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The Economic Approach to Human Behavior

The University of Chicago Press

The Economic Approach to Human Behavior

Economy is the art of making the most of life.

George Bernard Shaw

The following essays use an "economic" approach in seeking to understand human behavior in a variety of contexts and situations. 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, (2) the market sector, and (3) the allocation of scarce means to satisfy competing ends.

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, economists are as successful in understanding the production and demand for retail trade, films, or education as they are for autos or meat. The persistence 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." 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 economists, and usually is immediately qualified to exclude most nonmarket behavior.

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.

Let us turn away from definitions, therefore, because I believe that what 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, anthropology, 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 understanding 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.

The preferences that are assumed to be stable do 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 do not always bear a stable relation to market goods and services (see chapter 7 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, be it a rise in the market price of eggs reducing the demand for eggs, a rise in the "shadow" price of children 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. 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. The economic approach has developed a theory of the optimal or rational accumulation of costly information that implies, for example, greater investment in information when undertaking major than minor decisions — the purchase of a house or entrance into marriage versus the purchase of a sofa or bread. The assumption that information is often seriously incomplete because it is costly to acquire is used in the economic approach to explain the same kind of behavior that is explained by irrational and volatile behavior, or traditional behavior, or "nonrational" behavior in other discussions.

When an apparently profitable opportunity to a firm, worker, or household is not exploited, the economic approach does not take refuge in assertions about irrationality, contentment with wealth already acquired, or convenient ad hoc shifts in values (i.e., preferences). Rather it postulates the existence of costs, monetary or psychic, of taking advantage of these opportunities that eliminate their profitability — costs that may not be easily "seen" by outside observers. Of course, postulating the existence of costs closes or "completes" the economic approach in the same, almost tautological, way that postulating the existence of (sometimes unobserved) uses of energy completes the energy system, and preserves the law of the conservation of energy. Systems of analysis in chemistry, genetics, and other fields are completed in a related manner. The critical question is whether a system is completed in a useful way; the important theorems derived from the economic approach indicate that it has been completed in a way that yields much more than a bundle of empty tautologies in good part because, as I indicated earlier, the assumption of stable preferences provides a foundation for predicting the responses to various changes.

Moreover, the economic approach does not assume that decisions units are necessarily conscious of their efforts to maximize or can verbalize or otherwise describe in an informative way reasons for the systematic patterns in their behavior. Thus it is consistent with the emphasis on the subconscious in modern psychology and with the distinction between manifest and latent functions in sociology (Merton 1968). In addition, the economic approach does not draw conceptual distinctions between major and minor decisions, such as those involving life and death in contrast to the choice of a brand of coffee; or between decisions said to involve strong emotions and those with little emotional involvement, such as in choosing a mate or the number of children in contrast to buying paint; or between decisions by persons with different incomes, education, or family backgrounds.

Indeed, I have come to the position that the economic approach is a comprehensive one that is applicable to all human behavior, be it behavior involving money prices or imputed shadow prices, repeated or infrequent decisions, large or minor decisions, emotional or mechanical ends, rich or poor persons, men or women, adults or children, brilliant or stupid persons, patients or therapists, businessmen or politicians, teachers or students. The applications of the economic approach so conceived are as extensive as the scope of economics in the definition given earlier that emphasizes scarce means and competing ends. It is an appropriate approach to go with such a broad and unqualified definition, and with the statement by Shaw that begins this essay.

For whatever its worth in evaluating this conclusion, let me indicate that I did not arrive at it quickly. In college I was attracted by the problems studied by sociologists and the analytical techniques used by economists. These interests began to merge in my doctoral study, which used economic analysis to understand racial discrimination (see chapter 2 and Becker 1971a). Subsequently, I applied the economic approach to fertility, education, the uses of time, crime, marriage, social interactions, and other "sociological," "legal," and "political" problems. Only after long reflection 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 new, even outside the market sector. Adam Smith often (but not always!) used this approach to understand political behavior. Jeremy Bentham was explicit about his belief that the pleasure-pain calculus is applicable to all human behavior: "Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do, as well as to determine what we shall do. ... They govern us in all we do, in all we say, in all we think" (1963). The pleasure-pain calculus is said to be applicable to all we do, say, and think, without restriction to monetary decisions, repetitive choices, unimportant decisions, etc. Bentham did apply his calculus to an extremely wide range of human behavior, including criminal sanctions, prison reform, legislation, usury laws, and jurisprudence as well as the markets for goods and services. Although Bentham explicitly states that the pleasure-pain calculus is applicable to what we "shall" do as well as to what we "ought" to do, he was primarily interested in "ought" — he was first and foremost a reformer — and did not develop a theory of actual human behavior with many testable implications. He often became bogged down in tautologies because he did not maintain the assumption of stable preferences, and because he was more concerned about making his calculus consistent with all behavior than about deriving the restrictions it imposed on behavior.

Marx and his followers have applied what is usually called an "economic" approach to politics, marriage, and other nonmarket behavior as well as to market behavior. But to the Marxist, the economic approach means that the organization of production is decisive in determining social and political structure, and he places much emphasis upon material goods, processes, and ends, conflict between capitalists and workers, and general subjugation of one class by another. What I have called the "economic approach" has little in common with this view. Moreover, the Marxist, like the Benthamite, has concentrated on what ought to be, and has often emptied his approach of much predictive content in the effort to make it consistent with all events.

Needless to say, the economic approach has not provided equal insight into and understanding of all kinds of behavior: for example, the determinants of war and of many other political decisions have not yet been much illuminated by this approach (or by any other approach). I believe, however, that the limited success is mainly the result of limited effort and not lack of relevance. For, on the one hand, the economic approach has not been systematically applied to war, and its application to other kinds of political behavior is quite recent; on the other hand, much apparently equally intractable behavior — such as fertility, child-rearing, labor force participation, and other decisions of families — has been greatly illuminated in recent years by the systematic application of the economic approach.

The following essays, through the variety of subjects covered, and (I hope) the insights yielded, provide some support for the wide applicability of the economic approach. Greater support is provided by the extensive literature developed in the last twenty years that uses the economic approach to analyze an almost endlessly varied set of problems, including the evolution of language (Marschak 1965), church attendance (Azzi and Ehrenberg 1975), capital punishment (Ehrlich 1975), the legal system (Posner 1973, Becker and Landes 1974), the extinction of animals (Smith 1975), and the incidence of suicide (Hammermesh and Soss 1974). To convey dramatically the flavor of the economic approach, I discuss briefly three of the more unusual and controversial applications.

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Excerpted from The Economic Approach to Human Behavior by Gary S. Becker. Copyright © 1976 The University of Chicago. Excerpted by permission of The University of Chicago Press.
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