Interview with Gary Becker on Rational Choice

11 June 2012 at 9:30 am Peter G. Klein 5 comments

| Peter Klein |

The latest issue of the Erasmus Journal for Philosophy and Economics features an interview with Gary Becker on rational choice. I am not a Chicagoite positivist, but I sympathize with Gary’s overall take on the behavioral revolution: Meh.

Interviewer: Following the crisis, many economists and methodologists have argued that more realistic behavioral underpinnings of economic theory would have made forecasts more accurate. Do you think that one of the things the recent crisis has shown us is that people just do not behave rationally? Or did the crisis rather show exactly the opposite—that people did in fact react to incentives and that the consequences of introducing new financial instruments were just not foreseeable?

Becker: I think it is mainly the latter. There were incentives, both on the borrower and on the lender side, that these subprime loans would be made available at the lowest interest rates; and there was pressure from the government to do so; and probably those involved did not understand the financial instruments. Now, is it that we have to change our theories radically with respect to their behavioral structure or even switch to a new behavioral framework? There is very little evidence that would support such a move.

A later remark supports my argument that “disequilibrium analysis” is not the defining characteristics of the Austrian school:

I have read some of the literature on the critique of equilibrium, not so much by philosophers but by the Austrian school of economics, and I could just never make sense out of it, because I do not see what they are substituting for it. Even Friedrich Hayek, who is listed as one of the top Austrians, if you read his analysis, you see that he is using equilibrium analysis.

Entry filed under: - Klein -, Austrian Economics, Bailout / Financial Crisis, History of Economic and Management Thought, People.

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5 Comments Add your own

1. Steve Phelan | 11 June 2012 at 11:35 am

“people did in fact react to incentives and that the consequences of introducing new financial instruments were just not foreseeable?”

Really? Seemed pretty foreseeable to me.
2. Allan Walstad | 12 June 2012 at 9:21 am

Good example of what’s wrong with the mainstream. Becker defends the math-fetish on the basis that econ was non-math before the Great Depression and failed to forecast it! But of course Hayek was warning about a bubble, and 75 years of mathemized mainstream econ “progress” did not help in averting or forecasting the most recent bubble-bust. Becker thinks econ should not be taken to account for major events, because they’re too hard to predict. This is like the building inspector shrugging off not noticing that the structure is collapsing. On equilibrium, it appears Becker long ago covered his eyes and ears. Sad.

Peter, whether or not non-equilibrium analysis is “the defining characteristic” of the Austrian school, why would you take the opinion of a Chicago school theorist like Becker as having much significance in that regard?
3. Klein, Peter G. | 12 June 2012 at 10:12 am

Oh, I certainly wouldn’t take Becker’s remarks on equilibrium as dispositive. But I find it interesting that an outsider — who has certainly been around Austrians before — doesn’t think of Hayek as some kind of disequilibrium theorist. (This is also Terence Hutchison’s view in making the famous “Hayek I” “Hayek II” distinction.)
4. Why smart people are stupid - CycloneFanatic | 17 June 2012 at 11:15 pm

[…] this piece, Kahnamen and Tversky, are mentioned in the interview with Becker linked here (page 8): Interview with Gary Becker on Rational Choice Organizations and Markets As I recall, when the crisis hit, in one of his blog posts (Becker-Posner blog), Becker made […]
5. Peter Lewin | 11 July 2012 at 3:59 pm

It depends what you mean by equilibrium. The Austrians certainly do part company with the mainstream on what the mainstream sees as equilibrium. Hayek changes his approach post-1937; The Pure Theory of Capital is a sequence of equilibrium exercises that was meant to be a prelude to a dynamic “disequilibrium” analysis.

Chicago style economics is much looser in this regard than, for example, MIT or Harvard. Their “equilibrium always” analysis is often indistinguishable from “purposeful action”.

Becker does not understand the point because he doesn’t understand or care about the fundamental methodological differences. He doesn’t see a difference between simple and complex phenomena.