“Freakonomics” by Steven D. Levitt and Stephen J. Dubner Essay
“Freakonomics” by Steven D. Levitt and Stephen J. Dubner
Freakonomics, by Steven D. Levitt and Stephen J. Dubner, is book that not your typical economist would write it was co-authored in 2005 and if morality represents how we would like the world to work, then economics represent how it actually does work in this award-winning book. Steven D. Levitt is a not your typical economist. He is a much-heralded scholar who studies the riddles of everyday life- from cheating and crime to sports and child rearing and whose conclusions turn the conventional wisdom on its head (freakonomics.com). Stephen J. Dubner is an award-winning author and journalist (freakonomics.com). These two authors team up to create a very insightful groundbreaking collaboration.
They set out to to explore the inner workings of a crack gang, the truth about real estate agents, the secrets of the Ku Klux Klan, and much more. Through much story telling and insightful knowledge, they show that economics is at the root, the study of incentives (freakonomics.com). There is not one underlying theme the book, Freakonomics, is built around, but there are many reoccurring themes throughout. The three major themes that I found occur throughout the book are: positive vs. normative analysis, incentives are the cornerstone of modern life, and the idea of “tournament” style markets, “winner take all”.
Freakonomics is a brilliant, provocative investigation into motives: what are they, how they can be changed, and how they affect what people do. It is also a deceptively easy read: its style is very humorous and really grips the reader throughout the book. Freakonomics tackles some of our most basic assumptions about the way people, and society, work. I believe that Freakonomics demonstrates the basic economic principles. I will defend this argument through the underlying themes of Freakonomics.
Positive vs. normative analysis is one of the many underlying themes of Freakonomics. The conclusions derived from each chapter will often surprise the reader. These conclusions may also not agree with your personal beliefs, but that is the basis of positive vs. normative analysis. Positive economics is objective and fact bases, while normative economics is subjective and value based. Positive economic analysis statements do not always have to be true, but in order to be considered a positive analysis you must be able to test and prove or disprove the statement. Normative analyses are opinion based, so they cannot be proved or disproved. This basic economic principle is not always easy to understand because the consumer is usually very value based. Public policies are typically revolved around normative economic statements meaning the disagreements carry on because neither side can prove that is correct or incorrect.
There are many examples of positive vs. normative analysis throughout Freakonomics, in chapter four, on crime and abortion, the authors brought forth the issue of how crime rates relate to abortion and backed it up with the statistical information. This is an example of positive analysis because the statistical information supports the issue being argued. Normative analysis of the issue between crime and abortion would be that they are not correlated to one another because it pledges the fidelity to notions of the way the world should be. Also, in chapter five, the coauthors believe that a child’s academic success does not come from parental efforts and they explained this through the data presented in the book. One would think a parental figure would help a child’s development in the classroom, but in reality its other external factors that does. This clearly illustrates the difference between an analytical approach that considers the world, as it is (positive analysis) and an analytical approach that is based on how the world should be (normative analysis).
Incentives are the cornerstone for modern life, people respond to incentives. An understanding of incentives is the key to clearly understanding any human behavior. Incentives are a thing that motivates or encourages one to do something. Incentives are everywhere in the world especially in economics. Corporations are often given tax incentives for hiring more employees. Incentives are a payment or concession to stimulate greater output or investment. In Freakonomics, Levitt and Dubner believe incentives equivalent to the study of economics. In chapter one, Dubner and Levitt exclaim that incentives come in three varieties: moral incentives, social incentives, and economic incentives. Moral incentives are which one acts out of conscience or conviction. Social incentives are by which actions are related to shame or glory.
Economic incentives are causing people to act in their own personal financial interest. In chapter one, we saw the example of a day care center in Haifa, Israel, in which a fine was levied for parents picking up their child late from day care. Once the fine was implemented, we started seeing parents showing up late because it allowed more personal free time. Once this economic incentive was levied parents found that the free time outweighed the economic incentive. Parents were only picking up their child on time because there was somewhat of an incentive socially and morally. They morally or socially believed they had to pick up their child on time, but now that an economic incentive was implemented they did not feel morally responsible to be on time and just paid the fine. Also in chapter one, we saw the incentive for teachers and their students to do well on standardized testing for more school funding or even to keep their job, so teachers act out irrationally and help students cheat on standardizing testing.
Incentives are found in everyday life they are in every situation depending on one’s personal beliefs, which also can relate back to normative vs. positive analysis. In chapter two, real estate agents don’t have moral incentive to get the best price for their customers house being sold. Getting the optimal price on a house and time consuming. Since real estate agents make 3 to 6% commission on houses they have little incentive to put more work in then needed for a small amount of money more. They feel their time is more valuable then putting forth more effort in selling a house knowing they can sell it faster at a cheaper price. There are many examples throughout the book of incentives, but the one I found most interesting was the issue of drug dealers still living at home in chapter three.
Levitt and Dubner use dealing crack cocaine as an example of an incentive to better yourself and make money through harsh working environments, but it is also an example of a basic economic principle called “tournament type markets”. They strategically use the example of dealing crack cocaine as a “tournament” type market by convincing the reader this is a “winner take all” field of work. Street-level drug salesman usually are motivated by the idea of getting promoted in the drug business, so they ultimately try to maximize the gang’s profits.
Higher ranker officials however are more interested in making money since they are already in a position of high status. Overall in this market there are many players, but one by one they are eliminated. At the end, a victor emerges and takes home the “prize” or money. As stated in the book, the top 120 “managers” in the Black disciples gang represented just 2.2 percent of the full-fledged gang membership, but took home well more than half the money. This is a “tournament” style market because these “managers” emerged from all the other competitors and are now high ranking, they won the “tournament” in essence.
Overall I believe Freakonomics illustrates basic economic principles. Levitt and Dubner lay out many underlying themes in the book, Freakonomics, but there are many reoccurring themes throughout. The three major themes that I found throughout the book are: positive vs. normative analysis, incentives are the cornerstone of modern life, and the idea of “tournament” style markets, “winner take all”. These three basic economic principles are just a few of the major themes in the book, but I believe are enough evidence to convinced the reader that Freakonomics does cover major economic principles and is a book of economics. In all, Freakonomics is a brilliant book that incorporates everyday ideas into economic ones. It truly is a book about economics and the evidence given proves this.
“Freakonomics.” Freakonomics RSS. N.p., n.d. Web. 17 June 2014. Levitt, Steven D., and Stephen J. Dubner. Freakonomics: A Rogue Economist Explores the Hidden Side of Everything. New York: William Morrow, 2005. Print.