Economics is the study of society. It goes beyond the allocation of scarce resources in markets, examining how agents in society behave and how their behaviour influences their environment. This human factor makes the study of Economics both important and exciting. However, how to model it is an open debate in Economics. In today’s post, I want to look at the new classical Economist’s view on humans. It has been shaped by the works of Chicago Economist and Nobel Laureate Gary Becker. In particular, Becker’s book The Economic Approach to Human Behavior (1976) serves as a cornerstone for how one ought to model human behaviour in the economy and society. It argues for (1) maximising behaviour, (2) market equilibrium, and (3) stable preferences.
In the new classical view, humans are assumed to be utility maximisers. They act as if they maximise their intrinsic utility or wealth function. However, utility maximisation does not necessarily imply that humans act only in their own interest. Becker (1993, p.386) argues that “individuals maximize welfare as they conceive it, whether they be selfish, altruistic, loyal, spiteful, or masochistic”. Hence utility maximisation is consistent with the view that humans have some broader preferences and a wide range of constraints such as income, time, imperfect memory and abilities, limited resources or opportunities available to them (Becker, 1996).
The second pillar is market equilibrium. Markets are in place to coordinate humans’ actions. Although they vary on their degree of efficiency, markets converge towards equilibrium because humans as utility maximising agents exploit all their profit opportunities.
The third pillar is not uncontroversial; it is assumed that humans’ preferences are stable over time and similar among people. Such preferences are not preferences regarding goods and services but preferences over the fundamental aspects that people have to deal with in life. Gary Becker (1976) names the areas of health, prestige, sensual pleasure, benevolence, and envy as examples. That humans should be modeled as agents with stable preferences over these fundamental aspects in life is explained as follows:
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 (Becker, 1976, p. 5).
It should also be noted that Becker has changed his view on humans’ preferences over the course of his works. In his early works, he advocates a radical version of preference stability with time-invariance and similarity of preferences among the poor and the wealthy as well as different countries and cultures (Becker, 1976). In later works, he reverts to a less radical view on preference stability in which preferences are shaped, for example, by parents during childhood, as well as the media through advertising, or “imagination” capital (Becker, 1996). This less radical view acknowledges that humans’ preferences are relatively stable but can evolve through practice, habituation and learning, and may therefore be heterogeneous (Heckman, 2015).
In sum, the new classical view argues that “all human behaviour can be viewed as involving participants who maximize their utility from a stable set of preferences and accumulate an optimal amount of information and other inputs in a variety of markets” (Becker, 1976, p.14). Hence utility maximisation, market equilibrium and preference stability serve as the three pillars for how to analyse human behaviour in the economy and society. They ensure that new classical Economists apply the same analytical framework because human behaviour “is not compartmentalized, sometimes based on maximizing, sometimes not, sometimes motivated by stable preferences, sometimes by volatile ones, sometimes resulting in an optimal accumulation of information, sometimes not” (Becker, 1976, p.14).
Lastly, I would like to stress that, while Becker’s works have greatly influenced the profession (especially standard economic theory), his arguments are not uncontroversial. For example, although utility maximisation allows for a broader set of preferences and constraints, it models humans in a very mechanical way. Lucas, a central figure in the new classical approach to macroeconomics, once admitted that “we’re programming robot imitations of people, and there are real limitations on what you can get out of that” (Lucas in Klamer, 1984, p.49). In my opinion, this is one of the main reasons why Behavioural Economics has been so successful in the last couple of years, especially after the global financial crisis of 2008. Behavioural Economics, unlike New Classical Economics, models humans as humans and not as robots. While this may complicate the analysis, it allows for descriptive models rather than normative models of human behaviour which are of superior predictive value.
I hope you enjoyed today’s discourse and many thanks for reading,
Becker, G.S. (1976). The Economic Approach to Human Behavior. Chicago: University of Chicago Press.
Becker, G.S. (1996). Accounting for Tastes. Cambridge: Harvard University Press.
Heckman, J.J. (2015). Gary Becker: Model Economic Scientist. The American Economic Review, 105(5), 74–79. http://doi.org/10.1257/aer.p20151106
Klamer, A. (1984). The New Classical Macroeconomics: Conversations with New Classical Economists and Their Opponents. Brighton: Wheatsheaf.