Kevin Murphy and I were invited to speak at a memorial session for Gary Becker at the Mont Pelerin Society meetings in Hong Kong yesterday. My remarks focused on the time Gary spent each year at the Hoover Institution and on his foray into presidential politics, much like I wrote in this post, but I also was asked to delve into macro which is quite interesting
Gary wrote several good papers on macro back in the 1950s. In a 1952 paper with William Baumol, coming out of his undergraduate days at Princeton, Gary defended the classical economists showing that they were not nearly as naïve as Lange and Keynes claimed. Then in a 1957 paper with Milton Friedman, he criticized empirical tests of the Keynesian consumption function, and followed up a year later with a reply to Lawrence Klein who reacted angrily to the criticism.
Most interesting was his 1956 “A Proposal For Free Banking,” a short paper which remained unpublished for 37 years, though Friedman referred to it in his famous 1960 Program for Monetary Stability. Gary was reacting to the 100% reserve requirement proposal then popular at the University of Chicago, arguing that the banks were already too regulated. He did recommend that the government maintain a monopoly on printing notes, because he was worried about an indeterminate price level. While banks could issue checking deposits, holding reserves as needed to deal with currency demand, he argued that the need to convert to cash would lead to a finite amount of deposits and a determinate price level and that shifts in the currency deposit ratio would not be that great and could be stabilized.
No discussion of Gary’s contributions to macro would be complete without considering his Presidential address to the American Economic Association in Chicago in 1987. I was at the talk and recall being surprised that he decided to concentrate on macroeconomics. He titled the talk “Family Economics and Macro Behavior.” And he covered the gamut of the subject.
He was positive about the neoclassical growth model’s advances over the Malthus, but he criticized it for leaving out sustained growth in income per capita. As Becker put it, “The persistent growth in per capita incomes during the past two centuries is no easier to explain within the neoclassical framework than within the Malthusian” and the need to rely on “exogenous progress is a confession of failure to explain growth within the model.” The neoclassical modelers were right to stress endogenous capital accumulation and the Malthusians were right for stressing fertility responses, he argued, but then went on to discuss the importance of adding the family to economic growth and traced out a model “combining the best features of the neoclassical and Malthusian models” in which parents choose both the number of children and the human capital bequeathed to each child, motivated by parental altruism or love toward children. “Altruism means that the utility of parents depends on the utility of each child,” an idea, once conceived, that was easy to work into the algebra. So he added family economics to the Solow growth model simply by letting the parent’s utility function depend on the utility of the children. This changed the results in important ways. In the event of a deep recession, a temporary decline in productivity could permanently lower aggregate income because of the decline in birth rates.
And it had other implications. He pointed out, referring to Robert Barro, that a “dose of family economics radially alters traditional conclusions about the effects of budget deficits on private saving” because “Parents offset any increase in future taxes with a greater bequest, and thus there is no effect on consumption. “ He then showed that this Ricardian equivalence result could be reversed if Social Security reduces the demand for children.
Becker also criticized the overlapping generation models because they did not include familial connections. In his view the lack of connections between children and parents, husbands and wives and other members of the family led these models to focus on minor problems. He particular criticized the models as ways to justify the demand for money, as Sargent and Wallace had done. He argued that in both modern and ancient times, “children have been an important resource and money balances an unimportant resource of the elderly in practically all societies, whether simple or complex.”
Regarding shorter run cycles, Gary had to admit that none of the modern macroeconomic theories relied much on family behavior to cause business cycles, but he did mention that Hansen’s secular stagnation concept related to declining population growth, which could have been an endogenous response to the great depression.
Many of these family economics ideas are now an integral part of the macro mainstream. In fact in the latest edition of the Handbook of Macroeconomics Harald Uhlig and I are including a chapter on “Family Macroeconomics” by Matthias Doepke and Michele Tertilt and another paper on “The Macroeconomics of Time Allocation” by Mark Aguiar and Erik Hurst.
Baumol, William J. and Gary S. Becker (1952), “The Classical Monetary Theory: The Outcome of the Discussion,” Economica, New Series, Vol. 19, No. 76. Nov, pp. 355-376.
Becker, Gary S. (1956), “A Proposal for Free Banking,” published later with a new introduction in L. H. White (Ed.) (1993) Free Banking, Aldershot, U.K.: Elgar, 1993, pp. 20-25
Becker, Gary S. and Milton Friedman (1957), “A Statistical Illusion in Judging Keynesian Models,” Journal of Political Economy, Vol. 65, No. 1, Feb. pp. 64-75
Becker, Gary S. and Milton Friedman (1958), “The Friedman-Becker Illusion: Reply” The Journal of Political Economy, Vol. 66, No. 6, Dec. pp. 545-547
Becker, Gary S. (1988), “Family Economics and Macro Behavior,” The American Economic Review, Vol. 78, No. 1, Mar., pp. 1-13.