With its title of Freedomnomics, some might dismiss John Lott’s latest book as just some slanted ideological rhetoric to be ignored. That would be a mistake. Having known him since graduate school at UCLA, I can attest that he is not an ideologue trying to abuse logic and statistics to confirm prior assumptions. He is someone who does his best to follow where the evidence leads. His subtitle’s conclusion that “the free market works†is the result of years of careful investigation, not a premise he started out to “prove,†regardless of reality.
Much like University of Chicago economist Steven Levitt of Freakonomics fame, Lott is primarily an empirical economist. Lott simply does a better job of recognizing the often subtle incentive mechanisms at work, particularly in markets, and designing empirical tests that incorporate those mechanisms, resulting in a substantial body of scholarship frequently at odds with Freakonomics’ conclusions, particularly when it comes to crime and the implication that in markets, others are always ripping you off.
Freedomnomics clarifies several areas of market behavior where “evil†monopoly or collusion explanations are frequently invoked and rebuts the implication that more government is necessary to protect us from getting ripped off. Careful attention to logic refutes many “blame someone and call for the government†assumptions and allegations. These include gasoline pricing during disasters, the high cost of last-minute airline tickets, higher restaurant markups for dinner, wine and coffee, full service price differentials at gas stations and more. Especially useful is his discussion of why predatory pricing, though frequently alleged, makes no sense for profit-seeking firms. He builds on the earlier work of John McGee, Harold Demsetz and Dominick Armentano, adding how the possibility of short-selling makes predatory pricing even less likely in markets. In contrast, he offers an excellent discussion of why government, which does not face the discipline of clear ownership and markets, is the real locus of predatory pricing, illustrated in areas from weather forecasting to higher education to the post office to NASA.
Freedomnomics defends voluntary arrangements by showing how powerful reputation is as an incentive to trustworthy behavior in markets, which less insightful commentators often ignore (e.g., Freakonomics’ discussion of real estate agents). It goes further to illustrate how innovative people are, when left free of restraints, in overcoming alleged market failures (e.g., the “lemon†problem in the used car market), and contrasts those successes with the failures created when government steps in to “fix†them.
Freedomnomics also relies on evidence about hot-button political topics that are usually discussed at much higher volumes, such as campaign finance reform and the influence of political donations. Of particular note is his discussion of why the greatest cause of increased efforts to influence government is the rapid expansion of the size and reach of government, not the other way around (e.g., “The reason why campaign financing keeps growing is because the government is constantly expanding its grip on the economyâ€). Also insightful, though politically incorrect, is his discussion of the evidence connecting the incentives and voting patterns of women since woman’s suffrage and the growth of government.
Lott’s empirical bent is illustrated most clearly in Freedomnomics’ discussion of crime. He deploys evidence to reject some popular explanations for the 1990′s fall in crime rates, such as the broken window argument, and his analysis instead concludes that “increased use of the death penalty, rising arrest and conviction rates, and the passage of right-to-carry laws account for between 50 and 60 percent of the drop in murder rates during the 1990s.†He also shows that Freakonomics’ controversial conclusion that legalized abortions were a major cause of the drop, by reducing the number of unwanted children, was unsupported by the data. He shows that not only is other evidence inconsistent with that conclusion, but that it ignored an important mechanism—”multiple studies have shown that legalized abortion, by raising the rate of unprotected premarital sex, increases the number of unplanned births, even outweighing the reduction in unplanned births due to abortion.†If abortion increased rather than decreased the number of unplanned births, it contradicts an argument that is premised on fewer unwanted children.
Freedomnomics offers some insights even for someone who has taught and written in the areas it discusses. However, its logic, focus on evidence and accessible, jargon-free style makes it an even better book for the general public. It allows them to unlearn many things about markets and government intervention they have been trained to “know,†but aren’t true, and to begin to replace it with real understanding.
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Gary,
Given that no library seems to carry the book, at least yet, buying it was the only alternative, and, so far, so good.
While John seems to have many good big picture views, some of the detailed economic explanations fall well short, even if they are an advance over the competition.
For example, the real reason that the price of Seagram’s Seltzer Water is about twice the price of Coca-Cola is NOT that ‘water quality and carbonization levels have to be higher when pure seltzer is not masked by cola flavoring.’
John seems to have a bias for insisting that prices are strongly related to costs, something no Austrian will have.
Presumably, consumer knowledge of Seagram’s is the result of advertising and some consumers will be willing to pay substantial prices for the product. However, the number of such consumers will likely be far less than for Coca-Cola at any given price. In fact, it is likely that reducing the price below twice that of Coca-Cola will be counter-productive as the demand will not increase as fast as the price falls.
So we have a high profit seltzer water, as long as we don’t try to sell too much. Why won’t this high profit be competed away?
Because the entry of a new competitor will impeded by the lack of low cost shelf space and transportation. Coca-Cola already has both shelf space and transportation. All it needs do is substitute a number of high profit seltzer six-packs for low profit Coca-Cola six-packs.
Regards, Don
Gary wrote:
Lott’s empirical bent is illustrated most clearly in Freedomnomics’ discussion of crime. He deploys evidence to reject some popular explanations for the 1990′s fall in crime rates, such as the broken window argument,
What is the “broken window argument” to which he referred? Was it the idea that if the government mandated that buildings with broken windows got their windows replaced, crime would go down, as New York City implemented?
Nasikabatrachus,
In case you weren’t kidding, see http://en.wikipedia.org/wiki/Fallacy_of_the_broken_window
Kevin,
I thought of the broken window fallacy too, but referencing it in relation to dropping crime rates doesn’t make sense to me, and I don’t remember anything from Freakonomics or the general discourse that argued that make-work jobs decrease crime. Please enlighten me on why it’s relevant, I’m awfully in the dark here.
Nasikabatrachus, I think you had the right idea in your first post. This link seems to be a better fit,
http://en.wikipedia.org/wiki/Fixing_Broken_Windows
I think it is unfortunate that the Freakonomics things got tied into this, because much of his book is quite good. The title and cover should not have been such obvious references, he should not have sued them and he should not have tried to frame his book as a response to Levitt’s, which is actually not as “anti-market” as he portrays it. Don’t let that last sentence fool you into thinking I believe in objective “oughts” though, these are my preferences.
I only skimmed through parts of the book in a book store, but I found the part urging us to be less cynical about the motivations of politicians interesting. I am generally in favor of cynical beliefs, for reasons Robin Hanson points out at the end of this. he seems to have evidence that politicians behave the same after they truthfully announce they are not running again as they do otherwise, as also do politicians that become lobbyists compared to those who do not. His explanation is that politicians really believe that their policies are good policies. This would seem to mesh with Mises’s (and I think Caplan’s as well) belief that earnest politicians will have an advantage at appearing earnest to voters compared to cynical ones. Of course, Caplan views all this as a bad thing while Lott does not even question its goodness, though he does almost claim granting suffrage to women was a bad idea (though he also said it would support the feminist claim that women have needs that weren’t being met by a government determined by males).
An interesting contrast is Bruce Bueno de Mesquita. You can find econtalk interviews with him here. He is perhaps the most cynical voice on politics I have come across from someone who seems more knowledgeable than bitter. It is in the tradition of both Machiavelli and (more directly) William Riker, whose self-interested rational choice assumptions are both currently under assault from Bryan Caplan. His ideas are interesting and plausible and he claims to have empirical evidence, but Arnold Kling savages the manner in which that was investigated here.
For those who read Unqualified Reservations (and if you don’t, then why not?) and are wondering why this post is so similar to one I made here, the answer is that I am lazy and just copied much of it.
“Broken window” refers to policing minor crime more harshly to prevent major crime.
http://www.talkleft.com/story/2003/02/02/081/73183
“Broken window” also refers to requiring property and business owners to keep their property in good condition, fixing broken windows, cleaning trash, removing gang signs. It works. It parallels the old real estate saying, “Location, location, location.”
Any of you want to live in a trashy neighborhood? I live in a lower class neighborhood. One can tell the rental houses by the junk cars on the street. America, I suppose like other places, has a civilized class culture and a trash class culture. Every time I take a walk I fill a small sack with aluminum cans (yes, I ignore plastic).
I see the same trash in the same yards every day. The resident walks by the same trash in their yard every day. It isn’t any harder for a trash class person to pick it up than for a civilized person.
Death penalty – Several hundred years ago England began the transportation of criminals to the colonies because hanging petty criminals didn’t deter crime.
“Having known him since graduate school at UCLA, I can attest that he is not an ideologue trying to abuse logic and statistics to confirm prior assumptions. He is someone who does his best to follow where the evidence leads.”
Please tell me “Gary Galles” isn’t just another Mary Rosh pseudonym.
Nasikabatrachus,
Oops. Sorry.
Kevin Carson,
I assure you Gary Galles is a real person. I had him as an undergradute professor for several courses at Pepperdine. He first introduced me to the writings of Hayek, Alchian and Reisman. Great professor.
Ike, if you had to pick one work by Alchian to recommend to us, what would it be?
Kevin Carson, you can find Gary Galles’ page here. Since you are the lefty I have the most respect for, I’d like it if you could add a comment or two to Mencius Moldbug’s blog Unqualified Reservations. It’s one of the more interesting ones I’ve come across, which advocates something he terms “formalism“, which resembles medieval monarchy, Singapore and modern corporate structure to some extent, but he denies is anarcho-capitalism. His distaste for modern neo-classical economics (I am the sorry apologist for it and its methods there, and I treated my one econ class in high-school as a study hall) and interest in the pre-democratic past oddly reminds me of you. Unfortunately, readership and commenting is heavily selected for certain varieties of right-wing extremism, and I think without the corrective influence of discourse and disagreement a writer like that can come to resemble the Asia Times’ Spengler.
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