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An Answer to the Freaks

July 24, 2007

Tags Free MarketsMedia and CulturePhilosophy and MethodologyPolitical Theory

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 economy"). 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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