Russ Roberts

Edward Lazear on Becker

EconTalk Episode with Edward Lazear
Hosted by Russ Roberts
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Edward Lazear of Stanford University talks with EconTalk host Russ Roberts about Gary Becker's innovative contributions to economics. The conversation opens with personal reminiscences by Lazear and Roberts. They then discuss Becker's application of economic principles to social phenomena such as discrimination, crime, education and the family along with Becker's overall approach to economic theory and measurement.

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0:33Intro. [Recording date: May 21, 2014.] Russ: Our topic for today is the work of Gary Becker, who recently passed away, and I want to start with some brief personal thoughts from both of us; and then we'll move on to Gary's work. Eddie, tell us how you knew Gary and when you first met him, and your relationship with him over the years. Guest: Well, Gary was my idol, actually, as both an undergraduate and as a graduate student. And when I say that, it's actually quite startling, because Gary was not an old man at the time. In fact, he was just in his 30s, but was such a powerful intellect and such a powerful force on the economics profession that he already had a major impact not only on his graduate students but also on undergraduates at other institutions and people following economics in general. So, he was a major force. I was an undergraduate student and UCLA (University of California, Los Angeles), and I was a Ph.D. student at Harvard, so I didn't have any direct contact with Gary, but it was always my dream as a Harvard Ph.D. student to get a job at the U. of Chicago and to work with Gary Becker. And that happened; that was my first job; and that was how I got to know him. Russ: What was your dissertation on? And who did you work with at Harvard? Guest: I actually wrote a dissertation on a combination of human capital--which is a labor economics topic, and patent technology issues, which was an industrial organization topic. I worked with Zvi Griliches, who was my chairman at the time. And Zvi had been a Chicago Ph.D. and a Chicago professor. So I certainly had that influence. But I also had the benefit of studying with Sherwin Rosen, who visited Harvard during my second year as a graduate student. And Sherwin was an enormous influence on me--not only got me more acquainted with the Chicago style and with Gary's work, but really taught me how to think hard about serious research questions. I would say he and Gary, at least personally, were the two most influential people in my intellectual life. Russ: And of course you ended up writing some very influential papers with Sherwin. He was on my Ph.D. committee, and I remember many heart-to-hearts with Sherwin, because Gary was my adviser, and you didn't get many heart-to-hearts with Gary, as I'll mention in a minute. So, you arrived at Chicago--what year was it? Guest: That was 1974. I was a very young Assistant Professor at the time, and pretty green, but with a lot of enthusiasm for economics, much of which actually was consistent with the way Gary thought about the world, and I'm sure we'll get a chance to talk about that. But Gary was extremely enthusiastic and his enthusiasm was contagious. But I would say that in terms of his influence--and again, I'm sure we'll a chance to come to that--it was absolutely remarkable how many young people--and when I say 'young,' these are people just a few years junior to him--he was able to affect in an absolutely profound way. Russ: Did you have much interaction with him directly, as a colleague? Guest: Well, I certainly did once I got there. But I do remember kind of a funny story, actually, and I once reminded Gary of this. I had a job interview with Gary. Gary did not like to go to the American Economics Association meetings. He was a bit of a recluse at that time. He was pretty devoted to his work and focused on it, and felt he was, in some sense, I don't want to say, a loner, because he had so many students. But he was going to go down his own path and he wasn't going to be influenced by what others thought was mainstream economics. So he tended to avoid the big economics meetings, and the American Economics Association meetings of course was the biggest. Well, I don't know if your listeners know this, but the way the job market works in economics is that most of the graduate students attend those meetings and are essentially shopping their skills and trying to find a job by matching with universities that are looking for young assistant professors. And you go from, literally, from hotel room to hotel room, doing interviews, talking to various universities and hoping that they'll fly you out so that you can get an opportunity to present a seminar. Russ: Almost every door gets opened in those 3 days. It's a very intense, localized in space and time, experience. It's not like it unfolds over weeks and months. The interviews do, but if you don't get an interview at that meeting, you are kind of unlikely to get one. Guest: More than unlikely--almost certain not to get one. So, those meetings are intense. They are extremely stressful for the candidates. And they are very important. And I hear you chuckling, because we all think back to our memories of that, and my memory is a long, long time ago, but it's still vivid. It is such a powerful experience. I think all job hunting is that way. It's not unique to us. But I think what is unusual is that this is so condensed, as you mentioned, Russ, into this 2-day period. Anyway, so Gary didn't want to interview me at these meetings. He simply wasn't going to play that game. And so the U. of Chicago, where I eventually did get a job, they weren't going to have a regular interview with me. But Gary agreed that he would meet me at his hotel for a half hour discussion just so that we could get to know each other, and then he would decide, pretty much unilaterally, without his colleagues, whether they would fly me out to Chicago for a more formal interview. Anyway, Gary was not staying at one of the hotels that was associated with the American Economics Association meetings. He was off, actually it was a very nice hotel, but he was off on the--it was in New York, he was off on the East Side and I had to go visit his hotel. So, I went to the hotel, and we had-- Russ: Oh, what fun. Were you a little nervous? Guest: Yeah. Well, not only nervous. I mean, this of course was the high point of the whole meetings for me, because it was the job I wanted more than anything else. And meeting the great Gary Becker--and as I said, by that time I guess he was already in his young 40s, but he was probably 41, 42 years old, but was already the great man. And meeting Gary was--this was something that of course was something I'd dreamed about, I'd thought about. And so, you know, I'm sure I sweated through a number of shirts and suits at the same time. But I got to the hotel at 11 o'clock in the morning, and that's when the appointment was, and 11 came, 11:15, 11:20, 11:30, and Gary wasn't there. So, finally I got the nerve to approach the desk and to call up to his room. And no answer. So, I hung around till about 12, 12:30, and then finally said, Well, I guess it's just not going to happen. And left; and that was my last interview at the meetings. And went off back to Boston. Well, Gary had just forgotten. And the reason he had forgotten, of course, was this was a very minor thing in his life, but of course it was the single most important event in mine. And I remember reminding him about it, and he said, 'Oh, yeah, I guess so.' But fortunately he remedied the situation and had me out for an interview at Chicago. It was a very brief one, actually. It happened over a lunch. And I do remember that lunch, with all the Chicago greats--Milton Friedman, George Stigler, Arnold Harberger--around 8 or 9 people around a circular table at the faculty club, which we called the Quad Club. And they just grilled me over lunch; and fortunately I guess I did well enough, so they offered me a job. Russ: Yeah. You were the main course. And you were well grilled.
9:37Russ: You know, when you mentioned that he didn't spend much time at the meetings or doing the day-to-day job of the department, it reminds me--I used to say about him a story that I had heard from George Allen, the Redskins football coach at the time. Supposedly George Allen said he didn't send Christmas cards because they don't help you win football games. And it reminded me--whenever someone would say, 'Gary doesn't do this' or do that,' I'd say, 'Well, of course he doesn't. It doesn't help him publish economics articles and understand how the world works.' He was pretty focused on his work. In those years he was working, I think, on the Treatise on the Family, which he later wrote, was an exhausting mental effort. Now I was his student. He was my Ph.D. adviser. And I would see him every once in a while. His office was, if I remember correctly, on the fifth floor. Guest: Fifth floor. Russ: It was like the attic of the Social Science building. I think there were only two offices up there at the time--his and Saul Bellow's. Guest: That's right. Russ: I never saw Saul Bellow. But I saw Gary. And when I did see him, his secretary, Myrna, would make me, would give me a 15 minute appointment. I would go sit outside his office. Sometimes there was more than one of us sitting there waiting to go in. You would go in; he would say, 'What's happening--what's up? What's your problem?' I would tell him something I was working on with my dissertation that I was struggling with or wasn't sure about. He said, 'Well, have you tried--' that, this, the other. And I would say, 'Those are good ideas,' and write them down, and I'd say, 'Thank you,' and I'd leave. And I'd usually spend less than 15 minutes in his presence. Unlike, Sherwin, who would chitchat and who would ask about you, and you'd talk about yourself sometimes; and he'd talk about himself; he'd tell you about things that had gone on, were challenging when he was a grad student. But Gary was all business. He had truth to reveal and he didn't spend a lot of time chitchatting. The other memory I want to pass on of mine about him was his workshop behavior. His workshop was--he had a workshop on the family, and that was broadly defined. And he would read the paper in advance, as we were all supposed to do. And the person giving the presentation was given 3 minutes--no more than 5. Gary would say, 'Do you have anything you want to add before we get started?' So there was no formal presentation, which was very intimidating, because it meant for the full 90 minutes or 75 minutes, whatever it was, you had to be like you were at lunch--you had to be grilled about your paper. And we graduate students looked at Gary's copy of the workshop paper with awe and reverence, because it was dog-eared and every page seemed to be covered with questions and insights. It looked like it had been run over by a car three or four times. We always thought maybe we could simulate that somehow, but we knew we couldn't actually reproduce that. So, he was an incredible intellectual figure, as you say. And we were all, essentially, as the students, in awe and a little bit in fear of him. It's taken me a long time to call him Gary. He was Mr. Becker--as were all the faculty there. As was Mr. Lazear, who you of course remind--Econ I think it was 303, Math Econ teacher in 1977. Spring of 1977. Guest: Are you that old, Russ? I didn't know you were that old. Russ: I am. Guest: Well, you look good. Russ: So do you. I was surprised to see when you graduated, as well. It was an incredible time. Lucas was working on business cycles; Gary was doing his thing. Sherwin was doing incredible work that you were going to end up working with on hedonic pricing and superstars and labor compensation. Just an incredibly exciting and amazing intellectual environment.
13:34Russ: Let's turn to his work. One thing that I want to start as an introductory point, and if you have something to say I'd love to hear it. We who were his students knew that he was a very, very controversial figure. Today, he's not. Today he's honored and respected and lauded for his incredible contributions. But in the 1970s, you know, I had friends who were in other graduate programs, and they viewed Gary as kind of a crank, or a kook. Just as Milton Friedman had been viewed when he first started his work in monetary theory. But Becker even more so, because he was applying economics to all these crazy things, like the family and crime and punishment, and discrimination--topics that sociologists were interested in, and seemingly nothing to do with economics. And people elsewhere really saw him--crank is not the right word. Almost as a buffoon. And Gary had no sense of humor about that. He was totally focused on what he saw as a vision of understanding the world, and he never paid--it seemed to me, I'm sure he did--but he seemed to pay little or no attention to that. He just kept going. Guest: Right. Russ: I'd be curious if you saw any of that, if you agree with that assessment of both the way the world looked at him then and how he responded to it. Guest: Oh, I think you're absolutely right. In fact, I recall, I mentioned it, I had studied among the infidels at Harvard, and you know, if you think about the people in Cambridge and how they viewed Gary's work, not only did they view him as a kook, I think some people thought that his work was actually immoral. Beyond being a kook. Russ: Absolutely. Guest: For example, thinking about discrimination in cost-benefit terms where you would model people trading off tastes for discrimination tastes against the profit that they would get from discriminating or not discriminating in this case, and hiring workers who would be more talented and profitable but might offend their tastes--many people, that offended their tastes, and they thought was simply an inappropriate way to be thinking about this. One very famous economist, I won't mention his name, but one very famous person at one point was asked about Gary Becker, and he said, Yeah, I love to read Gary Becker; I enjoy American humor. And when you think about that, he was basically arguing that Gary was a caricature of what economics should be. But, you know, the whole thing about Gary's work was he was very creative. And not just the immorality. You mentioned people thinking of him as a kook. In some ways you could see why. Because Gary would do things--I don't want to say intentionally, to offend. But he certainly didn't worry about offending. So, for example, who in his right mind would refer to a child as a consumer durable? You just wouldn't do that. Russ: Bad marketing, at the minimum. Guest: Bad marketing. Insensitive. And Gary almost took pride in doing that, because it was a way to think about things in such a radical and unconventional way, that, of course, as you mentioned earlier, really is the thing that made his work so powerful, is that he did think in nonconventional, and revolutionary ways, really. So I think that's what did it. When you call a kid a consumer durable, no one's going to find that particularly powerful, especially back in the 1960s and 1970s before people were thinking in these certainly more open and dramatic ways that he taught us to think, and now, as you said earlier, are now quite acceptable. Russ: You make a great point. He was kind of asking for it, and I think probably somewhere inside kind of reveled in it. What I thought was interesting was that sitting in on his workshop week after week--so I saw him reacting to other visiting economists, challenging our work when we had to present and of course presenting his own work from time to time, what he exuded was a very quiet confidence. There was nothing arrogant about him. He was very sure of himself, but somehow he managed to do it without being arrogant. I want to tell a quick story, and I think it's true--you can maybe verify it or not--but I was told that--he was an undergraduate at Princeton and he went there to be a mathematician. And in his freshman, first semester or maybe first year, he found himself doing very poorly relative to his roommate. And so he just sort of thought, Well, I guess I'm not so good at this. And he looked elsewhere. And I think he originally started to think about sociology and eventually ended up in economics. Well, his roommate--I don't remember his name--ended up winning a Fields Medal. [Maybe John Milnor?--Econlib Ed.] He was one of the top mathematicians of his generation. So the fact that Gary wasn't better than his roommate was really not that informative. Or maybe it was. Maybe he would only have enjoyed being a mathematician if he had been at the very top. He had a cerebral ability--when I think about his work, and we'll talk about it now, we'll turn to that, when I see something in it that is, say, wrong, or leads to an implication that I think is silly or foolish, I always think, and now he's gone, but if you told him anything like that, ever, in my experience--and I saw many people much smarter than I am dismiss his work with criticisms like the ones I'm thinking of, some implication that seemed inconsistent with the data or whatever it was, he would always have anticipated that problem and challenge, and he always had an answer. His brain was very, very large. And I think that probably sustained him when he saw people that he thought maybe weren't as smart as he was, saying his work was worthless and not getting their respect. Guest: Absolutely. And I think, the point that you made earlier when you were talking about Princeton and competing with his roommate that eventually earned the Fields Medal, you know, I think that Gary actually did make the right choice. Because, while he might have been a decent mathematician, that was not his strength. Russ: Absolutely. Guest: And if you think back on his work, it's not that he had such great formal skills. This is not a guy who was a terrific, either formal mathematician, or even modeler in the sense of kind of standard or now, what is standard, economics--game theory and other kinds of formal economic approaches. Gary was not that great at that. What Gary was unbelievable at was creativity. Gary is probably the most creative mind I have ever known in my life. And I've known some great minds, including people like Milton Friedman and George Stigler and Kenneth Arrow, all of whom are fabulously creative and fabulously important innovative thinkers. But when I think about Gary, what really defines him and what differentiates him from the pack, is that he was able to think about questions that no one would conceivably think of in the way he did; and he would always add insight and experience where you'd kind of hit yourself in the forehead and you'd say, 'Why didn't I think of that? That's such a terrific way to approach this problem, but I never would have thought of it.' Only Gary could have come up with it. Russ: Yeah. And I've drifted away from the areas of research that he was interested in, so I've forgotten many of the subtleties and nuance. And it's very easy to say about Gary, 'Oh, yeah, he was creative because he would apply economics to think people wouldn't have thought of before.' And that's true. He was. That was more than creative--that was courageous, because as we've just talked about, he got criticized and lost respect from people because of that ambition and courageous approach. But the real creativity, to me, took place in the actual work, and the subtlety and nuance with which he used the rational choice model. And as I've gotten older I've gotten much less enamored of rational choice, much more sympathetic to what I think of as a Smithian approach that's less formal. And when I go back and read Gary, I see that he was never, ever hemmed in by the formality. He always used the formal models as a way to have these incredible leaps of insight into possible behaviors and predictions that you wouldn't have come to. So in a way, he's the exception that proves the rule. There's nothing sterile about his application of formal models, as you see in some practitioners.
22:38Russ: So, let's turn to his actual work. So, his dissertation was in 1955. It was on the economics of discrimination; he turned it into a book in 1957. And I have some things I want to say about it that I think will be relevant particularly for listeners, and this topic has been discussed before. But I want to hear your thoughts on it first. You've mentioned already some of the parts that were shocking to people, the idea that you would model or look at discrimination in some cost-benefit framework. What else did Gary--what are his important contributions there? Guest: Well, what Gary did was he allowed us to think about discrimination in a way that would give very strong and clear predictions about what we should observe in the world. So, most people up to that point were just thinking of discrimination as something that was innate. And perhaps it is innate; perhaps it is something that's hardwired into people's brains, that they are born with some tastes against people who look or behave other than the way they do. But that wasn't the important point. The important point was Gary took that as a given, and he said, let's assume that's true. What does that imply about the way these things will translate into market behavior, into prices, into wages, into the kinds of patterns that we observe in labor markets? So, for example, one of the points that Gary made was that the number of people in a group would be a very important determinant of the discrimination premium that you would see. Let me be a little more specific about this, because that's kind of a technical way to put it. Let's say you take two groups: you have a large group, like say African Americans, and then you have, say, a much smaller group of individuals, say, Jews, in the United States. So one is 2% of the population; the other is 10, 11% of the population. Well, what Gary said is, let's assume that people have a distaste for these groups, people being the majority population, say the white population at the time, had a distaste for both of those groups. And let it be the case, just for simplicity, that the distaste was the same. So, it wasn't that people hated African Americans more than Jews, or Jews more than African Americans: let's say that was the same. What Gary showed, and the very simple logic, was that if you were an African American, you would suffer more because you would have to sell your services to people who were more averse to your type than the Jews would. Why? Because Jews were only 2% of the population; they can find people who are not so averse to them. But because African Americans are a much larger group, they have to push harder into the population of potential hires, of buyers of their services in this case. And what that means is they are going further and further down the distribution of people who have tastes against them. And so what you'd expect to see are bigger wage differentials there. So, that's an example of thinking about this in a logical, rational way that would give very clear predictions for what we should observe in a labor market. Again, based on a taste notion but saying, let's push the logic of this, and let's see what this implies. And the nice thing about Gary's work is that it gave you an implication that was both testable and refutable. And we know that in science, if it's not refutable and testable it's not really a theory; it's not a valuable theory because you can simply spin any yarn that you want. And so Gary was able to provide us with implications that were testable. And then these implications were tested and found to hold in the real world. Russ: Yeah. It says in the--it's carved in stone, actually, at the U. of Chicago--the quote from Lord Kelvin, that if your knowledge--I'm going to butcher it a little bit, but if your knowledge can't be measured, it's meaningless. It's slightly more eloquent than that. I've become a little more skeptical of that, as I've left Chicago. Because I think we struggle often to test our theories with any reliability. But I do think data matters and facts matter a lot. And Gary focused, and focused us in the profession, on those things. The thing I want to say about discrimination is that for some reason--and I have some theories about it that are not worth going into--people who don't like his work, have caricatured it to say that competition will, in the long run, eliminate discrimination. Gary never write that; he never said that. That claim got repeated a few months ago; and I went back and re-read The Economics of Discrimination, which I hadn't read in ages. And he says that nowhere in that book. And in fact, the more you read the book, it just, again, it's such a subtle use of comparative statics, of what happens to one factor if another factor changes, holding other things constant. And yet, Joe Stiglitz, for example, has written--and he wrote when he won the Nobel Prize, and he footnoted Becker's work, suggested that Becker argued that it would disappear. And of course, what Becker wrote is that competition is good for people who are discriminated against. Obviously it gives them more choices, like you were just talking about. When you have a monopoly or you have less competition, it's cheaper for people to indulge their taste for racism. And so they are more likely to do it. And competition punishes that. In fact, we see that right now. Donald Sterling, the owner of the Clippers, the NBA [National Basketball Association] basketball team, appears to be something of a racist. Maybe a really awful one. And yet, to be competitive in his basketball team, he hires almost all African Americans, pays them all market wage, probably despite himself--I don't know. But he has to, if he wants to have a winning team. And it doesn't mean he doesn't discriminate; it doesn't mean that there's no discrimination. It doesn't mean anything ludicrous like that. It just means the competition matters. And somehow Gary's been caricatured about that. And the last substantive email I had with him was over this issue; and I asked him why he thought people caricatured him this way. And he says, 'I don't know.' But if you read his Nobel Prize address, he very explicitly says that in the long run it's very possible for discrimination to persist. And I think it's a caricature because it's like, 'Well, the invisible hand solves all problems'. But Gary Becker didn't believe that. So they were caricaturing somebody that wasn't him. Or they were caricaturing him in a way that wasn't accurate. Guest: I agree with you. I think that, again, if you look at the specific predictions, he did have very detailed ideas about how markets would behave and what one would observe in markets. For example, one of the things he talked about was self-employment, and that one way to avoid discrimination would be to become self employed. So if you were in a group that suffered discrimination and were in the minority that tastes of the majority were against you, then you'd tend to see those people being self employed. One example that often comes up is the male-female differential. Now, of course females are not a minority; but there's plenty of evidence that they've been discriminated against over time in labor markets. And so one does observe that females do tend to be in self employment, sometimes small businesses, sometimes individual proprietorships. But you do tend to observe that, and that was one of the implications of Gary's early work. So, again, I think what Gary tried to do was to stay away from the normative implications, which, as I said, I think people who want to make him a caricature argue that, well, he had this kind of naive view, and his naive view led to racism and so forth--were really not thinking about the topic in the way that Gary thought about it. Gary was really thinking about: what are the predictions of this particular kind of behavior, what does it mean, and how can I go out and test this? The more normative things--not that he didn't talk about normative issues; he certainly had policy views and wrote about policy views. He had a blog; he also wrote op-eds in well known newspapers, and so forth. But I think for the most part, he was a real scientist and he wasn't focused on doing policy. By the way--that distinguishes him from other U. of Chicago economists, most notably Milton Friedman, who although he was a terrific scientist, certainly undisputed one of the true great scientists of the 20th century in economics, also felt that it was important to influence policy and spoke out on policy very strongly and frequently. That was not Gary. Russ: My only footnote to that is that most of Gary's policy work, I think, came after the won the Nobel Prize. Which, by way, of course made it less expensive for him to get an audience. People were more interested in hearing him. He'd be happy to, I think, agree with that. I wrote in my notes for this conversation, Eddie, I said, 'He was a microeconomist's microeconomist.' He really focused on micro. Later on he got more interested in macro, a little more interested. And you'll be interested to know that my spellchecker in Pages corrected 'microeconomist' to 'macroeconomist.' And I had to then manually revert to what of course is the better field. But that's life.
32:35Russ: Let's turn to human capital, in which he was an incredible pioneer; and he wasn't the first, but he was building on some of the work of others; but he was probably the most important. Also a radical idea that education is an investment, which sounds totally normal today, but at the time was viewed as tawdry. Guest: Absolutely. In fact, Gary once told me an interesting story about--again for your listeners who aren't quite as familiar with the topic of human capital as you and I are--that the basic notion of human capital is to think about a person as being essentially like a factory. In a factory you put machines in the factory, you put capital in the factory to make it more productive. And the theory of human capital says, well, what you do is you put skills, education on the job training in the human body to make it more productive and it will yield higher returns. And once you start thinking about that, you say, well, when does it pay to invest in these skills? When they are profitable. And that means when the benefits of investing in the skills outweigh the costs. In other words, the returns to, say, going--and I teach MBA [Masters of Business Administration] students right now at Stanford. The returns to going out, investing, taking a couple of years off, paying tuition, getting an MBA--it better be the case that the increased earnings or the job satisfaction or whatever else, job security, whatever you want to call it--that you get from making that investment overcomes the $2-300,000 cost that you are bearing in order to do that. So that's the basic idea behind human capital theory. And of course Gary had much more detail and fleshed out many more implications than I'm giving you right now. But that's the basic idea. Now, when he first came up with that idea, as was the case with all of his work, it was viewed as somewhat radical and somewhat inappropriate. Particularly by the education establishment. The education community felt that this was demeaning, that by talking about education as an investment, you somehow belittled the value of education. Which of course we know is a moral imperative--it's not just an investment, it's not just something that affects your wellbeing; this is something that affects your life and the way you think about the world. So, Gary told a story about once going to speak to, I believe it was actually a group in Chicago, the Chicago Board of Education, with a large audience--they had presented some kind of a conference. And Gary talked about his theory of human capital and how that applied to education. And one speaker after the other, right after him, just got up and criticized him and said this is heresy and it's terrible to think about this. And then finally, one visionary among the education scholars or among the board members--I forget which it was--said, 'You know, you guys are being way too narrow about this; you are thinking about this in the wrong way; what Becker is doing is he is giving us another way to think about the value of education. And this actually makes education more important, not less important. Sure you can have all the other reasons for getting education, makes you a better, a more intelligent person and a better voter and a better parent and so forth. But affecting your earnings is another absolutely fundamental way in which education can be valuable. And we should embrace it rather than reject it.' And now, I would say that most of the education community subscribes to the theory of human capital and doesn't think of it as the antithesis of what they are doing but rather as a strong complement to the way they think about the world. Russ: Yeah. And I think it's important to emphasize, that Becker, as you alluded to a minute ago and formally, Becker would certainly agree that there are lots of returns to the human capital investment beyond your earnings. But that those might tend to be similar over time, whereas the earnings are the ones that are going to change. So when the earnings of women change, that's going to change their incentive to invest in schooling. As lifespans extend, that might change when you invest. As interest rates change, that's going to change the return because a lot of the benefits come well into the future. So, it's really important, I think, to remind folks that he was very focused--I don't want to not get this in. I mentioned before, when I saw him honored at Chicago, maybe 10, 15 years ago, somebody asked him which economist influenced him the most. And he said, without hesitation, 'Adam Smith and Alfred Marshall.' Which shocked me and surprised me. And yet, when you look at Adam Smith's work and you go back, you can see a lot of it clearly did influence Becker. And I want to quote his Nobel Prize Address. He says:
Unlike Marxian analysis, the economic approach I refer to does not assume that individuals are motivated solely by selfishness or gain. It is a method of analysis, not an assumption about particular motivations. Along with others, I have tried to pry economists away from narrow assumptions about self interest. Behavior is driven by a much richer set of values and preferences.
And he would talk, I remember, about 'approbation' and 'disapprobation' in his microeconomics class, which are very Smithian terms that Smith uses, meaning approval and disapproval of others and being applauded for what you do, and your reputation. Becker was deeply interested in applying economic tools to non-economic aspects, non-financial aspects of life. And I think that was what made his work so important. Guest: I agree. There are so many things that we sort of think of in some ways as obvious; and then you think about them and you say, wait a minute: how would you explain that? So you were talking about the implications of human capital. The simplest one is young people go to school more than old people. Now, just think about that for a second. You think, that seems kind of obvious, that young people are going to go to school more than old people-- Russ: Because you see it-- Guest: But why?. Why is it obvious? Russ: Because it could go the other way. Guest: It could go. Right. It could go that when you are young it's harder to learn; why don't you wait a while? Russ: Yeah. Guest: You're right, exactly. And so it's not so obvious that that's the case, once you start thinking about these things in a more focused and harder way. And what Gary did in his theory was a simple and sort of the most obvious simplification, but you say, Look, if this is an investment, you get higher returns to the investment if you do it early, and you get to recoup those returns over your entire lifetime. So, if you are ever going to make an investment, make it early and get the returns for a long period of time, rather than make it later. You are not going to see someone a year before retirement investing in an MBA. It just doesn't make any sense. Well, we kind of know that; it seems sort of obvious. But you have to think about why is that the case. And then of course that leads to many other implications, some of which you already detailed. But again, I think that many of the things that Gary thought about, where you'd say, well isn't this kind of obvious--when you think about it hard you realize, no, it isn't obvious at all.
39:53Guest: I'll give you another in another area--I don't know if you're ready to turn to this-- Russ: Yeah, it's fine; go ahead. Let me give you one on fertility. So, one of the things that Gary observed--one of his early papers was on the economics of fertility, and as I mentioned earlier, the heresy of calling a child a consumer durable was in the context of this work. But what Gary was dealing with, again, he was looking at an empirical phenomenon that puzzled him. And here's the phenomenon. If you look back in the 19th century, what one observed is that the richer families were the ones who had lots of children, and the poorer families had fewer children. Whereas in the 20th century that was reversed: the larger families were among the lower income people and the smaller families tended to be among the higher income people. And that was particularly true among the professional class. And the question was: Why? So, Gary started thinking about this and saying, well, wait a minute; is there a rational way to reconcile these two facts in one simple theory? And that's how he came to the theory of fertility. And the basic idea was: Let's think of a child as being, as I said, a consumer durable, but basically think of it as something that a family decides to buy or to have as a conscious decision--this is not just a mechanical; we are going to think about this as a conscious decision. And then you have to say, well, if it's a conscious decision, you trade off again the costs of having the child against the benefits from having a child. So, there are many benefits from having children, and we know what those are. But what Gary focused on was the cost side. And the most important insight is he said, Look, one of the things about children is that they are very time-intensive. It takes a lot of time to raise a kid, and in particular it tends to be the mother's time that is involved in raising the child. So Gary reasoned, well, if it's the mother's time that's involved then you have to ask: What is the cost of using the mother's time? And of course in economics one of the most fundamental concepts is opportunity cost. It's the cost of foregoing the next best alternative. And so Gary then reasoned that the opportunity cost of a child was the price of the mother's time; and the price of the mother's time is what she could be doing elsewhere. And that related to her wage rate. All right, so what does that tell you? Well, in the 20th century, what that says is that when women had the option to work, or when most women were working, as they are now, what you'd expect is that women with high wages have very high values of time, and as a result, it's more costly for them to take time off and to have children, and so they tend to have fewer of them. If you go back to the 19th century, women were not working, and so this mechanism of high-priced women versus low-priced women was the reverse. The women whose time value was high in alternative activities, like working on a farm or doing household chores, was actually the low-priced woman, or the woman who was poor. And so we had the situation reversed in the 19th century. And so what Gary was able to do with this simple approach was to reconcile two facts. I'll make one more point and then I'll pause. Russ, I'm sorry I'm talking on here, but this is-- Russ: Go ahead. This is great. Guest: This is one that gets me excited. One of the most important policy implications that came out of Gary's work--and at this point it's so obvious and so much of a given that people don't even realize that it came from Gary's economics of fertility. And that is that if you want to change population growth rates--let's suppose we go to a developing country where population is growing at a very rapid rate--the implication of Gary's work is that the best way to do that is to educate girls. And it has nothing to do with teaching them about birth control or other methods of abstinence or anything like that. What it has to do with is that if you educate girls, what you do is you raise the value of their time in the labor market, and as a consequence, women will then voluntarily choose to have fewer kids. And we see this all around the world, and virtually every international organization and NGO (Non-Government Organization) accepts this as a given. And that's now an important component of fertility policy. If you want to change the fertility rates, you need to make sure that you educate girls. And so, again, that comes right out of Gary's work. It's such an obvious point at this time that we take it as sort of given and don't even attribute it to Gary. Russ: Yeah. And I can see Gary in the classroom now. He pauses; he looks up at the ceiling, which he was prone to do when he lectured. His hand would sort of--one of his hands, his right hand probably, would come up by his head and he would shake it, to signify a question was coming, and then he'd say: 'So what would be the implications for quantity and quality, Roberts?' And he'd call on one of us. And most of the time we'd ask him to repeat the question, because we'd be stalling for time. But he was a very diligent questioner of students in class, and a relentless questioner; and most of us got the questions wrong. I always got them wrong. It was a very sobering experience. But it was a very educational experience. But one of the things he was obsessed with in those years, of course, was what he called the quality-quantity tradeoff. Which, again, doesn't sound so attractive; and as a parent, I don't think you sit around and draw up a budget, although some parents do. But his point was that as you get wealthier, you prefer to have higher quality children. By that, he meant, you invest more in their education, in their--not just their financial power but also their music ability, their sports skills. And as you get wealthier, you want children of higher quality--meaning that have better skills and a richer life. And that means that any one child is more expensive. And so he talked a lot about how, as we have gotten richer in the world, not just the effect of women's wages on the opportunity cost of staying out of the labor force, because we've reduced that a lot over time. Women now spend less time out of the labor force--for obvious reasons. Their wages are higher than before. But the other factor is the fact that as we get wealthier, we want better kids--whatever that means; it's not attractive to say it, but I think it's correct. And they are expensive. So we tend to have fewer. So family sizes fall with income independent of the wife's wage. I think I have that correct. Can you speak to that? Guest: Yeah. Right. So, the quantity-quality tradeoff--and again, those words--again, I go back to saying, I wouldn't say intentionally antagonistic. But Gary never worried about whether that would antagonize people or not. And it surely would. Thinking about trading off the quality of your--what do you mean by the 'quality' of a human? Russ: Disgusting. Guest: Isn't that immoral to talk about the quality of a human? Don't we think of humans as all being created equal? And so forth. So, I think--Gary--what he did mean was measurable aspects of what he called 'quality'. And the kinds of things you are talking about, inputs, expenditures that you'd make per child. So the question would be: Would some families choose to have fewer children and spend more per kid, rather than having many children and spending less per kid? And that was a tradeoff that people would make, and would make rationally; and what he modeled in his Treatise on the Family was this tradeoff and how that would evolve over time, and cross-section, as you look from one family to another, how we'd see it in different countries, different levels of income within a country, and so forth. And again, these implications were not only very specific and predictive, but they actually turned out to be right. And I think that's the most important point about it, is that some of these things that sounded totally wacky when he first said them turned out to be right. And that's how he won his critics over, I think--is that it wasn't that people said, 'Oh, yeah, this is a cool way to think about it; I've changed my mind on the terminology.' It was that what Gary showed was he had a better theory; and his theory was better because it predicted what we observe in the real world a lot better than what anybody else had.
48:47Russ: We should probably say something briefly about the 'rotten kid theorem', which is another slightly jarring description. So, Gary suggested that there would be sort of an invisible hand working within a family that, if you weren't so nice and you didn't care about your siblings, you might act as if you do because of transfers the parents can make to you, either of money or of time, attention. It would be in your interest for the family to thrive. If there was a residual claimant--again, to use technical language to raise a few feathers--the parents say, or the patriarch or matriarch who kept kids in line. Guest: Absolutely. So the whole idea behind the rotten kid theorem is, even if the kid is inherently bad and does not have warm feelings about his brothers and sisters--and that's probably true of all of us at least in some stages in our childhood, where we want to take a punch at our brother or something, what Gary showed was that may be true, but because the parents care about the kids, what they will do is, they will transfer resources from one child to another. Not so much as punishment--it's not explicit punishment--but rather because if you bring the welfare of your brother down, it's necessarily the case the parent has to compensate for that, because the parent loves that kid. And as a result, the parent will compensate and reduce the welfare of the offending sibling, in this case. And that induces the child to do the right thing. So it's not exactly a punishment strategy explicitly, but it turns out to be one in that in doing that creates the right incentive. By the way, Russ, when you raise the rotten kid theorem, and you think about punishment, this is another thing that connects Gary's work. One of the things that we see is that some of the same basic themes that came up in one line of research came through in a large number of other areas. So, for example, when you think about punishment, you say, Gary wrote a very important piece of work called "Crime and Punishment". The "Crime and Punishment" paper obviously picking up on the previous Russian author on that-- Russ: Dostoyevsky. Guest: Yeah, Dostoyevsky, sorry. Russ: It was an unusual literary allusion for Gary, I have to say. I don't think he read a lot of Russian literature as an adult. Guest: It was. Russ: Because I do think he was kind of focused on that economics thing. But he had somewhere come across it. Guest: It was. It was one of, I would say most of his titles were not particularly cute. That was one of the few that was. They were pretty, you know, "The Economics of Fertility," A Treatise on the Family. Russ: "A Theory of Social Interactions." Guest: Yeah. I mean, it's kind of boring stuff. "Crime and Punishment" was kind of sexy. Anyway, but the whole idea there, in "Crime and Punishment", was to think about: How do I model deterrence? How do I model behavior, among criminals? Now, when you think about deterrence--we all think about deterrence these days. But in those days, people didn't think about it. In fact, they thought, well, criminal behavior is just an abnormality. And criminals don't think about these things in rational ways. They behave irrationally. That's why we call them criminals. Well, Gary said, No, that's not the right way to think about it. What we want to think about is that even though there may be some irrationality in this, criminals do take into account the costs and benefits of their actions. And if we do that, what we'll understand is if we raise the cost of taking these actions, we will deter criminals in engaging in those. So, he focused on two components of it. One was the penalty associated with being convicted of a crime, and the second was the probability of being detected of that crime. And what he showed was there was a tradeoff between the two. So, one thing you could do is you could have a very low probability of detection, but that would require high penalties. Now, I remember an example, a personal example: when I was an undergraduate I had a job in my undergraduate days at UCLA. I worked at the UCLA hospital and I worked in the housekeeping department, and I was a clerk, and I remember keeping the time cards and so forth of the various workers there. Russ: I'm getting nervous, Eddie. Has the statute of limitations run out? I wonder if you are going to describe [?] Guest: Yeah, no, no, no, this is all right. Don't worry about it. I didn't do anything illegal. But I worked--my boss was the head of the department; he was a terrific man; I learned an enormous amount from him. But one of the things that they did was they had what I thought was an absolutely extreme punishment. And the punishment was--this was a swing shift, so the swing shift means you come in at 5 and you'd leave at 1 in the morning. And so the hospital at that time was pretty quiet. No one was around. The patients of course were there, but very few others. And so what would happen is occasionally the janitors would be caught sleeping on the job. It's a hospital with lots of beds there, so they'd be caught sleeping on the job. The penalty for being caught sleeping on the job was immediate termination. And, to me, that seem absolutely draconian, and the reason it seemed draconian is, how much is the guy stealing from you by sleeping on the job? So he takes a half-hour nap. His wage rate at that time was about, you know, $2.30 an hour; so he stole $1.15 from you in labor value; and you fire the guy over it. Well, the reason of course is they did this is because the probability of detection was so low. And so it was so difficult--people could hide in various places throughout the hospital; it was so rare that you would actually catch someone engaged in sleeping on the job that when they actually did catch someone, they would make an example of him. In other words, create a punishment that was so high, it would have a deterrent effect. And that was the reason for doing that. Gary made that argument rational. Now, there are other things that we think about, that context that you worry about, the whole notion of cruel and unusual punishment may fly in the face of this, because it means that you punish one person far more than the cost of that particular crime. Russ: Yeah. It disturbs our sense of morality. We've even mentioned that on the program before. I don't remember which episode. Preparing for this conversation, Eddie, I thought: This would be one of those things where I'd say, 'But Gary, that's ridiculous, because--', and I'm sure he had something thoughtful to say about it. I don't know what it was. But I'm sure he wouldn't go, 'Oh, I never thought about that. That would bother people, wouldn't it?' Yeah, he's thought about it. Guest: He certainly thought about it. The obvious way to think about this--again, Gary's paper, this was the first, pioneering paper on the topic. And so just even laying out the concept and even thinking about this in a rational way was just profound. And then you'd say, 'All right, so wait a minute; what about this? And what about this?' and it started an entire literature. The whole deterrence literature in law and economics is based, really, on that paper, is derived from that paper. And people say, well, what if people are risk averse? What if you make mistakes, for example, what happens if sometimes you punish a person inappropriately--he actually wasn't sleeping, he was just, happened to be cleaning behind something and looked like he was in the bed or something, and you fire the guy. Or you execute someone who is innocent. Obviously that has a very high cost and we want to avoid those. Gary did think about those things and certainly would modify the simplest, basic theory. Gary thought about things more deeply than just about anybody else on any topic. It would never be the case, as you pointed out, Russ, that you'd say, 'Well, what about this?' and he'd say, 'Oh, yeah, I never thought about that.' I mean, that was so rare. Talking about crime--we're almost out of time. I want to add one more point about crime and then we'll finish up. He had a lot of fascinating things to say about employee theft and getting people--I think he called it malfeasance--people performing poorly. You think about, going back to basketball for a second, recent scandal in the NBA a few years back when a referee was caught gambling on games or taking money from gamblers to make a few calls here and there that would swing a game. And Gary's point early on--I remember this vividly; I think it was his class, I could be wrong, but I remember vividly in class talking about the fact that--'Well, that's why you have to pay them a lot. You pay them a lot because it's very hard to detect. So what you want to do is raise the price of them getting caught and losing their jobs. Or being suspected of not being a good referee and losing their job.' So, if you look at sports referees, they are all "overpaid." They are paid a lot more than it would take to attract quality people into the job. But that is like a golden handcuff, to keep them honest. Just the other day I was talking to people at dinner, shortly after Gary passed away, and somebody said, 'There's a lot of theft in these big box stores by employees.' And I had a Beckerian thought, which is: but that lets them pay lower wages than they otherwise would. Because of course if you are in an environment where you know you can steal stuff, the competition to get in those jobs tends to bid down the wages. It doesn't totally offset the losses from the theft, I'm sure we could show. But thinking that way was one of the things I learned from Becker, which was the incredible power of incentives. Incentives embedded in markets and how they interact. And that I think is, to me, the thing I learned the most from him.
58:46Russ: The other thing I thought I'd just add, which I know you meant to talk about and we didn't have time, is his emphasis on time. He wrote a very influential paper on the importance of time in our demand for goods because we don't just look at the money price, we look at the time price it takes to consume them. And he focused on that, which is incredibly important. I think those two things--I'm going to say three things: His courage in applying economics to things that aren't thought of as economics; his skill and nuance in using prices and incentives in markets; and then, not just looking at money price, but time price and the full cost, which can include shame and the Smithian aspects from The Theory of Moral Sentiments were really what, to me, made him one of the 5 greatest economists of the 20th century. It's a short list, those five. But for me, in terms of influence--not my 5 favorites. It's influence. It's Keynes, Friedman, Hayek, and Becker would be the top four. I don't know who the fifth--maybe Paul Samuelson for his influence on mathematical economics. But those would be my five. What are your thoughts, closing thoughts, on Gary's influence on you or the profession? Guest: Just to pick up very quickly on what you said earlier about the referee process, there's actually a more important--I shouldn't say important--but certainly an important application of that, and that's corruption in government. One of the things that Gary pushed in his policy side was that if you want to have honest government officials, you have to make sure that you pay them a lot. In the same way you were talking about with referees. For many people, Lee Kuan Yew is probably the best example of having implemented that in Singapore. We had, those people are, the government officials are paid very high salaries, and they a government that's very efficiently run with minimal corruption; whereas you look at countries that pay their officials lower wage rates and you have much more corruption. So that's an implication, I think, of Gary's work. Again, you might say some of that's obvious. I think it's obvious only after you see it. Russ: One last thing. I think Gary would add that if you are not careful you'll pay them too much and attract some of the more productive people into the less productive aspects of the economy. So you might want to take a little fraud and a little corruption. Go ahead. Close us out. Guest: Well, I was just going to say that the final thought was that Gary was an optimist. And the reason he was an optimist is that he believed in the importance of incentives and he believed that people would behave appropriately--as Adam Smith did. Gary was an invisible hand kind of guy. And it's not surprising to me that you said earlier that Smith was one of the people who influenced him the most. He believed that, and he believed as a result that individual behavior, rational behavior, and personal maximizing behavior would lead to the greater good. And for that reason, he was an optimist. And he felt even in the face of misguided government policy, people would through their strong incentives to maximize their own welfare and that of their children, would overcome that and that we would be led to a greater good. And so I think for that reason, Gary was a positive person, not just in terms of his research but also in terms of his views of policy. Russ: And of course, he was an early guest of EconTalk. You can find that in our archives; we'll put a link up to that episode.

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COMMENTS (12 to date)
Michael Walker writes:

[Comment removed pending confirmation of email address and for irrelevance. Email the webmaster@econlib.org to request restoring your comment privileges. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Brian Oeding writes:

Russ,
I've listened to and enjoyed all of your podcasts. Thanks for providing them. Perhaps this is the quote you were looking for (although maybe not all of it written in stone) and I can see why it was hard to remember:

"I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind; it may be the beginning of knowledge, but you have scarcely, in your thoughts, advanced to the stage of science, whatever the matter may be." ~ William Thomson, aka. Lord Kelvin (1824–1907) from his Lecture on "Electrical Units of Measurement" (3 May 1883), published in Popular Lectures Vol. I, p. 73.

Cowboy_Prof writes:

I really enjoyed this podcast and similar ones wherein you reflect about the lives of various economists (e.g., Boudreaux on Coase, Boettke talking about Buchanan). The "everyday stories" about these figures really help to bring their ideas to life. Understanding Becker's personality as someone who either didn't care about criticism and/or liked to stir controversy (e.g., "children are consumer durables") helps to understand a great deal of what he wrote. His connection to Smithian ideas was also enlightening.

I particularly liked Lazear's story on his job search excursion to Gary's hotel and Russ's terror of being called upon in seminar. Good to hear that other folks have these experiences in academia. Given that I live in a world where Becker's ideas are more commonplace, this podcast made me appreciate how rebellious his ideas were and how important that is in the scientific process.

I couldn't help think of my own brief meeting with Becker back in 1997. I was invited to give a talk at his graduate seminar that he co-taught with Andrew Greeley at the time. It happened to fall on Gary's 67th birthday, so that was an extra special treat. (We had a nice dinner.) But everything that Russ said about the typical seminar held true -- despite having a 20 minute presentation set up, I was given about 3 minutes (seemed like 42 seconds) and then it was a fast and furious frenzy of ideas. I learned a great deal about "give-and-take" thinking that evening. I don't remember any of the graduate students in that room, but I did notice that some of them had a dazed look in their eyes.

One of the things that this podcast brought to light was how "big of a deal" that seminar presentation was. I'm not one who puts too much stock in celebrity status, though admittedly I was impressed by his Nobel Prize (I had once won 1st place in my age division for the county's soapbox derby when I was a wee lad; I thought this would put us on comparable levels).

All told, hearing your stories about Gary Becker made me appreciate that cold December day in Chicago. Thanks.

Please do more podcasts like this.

Greg G writes:

Just want to echo what Cowboy_Prof said there. I'm also a big fan of these podcasts where you highlight the key ideas of one famous economist. I can't imagine how those of us unfamiliar with these economists could learn more in an hour.

Luke J writes:

I appreciate these types of episodes as well. I did not have the chance to study under or meet Becker (or Coase, Buchanan, Friedman, Hayek, etc.), so this little chat gives me a little piece of a person who obviously contributed quite a bit to the profession and to those who knew him.

Steven writes:

[Comment removed for irrelevance. Please see your email --Econlib Ed.]

Steven writes:

I have no idea why the Econlib editor removed my comment for "irrelevance." I said that Becker had interesting ideas and insights and I'd like to learn more. It's not a "meaty" comment, but why bother removing it?

Well, let's see if I can get more relevant. I could point out that I'm not sure I agree with the point made about the link between higher pay and "honesty." For example, Russ said that sports referees are greatly overpaid and that this acts like "golden handcuffs." I suppose the logic goes that one is more likely to stay honest if one has more salary to lose. But if referees weren't overpaid, they'd still lose their job if caught doing something dishonest. Not only that, they could face criminal prosecution. Would Becker say that isn't enough incentive for honesty? Russ gave the example of an NBA referee involved in some kind of gambling scheme. I imagine that would be a fairly serious criminal offense.

Russ provided some counter examples, about low-pay Big Box store employees who steal merchandise. The implication seems to be that if the employees were paid good wages, or "overpaid," then there would be significantly less employee theft going on, again because of "golden handcuffs." Is there any real evidence for this assertion, and if there is, can we say that we know how it works? Isn't it possible that Big Box employees who earn good wages would simply feel less desire to steal merchandise because they can afford to buy things? And regardless of whether such an employee is given low wages or good wages, wouldn't the threat of criminal prosecution be the primary deterrent to stealing?

Conversely, is there any evidence to suggest that people who earn more money are significantly more honest than people who earn less money? What about all the shenanigans we keep hearing about that happen at the top of the income curve?

Daniel Barkalow writes:

I imagine that what Becker would say if you brought up the fact that making an example of the people who get caught is unfair is that, if what the people who make the rules care primarily about is the deterrent effect, and you care about the unfair harsh punishment, you just need to increase the chance of detection. All else being equal, the Powers That Be will be more lenient on people who are easy to catch, because they don't need more than a proportional response if the probability of detection is high. (Unless, of course, their goal isn't actually deterrence.)

Josh Woods writes:

Hi Russ, I thought this was a great episode, I really enjoyed hearing about Becker's fearlessness in presenting ideas he knew would be unpopular amongst many and his ability to overcome that initial reaction and gain wide acceptance for his work.

Throughout the podcast, I did find myself wondering what Becker would have made of Bryan Caplan's recent podcast on the signalling value of education as opposed to the human capital model and indeed an earlier econtalk (2011) where Bryan explicitly rejected Becker's quantity/quality tradeoff when choosing the number of children to have. As someone familiar with both economists, do you know if Becker was aware of Bryan's work and if he had any responses to it?

Bryan Caplan writes:

@Josh - I met Becker a few times, but as far as I know he never responded to me on signaling or the quality/quantity trade-off. Becker was generally very unconvinced by signaling, for reasons I critique here:
http://econlog.econlib.org/archives/2006/02/mixed_signals.html

D Donaghy writes:

I also very much enjoyed the podcast and have listened twice now. It left me with a few questions - what are the rates of self-employment among minority groups then? this goes more to how groups have dealt with the discrimination effects than Dr.Becker's specific work. Is there anyone doing work on why/why not self employment is/is not an happening. On crime,1) how does the current model of prisons as for profit institutions change the dynmaics of crime and punishment, and 2) in the drug war didn't we do both - high levels of detection (at least for the lower level dealers) and high prison sentences?

Trent writes:

Steven,

The NBA referee who was mentioned in the podcast was Tim Donaghy, who in 2007 pled guilty to 2 counts related to gambling (conspiracy to engage in wire fraud and transmitting wagering information through interstate commerce). He served just over a year....and as almost everybody in sports does, he wrote a book detailing all that happened: "Personal Foul: A First-Person Account of the Scandal that Rocked the NBA."

As for overpaying sports referees, there's Prof. Becker's point that you provide a huge disincentive to engage in illegal activies and risk that large income. Along the same lines, I think there's another point: If you pay the officials a large enough salary, most of them won't be looking for outside income in the first place.

One potential counter to the above was the NBA referees plane ticket scandal in the mid-1990s. Several of them got into trouble with the IRS for downgrading their NBA-paid first class/full-coach-fare plane tickets, pocketing the $$$ difference, and not reporting that as income on their taxes. Doesn't seem logical that they'd risk their highly paid jobs for a few hundred dollars here and there, but several of them did it. What I don't know is (a) how much they were paid back then (has there been a substantial increase in pay since then that would change the incentives)?; and (b) how many of them really knew this was wrong/illegal so that they were risking their jobs? Ignorance isn't a legal defense, I know....but I could understand a thought pattern that 'the NBA is paying for me to go from A to B....I don't need the first class ticket that they bought me (probably union rules on a flights above a certain length)....I'll downgrade, pocket the difference, and it's a win-win....who'll ever know?'

Lastly, will join in with the rest of the kudos expressed - this was a very interesting, very engaging conversation to listen to!

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