Tuesday, May 13, 2014

Good can and often does emerge from actions not intending it. Bad can and often does emerge from actions intending to do good

The idea that good can and often and does emerge from actions not intending it, and, that bad can and often and does emerge from actions intending to do good, is amazingly unfamiliar to many, perhaps most, thinking people today - and this is true not only of young people, though they are the ones I would like to target with this post. 

I write this out of my frustration in encountering a tremendous resistance to the idea by young people known to me, some of them very close to me. They dismiss it when I say it, thinking it is some kind of apologetics coming from me, a certifiably extreme "conservative" thinker [though of course I am neither extreme nor conservative]. How to pierce the barrier of knee-jerk disbelief to provoke real thought is something I have yet to figure out. In the meantime, for the choir or for those who might be willing to give it a chance, here is what I believe. 

Prosperity is not the result of intending to do good, but stagnation through the welfare state is the result of so intending to do good. The road to stagnation, corruption, deprivation, and poverty is paved with good intentions.

Doing well pretty much trumps doing good when it comes to doing good. Intentions are (or should be considered) irrelevant in evaluating the outcome. Doing well does much more good than intentionally doing good. And, at the individual level, the obvious good done by the Bill and Melinda Gatefoundation pales compared to the good Microsoft has done by transforming average people's lives while pursuing profits.

There is nothing particularly worthy about doing good altruistically as compared to doing good by making profits when you understand the greater good that the latter does. But the prevailing conventional wisdom has deprived the business person of the ability to benefit from this understanding, because most people not only simply do not understand it, but, in addition, what they think they know about it is exactly the opposite, namely, that in order to do good one must intend to do so directly and not by pursuing profits – pursuing profits according to this conventional wisdom results in exploitation and inequality, not general wealth-creation, and besides is selfish and unworthy. Businessmen out for profits are want to "trick" consumers into buying their products. The public discourse has thus demonized profit-seeking, but doing good by doing well is admirable and should be praised. And businessmen should be made to feel proud and motivated by it.

It is not acceptable to condemn successful business people for not doing enough for charity. What the successful businessman has done is incredibly admirable (though he personally may not be so admirable) and will do more good indirectly and in the long run than any charitable contributions he would have made. I am happy to praise charitable contributions. But I am not going to exaggerate their good or diminish the greater good done by simply doing business - by providing people more valuable options that they can afford and give them the ability to elevate their lives. We put hard-working entrepreneurs in the position of thinking they have to apologize for the profits they make and cover their rears by ensuring that they make some token charitable contributions. It is obnoxious in the extreme and if not remedied will bring the end of our profit-driven wealth-creating economy.

See Dwight Lee and J.R. Clark on “Markets and Morality” here.  

Sunday, May 4, 2014

Gary Becker (1930-2014): A Personal Appreciation

Professor Gary Becker died yesterday at the age of 83. At the time of his death, he was arguably the most highly respected living economics scholar.

The blogosphere will soon be flooded with obituaries, appreciations  and evaluations of his work by people better placed than I to offer them. Given, however, that I was privileged to have been able to study with him for a short period of time as a graduate student at the University of Chicago, and that he acted as the chairman of my Ph.D. dissertation committee, I would like on the occasion of his passing to  offer a few words of personal appreciation.

Becker will be remembered mostly for his work on human capital and the economics of the family. It is hard to overstate the influence of his contributions to these fields. Indeed, he pretty much created them – though one must not minimize the contributions of others early scholars like T. W. Shultz, Simon Polacheck, and especially the independent and complementary work of Jacob Mincer.

By his own account, Becker came to these subjects through the influence of his mentor Milton Friedman whose approach led him to see economics as the study of people “in the ordinary business of life” (as Alfred Marshall would have it). But his first foray beyond the traditional borders of the subject was not in those subjects (human capital or the economics of the family) but rather in the economics of discrimination, a very volatile subject at the time. He literally wrote the book on The Economics of Discrimination (see also here). It seemed to him at the time that the conversation on civil rights and segregation was hopelessly confused by the lack of an understanding of the social processes at work, an understanding that was accessible using the eternal principles of economics to investigate how people act on their preferences, whatever they are and whatever we may think of them. So he quite controversially investigated the likely results of economic processes in which people had given (race or gender) preferences and showed quite simply that, as long as people were free to act in open markets as employers, workers, or consumers, the act of discrimination would carry a price. For example, discriminator-employers who indulged their preferences would be outcompeted by those who hired the most qualified person for the job, and, in this way, open competition would tend to erode discriminatory outcomes (if not discriminatory attitudes).

When I came to the University of Chicago I knew nothing of any of this. My exposure to Chicago was confined to Friedman’s monetary work. I did not even know what a great price theorist Friedman was. But I soon became aware of Becker, the young prince of the department, and I took as many courses from him as I could – two in price theory and at least one on topics in family economics as I recall. And I became aware also of his work on discrimination. I read the book with great excitement, but also some disappointment. I left South Africa for Chicago in September 1972. This was, in retrospect, the peak in the power of the Apartheid regime. South Africa epitomized racial discrimination and it was very ugly. I had seen it first-hand every day. And here was a book on the underlying principles of discrimination. So I thought it would provide answers for me about South Africa – what was Apartheid really about, what was its future?

While I found the book fascinating, I did not find the answers to the questions I started with. Of course, this was an absolute blessing for me. It became the opportunity for my dissertation on the economics of Apartheid. The reason the answers were not there was that Becker had excluded the case of state-enforced discrimination by assumption. But his work did provide the answers by implication. If state power is used to prevent the competitive process from eroding the effects of discrimination then discrimination may endure and even flourish. (I subsequently found the analysis I was looking for in the works of Anne Krueger and William Hutt). Becker’s models provide the necessary window into what would happen once the apparatus of state discrimination were abolished. It was vitally relevant at the time, and it remains so to this day as we consider the current regulatory environment of affirmative action and racial preferences.

I used Becker’s theories again in my work on capital. I came to Chicago after studying capital theory with Ludwig Lachmann. The two scholars were different in every way. It was as if they spoke different languages, not even the common language of economics. It left me quite confused. But when I started to study Becker on human capital I made my own “translations” and began to see very interesting things. Crazy to imagine combining a radical Austrian with a Chicago equilibrium-empiricist. But that is what I ultimately did, and I think it worked. Becker adopted the language of scientism, the denigration of any work that did not feature confronting the data with some very abstract model to yield satisfactory t-statistics. But I did not find this persuasive or helpful. Rather it was Becker’s penchant for imaginative theoretical insights, using what Chicago thought of as “the equilibrium-method,” that fascinated me.  The equilibrium method consists in understanding equilibrium to mean individual constrained-maximization, which really means purposeful action. The economic models take basic economic situations and manipulate logical (mathematical) symbols, representing aspects of those situations, like attitudes, costs, benefits, etc., to wring-out hard-to come by, but important, economic intuitions that often explain observed phenomena in new and insightful ways. That was the genius of this productive period in the history of the Chicago School that is Becker’s legacy. One has to look past the method, which is both a way of thinking and a way of gaining “scientific” respectability, to see the richness of the insights. This richness is a result of the “Chicago-method” of applying basic Marshallian price theory in a flexible and innovative way. For example, the economics of the family, the economics of discrimination,  crime and punishment, human capital, public choice, religion and, most recently, the economics of addiction and similar subjects.

Clearly Gary Becker’s contributions transformed economics. His work spurned massive changes in approach and widened the scope of its endeavors. When he wrote his book on Human Capital he faced substantial opposition to the very use of the term. His daring to apply economic tools to an analysis of choice to have children provoked the vehement condemnation of the sociologists. But Becker was always unfazed by these obstacles. He harbored no grudges and he affected no airs. As a teacher he was tough but incredibly open-minded and accepting of the thoughts of others. He encouraged critical thinking and the expression of ideas. I never saw him angry with students or colleagues. He was a true gentleman.

He was busy, always busy, and I had a hard time getting to talk to him. And I was always awed by him. I wish I had been able to have had more of him, but I am honored to have been able to have known him in the way I did.