Freakanomics Is it Economics --

Freakanomics

Is it Economics -- or Freakonomics? A review of Stephen Dubner and Steven Levitt's text Freakonomics

Economics is often called the 'dismal science' because of its pessimistic view of human nature. However, according to Stephen Dubner and Steven Levitt, the authors of Freakonomics economics might also be called the surprising science. Contrary to classical economic theory, human beings often respond to a much more complex network of incentives than might initially appear to the naked, economic eye. Conversely, the unexpected use of economic theory can also be used to explain social behavior that might seem to have nothing to do with dollars and cents, like why people with certain names are more apt to succeed than others.

The book is structured along the lines of a number of very eye-catching, humorous titles such as: "Chapter 1: What Do Schoolteachers and Sumo Wrestlers Have in Common?" The book explains why rewarding teachers for their class' sterling performance on standardized test encourages teachers, however unintentionally to help students cheat on the test. While some teachers may not bald-facedly 'give the answers' to their students, because their own reputations and the reputations of their schools rest upon test performance, they feel pressured to allow students to engage in unethical behavior, such as answering leading questions about the test material, teaching actual test questions in the review. The net result of the incentive of rewarding high levels of collective test performance unintentionally contributes to a policy that does not realize the ultimate goal of having a standardized test in general, namely measuring student performance.

In Chapter 2, discussing example of real estate agents, the authors point out that real estate agents have an incentive to sell houses for less than the house it worth. After all, every house the agent sells registers as a commission, and a few thousand dollars less for a sales price here or there makes little difference in terms of their salary percentage, if they sell many houses. For the seller, these few thousand extra for a correctly negotiated sales agreement may mean a great deal. Looking at motivational factors in terms of psychology, rather than supply and demand alone provides valuable clues that can help individuals make better decisions. It also illustrates that knowledge itself generates economic power. For example, after reading Freakanomics, a reader might be more apt to sell his or her own home, rather than go through an agent.

Other chapters in Freakanomics seem deliberately provocative, like the chapter chronicling the struggles of drug dealers. Drug dealers aspire to become the 'main dealer' even though they make very little money in relation to the risk they assume, writes Dubner and Levitt, because they have hopes of eventually becoming 'top of the heap.' The authors call this a 'tournament' economy, an economy with only one winner. That explains why even though the salary of a drug foot soldier is $3.30, individuals are still willing to 'fall in line' with a drug kingpin and obey, enduring risk to their physical safety, pain, and flagrantly disobeying the law. Of course, the lack of opportunities in urban areas is another reason, although the authors do not discuss psychological despair very much in their risk vs. cost benefit analysis for a 'job' that has a one-in-four chance of getting the employee killed.

Dubner and Levitt delight in flouting conventional, politically-correct norms of behavior -- for example, they suggest that a decline in criminal behavior may be directly tied to the passage of Roe v. Wade by the Supreme Court, meaning that many parents from deprived economic circumstances who might have given birth to the criminals of the future can now have abortions. With similar glee they also note that parents actually matter very little in how a child turns out -- environment such as peers and socioeconomic opportunities are more significant. In other words, it is better to live in a rich, privileged district that offers children exposure to many opportunities and to be a mediocre parent than it is to be a good parent, but poor and hard-working, and be forced to send one's children to bad schools.

Although their analysis may be delivered in a humorous tone, there are serious policy prescriptions that follow from their suggestions. For example, investing in schools may be more important than constructing a welfare policy to ensure that parents marry and stay together, if the goal is to improve the inner city children's lives of today and tomorrow. Overturning Roe v. Wade, regardless of constitutionality or morality, may result in a spike in the crime wave, even though conservatives who claim to be anti-crime are often anti-abortion.

Finding the real causes of human behavior are at the heart of Freakanomics. For example, it is an oft-cited factoid that children with unusual names often have difficulties in life, and are less successful than those who have conventional names. Is this due to the fact that children with parents who name their children unconventional names are more likely to come from deprived backgrounds, or do not have sufficient judgment to put a great deal of thought into what they name their children, or because of societal prejudice against unusually named children? The authors cite the example of one girl, named Temptress, was said to have been named because her mother was watching the Cosby Show when she gave birth to the girl, and misheard the name of the lead actress, and had no idea what 'temptress' really meant. Her daughter went on, sadly, to live out the meaning of her name, even though it was not deliberately given to 'mark' her -- society treated her according to the 'value' given to her by her name, and her original circumstances did not bode well for her future.

What is so unique about these economist's method of asking and answering questions about social phenomenon is that they apply economic ideas, like the principles of incentives, in unexpected ways, like teachers, real estate agents, and drug dealers -- and seem to explain the inexplicable. They draw surprising connections, such as the fact that a drug dealer may actually be applying the same rationale as a private in the army to his 'initiation' and period of risk, as he hopes to aspire to the top-level job. They also apply an economist's rational eye to human behavior, and refuse to turn away from an issue simply because it might not be politically correct.

There are clearly benefits from taking such a rationalistic approach. It is particularly interesting to read this work in light of the current economic crisis. The idea of information being power, as outlined in Chapter 2, for example, seems particularly pertinent, given that so many individuals were encouraged to take on mortgages larger than what they could realistically pay for, because they often did not understand complex economic arrangements. Using complexity against the individual is a common technique of unethical people in many industries from 'bait and switch' salespeople to bankers. The author's idea of monopolistic competition and a 'tournament'-style market with many individuals vying for jobs explains why people will work as extras in Hollywood films for very small salaries -- all of them eyeing the 'top job' in hopes of making a killing at their profession.

However, as psychologically insightful as some of the analysis may be, there are limitations to Freakanomics, as there are to conventional economics. First of all, although they use interesting anecdotes and examples to illustrate their principles, Leavitt and Dubner will no doubt offend some people who do not fit into their formula of human behavior. For example, someone who works hard to raise a child in a difficult environment whose child succeeds would counteract their thesis that social advantages mean more than parenting. So would people with strong moral and ethical compasses, such as real estate agents who refuse to take advantage of their superior knowledge negotiate an unfair deal for their clients, or teachers who would never allow children to cheat on tests, rationalizing that they chose a lower-paying profession for love, not to win some sort of competition. As mentioned before, desperation, the attractiveness of a 'father figure' and other incentives may seem to be more apt encourage urban youths to sell drugs far more than the idea of being a drug kingpin someday. This might be a more plausible motivating factor for a young person who devolves into a life of crime -- the fact that he or she cannot perceive another life, given dealing drugs is the only viable option he or she sees in the environment.