"Freakonomics: A Rogue Economist Explores the Hidden Side of Everything," by Steven D. Levitt and Stephen J. Dubner. William Morrow, 2005, 242 pages.

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The Dismal Science's Freaky Side?

by Robert Formaini

Being human, economists tend to envy those in their profession who achieve internal fame, but roll their eyes and mutter about those who try to communicate with non-economists. Especially galling are economists who write bestsellers (with or without help). Steven Levitt need not fear such criticisms, as his career is already quite successful and his future well-assured. He is a tenured professor at the storied economics department of the University of Chicago, and the 2003 winner of the John Bates Clark medal, biennially awarded to the nation's best young economist by the American Economics Association. Governments, politicians, and corporations routinely seek his advice. But as this book makes clear, Levitt is not your typical economic Titan. For one thing, he freely admits to mathematical deficiencies that would cripple the careers of other economists. For another, he seems to like spending time in the real world, analyzing actual problems as opposed to purely theoretical ones. Finally, he communicates those findings not only to his colleagues but to the general public. I suppose this is a bit strange for an economist, but I'm glad he does it, because someone has to.

Let me begin, however, with some quibbles. The title of this book is unfortunate, and I want to believe that Levitt did not name it. There is nothing freaky about what lies between its pages and it does not — nor could it — "explore the hidden nature of everything." It does explore a number of interesting situations and use creative approaches to understanding them. Levitt is not a "rogue economist" in any sense of the term, including the one meant by the authors — which is, undoubtedly, "mischievous." This is a book that almost any academic might have written: not just an economist but even a sociologist, criminologist, psychologist, or a plain old statistician. Beyond its liberal reference to economic incentives and use of thinking at the margin, there isn't a lot of economic theory in the book, and where statistics are used, the analyses are rather basic even when regression is involved. One can, of course, view this "keep it simple" approach as one of the book's many strengths. No doubt, for the majority of readers, it is.

Even the most sophisticated analysis is useless if it is communicated poorly — or not at all. No such criticism applies here. Dubner, whose New York Times profile of Levitt began their collaboration, communicates Levitt's work quite well. They might, however, have avoided putting in things that look more like political cheap shots and less like economic insights. For example, they quote Dubner's Times colleague Paul Krugman complaining that "The approved story line about . . . [George W.] Bush is that he's a bluff, honest, plainspoken guy," rather than "a phony, a silver-spoon baby who pretends to be a cowboy" (p. 91). Likewise, the quotation from Harry Blackmun on the death penalty (125), which is not logically connected with the lengthy critique of the death penalty preceding it, seems out of place. It seems that Dubner and Levitt (surprisingly?) agree with many of the standard editorial page positions of the New York Times. I suspect that Dubner is more responsible for their inclusion in this volume than Levitt, and as I said, these are the cause of quibbles which won't bother most readers anyway.

The topics addressed in the book are wide-ranging: duplicitous real estate agents; cheating by sumo wrestlers and by teachers giving standardized exams; the economics of crack gangs; ways in which secret information affects groups such as the Ku Klux Klan; reasons why crime rates really fell during the 1990s; the comparative risks of driving, flying, swimming pools, and gun ownership; the whys of baby names; the ethnic makeup of game show contestants. Levitt's approach to analyzing these topics is taken from neoclassical microeconomics: maximizing utility at the margin through choice, while people act under objective constraints. Nothing freaky about that, although some of my students might argue the point.

Take those less-than-honest real estate agents. If one understands how they make their money, it's pretty simple to understand why they might give false advice to their clients. Since they receive only a fourth of the cartel-enforced 6% commission they charge, accepting a low-ball offer for your house costs them only 1.5% of the difference between the low-ball price and what you might receive from another buyer in the future. The agent, wanting to get the commission, sacrifices perhaps a few hundred dollars in exchange for a faster, more certain payday. Do they really act this way? Levitt shows that, when selling their own residences, agents tend to wait for (and receive) better offers. Why? Because they gain 94% (more, if self-selling) of any additional offer increase. Gosh . . . I'd always believed that real estate agents could be trusted!

What about the match results of those inscrutable sumo wrestlers? What incentives would they have to throw some of their matches? Their salaries and fringe benefits are determined in six yearly tournaments, where winning at least eight bouts is very important. When two wrestlers — one with a 7–7 record and one with an 8–6 record — meet, they have very different incentives: the 7–7 wrestler needs very much to win, while the 8–6 wrestler has already done well, making a loss no big deal. It's possible that the 7–7 wrestlers simply outperform statistical expectations in these matches because of the importance of victory, but Levitt's data suggest that deals are made in the sumo stables, based on bribes, or simply on the agreement that if "you scratch my back; I'll scratch yours." In fact, there have been exposŽs on sumo cheating, and even suspicious deaths of wrestlers who came forward with tales that support Levitt's analysis. His interpretation of the wrestling data seems quite convincing.

Analysis of information and prices informs several of Levitt's examples, including a case in which his analysis cost some cheating teachers their jobs. He also demonstrates how the exposure of secret information devastated the Ku Klux Klan. Modern technology, especially the Inter-net, has made information much more accessible for every-one.

Consumers shopping for life insurance, for example, now have easy access to price comparisons, resulting in savings of a billion dollars a year. Economists say that such things as Internet sites reduce information asymmetry: no longer are you at the mercy of buying from people who have better information about their prices than you have, because it's now easy and cheap to acquire that information. Experts often use inside information to promote their interests even as they argue that they are promoting yours. How many people get a second opinion before being rolled into operating rooms? We mostly defer to our doctors, but what are their incentives? If they're surgeons, the answer is obvious.

One of Levitt's fellow Chicago students, Sudhir Venkatesh, provided material for some of the book's most interesting conclusions by visiting a Chicago housing project with a sociology survey in his hands. He wound up almost being killed by a drug gang, then practically lived with them for the next six years as he studied the drug culture up close, embedded like a reporter in one of many rival gang armies in a domestic war zone — south Chicago. Levitt found that the drug gangs were run just like any other business and that the answer to the question "If drugs are so lucrative why do dealers live with their mothers?" is that drugs are not lucrative for the average gang member. In fact, they work under extremely dangerous conditions with high relative mortality, often for less than the minimum wage. So why would anyone pursue such employment? "For the same reason," Levitt says, "that a pretty Wisconsin farm girl moves to Hollywood" — extreme competition that rewards a lucky few with vast wealth and power. The book has a long discussion of the rise of crack and the alliance between Colombia and inner city gangs.

One of the claims that has generated a very strong backlash is that legalized abortion is primarily responsible for the decline in crime rates during the 1990s. The book shows why Levitt believes this, and also discusses other possible explanations such as "broken windows policing," building more prisons, handing out longer prison sentences, the aging of the population, an improving economy, the effects of concealed weapons laws or tougher gun control, etc. Some of his opponents believe his reasoning smacks of eugenics, which has, of course, always been abortion's crazy aunt in the attic. But just because Levitt made people angry with this claim, does that mean he's wrong? Of course not. Levitt is not making a moral argument about abortion, although the book suggests the authors favor it on utilitarian grounds.

Levitt's analysis of parenting and the limited and surprising roles that parents play in their children's lives is enlightening (if true), and entertaining to read. The obsessiveness of many modern parents, and the things they do to help their children, can be very amusing, but if Levitt is correct many such endeavors are expensive and pointless. Levitt finds little evidence that parenting matters much at all! Bonding with the baby, reading to kids, playing Mozart for them, school choice programs — all the things we think are important — Levitt dismisses as irrelevant. What does matter then? According to Levitt, it's environmental factors such as the parents' education level, socio-economic status, age of mother at first birth, birth weight, whether English is spoken in the home, whether the child is adopted, etc. (The correlations between cited environmental factors and test scores are sometimes positive and sometimes negative.) And what doesn't matter? An intact family, a move to a better neighborhood, whether mom works between birth and kindergarten, Head Start, trips to museums, spanking, television watching, reading to children every day. The final conclusion is that it matters more what parents are than what they try to do for their children. Along the way, the authors suggest that IQ exists and is a powerful determinant of success. And I thought Charles Murray made up all that IQ stuff! I guess if you write for the Times and you support Head Start even though you admit it doesn't work, you get to make this IQ argument while immunized against the usual outrage.

"Freakonomics" ends with a lengthy examination of the differences between white and black names for children, and inter-group socio-economic name differences over time. Is your name your destiny? Well, yes . . . at least, sort of. I have to leave readers something to do on their own. I will say, however, that, generally speaking, this is a good book, though over-hyped. But that's the time we live in. It's standard marketing practice today for every book, television show, and product that comes along, most of which are not worth reading, watching, or owning. I'm glad this book has been successful, because the information contained in the sales figures should direct publishers to put out more general-interest economics books. Making money by using information to maximize voluntary exchange — isn't that what the market's all about?

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