Gary Becker was right, part five: Human capital

Human capital is generally reckoned to be the skills, knowledge, and experience possessed by an individual or population.  It represents the value of our human capacities, and is what enables us to achieve our goals individually, or collectively in organizations and nations.  It can be invested in through education and training, and can improve both the quality and the level of production.  It has a rate of return that can be measured, albeit inexactly.

Gary Becker controversially compared the rates of return on human capital with the rates of return on children.

When human capital is abundant, rates of return on human capital investments are high relative to rates of return on children, whereas when human capital is scarce, rates of return on human capital are low relative to those on children.  As a result societies with limited human capital choose large families and invest little in each member; those with abundant human capital do the opposite.

We have empirical evidence that people in poor countries have large families.  They need the economic contribution the children will make to the family budget, and they need children to support them in old age.  As societies grow richer there are more opportunities to educate and train children instead of putting them to work.  Furthermore, social benefits, rather than children, can support the aged.  These factors explain why wealthier societies have lower population growth.  Indeed, most European populations are in decline, and it is immigration, rather than fertility, which contributes to those that are not.

It should be noted that the rate of return on human capital rises, rather than diminishes, as the human capital increases.  The more there is of it, the more worthwhile it is to invest in it.  This, in turn, implies better future production, both in quality and output.  Resources can increase even if population rises, contrary to what Malthus thought.

The doomsayers tell us that a massively over-populated world will have neither the food nor the resources to cope, and predict wars and starvation.  But set against them are the optimists, including Becker, who think that rising stocks of human capital will reduce population pressure and make more efficient use of resources.  Yet again, Becker seems to be on the winning side.

Gary Becker was right, part four: Immigration

Gary Becker proposed a remarkable  way of dealing with immigration.  He suggested selling the right to live and work in the US or the UK.  His proposal was that the countries should set a price ($50,000, for example), and admit foreigners prepared to pay it.  Of course certain categories such as terrorists or criminals would be excluded, but otherwise the doors would be open to those prepared to stump up the money.

His reasoning was that this would lead to the type of immigrants of most value to the recipient country.  Skilled people would be ready to pay because they would enjoy a bigger pay differential in moving from a poor country to a rich one than would poorer people.

Young people would be attracted because they would enjoy longer working lives in which to reap the benefit of their investment.  And those intending to settle permanently and make a commitment to the host country would have a longer time there to enjoy the benefits than those who intended to return to their own country.  All three categories make desirable immigrants.

Whether or not one agrees with the details, it is easy to agree with Becker on the principle that immigration should be encouraged where it is certain to make a positive contribution to the host country as well as to the immigrant.  Several countries already have schemes in place to achieve this.  St Kitts and Nevis offers citizenship as well as residence to those investing $250,000 in sugar industry diversification or $400,000 into real estate.  Dominica offers citizenship for an investment of $100,000.  The US will give a green card to someone investing $500,000 and creating 10 jobs for Americans, and Canada will let you in for 400,000 Canadian dollars.

The Becker proposal does deal with the objection that some raise about immigrants coming in and claiming welfare and health benefits.  The objection seems unlikely, in that most immigrants are young and healthy and seeking work, but we can be reasonably sure that no claimants would be coming in under Becker-type rules.  Many who oppose immigration are ready to make exceptions for skilled workers and those prepared to invest in their host country.  International businesses might well stump up the money required for them to transfer in skilled workers with none of the hassle and delays of conventional applications.

Once again Becker has shown how economics can be applied to areas other than the economy.

Gary Becker was right, part three: Drugs

Last February Gary Becker wrote a post on the Becker-Posner blog calling for marijuana to be decriminalized.  Ten months earlier he publicly called for the legalization of a wide range of drugs.  He listed some of the advantages of decriminalizing marijuana, such as undercutting drug cartels, enabling those needing medical help to come forward, and saving costs on enforcement.

There is no doubt that the war on drugs has been a disaster.  It has led to a huge upsurge in crime in both the producer and consumer countries.  There have been murders by the tens of thousands, and the profits from the illegal drugs trade have corrupted the law in many countries.  Drug use has not deceased.  Any rational person would propose trying a different approach, yet most of those in legislatures and the media insist that we should do even more of what we already know does not work.

Becker is in accord with what the Adam Smith Institute has said.  We have called for addiction to be regarded as a medical problem rather than a criminal one.  We proposed that clinics be set up on High Streets manned by doctors and nurses.  Addicts would be able to go in and, subject to undergoing medical examination and receiving advice, should receive free supplies to be consumed on the premises.  Since people would not do this for recreational drugs, we proposed that cannabis, ecstasy and cocaine should be legalized.

The crime built up on the drugs trade would vanish.  Teenagers would no longer shoot each other on the streets in drug turf wars.  Prisons would find they had space again.  People would no longer find their habits set them against the law, regarding police and the courts as their enemies.  Control over quality would be established, and deaths from tainted doses or overdoses would diminish.

Yes, drug use might increase.  More young people might be tempted to give it a try, just as many do today with tobacco and alcohol.  But what we have at the moment is far worse.  We have a situation with drugs approximating to America’s stint on prohibition of alcohol, with criminal gangs flourishing like weeds and lawlessness prevailing.  It is time to try it Becker’s way instead.

Gary Becker was right, part two: Cuba

For many years Gary Becker wrote a blog with Richard Posner.  In the last entry, shortly before his death at age 83, Becker wrote one entitled “The Embargo of Cuba – Time to Go.”  The US embargo of Cuba, began in 1960, was designed to put pressure on Castro’s communist government, and if possible to persuade Cubans to overthrow it.  It did not achieve that objective, but it did give Cuba a fig-leaf excuse to explain away the economic failure of communism.

In 1959 Cuban, exporting tobacco and sugar, was richer per head than Taiwan, exporting rice and sugar.  Nowadays Taiwan has a modern, open market economy trading globally, and has a per capita income over five times that of Cuba, where tobacco and sugar are still important exports.  Becker wrote:

Since Cuba no longer provides any significant threat to American interests, there is no sense in continuing to punish the Cuban people with an embargo on trade, nor to provide excuses to its leaders for the poor performance of the Cuban economy.

This is one of the main objections to embargoes: they punish the wrong people.  General embargoes hit the living standards of poor people in countries subjected to them.  Those people are denied access to global goods, and cannot sell what they produce on world markets.  They also hurt the countries that impose them.  The US International Trade Commission estimates that its embargo on Cuba costs America $1.2bn annually, largely through lost potential gains in tourism, agriculture and other industries.

Becker recommended that “free trade is a principle that the United States should follow except in extraordinary circumstances,” a sentiment most free market supporters would endorse.  Richard Cobden thought that free trade between nations would eventually lead to peace, and it is true to a large extent that nations which trade with each other learn to negotiate with each other and settle disputes peaceably.  Furthermore, trading nations begin to see each other as partners, to depend on each other for goods, and for their peoples to learn more about each other.

Becker is right.  Raising the Cuban embargo would bring immediate benefit to the people there, and would probably speed up that country’s retreat from communism and its entry into the modern world.

Gary Becker was right, part one: Crime

Gary Becker famously applied economic thinking to whole areas of activity that lie beyond the realm of narrow economic transactions.  One such area is crime.  The prevailing thinking of the day was that criminal activity derived from mental aberration or from social repression, and might be tackled by measures to improve mental health or to upgrade social conditions.

In his paper “Crime and Punishment – An Economic Approach” (1968) and in subsequent publications, Becker advanced the alternative view that criminals were basically rent-seeking, trying to secure more of the resources that others produced instead of contributing to economic growth themselves.  He posited that criminals are rational, performing a kind of cost-benefit analysis in which they set the gains they stand to make from a crime against the likelihood of being caught and facing a penalty.

Society can alter that cost-benefit equation in two ways, by increasing the likelihood of detection, or by increasing the penalties faced upon conviction.  Increased police presence is by far the costlier of the two options, while jacking up the penalties can be relatively less costly to do.

Becker’s insights have altered the way in which authorities tackle crime.  Zero tolerance, for example, proposes that pursuit of minor offences (“broken windows”) can create a climate in which potential criminals feel they are more likely to be caught.  The use of CCTV to identify criminals by recording them in the act is similarly intended to raise the stakes of crime by making its detection seem more likely.  On the other side of the equation the use of longer prison sentences also increases the costs that the potential criminal has to set against the benefits.

It was entirely typical of Becker, and part of his great contribution, that he took economics out from the economy itself and into the activities and relationships in society at large.  Crime was one such area.