Challenging Economic Beliefs: A Review of Freakonomics

Freakonomics, written by Steven D. Levitt and Stephen J. Dubner and published in 2005, challenges conventional economic beliefs by investigating the link between morality and economics. The book presents the harsh truths of reality rather than optimistic ideals. Levitt and Dubner delve into subjects like cheating, crime, sports, and parenting to offer a distinctive and stimulating viewpoint on these topics (freakonomics.com).

Through engaging storytelling and insightful knowledge, the authors of Freakonomics explore a range of topics including the operations of a crack gang, the reality behind real estate agents, and the mysteries of the Ku Klux Klan.

They contend that economics is mainly concerned with analyzing incentives. Rather than focusing on a single theme, the book addresses recurring ideas such as positive versus normative analysis, the importance of incentives in today's world, and the concept of "tournament" style markets where one winner emerges victorious.

Freakonomics is a witty examination of motivations, including what they are, how they can change, and their influence on human actions.

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The book's entertaining and captivating prose makes it both accessible and intellectually stimulating. It dares to question conventional wisdom about people and communities, illustrating key economic concepts through its overarching ideas.

Positive and normative analysis is a central theme in Freakonomics, presenting surprising conclusions that may challenge individual beliefs. Positive economics is based on objective, fact-driven analysis, while normative economics is subjective and value-oriented. Positive economic statements can be tested, whereas normative statements are opinions that cannot be definitively proven or disproven. This distinction can be challenging to understand due to the emphasis on values by consumers.

Public policies frequently rely on normative economic statements, resulting in ongoing disputes without clear resolution.

Throughout Freakonomics, there are numerous instances of positive vs. normative analysis. In chapter four, the authors discuss the correlation between crime rates and abortion, using statistical information to support their argument. This demonstrates positive analysis, as the data backs up the claim being made. On the other hand, normative analysis would argue that crime and abortion are not related, based on ideals of how the world should be. In chapter five, the authors suggest that a child's academic success is not dependent on parental efforts, contrary to common belief. This highlights the distinction between approaches that consider the world as it is (positive analysis) and those based on ideals of how the world should be (normative analysis).

Incentives are crucial in modern society as they influence human behavior, motivating individuals to act in specific ways. Understanding and acknowledging these incentives is vital for comprehending human actions. In economics, incentives play a significant role, with corporations often receiving tax benefits for increasing their workforce. Levitt and Dubner highlight the importance of incentives in economics in their book Freakonomics, categorizing them into moral, social, and economic incentives. Moral incentives stem from conscience or conviction, while social incentives are driven by feelings of shame or glory.

The introduction of economic incentives is driving individuals to prioritize their own financial well-being. In chapter one, a daycare center in Haifa, Israel implemented a fine for parents who were late in picking up their children. This led to an increase in late pickups as parents valued personal free time over avoiding the fine, indicating that the benefit of free time outweighed the cost of the fine. Previously, parents adhered to timely pickups based on social and moral obligations but the economic incentive diminished their sense of moral responsibility. Similarly, teachers and students were motivated by incentives related to standardized testing, such as increased school funding or job security, leading to unethical behavior like aiding students in cheating on exams.

Incentives play a crucial role in various aspects of everyday life, as they are present in different situations based on individual beliefs, which can also be linked to normative versus positive analysis. In the context of real estate, Chapter Two highlights how real estate agents lack moral incentives to secure the best price for the houses they are selling on behalf of their clients. As the process of obtaining the optimal price for a house can be time-consuming, real estate agents, who typically earn a commission of 3 to 6% on house sales, may feel little motivation to invest additional effort for a relatively small financial gain. They often prioritize their time and value it above exerting more energy to sell a house at a higher price, preferring a quicker sale at a lower price. The book presents numerous illustrations of incentives, with one particularly intriguing example being the situation of drug dealers who still reside at home, as discussed in Chapter Three.

Levitt and Dubner illustrate the concept of "tournament type markets" using the example of dealing crack cocaine to show how individuals can be incentivized to improve their circumstances and earn money in challenging settings. They depict the world of street-level drug sales as a competitive "winner take all" market where participants are driven to increase profits for their organization in hopes of advancing within the hierarchy.

In this market, higher-ranking officials are more interested in making money due to their elevated status. Despite the presence of numerous players, one by one they are gradually eliminated. Ultimately, a victor emerges and claims the "prize" - typically money. According to the book, even though the top 120 "managers" within the Black Disciples gang constituted just 2.2 percent of the total gang membership, they were able to acquire more than half of the earnings. This market operates in a "tournament" style where these "managers" rise above the competition to become high-ranking individuals, essentially winning the "tournament."

Overall, I think Freakonomics demonstrates fundamental economic concepts. Levitt and Dubner outline various key themes in their book, but three central ideas stand out: the distinction between positive and normative analysis, the pivotal role of incentives in modern society, and the concept of "tournament" style markets where one winner takes all. While these are just a few of the main themes in the book, they provide ample evidence to support the argument that Freakonomics delves into essential economic principles. Ultimately, Freakonomics is a compelling work that merges commonplace ideas with economic concepts, solidifying its place as a book on economics.

Works Cited

The book "Freakonomics" by Steven D. Levitt and Stephen J. Dubner was published in 2005 by William Morrow. This information was retrieved from the Freakonomics RSS feed on June 17, 2014.