ECONOMIC IMPERIALISM* E Pflash.lakeheadu.ca/~kyu/E5111/Lazear2000.pdf · to economics. The simple,...

ECONOMIC IMPERIALISM

EDWARD P LAZEAR

Economics is not only a social science it is a genuine science Like the physicalsciences economics uses a methodology that produces refutable implications andtests these implications using solid statistical techniques In particular economicsstresses three factors that distinguish it from other social sciences Economists usethe construct of rational individuals who engage in maximizing behavior Eco-nomic models adhere strictly to the importance of equilibrium as part of anytheory Finally a focus on efficiency leads economists to ask questions that othersocial sciences ignore These ingredients have allowed economics to invadeintellectual territory that was previously deemed to be outside the disciplinersquosrealm

By almost any market test economics is the premier socialscience The eld attracts the most students enjoys the attentionof policy-makers and journalists and gains notice both positiveand negative from other scientists In large part the success ofeconomics derives from its rigor and relevance as well as from itsgenerality The economic toolbox can be used to address a largevariety of problems drawn from a wide range of topics

In earliest times economics was not distinct from other socialsciences or even philosophy Aristotle and Plato discussed eco-nomic issues in the context of social philosophy Adam Smith1776 Ricardo and Malthus analyzed economic factors in broadercontexts than most economists do today The American EconomicAssociation itself was hewn from the societies of other elds TheAEA was created as a joint effort of the American Social ScienceAssociation and the American Historical Association for thepurpose of encouraging economic research1

At least during the last four decades economics has expandedits scope of inquiry as well as its sphere of inuence Neither lucknor the inherent charm of economists is responsible for thechange Rather the ascension of economics results from the factthat our discipline has a rigorous language that allows compli-cated concepts to be written in relatively simple abstract termsThe language permits economists to strip away complexity Com-

This research was supported in part by the National Science Foundation Iam grateful to Kenneth Arrow James Baron Gary Becker Roger Faith ClaudiaGoldin Morley Gunderson Lawrence Katz Robert Lucas Michael SchwarzAndrei Shleifer and Nancy Stokey for helpful comments and discussions

1 Kiger 1963 Note that the current Allied Social Science Association(ASSA) is a different organization from the one that spawned the AEA

r 2000 by the President and Fellows of Harvard College and the Massachusetts Institute ofTechnologyThe Quarterly Journal of Economics February 2000

99

plexity may add to the richness of description but it also preventsthe analyst from seeing what is essential2

Our rigorous language can be used in many ways but overthe years three themes have become fundamental in economicsFirst economists assume that individuals engage in maximizingrational behavior Second economics adheres strictly to theimportance of equilibrium as part of any theory Third economistsplace a heavy emphasis on a clearly dened concept of efficiency

The starting point in economic theory is that the individual orthe rm is maximizing something usually utility or protEconomists almost without exception make constrained maximi-zation the basic building block of any theory Many of ourempirical analyses seek to test models that are based on maximiz-ing behavior When we obtain results that seem to deviate fromwhat would appear to be individually rational we reexamine theevidence or revise the theory But the theoretical revisions almostnever drop the assumption that individuals are maximizingsomething even if the something is unorthodox Few economistsare willing to concede that individuals simply do not know whatthey are doing We may permit imperfect information transactioncosts and other intervening variables to muddy the waters butwe do not model behavior as being determined by forces beyondthe control of the individual Most sociologists by contrast arguethat understanding the constraints is more important thanunderstanding the behavior that results from optimization giventhe constraints3

The emphasis on maximization is important because it allowsan analyst to make predictions in new situations When individu-als are assumed to maximize something a well-dened andpredictable behavioral response to any stimulus can be derivedOther social sciences that are unwilling to assume maximizationare in the position of being unable to predict in new situationsThe maximum of a function is a well-understood concept otherrules are not especially when they vary from situation to situation

2 Rigor need not take the form of mathematics but much of economic rigorrelies on its mathematical precision Although many economists of earlier yearswere accomplished mathematiciansSamuelson1947 made mathematicaleconom-ics available to the profession at large

3 Becker and Murphy 2000 argue that when social feedback effects aresufficiently strong the maximizing individual will not be sensitive to the tradi-tional variables of price and incomeAs a result it will appear as though individualbehavior is dictated by society They argue that a more fruitful way to think aboutthis is to allow for individual maximization with strong social interaction effectsIn this way equilibria can be understood and the nature of the result andfeedbacks can be studied and predicted

QUARTERLY JOURNAL OF ECONOMICS100

A corollary of maximization is that on the margin there arealways trade-offs The notion that there is no free lunch is centralto economics The simple but crucial concept of opportunity costlies behind much of the ability of economics to extend into otherareas Sometimes the trade-offs are subtle Prices and costs arenot necessarily parameters that are observed in market data butthey affect behavior nonetheless Other social sciences do notplace the same weight on explicit recognition of the tensionbetween costs and benets which reduces the ability of theseelds to grapple systematically with social phenomena Thinkingabout trade-offs gives rise to related thoughts on substitutabilityEconomists place emphasis on choice Things are not technologi-cally determined This is true for consumers and producers alikeThere is no xed number of jobs Firms can trade off betweenemploying labor and capital and workers can choose betweenlabor and leisure

Second as in the physical sciences equilibrium is a centralconcept in economics Virtually all economic theories have asprimary desiderata that the behavior described must be consis-tent with some notion of equilibrium Economic theory usuallyconsists of modeling the behavior of agents Then behavior of theindividual actors is aggregated to examine what happens whenthey interact Often this is in the context of a market Theeconomistrsquos most familiar tools are supply and demand whichappeared during the nineteenth century (see Jenkin 1931 origi-nally 1871) Marshall 1890 made heavy use of these tools andderived a rich set of implications and testable predictions Al-though the behavior of individuals who lie behind the supply anddemand curves is inherently interesting it is the interest inequilibrium itself that distinguishes economics from other socialsciences To be sure other social sciences discuss spillover andfeedback effects but among social scientists only economistsinsist on a physical-sciences-style equilibrium as part of theanalysis

Third much of economics is driven by the notion thatefficiency is important Adam Smithrsquos 1776 concept of theinvisible hand is a guiding principle in economics Individualsacting in their self-interest further the general goals of societySmith took the moral ideas of the Enlightenment (especially theemphasis on free will) and transformed them into a positivetheory of the economy with limited or no role for the state Moreformal statements have been provided during this century The

ECONOMIC IMPERIALISM 101

idea that competitive equilibrium is efficient appears in theliterature since the time of Marshall4

The importance of efficiency is not that it is an apology for thestatus quo Efficiency is a concept that together with equilibriumpushes economists to do a particular kind of analysis Wheneconomists model a situation and the resulting equilibrium isinefficient usually there are trades that could have occurred thatare implicitly or explicitly ruled out The analyst or his critics areinduced to ask what the reasons are and what market or otherinstitutions could arise to remedy the situation Thus the focus onefficiency when combined with equilibrium prevents the econo-mist from being content with partial answers and half-truths Thenotion that efficiency is a natural outcome motivates a largerseries of questions and initiates deeper analysis It also permitseconomists to make clear unambiguous policy statements al-though the assumptions that lie behind welfare economics aresomewhat controversial Still Pareto optimality is a well-denedconcept that allows us to take an axiomatic approach to issuesover which other elds can only wring their hands

Other social scientists generally ignore equilibrium consider-ations5 In part this is intentional reecting a belief thatequilibrium takes too long to reach and too many things changebefore a given equilibrium is ever attained For the most parthowever it is simply taken as a given much as equilibrium istaken as a given for economists In sociology and psychologyequilibrium is rarely considered For economists it is a necessarycomponent of the model

The power of economics lies in its rigor Economics is scien-tic it follows the scientic method of stating a formal refutabletheory testing the theory and revising the theory based on theevidence Economics succeeds where other social sciences failbecause economists are willing to abstract The old joke about astranded starving economist assuming a can opener to open a canof food pokes fun at our willingness to assume away what we

4 Early examples include Hotelling 1938 and Bergson 1938 Formalanalyses are found in Arrow 1951a and Debreu 1951

5 On rare occasion sociologists develop models that discuss an equilibriumOne such example is Berger and Snell 1957 Interestingly this paper was heavilyinuenced by economics in particular the work of Prais 1955a 1955b

An important more recent exception is sociobiology eg Wilson 1975 Thiseld uses the same approaches as those of economists to explain evolutionarydevelopments A nice summary of the literature on social selection of mates isfound in Ridley 1993 This book makes constant reference to trade-offs and toefficiency of equilibria and reads like an economics article


believe to be unimportant or difficult details Economists are usedto posing the counterfactual question to do analysis What wouldone expect in the absence of the hypothesized effect What wouldbe observed Do the data allow us to choose between varioushypotheses Economists are not alone among social scientists infollowing this method but this form of inquiry has become thestandard for economic research

It is the ability to abstract that allows us to answer questionsabout a complicated world As economists however we believe incomparative advantage I have argued elsewhere that the strengthof economic theory is that it is rigorous and analytic (see Lazear1995 Chapter 1) But the weakness of economics is that to berigorous simplifying assumptions must be made that constrainthe analysis and narrow the focus of the researcher It is for thisreason that the broader-thinking sociologists anthropologistsand perhaps psychologists may be better at identifying issues butworse at providing answers Our narrowness allows us to provideconcrete solutions but sometimes prevents us from thinkingabout the larger features of the problem This specialization is nota aw much can be learned from other social scientists whoobserve phenomena that we often overlook But the parsimony ofour method and ability to provide specic well-reasoned answersgives us a major advantage in analysis

There are two claims made in this essay The rst is thateconomics has been imperialistic and the second is that economicimperialism has been successful6 To establish the validity of theargument it is rst necessary to dene economic imperialism andthen to establish a criterion against which success can be judgedEconomic imperialism is dened as the extension of economics totopics that go beyond the classical scope of issues which includeconsumer choice theory of the rm (explicit) markets macroeco-nomic activity and the elds spawned directly by these areas Themost aggressive economic imperialists aim to explain all socialbehavior by using the tools of economics Areas traditionallydeemed to be outside the realm of economics because they do notuse explicit markets or prices are analyzed by the economicimperialist For example discrimination against particular groups

6 This is not the rst time this claim has been made See for exampleRaditzky and Berholz 1987


traditionally thought of as a perhaps irrational social phenom-enon has been addressed by economists during the past 40years7

Additionally those issues that lie at a deeper level than thoseof traditional economics are also part of economic imperialismEconomics is extended to consider questions that are inside thelsquolsquoblack boxrsquorsquo For example microeconomics historically took therm as an entity Modern economics examines the structure ofrelations within the rm including issues of personnel policy andmarket strategy that have traditionally been outside the scope ofeconomic analysis Historically economists assumed that rmswould simply do what was best for maximizing prots withoutattempting to describe the details on how prot maximization isbest achieved

Economists generally believe in the market test Economicimperialism can be judged to be successful only if it passes thistest which means that the analyses of the imperialists mustinuence others The effort to extend the eld measures itssuccess by inducing others to adopt the economic approach toexplore issues that are not part of classical economics8 Onepossibility is that scholars outside of economics use economicanalyses to understand social issues Political scientists lawyersand sociologists come to use the methods of economics to answerthe questions that are of interest in their elds Another possibil-ity is that economists expand the boundaries of economics andsimply replace outsiders as analysts of lsquolsquononeconomicrsquorsquo issuesforcing noneconomists out of business as it were or at leastproviding them with competition on an issue in which theyformerly possessed a monopoly Below it will be argued that bothroutes have been followed with success

In what follows a number of new areas into which economicshas broken will be discussed In each case I will attempt toillustrate by way of these examples how the framework the focuson maximizing behavior equilibrium and efficiency have led tonew insights on a diverse array of subjects

7 Modern economic imperialismrsquos birth is due primarily to Gary Becker butthere are precedents in the work on household economics by Margaret Reid 1934and on human capital by T W Schultz 1959 1961 1963

8 It is always a bit dangerous to claim that an area was not part of classicaleconomics There are very few topics today that cannot be argued to have someroots in the writings of the classical economists especiallyAdam Smith


LOOKING INSIDE THE ATOM

Much of economic imperialism is analogous to looking insidethe atom For many purposes in physics and especially chemistrytaking the atom as the relevant unit of analysis is appropriateFor example chemists tell us that water is made from thecombination of two hydrogen atoms with one oxygen atom But forother purposes such as the production and harnessing of nuclearpower it is necessary to understand that the atom is made up ofelectrons neutrons and protons and to understand how theyinteract with one another

The same is true in economics For many questions it issufficient to think in terms of an individual a household or a rmBut the economic imperialists have not been content with answer-ing questions that can be dealt with at that level of abstractionThey have tried to understand the preferences of the individualthe composition of the household and the internal workings of therm to answer more questions that are of interest to socialscientists

Let us begin then by examining economic imperialism thattakes the form of moving to a deeper level of analysis We start byconsidering consumer theory and with it the preferences of andbudget constraint faced by the individual

CONSUMER THEORY

Modeling Tastes

In modern decades Gary Becker is surely the economist whohas done the most to expand the boundaries of economics into theother social sciences particularly sociology9 Sociology arose in theearly part of this century as a reaction against individual rational-ism Over his career Becker has reasserted the ability of econom-ics with its assumption of rational maximizing behavior toexplain social phenomena that were in the purview of sociology Invirtually every area of economic imperialism Beckerrsquos work playsa prominent and often controversial role Like it or not Beckerhas forced sociologists to take account of his theories

9 For an excellent discussion of the impact of economics on sociology seeBaron and Hannan 1994 who argue that most of the attention that sociologistshave paid to economics is directed toward human capital and critiques thereof


One of Beckerrsquos early important contributions was more of aforay into psychology than it was an attempt to move to the levelof society Rather than trying to describe tastes directly Beckerrecast consumption as production so that changes in prices andincome could be the driving forces to understanding behaviorBeckerrsquos lsquolsquoTheory of the Allocation of Timersquorsquo 1965 gave economistsa different way of thinking about consumption and labor supplyThis work and that of Lancaster gave major impetus to thecreation of a eld that has come to be known as householdeconomics Both Becker and Lancaster viewed goods as inputsinto an individualrsquos or householdrsquos production function Whatentered the utility function were commodities zi that could beproduced by some combination of goods xi and time ti according toa production function

zi 5 f (xiti)

This seemingly minor change in specication gave rise to alarge number of implications and was especially helpful inexplaining behavior Rather than focusing on taste differencesBecker placed the emphasis on subtle prices and replaced some ofthe emphasis on heterogeneous preferences with a measurableand testable source of variation Time-intensive commodities aremore expensive to high-wage individuals than are goods-intensivecommodities Thus high-wage people enjoy their leisure in differ-ent ways than low-wage people High-wage people may spendfewer hours in leisure activities but these involve high pricedgoods such as opera tickets expensive restaurant meals andyachting Low-wage people combine their time with relatively lowcost inputs spending a higher fraction of their time playingbasketball and watching television

Instead of assuming that poor people have different tastesthan rich people the allocation of time framework allowedeconomists to think about differences in consumption patterns ina systematic way Poor people consume more time-intensivecommodities not because they like them better than rich peoplebut because they cost relatively less to poor people who place alower value on their time Since economists are not particularlygood at modeling taste differences across individuals this modelprovided a real insight into at least some differences in consump-tion patterns It also brought economics into the realm of psychol-ogy The theory made it possible to predict the preferences ofindividuals for particular goods Although economists generally


concede the analysis of tastes to psychologists the allocation oftime approach provided some competition Most important thepredictions of the allocation of time model are borne out in marketdata and could also be tested using laboratory experiments

Demography

Malthus 1890 was the rst economist to model populationgrowth Noticing that income and population growth were posi-tively correlated both cross-sectionally and over time Malthus setabout to construct an economic theory of population dynamicsMost important Malthusrsquo view of population relied on quite aformal notion of equilibrium which was determined by thesubsistence level of consumption FurthermoreMalthus did allow(in his second version) for choice to play a role in the determina-tion of the fertility rate Malthus discussed delayed marriageabstinence and other methods that could be used to reducepopulation growth that result from the choice of individuals overchildbearing Malthusrsquo model was quite successful at explainingthe facts that prevailed during his time but the theory did not doso well in explaining the population patterns of the twentiethcentury

To explain twentieth century patterns Becker used a directextension of the allocation of time framework which allowed foran even greater role of choice than did Malthusrsquo framework In oneof Beckerrsquos more controversial works he modeled the choice tohave children as the demand for a consumer durable (see Becker1960b) Children produce a stream of services over time muchlike an automobile so one could talk about population growth interms of consumption and demand curves

The allocation of time approach is useful in predicting morerecent time series and cross-sectional difference in fertility behav-ior High-wage women are less likely to have children thanlow-wage women Since child services (the commodity producedwith children) is a time-intensive commodity high-wage womenface a higher price of children than do low-wage women Also aslabor force opportunities improve for women in part because ofmore equal distribution of education women nd it more costly tohave children The policy implications of this theory are profoundto reduce fertility it is important to raise the wage rate of womenand improve their labor market alternatives

Becker argued that most of what determined fertility rateswas choice and further that individuals make rational decisions


to have children Data supported his view Declines in childhoodmortality rates were followed by declines in fertility rates suggest-ing that people were adjusting their behavior to obtain a desiredfamily size

There is considerable evidence of the success of the economicapproach to fertility Economists play an important role at annualdemography meetings publish papers on demography in botheconomic and demography journals and are signicant in thepolicy discussion Even demographers who do not embrace theeconomic approach10 view it as a force to be reckoned with

Discrimination

An early economic exploration of the issue of discriminationwas Gunnar Myrdalrsquos An American Dilemma 1944 Myrdalrsquoswork made tastes for discrimination endogenous and discussed aself-reinforcing equilibrium He argued (see Chapter 9) that threefactors namely economic well-being ex post intelligence andeducational attainment and discrimination by whites were linkedAny one would give rise to the other two This created a viciouscircle and perpetuated the state of poverty into which the African-American found himself locked

A more rigorous approach was provided by Becker in hisdoctoral dissertation In fact Becker started his imperialisticcrusade in this work which examined the phenomenon of discrimi-nation especially racial discrimination Becker 1957 Beckermodeled discrimination as a taste against a particular group buta taste that varied throughout the population Becker assumedthat a taste for discrimination was part of an individualrsquos utilityfunction As a result discrimination could be analyzed in the sameway that the demand for other goods could be understood Thetaste might reect a utility function that most would regard asobjectionable sinister or evil but the behavior of the individualpossessing such a taste is rational that is consistent withmaximizing behavior In the context of discrimination beingrational means being willing to pay a price in order to exerciseonersquos taste for discrimination In the labor market context thiswould imply that an employer who did not like blacks would bewilling to pay a higher wage to white workers of equal abilitySpecically one could dene a discrimination coefficient from the

10 A case in point was Kingsley Davis the late well-known demographer


following relation

ww wb 1 d

or

d ww 2 wb

where ww is the wage of white workers and wb is the wage of blackworkers An individual possessing a discrimination coefficient dwould be indifferent between hiring a black at wage wb and awhite at wage ww The larger the value of d the greater is anindividualrsquos discrimination against a particular group Given thisvalue of d the individualrsquos behavior was hypothesized to beotherwise completely consistent with standard predictions ofconsumer behavior

Not only did Becker make rationality part of the theory butdiscussion of market equilibrium was an essential part of theanalysis Because tastes vary some employers are willing to pay alarger discrimination premium than others But it is the taste ofthe marginal agent not the average agent that determines pricesin markets This means that the wage differential between blackand white workers depended on supply as well as demand If thereare very few individuals from the group against which there wasdiscrimination then the equilibrium wage differential will not belarge Individuals from each group simply work for employerswith the least taste against them This gives the implication thatwage differentials are smaller in markets with fewer of thediscriminated against individuals

Efficiency considerations also pushed Becker to consider thedynamics of this market Since individuals who discriminate payhigher wages than those who do not discriminators must accept alower return on their capital The expectation is that in the longrun discriminatory employers are replaced by nondiscriminatoryones Thus discrimination should not persist over the long runThe fact that wage differentials have persisted for a long period oftime suggests that other explanations perhaps relating to discrimi-nation that occurs before the individual enters the labor market ordiscrimination at the level of the consumer need be found

Beckerrsquos model also provides a way to test for the existence ofdiscrimination For example if it is alleged that lenders discrimi-nate against a particular group then those who do not discrimi-nate should earn higher returns on their loans than those who do


Economic theory provides a clear prediction that can be testedusing cross-sectional data

Beckerrsquos analysis of discrimination is one of the best ex-amples of the ability of economics to understand lsquolsquononeconomicrsquorsquoissues Discrimination on the basis of race sex or religion isviewed by most as heinous and the topic often inspires heateddiscussion Nevertheless the emotional aspect of the topic did notprevent economists from thinking about discrimination in arigorous way Economics derives the logical conclusions of a set ofassumptions about discriminatory tastes and provides clean andtestable implications By adding a degree of logic to the discus-sion economics has made a topic that previously could only bediscussed in emotional terms one that is the subject of a great dealof theoretical and empirical analysis

The Family

Most analyses in consumer theory assume that the utilityfunction reects the preferences of an individual or sometimes of ahousehold The composition of the household is taken as givenThe economics of the family tries to understand the determinantsof household structure and the interactions of its members ratherthan taking the unit as a given The major work in this area againbelongs to Becker Beckerrsquos 1991b Treatise on the Family rstpublished about twenty years ago dramatically changed the waythat academicians thought about the family Almost hereticalBeckerrsquos willingness to extend the economic framework to con-sider topics like marriage and divorce love for children andparents institutions such as primogeniture and even disciplinereward and punishment in the context of the family was nothingshort of revolutionary

As is always the case in Beckerrsquos work rational maximizingbehavior is the key to understanding behavior even when it comesto such seemingly irrational activities as love Beckerrsquos theory ofmarriage and divorce relates closely to labor market theories ofspecic human capital and to matching theory (see Jovanovic1979) In the labor market lsquolsquomarriagesrsquorsquo between workers andrms tend to survive when the match is a good one A good matchconsists of a situation where there is more surplus generated bythe particular pairing than by other congurations When work-ers have rm-specic human capital the workerrsquos value to hiscurrent employer exceeds that to another Such pairings arerobustAnalogously marriages that have a great deal of marriage-


specic capital are also likely to survive Two proxies for marriage-specic human capital are the existence of children and thenumber of years during which the couple has been togetherChildren are marriage-specic because perhaps for evolutionaryreasons parents tend to love their own children more than adultslove the children of others The presence of children Beckersuggests reduces the likelihood of a breakup Also just asrm-specic human capital increases with time on the jobmarriage-specic capital increases with time in the marriageThus the observed patterns of declining hazard rates with jobtenure are mirrored in the relation of divorce to time of marriageThe pattern shown in Figure I is consistent with the data on bothworker turnover and divorce11

The way that parents relate to their children is modeled byappealing to altruism which means formally that the childrsquosutility (or consumption) enters the parentrsquos utility function Thedistribution of schooling across families and between siblingswithin families can be explained as an attempt to equalize utilityacross offspring Such institutions as primogeniture coupled with

11 See Becker Landes and Michael 1977 and Mincer and Jovanovic 1981

FIGURE I


sending a second son to the military college or the clergy can beunderstood in this context Analogously the patterns of support ofthe elderly and their housing choices also t into this framework

Related to this work are some important spillovers intomacroeconomic and social security policy Barrorsquos 1974 work onRicardian equivalence and the effect of various governmentalpolicies on investment derive in large part from thinking in termsof intergenerational links and altruism Auerbach and Kotlikoff1987 build a system of intergenerational accounting that usesthe economics of the family as a foundation

Beckerrsquos work on the family is recognized both inside econom-ics and to some extent in other elds as well as the mostcomprehensive and rigorous treatment of family formation andpreferences to date Again the market test vindicates the use ofeconomics to understand family behavior Ideas that were consid-ered bizarre and almost comical twenty years ago are nowstandard Even sociologists who were initially very resistant tothe concepts have given some ground here12

Social Interactions

Taste formation has generally been declared off limits toeconomists Preferences are of primary interest to psychologistsand to sociologists More recent studies in economics have at-tempted to incorporate the concepts of the other social sciencesbut in doing so to provide theories that better explain the socialphenomena from which the observations are derived In particu-lar concepts that have long been discussed in other elds now areanalyzed by economists as well For example the sociologistrsquosnotions of peer pressure norms and social interaction now appearin the economics literature

Sociologists stress the importance of constraints imposed onindividuals by the fact that they live in a community interactingwith other individuals Peer pressure is exactly one such interac-tion Kandel and Lazear 1992 consider the effect of peer pressureon work effort Individuals maximize but take into account theeffect of their actions on the views of their peers which enter theindividualrsquos utility function Guilt and shame can act as motiva-tors in social and work contexts Norms are established as the

12 The lsquolsquorational choicersquorsquo school of sociology best represented by the lateJames Coleman is a move back in the direction of economics Furthermore inaddition to being a member of its Department of Economics Becker is a member ofthe Department of Sociology at the University of Chicago


equilibrium outcome of a process where deviations from any given(say mean) level of effort results in direct or indirect sanctionsPeer pressure is more likely to be effective in small groups

A more complete theory of social interaction is offered byBecker and Murphy 2000 The emphasis here is on maximizingbehavior but an additional important component is attention paidto equilibrium The word lsquolsquomarketrsquorsquo in the title of their work SocialMarkets The Marriage of lsquolsquoEconomicrsquorsquo and lsquolsquoSocialrsquorsquo Forces13

emphasizes that the action takes place in an equilibrium frame-work Specically Becker and Murphy allow for feedback effectsfrom other individuals As in Kandel and Lazear Becker andMurphy postulate a utility function where concern for the actionsof others is important Thus an individual may prefer to go to arestaurant that others favor simply because he derives utilityfrom being associated with these individuals or the image of goingto a crowded restaurant14 Becker 1991a shows that suchbehavior can result in multiple equilibria and may cause arestaurant with long queues of customers to resist raising pricesBy raising prices and reducing the number of individuals whocome to the restaurant additional spillover effects are createdthat reduce the demand for the restaurantrsquos product Under suchcircumstances it may be more protable to charge a lower priceand to encourage large queues Earlier Schelling 1978 used thesame kind of analysis to explain how a neighborhood could tipfrom being predominantly white to predominantly nonwhite

Rather than saying that individuals have little control overoutcomes because most are determined by social constraintsBecker and Murphy prefer to frame the problem in terms ofmaximization in the face of large spillover effects When theseeffects are large the elasticities of quantities with respect to thetraditional variables of price and income are small They arguethat this is what sociologists mean when they say that individualsare constrained by the actions of society because agents are lessresponsive to the standard economic variables

The more general point illustrated by this example is thatfeedback effects can affect individual decision-making which inturn affects the equilibrium that is observed The importance of

13 Schelling 1978 considered social markets using a somewhat differentapproach but also assuming rationality and maximization

14 Another way to think about this is that there is information conveyed bythe fact that others are purchasing a particular good or service This has beenemphasized in the nance literature eg Bikhchandani Hirshleifer and Welch1992 and Bulow and Klemperer 1994


thinking about the world in this way is rst that it changes thefocus from the nonrational to the systematic and predictableSecond it causes the researcher to ask other questions that do notarise in a nonmaximizing context Becker and Murphy emphasizethe importance of reference groups when large social spilloversexist If individualsrsquo elasticities are small once peer effects areconsidered then it is important to choose onersquos friends wiselyThus the choice of neighborhood in which to locate is a decisionthat affects many aspects of consumption This theory provides adifferent way to think about neighborhood effects and locationchoice Finally the theory is extended to examine dynamicstructures and especially fads and fashion where feedback effectsseem to be the heart of the issue The notion that social spilloversare important has been used to examine criminal behavior and topredict riots In this invasion into the study of crime the notion ofequilibrium is again key Sah 1991 models the spillover effects ofcrime on the probability of a given criminal being apprehended Inneighborhoods where many crimes are being committed theprobability that any one criminal will be caught is low becausepolice are busy chasing others15 DiPasquale and Glaeser 1998have extended the idea to model the likelihood of riots This ismodeled as a situation of multiple equilibria where spillovereffects determine whether a riot occurs or not If a potential rioterbelieves that no others will riot he is reluctant to take action forfear that he will be caught But if many others are rioting thelimited police resources are spread thin reducing the probabilityof detection to acceptable levels and making rioting worthwhileThus small changes in beliefs can set off a riot as society jumpsfrom one equilibrium to another16

It is already clear that economists feel comfortable extendingstandard analysis to consider issues that involve society as awhole or some subset of it Whether noneconomists are eventuallypersuaded that our approach is useful remains to be seen

15 There is a supply side to this story as well High crime neighborhoods maywarrant a greater police presence which works in the opposite direction Econo-mies of scale in detection play an important role in determining the direction of thenet effect

16 As with all models that rely on multiple equilibria the story is incompleteThe existence of multiple equilibria means that something is absent from themodel that determines which of the equilibriaprevails In this context missing is amodel of beliefs and changes in them over time


Religion

If bringing economics to bear on the analysis of the familyseems disrespectful applying it to religion is downright danger-ous given the power of higher authorities Yet economics hasmade an impact on religion and the work by Lawrence Iannac-cone in particular is viewed by those who study religion as asocial phenomenon as one of the (newly) established schools ofthought17

There are at least two ways to bring economic thinking into adiscussion of religion One is to simply assume that religion entersthe utility function Treating religion in this way relegates it tobeing simply one of many important industries and it is theapproach followed by Azzi and Ehrenberg 1975 who studyreligiosity Their model of church attendance addresses the prob-lem as one of investment under uncertainty where the uncertainevent is entering heaven Although the predictions of the theoryare empirically veriable (eg older people should be more likelyto attend church) the validity of the underlying assumptions isimpossible to determine in the current life

An alternative is to view religion as changing preferences orprices in a more fundamental way This is Iannacconersquos approachIannaccone uses agency theory to model the practices of religiousgroups Specically Iannaccone 1992 argues that free-ridereffects were important in religious groups and that they had tond ways to deal with these effects One method is to lower thevalue of alternatives thereby increasing commitment to thegroup By changing the prices or alternatives the budget con-straint is shifted inducing individuals to take actions that arebetter for the group in question Thus Hari Krishnas by dressingin unusual ways make themselves unacceptable to others whichdecreases the incentives to spend time engaged in activity outsidethe Hari Krishna circle A similar point is made by Max Weber1946 1970 originally 1906ndash1924 Kosher laws followed by Jewsmake it impossible for them to accept invitations to eat innonkosher households thereby restricting their contact to otherkosher Jews Recently Berman 1998 used the Iannacconemodel to explain puzzling fertility rate changes and labor forceparticipation behavior among ultra-orthodox Jews Related un-

17 North 1981 argues that lsquolsquoany successful ideology must overcome thefree-rider problemrsquorsquo and argues that modeling the free-rider problem is key tobuilding a positive theory of laws and institutions


usual dress codes and costly practices provide a screen (eg theAmish) Individuals signal their commitment to the group byacceding to the grouprsquos dress codes and other restrictions

THE THEORY OF THE FIRM

Just as consumer theory can be taken to a deeper level ofanalysis so too can economists penetrate the standard conceptsused in production theory to extend the boundaries of economicsThis can be done in a few ways

First the quality of factors of production can be viewed asendogenous The most direct application of this kind of thinkingopened up the economics of education

Second the nature of the interactions between various agentscan be modeled and studied Economists are no longer contentwith writing down a production function and assuming that thenature of that function is the scope of engineering or organiza-tional behavior Alfred Marshallrsquos famous statement that it is notthe business of the economist to tell the brewer how to make beeris less true today than it was in his day Imperialistic economistsare anxious to get inside the brewing process Although notliterally true economists now see it as their task to understandhow various production technologies and interactions can arise

Third the notion that rms simply maximize prots is nolonger sufficient Economists now want to know how it is doneWhat is the method used to monopolize a market and to choosewhich products to produce

Although these questions that relate to the rm may seem tobe closer to the main topics that economics has studied we shouldnot take for granted that these areas were open to economistsIndeed for most of this century other social sciences controlledthis territory

Surprisingly scholars in the area in which economics wouldseem to be most applicable namely the study and analysis ofbusiness have avoided using economics until recent decadesThere are still some holdouts In some famous business schoolsbasic microeconomics is not even part of the curriculum18 Per-haps as a result of the high level of abstraction economics was notthought to be applicable to business issues The view was thateconomics was not practical Economic analysis has only recently

18 Harvard Business School is an important example


changed that view and has made its mark in nance accountingmarketing human resources and industrial relations the theoryof organizations and business strategy By now despite somelaggards the impact of economics on the study of business isprofound Economics has genuinely altered the way that businessresearch and education is conducted

Economic theoryrsquos slow entrance in business was in part afault of economics itself Economists as scholars have empha-sized the positive aspects of economics and eschewed the norma-tive (see Friedman 1953) Business is in large part normativebecause the goal of a business education is not so much to explainthe world but to run it Thus much of the contribution ofeconomics to both the study and teaching of business has been aresult of translating positive lessons into normative ones

The impact of economics has not been conned to the study ofbusiness Economics has made its mark on the business commu-nity itself An obvious example of this is the Black-Scholesformula for option pricing Options are now priced in the marketvery much in line with the Black-Scholes formula The fact thatpeople believe that this is the correct way to price options forcesmarket prices to conform to this formula whether they did sobefore or not Consulting rms borrow concepts from economicsand sell them to their clients For example compensation consul-tants price jobs based on their nonpecuniary attributes Theseconcepts on which the method is based date back to SmithrsquosWealth of Nations19 Yet consulting rms still reject economics asbeing fundamental to understanding business and advising cli-ents These rms are lled with psychologists and others withbroad managerial training Things are changing over time how-ever as economists have shown that they have a different butinsightful way of looking at issues that have been of traditionalconcern to the rmsrsquo clients

Determining the Quality of Labor

The theory of human capital is the most important contribu-tion to determining the quality of labor inputs Human capitaltheory especially as it was applied to education opened up a newarea of inquiry and is strong evidence of the power of the economicframework The three names most important here are Jacob

19 See Smith 1986 originally 1776 Book I Chapter 10 on wage differencesthat compensate for job characteristics


Mincer 1958 T W Schultz 195919611963 and again Becker1960a19621975 Forty years later it is obvious that educationcan be thought of as an investment that affects the quality oflabor It was not so obvious at the time The notion that humanswere capital was anathema to many inside the economics commu-nity as well as out

The costs of education are somewhat subtle As in the area ofdemography recognizing that a large part of the cost of educationconsists of forgone earnings provided key insights into understand-ing the distribution of schooling across a population The fact thatthe young are more likely to go to school than the old is derived inpart from this point Because the opportunity cost of a childrsquos timeis low this is the ideal time to invest (It also allows the greatestpayoff period) Prime-age workers rarely drop out of work toattend school even if attendance would increase their earningsThey simply cannot afford to do so because the opportunity cost offorgone wages is too high

Both equilibrium and efficiency drive a number of the resultsassociated with the economics of education Initially economistsworried that there was too little investment in education becausethe rate of return to schooling exceeded what most thought of asthe rate of return on other investments Some then claimed thatthe reverse was true as a result of increased enrollment inschools done to avoid military service during the Vietnam Warthe rate of return to schooling plummeted during the seventiesonly to return to its highest historical level by the time of thiswriting (see Freeman 1976) The importance of the economicapproach to education is that it gives social scientists a way tothink about who would acquire education when education wouldbe acquired and it guides social policy by providing a method fordetermining the optimal level of schooling No other social sciencehas delivered the same implications or prescriptions

The extension of economics into education had spillovereffects The earnings equation that Mincer derived in the late1950s stated that

ln (Earnings) 5 a 1 r (Schooling)

This function or some variation of it has probably been estimatedmore times by more researchers and on more different data setsthan any other relation in economics It generated an enormousinterest in analyzing cross-sectional and panel data sets and wasa force behind the acquisition of some of the data collected during


the 1960s and 1970s A consequence of this kind of analysis wasthe renement of econometric techniques and an emphasis onserious statistical analysis Of course serious statistics are notwithout their precedents in labor and consumer economics Forexample Friedman and Kuznets 1945 is a masterpiece incombining economic theory with data analysis But the work inhuman capital gave impetus to the collection of new kinds of datawhich made economics far more empirical than it had been in thepast Furthermore the intensity and quality of empirical analysisgave credibility to the results obtained by economists that sur-passed that earned by scholars in other elds

No one can doubt the impact that human capital theory hashad on other elds Scholars in education now think of the modelas mainstream The National Science Foundation is currentlyfunding a major project in understanding human capital Eventhe business press features articles on human capital It hastaken over the way that most social scientists model educationand the quality of labor

Personnel Economics

Human resource executives are often regarded as the lowestform of managerial life The same has been true of those academ-ics who study human resources There is a reason historically theeld was loose talk It was descriptive It was ad hoc It lackedpositive predictions or reliable normative prescriptions The olderanalysts focused much of their attention on industrial relationswhich has all but died as unions have become less important inthe American labor market

Human resource management is today where nance wastwenty years ago Recently having become rigorous both researchand teaching in the eld have been inuenced if not taken overby economics Industrial relations has been replaced at the topbusiness schools by personnel economics The difference betweenthis approach and earlier human resources research is that theeconomic approach emphasizes maximization and rational deci-sion-making by workers competition in labor markets andefficiency in labor contracting

Personnel economics uses economic analysis to model therelationships between workers managers and owners It is anattempt to move inside the prot maximization equation todetermine how labor supply is elicited who has incentives to dowhat to whom and how rms can best make decisions about the


use of factors of productions It is somewhat more normative thanmany traditional economics elds in that it reasons throughcomplicated incentive problems partly with the goal of informingmanagers It is for this reason that it was started by individualswhose primary appointment was in business schools

It is instructive to contrast the approach of the personneleconomist with that of more traditional human resource scholarsLet me offer an example One area in which economics has directapplication is in determination of turnover and layoff policyEconomists naturally think about issues involving market compe-tition and appropriate matching These ideas may be implicit inold-style human resources but they are never dealt with in asystematic way in large part because the disciplines from whichhuman resources scholars were traditionally drawn do not have aframework for analyzing these issues Among the more analyticand respected of the human resources authors is George Milkov-ich In his text with John Boudreau 1988 p 327 turnover isdiscussed as follows

Many employment planners establish specic rates of turnover (orpatterns of mobility) as an objective Subsequently personnel programs aredesigned to achieve the objective Looking again at Kodak it designed earlyretirement programs to encourage older experienced and more expensiveemployees to leave It also designed layoffs and instituted a recruitingfreeze Whether to seek increased or decreased turnover rates depends onthe circumstances faced by the organization

Although there is little that is controversial in this statementthere is also no guidance as to when to lay workers off whom to layoff what is a desirable turnover rate and how does it vary witheconomic conditions Contrast this with the approach that econo-mists use Lazear 1998 Ch 1 The economic approach focuses onprot maximization and on efficiency The efficiency rule can bestated as follows a worker should be kept whenever his productiv-ity at the current rm Q exceeds the value of his alternatives AThis can be broken down into two statements A rm wants to layoff a worker whenever the wage W exceeds Q The worker wants toquit whenever W A In situations where the worker has rights tohis job the framework provides a rule for successful buyoutswhich is another manifestation of the Coase theorem WheneverQ A there exists the possibility of a buyout The worker earnsrent W 2 A by staying The rm loses rent W 2 Q by having theworker stay Thus the rm is willing to pay B W 2 Q to have theworker leave The worker will accept B8 $ W 2 A to go A


successful buyout exists whenever B B8 the offer exceeds thedemand or whenever

W 2 A W 2 Q

This can be rewritten as

A Q

which is the efficiency condition A successful buyout offer canalways be made whenever it is efficient for the worker to goelsewhere

Of course estimating the values of A and Q may be a difficulttask But the old HR approach has the same difficulty Anytime alayoff decision is made the rm is saying that it views theworkerrsquos net output as less than his wage The economic approachdoes this explicitly and gets the decision rule correct at the outset

The economic approach to turnover is very different from thetraditional HR approach The economic approach focuses onefficiency competition and market equilibrium and prot andutility maximization It provides many more implications forspecic rules of turnover than does the HR approach It dictatesthat layoffs occur not when things are bad at any particular rmbut when things are worse there than elsewhere It also impliesthat young individuals and older ones are most likely to separatebecause the young have little rm-specic human capital and theold have alternative uses of time that are close to the value of theirproductivity on the job20 Finally it prescribes a specic structureof buyouts that will be successful for targeted workers

The difference between the way that economists and othersocial scientists think about personnel issues is illustrated by thefollowing example

The CEO of a major nancial services rm recently statedthat in a survey of the rmrsquos workers one nding was ubiquitousat offices throughout the world Workers said that they wouldprefer better working conditions to more money in their currentjobs Critics of the economic approach often delight in facts likethis which they often believe negates the economic approach thatplaces such heavy emphasis on money An industrial psychologistmight argue that improved working conditions signal to theworker that the rm cares about the workerrsquos welfare and creates

20 Efficient retirement occurs at the age when the value of alternatives justequals the value of productivity on the job Workers who were paid their marginalproducts would retire voluntarily at the efficient age


a feeling of family and loyalty There may be truth to this but theeconomist would take a harder line First the economist mightpoint out the question was not well-posed It is rst necessary tospecify whether the improved working conditions cost more or lessthan the additional money offered to the worker It would hardlybe surprising to nd that rm spending of $50000 on improvedworker conditions for a given worker is preferred to an increase ofsay $1000 Unlike other social scientists the economist asks lsquolsquoatwhat price or costrsquorsquo Second even if the comparison were betweenworking conditions and benets that cost the same amount theyshould have equal value to the worker at the optimum At theoptimum a dollar spent on working conditions should produce thesame utility for a worker as a dollar spent on salary If a dollarspent on working conditions produces more utility then resourcesshould be transferred from salary to working conditions until theworker is indifferent between the two The nding reported by theCEO that improved working conditions are preferred to moneysimply reveals that this rm is not at the optimum and shouldtransfer resources from salary to working conditions The reversecould just as well be true at other rms that overspend on officefurniture

Personnel economics deals with interactions that are insidethe rm in a rigorous way The eld which applies labor andmicroeconomics to human resource management has had a largeimpact on the literature and is having an impact on teachingWhether it will come to dominate the eld in the same way thateconomics has dominated nance remains to be seen

Whereas human capital theory and personnel economics havehelped delve deeper into the understanding of labor within therm modern nance has made much progress in rationalizing thestudy of capital usage To some this may not seem like imperial-ism at all What could be a more natural part of economic theorythan nance Although seemingly obvious it took some energeticeconomic pioneers to wrest the eld away from the traditionalmanagement types who owned the discipline until the sixties

Prominent among these earlier researchers was MertonMiller Millerrsquos contribution was to discover that because changesin capital structure do not alter the ow of earnings over timealtering the division of the rmrsquos liabilities between stocks andbonds leaves the total value of the rm unchanged When askedabout his contribution with Franco Modigliani to understandingnance Miller remarked lsquolsquoIf I take a pizza and cut it into eight


pieces itrsquos still a pizzarsquorsquo This insight was one of the rst buildingblocks of modern nance Modigliani and Miller 1958 Not allnancial economists accept the reasoning of the MampM theorembut even its doubters have been inuenced by it to look into areasof corporate governance and incomplete markets that might affectinterpretation of the theory

There are a few other individuals who are noteworthy HarryMarkowitzrsquos 1952 early analysis of portfolio choice WilliamSharpersquos 1964 capital asset pricing model Eugene Famarsquos 1970work on efficient markets and the already-mentioned Black-Scholes formula are the groundwork on which much of theresearch in modern nance is based Work in nance during thefties and early sixties focused attention on capital budgetingmuch of which can be traced back to early treatises on the timevalue of money especially by Irving Fisher 1930 More modernasset pricing research however owes much of its existence to theeconomic theory provided by economists mentioned above

Their theories were a major break from the institutionalnance that used to be the subject of business teaching andanalysis Absent economic theory with maximizing agents equi-librium and efficiency nancial scholars spent much of their timedescribing the institutions such as banks that prevailed inmarkets and trying to understand their differences and similari-ties Much of the material was classicatory grouping certainassets into some categories and other assets into other categoriesThe new nance broke away from this approach by keying in onboth equilibrium and efficiency

The simple concept of arbitrage made much of the workpossible Although arbitrage does not always guarantee efficiencyit was the concentration on economic efficiency maximizationand equilibrium that induced nancial theorists to think in termsof arbitrage conditions and thereby change the direction ofnance The Black-Scholes options pricing formula widely usedin the business world as well as in academia exploits the conceptof arbitrage in a sophisticated way Understanding that con-straints were placed on prices by the ability to trade assets thatwere identical or equivalent to the ones in question imposeddiscipline on economic predictions The assumption that marketagents maximize prots by engaging in particular trades was astraightforward and powerful engine that yielded results Marketequilibrium based on standard supply and demand analysis


replaced institutional taxonomies for determining the linkagesbetween securities

The effects of the introduction of economic theory and econo-metric analysis into nance have been powerful Finance isviewed as the premier eld in business schools and attracts someof the nest talent in the profession (In addition to the NobelLaureates listed above note that two of the last seven winners ofthe John Bates Clark Medal are nancial economists) Financehas relevance to the real world it has mathematical and statisti-cal sophistication it is important in terms of spillovers to andfrom other branches of economics and as a result commandsgreat respect as a discipline It is no wonder that nance hasexperienced a meteoric rise in status especially in the researchcommunity over the past three decades Neither is economistsrsquotakeover of the eld of nance a given nor is it an obviousextension of traditional economics Just as sociologists argue thatinstitutions are more important in determining individual behav-ior than is maximization given constraints management profes-sors who taught nance believed that institutions were the key tounderstanding nance and nancial institutions They controlledthe eld and rejected the idea that economic theory could informtheir discipline They have been replaced by nancial economistsalmost to the person

Accounting

If nance sits atop the altar of business research accountingis the ancient language of the temple Almost every manager whohas had even a rudimentary business education has at least abasic knowledge of elementary accounting Terms such as assetsand liabilities credit and debit and the simple balance sheet arestandard in business vernacular Like nance until recent yearsaccounting was a eld rich in description but lacking rigoroustheory That started to change perhaps three decades ago and thedeparture from the old style of analysis in accounting hasaccelerated in recent years

Accounting is a eld that is a natural to be informed byeconomics but like nance the resistance was great and inroadswere made only recently Economics was so absent from account-ing that the two elds had very different concepts of prot whichled to signicant confusion Businesspersons often have a difficulttime understanding why any rm would be in business simply toearn zero prot neglecting the fact that economic prot allows a


normal return on capital and to managerial labor The economistrsquosdenition is the one that comes from a notion of equilibrium theaccountantrsquos denition a usage of the term that is unrelated toequilibrium

Much of the change in accounting came about as the aware-ness of information economics grew Since accounting is for themost part about information breakthroughs in the theory ofinformation had direct application to accounting This showed upmost dramatically in managerial accounting There came to be arecognition that the kind of information that is most useful forguiding decisions is not necessarily the kind of information thatwas reported to or required by governmental agencies Decision-making requires a sophisticated understanding of costs andknowing what to do with the information Allocating costs tovarious units or activities in rms poses deep theoretical andempirical challenges Microeconomics provided guidance in themiddle of this century to those trying to decide whether costsshould be regarded as xed or variable and what the classicationimplied for build or scrap decisions (see Horngren Sundem andElliott 1999) Information and personnel economics providedinsight into other kinds of decisions problems Transfer pricingprovides incentives to divisions and managers to behave in waysthat can make the rm better off but setting the prices correctlyor choosing to use implicit rather than explicit systems requires asophisticated understanding of economic mechanisms Modernaccountants now possess that understanding

Second accountants have come to realize that accountingstatements are not the only determinant of market valuationThis derives from an awareness of asset-pricing mechanisms byknowledge of modern nance and the economics that created itMuch of the empirical accounting literature over the past twodecades is concerned with the kind of information that is mostlikely to affect market valuation (see Beaver 1968)

Finally a large part of accounting is normative It providesguidance for managers and sometimes for policy-makers Variousagencies use the work of accountants to guide their policies onrules that rms must follow Since the analyses are based in largepart on economic reasoning economics has altered policy21 For

21 The Federal Accounting Standards Board (FASB) has been caught in themiddle of a battle between academic accountants and businesspersons for the pastten years over whether the expected value of options should be deducted fromearnings at the time that they are granted Academics generally believe that the


example one question is whether a regulatory agency like the IRSshould announce or conceal its audit rules If rules are announcedthen rms know what they can get away with and what theycannot This will induce them to take actions that they might havebeen afraid to take if the rule had remained secret But makingthe audit rule clear also means that transgressions that mighthave occurred if the rule had been kept secret will be completelyeliminated by publicizing that such behavior will result in certainpunishment No cheating on the audited items occurs when therule is announced

Modern accounting scholars now use the language and toolsof economics Agency theory22 information economics and eco-nomic notions of equilibria and pricing are used in cost account-ing The fact that young accountants who possess the new skillsthat make heavy use of economics are in such demand bybusiness schools is testimony to the impact of economics on theeld

STRATEGY

Until very recently economists assumed that they had littleto say about the optimal strategy of the rm Emphasizingpositive economics economists generally shunned making norma-tive prescriptions Rather the direction was the reverse Busi-nesspeople were assumed to know what they were doing Theeconomistrsquos job was only to document it and to explain thebehavior in a systematic way That goal still remains noble but ithas been broadened

The eld of business strategy was never part of economicsproper Even Adam Smith did not include it among the topics thathe discussed Twenty years ago research in business strategy(sometimes called business policy) meant studying the composi-tion and behavior of boards of directors The analysis was muchlike Kremlin watching in the former Soviet Union Who sat next towhom at the board table was noted with signicance and theimportance of liaisons was emphasized Much of the change is adirect result of Porterrsquos 1980 book which took the positiveeconomics of industrial organization and made it normative

impacts will not be signicant because the market will see through the change inaccounting rules Firms that grant options are adamantly opposed to such achange

22 See for example Lambert Larker and Verrecchia 1991 and Ritter1984


Porter used what we know about vertical integration mo-nopoly and pricing and translated it into rules or lists of factorsthat businesspersons could follow Some view this as mere intellec-tual arbitrage To do so is equivalent to denigrating a producer formerely copying and improving an existing product By making aproduct better and cheaper the follower may generate the lionrsquosshare of consumer surplus In a similar vein business strategyscholars have done much to improve our understanding of busi-ness by taking theories that were positive in nature and applyingthem in a more normative contextAnd there is no doubt that theyhave succeeded Strategic management as a eld is now appliedindustrial organization where the appropriate boundaries of therm product choice where when and along which dimensions tocompete are all studied systematically Previously missing butnow at the heart of the eld is the assumption of prot maximiza-tion by rms working out market equilibria as a result ofengaging in a particular strategy and efficiency considerations

Game theory has added much to the discussion of strategyissues The language used in game theory is the same as that ofbusiness strategy In game theory as in strategy attention is paidto economic efficiency Business strategy is a process-orientedeld Game theory is attractive not only because it allows thederivation of equilibria where the standard models were unsatis-factory but also because it focuses more on process than the oldcompetitive model23 The Walrasian auctioneer was an analyticction to make us feel more comfortable about the process thatgenerated a result we believed in Game theory and mechanism-design analyses place much more emphasis on process than thecompetitive model and the stories seem realistic When weconsider two rms interacting with one another in a marketprisonerrsquos dilemma scenarios seem to vividly capture the nature ofat least some interaction When we think about rms that areghting over a standard to be selected for the industry thebattle-of-the-sexes framework seems to be more than just ametaphor But herein lies the danger which shows up in businessstrategy literature Because the models of the process are sorealistic scholars are often content with results that implyinefficiencies Rather than asking whether the selection of thestrategy space has ruled out efficiency-enhancing trades model-ers sometimes stop too soon and do not question whether there is a

23 This is especially true when considering oligopoly


pattern to the inefficiencies that might be explained by a morecomplete theory Standard competitive theory is less likely to leadto this conclusion because almost no weight is placed on theprocess instead the focus is on the equilibrium itself An exampleis instructive

Suppose that a rm is engaged in a long-term tradingrelationship with a supplier Since the relationship has bilateralmonopoly aspects to it one possible way to model this is to allowthe supplier to demand a particular price and to allow the buyer toaccept or reject This is not an unrealistic description of theprocess that might occur in the real world Let the value of theinput to the purchaser be M distributed F(M ) and the reserva-tion price of the supplier be C where C is known to all Supposethat the supplier does not know the realization of M but knowsthe distribution F(M ) The supplierrsquos problem is then to announcea demand price P to solve

maxP

1 2 F(P)(P 2 C)

since the producer accepts the supplierrsquos price whenever M P or(1 2 F(P)) of the time The solution is

P 5 C 1 (1 2 F(P)f (P)

This is monopoly pricing and results in an inefficiency Becausethe supplier is trying to maximize its own surplus it announces ademand that exceeds its reservation price Inefficiency results inthose situations when P M C Trade does not occur becauseP C ie the price is set above the reservation value Tradeshould occur because M C ie the value of the trade is positive

The inefficiency results however because the strategy spaceis not sufficiently rich The seemingly realistic structure disguisesthe fact that there is room for trade that eliminates the ineffi-ciency Since C is known to all the solution is to sell the power toset price to the producer who is the buyer of the input not to thesupplier who is the seller of the input The producer pays aretainer to the supplier which determines the share of rent thatgoes to each party All trades take place at price C which thesupplier always accepts Whenever M C the producer offers thesupplier C When M C no offer is made and no trade occursThis eliminates all inefficiency since the producer buys if and onlyif C M

Concentrating on the process rather than the equilibrium is


more common in other social sciences There constraints areaccepted as part of the problemrsquos description and researchers areunlikely to ask whether there are incentives to relax the assumedconstraints in order to eliminate an inefficiency If not why notPerhaps the inefficiencies are minimal and of little socialconsequence

OTHER BUSINESS SCHOOL DISCIPLINES

Organizational behavior (OB) as a discipline is at the oppositeend of the spectrum from economics Whereas economics isprecise rigorous and willing to abstract from details organiza-tional behavior is rich in description of details and empiricallyobserved phenomena but loose and without a parsimoniousframework Economists love to generalize OB scholars like tofocus on differences Most important economists who examine theissues assume maximization that must be consistent with anequilibrium Researchers in organizational behavior feel no suchcompulsion and are generally put off by the notion that individu-als are rational and maximize

Economists have begun to have an impact on the way thatorganizational behavior is researched and taught Work by Wil-liamson 1975 Milgrom and Roberts 1992 Brickley Smith andZimmerman 1997 and most recently Jensen 1998 bringseconomic reasoning to bear on questions of organizational struc-ture For example Milgrom and Roberts emphasize efficiency atthe outset of their book Efficiency considerations determinewhether rms operate using a system of transfer prices orwhether they operate using quotas Milgrom and Roberts empha-size brittleness which is a measure of the amount by whichexpected prots decline when a manager has imperfect informa-tion (see p 94) Their approach represents a clear break from theorganizational behavior tradition lsquolsquoBrittlenessrsquorsquo is not what an OBscholar would make central While economists already take thisas an appropriate model of the internal workings of the rmorganizational behaviorists with a few exceptions have not yetsigned on

Economics has inuenced empirical analyses done by sociolo-gists in the area of organizations Thus two sociologists Baronand Hannan 1994 summarize the work of sociologists who havestudied promotion and incentive systems the economic models oftournaments internal labor markets and acquisition of human


capital agency theory and worker-rm matches The fact thatthere is a literature to summarize attests to some inuence thateconomics has had on this neighboring eld

Marketing has always been a eld dominated by psychologynot economics Like most of the elds that have been the target ofeconomic imperialism the eld was not studied by economistsbecause we have traditionally held the view that to understandmarketing it is necessary to understand taste formation Sinceeconomists generally have been reluctant to discuss taste forma-tion it is not surprising that economists have not played asignicant role in marketing Nor is it obvious that economics iswell suited to discussing the kinds of issues that are central tomarketing Still economists have tried to analyze some of themore market-oriented aspects of the eld and some have gonebeyond to model tastes and advertising (see Becker and Murphy2000) Clearly pricing policies bundling practices and retailwholesale relationships can all be informed by economics For themost part marketing scholars have been affected by economicsprimarily by encouraging sophisticated econometric analyses

There are a number of areas in which economics has hadstrong impacts Application of standard price-theoretic and game-theoretic models to marketing are summarized in Moorthy 1993Rao 1993 and Blattberg and Neslin 1993 They includeanalyses of price competition promotions (ie sales) advertisingcompetition as an arms-race phenomenon and media schedulingas a jumping-the-gun phenomenon Roth et al 1994 Finallyincentive models from personnel economics have been used tounderstand sales force compensation (see Coughlan 1993) Mostof these are inherently economic and are imperialistic only in thesense that individuals who studied and taught marketing wouldnot have been willing to use these approaches twenty years agoNevertheless it is noteworthy that ve out of eighteen chapters ina recent handbook of marketing are devoted to economic analysesor applications thereof

MOVEMENT ACROSS BORDERS

The impact of economics has not been conned to diggingmore deeply into the standard economic constructs Economicshas affected thought in other elds most notably law politics andhealth


Law

Half a century ago the cornerstones for the eld of law andeconomics were being laid at the University of Chicagorsquos LawSchool An early pioneer Aaron Director set much of the tone forthe work that followed Again the familiar themes were presentMaximizing behavior equilibrium and efficiency all played a roleThe most celebrated result in all of law and economics is the Coasetheorem Coase 1960 which is a powerful use of the concept ofefficiency The Coase theorem states that in the absence oftransactions costs the allocation of resources will be unaffected bythe assignment of property rights Although the distribution ofincome is affected the nature of production is not When there areno transaction costs the welfare-maximizing allocation is obtained

The Coase theorem is perhaps the best example of the old sawthat important results are rst claimed to be incorrect and thenasserted to be obvious The various interpretations of the Coasetheorem provided a number of useful directions for economics tofollow Because the result is so profound many concluded that oneinterpretation of the theorem is that transactions costs must bevery important because the allocation of resources does seem to beaffected by property rights Many economists have built theircareers thinking about the impact of transactions costs on eco-nomic behavior24

More important is that legal scholars have been inuenced bythe Coase theorem The focus of the work by Richard Posner1972 Frank Easterbrook and Daniel Fischel 1991 and RichardEpstein 1985 is efficiency25 Posner especially has viewed the lawas in large part attempting to bring about efficient outcomes Thiswas a radical concept The idea that the law should deal withefficiency rather than lsquolsquojusticersquorsquo was a bitter pill for legal scholars toswallow26 An example from contract law is useful

Consider a woman who signs a contract with a builder to havea new house constructed She agrees to pay him x at the time ofcompletion After signing the contract the builder is presentedwith an alternative that has value z to him The builder breacheshis contract with the woman and accepts the alternative Thewoman who retained the builder initially can have the house

24 Williamson1999 is a well-respected case in point25 Actually Epstein 1985 questions whether efficiency is sufficient or

whether the law should take into account implementability26 See Kaplow and Shavell 1998 for an argument that efficiency is the only

reasonable denition of justice


constructed by another builder but at a cost of y x The house isactually worth v $ x to the woman How much should the builderwho breached the contract be required to pay One obvious choiceis to order the contract violator to pay the difference betweenreplacement cost and contract price ie to pay of y 2 x Anotherchoice is to order him to pay the difference between the value tothe buyer and contract price ie a payment of v 2 x

The economically efficient solution is to require the builder topay v 2 x in compensatory damages The fact that the builderaccepted the alternative tells us that z x But efficiency requiresthat the builder turn down the alternative unless z v becausesocial value is maximized by having the builder spend his time inthe highest valued use If the builder is required to pay y 2 x indamages he will breach the contract if and only if

z 2 ( y 2 x) x

because he receives z but pays ( y 2 x) for a breach If he honorsthe contract he receives x This simplies to breaching if and onlyif

(1) z y

If instead the builder is required to pay v 2 x then he will breachif and only if

z 2 (v 2 x) x

or if

(2) z v

Expression (2) guarantees efficiency Expression (1) does notSpecically there might be situations where the cost of having thehouse built by another builder far exceeds its value to the womanConsider the situation where y z v Rule (1) would cause thebuilder to honor his contract with the woman when a breachwould actually be efficient Because y z the builder honors thecontract But this is inefficient since z v The value of thealternative use of the builderrsquos time exceeds the value to thewoman of having the house built Forcing the builder to pay onlythe difference between the value to the buyer and the agreed-uponprice is tantamount to requiring (2) which simply states theefficiency criterion This is always the correct rule

The law requires reimbursement for damages not for replace-


ment cost27 Reasonableness rules are consistent with this Theprohibition of requiring specic performance under most circum-stances is an example of efficiency in this context Take anextreme case where there is no alternative builder who couldbuild the house Thus y is innite The court could not requireinnite payment in damages but it could compel the builder tohonor the contract This would amount to specic performancewhich is prohibited in labor contracts Instead the contractorwould be responsible for damages equal to the difference betweenthe value to the woman of the house and the negotiated price

Ironically the Coase theorem taken to its logical conclusionimplies that the courtrsquos damages rule should not affect efficiencyEven when the builder is required to pay y 2 x in damages anefficient breach can occur The woman knows that the builder willnot breach when damages are y 2 x But she can agree to permitthe breach at some price greater than v 2 x but less than z 2 x Aslong as z v which is the condition for efficiency a deal of this sortcan be struck Thus even if the court adopts an inefficient rulethe Coase theorem implies that it will have no effect on efficiencyabsent transactions costs The key is the phrase lsquolsquoabsent transac-tions costsrsquorsquo The existence of courts may be evidence that transac-tions costs are positive and substantial Alternatively they maymerely reect the attempt by the various parties to affect thedistribution of rents independent of the allocation of resources

A natural outgrowth of the interest in law is an interest inincentives that are created by the law In particular deterrenceassociated with penalties for committing crimes is a primary goalof any punishment system How large is the deterrent effect thatis associated with any particular penalty Becker 1968 modeleddeterrence in an expected cost framework The key insight is thatthe criminal cares about the expected penalty dened as theproduct of the size of the penalty and the probability of having thepenalty imposed28 This simple point provided strong normative

27 Sometimes damages are equal to replacement cost This occurs when x y v z In this situation the house can be built by a third party at a cost lessthan the womanrsquos value of the house Efficiency requires that the woman acceptthe offer to build at cost less than v Efficiency also requires that the originalcontractor take his alternative because z exceeds v Thus the general rule shouldbe that the penalty for a breach should be equal to the smaller of replacement costor the value of the house to the contracting party

28 It is actually the change in the probability as a function of committing thecrime that is relevant If a court system imposes high penalties randomly then thepenalty has no deterrent effect at all Deterrence comes from the change in theexpected penalty associated with committing a crime


implications Since detection is imperfect it is necessary tooverpenalize the convicted Having the penalty t the crimeresults in too little deterrence if this is interpreted to mean thatthe penalty be equal to the damages caused Efficiency requiresthat the penalty should be inated by the reciprocal of theprobability of conviction29

This framework was used in a number of empirical studies todetermine the effect of various policies on deterrence Among thebest known and most controversial is the analysis by Ehrlich1975 of the effect of the death penalty on murder rates Ehrlichfound strong deterrent effects and this evidence has been used tobolster the case for capital punishment

Economists gained insight into deterrent effects by assumingrationality Even criminal behavior which many believe to beinherently irrational was modeled as a rational process whereindividuals maximize utility and take punishment into account ina rational way Pushing the notion that individuals maximizeutility provided guidance rigor and specicity that was lacking inother disciplinesrsquo approach to analysis of criminal behavior

The economistsrsquo approach to the law has indirect spillovers Ihave argued that etiquette is simply a way by which societyenforces rules that lead to efficient behavior as an extension of thenotion that the law promotes efficiency Lazear 1993 Etiquette islaw where custom substitutes for courts For example etiquettedictates that a young person give his seat to an older one on acrowded bus This is efficient because the gains from sitting to theolder person exceed the costs of standing to the younger one Inpoor societies etiquette dictates that working men eat rst andchildren receive what is left This is not the general pattern inwealthier societies When a family is close to subsistence invest-ing calories in working men may be the best way to ensure thefamilyrsquos survival In wealthy societies investments in childrenand women may be more efficient

Another example relates to professional etiquette Orr 1993states that it is poor department etiquette to dump committeework on junior faculty This is consistent with efficiency since

29 There are some complications to this simple rule A risk-averse societymay not want such a severe penalty rule when there is some probability ofconvicting an innocent person Furthermore since it is marginal considerationsthat are important imposing too large a penalty for small crimes reduces thedeterrence for larger crimes For example if the penalty for stealing a loaf of breadis execution then the thief might be attempted to kill a policeman to escapebecause the penalty for murder is no worse


comparative advantage in committee work rests with senior notjunior faculty Finally law journals allow simultaneous submis-sion of papers Economics journals require that a paper besubmitted exclusively to one journal at a time Law articles arerefereed by students who view the task as education Economicsarticles are refereed by more senior scholars whose time is morevaluable The differences in etiquette across elds can be ex-plained by efficiency30 Thus economists may even have an impacton Miss Manners

The inuence of economics on legal scholarship has beensubstantial Landes and Posner 1992 document its growth overthe 1980s By counting citations to particular economists associ-ated with law and economics they nd that citations in lawjournals increased from 283 between 1976 and 1980 to 2227between 1986 and 1990

Political Economy

It has never been much of stretch between economics andpolitics Historians political scientists and economists alike havebelieved that economics can exert a strong inuence on politicsboth at the national and international levels This connectionhowever has nothing to do with economic imperialism Economicimperialism in the realm of political economy consists of the use ofeconomic methods to understand political processes In earliertimes the two were inseparable The Mercantilists Physiocratsand Adam Smith focused much of their attention on the relation ofeconomics to politics Modern economists have returned to some ofthe same themes but in a somewhat different way Two earlyworks in this area are Schellingrsquos 1960 The Strategy of Conictand Buchanan and Tullockrsquos 1962 The Calculus of Consent

Schelling uses early game theory to analyze the interactionbetween political entities Much of the work considers interna-tional relations Key is that Schelling emphasizes rational choicebased on maximization Schelling writes lsquolsquoThreats and responsesto threats reprisals and counter-reprisals limited war armsraces brinkmanship surprise attack trusting and cheating canusefully be viewed as either hot-headed or cool-headed activi-

30 Some less important rules of etiquette seem to reect multiple equilibriaFor example who goes rst (women before men age before beauty) is a conventionthat is useful but arbitrary Since there are no strong efficiency impacts of oneversus another they tend to vary over time and across societies


ties It is asserted that the assumption of rational behavior isa productive one in the generation of a systematic theoryrsquorsquo p 16

He makes the radical statement that lsquolsquoHitler the FrenchParliament Khrushchevrsquorsquo can be modeled as behaving in amaximizing way p 17 In addition to pushing the notion thatmaximizing behavior can be used to understand political interac-tions Schelling puts forth a variety of ideas that show up later inthe game theory literature Perhaps most important is Schellingrsquoswell-known point about there being strength in weakness Thisearly version of pointing out that it is helpful to be able to committo a particular strategy has many applications in political economyFor example a country can prevent surprise attacks by publiciz-ing the existence of a device that automatically launches full-scalenuclear retaliation at the rst sign of attack A potential aggressorwho knows this would not benet from attempting an early strike

Issues of voting rules and constitutionality appeared early inArrow 1951b who proved the well-known impossibility theoremand Downs 1957 who modeled the median voter Buchanan andTullock opened a large area of research by arguing that standardeconomic tools could be used to understand political processesIndividuals and groups act in their self-interest using the politicalprocess to further their own goals Buchanan and Tullock employeconomics to construct a general theory of constitutions to discussthe impact of majority rules rules of unanimity different legisla-tive structures and the optimal size of government31 Theirapproach has paramount in it questions of efficiency When sidepayments can eliminate an inefficient outcome they ask whethera political system will impede such side payments

Rent-seeking activities that are socially unproductive butprivately benecial are common in a system where some agentscan gain at the expense of others by a political system that favorstheir goals Theories of regulation and government capturepresented by Stigler 1971 are extensions of the Buchanan andTullock approach to rational action in a political environment

Modern political scientists use economic tools and game-theoretic constructs as well as the logic of maximization effi-ciency and equilibrium to analyze political situations Muchbuilds on the work of Downs and the importance of the median

31 They argue that governments should be small for two reasons First thisallows for more competition between entities Second smaller jurisdictions cancater more specically to the interests of their residents Only when externalitiesare sufficiently large should the size of the governmental unit be expanded


voter but the main point is that the literature assumes aself-motivated rational maximizing voter John Ferejohn andMorris Fiorina 1974 two distinguished political scientists con-sider strategic interaction among agents and other decisions rulesto explain why a rational individual votes Their approach iseconomic Costs and benets are weighed The controversy in thisliterature is over what are the appropriate ways to treat uncer-tainty not over whether the individual is a maximizer Addition-ally the analyses of which this is an early example use theeconomistrsquos denition of equilibrium usually in the sense of Nash

The literature considers policies efficient which are dened asthose that benet one group by more than others are penalizedie Pareto optimality Some models have Congress playing agame against a president who has the power of veto by presentinghim with a bill that he does not necessarily prefer but one that helikes better than the alternative of no bill at all Here as inSchellingrsquos early work the ability to commit to consider no otherbills after a veto strengthens the hand of Congress Compensationand incentive theory nds its way into the literature as well Forexample Ferejohn 1986 models a representativersquos behavior whoseeks the reward of votes Voters cast their votes on the basis ofthe representativersquos performance and the reward structure andincentive analysis resemble the tournaments of personnel econom-ics where output is only imperfectly observed

Economics has permeated international affairs In Bueno deMesquita 1985 and Altfeld and Bueno de Mesquita 1979choices of sides and strategies in war are modeled as the outcomeof rational maximizing behavior Once again equilibrium in theeconomic sense is incorporated into the analysis Not only aretheories developed but the predictions are tested and conrmedusing the historical record

Health Economics

Part of health economics can be viewed as an extension of thetheory of the rm Education is one way to affect the quality oflabor Investing in health is another Accounting for about 15percent of GDP the health industry is an extremely importantpart of our economy

Most health issues do not revolve around improving thequality of labor Medicine is interesting to economists not onlybecause it is an important industry and not only because it affectslabor quality but also because many people view health care as


inherently different from other goods or services Early work byFuchs 1974 and Feldstein 1971 changed this view amongeconomists Fuchs in particular had a signicant effect onacademic physicians and those who study health administration

Fuchsrsquos book made clear to those in the health industry thattrade-offs are as important in medicine as they are in any otherarena Health care is an economic good that is a scarce resourcethat cannot be provided to everyone Part of what made thispalatable was that Fuchs cast much of the discussion in terms ofproduction trade-offs For example a hospital with limited re-sources must choose between another kidney dialysis machineand some orthopedic device In the absence of economic reasoningone might reason that the kidney machine is more essentialbecause it is life-saving whereas the orthopedic device simplymakes life more pleasant for someone Yet almost all hospitalschoose to have some of both implicitly trading off a life-savingdevice for one that may seem less important Just as in diamond-water paradox people value diamonds more highly on the marginthan they do water even though water is life-sustaining anddiamonds are mere ornaments Economics makes clear the differ-ence between the value of the rst unit and of marginal units Atsome point kidney dialysis machines are sufficiently abundant ina particular hospital that it pays to spend marginal dollars onorthopedic equipment because the additional kidney machine haslower value than the rst orthopedic device

The implications are even more dramatic in other situationsThe decision to spend money on a heart-lung machine rather thanon equipment that makes possible chemotherapy for leukemiapatients might favor older individuals over children Money spenton breast cancer instead of prostate research favors women overmen Money spent on health care over homeless shelters favorsthe middle class over the poor Such trade-offs obvious andnatural to economists were anathema to those in health care

Economics plays a role in current thinking on incentives andreimbursement Much of this comes from the relatively new areaof personnel economics Reimbursement systems that pay doctorsa xed amount for a given illness (the diagnostic related group orlsquolsquoDRGrsquorsquo system) tend to encourage cost saving but lower thequality of treatment Systems that reimburse for costs tend toinduce more than the optimal quality of care with excessivetesting and treatment There is nothing unique to medicine Thisis a direct application of standard contracting theory where


distinctions are made between payment on input and payment onoutput When a builder is given a xed-price contract he wants tocut corners and reduce quality When he is paid on a cost-plusbasis he tends to spend too much on the job and does not concernhimself enough with efficiency

The impact of economics in this eld particularly the focus onrational behavior has been profound The concept of opportunitycost is now explicit in medical decisions Many major medicalschools and schools of public health have economists on theirstaffs Economists publish in medical journals32 and there iswidespread recognition that economics can be of assistance inthinking about the allocation of resources of pricing and ofreimbursement algorithms

Other Targets

One of the more unusual applications of economics derivesfrom Sherwin Rosenrsquos 1974 work on valuing attributes Rosenshowed that nonmonetary attributes of a good service or jobcould be valued by looking at market trade-offs Rosen argued thatthis idea could be used to estimate the value of a life In Thalerand Rosen 1976 the notion that workers are willing to give upsomething to work in a less dangerous environment is used toestimate the value that workers attach to their own lives Thelogic is that if a job that has no danger associated with itwhatsoever has a lifetime wage of say $2500000 and one thathas a 1100 probability of death pays a lifetime wage of $2550000then the marginal worker views a 1100 chance of death as beingworth $50000 If marginal utility equals average utility then thevalue of life would be estimated to be 100 times $50000 or $5million Even under less stringent assumptions lower (or upper)bounds can be placed on the value of a life The method has beenused in the medical literature to determine whether a particularprocedure is worthwhile (see Kessler and McClellan 1996) indetermining whether a particular piece of military hardware iscost effective and in court cases involving damages in a loss of lifesituation

In another unusual application economics has begun toventure into linguistics The jumping-off point is the notion thatlanguage can be thought of as a standard (see for example

32 See for example Sicherman Bombard and Rappoport 1995 on when touse amniocentesis testing


Church and King 1993) Like all standards other things equal itis better if all conform to one standard This idea has been used tomodel cultural assimilation and the equilibrium distribution oflanguages across a region (see Lazear 1999 and John and Yi1995 In my own model I argue that the main purpose oflanguage is to facilitate trade broadly dened Thus the incen-tives to learn another language are greater when the language inquestion is used by a large portion of the population It is for thisreason that minorities are more likely to learn the majoritylanguage than are majorities to learn the minority language Theempirical ndings are extremely strong Using the 1900 and 1990U S Federal Population Census it is found that individuals wholive in ghettos with many others from their native land are muchless likely to be uent in English than those who live in communi-ties in which they are a smaller minority The approach is thenused to examine the equilibrium that occurs in countries under avariety of circumstances Minority languages tend to disappearover time Countries made up of many equal-size minorities arelikely to adopt one language (often an outside one) as thestandard Chauvinism where a society forces immigrants andminority members to learn the majority language may be sociallyoptimal because the gains to the community as a whole inincreased trade swamp the costs borne by minority individualsFinally ghettos are a natural outgrowth of the attempt to increasetrade by associating with those who share a language or cultureand need not result from constraints imposed by others

The emphasis in this literature is on the three key economicingredients Individuals learn language as a rational choice Theydo this taking into account the resulting equilibrium and that theequilibrium reects the actions of optimizing agents Finallysocieties may attempt to impose rules taxes or subsidies toeliminate inefficient outcomes in language choice and assimila-tion speed

BARBARIANS AT THE GATE

It would not be fair to discuss economic imperialism withoutalso mentioning the effect that other elds most notably andrecently psychology have had on economics This comes in twoforms Because much of psychology is empirical based on labora-tory experiments where economic theories can be tested in acontrolled environment ndings by psychologists are sometimes


of interest or worse a source of embarrassment to economists (seefor example the work of Tversky and Kahneman 1990) Therehave been two approaches to the anomalies to which outsiders callour attention The rst is to incorporate them into economicmodels This approach best exemplied by Akerlof rsquos 1982 workwhich takes concepts from psychology and imbeds them in aneconomic model33 These models retain all of the essential ingredi-ents of economic analysis They continue to assume a maximizingindividual albeit one with a perhaps unorthodox utility functionThey also maintain the central role of equilibrium in the analysisThe approach is economic but economics informed by psychology

Another approach attributed to those who study behavioraleconomics does not accept the economic framework Ratherresults from other elds are used to tweak the noses of economistsfor being so naive and using abstractions that do not t the dataCamerer et al 1997 is an example of this type of analysis Ratherthan relying on maximizing behavior equilibrium and efficiencythis work attempts to show that the standard models are at oddswith the data They are often presented as puzzles

Although puzzles and anomalies are useful because theyprovoke thought they are best thought of as starting pointsrather than conclusions Most economists who have done empiri-cal research nd that they encounter many puzzles along the wayThe goal of the scholar is to make sense of the data to reconcilethe puzzles and if completely successful to bring them into ageneral framework that allows predictions to be made Success isdened by enhanced understanding not by increased confusionTo the extent that the anomalous results lead to improvedanalyses and better models they are indeed worthwhile Thisdoes not imply that the economist should adopt the methodologyof other elds It is the obsession with theories that are consistentrational and unifying that gives economics its power

An example of the difference between the way economists andpsychologists think about a problem is instructive Psychologistshave been studying utility functions and trying to specify whatthey actually look like One case involves perceptions about livingin California Despite the common perception that living inCalifornia is pleasant Schkade and Kahneman 1998 nd thatCalifornians are no happier as measured by their responses to a

33 See for example Akerlof 1982 and Akerlof and Dickens 1982 Thalerand Sheffrin 1981 might also t into this category


particular survey than are non-Californians They view this asbeing somewhat anomalous Perhaps but an economist wouldthink of this in a different way Because we focus on equilibriumwe would argue that the marginal person in Chicago can be no lesshappy than the marginal person in California Geographic sortingon the basis of local characteristics is the essence of the pointmade by Tiebout 1956 Free mobility ensures that happiness isequated for the marginal individual If everyone had the sametastes then land prices or other attributes of the communitieswould change such that in equilibrium everyone would view thecommunities as producing equal satisfaction If tastes differ thenthe marginal individual is indifferent and all others are happierin their current location Economic models try to make sense outof nonsense Sometimes they abstract away from the essence ofthe problem But the better analyses provide insight where therewas confusion

CONCLUSION

Economics has been successful because above all economicsis a science The discipline emphasizes rational behavior maximi-zation trade-offs and substitution and insists on models thatresult in equilibrium Economists are pushed to further inquirybecause they understand the concept of efficiency Inefficientequilibria beg for explanation and suggest that there may be gapsin the underlying models that created them

Because economics focuses so intently on maximizationequilibrium and efficiency the eld has derived many implica-tions that are testable refutable and frequently supported by thedata The goal of economic theory is to unify thought and toprovide a language that can be used to understand a variety ofsocial phenomena The most successful economic imperialistshave used the theory to shed light on questions that lie far outsidethose considered traditional The fact that there have been somany successful efforts in so many different directions attests tothe power of economics

UNIVERSITY OF CHICAGO

REFERENCES

Akerlof George lsquolsquoLabor Contracts as Partial Gift Exchangersquorsquo Quarterly Journal ofEconomics XCVII (November 1982) 543ndash569


Akerlof George and William Dickens lsquolsquoEconomic Consequences of CognitiveDissonancersquorsquo American Economic Review LXXII (1982) 307ndash319

Altfeld Michael F and Bruce Bueno de Mesquita lsquolsquoChoosing Sides in WarrsquorsquoInternational Studies Quarterly XXIII (March 1979) 87ndash112

Arrow Kenneth lsquolsquoAn Extension of the Basic Theorems of Classical WelfareEconomicsrsquorsquo in J Newman ed Proceedings of the Second Berkeley Sympo-sium on Mathematical Statistics and Probability (Berkeley University ofCalifornia Press 1951) pp 507ndash532 Social Choice and Individual Values (New York John Wiley amp Sons 1951)

Auerbach Alan J and Laurence J Kotlikoff Dynamic Fiscal Policy (CambridgeCambridge University Press 1987)

Azzi Corry and Ronald Ehrenberg lsquolsquoHousehold Allocation of Time and ChurchAttendancersquorsquo Journal of Political Economy LXXXIII (February 1975) 27ndash56

Baron James N and Michael T Hannan lsquolsquoThe Impact of Economics on Contempo-rary Sociologyrsquorsquo Journal of Economic Literature XXXII (September 1994)1111ndash1146

Barro Robert J lsquolsquoAre Government Bonds Net Wealthrsquorsquo Journal of PoliticalEconomy LXXXII (NovemberDecember 1974) 1095ndash1117

Beaver William lsquolsquoThe Information Content of Annual Earnings AnnouncementsrsquorsquoJournal of Accounting Research Empirical Research in Accounting SelectedStudies Supplement to Volume VI (1968) 67ndash72

Becker Gary S The Economics of Discrimination (Chicago University of ChicagoPress 1957) lsquolsquoUnderinvestment in Educationrsquorsquo American Economic Review L (May1960a) 346ndash354 lsquolsquoAn Economic Analysis of Fertilityrsquorsquo in UniversitiesmdashNational BureauCommittee for Economic Research Demographic and Economic Change inDeveloped Countries (Princeton Princeton University Press 1960b) pp209ndash231 lsquolsquoInvestment in Human Capital A Theoretical Analysisrsquorsquo Journal of PoliticalEconomy LXX (October 1962) 9ndash49 lsquolsquoA Theory of the Allocation of Timersquorsquo Economic Journal LXXV (September1965) 493ndash517 lsquolsquoCrime and Punishment An Economic Approachrsquorsquo Journal of PoliticalEconomy LXXVI (MarchndashApril 1968) 169ndash217 Human Capital A Theoretical and Empirical Analysis with SpecialReference to Education 2d ed (New York Columbia University Press forNational Bureau of Economic Research 1975) lsquolsquoA Note on Restaurant Pricing and Other Examples of Social Inuences onPricersquorsquo Journal of Political Economy XCIX (October 1991a) 1109ndash1116 A Treatise on the Family enlarged edition (Cambridge Harvard UniversityPress 1991b)

Becker Gary S Elisabeth Landes and Robert Michael lsquolsquoAn Economic Analysis ofMarital Instabilityrsquorsquo Journal of Political Economy LXXXV (December 1977)1141ndash1187

Becker Gary S and Kevin M Murphy Social Markets (Cambridge HarvardUniversity Press 2000)

Berger Joseph and J L Snell lsquolsquoOn the Concept of Equal Exchangersquorsquo BehavioralScience II (April 1957) 111ndash118

Bergson Abram lsquolsquoA Reformulation of Certain Aspects of Welfare EconomicsrsquorsquoQuarterly Journal of Economics LII (February 1938) 310ndash334

Berman Eli lsquolsquoSect Subsidy and Sacrice An Economistrsquos View of Ultra-OrthodoxJewsrsquorsquo Boston University 1998

Bikhchandani Sushil David Hirshleifer and Ivo Welch lsquolsquoTheory of Fads FashionCustom and Cultural Change as Informational Cascadesrsquorsquo Journal of Politi-cal Economy C (October 1992) 992ndash1026

Blattberg Robert C and Scott A Neslin lsquolsquoSales Promotion Modelsrsquorsquo in Handbooksin Operations Research and Management Science Volume 5 Marketing JEliashberg and G L Lilien editors (Amsterdam North-Holland 1993) pp553ndash609

Brickley James A Clifford W Smith Jr and Jerold L Zimmerman ManagerialEconomics and Organizational Architecture (Chicago Irwin 1997)


Buchanan James M and Gordon Tullock The Calculus of Consent LogicalFoundations of Constitutional Democracy (Ann Arbor University of MichiganPress 1962)

Bueno de Mesquita Bruce lsquolsquoThe War Trap Revisited A Revised Expected UtilityModelrsquorsquo American Political Science Review LXXIX (1985) 156ndash177

Bulow Jeremy and Paul Klemperer lsquolsquoRational Frenzies and Crashesrsquorsquo Journal ofPolitical Economy CII (February 1994) 1ndash23

Camerer Colin Linda Babcock George Loewenstein and Richard Thaler lsquolsquoLaborSupply of New York City Cabdrivers One Day at a Timersquorsquo Quarterly Journal ofEconomics CXII (May 1997) 407ndash441

Church J and I King lsquolsquoBilingualism and Network Externalitiesrsquorsquo CanadianJournal of Economics XXVI (1993) 337ndash345

Coase R lsquolsquoThe Problem of Social Costrsquorsquo Journal of Law and Economics (October1960) 1ndash44

Coughlan Anne T lsquolsquoSalesforce Compensation A Review of MSOR Advancesrsquorsquo inHandbooks in Operations Research and Management Science Volume 5Marketing J Eliashberg and G L Lilien editors (Amsterdam North-Holland 1993) pp 611ndash651

Debreu Gerard The Coefficient of Resource Utilization (Chicago University ofChicago Press 1951)

DiPasquale Denise and Edward L Glaeser lsquolsquoThe Los Angeles Riot and theEconomics of Urban Unrestrsquorsquo Journal of Urban Economics XLIII (January1998) 52ndash78

Downs Anthony An Economic Theory of Democracy (New York Harper amp Row1957)

Easterbrook Frank H and Daniel R Fischel The Economic Structure ofCorporate Law (Cambridge MA Harvard University Press 1991)

Ehrlich Isaac lsquolsquoThe Deterrent Effect of Capital Punishment A Question of Lifeand Deathrsquorsquo American Economic Review LXV (June 1975) 397ndash417

Epstein Richard Allen Takings Private Property and the Power of EminentDomain (Cambridge MA Harvard University Press 1985)

Fama Eugene F lsquolsquoEfficient Capital Markets A Review of Theory and EmpiricalWorkrsquorsquo Journal of Finance XXV (May 1970) 383ndash417

Feldstein Martin S lsquolsquoAn Econometric Model of the Medicare Systemrsquorsquo QuarterlyJournal of Economics LXXXV (February 1971) 1ndash20

Ferejohn John lsquolsquoIncumbent Performance and Electoral Controlrsquorsquo Public Choice L(1986) 5ndash25

Ferejohn John and Morris Fiorina lsquolsquoThe Paradox of Not Voting A DecisionTheoretic Analysisrsquorsquo American Political Science Review LXVIII (1974) 525ndash536

Fisher Irving The Theory of Interest (New York Macmillan 1930)Freeman Richard B The Market for College-Trained Manpower A Study in the

Economics of Career Choice (Cambridge MA Harvard University Press1971)

Friedman Milton Essays in Positive Economics (Chicago University of ChicagoPress 1953)

Friedman M and S Kuznets Income from Independent Professional Practice(New York NBER 1945)

Fuchs Victor R Who Shall Live (New York Basic Books 1974)Horngren Charles T Gary L Sundem and John A Elliott Introduction to

Financial Accounting 7th edition (Upper Saddle River NJ Prentice-Hall1999)

HotellingHarold lsquolsquoThe General Welfare in Relation to Problems of Taxation and ofRailway and Utility Ratesrsquorsquo Econometrica VI (July 1938) 242ndash269

Iannaccone Laurence R lsquolsquoSacrice and Stigma Reducing Free-Riding in CultsCommunes and Other Collectivesrsquorsquo Journal of Political Economy C (April1992) 271ndash291

Jenkin Fleming lsquolsquoThe Graphic Representation of the Laws of Supply andDemand and Other Essays on Political Economyrsquorsquo London London School ofEconomics and Political Science 1931 No 9 in series of reprints of scarcetracts in Economics and Political Science

Jensen Michael C Foundations of Organizational Strategy (Cambridge MAHarvard University Press 1998)


John Andrew and Kei-Mu Yi lsquolsquoLanguage Learning and Locationrsquorsquo unpublishedmanuscript University of Virginia 1995

Jovanovic Boyan lsquolsquoFirm-Specic Capital and Turnoverrsquorsquo Journal of PoliticalEconomy LXXXVI (December 1979) 1246ndash1260

Kandel Eugene and Edward P Lazear lsquolsquoPeer Pressure and PartnershipsrsquorsquoJournal of Political Economy C (August 1992) 801ndash817

Kaplow Louis and Steven Shavell lsquolsquoFairness versus Welfare Economics inNormative Analysis of Lawrsquorsquo Harvard Law School 1998

Kessler Daniel and Mark McClellan lsquolsquoDo Doctors Practice Defensive MedicinersquorsquoQuarterly Journal of Economics CXI (1996) 353ndash390

Kiger Joseph American Learned Societies (Washington DC Public Affairs Press1963)

Lambert Richard A David F Larcker and Robert E Verrecchia lsquolsquoPortfolioConsiderations in Valuing Executive Compensationrsquorsquo Journal of AccountingResearch XXIX (Spring 1991) 129ndash149

Landes WilliamM and Richard A Posner lsquolsquoThe Inuence of Economics on Law AQuantitative Studyrsquorsquo University of Chicago Law School John M Olin Programin Law amp Economics Working Papers 1992

Lazear Edward P lsquolsquoDiscussion The Economics of Professional Etiquettersquorsquo Ameri-can Economic Review LXXXIII (2) (May 1993) 44 Personnel Economics (Cambridge MA MIT Press 1995) Personnel Economics for Managers (New York John Wiley amp Sons 1998) lsquolsquoCulture and Languagersquorsquo Journal of Political Economy CVII (December1999) S95ndashS126

Malthus Thomas Robert An Essay on the Principle of Population (London WardLock 1890)

Markowitz Harry lsquolsquoPortfolio Selectionrsquorsquo Journal of Finance VII (March 1952)77ndash79

Marshall Alfred Principles of Economics 9th (variorum) edition with annota-tions by C W Guillebaud (London New York Macmillan for the RoyalEconomic Society 1961 rst edition 1890)

Milgrom Paul and D John Roberts Economics Organization and Management(Englewood Cliffs NJ Prentice-Hall 1992)

Milkovich George T and John W Boudreau PersonnelHuman Resource Manage-ment 5th edition (Plano TX Business Publications Inc 1988)

Mincer Jacob lsquolsquoInvestment in Human Capital and Personal Distribution ofIncomersquorsquo Journal of Political Economy LXVI (August 1958) 281ndash302

Mincer Jacob and Boyan Jovanovic lsquolsquoLabor Mobility and Wagesrsquorsquo in Studies inLabor Markets Sherwin Rosen ed (Chicago University of Chicago Press forNBER 1981) pp 21ndash64

Modigliani Franco and Merton H Miller lsquolsquoThe Cost of Capital CorporationFinance and the Theory of Investmentrsquorsquo American Economic Review XLVIII(June 1958) 261ndash297

Moorthy Sridhar K lsquolsquoCompetitive Marketing Strategies Game-Theoretic Mod-elsrsquorsquo in Handbooks in Operations Research and Management Science Volume5 Marketing J Eliashberg and G L Lilien editors (Amsterdam North-Holland 1993) pp 143ndash190

Myrdal Gunnar An American Dilemma (New York Harper and Row 1944)North Douglas C Structure and Change in Economic History (New York W W

Norton 1981) Ch 5 lsquolsquoIdeology and the Free-Rider ProblemrsquorsquoOrr Daniel lsquolsquoReections on the Hiring of Facultyrsquorsquo American Economic Review

LXXXIII (May 1993) 39ndash43Porter Michael Competitive Strategy (New York Free Press 1980)Posner Richard A Economic Analysis of Law (Boston Little Brown 1972)Prais S J lsquolsquoMeasuring Social Mobilityrsquorsquo Journal of the Royal Statistical Society

CXVIII (1955a) 56ndash66 lsquolsquoThe Formal Theory of Social Mobilityrsquorsquo Population Studies IX (1955b)72ndash81

Raditzky G and P Berholz Economic Imperialism The Economic MethodApplied Outside the Field of Economics (New York Paragon 1987)

Rao Vithala R lsquolsquoPricing Models in Marketingrsquorsquo in Handbooks in OperationsResearch and Management Science Volume 5 Marketing J Eliashberg andG L Lilien editors (Amsterdam North-Holland 1993) pp 517ndash552


Reid Margaret Economics of Household Production (New York John Wiley ampSons 1934)

Ridley Matt The Red Queen Sex and Evolution of Human Nature (New YorkPenguin 1993)

Ritter Jay R lsquolsquoThe lsquoHot Issuersquo Market of 1980rsquorsquo Journal of Business LVII (April1984) 215ndash240

Rosen Sherwin lsquolsquoHedonic Prices and Implicit Markets Product Differentiation inPure Competitionrsquorsquo Journal of Political Economy LXXXII (JanuaryFebruary1974) 34ndash55

Roth Alvin E et al lsquolsquoJumping the Gun Imperfections and Institutions Related tothe Timing of Market Transactionsrsquorsquo American Economic Review LXXXIV(September 1994) 992ndash1044

Sah Raaj Kumar lsquolsquoSocial Osmosis and Patterns of Crimersquorsquo Journal of PoliticalEconomy XCIX (December 1991) 1272ndash1295

Samuelson Paul A Foundations of Economic Analysis (Cambridge MA HarvardUniversity Press 1947)

Schelling Thomas C The Strategy of Conict (London Oxford University Press1960) Micromotives and Macrobehavior (New York W W Norton and Company1978)

Schkade D and Daniel Kahneman lsquolsquoDoes Living in California Make PeopleHappy A Focusing Illusion in Judgments of Life Satisfactionrsquorsquo PsychologicalScience IX (1998) 340ndash346

Schultz Theodore W lsquolsquoInvestment in Man An Economistrsquos Viewrsquorsquo Social ServiceReview XXXIII (June 1959) 110ndash117 lsquolsquoInvestment in Human Capitalrsquorsquo American Economic Review LI (December1961) 1ndash17 The Economic Value of Education (New York Columbia University Press1963)

Sharpe William F lsquolsquoCapital Asset Prices A Theory of Market Equilibrium underConditions of Riskrsquorsquo Journal of Finance XIX (September 1964) 425ndash442

Sicherman Nachum Allan T Bombard and Peter Rappoport lsquolsquoCurrent MaternalAge Recommendations for Prenatal DiagnosisA Reappraisal Using ExpectedUtility Theoryrsquorsquo Fetal Diagnosis and Therapy X (MayndashJune 1995) 157ndash166

SmithAdam Inquiry into the Nature and Causes of the Wealth of Nations original1776 (Penguin versionmdashHammondsworth Penguin 1986)

Stigler George J lsquolsquoThe Theory of Economic Regulationrsquorsquo Bell Journal of Econom-ics II (Spring 1971) 3ndash21

Thaler Richard and Sherwin Rosen lsquolsquoThe Value of Saving a Life Evidence fromthe Labor Marketrsquorsquo in Household Production and Consumption Nestor ETerleckyj ed Studies in Income and Wealth 40 (New York ColumbiaUniversity Press for NBER 1976)

Thaler Richard H and H M Shefrin lsquolsquoAn Economic Theory of Self-ControlrsquorsquoJournal of Political Economy LXXXIX (April 1981) 392ndash406

Tiebout Charles lsquolsquoA Pure Theory of Local Expendituresrsquorsquo Journal of PoliticalEconomy LXIX (October 1956) 416ndash424

Tversky Amos and Daniel Kahneman lsquolsquoAnomalies Preference Reversalsrsquorsquo Jour-nal of Economic Perspectives IV (Spring 1990) 201ndash211

Weber Max From Max Weber Essays in Sociology (New York Oxford UniversityPress 1946) Le Judaisme Antique (Paris Plon 1970)

WilliamsonOliver Markets and Hierarchies Analysis and Antitrust Implications(New York The Free Press 1975) The Economics of Transaction Costs edited by Oliver E Williamson andScott E Masten eds (Cheltenham UK Northampton MA E Elgar Pub1999)

Wilson E O Sociobiology The New Synthesis (Cambridge MA Harvard Univer-sity Press 1975)


plexity may add to the richness of description but it also preventsthe analyst from seeing what is essential2

Our rigorous language can be used in many ways but overthe years three themes have become fundamental in economicsFirst economists assume that individuals engage in maximizingrational behavior Second economics adheres strictly to theimportance of equilibrium as part of any theory Third economistsplace a heavy emphasis on a clearly dened concept of efficiency

The starting point in economic theory is that the individual orthe rm is maximizing something usually utility or protEconomists almost without exception make constrained maximi-zation the basic building block of any theory Many of ourempirical analyses seek to test models that are based on maximiz-ing behavior When we obtain results that seem to deviate fromwhat would appear to be individually rational we reexamine theevidence or revise the theory But the theoretical revisions almostnever drop the assumption that individuals are maximizingsomething even if the something is unorthodox Few economistsare willing to concede that individuals simply do not know whatthey are doing We may permit imperfect information transactioncosts and other intervening variables to muddy the waters butwe do not model behavior as being determined by forces beyondthe control of the individual Most sociologists by contrast arguethat understanding the constraints is more important thanunderstanding the behavior that results from optimization giventhe constraints3

The emphasis on maximization is important because it allowsan analyst to make predictions in new situations When individu-als are assumed to maximize something a well-dened andpredictable behavioral response to any stimulus can be derivedOther social sciences that are unwilling to assume maximizationare in the position of being unable to predict in new situationsThe maximum of a function is a well-understood concept otherrules are not especially when they vary from situation to situation

2 Rigor need not take the form of mathematics but much of economic rigorrelies on its mathematical precision Although many economists of earlier yearswere accomplished mathematiciansSamuelson1947 made mathematicaleconom-ics available to the profession at large

3 Becker and Murphy 2000 argue that when social feedback effects aresufficiently strong the maximizing individual will not be sensitive to the tradi-tional variables of price and incomeAs a result it will appear as though individualbehavior is dictated by society They argue that a more fruitful way to think aboutthis is to allow for individual maximization with strong social interaction effectsIn this way equilibria can be understood and the nature of the result andfeedbacks can be studied and predicted






























CONSUMER THEORY

Modeling Tastes





zi 5 f (xiti)





Demography








Discrimination





following relation

ww wb 1 d

or

d ww 2 wb








The Family







FIGURE I





Social Interactions


















Religion
































Personnel Economics











W 2 A W 2 Q


A Q




















Accounting












STRATEGY












maxP

1 2 F(P)(P 2 C)


P 5 C 1 (1 2 F(P)f (P)

















Law











z 2 ( y 2 x) x


(1) z y


z 2 (v 2 x) x

or if

(2) z v



















Political Economy















Health Economics











Other Targets

















CONCLUSION




REFERENCES




























































































































CONSUMER THEORY

Modeling Tastes





zi 5 f (xiti)





Demography








Discrimination





following relation

ww wb 1 d

or

d ww 2 wb








The Family







FIGURE I





Social Interactions


















Religion
































Personnel Economics











W 2 A W 2 Q


A Q




















Accounting












STRATEGY












maxP

1 2 F(P)(P 2 C)


P 5 C 1 (1 2 F(P)f (P)

















Law











z 2 ( y 2 x) x


(1) z y


z 2 (v 2 x) x

or if

(2) z v



















Political Economy















Health Economics











Other Targets

















CONCLUSION




REFERENCES

































































































zi 5 f (xiti)





Demography








Discrimination





following relation

ww wb 1 d

or

d ww 2 wb








The Family







FIGURE I





Social Interactions


















Religion
































Personnel Economics











W 2 A W 2 Q


A Q




















Accounting












STRATEGY












maxP

1 2 F(P)(P 2 C)


P 5 C 1 (1 2 F(P)f (P)

















Law











z 2 ( y 2 x) x


(1) z y


z 2 (v 2 x) x

or if

(2) z v



















Political Economy















Health Economics











Other Targets

















CONCLUSION




REFERENCES

































































































Demography








Discrimination





following relation

ww wb 1 d

or

d ww 2 wb








The Family







FIGURE I





Social Interactions


















Religion
































Personnel Economics











W 2 A W 2 Q


A Q




















Accounting












STRATEGY












maxP

1 2 F(P)(P 2 C)


P 5 C 1 (1 2 F(P)f (P)

















Law











z 2 ( y 2 x) x


(1) z y


z 2 (v 2 x) x

or if

(2) z v



















Political Economy















Health Economics











Other Targets

















CONCLUSION




REFERENCES


































































































Discrimination





following relation

ww wb 1 d

or

d ww 2 wb








The Family







FIGURE I





Social Interactions


















Religion
































Personnel Economics











W 2 A W 2 Q


A Q




















Accounting












STRATEGY












maxP

1 2 F(P)(P 2 C)


P 5 C 1 (1 2 F(P)f (P)

















Law











z 2 ( y 2 x) x


(1) z y


z 2 (v 2 x) x

or if

(2) z v



















Political Economy















Health Economics











Other Targets

















CONCLUSION




REFERENCES
































































































following relation

ww wb 1 d

or

d ww 2 wb








The Family







FIGURE I





Social Interactions


















Religion
































Personnel Economics











W 2 A W 2 Q


A Q




















Accounting












STRATEGY












maxP

1 2 F(P)(P 2 C)


P 5 C 1 (1 2 F(P)f (P)

















Law











z 2 ( y 2 x) x


(1) z y


z 2 (v 2 x) x

or if

(2) z v



















Political Economy















Health Economics











Other Targets

















CONCLUSION




REFERENCES


































































































The Family







FIGURE I





Social Interactions


















Religion
































Personnel Economics











W 2 A W 2 Q


A Q




















Accounting












STRATEGY












maxP

1 2 F(P)(P 2 C)


P 5 C 1 (1 2 F(P)f (P)

















Law











z 2 ( y 2 x) x


(1) z y


z 2 (v 2 x) x

or if

(2) z v



















Political Economy















Health Economics











Other Targets

















CONCLUSION




REFERENCES



































































































FIGURE I





Social Interactions


















Religion
































Personnel Economics











W 2 A W 2 Q


A Q




















Accounting












STRATEGY












maxP

1 2 F(P)(P 2 C)


P 5 C 1 (1 2 F(P)f (P)

















Law











z 2 ( y 2 x) x


(1) z y


z 2 (v 2 x) x

or if

(2) z v



















Political Economy















Health Economics











Other Targets

















CONCLUSION




REFERENCES



































































































Social Interactions


















Religion
































Personnel Economics











W 2 A W 2 Q


A Q




















Accounting












STRATEGY












maxP

1 2 F(P)(P 2 C)


P 5 C 1 (1 2 F(P)f (P)

















Law











z 2 ( y 2 x) x


(1) z y


z 2 (v 2 x) x

or if

(2) z v



















Political Economy















Health Economics











Other Targets

















CONCLUSION




REFERENCES













































































































Religion
































Personnel Economics











W 2 A W 2 Q


A Q




















Accounting












STRATEGY












maxP

1 2 F(P)(P 2 C)


P 5 C 1 (1 2 F(P)f (P)

















Law











z 2 ( y 2 x) x


(1) z y


z 2 (v 2 x) x

or if

(2) z v



















Political Economy















Health Economics











Other Targets

















CONCLUSION




REFERENCES


























































































































Personnel Economics











W 2 A W 2 Q


A Q




















Accounting












STRATEGY












maxP

1 2 F(P)(P 2 C)


P 5 C 1 (1 2 F(P)f (P)

















Law











z 2 ( y 2 x) x


(1) z y


z 2 (v 2 x) x

or if

(2) z v



















Political Economy















Health Economics











Other Targets

















CONCLUSION




REFERENCES






































































































W 2 A W 2 Q


A Q




















Accounting












STRATEGY












maxP

1 2 F(P)(P 2 C)


P 5 C 1 (1 2 F(P)f (P)

















Law











z 2 ( y 2 x) x


(1) z y


z 2 (v 2 x) x

or if

(2) z v



















Political Economy















Health Economics











Other Targets

















CONCLUSION




REFERENCES












































































































Accounting












STRATEGY












maxP

1 2 F(P)(P 2 C)


P 5 C 1 (1 2 F(P)f (P)

















Law











z 2 ( y 2 x) x


(1) z y


z 2 (v 2 x) x

or if

(2) z v



















Political Economy















Health Economics











Other Targets

















CONCLUSION




REFERENCES








































































































STRATEGY












maxP

1 2 F(P)(P 2 C)


P 5 C 1 (1 2 F(P)f (P)

















Law











z 2 ( y 2 x) x


(1) z y


z 2 (v 2 x) x

or if

(2) z v



















Political Economy















Health Economics











Other Targets

















CONCLUSION




REFERENCES






































































































maxP

1 2 F(P)(P 2 C)


P 5 C 1 (1 2 F(P)f (P)

















Law











z 2 ( y 2 x) x


(1) z y


z 2 (v 2 x) x

or if

(2) z v



















Political Economy















Health Economics











Other Targets

















CONCLUSION




REFERENCES












































































































Law











z 2 ( y 2 x) x


(1) z y


z 2 (v 2 x) x

or if

(2) z v



















Political Economy















Health Economics











Other Targets

















CONCLUSION




REFERENCES


































































































z 2 ( y 2 x) x


(1) z y


z 2 (v 2 x) x

or if

(2) z v



















Political Economy















Health Economics











Other Targets

















CONCLUSION




REFERENCES















































































































Political Economy















Health Economics











Other Targets

















CONCLUSION




REFERENCES










































































































Health Economics











Other Targets

















CONCLUSION




REFERENCES







































































































Other Targets

















CONCLUSION




REFERENCES












































































































CONCLUSION




REFERENCES
































































































ECONOMIC IMPERIALISM* E Pflash.lakeheadu.ca/~kyu/E5111/Lazear2000.pdf · to economics. The simple,...

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Transcript of ECONOMIC IMPERIALISM* E Pflash.lakeheadu.ca/~kyu/E5111/Lazear2000.pdf · to economics. The simple,...