TCS Daily

A Microeconomist on the Loose

By Kenneth Silber - April 20, 2005 12:00 AM

The philosopher Isaiah Berlin once divided intellectuals into two categories, based on a fragment from the ancient Greek poet Archilochus: "The fox knows many things, but the hedgehog knows one big thing." Thus, hedgehogs produce work that reflects a single vision or principle, while foxes explore a scattered array of ideas. In Berlin's telling, Plato, Dante, and Proust were hedgehogs; Aristotle, Shakespeare, and Joyce were foxes.

Steven D. Levitt, an economist at the University of Chicago, would be, in any such reckoning, a fox. The winner of the 2003 John Bates Clark Medal, an award given biennially to an outstanding economist under 40, Levitt avoids overarching theory and big-picture subjects like trade and monetary policy. Rather, he sifts through data and applies microeconomic analysis to an eclectic array of topics. His new book Freakonomics: A Rogue Economist Explores the Hidden Side of Everything (William Morrow), written with journalist Stephen J. Dubner, includes discussion of crack gangs, real-estate agents, baby names, sumo wrestlers, teachers, the Ku Klux Klan, and more.

The book, which grew out of a 2003 profile of Levitt by Dubner in the New York Times Magazine, is organized around an eccentric set of questions. One chapter, for instance, is titled "How is the Ku Klux Klan Like a Group of Real-Estate Agents?" The answer is that both groups depend on closely held information. Agents hoard data on market trends, inventories and leads. Klansmen obscure their identities and activities. The Internet has eroded real-estate professionals' information edge. The Klan was thrown into turmoil decades ago by an informant who revealed passwords and other secrets to producers of a Superman radio show, such that kids were soon engaged in mock Klan-busting.

Of course, likening real-estate agents to Klansmen on a moral basis would be a stretch. However, agents do not come across well in Levitt's telling. He worked on a study that showed agents sell their own homes for more than they do comparable client homes, thus making income through volume rather than by getting the best prices for their clients.

Levitt sparked intense controversy several years ago with a study suggesting that legalized abortion in the 1970s was a major factor in the decline of crime in the 1990s -- since abortions prevented many births that would have resulted in children growing up at high risk of becoming criminals. He maintains this position in Freakonomics, arguing that statistical analysis shows Roe v. Wade led to safer cities. (He acknowledges, though, that this does not settle moral arguments over abortion.) According to his analysis, other important factors in the crime drop included higher numbers of police and the bursting of the crack market bubble. He argues that little role was played by other oft-cited factors, such as the economy, new police strategies, and making gun laws tighter (or looser).

A chapter titled "Why Do Drug Dealers Still Live with Their Moms?" provides an analysis of the economic workings of a Chicago crack gang, based on data collected (initially at high personal risk) by a young sociologist named Sudhir Venkatesh. The upshot is that the crack trade, even at its market peak, was lucrative only for those at the top of a selling organization. The gang's foot soldiers made less than minimum wage and faced a 1-in-4 risk of being killed over four years. (In the same time, being a timber cutter, the most dangerous legitimate job in the U.S., carried a 1-in-200 risk.) These drug dealers struggled desperately to reach the gang's upper echelons, but few would make it.

Another chapter deals with cheating among both schoolteachers and sumo wrestlers. An analysis of Chicago test scores suggests that teachers tinkered with students' answers or otherwise broke the rules to elevate scores in at least five percent of the classrooms. Sumo tournament results give reason to believe the wrestlers sometimes engaged in quid pro quos, allowing each other to win in matches that were more crucial to one wrestler's rating than another's. Teachers and sumo wrestlers, like everyone else, respond to incentives, Levitt notes. However, he also provides an example that shows that most people don't cheat. A large majority of office workers receiving bagels from a delivery service that operated on the honor system did stuff dollars in a box left for that purpose.

Freakonomics contains much that is thought-provoking and surprising, especially for readers not previously familiar with Levitt's work. (Most of the topics were touched on in Dubner's New York Times Magazine piece.) Overall, Freakonomics serves a valuable purpose in conveying that economics is not necessarily highly abstract or sadly boring.


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