Freakonomics | Study Guide

Steven D. Levitt & Stephen J. Dubner

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Freakonomics | Context

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Economics

The word economics comes from the Greek words oikos, meaning "estate," and nomos, meaning "law." Economic theory evolved from the study of the laws of estates, or household management, to the study of how countries gain and keep wealth and capital. The study of economics looks at how goods and services are produced, distributed, and consumed, and has since grown into two distinct branches: macroeconomics and microeconomics. Although economics relies on math and statistics, it's considered a social science because it examines how people behave and interact to acquire goods and services. Although economic interactions usually occur between buyers and sellers, any kind of incentive produces an economic transaction. Understanding economics requires knowledge of math and statistics to analyze and interpret data, particularly data showing a cause and effect.

Economic analysis can be applied to various fields such as business, finance, education, crime, and law. Scottish economist Adam Smith, author of An Inquiry into the Nature and Causes of the Wealth of Nations (1776)—the fundamental work of political economy and the foundation of capitalism (economic system based on the private ownership of goods and free market competition for distribution)—posited the theory humans are likely to act according to their own self-interests. The authors of Freakonomics both question and support this concept. The field of economics is not concerned with whether something is "right" or "wrong" or with how it came to be. Rather, it is concerned with analyzing the incentives that produce the outcomes. Therefore, incentives can be researched to predict how people will behave in any given interaction. Through this lens, economics is a study of human behavior.

Historical Allusions

Reconstruction: Freakonomics references the plight of African Americans to gain equal social, political, and economic footing with whites after the end of slavery in 1865. Many of the barriers African Americans face began during the Reconstruction era (1865–77), a national rebuilding period that followed the Civil War (1861–65). During this time President Andrew Johnson's administration passed laws that were prohibitive to African Americans in gaining employment and other freedoms, such as voting rights, afforded to whites. Although African Americans eventually gained political positions in the U.S. Congress and legislature, they faced incredible opposition sparked in large part by white supremacist groups such as the Ku Klux Klan (KKK).

Tensions increased in the South as states struggled to coexist in a new society with new rules. The reverberations of these struggles over generations are highlighted by many of the modern-day economic examples in Freakonomics, such as disparities in poverty that exist along racial lines and feed into criminal activities.

Ku Klux Klan: The Ku Klux Klan (KKK), a white supremacist group, was founded in 1866—the year after the Civil War ended and Reconstruction had begun. By 1870 there was a chapter in every southern state. The Klan symbolized white southern resistance to equal rights for newly freed African Americans. The Klan used intimidation and violence to terrorize blacks and harass political leaders who supported equal rights.

Freakonomics suggests that the members of the Ku Klux Klan use hidden information as power. For example, the Klan has long relied on secret membership and private rituals to threaten and intimidate behind the scenes of public knowledge. The exposure of such practices to the public has the potential to diminish the Klan's power through public outrage. Although the Klan's membership has waxed and waned over the years, there is often a resurgence when there are perceived advances in social equality.

The Crack Cocaine Epidemic

Freakonomics delves deeply into the economic incentives of drug dealing, particularly surrounding the crack cocaine boom of the 1980s. The authors examine the particulars of how crack cocaine became popular because of its cheap ingredients and production costs and discuss Oscar Danilo Blandon, who became a source for it in the 1980s through his Colombian cocaine connection. The crack cocaine epidemic had its greatest effect on lower-income African American inner-city communities and was correlated with a rise in crime and violence. Part of the drug's popularity had to do not only with its low cost but also its intense feelings of euphoria and short duration—users became easily hooked and immediately craved more.

This combination led to a huge rise in crack cocaine addictions, an increase of 1.6 million people between 1982 and 1985. The rise in crack cocaine dependency in turn caused a boom in the drug-dealing industry, with many operations run by the kind of street gang detailed in the book. Although those at the top could make a great deal of money, those at the bottom risked violence and death for what amounted to the same wages they could earn at a fast food job. This competition was to blame for the dramatic rise in crime and violence during this time, as drug dealers battled for turf rights and customers.

The crack cocaine epidemic was so devastating it spurred President Ronald Reagan's administration to begin a campaign known as the "War on Drugs," which passed federal antidrug laws and increased funding for prison and police programs. As a result the prison population doubled, with one in four African American men aged 20 to 29 being incarcerated or put on probation by 1989. The authors of Freakonomics go to great lengths to show not only how the crack cocaine drug-dealing enterprise was run much like any other capitalist business but also how it affected an entire segment of the American public that fell victim to addiction and decreased chances of socioeconomic gain.

High-Stakes Testing

To show how incentives can produce negative outcomes such as cheating, the authors provide the example of how high-stakes testing in Chicago public schools led teachers to alter their students' exams. Freakonomics devotes an entire chapter to looking at how the data from high-stakes testing can reveal the incentives that caused teachers to cheat on the tests.

High-stakes testing came about through the 2002 No Child Left Behind Act signed into law by President George W. Bush. Its goal was to incentivize schools to improve the quality of their teaching and curriculum, and its measuring stick was an achievement test at the end of the school year. Although the goal of the test was to measure students' progress, individual schools were held accountable for the outcomes and accordingly received—or did not receive—funding. Schools in turn placed pressure on individual teachers, tying raises and bonuses to high test scores and threats of termination to low scores. Both positive and negative incentives thus related to student performance. In the Chicago Public School system, a pronounced spike in teacher cheating occurred the year high-stakes testing was introduced.

One place in which economics can shed light on how incentives led to cheating is by examining high-stakes testing results in schools. Although the incentive would seem to be to raise the standards of learning, the consequences for teachers whose class scores don't improve create a stronger incentive to raise those scores by any means possible. The data show negative incentives work just as strongly as positive ones. In this case, economic incentives take precedence over moral incentives—teachers would rather not lose their jobs than worry they are doing their students a disservice by altering their test scores.

When the new CEO, Arne Duncan, was put in charge of the Chicago Public School system, he investigated the findings and changed incentives so that teachers caught cheating were easier to discover and penalize. After these changes the incidents of teacher cheating dropped by 30 percent.

Reception and Criticism among Economists

The publication of Freakonomics was met with as much buzz as skepticism. An accessible book explaining economic theory to a layperson in a catchy, controversial tone had never before been published. The book became a near-instant best seller, climbing to second place on the New York Times Best-Seller list. Critics appreciated the real-life applicable research in areas such as parenting and real estate, with which the authors enticed readers. For their part, Levitt and Dubner purposely designed the book to feel like a detective's investigation, encouraging readers to view the issues through an economic lens.

Other critics, however, derided the text as a "fad book," where statistics had been cherry-picked to make provocative economic claims. Some found nothing groundbreaking in the book, believing that it was common knowledge that "everyone is inclined to cheat" when provided with the right incentives. Many economists took issue with the authors for making controversial claims without rigorous data analysis to back them up. These economists believed that if the average person reading Freakonomics didn't have the training to understand confirmation bias, then the authors did a disservice to them by neglecting other data that might be considered. Many criticized the authors' claim regarding the link between abortion and lowered crime rates as an argument in favor of legalized abortion. Yet Levitt and Dubner are careful to state that economics is not a study of whether something is moral, but rather a study to understand its incentives. Nonetheless, the popularity of a book explaining the previously inscrutable field of economics excited many people new to the topic. As a result the authors created a popular podcast that dealt with similar economics puzzles and theories.

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