family social science, demography and other fields.
Becker was awarded the Nobel prize in economics in 1992 for "having extended the domain of microeconomic analysis to a wide range of human behavior and interaction, including nonmarket behavior." The award, said former Treasury Secretary and current Harvard University President Lawrence Summers, "was the most overdue prize they've ever given." In 2000, Becker was awarded the National Medal of Science, the nation's highest scientific honor.
Our interview with Gary Becker is fittingly broad, ranging from his views on moral hazard in banking, to the intriguing genesis of his work on the economics of crime, and the (mostly) rational decision-making that led to his becoming an economist. As always, he reveals the humanistic vision that underlies his work and the intellectual rigor that is its hallmark.
REGION: I understand that you found the initial inspiration
for your work on the economics of crime while searching for a parking
BECKER: True story.
REGION: Would you tell us that story?
BECKER: I was coming down for an oral exam at Columbia
University when I was teaching there. In those days instead of written
exams for Ph.D. students, we gave them orals. And my task was to
ask a half-hour of questions on price theory. I was living in the
suburbs, I drove down to Columbia and I was a little late. And it's
New York City, so it's not easy to find a parking place. Columbia
had no parking for its faculty in those days, so either you parked
illegally or you went into a parking lot. Those were your choices.
So as I got there I had to make that decision. I remember making
that calculation of what are my chances if I park it in an illegal
spot. Or, there was a parking lot a couple of blocks away and I
would have a longer walk and, of course, it cost a little money.
I started thinking about my chances of getting caught. As I walked
over to the examit took me about 10 minutesI'm realizing
that if I'm thinking about my chances, the police, if they're being
rational, must also be thinking about that. What's the likelihood,
the chance of catching somebody? They don't want to spend every
minute looking, so they do some kind of a probability analysis.
And so they're kind of in a war against the offenders.
So I thought through some of this, and when I got to the exam the
first question I asked the student was, "How do you work out
that problem?" I did not think he would get the answer easily.
I just wanted to see how he went about thinking about the answer.
I don't remember the details of that. My impression is he did not
do well. The question was a little tough. But after I finished the
exam, I said, "Gee, this is an interesting topic." I started
working on it seriously at that point. That's exactly how that went.
Then I began to see a little better how to set up the problem. I
set it up so that society was trying to minimize the expected loss
from criminals, taking account of the damage done by the crime,
cost of policing, cost of taking somebody to trial, cost of punishment,
how much deterrence there would be if criminals expected greater
punishment or lesser punishment, and so on. I had a model of the
criminal and a model of society, and I put those two together to
get a solution as to how much crime there should be.
I looked at a little data to check my simple predictions, that the
more serious crimes should have greater likelihood of being convicted,
which we did find, and criminals convicted of these crimes would
face greater punishments, which they do. I had several students
who subsequently worked on this problem and you know, crime is now
a pretty vibrant area in economics.
I just came back from Mexico on Saturday. Crime may be the number
one problem in Mexico. Businessmen talk about it, the average citizen
talks about it. It's just a horrendous problem. Crime is a worldwide
problem, more so in some countries than in others. It affects the
economy, often significantly sowhere people locate, where
businesses locate. And I guess in a sense I began to think about
it by accident. But I am very happy that accident happened.
REGION: You've had a profound influence on the field of
law and economics. But five years ago, at a Law and Economics roundtable
at the University of Chicago with Ronald Coase, Richard Posner and
Merton Miller, you said, "Despite its enormous success, law
and economics has entered a more static, more sterile period."
And I believe you also said that that period might be prolonged
because its theoretical development has been largely detached from
empirical research. Are you still concerned about the future of
law and economics?
BECKER: Well, I am still concerned, although some of the
leaders in law and economics did not like my saying that. Some of
my best friends did not like it. But I believe it was an accurate
statement and sometimes disguised by the fact that law and economics,
which started at Chicago and then moved across the United States,
has been spreading throughout the world. So it still seems very
robust. I am going to a conference in Greece on law and economics,
and I have been invited to several in Mexico City and Latin America.
So it is a wonderful development that law and economics is spreading.
But at the pioneering level, there is less novelty. Of course there
is still interesting work being done, but all fields go through
a period of static development once the initial excitement wears
off. I mean, that is inevitable. I do not intend to knock law and
economics. Every single field within economics goes through that
cycle. You can delay that more when there is a closer dialogue between
the data and the theory, because then you take your inspiration
from data developments rather than from what other economists or
lawyers are writing about. Fields become sterile when the source
of inspiration for additional work is simply the literature in the
field rather than the world out there. We can see many fields where
it is the literature that generates what gets done, not the problems
encountered in the world.
Law and economics is not completely divorced from problems, by no
means. It is much better than certain other fields in economics
because it is always dealing with cases and new issues. But many
of the leading law and economics people have been theorists who
have not been interested in, or been very familiar with, the empirical
side of things. I have nothing against having some people who are
purely theorists or purely empirical. There is much room for a division
of labor. But you need many people arbitraging between the empirical
and theoretical sides. Unless you have that, I believe fields become
sterile. You are beginning to see more of that arbitrage in law
and economics. [William] Landes and [Richard] Posner have done that
for many years. Still, the excitement is less in law and economics
now than 20 years ago or 10 years ago, although it can revive.
REGION: If I'm not mistaken, you said that family law would
be a good area in which to do more law and economics work.
BECKER: That is one of the areas I am familiar with. Family
law has been looked down on in law school; it is not considered
a field that top people should go into, and that is a mistake. The
family is such an important institution in society. It has evolved
so much. Families have not been static and have changed so much.
There are many interesting areas of family law like divorce, fertility,
child care, and one could go on and on. For example, should two
homosexuals have the right to be parents of a child? Should they
have legal rights for marriage? What should be the role of marriage
contracts, of custody provisions? These issues are being discussed
now, and they combine law and economics. There are only a couple
of outstanding people in the law and economics field who have made
family law an important part of their speciality. That's clearly
one area where much more can be done with the tools of law and economics.
REGION: I'd like to turn to another policy issue. As you
know, the Fed has a charge to implement the Community Reinvestment
Act, basically to make sure that banks meet the lending needs of
their communities. Implicit in that charge is ensuring that banks
don't discriminate racially or otherwise in their lending practices.
But defining and identifying discrimination in lending or in other
economic endeavors is often difficult in practice. In a very real
sense you laid the groundwork for this in your doctoral dissertation,
which later became your first book, The Economics of Discrimination,
So, I have a three-part question. Could you explain how you have
defined that type of discrimination in the economic sense? How does
your definition differ from that codified in the law? Finally, how
would you change the current legal response to actions defined as
discriminatory in the lending arena?
BECKER: Those are all important questions. Well, to me discrimination
occurs when, let me give an example: You can hire, let's say, a
man and woman at equal wages, but you prefer the man. Even if the
wages were a little bit less, you would prefer the man. I would
say you have a prejudice, or a preference, against women, or against
blacks or Hispanics, or Chinese or foreigners, whatever the group
may be. That is how I define discrimination. A person discriminates
if he is willing to pay to avoid working with a woman. If you do
not want a woman as your boss, you are willing to pay for that privilege.
To define discrimination I use the economic concept of willingness
to pay, which is crucial in all parts of economics.
REGION: Is that essentially the discrimination coefficient?
BECKER: That's the discrimination coefficient, a measure
of how much you are willing to pay. Discrimination comes from prejudice,
and I translate that into a monetary amounthow much you are
willing to pay. So how much less would women's wages have to be
than men's wages before a person is indifferent between hiring them?
That is a function of how much he is willing to pay to avoid hiring
women. That is what I start with.
Therefore, if you want to look at discrimination by a bank, you
have to ask if the bank gets an application from, say, blacks and
whites, is it giving up profits in order to avoid lending to blacks?
A profit test would be the crucial test. If they are not giving
up profits, then maybe they are not lending to blacks because blacks
are a poor risk, they won't pay it back, they have lower incomes,
they're more likely to be unemployed. So you have to look at profits.
The problem with many studies, such as the Boston Fed's study [Mortgage
Lending in Boston: Interpreting HMDA Data, 1992] which has received
enormous attentionand I wrote a BusinessWeek response
which in turn created a furor and led to a counter-responsewas
what they do not look at. You see, they had a very sophisticated
study but along a particular line. Namely, they said, well, let
us look at the propensity to turn down black applicants and white
applicants after we adjust for as many variables as we can that
might make a difference. That is perfectly legitimate, as far as
it goes. And they adjusted for a lot of variables, and they still
found a greater propensity to turn down blacks. Even if you look
at blacks and whites who have the same 50 characteristics, whatever
they may be, and the study had a lot of variables, they found still
a greater propensity to refuse blacks. So they concluded that there
Now my response wasand the response from the theory would
bewell, yes, you looked at a lot and that's better than not
looking at any, but we can never look at everything that bankers
know. All we can do as analysts is look at the data we can get access
to. We cannot get into the knowledge set or prejudices of people
making the decision. OK? We cannot. So maybe they are prejudiced,
but maybe they had more knowledge and we do not know that.
So I indicated that it was necessary to measure how successful were
the loans made to blacks. Are they better loans for banks? Are banks
making more money on these loans? Is there a lower default rate?
Are they getting higher interest rates? And so on. The Fed study
did not do that. Some economist subsequently did that. There is
a lot of controversy now about what one finds. Some people say you
do not find any difference in profitability. Others say you still
find a difference. I have a student at Chicago doing still another
dissertation with data on interest rates charged as well as default
rates that can be used to study discrimination.
Presumably, black-owned banks do not discriminate against blacks,
or not as much as white-owned banks. Are they lending to blacks
in greater propensities and making a higher return on their investments?
Or what are the policies and profits of female-owned banks?
I do not know the answer to those questions, but my belief is that
the Boston Fed study greatly overstated the degree of discrimination
by banks. That does not mean there's none. It is still an open question
whether there is any and how much, but I am sure their study didn't
prove that there was much discrimination.
It was unfortunate that they were willing to go so quickly from
a decent study to a policy recommendation. On policy issues you
have to be pretty careful. I mean, it's OK if I write about policy
in BusinessWeek without firm data. It is okay for a columnist
to be talking about policy without fully convincing data. Similarly,
for a politician who must vote without definitive evidence. But
the Fed did a research study. They should have exposed that study
to criticism and waited to see what emerged before going to a policy
recommendation. That is what bothered me most about the study.
REGION: So you're saying that at this point the data aren't
all in; therefore, changing the legal response isn't warranted?
BECKER: That's my opinion. Other people have looked at this
data and they have a different opinion. When I evaluated the data,
I concluded that there does not seem to be a lot of discrimination
by banks. That is my evaluation of what I have seen, but the studies
are ongoing. Maybe that will be changed by further data.
REGION: You just touched on your work, in essence, as an
economic educatoryour column in BusinessWeek. What
do you feel about the state of economic literacy in the United States?
There's certainly a great deal of economic news in the public arena.
But are Americans by and large sufficiently literate in economics?
If not, what should be done to improve the state of affairs?
BECKER: Economics is an easy subject and a difficult subject
at the same time. It is easy in the sense there are only a few principles
that really guide most economic analysis. It is simple and yet it's
obviously very difficult. I have dealt a lot with Nobel laureates
in physics, chemistry and other fields who have very strong opinions
on economic issues and usually they are terrible. These are obviously
first-class minds, but they have not given economic issues much
attention. They believe that they can casually talk about an economic
issue and come up with the right answer, that one just has to be
intelligent. This is obviously not the case. There are economic
principles. If you do not use these principles, you are likely to
come to the wrong answers.
Clearly the American public could be much better informed and more
sophisticated. One of the problems is that members of the news media,
especially those on television, are themselves not that familiar
with economic principles. The print reporters are a lot better than
the television people. You get some terrible economics when you
listen on TV to the news; in the print media it varies a great deal.
There has been an enormous improvement in the sophistication of
the writings on economics by newspapers and magazines during the
last 30 years. There were only a few people 30 years ago who wrote
about economics in an intelligent way. Now there are many more.
Academic economists are worried that journalists do not dot all
the i's and cross all the t's, but having written a regular column
for many years, I have more sympathy toward journalists. They have
limited space, and they must be clear but short. What is the basic
message without giving all the qualifications. So while much of
the journalistic economics is bad, it's greatly improved over what
The American public are frightened by economics. When you mention
you are an economist, people say they took an economics course in
college and they were terrible at it. I believe an economist should
try to get people to relax over economics, should express concepts
in simple language and show how to deal with important problems
in a fairly simple way. Sometimes the results are counter to their
common sense, but often it's a way of articulating their common
sense. They cannot articulate that very well, but once they hear
it they say, gee that makes a lot of sense.
So you try to appeal to their understanding, and you carry the argument
beyond where they can carry it themselves. There are some things
that they cannot reason through even if you articulate the issues,
so you really have to help them a lot. But much of the time you
are leading them in ways that they can see. If you write well and
clearly, you bring them along with you. That's what you try to do.
I was recently down in Mexico City to help launch the Spanish translation
of my book, the Economics of Life, a collection of my essays
that I edited with my wife. I stressed there that few important
conclusions of economic analysis cannot be expressed in simple language.
The challenge is to find how to do that. Many intellectuals, many
economists, use obscure language when they write. Sometimes it is
a way of disguising that they are not saying a heck of a lot. Of
course, some propositions are tougher to express. I'm not claiming
they are all equally easy. But there are few ideas for which you
can't give an intelligent person a feel for the basics. The challenge
to a writer is to do that.
REGION: You've done a great deal of work on intergenerational
economic transfers. What are your views about social security? Should
individuals be given more discretion over their social security
monies? What would be the optimal design for a social security system?
BECKER: I do believe individuals should be given most of
the discretion over their money, and I believe very much in a privatized
system. But the selling of privatization has stressed the wrong
issues. There are no magical higher rates of return from a private
rather than public system. That is not the reason to privatize.
The present Social Security system is a mixture of an annuity and
redistribution system. The redistribution system discourages many
people from working at older ages when they are healthy enough and
would want to continue working. Social Security gives them an incentive
not to work because they are taxed so heavily on their earnings.
It is really incredible, given that work is now much less physically
demanding, and people are much more mentally and physically stronger
than they used to be.
There are two inefficiencies: the first is the Social Security tax
on the earnings of working people. It is a tax because workers do
not get back dollar for dollar what they put in. They get back around
30 cents on each dollar they put in. Second, at the other end, the
system discourages older people from working because their earnings
are also taxed.
So I would like a privatized system in large measure because that
could allow people to decide how much they want to save for their
old age. They can get access to that savings at say age 65, whether
they retire or not. A good system should separate the decision to
retire from when older persons get access to their assets. The amount
they save would then no longer be taxed, and the amount they get
out at 65 would be either an annuity or a lump sum payment.
I also believe in a minimum standard of living for older members
of our society. So if older persons, for one reason or another,
did not save much, they would get a minimum level of say, Medicare
and retirement income. That would be part of the welfare system
for low-income people. I do not know what that amount should be.
Voters have to decide that. It would be a safety net for the elderly
so that they would not be dependent only on their children or private
charity. However, I would separate the safety net aspect from the
rest of the systemyou don't want the tail wagging the dog.
REGION: I'd like to ask you about the field of behavioral
economics. Much of your work has applied economic thought to sociological
and psychological phenomena. These days a number of so-called behavioral
economists, including your colleague Richard Thaler, are effectively
reversing that looking glass by applying psychology and sociology
to economic analysis. What do you think of the potential for such
BECKER: A lot depends on what is meant by behavioral economics.
If that means a broadening of the scope of variables that influence
people's behavior, it is quite relevant. For example, if I own a
bottle of wine for two years and it appreciates a lot in value,
then I may not want to sell it, even though I would not pay that
much for a bottle of wine. That's sometimes called the endowment
effect. It is not inconsistent with rational behavior, but economists
have neglected these types of considerations.
One of the things I have tried to do in my research is to broaden
the type of considerations that go into models of people's preferences.
I have no problem in my vision of economics with endowment effects,
fairness issues and many other considerations that affect people's
preferences. Therefore, in a sense, I'm a behavioral economist.
But I would have some major differences with behavioral economics
as it is usually defined. Let me say two things: First, there is
a heck of a difference between demonstrating something in a laboratory,
in experiments, even highly sophisticated experiments, and showing
that they are important in the marketplace.
Economists have a theory of behavior in markets, not in labs, and
the relevant theories can be very different. One reason is the division
of labor in markets. Consider, for example, the claim by behavioral
economists that most people cannot calculate probabilities accurately.
I agree to some extent but am confident that people who work at
blackjack tables know the relevant probabilities very well. Otherwise
they don't work at these jobs. People go into activities when they
are either good at those activities, or when they learn to be reasonably
good. So while the average person may not calculate certain probabilities
very well, they do not end up in jobs where they need to make those
A market economy is a group of specialists who are integrated by
exchange. It may be that each of these specialists is terrible at
other activities, but the whole aggregate can be highly efficient.
The aggregate may make few mistakes. One of the things some behavioralists
have missed is that a specialized economy eliminates many mistakes
because vulnerable people don't get put into positions where they
can make these mistakes.
The second related criticism I have is that some of the defects
in behavior claimed by behaviorists tend for a different reason
to be eliminated in an exchange economy. It is sometimes claimed,
for example, that people's preferences are not transitive. Transitivity
means that if I like a group of goods donated by A over another
group, B, and B over C, then I like A over C.
Now suppose a case that violates transitivity. Suppose I prefer
one apple to one orange and one orange to one pear, but I prefer
one pear to an apple. That is intransitive preferences. What would
happen? Someone would come to me and say since I prefer an orange
to one pear, I should give him a pear plus money in exchange for
an orange. Then he gives me an apple for my orange plus money. OK
again. But since by assumption I prefer a pear to an apple, he gives
me back my pear in exchange for the apple plus more money. I end
up with the pear I started with, but I lost money in three transactions.
Why? Because in each case I have given him some money plus a piece
This is called the Dutch book argument in economic theory. I do
not know if you have heard that before. I don't know where the expression
comes from, but it is illustrated here by a series of exchanges
that can take advantage of these intransitive preferences. Many
other of the behaviorists' claims are subject to similar Dutch book
arguments that either make behavior more rational, or a person goes
broke. Since this is mainly an implication of exchange, it is hard
for me to believe that such inconsistent behavior is important in
modern exchange-based economics.
Barnum said there's a sucker born every minute of the day. Well,
suckers lose their money. Another example: I have fair dice, but
you believe that a 12 is going to come up half the time. I would
love to play craps against you. You will continue to lose until
either you change your beliefs, or you lose your shirt. Exchange
and the division of labor do not eliminate all the issues brought
up by behavioral economics but I believe "behavioral"
economics has a different place in modern economies than is often
To be sure, I agree that economists have often taken a very naive,
materialistic, narrow approach to preferences and behaviors. I also
agree that we do not want to assume that everybody is a perfect
calculator. There are limits to our ability to calculate. Broader
preferences and "bounded" rationality are part of a more
relevant model of rational behavior. In my own way I have been trying
to broaden preferences to take account of some of these points.
But I am dubious about behavior that won't survive in an exchange
economy with an extensive division of labor. This is where experimental
and market behavior may be totally different.
REGION: This seems another area where comparing theory with
empirical evidence from the marketplace is important to future development
of the field.
BECKER: It's crucial. One can get excellent suggestions
from experiments, but economics theory is not about how people act
in experiments, but how they act in markets. And those are very
different things. It is similar to asking people why they do things.
That may be useful to get suggestions, but it is not a test of the
theory. The theory is not about how people answer questions. It
is a theory about how people behave in market situations. Once you
recognize that, it is essential to have a dialogue between market
behavior and the theory in order to test various hypotheses.
REGION: Let me ask about something you've just touched on.
Your recent book, Social Economics that you wrote with Kevin
Murphy, extends the standard utility function to include not just
goods and services that individuals consume but also the social
environment affecting choices and behaviors of individuals. Why
is it important to broaden the conventional framework for understanding
market behavior? And would you also explain how the concept of "social
capital" relates to the broader notion of human capital?
BECKER: These are important questions. I believe social
forces are important for many aspects of market behavior. Individuals
are not Robinson Crusoes alone on islands. For some problems, the
island model is a good metaphor, but for most behavior, people are
influenced by what others around them are doing. Look at the popularity
of certain books, for example, A Brief History of Time, by
[Stephen] Hawking, the great astrophysicist. Well, nobody can understand
that book. It sold millions of copies, but essentially nobody understands
it. Why do they buy it? Not because they were going to read the
book. I have spoken to top physicists who have trouble reading it.
So the vast majority of people were buying this book for their coffee
To take another example, if many women are working, women who stay
at home may feel a little odd. Just as in the past when most women
stayed at home, those who worked felt odd. Or consider the change
in attitudes about divorce. When I was growing up, a divorced woman
was considered an outcast, an oddball, a loose woman. Well now,
few people think so because many people are divorced.
Social phenomena are important in markets, and economists need to
put more efforts into using economic analysis to incorporate social
forces. To me, to Kevin and to others who are working in this field
of social economics, the challenge is not to give up the economics
but to incorporate social forces into the economics.
And that is, one might say, an influence from sociology onto economics,
as opposed to the opposite influence. James Coleman and I started
a seminar in the early 1980s on rational choice in the social sciences.
Coleman was one of the greatest sociologists, and that seminar influenced
my thinking on the role of social forces.
Yes, we need to incorporate some of sociology into economics, but
also sociology can benefit from incorporating more economic-type
thinking. Social influences affect behavior, but social influences
are themselves built up from behavior. It goes both ways. For example,
some chapters in our book look at the formation of social groups
by neighborhoods, by income level and by other criteria. Coleman
recognized the importance of these "macro" sociological
problems, but he lacked the tools to fully succeed in building macro
behavior from individual behavior. Economists have more tools, and
a growing number of economists are trying to use economic reasoning
to understand the formation of norms and social capital. Progress
is being made, but it is still slow.
REGION: What is the relationship of social capital to human
BECKER: I consider social capital to be a particular type
of human capital. Human capital, so to speak, usually looks at a
person. It is her knowledge, or her skills. Social capital looks
at a person's link to other individuals. If I am involved in AA,
I may be obligated to help members who are tempted to drink. In
turn, I can call on them if I am having trouble with my alcohol
consumption. That is an example of social capital. It is a form
of human capital because it is part of me. However, it is very different
from the skills I have as an educated person, or the training I
have or the knowledge I have. Social capital involves a linkage
among individuals. That is why it is "social." It is capital
because it has some durability, where depreciation rate may be endogenous.
Anyway, that is how I look at it.
Social economics is an important field that economists are beginning
to discover. Our book makes only a small beginning. But my hope
has been that this small beginning will encourage others to make
bigger advances as they recognize the importance of this kind of
capital. I do believe economists are still too enamored of the Robinson
Crusoe economy. For a lot of problems we have to recognize that,
as Aristotle said, manand womanis a social animal, and
we must incorporate that into models of behavior.
REGION: The title of your 1992 Nobel lecture was "The
Economic Way of Looking at Behavior," and in that speech you
describe lucidly how you've used economics to explore several areas
of human decision-making. Can one apply that same method to the
decision to become an economist? More personally, as a welfare-maximizing
individual, forward-looking but facing constraints, what factors
were most important to your choice of economics as a profession?
BECKER: Yes, these are the factors that affect choice, but
I do not believe people can make occupational choices by a fine-tuned
calculation. A lot of considerations are hard to verbalize, hard
What attracted me to economics was very simple. In high school I
was active in mathematics; for example, I was on the math team.
But I wanted to do something for society. When I went to Princeton,
I originally planned to major in mathematics. By accident, I took
a course in economics because we had to meet certain distributional
requirements. I began to see then that one could use rigorous mathematics
in economics to study important social problems that I wanted to
deal with. I was excited about this for a couple of years at Princeton,
but then I began to feel that economics was sterile. I wanted to
deal with important questions, but mainly my economics courses were
providing tortuous discussions of marginal utilities.
I began to contemplate leaving economics. I looked to sociology,
and some sociology professors there gave me books to read on the
subject, but they were too difficult. I found Talcott Parsons, who
was then Mr. American Sociologist, impossible to read. I tried and
I said, "I just can't make it as a sociologist. I can't understand
So I went back to economics. I decided to go to graduate school,
came to Chicago, and by far the biggest influence on me was Milton
Friedman. He is known as a monetary economist and so on, but that
was not the main influence he had on me. Milton Friedman was, and
ishe is still going stronga great economist, who saw
the power of economics as a tool of analysis to discuss real problems.
I saw then that my discouragement when a senior at Princeton was
misplaced. It was just my teachers' approach, and much of my reading.
But economics could deal with the problems I was interested in,
and it could be exciting to me.
And so I made the decision then to pursue economics as a career.
I liked this subject a lot, although I was unsure about how creative
I would be as a professor of economics. I did not believe I would
earn as much as a professor as turned out to be. I remember I went
to my mother, I said Mom, I want to be a professor. She said, but
you will only make $10,000 a year. That was not much even then,
although we have to adjust for price level changesthis was
a long time ago. I replied that it would be enough for me. And she
said, well you will discover it isn't enough for you. (My father
was a reasonably successful businessman.) I said perhaps, but I
did not care at age 22 about money.
So I did not make a fine-tuned calculation. I do not believe people
usually make such calculations. I say to people who ask me if they
should do this or do that, that they should think about the pros
and cons, but often it comes down to things that we cannot articulate
I had a gut feeling I should go to Chicago rather than Harvard for
graduate studythose were the two places I was consideringand
Chicago was clearly the right decision for me.
I had a feeling economics was what I wanted to do. I did not know
if I would be good at it, but it seemed exciting to me. Is that
making a fine calculation? Is that being behavioral? Is that being
an economic man? It is being an economic man in a very general way.
We are dealing with an uncertain future. By choosing economics,
I would be going into something I liked, and I had the math. Indeed,
compared to students of my generation in economics, I had a lot
of math. So in a sense I was making a calculation, but it was a
very loose calculation. Typically, I do not believe a young person
can make a better occupation-choice calculation than that.
The important point is that markets are more "rational"
than individuals. Markets assign persons to jobs and professions.
If I did not get a good academic job, then I may have put my talents
to some other use. Many behaviorists do not appreciate that markets
have a lot more rationality than any one person does. Economists
are really analyzing markets and how they work.
I did well in economics. I made more money than I thought I would
make, and got more acclaim than I thought I would get, so it turned
out to be a good decision. But if others made a mistake by going
into economics, some of these left, or left research or left teaching.
So I believe rough as it was, my decision to enter economics was
a "rational"decision, but people do not literally make
a fine-tuned calculation.
How many people sit down before they marry and say, oh these are
the reasons I should marry this woman, these are reasons why I should
not marry her, then weigh these and see if the pluses exceed the
minuses? Very few people do that. If your girlfriend knew you did
that, she probably would not want to marry you. But implicitly,
most people ask if marriage will make them happier. Is this the
best they can do? Are they in love? Is this the right decision for
them? And they make mistakes. That is why couples divorce. But the
marriage market functions well as a whole. So I return to my emphasis
on marketseconomics is a theory of markets. The theory of
the individual is just a way of attacking market problems. That
is my view.
REGION: A final question. As you know, the Minneapolis Fed
has an ongoing concern with the policy of too-big-to-failthat
is, the policy in which governments implicitly ensure that large
banks will be protected from failure because such failures could
spill over to the broader economy. This in turn raises the problem
of moral hazard, the worry that large banks may take on excessive
risk if they believe they will be bailed out by central banks or
other government entities. What advice would you give to central
banks that wish to avoid creating moral hazard, while still hoping
to reduce the likelihood that a large bank failure could spill over
to the entire banking system?
BECKER: Moral hazard is a real problem. Look at Argentina
nowI am writing a column about Argentina [published in BusinessWeek,
Feb. 11]. That country was able to borrow $140 billion, mainly in
dollars, partly because financial institutions and other lenders
expected that Argentina would be bailed out of any crises by the
International Monetary Fund and the U.S. government. Otherwise,
I do not believe Argentina could have borrowed so much, even at
the higher rates they were forced to pay. I hope neither the IMF
nor the U.S. government helps these lenders. They have to take the
consequences of their poor decisions, and we have to send a message
to lenders that they will not get help if they make bad investments.
Of course, the Fed has to worry about contagions and runs on banks.
But I do not believe the best way to reduce contagions is to bail
out banks that fail. I have opposed bailouts of even large banks,
such as the bailout of Continental Illinois of Chicago many years
To be sure, the Fed should provide enough liquidity to the banking
system when a large bank fails, but deposit insurance and other
safeguards help do that. The Fed should also make sure that banks
can survive temporary liquidity problems by borrowing from the Fed
and by selling assets. If the Fed does that, the too-big-to-fail argument is weak.
I was against the Fed's helping Long-Term Capital Management. In
discussing this with Peter Fisher [then executive vice president]
at the New York Fed, he said that the Fed did very little. That
is possible. I do not know how much behind-the-scenes arm twisting
there was. An offer was on the table from Warren Buffett. He wanted
to let Long-Term Capital investors retain 5 percent of their equity;
the actual deal ended up giving them 10 percent. The Buffett offer
might have been accepted if the Fed had not become involved.
I can understand why the Fed was concerned about the consequences
of a collapse of LTCM, but it does not seem to me that this merited
the Fed getting involved. I say this even though some of my friends
were partners in Long-Term Capital, and I greatly respect them.
I have no objection if the Fed only, as Fisher claimed, facilitated
a purely private sector transaction.
I do not like the Fed's involvementeven if innocuousbecause
there is too much room for politics. The big challenge to international
and domestic monetary policies is to separate the economics from
the politics. Often, unfortunately, the politics dominates. So one
should try to build a structure that minimizes the impact of politics.
The too-big-to-fail argument is likely to be driven mainly by politics.
REGION: And to maintain a time-consistent policy?
BECKER: Yes, time-consistent policies. People should know
what the policies will be, and that these policies will be followed
in a time-consistent way. [The Minneapolis Fed's] Ed Prescott is
one of the pioneers on time consistency. This is one reason why
I favor simple rules for monetary policy. They are knowable and
are easier to separate from politics.
REGION: Thank you, Mr. Becker.
More About Gary Becker
- University Professor of Economics and Sociology at the
University of Chicago, current
- Rose-Marie and Jack R. Anderson Senior Fellow, Hoover
Institution, Stanford University, current
- Research Associate, Economics Research Center at the
National Opinion Research Center since 1980
- Associate member, Institute of Fiscal and Monetary Policy
for the Ministry of Finance in Japan since 1988
- Past president of the American Economic Association
- Professor of Economics, Columbia University, concurrent
with a position at the National Bureau of Economic Research,
1957 to 1968
- Bank of Sweden Nobel Memorial Prize for Economic Sciences,
- National Medal of Science for work in social policy,
- The Frank E. Seidman Distinguished Award in Political
- Honorary degrees from numerous universities, including
Hebrew University, Jerusalem; Knox College, Ill.; Columbia
University; Princeton University; and the University of
Illinois at Chicago
- Regular columns in BusinessWeek, since 1985
- Numerous books, including Social Economics (2001) with
Kevin Murphy; The Economics of Life (1996), with his wife,
Guity Nashat; Human Capital (1964; third edition, 1993);
A Treatise on the Family (1981; expanded edition, 1991)
- 50 years worth of journal articles and essays
- Bachelor's degree, Princeton University
- Master's and doctorate, University of Chicago