"Economy is the art of making the most of life." - George Bernard Shaw

I IM'ed my college-freshman son the other afternoon and asked him how classes were going this semester. He cycled through the list, offering the usual evaluations of instructors, work load, relevance, etc. When he came to his economics course, however, the pre-business major opined: “I like the way economists look at the world. I just don't much care for the subject matter of macroeconomics.” It was deja vu for me, having felt the same way when I took macro over 30 years ago. Must be genetic.

Economics Nobel Laureate and current University of Chicago professor Gary Becker may have had similar feelings when he was a student 50 years ago. His doctoral dissertation, written in the 1950's, revolved on using economic analysis to explain job discrimination. For an economist at that time to take on a topic generally considered the purview of sociologists or political scientists was unheard of – and frowned on. Becker's career has continued down the path of using economic analyses to “explain” social behavior generally not addressed by mainstream economics. Indeed, the press release for his 1992 Noble award cited Becker “for having extended the domain of microeconomic analysis to a wide range of human behavior and interaction, including nonmarket behavior.” Freakonomics author and UofC colleague Steven Levitt pays homage to Becker for enabling and encouraging his own work as a rogue economist. I recently resurrected a book of Becker's essays, The Economic Approach to Human Behavior, first published in 1976, that is quite relevant for BI. I think Becker's “economic approach” should be prominent in the toolchests of BI analysts who help assess the performance of business strategy.

For Becker, the definition of economics as “the allocation of scarce means to satisfy competing ends” is the point of departure. He believes that “the combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly, form the heart of the economic approach... that can integrate a wide range of human behavior.”

“Prices, be they money prices of the market sector or the 'shadow' imputed prices of the nonmarket sector, measure the opportunity cost of using scarce resources, and the economic approach predicts the same kind of response to shadow prices as to market prices.” For example, a person's time to produce a commodity might be a relevant shadow price. An increase in such time required, “would tend to reduce the consumption of that commodity.”

Becker, almost in anticipation of the now fashionable “predictable irrationality” of behavioral economics, posits: “When an apparently profitable opportunity to a firm, worker, or household is not exploited, the economic approach does not take refuge in assertions about irrationality....or convenient ad hoc shifts in values. Rather, it postulates the existence of costs, monetary or psychic, of taking advantage of these opportunities that eliminate their profitability.”

As an illustration, Becker offers the economics of marriage: “According to the economic approach, a person decides to marry when the utility expected from marriage exceeds that expected from remaining single or from additional search for a more suitable mate. Similarly, a married person terminates his (or her) marriage when the utility anticipated from becoming single or marrying someone else exceeds the loss in utility from separation, including losses due to physical separation from one's children, division of joint assets, legal fees, and so forth.”

In summary, “all human behavior can be viewed as involving participants who maximize their utility from a stable set of preferences and accumulate an optimal amount of information and other inputs in a variety of markets.” The Economic Approach to Human Behavior applies these principles to such distinctive human behaviors as job discrimination, marriage and fertility, social interaction, and irrationality.

It's pretty easy to find Becker-esque illustrations of the economic approach now. A riveting article in the February 27 Wall Street Journal by former CIA field officer Robert Baer, A Perfectly Framed Assassination, tells the story of the assassination of Hamas military leader Mahmoud al-Mabbouth in Dubai, allegedly by Israeli operatives. Dispassionate Baer was not sympathetic, arguing that “Israel has yet to feel the real cost of the hit in Dubai. But the longer it's covered in the press, the higher the cost.” Was the assassination worth it? “In cold prose, it sounds inhuman, but there should be a cost-benefit calculation in deciding whether to assassinate the enemy....Plausible deniability is out the window....The bottom line, it seems to me, is that assassination is justified if it keeps us out of war. But short of that, it's not.”

A bit closer to the more mundane world of business strategy and BI, Newsweek columnist Daniel Lyons wrote an incisive article, Google's Orwell Moment, on Google's travails with the introduction of social networking capabilities to Gmail. The service, Buzz, at first showed everyone in a user's network the list of those she e-mails most frequently. It's not hard to imagine situations where such exposure is undesirable: think the recent exploits of a famous golfer. Ditto for a new set of privacy settings rolled out by Facebook to "empower people" by giving them more "granular" control over personal information. But “many viewed the changes as a sneaky attempt to push members to expose more information about themselves”, prompting complaints to the FTC. Both Google and Facebook had to backtrack from the initial “defaults”.

Lyons believes that young social networking users, with little money and even less commitment to privacy, are willing to exchange that privacy for software capabilities – in effect, making it the new currency of the web. He notes: “The genius of Google, Facebook, and others is that they've created services that are so useful or entertaining that people will give up some privacy in order to use them. Now the trick is to get people to give up more—in effect, to keep raising the price of the service.” The exponential growth of social media suggests that users find the “price” acceptable. As for Google and Facebook “the fact that they'd rather get your data than your dollars tells you all you need to know."

Steve Miller also blogs at miller.openbi.com.

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