Social Economics

Market Behavior in a Social Environment

Gary S. Becker,Kevin M. Murphy

• Publisher: Belknap Press
• Year: 2003
• ISBN:
  9780674261969
• Topic: Economía
• Subtopic: Teoría económica

Economists assume that people make choices based on their preferences and their budget constraints. The preferences and values of others play no role in the standard economic model. This feature has been sharply criticized by other social scientists, who believe that the choices people make are also conditioned by social and cultural forces. Economists, meanwhile, are not satisfied with standard sociological and anthropological concepts and explanations because they are not embedded in a testable, analytic framework.In this book, Gary Becker and Kevin Murphy provide such a framework by including the social environment along with standard goods and services in their utility functions. These extended utility functions provide a way of analyzing how changes in the social environment affect people's choices and behaviors. More important, they also provide a way of analyzing how the social environment itself is determined by the interactions of individuals.Using this approach, the authors are able to explain many puzzling phenomena, including patterns of drug use, how love affects marriage patterns, neighborhood segregation, the prices of fine art and other collectibles, the social side of trademarks, the rise and fall of fads and fashions, and the distribution of income and status.

PART I

The Effect of Social Capital on Market Behavior

CHAPTER 1

The Importance of Social Interactions

1. Introduction

Modern economics, whether in textbooks or in the most advanced journal articles, typically assumes that individual behavior is not directly influenced by the actions of others. Of course, it is understood that every individual is greatly affected indirectly, since the behavior of other persons and of firms determines the relative prices of different goods, the rewards to different kinds of labor and capital, marital prospects, political programs, and most other aspects of economic, social, and political life.

While these indirect effects are enormously important, they do not capture fully the influence of others on a person’s behavior. Presumably for this reason, anthropologists and sociologists have repeatedly told economists about the importance of culture, norms, and social structure. Economists have not listened, however, mainly because these other fields have not developed powerful techniques for analyzing social influences on behavior.

Yet endless examples attest to the great impact of culture, norms, and social structure. Popular restaurants and books are determined in good part by what is considered “in”; a teenager’s propensity to take drugs and to smoke is very much affected by whether his peers do; a person’s preference for political candidates is affected by polls stating who is more popular; whether an unmarried mother applies for welfare is influenced by whether many women in her neighborhood are collecting welfare; the popularity of particular types of clothing, designer watches, painting and architectural styles, and even ideas is dependent on the tastes of fashion and intellectual “leaders”; how well children treat their elderly parents is determined by what other children are doing, and by the traditional way of treating parents of past generations; whether a person is honest is very much affected by the teachings of parents and religion, and by traditions inherited from the past.

The activities, behavior, and consumption most subject to strong social pressures from peers and others are those that take place publicly. Such group consumption includes drinking at bars, smoking and eating at parties, playing tennis and other sports, attending the theater, movies, or rock or symphonic concerts, eating at restaurants, attending school, praying and socializing at churches, visiting museums, working in teams and other groups, participating in strikes and other trade union activities, searching for marriage mates at social gatherings, caring for lawns visible to neighbors, decorating homes and offices, driving on one or the other side of roads, and being exposed to the publicity given to those who are punished for serious violations of laws.

Although this long list covers many aspects of modern life, it does not even exhaust activities with important public dimensions. Moreover, various kinds of private activities are also subject to strong social pressures. Advertising suggesting that Michael Jordan eats a particular breakfast cereal may induce many children and adults to eat this cereal so that they can vicariously be “closer” to this superb former basketball player.

Even though any help children provide their elderly parents may be directly known only to the children and parents, other families often learn about this either through gossip, or through observing the living condition of the parents. As a result, children have been subject to considerable social pressure to help their parents, especially in poorer societies without social security systems. In modern democracies, people vote privately, but the way they vote is often subject to enormous social influences through the preferences of others expressed in polls, discussions with friends, and from political campaigning.

Parents, schools, religions, governments, and other organizations and institutions mold the preferences of young people toward honesty, to respect elders, to pay or avoid payment of taxes, and toward other values and behavior. The internalization of such social norms of conduct into attitudes and preferences helps control many kinds of private behavior which are least subject to scrutiny by others.

These examples should make it clear that social influences on behavior are common and even pervasive. We are especially interested in the mutual interaction between social forces and market behavior, which we call “social markets.” By markets we do not mean only ordinary market behavior, for we also consider implicit markets, such as marriage markets.

The analytical approach relies on the assumptions of utility maximization and equilibrium in the behavior of groups, which are the traditional foundations of rational choice analysis and the economic approach to behavior. This book shows how to incorporate social forces into this approach.

Part I derives various implications for the behavior of social influences; some of these differ substantially from the implications of conventional theories of choice. Part II discusses the effects of prices, altruism, laws, and other factors on the formation of social groups. It considers how individuals and families get sorted into different marriages, friendships, neighborhoods, income classes, schools, peer groups, churches, and consumer goods. Part III considers the dynamics of the formation of social influences through fads, fashions, and norms.

2. Prices in the Literature

The late James Coleman had a large influence on our interest in the relation between social forces and market behavior. This was partly through his fundamental treatise, Foundations of Social Theory (1990), in which he extensively analyzed social capital and other social influences on behavior. Even more important to us was the Seminar on Rational Choice in the Social Sciences that Coleman and Becker started in 1983 and ran together until Coleman’s premature death in 1995. This interdisciplinary seminar had lively discussions of the relation between social forces and behavior.

We were surprised to discover, upon rereading Thorstein Veblen’s influential Theory of the Leisure Class (1934), that he anticipated many of our results, although he does not make a systematic analysis. Veblen argues that social interactions are extremely important in modern economics; he particularly emphasizes behavior that conveys signals about one’s wealth, that is, “conspicuous consumption,” to use his famous phrase.

Thomas Schelling’s Micromotives and Macrobehavior (1978) is a pioneering analysis of the influence of social groups on behavior. He has many insights concerning the dynamics of choices when individual preferences depend on group variables, such as the racial or income composition of neighborhoods. He shows the possibility of multiple equilibria, analyzes differences between stable and unstable equilibria, and considers determinants of “tipping” where neighborhoods undergo radical changes in composition by race, religion, income, and other characteristics.

The major contribution of our study to the literature is its systematic analysis of the effects of prices on market behavior where social interactions are important. Coleman, Veblen, and Schelling, for example, almost entirely ignore prices, whereas prices are a fundamental part of our analysis of the social multiplier on behavior, outcomes in marriage markets, the allocation of different groups to various neighborhoods, the rise and fall of fads and fashions, the escalation of product quality to separate leader from follower, and the distributions of incomes and status.

To be sure, prices are not important in some of the examples considered by others, such as Schelling’s discussion of the wearing of protective masks in hockey, and of the social rules that govern when to applaud at concerts. However, prices are usually neglected when they are important, such as in marriage markets (see Gale and Shapley, 1962).

Without a systematic discussion of the effects of housing prices, Schelling could not determine whether there is “too much” or “too little” segregation in the housing market relative to the segregation that maximizes willingness to pay or relative to other criterion. The role of equilibrium prices in competitive housing markets is essential to our proof that the degree of neighborhood “segregation” of different social groups tends to be excessive compared with the level that maximizes aggregate willingness to pay (see Chapter 5, section 2).

Veblen’s observation that beautiful objects often sell for much more than can be attributed to their beauty alone is a keen insight. But this cannot be proved without an analysis of how prices are affected by the interaction between the demand for beauty and the desire for social distinction. Our analysis in Chapter 6 of the demand for paintings by masters and for other objects proves this claim by relying heavily on the allocative role of prices in markets with social interactions.

In addition to the influence of Coleman, Veblen, and Schelling, we are indebted to a considerable literature by economists and sociologists on the relation between social interaction and individual choices. Theorists have been devising analytical techniques and trying to measure these relations. For example, the term “social capital” was apparently introduced by Loury (1977) and popularized by Coleman (1990). Other important work includes Hirsch (1976), which greatly influenced Frank (1985, 1999); Benabou (1996a, b); Glaeser, Sacerdote, and Scheinkman (1996); Brock and Durlauf (1995); Brenner (1983); and Weiss and Fershtman (1998).

CHAPTER 2

Social Forces, Preferences, and Complementarity

1. Introduction

Economists usually assume that utility functions depend either directly on the goods and services consumed, or on household commodities produced with time and purchased goods and services. Social forces are either ignored or left to lurk in the background as part of the general environment. In this approach, changes in social forces would “shift” utility functions because they change the environment.

This approach is adequate for dealing with many kinds of behavior when the social environment is stable. However, it cannot analyze behavior that aims to change this environment, as when a family moves because it believes a different neighborhood would be better for its children. Moreover, it says little about how exogenous changes in the social environment alter behavior, and nothing about how the aggregation of all behavior itself determines the social environment.

The approach we take treats the social environment as arguments, along with goods and services, in a stable extended utility function. This provides a direct way to analyze how changes in this environment affect choices and behavior by changing the utilities of goods. Moreover, and perhaps even more important, it also provides a natural way to analyze how the social environment itself gets determined by the interaction of individuals.

Consider the utility function

(2.1) U = U(x, y; S),

where x and y are goods and services of all kinds, which we will refer to simply as goods. The variable S represents social influences on utility through stocks of “social capital.” In the usual approach, utility depends directly on x and y, as in V = V(x, y), so that changes in S would then shift the whole V function.

In equation (2.1), changes in social capital do not shift the utility function, but rather raise or lower the level of utility within the stable function, U. Moreover, even exogenous changes in S would affect behavior if these changes raise or lower marginal utilities of different goods. The utility from drugs, crime, going bowling, owning a Rolex watch, voting Democratic, dressing informally at work, or keeping a neat lawn depends on whether friends and neighbors take drugs, commit crimes, go bowling, own Rolex watches, vote Democratic, dress informally, or keep their lawns neat.

The fundamental assumption in analyzing the influence of social...