A Rogue Economist Explores the Hidden Side of Everything
Steven D. Levitt and Stephen J. Dubner
New York: William Morrow/HarperCollins Publishers ©2005
What connection could there possibly be between sumo wrestlers and schoolteachers? When you study the data as the authors do, particularly as it relates to cheating in high-stakes situations, it's not as far-fetched as it may seem on the surface. And that is precisely the premise of Freakonomics: virtually everything produces unintended consequences as it gains foothold and swirls around in the web of life.
The notion that cause and effect may be unrelated in space and time, while harder to grasp initially, reflects the way the real world works, although it's generally the opposite of our typical "enter money, push button, beverage container drops into slot" shorthand expectation. It's an idea that also appeared with several other important premises in Peter Senge's 1990 book, The Fifth Discipline, now a classic in the business management field of systems thinking.
In Freakonomics, the distant/subtle-cause-and-effect idea is only one of several cited as belonging to the "very specific worldview" of its author(s) that are explored in the book. The primary one is that "incentives are the cornerstone of modern life," followed closely by "the conventional wisdom is often wrong." Others are that "'experts' — from criminologists to real-estate agents — use their informational advantage to serve their own agenda," and "knowing what to measure and how to measure it makes a complicated world much less so."
Doesn't seem like rocket science — or anything you've heard or known about the study of economics, does it? Which may give heartburn to the professional or academic economists in the world, but, for the rest of us, it brings a welcome whiff of skepticism into the dispensing of pronouncements citing detailed statistical data.
Early on, the authors share their easy-to-understand definition of economics, the reasoning behind economists' studies, and the underlying theme of the book, even while assuring us that they have no such organizing principle.
Economics is, at root, the study of incentives: how people get what they want, or need, especially when other people want or need the same thing. Economists love incentives. They love to dream them up and enact them, study them and tinker with them. The typical economist believes the world has not yet invented a problem that he [sic] cannot fix if given a free hand to design the proper incentive scheme. His solution may not always be pretty — it may involve coercion or exorbitant penalties or the violation of civil liberties — but the original problem, rest assured, will be fixed. An incentive is a bullet, a lever, a key: an often tiny object with astonishing power to change a situation.
No one seems immune from the almost Pavlovian response to incentives, defined by the authors as "simply a means of urging people to do more of a good thing and less of a bad thing." Whether it's a toddler who learns by painful experience not to touch a hot stove, or the smoker who quits because the tax on cigarettes rises to levels that break the budget, incentives seem to work. In fact, automatic tax withholding from paychecks was the federal government's method of creating an incentive to change behavior when too many Americans were not paying their share of income tax.
In noting the "strange and powerful nature of incentives," where "a slight tweak can produce drastic and often unforeseen results," the authors cite Thomas Jefferson, "reflecting on the tiny incentive that led to the Boston Tea Party and, in turn, the American Revolution: 'So inscrutable is the arrangement of causes and consequences in this world that a two-penny duty on tea, unjustly imposed in a sequestered part of it, changes the condition of all its inhabitants.'"
Most of the book's examples deal with economist Levitt's main interests: cheating, corruption, and crime. But the ideas also start with asking questions about seemingly unrelated things: "How is the Ku Klux Klan like a group of real-estate agents?" or "Why do drug dealers still live with their moms?" or "Where have all the criminals gone?" or "What makes a perfect parent?" The answers require us to dispense with the "conventional wisdom," a phrase coined by John Kenneth Galbraith, "the hyperliterate economic sage," who "did not consider it a compliment."
'We associate truth with convenience,' he [Galbraith] wrote, 'with what most closely accords with self-interest and personal well-being or promises best to avoid awkward effort or unwelcome dislocation of life. We also find highly acceptable what contributes most to self-esteem.' Economic and social behavior, Galbraith continued, 'are complex, and to comprehend their character is mentally tiring. Therefore we adhere, as though to a raft, to those ideas which represent our understanding.'
So the conventional wisdom in Galbraith's view must be simple, convenient, comfortable, and comforting — though not necessarily true. It would be silly to argue that the conventional wisdom is never true. But noticing where the conventional wisdom may be false — noticing, perhaps, the contrails of sloppy or self-interested thinking — is a nice place to start asking questions.
And asking questions is a good place to start anything. Whether or not Freakonomics is a book about "real" economics, it offers examples and suggests interestingly useful ideas for considering how the world in front of us came to be the way it is — and what might be involved in creating change.