Economic approach to human behavior

This module start with an excerpt from a lecture of Prof. Hugo Mialon titled “The Importance of Being Gary Becker: Economics is Everywhere“. Gary Stanley Becker (1930 – 2014) was an American economist who received the 1992 Nobel Memorial Prize in Economic Sciences. He was a professor of economics and sociology at the University of Chicago, and was a leader of the third generation of the Chicago school of economics. Gary Becker demonstrated the degree to which economic reasoning can improve our understanding of (mis)behavior. he illustrated the effectiveness of economic analysis in areas like crime, addiction, marriage, divorce, and addiction, topics we will discuss during the entire course. Moreover, Becker generated new areas of study and led hundreds of social scientists in innovative, challenging directions.

=> Watch this short video

 

=> Read:

 

According to Becker, the economic approach consists of 3 elements:

  1. Optimizing behavior by individuals: people make the best choices they can subject to limitations on their resources (time, money,  information, energy, and ability). We can analyze human behavior assuming that people are doing their best to make themselves happy with whatever means are available to them. It is important to clarify that optimizing behavior is a method of analysis and not an assumption about particular motivations.

    It does not mean that people are only interested in money, are narrow-mindedly selfish, or that decisions are unaffected by limited information, social considerations, or accidents of time and place. Optimization does not mean that people are cash registers with legs. It does not mean that we should not incorporate effects of families, schools, jobs, and governments on an individual’s decisions. In fact, economists are including these elements more and more, and this is due at least in part to Becker’s example.

  2. Market equilibrium: the definition of equilibrium refers to the aggregation of the choices of individuals to derive implications at the group or macro level. For

    this definition, a system is said to be in equilibrium when the behavior of all individual agents is consistent. Equilibrium is the usual mode of analysis in economics, and it does not imply that everything is perfect, since not all equilibria exhibit socially desirable properties.

    An example can be found in Becker’s work on pressuregroups. If we look at a case with two groups identical in influence, the result is that there are no winners or losers, because there is no redistribution in favor of any group. But both parties have spent valuable resources in order to get their way – lobbying for lower taxes, for example – and the outcome is an equilibrium, even though the social outcome is worse than if the groupshad never fought at all.

  3. Stable preferences are used to avoid the reductio ad absurdum that people’s behavior varies because their tastes are continually changing. Stigler and Becker argue in “De Gustibus Non Est Disputandum” that people have stocks of experience that affect their enjoyment of goods (the more exposure I had to classical music in the past, the more I enjoy it today) and that these stocks of “consumption capital” are what change over time, not the underlying tastes themselves. In this view, stocks of consumption capital are accumulated by individuals (to some extent by choice) having future implications in mind. Much of Becker’s work has relied on the idea that people realize that their preferences are in part a function of what they allow themselves to experience. Reformed alcoholics use this concept when avoiding places that serve alcohol, for example.

 

Economics has been widened, deepened and energized by Becker’s writings and teachings. It has been long referred to as the dismal science; we (and he) prefer to call it the science of human behavior.

 

=> Assignement: answer the following questions (link TA)

  • What does “economic approach” means?
  • What are the economic tools we can use to understand the world around us?
  • Is realistic to assume people have stable and homogeneous preferences?
  • Is the economic approach restricted to material goods and wants? Is it confined to the market sector?
  • Does the economic approach assume that all participants have complete information or engage in costless transactions?
  • Does the economic approach assume that decisions units are necessarily conscious of their effort to maximize?

 

[…] 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.

 

=> If you want to know more about Gary Becker, listen the Episod 35 – Gary Becker (58:04) of the podcast “Free to Choose”.