The Chicago School (New Classicism) PDF

THE CHICAGO SCHOOL (THE NEW CLASSICISM)  Classicism Mercantilism Physiocracy Socialism Chicago...

THE CHICAGO SCHOOL (THE NEW CLASSICISM)  Classicism Mercantilism Physiocracy Socialism Chicago Neoclassicism Marginalism Institutionalism German Historicism  THE CHICAGO SCHOOL ▪ The modern phase of the Chicago school of economics began in 1946 when Milton Friedman joined the faculty at the University of Chicago. ▪ He and George Stigler, who arrived in 1948, firmly established the school’s unique identity. ▪ Gary Becker, Robert Lucas, and several other prominent economists at Chicago have continued the tradition, as have economists holding widely scattered positions in academia, business, and government. ▪ Discover that the tenets of the Chicago school fit within the broader classical- neoclassical tradition. The Chicago perspective is a variant of neoclassicism and is referred to as the “new classicism.” ▪ Topic Outline: overview of the modern Chicago school, works of three of its main figures ▪ Three main figures: I. Milton Friedman (1912 – 2006) II. Robert Lucas (1937 – 2023) III. Gary Becker (1930 – 2014)  THE CHICAGO SCHOOL ▪ Overview of the institutionalist school, back to 5 major questions: 1. The historical background of the school 2. Major tenets of the institutionalist school 3. Whom did institutionalism benefit or seek to benefit? 4. How was the institutionalist school valid, useful, or correct in its time? 5. Which tenets of the institutionalist school became lasting contributions? THE HISTORICAL BAKGROUND OF THE SCHOOL ▪ Many of the important developments in economic thought since the time of Marshall stimulated, or at least rationalized, greater government involvement in the economy. ▪ Pigou’s idea of externalities implied that government could improve the allocation of resources through selective taxes and subsidies. ▪ Robinson’s theory of monopsony suggested that government should establish a minimum wage and promote labor unionism. THE HISTORICAL BAKGROUND OF THE SCHOOL ▪ The theories of imperfect competition and monopoly power led many to conclude that government's regulatory role in the economy should be expanded. ▪ The Keynesian revolution had firmly taken hold. Its central concept, that the government should use fiscal, monetary, and income policies to stabilize the economy, became the new standard of thought. ▪ Both marginalist and Keynesian analysis provided explanations for government income redistribution. THE HISTORICAL BAKGROUND OF THE SCHOOL ▪ Members of the Chicago school opposed this entire line of reasoning. ▪ In the earlier years of this school, its supporters made little progress in convincing others. ▪ But the economic experience of the 1970s (time of economic instability & crisis: stagflation, slowed growth, etc..) cast doubt on the validity of several aspects of the new economic orthodoxy. ▪ The Chicago view was widely accepted, with numerous younger economists following their lead.  MAJOR TENETS OF THE CHICAGO SCHOOL The main principles and characteristics of the Chicago school: 1. Optimizing behavior 2. Mathematical orientation 3. Rejection of Keynesianism 4. Limited government 5. Observed prices and wages in general tend to be good approximations of their long-run competitive ones.  MAJOR TENETS 1. Optimizing Behavior ▪ Members of the Chicago school stress the neoclassical principle that people attempt to maximize their well-being (they engage in optimizing behavior at the time of their decisions). ▪ The basic economic unit is the individual. Individuals combine into larger units— families, political interest groups, business organizations—as a way to achieve gains from specialization and exchange. ▪ Preferences tend to be stable and independent of prices. ▪ People make rational choices, although such choices do not always produce the results expected; Benefits and costs are uncertain. ▪ Consumers, workers, and firms respond to monetary incentives and disincentives.  MAJOR TENETS 2. Mathematical Orientation ▪ The Chicago school relies heavily on mathematical theorizing , using both the Marshallian partial equilibrium method and the Walrasian general equilibrium approach. ▪ Empirical verification is stressed but sometimes left to others.  MAJOR TENETS 3. Rejection of Keynesianism ▪ The economy is self-adjusting and regulating, with minor fluctuations being self- limiting. ▪ Severe recessions and depressions result from inappropriate monetary policy, not from autonomous changes in spending. ▪ Changes in the money stock cause direct changes in the nominal gross domestic product, rather than operating exclusively through financial interest rates. ▪ Fiscal policy is generally ineffective, unless accompanied by changes in the money supply, and even in the latter case is impotent in the presence of rational expectations. ▪ The theory of seller’s or cost-push inflation is erroneous / invalid / wrong because inflation is always and everywhere a monetary phenomenon.  MAJOR TENETS 4. Limited Government ▪ Government is inherently inefficient as an agent for achieving objectives that can be satisfied through private exchange. ▪ Government officials have their own objectives that they seek to optimize (divert a portion of the resources at their disposal to purposes other than those that benefit taxpayers). ▪ Rather than serving the public interest, government regulation typically helps those who want it or who understand how to use it for their own benefit.  MAJOR TENETS 5. Observed prices and wages in general tend to be good approximations of their long-run competitive ones. ▪ Prices and wages reflect opportunity costs to society at the margin. ▪ Divergences / differences between actual and competitive prices caused by monopoly or monopsony are in general inconsequential. ▪ Monopoly prices persist in the long run only in instances where government blocks competitive entry. ▪ Even in those instances, competition will eventually generate new products and technologies that will undermine the monopolist’s position. ▪ Establishing clear property rights and encouraging private negotiations can minimize externalities. ▪ Institutional arrangements—seniority pay, large executive salaries, union contracts, and so forth—that on the surface appear to set wages and prices independently of market forces usually exist because the parties involved see them as being efficient.  WHOM DID THE CHICAGO SCHOOL BENEFIT OR SEEK TO BENEFIT? ▪ Advocates of the Chicago view helped convince the general population and elected officials that the competitive market system, left relatively free of government interference, produces maximum economic freedom, which in turn yields maximum individual and collective economic well-being. ▪ In other words, the Chicago view benefits society at large. ▪ Many corporate interests have benefited from the broader acceptance of Chicago views. ▪ The new classical economists have helped make the case for less government regulation and paperwork. ▪ By making the case that the tax system should be used to raise revenues and not to redistribute income, the Chicago economists have benefited high-income groups WHOM DID THE CHICAGO SCHOOL BENEFIT OR SEEK TO BENEFIT? ▪ The Chicago school tenets, however, “cut two ways”. ▪ For example, they bar government actions such as providing loans for firms going bankrupt or imposing import quotas on foreign goods. ▪ make new practitioners hard to enter the market ▪ groups and individuals who rely on government for subsidy, employment, regulation, or special legislation stand to lose by the political acceptance of Chicago school policies. ▪ Farm interests that advocate government price supports and subsidies, Unions or professional groups that represent government employees and officials, opposed the Chicago perspective. ▪ The Chicago School as a whole supported political conservatism in the United States, despite the fact that many of its more modern economists are apolitical. HOW WAS THE CHICAGO SCHOOL VALIDE, USEFUL, OR CORRECT IN ITS TIME? ▪ The Keynesian revolution tended to put the advancement of microeconomics on hold, many of the best scholars in the profession directing their attention toward expanding the Keynesian system of ideas. ▪ The Chicago school, in a sense, maintained and strengthened the marginalist tradition at a time when it had diminished popularity. ▪ This is not to suggest that the Keynesian revolution has ended. But it is to suggest that economists have once again turned to microeconomic analysis to expand their insights into the issues of the day, including those that previously seemed to be the exclusive domain of macroeconomic theorists. ▪ For example, the analysis of unemployment now includes emphasis on the microeconomic theories of job search and intertemporal substitution between work and leisure. HOW WAS THE CHICAGO SCHOOL VALIDE, USEFUL, OR CORRECT IN ITS TIME? ▪ The Chicago school was also useful in its time by keeping alive the monetary views of Fisher during a period when they easily could have become permanently buried by the weight of Keynesian ideas. ▪ The rapid inflation of the 1970s and early 1980s turned the nation’s attention away from the main concern of Keynesianism— unemployment—to the concern of Fisher and Friedman—inflation. ▪ The new classicists argued that the long-term trade-off between inflation and unemployment is false. They maintained the optimistic classical view that economic efficiency, price stability, and full employment are all achievable. WHICH TENETS OF THE CHICAGO SCHOOL BECAME LASTING CONTRIBUTIONS? ▪ Because several of the theories connected with the new classical school are very new, it may be premature / too early to predict / judge which, if any, will make long- term contributions to economics. ▪ For example, the major textbooks on principles of economics all have chapters on the new classical macroeconomic perspective, including discussions of a natural rate of unemployment, rational expectations, a long-run vertical Phillips curve, and short-run versus long-run aggregate supply. ▪ The Chicago theories of human capital, household production, job search, and discrimination all are discussed within textbooks on contemporary labor economics. ▪ In short, several of the ideas given by members of the Chicago School, broadly defined, appear to have long-term worth. Nonetheless, a final appraisal of these contributions must be left to our children and grandchildren.  KEY FIGURES OF THE CHICAGO SCHOOL Milton Friedman Robert E. Lucas Jr. Gary S. Becker (1912 - 2006) (1937 - 2023) (1930 - 2014)  KEY FIGURES OF THE CHICAGO SCHOOL ▪ leading figure of the Chicago view. ▪ received his graduate degrees from the University of Chicago and Columbia University. ▪ In 1948, Friedman joined the faculty at Chicago and remained there until his retirement in 1977. ▪ He was president of the American Economic Association in 1967 ▪ won the Nobel Prize in economics in 1976 ▪ Theory by Friedman: I. Theory of the Consumption Function Milton Friedman (1912 - 2006) II. Monetary Theory (several interrelated topics: the demand for money, the modern quantity theory of money, The long-run vertical Phillips curve, the monetary rule)  KEY FIGURES OF THE CHICAGO SCHOOL Theory of the Consumption Function ▪ In 1957, Friedman published A Theory of the Consumption Function, in which he suggested that the Keynesian consumption function is too simplistic. ▪ Friedman pointed out that lengthening the period of observation from a day to a week would eliminate the error in this simple example. ▪ But in terms of actual consumption-income data, the use of a period of even one year fails to correct the problem. Milton Friedman ▪ According to Friedman, a household’s consumption is (1912 - 2006) determined by permanent income rather than current income, where permanent income is defined as the average income that people expect to receive over a period of years. ▪ Consumption does not respond to every change in income caused by changes in investment or government spending; it responds only to changes in income that people view to be permanent and long-lasting.  KEY FIGURES OF THE CHICAGO SCHOOL The Demand for Money ▪ Friedman viewed the demand for money as the demand for cash balances. People demand cash balances because they provide utility to the holder. ▪ There are three major determinants of the amount of money households and enterprises will desire to hold at any given time (These determinants are independent of factors that influence the supply of money). Milton Friedman I. Total wealth (1912 - 2006) II. Cost of holding money III. Preferences  KEY FIGURES OF THE CHICAGO SCHOOL The Demand for Money I. Total wealth ▪ Total wealth in all forms, including human capital, can best be measured by permanent income. As wealth, or permanent income, increases, the amount of money people desire to hold as cash balances also increases. II. Cost of holding money ▪ The second major determinant of money demand is the cost of holding money. Higher costs will result Milton Friedman in less money being held. These costs vary with the (1912 - 2006) interest rate, the expected rate of inflation, and the price level. III. Preferences ▪ Preferences, or basic attitudes, about holding and using cash are the third major determinant of money demand. Friedman asserted that these preferences remain relatively constant “over significant stretches of space and time.”  KEY FIGURES OF THE CHICAGO SCHOOL The Long-Run Vertical Phillips Curve ▪ According to Friedman, there is a distinction between the actual and natural rates of unemployment. ▪ The natural rate of unemployment is the one that will occur when the actual rate of inflation and the expected rate of inflation are equal. ▪ Authorities can push the actual rate of unemployment temporarily below the natural rate only by generating a Milton Friedman level of inflation that is greater than expected. (1912 - 2006) ▪ But once people adjust their expectations to the new higher rate of inflation, the natural rate of unemployment will return. The Long-Run Vertical Phillips Curve ▪ Our expository approach first will be to establish a short-run Phillips curve and then to explain how such short-run curves can shift upward to produce a vertical long-run curve. ▪ This figure sometimes referred to as the Phelps-Friedman Phillips Curve. ▪ Each short-run Phillips curve shows the combinations of inflation and unemployment that are possible when the actual rate of inflation diverges(differs) from the expected rate. ▪ let’s focus on the short-run Phillips curve SRPC1. ▪ Suppose that the rate of inflation is P1 and unemployment is at the natural rate Un (point a). The Long-Run Vertical Phillips Curve ▪ Suppose that the monetary authorities desire to peg the actual rate of unemployment at U1 , in a sense indicating a willingness to trade off higher inflation (P2 rather than P1 ) for a lower rate of unemployment. ▪ Suppose that the monetary authorities increase the stock of money to accomplish this. This eventually raises the rate of inflation to P2 and temporarily reduces unemployment to U1 (point b). The Long-Run Vertical Phillips Curve ▪ The reasons? ▪ Firms discover that their product prices are rising faster than their unit labor costs. The labor contracts under which many employees are working were set on the expectation that inflation would continue to be P1. ▪ Because prices rise and nominal wages remain unchanged, real wage rates fall and employers respond by increasing employment. The Long-Run Vertical Phillips Curve ▪ The economy will not stay at b on SPRC1 , said Friedman. ▪ People adjust their expectations to the higher rate of inflation, P2 , and expect it to continue. ▪ Once such an adjustment has taken place, the short-run Phillips curve shifts upward to SPRC2. ▪ Higher rates of expected inflation translate into higher locations of the short-run Phillips curve. ▪ As old contracts expire, wages rise, real labor costs rise to their former levels, firms discharge workers, and the natural rate of unemployment gets reestablished (point c). ▪ The natural rate now is associated with a higher actual and expected rate of inflation. The Long-Run Vertical Phillips Curve ▪ Suppose that the monetary authorities try to reestablish the U1 rate of unemployment. ▪ By increasing the money supply, they can once again temporarily achieve this (point d). ▪ But the employment gains are short-lived. The short-run Phillips curve shifts upward to SPRC3 , and the economy moves to point e. ▪ In the long run, there is no trade-off between inflation and unemployment. The long-run Phillips curve (LRPC) is perfectly vertical at the natural rate of unemployment. ▪ Monetary authorities can reduce unemployment below its natural rate in the long run only by continuously increasing the rate of inflation.  KEY FIGURES OF THE CHICAGO SCHOOL The Monetary Rule There are four reasons such a rule is needed: I. The past performance of the Fed. According to Friedman, “Throughout its history, the Fed has proclaimed that it was using its powers to promote economic stability. But the record does not support this claim. On the contrary the Fed has been a major source of instability.” Milton Friedman II. Limitations of economic knowledge. There are time (1912 - 2006) lags between changes in the money stock and changes in output and prices, and these time lags are themselves variable and unpredictable. Attempts to fine tune the economy are just as likely to add to instability as to correct for it.  KEY FIGURES OF THE CHICAGO SCHOOL The Monetary Rule There are four reasons such a rule is needed: III. Confidence. A monetary rule would enable businesses, consumers, and workers to make contracts with the confidence that the Fed was not going to later surprise them. IV. Neutralization of the Fed. “A monetary rule would insulate monetary policy both from the arbitrary power of Milton Friedman a group of men not subject to control by the electorate and (1912 - 2006) from the short-run pressures of partisan politics.”  KEY FIGURES OF THE CHICAGO SCHOOL ▪ Born in Yakima, Washington. ▪ Earned his B.A. and Ph.D. degrees at the University of Chicago. ▪ In 1995, he was awarded the Nobel Prize in economics for his contributions to macroeconomics. ▪ Lucas’s contributions: I. Rational Expectations II. Lucas’s Aggregate Supply Analysis Robert E. Lucas Jr. (1937 - 2023)  KEY FIGURES OF THE CHICAGO SCHOOL Rational Expectations ▪ Friedman’s theory of the inflation-unemployment relationship is based on the assumption of adaptive expectations. ▪ People determine their expectations about future inflation on the basis of past and present inflation and change their expectations only as new events unfold. ▪ Lucas, saying that economic agents form rational expectations about future outcomes of current Robert E. Lucas Jr. (1937 - 2023) stabilization policy. ▪ Lucas said that market participants reflect on their past errors, use and process all available information, and succeed in eliminating regularities in errors in predicting future price level changes.  KEY FIGURES OF THE CHICAGO SCHOOL Rational Expectations ▪ Because people understand that expansionary fiscal and monetary policies produce inflation, they immediately adjust their inflation expectations upward when government undertakes these policies. ▪ Resource and financial markets immediately adjust such that workers receive higher nominal wages, sellers of raw materials and other capital goods receive higher prices, and lenders receive higher nominal interest rates. Robert E. Lucas Jr. (1937 - 2023) ▪ These reactions to predicted inflation make expansionary fiscal and monetary policy ineffective. KEY FIGURES OF THE CHICAGO SCHOOL Rational Expectations ▪ Recall the Friedman’s Phillips Curve. ▪ Instead of the temporary increases in profits, output, and employment implied by the move from a to b, the economy moves directly from a to c. ▪ That is, the expansionary fiscal and monetary policies directly and immediately boost the rate of inflation from P1 to P2 upward along the vertical long-run Phillips curve.  KEY FIGURES OF THE CHICAGO SCHOOL Lucas’s Aggregate Supply Analysis ▪ Lucas distinguished between short-run and long-run aggregate supply. Robert E. Lucas Jr. (1937 - 2023) ▪ the vertical axes measure the price level, not the rate of inflation, and the horizontal axes measure real output, not the unemployment rate. KEY FIGURES OF THE CHICAGO SCHOOL Lucas’s Aggregate Supply Analysis ▪ an unanticipated change in aggregate demand does affect the level of real output, but only temporarily. In contrast, an anticipated change in aggregate demand has no effect on real output and employment. ▪ Suppose the economy is initially at point a. ▪ an unexpected surge in investment spending increases aggregate demand from AD1 to AD2 (shift upwards). ▪ Producers immediately experience rising prices and conclude that these prices are rising relative to other prices (and to prices of labor). ▪ Expecting higher profits, they increase employment and output, moving the economy from a to b (temporarily moves of the economy). KEY FIGURES OF THE CHICAGO SCHOOL Lucas’s Aggregate Supply Analysis ▪ Observe that the short-run aggregate supply curve AS1 is upsloping; the unanticipated price- level increase from P1 to P2 expands real output from Q1 to Q2. ▪ But in fact, all prices, including the price of labor and other inputs, are rising due to the general increase in aggregate demand. Firms collectively experience rising costs, causing the short-run aggregate supply curve eventually to shift leftward from AS1 to AS2. ▪ The economy moves from b to c, reversing the previous increase in output. ▪ In the long run, the economy’s aggregate supply curve is simply a vertical line (ASLR) originating upward from Q1 through points such as a and c. KEY FIGURES OF THE CHICAGO SCHOOL Lucas’s Aggregate Supply Analysis ▪ In the case of anticipated change in aggregate demand, say, the central bank increases the money supply in order to expand aggregate demand from AD1 to AD2. ▪ Because the Fed’s action is public and the inflationary outcome is anticipated, firms immediately recognize that the higher prices being received for their products are part of the general inflation they had anticipated. ▪ They understand that the same forces that are raising their prices are raising their costs, leaving their profits unchanged. ▪ The short-run aggregate supply curve shifts leftward from AS1 to AS2 simultaneously with the rightward increase in aggregate demand from AD1 to AD2. KEY FIGURES OF THE CHICAGO SCHOOL Lucas’s Aggregate Supply Analysis ▪ The economy moves directly from a to c on long- run aggregate supply curve ASLR. ▪ Real output remains unchanged at Q1 , and only inflation occurs. ▪ The long-run aggregate supply curve is the only relevant aggregate supply curve when increases in aggregate demand are anticipated. ▪ The economy is self-correcting, says Lucas, just as the classical economists thought. For this reason, his theory is known as new classical macroeconomics.  KEY FIGURES OF THE CHICAGO SCHOOL ▪ born in Pottstown, Pennsylvania. ▪ his undergraduate work at Princeton and received his doctorate from the University of Chicago. ▪ He was president of the American Economic Association in 1986 and, according to one historian of economic thought, “is one of the most original minds in modern economics.” ▪ In 1992, Becker was awarded the Nobel Prize in economics. ▪ he extended the economic approach, with its combined Gary S. Becker assumptions of maximizing behavior, stable preferences, (1930 - 2014) and market equilibrium, into the traditional domains of sociology, political science, law, social biology, and anthropology.  Theory of Investment in Human Capital ▪ In the book, titled Human Capital (1964), Becker presented the theory of investment in human capital in its modern, generalized form. ▪ This book greatly extended the work done earlier by Becker’s Chicago colleague, Theodore Schultz. ▪ Example, theory as it applied to a hypothetical individual deciding whether or not to go to college. ▪ The decision to attend college for investment purposes depends upon the expected return on one’s investment. ▪ The graph shows the Investment in Human Capital: College Education. ▪ Without college, the individual for whom the information in the figure applies could expect the annual earnings shown by line HH. ▪ With college, the earnings line becomes CC.  Theory of Investment in Human Capital ▪ Attending college for 4 years involves: I. direct costs (1) such as tuition and books II. indirect costs (2), which take the form of foregone earnings during the investment period. ▪ Once the college graduate enters the labor force, she or he will earn more than would have been earned with only a high school diploma. The difference between the two earning streams is shown as (3). ▪ The investment decision requires a comparison of the present value of the annual increments to earnings (3) with the present value of the direct and indirect costs (1 and 2). ▪ if the net present value is positive—the investment will take place.  KEY FIGURES OF THE CHICAGO SCHOOL Theory of Investment in Human Capital ▪ Becker was the first to distinguish between general training and specific training. ▪ General training increases the marginal productivity of workers not only in their present employment but also in any other employment in which they might engage. ▪ Specific training increases marginal productivity only Gary S. Becker within the firm providing it. (1930 - 2014) ▪ Hence, some of our skills are specific to a particular firm or situation (specific capital), whereas others can be broadly applied to various situations or work settings (general capital).  KEY FIGURES OF THE CHICAGO SCHOOL Theory of Investment in Human Capital ▪ Several point of view by Becker: I. earnings typically increase with age at a decreasing rate, and the rate of increase tends to be positively related to the level of skill II. unemployment rates tend to be lower for those who have greater levels of skill III. younger persons change jobs more frequently and receive more schooling and on-the-job training Gary S. Becker than do older persons (1930 - 2014) IV. people possessing more ability receive more education and on-the-job training over their lifetimes than others ▪ Over the last two decades, human capital has been the subject of scores of books and hundreds of journal articles.  KEY FIGURES OF THE CHICAGO SCHOOL Other Theories and Contributions ▪ Theory of the allocation of time (reconstruct the theory of consumer behaviour and theory of choice) argue that consumption takes time and that time is scarce and has value, example, to earn income. Some consumer goods take more time to consume than others. people take into account the “full cost” or “full price” of goods in making buying decisions. The full Gary S. Becker price of a good consists of its market price plus the (1930 - 2014) value of the time needed for its consumption.  KEY FIGURES OF THE CHICAGO SCHOOL Other Theories and Contributions ▪ Under the book, titled A Treatise on the Family (1981), Becker discuss few of the related theories / sub-topics: I. Theory of marriage II. Fertility III. Altruism IV. Divorce Gary S. Becker (1930 - 2014)  KEY FIGURES OF THE CHICAGO SCHOOL Other Theories and Contributions ▪ Theory of Marriage Marriage allows for a division of labor that enables partners to maximize their joint production and consumption of “commodities”, which provide economic well-being. Reproducing and raising children are central “commodities” that marriage facilitates (partners form Gary S. Becker a household out of economic self-interest). (1930 - 2014) Skill variations that enable gains from partnership result from different past experiences and other investments in human capital.  KEY FIGURES OF THE CHICAGO SCHOOL Other Theories and Contributions ▪ Theory of Marriage they have demanded long-term “contracts” from their husbands to protect them against abandonment and other adversities. Virtually all societies have developed long-term protection for married women; one can even say that “marriage” is defined by a long- term commitment between a man and a woman. Gary S. Becker (1930 - 2014) Marriage usually involves “positive sorting” between “high-quality” males and females. One reason is complementarity in production. The positive traits possessed by one partner increase the marginal contribution of the other in producing “full income”, broadly defined to include “commodities”.  KEY FIGURES OF THE CHICAGO SCHOOL Other Theories and Contributions ▪ Fertility The family produces children (“durable capital”), which add to the family’s full income, or economic welfare. But families do not produce as many children as would be biologically possible because children are costly. said Becker, they have a “price”. Gary S. Becker (1930 - 2014) This price involves direct costs such as expenditures for food, shelter, clothing, health care, day care, education, and so forth, and indirect costs in the form of opportunity costs of time. Rural families in the past had more children than did urban families because the costs of raising children were lower in rural areas. Welfare programs, said Becker, reduce the cost of having children and increase fertility.  KEY FIGURES OF THE CHICAGO SCHOOL Other Theories and Contributions ▪ Altruism (the unselfish concern for other people: doing things simply out of a desire to help, not because you feel obligated to out of duty, loyalty, or religious reasons. It involves acting out of concern for the well-being of other people) Altruism, which is defined in terms of linked utility, is an important feature of a family. A person is altruistic when her or his utility increases because someone else’s utility rises. Gary S. Becker Altruism adds to the potential gains from marriage, (1930 - 2014) because consumption of a commodity enables utility to rise by more than the rise in utility to the consumer. One family member’s joy adds to the other family member’s joy. The idea here is that an action that reduces the family’s full income will result in the altruistic head of the family having less full income to transfer to each of the benefactors.  KEY FIGURES OF THE CHICAGO SCHOOL Other Theories and Contributions ▪ Divorce Marriage partners search for information about prospective mates (but time, effort, and other costly resources must be spent on search, and the longer the search, the longer the gains from marriage are delayed). As a consequence, people often get married even though they have incomplete information about their partner. Gary S. Becker As such information reveals itself through the marriage, (1930 - 2014) divorce may become a new optimal decision. Unexpected good or bad fortune (becoming a movie star; suffering infertility) increases the likelihood of divorce. The increase in the market productivity of women reduces the gains from specialization and increases the probability of divorce.  KEY FIGURES OF THE CHICAGO SCHOOL Other Theories and Contributions ▪ Divorce It is clear that Becker’s work in this area is pioneering, provocative, and profound. As you might suspect, it is also controversial. As stated by Ben-Porath: “So when all is said and done, the marriage of economics Gary S. Becker and the family is interesting; it may not be happy and it (1930 - 2014) is certainly not peaceful, but it is unlikely to end in divorce. Will it also yield a progeny of verifiable knowledge? That remains to be seen.” (Yoram Ben-Porath, “Economics and the Family—Match or Mismatch? A Review of Becker’s A Treatise on the Family,” Journal of Economic Literature 20 (March 1982): 62–63) THANK YOU