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Freedomnomics & Freakonomics

23 Feb 2017Economics Essays

Introduction

Economics is often regarded as the study of dry, uninteresting financial trends and market developments. Freedomnomics takes an economic look at the effects of the free market, and presents some arguments against those found in the freakonomics. Steven Levitt’s groundbreaking work in the field reveals that the tools of economic research can be put to use in the study of the relationships that underlie the events and problems that we encounter and hear about every day.

In the first chapter of freedomnomics, Lott made an incentive assessment based on Speculators, price gougers and good people hence ask the question; are you ripped off? He argues that oil and gas companies have incentives to stabilize the prices of gas, which benefit the consumer in the long run. He asserts that the increases in gas prices during Hurricane Katrina actually helped mitigate the damage done by the hurricane, and how government price controls, like those of the 1970s, would have made life much harder for the victims. Many people cite corporate greed and or monopoly power as the only possible explanation why gas prices began rising even before Hurricane Katrina hit land and disrupted oil production in the Gulf of Mexico.

In the second chapter, Lott looked at the reputation as a vital element of our economy and our society. They are infused in everything from the pricing of consumer goods to the management of political campaigns. Overlooking the value of reputations has also resulted in the application of excessively high penalties for high-income criminals and for companies convicted of fraud. The reason for these unexpected outcomes becomes clear if one applies a little economic analysis to the overall role played by reputations in our society.

Government as nirvana is what Lott chose to look at in chapter three. He argues that people call for government intervention in the economy whenever the market is believed to be acting imperfectly. Implicitly, the comparison is between the flawed way the market actually works on the one hand and a nirvana-like state of government run perfection on the side. It’s evident that distortions do develop on the free market. Few people would really argue that the market is flawless, but it is a long leap from showing that such imperfections exist to proving that they would be solved or even mitigated by the government intervention.
In fact government intrusion into the economy tends to result in more inefficiency, unfairness and even predation that we would find in a completely free market. Lott asserts that professional licensing prevents the highest

quality entrants from entering professions from barbering to practicing law. He points out that even though he has been a university professor for many years, he is not legally able to teach at public high schools in most states because of government regulations.

In chapter four, Lott looks at the crime and punishment and he explains the economics behind the changing levels of crime across the United States. He asserts that abortion and affirmative action hiring in the police force increased crime, and argues that the death penalty, law enforcement, and allowing citizens to carry concealed weapons worked to decrease crime. He also argues that age, race, and gun control had little effect on the crime rate.

In the last chapter, Lott talks about voting rights and voting wrongs. He explains what he believes to be the economic factors within the United States voting system that affect voting turnout, voter fraud, and the size of the government. This includes looking at older examples such as the poll tax, secret ballots, and literacy tests as well as new examples such as voting machines, felony voting, the 2000 Florida vote, public schools and alleged bias in the media.

In Freakonomics, Levitt and his co-author, journalist Stephen Dubner, offer a survey of some of the most interesting research topics Levitt has tackled during his career. In chapter one, Levitt defines economics as nothing more than the study of incentives and how they are pursued. Sometimes a particular set of incentives is so irresistible that people are driven to attain them through unscrupulous behavior. He devised a way of analyzing data to detect not only the presence of cheating, but also some of the patterns and incentives that may have served to compel the cheaters to act unethically. The cases that are accorded the most attention include the Chicago public school teachers who changed answers on their students’ high-stakes standardized tests and Japanese sumo wrestlers who conspired to throw certain high-stakes matches.

Chapter two concerns about the theme of information and the way that individuals, organizations, and businesses often exploit their access to crucial information at the expense of others. He asserts that information asymmetry is one of the most powerful economic tools. Entire industries have flourished and many significant historical events have transpired as the result of an imbalance in the flow of information He went ahead to describe the way journalist Stetson Kennedy exploited information to help bring about the downfall of the Ku Klux Klan. Then his research on the actions of real estate agents offers another perspective to the discussion. Levitt relate a number of other instances of information asymmetry being used as an economic tool, including, most prominently, the practices of real estate agencies. By analyzing data about real estate agents common practices when they are selling their own houses, Levitt discovered that they may not always have their clients’ best interests at heart. His analysis of real estate data found that agents behave quite differently when the homes they are selling are their own.

In Chapter three, Levitt offers an in-depth discussion of the economic workings of a Chicago drug gang, shattering the common misconception that all drug dealers are wealthy. His analysis of the financial records of a Chicago gang proved that most street-level dealers earned far less than minimum wage. He turns to the socioeconomic context of most gangs for an explanation of the incentives that compel young men to become drug dealers. He relates the rise of crack in inner-city America to the historical crime pattern in the country and the social progress of the African American community. The chapter ends with an overview of the wave of violent crime that gripped the country in the early 1990s, and then began a mysterious and rapid decline.

Chapter four sets forth what is arguably Levitt’s most controversial finding: his research revealed a strong link between the legalization of abortion in the United States in 1973 and the sharp decline in violent crime that the nation experienced in the mid-1990s. Recognizing the volatility of this argument, he approached it from numerous perspectives, methodically challenging and undermining all of the most common theories that have been advanced to explain the sudden crime drop. In a detailed analysis, he demonstrate that factors such as improved policing strategies, new prisons, diminished drug demand, an aging population, stricter gun control, a strong economy, and a number of other possible explanations simply do not correlate with the available crime data. He bolsters the credibility of this claim by demonstrating that most other explanations for the crime rate drop are untenable. He noted a number of variables that are strongly correlated with criminality, such as poverty or an unstable family environment, are also likely to be the same reasons that compel pregnant young women to seek abortions. He suggested that the drop in violent crime in the United States occurred at the same time that the first wave of babies conceived after the legalization of abortion were entering late adolescence. Presumably, many of the additional 1.6 million children who would have been born annually if abortion had remained illegal would have been at high risk for engaging in violent crime. Although the he refrains from taking an ideological stance on the issue, he concludes that women with the right to choose abortion tend to make good decisions, based on the crime data.

Chapters five address various aspects of parenting and the way that parents’ status, choices, and actions can impact the outcomes of their children’s lives’. Several years before Freakonomics was published, author Steven Levitt lost his infant son Andrew to a sudden, fatal bout of pneumococcal meningitis. In the aftermath of this tragedy, Levitt and his wife became active in several support groups for bereaved parents. Even as he sought help and guidance for the terrible loss, he noticed the disproportionate number of parents in the groups whose children had drowned in backyard swimming pools. This prompted him to research the issue, as well as a number of other aspects of parenting, from an economic point of view. First, Levitt details the outcome of his study of the safety of backyard swimming pools, which found that children are 100 times more likely to drown in a backyard pool than they are likely to die while playing with a gun.

Then, he summarizes the findings of a series of studies about parenting practices, all of which suggest that parental socioeconomic status is a more reliable predictor of high academic outcomes in children than most other parenting practices that are commonly recommended by experts, such as reading books to your children. Positive parenting outcomes are linked more strongly to factors such as socioeconomic status and parental education than any specific parenting practices. Factors that are important in determining high standardized test scores in children include: highly educated parents, high socioeconomic status, maternal age of greater than thirty when the child was born, low birth weight, English as the primary language spoken in the home, parental involvement in the PTA, and many books in the home environment. Also, adopted children tended to have lower standardized test scores than their non-adopted peers.

Chapter six summarizes about perfect parenting. Levitt extend the discussion of parenting with an overview of more economic aspects of parental choices. Specifically, they focus upon the economic implications of children’s names, especially the overtly ethnic African-American names that have become common over the last several decades. The authors tied this issue to a larger question about contemporary black culture in the United States: is distinctive black culture merely a reflection of the economic gap between whites and blacks, or has it actively caused the gap to widen. His previous research did show that similar resumes with white and distinctively black names result in job offers being extended to the white-sounding applicant far more frequently than the black-sounding applicant. Among other things, it was determined that having a distinctively black name was linked to lower attainment and negative life outcomes in terms of employment, income, and education.

He then turned to the question of how names become popular among white Americans. In addition to the general trend of increasingly unique names for white children, Levitt describes a pattern by which highly educated parents popularize obscure names, gradually compelling the names to achieve broader popularity. Finally, after a period of several years, white parents from lower socioeconomic classes adopt the names, prompting a selection of new names among highly-educated white parents, and the repetition of another cycle.

After reviewing both books, Dr. Lott, author of Freedomnomics, did emphasize the liberty and justice inherent to capitalism, and debunks numerous arguments about the limitations of the free market along the way. The bottom line here is that capitalism is what has allowed America to become as well-off as they are. When it comes to the issue of the realtors, Levitt argued that realtors keep their homes on the market a little longer than their customers do, and also make a bit more profit upon selling them. From this, Levitt jumped to the conclusion that this meant realtors are systematically scamming their customers. Lott rightly countered with a much simpler and more straightforward explanation: every realtor follows his own sage advice, but not every realtor’s customer does.

Lott is on shakier ground still when he argues that legalized abortion caused an increase in crime, while citing data equally consistent with the view that some other factor, e.g., the sexual revolution, caused both the increase in uncommitted sex (with or without contraception) and the push for legalized abortion. Given the relatively short history between Griswold and Roe, in which Americans enjoyed a “constitutional” right to contraception but not abortion, it's not clear we will ever know which factor caused the other. Lott does appear to have made as strong of a case for the view that abortion causes crime as Levitt did for the view that it prevents it, thereby neutralizing the abortion as crime control argument with which Levitt himself stops short of fully endorsing.

Multiple studies have shown that legalized abortion, by raising the rate of unprotected premarital sex, increases the number of unplanned births, even outweighing the reduction in unplanned births due to abortion. Contrary to the theory postulated in Freakonomics, that abortion removes future criminals before they are born and thus lowers crime rates.

References

  • John R. Lott, Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don’t, (Regnery, June 2007)
  • Steven D. Levitt and Stephen J. Dubner, Freakonomics: A Rogue Economist Explores The Hidden Side of Everything (New York: HarperCollins, 2005)

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