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Freakonomics:
What We Can Learn from Gangsters
 June 22, 2005

Greg — June 22 @ 8:52am

Steven Levitt’s Freakonomics started circulating in my office about a month ago, and last Friday it was finally my turn to read it while everyone else covered phones, coffee, and crises. The fact that it took a whole month to get to me represents its own economic analysis of my relative worth in the office; I’m also the last to know about left-over food from office lunches. And that’s just the point I want to make about Freakonomics: once you read this book, you’ll start wondering if everything in your life can be explained by economics.

If it hasn’t made the rounds in your office, there’s a website that’ll give you a summary, reviews, and about a jillion chances to buy the book. But basically, the premise of the book is that economics—and specifically the study of incentives and motivation—can explain almost everything. Levitt, the self-styled rogue economist, takes piles of data, asks lots of unlikely questions, throws everything into a kitchen aid, and then draws out at random two phenomena that he relates through statistics and economic analysis. I found myself skeptical of some of the assumptions he starts out from—he blurs the line between crunching numbers and interpreting people and society with the cockiness of some pro basketball players—but controversy is probably good economics for book sales too.

Some of his conclusions are the stuff of conspiracy theorists. He says that school teachers and sumo wrestlers are linked in the underworld of cheating, that Ku Klux Klan members and real estate agents manipulate information in the same way, and that abortion has led directly to lower crime rates. So basically, everything we thought was good is not so good, and everything we thought was bad is not so bad. Or not so different, at least.

One of the things I found most interesting, however, was the book’s take on morality. One of the reviews says, “if morality represents how we would like the world to work, then economics represents how it actually does work.” In other words, a moral view of the universe is in many respects self-deceived, and an economic view of the universe is the beginning of really understanding what’s going on around us. I’m open to that—although a little bit troubled, since some of the best people I know are moral people, and I hate to think they’re all self-deceived. But at the same time that Levitt dynamites traditional morality, he suggests that morality emerges of its own accord in other, more unlikely places.

Take gangsters, for example. Crack gangs, to be precise. One of Levitt’s chapters takes data obtained from infiltrating a Chicago crack gang and explains how this highly structured, meticulous world works. It starts with the basic question, why do crack dealers still live with their moms (which most of them do, come to find out), and shows that in many ways, crime really doesn’t pay. Crack dealers earn $3.30/hour; the thugs right above them earn $7/hour, and it’s only when you get into middle and upper management that you actually start earning in the six figures–$100K and $500K respectively. But there are only about 12 people that earn $500K—kind of like there are only about 12 people that earn that much in any corporation with a CEO, board, and business plan. And that’s the point of this chapter: crack gangs aren’t that different from the McDonalds corporation. Lots and lots of foot soldiers, and a few guys with college degrees earning bank up top (true about the college degrees, too—that third and top level are populated by bachelors and masters). There are a couple of things that result from this: crack gangs don’t want gang wars. In fact, gang warfare is the equivalent of a fire in the kitchen—it only costs $3/hour to maintain all these crack dealers, but if they get killed or injured, it costs a hell of a lot more to compensate the family, bury them, and replace them. And scrupulous business practices—like good book-keeping and regular board meetings—are also essential for running a successful crack gang. Maybe this makes crack gangs seem a whole lot more white bread; maybe this gives McDs a suddenly sinister air. But black market economics—except for the whole breaking the law part—really doesn’t look all that different from business models in MBA schools everywhere.

So bringing this all back to morality. Crack gangs, in the absence of the law, behave not too differently from fast food corporations functioning under the law. Black market economics is interesting because it posits a system in which traditional authority figures or authoritative bodies are absent (the government, the Department of Labor, Arthur Anderson—I mean, Deloitte and Touche), and it looks at what kinds of moral laws emerge naturally. Some of them are different, but some of them aren’t so different—like war is bad, record-keeping is good, education gets you to the top, and it sucks to have to live with your mom. So what effect does authority have on morality anyway? Is it necessary? Is morality just wishful thinking? And what happens when, like crack dealers, you get to choose the authority figures you place over you? Just a few questions from a rogue economist.

19 Comments

  1. Greg. I borrowed this book from Jenn Fox (any relation?) and read it in more or less a night, and while I think it’s fun to apply economics to everyday relations, I don’t think it is at all meaningful. Every one of the examples he cites in the books can be explained in non-economic terms with more clarity and a lot less breath (like the argument that the crime drop in the 90s wasn’t the combined result of a booming economy, better law-enforcement techniques, and improvements in education, but of legalized abortion) I think economics and morality have thier respective places, and applying the language and reasoning of one to the other is entertaining, but sort of useless.

    Funny side note from a transcript from NPR’s Weekend Edition Saturday:

    SIMON: Is it true, Professor Levitt, you’ve been offered jobs by both the Clinton administration and this Bush administration?

    Prof. LEVITT: Bush administration did approach me to ask me if I wanted to be an adviser on crime…

    SIMON: Yeah.

    Prof. LEVITT: …and I told them you better go back and look at the study I did on the link between abortion and crime and if you’re still interested, call me back. I never did get that return phone call.

    Dianna Douglas — June 22, 2005 @ 4:35pm
  2. As an economist applying economics to everyday things, Thomas Sowell is much more insightful than Levitt. Levitt has to gloss over a lot of important differences between McDonalds and crack gangs in order to make them seem similar. For example, McDonalds has to submit to regular health inspections, but there’s no telling what’s in the crack you buy on the corner. When Dave Thomas opened Wendy’s to compete with McDonalds, I’m sure that McDonalds tried some business tricks that may have been underhanded, but they certainly didn’t resort to extra-legal means to block Wendy’s business, and if they had and it was discovered, they’d have probably lost more from it than they’d have gained, which leads to another important difference: fast food customers generally prefer to purchase burgers at an establishment that has something of a good social image (even if only on a very minimal level); crack addicts have no such scruples regarding local crack establishments. One could go on and on with the differences.

    Sure, the similarities can be a little surprising, but it takes more than a few data points to establish identity, or even similarity for that matter.

    The problem with Levitt’s approach to morality vs. economics is that it posits that they describe opposing ends of human conduct. In fact, economics is active in the moral sphere and vice versa, and often both are describing the same thing in different ways. For example, the economist points to the fact that people will respond to the incentives in their environment at least some of the time. The moralist says that we should avoid temptation. Aren’t economists and moralists really drawing from the same pool of truth in this instance? Isn’t Christ’s instruction not to strain at gnats just another way of saying that it’s not wise to follow commandments beyond the point of diminishing returns?

    DKL — June 22, 2005 @ 4:57pm
  3. This also falls in line with “game theory”. It applies to both economics and behavior. Essentially, every aspect of business or life can be viewed as a game. You figure out the rules so you can maximize your chance to succeed. In these life-games there are also incentives that come from breaking the rules as well as consequences if you are caught. It can be applied to almost everything… courtship, job interviews, international politics, parenting.

    Straight Talk — June 22, 2005 @ 5:49pm
  4. It’s tough competing with Porn and Divorce, let me tell you. Somehow crack gangs aren’t as sexy as Miranda. I’ll even take getting shot down on all counts to getting ignored.

    Dianna Douglas–No relation to Jenn Fox, unless she’s from the Pennsylvania Foxes who descended from one of the grandfathers of the Quakers. Is she hot? Your point that these phenomena can be explained with a lot less wind by other factors is a good one. I saw what Levitt was doing as a shock and awe campaign–taking far-fetched examples to make the point that in the linguistics of behavior, the dialects are more closely related than you’d think. That’s why I was interested in the Mormon response to a question like this–I wondered if you’d get all up in arms and say “No, no, it’s completely different, religious people don’t function on that level.” Which, in my data set of three, didn’t happen.

    Greg Fox — June 23, 2005 @ 8:23am
  5. Yeah, this is bald-faced numbers inflation. If I respond to each of your comment separately, it will look like more people read this. DKL–haven’t heard of Thomas Sowell. Hasn’t made the rounds of our office. I’d be interested in reading his stuff and seeing how it puts Levitt in check. But to Levitt’s credit, I think he’d acknowledge freely that many signficant differences exist between McDs and crack games–not the least of which is that crack has a much more devestating effect on the body (Supersize Me notwithstanding) and it can ruin people’s lives and family’s lives. The larger point Levitt seemed to be making is not that McDs is a lot shadier than we thought it was, but that crack gangs are a lot more rational than we thought they were. Uncovering the rational (i.e. economic) base of action and showing how, in fact, it puts a lot of disparate parts of life into some sort of temporary alignment with each other is more of what he’s doing.
    Personally, I think his view of morality is quite limited–he is describing a kind of knee-jerk, Sunday picnic morality which I think hasn’t been in vogue since World War I.
    Straight Tali: are you an economist? Does game theory have anything to do with A Beautiful Mind (Jennifer Connelly is my reference point for all sophisticated ecnomic thought). I agree that the principles of economics can provide insight into lots of areas of life–that’s why I liked this book.

    Dianna Douglas, I forgot one thing–priceless Weekend edition transcript. I wonder if Kerry has approached Levitt yet. Or Hilary? Maybe we could gauge 2008 hopefuls by who’s approached Levitt about a future spot in their administration.

    Greg Fox — June 23, 2005 @ 8:33am
  6. Bingo! John Nash is the Nobel Prize winning game theory man! When Nash applied to graduate school at Princeton in 1948, his Carnegie Tech professor, R.J. Duffin, wrote only one line on his letter of recommendation: “This man is a genius”

    My dad is an economist…

    Game theory deals with the analysis of “games” (i.e., situations which involve conflicts of interests). As well as simple games, which can be analysed completely, the theory has applications in “real games” like poker, chess, etc as well as in areas like politics, economics etc.

    See: http://dir.yahoo.com/Science/Mathematics/Mathematicians/

    or: http://dir.yahoo.com/Social_Science/Economics/Game_Theory/

    Straight Talk — June 23, 2005 @ 9:38am
  7. Thanks, Straight Talk. I’ll review those websites next time I go to Vegas. No seriously–I always lose money there. So what’s it like being the son of an economist? Or daughter? And what exactly does “Straight Talk” refer to?

    Greg Fox — June 23, 2005 @ 12:34pm
  8. Greg-
    Forget Jenn Fox. YOU’RE hot!

    Mycket

    Mycket — June 24, 2005 @ 1:44pm
  9. Mycket: Mutual, I’m sure. Is this your first time on Banner of Heaven? Glad to see you have such good taste in men.

    Greg Fox — June 25, 2005 @ 9:24am
  10. Greg, this is a great post. I think the idea that morality and ethics emerge naturalistically is a powerful one. It is typical to think that these are what separate us from the rest of the animal kingdom, but this may be true only in degree. The basic mechanism underlying most morality (and economics)—reciprocity—is observed in primates (see for example the article How Animals Do Business by Frans B. M. de Waal in the April 2005 issue of Scientific American.

    And what happens when, like crack dealers, you get to choose the authority figures you place over you?

    What happens is that you have the spectacle of libertine leftists vs. religious righters waging all-out war for control of our democracy.

    As for religious authority, we can choose this too—by changing religions, or choosing to follow no religion. This is something that is such a basic part of one’s inherited identity that perhaps relatively few even conceive of changing the religious authority they accept. Fortunately for Mormon missionaries, some do.

    Christian Y. Cardall (TSM) — June 25, 2005 @ 9:59pm
  11. Greg, it seems to me that the principal discontinuity between economics and morality lies in their divergent handling of contingency: economics is a form of determinism, reducing human agency to a set of finite responses to given incentives–and this is not a criticism of economics, since this sort of reduction is absolutely necessary to make predictive hypotheses; morality, on the other hand, emphasizes free moral agency guided only by the ungoverned and transcendant human soul.

    Rosalynde — June 26, 2005 @ 12:31am
  12. Rosalynde, a small quibble. I think the set of finite responses to given incentives you refer too is a lot bigger than you seem to think, and therefore not a form of determinism. In fact, for me at least, the frustrating thing about the economics classes I took was that humans are so unpredictable. We respond to incentives in various and unexpected ways. Some people accumulate money, others collect stamps or engage in birdwatching. Some of us even spend time reading blogs.

    Mark — June 27, 2005 @ 8:50am
  13. Christian thanks for your comments. What do you think of the Daily Show with Jon Stewart? That pretty much sums up my approach to politics. You make a good point about reciprocity being the basic commonality between morality and economics, the golden rule and the exchange system. Religion takes reciprocity one step farther than just morality, I think, because Jesus didn’t just follow the Golden Rule, he was Love incarnate. Also, about choosing religious authority and whether or not people actually do that, you might be surprised at how comfortable Christians are with up and changing their authorities. My grandparents have been going to the same fellowship for as long as I can remember, but it’s not unusual for a family to look for a new church if they don’t like the pastor or the types of ministries going on. That seems to be another difference I’ve noticed between Mormons and Christians–Mormons just go to the place that they live without looking around to see if they’d like another church leader more.

    Greg Fox — June 28, 2005 @ 10:36am
  14. Rosalynde, uh, have to go to dictionary dot come, be back in about 3 hours after I finish figuring out your post. No seriously, thanks for reading and commenting. Contingency means possibility or uncertainty, right? So you’re saying that economics and morality don’t deal with uncertainty in the same way, and that’s what makes them different. Economics doesn’t believe in contingency and has the view that there’s nothing left up to chance and choice, and morality believes that there is such a thing as uncertainty, and people can make themselves better or worse by the choices they make. So economics depends on people not having free choice and basically doing the same thing based on the same external stimuli all the time, and morality depends on people being able to choose for themselves how they will be according to what’s inside of them. Interesting. I think Levitt’s point was a lot more shallow, and basically that the results of these two paradigms of motivation can resemble each other a lot, maybe more than we’d feel comfortable admitting.
    Here’s another question just off the top. Does economics champion absolute truth more than morality, then? In other words, does economics say absolutes are possible while morality says only choice is possible? I couldn’t be way off here, just wondering.

    Greg Fox — June 28, 2005 @ 10:46am
  15. Rosalynde, I’m not sure the distinction you’ve drawn is cogent.

    I don’t know much about economics, but I’m pretty sure they would not claim determinism at the level of predicting any one individual’s responses. At most they would attempt statistical descriptions of large ensembles of people. They also increasingly acknowledge non-rational behavior, and attempt to quantify it statistically.

    Now, the gospel has incentives (peace in the this life and eternal life in the world to come, to name the big ones); and while no one individual’s response to these can be predicted, I see no reason why statistical descriptions and even models could not be developed to describe peoples’ reactions to these incentives. Nate’s post on applying insights from study of the prisoner’s dilemma to the relative successes of the United Order in varying circumstances is a qualitative, down-to-earth example.

    Christian Y. Cardall (TSM) — June 29, 2005 @ 9:15am
  16. Greg, love the Daily Show, though I don’t get to watch it nearly as often as I would like.

    Religion takes reciprocity one step farther than just morality, I think, because Jesus didn’t just follow the Golden Rule, he was Love incarnate.

    I’m having trouble translating this into operational terms.

    Also, about choosing religious authority and whether or not people actually do that, you might be surprised at how comfortable Christians are with up and changing their authorities.

    Yes, there is great variety here. I suppose it depends on how seriously one ever took the authority in the first place (i.e. how much one depended on and submitted to them), and correlated with this, the extent to which identification with the particular authority and community form a core part of a person’s identity. Mormonism, with its strong central authority and demanding lifestyle, tends to be central to the lives of its adherents; dissent and separation tend to be traumatic for those who have been “active.”

    Christian Y. Cardall (TSM) — June 29, 2005 @ 9:25am
  17. Mark (post 12) …You bring up a good point. I don’t think most people realize that economics was originally taught in the Social Science area of academics in the School of Arts and Science and not in the School of Business. Some schools still offer the major through the school of Arts and Sciences as opposed to their schools of business. Some allow you to major in it in either school within the university. It is very valuable to realize how much emotion goes into money. For example, emotion drove the bubble in the 90’s. Emotion caused by the negative burst in 2001-ish still keeps people out of a statistically healthy market. Where that helps, is that I can invest in the healthy market now, and get all the growth when time causes people to lose their skittishness and start investing again.

    Greg, (post 7) … hmmm… Being the son of an economist,,, I guess I save a lot more than my peers do. (At the moment, we happen save 25% for retirement… see the reason in the preceding paragraph.) I would say that being the son of a professor has a lot more of an effect than being the son of an economist. I grew up in an open environment of intellectual curiosity and dialogue.

    Greg, since you asked, “Straight talk” is just my motto. I get sick of people beating around the bush when they should just get to the point. As such, I try to have direct (straight) dialogue. Sometimes that ruffles some feathers. Sometimes it is appreciated. … Which reminds me, I am still waiting for a follow-up post from MirandaPJ to #142 in Porn, Divorce & Modern Women. Miranda, are you out there?

    Straight Talk — June 29, 2005 @ 2:23pm
  18. Christian. Comment 10. What, are you saying animals have the light of Christ. That we share this with apes. I don’t think so.

    And I had to look up reciprocity. Its a big word but its wrong. Righteousness is not about getting something back. its about selfless love. Of God and your neighbor. Like Greg said Jesus is love incarnate. His sacrifice was completely selfless.

    Aaron B. Cox — July 8, 2005 @ 4:12pm
  19. Welcome back man. Missed your sentence fragments

    Greg Fox — July 9, 2005 @ 2:29pm

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