~Frederic Sautet~

Among his many achievements, one that we can be thankful for was Gary Becker’s non-compromising attitude with regard to the application of economic reasoning. Take for instance his discussion of tastes, which are treated as given in economics. Until Becker arrived on the economics scene, differences in tastes generally meant the end of the discussion. This changed with Becker. In “De Gustibus Non Est Disputandum,” he and Stigler stated the following:

On the traditional view, an explanation of economic phenomena that reaches a difference in tastes between people or times is the terminus of the argument: the problem is abandoned at this point to whoever studies and explains tastes (psychologists? anthropologists? phrenologists? sociobiologists?). On our preferred interpretation, one never reaches this impasse: the economist continues to search for differences in prices or incomes to explain any differences or changes in behavior. (1977: 76)

The strength of Becker’s analysis comes from his relentless application of economic reasoning to areas that were thought to be outside the confines of economics and price theory (discrimination, crime, family, etc.). This is very important in this day and age where the open society is under attack both historically (e.g. the growing inequalities generated by capitalism) and theoretically (e.g. behavioral economics and irrationality). Becker’s analysis saves economics from these pitfalls. Peter Leeson has understood this very well and applies it to his own new areas (anarchy, witches, animal trials, etc.).

But what some regard as Becker’s theoretical achievement, others see it as a limit. Israel Kirzner points out in “Rationality, Entrepreneurship, and Economic ‘Imperialism’” that the universality of rational choice (that Becker embraces) does not imply the extension of the principles of economics uncritically to other areas of social interaction. Kirzner’s main theoretical justification is that “there is nothing in the character of interpersonal interaction which suggests any systematic discovery process.” In other words, while it is true that rational choice (i.e. one specific aspect of human behavior) is present in all human action, it does not imply that (a) all human activity is to be understood as the result of rational choice and (b) that the same analysis that we apply to understanding market interactions may be applied to understand non-market relationships (especially if this means postulating some kind of equilibrium in non-market settings, such as within the family).

Kirzner has a point. But Becker’s work has shown that the application of economic reasoning to different areas of human activity has yielded fruitful explanations unavailable otherwise. Becker’s hunch about the extended applicability of economic reasoning seems right. Searching for differences in incentives, prices, or incomes is what the economist should do. This is Becker’s great insight. This is also, in some ways, Ludwig von Mises’s, since he developed economics based on the universality of purposeful action.

At the end of the day, the difference between Becker and Kirzner boils down to the limit between the closed- and the open-ended analysis. That limit is hard to define because exhausting rational choice analysis in a closed world is difficult. Yet, the open-ended view yields insights not available otherwise (e.g. on the nature and existence of monopoly pricing). So when do we shift the analysis from a closed world (Becker) to an open-ended one (Kirzner)? When do we say that preferences “change” because it is how human beings learn (through discovery)? Not sure. All I know is that Becker and Kirzner are probably the best weapons we have against the assaults of behavioral and neo-Marxist analyses.

Gary Becker, RIP.