Freedom's Fidelity

Thursday, September 08, 2005

Book Review - Freakonomics

I read Freakonomics the other day. Good book, nice quick read. Economist and author Steven Levitt first came to my attention several years ago when his research suggested that the factor most responsible for the drastic drop in crime during the 90's was the legalization of abortion in the 60's. Conservatives were outraged with his conclusions feeling Levitt was endorsing abortion as a crime fighting tool. Liberals were outraged with his conclusions because they felt that the poor and black women were singled out. Levitt came under some pretty heavy assault from all sides.... so Levitt shrugged. After all, and however offensive, he did have reality on his side. This was not what he set out to prove with his research, but he came across it, and reported it as is, the guy honestly has no taste for politics, which is something that I appreciate about him and made the book that much more enjoyable.

Freakonomics is really nothing more than Classical or Austrian Economic analysis applied to social phenomenon, which for me is far and away the most appealing aspect of the dismal science. What struck me most while reading was that it all seemed like common sense to me, he was asking the questions that I always ask mentally but rarely ask out loud because they seem a bit .... freakish. I know, it sounds like I am flattering myself, 'I think exactly like Steven Levitt!' But really, this is the side of economics that comes most easily me (as opposed to the one with all the math!) Given that I can't say that I personally found his results especially shocking, but they certainly provide great reading, as well as very useful and fun mental exercises.

The basis of economics is that people respond to incentives, and Levitt is sure to make this simple, but often overlooked point. As well, perhaps the most important analytical paradigm I've ever learned came when I took an econometrics course in college relating to correlation and causation. The two are often confused, but the fact is that anytime one finds correlation between two items, there are always four possible explanations, which are:

1) A causes B
2) B causes A
3) C (some other variable) causes both A and B
4) The correlation is due to randomness. (Levitt, for some reason, did not emphasize this 4th possibility as much as the first three.)

For example, one could test the math skills of 1st-5th graders and also record their shoe sizes. The results would show that a larger shoe size is positively correlated with higher test scores. Under the above possibilities, we can come up with 4 different theories that the data does in fact support.

1) Large feet causes greater intelligence in math - perhaps it is easier to see your larger toes when using them to count, thus you are better in math?

2) Math skills cause your feet to grow - Your brain grows so much to hold all that math that your feet must also grow to stay in proportion?

3) Another variable (age) causes both - Older students naturally have larger feet as well as extra years of schooling in math

4) It is all coincidence.

Which theory makes the most sense? Obviously we can see that explanations 1 and 2 are absurd while number 3 is simply common sense and Occam's Razor suggests 4 is unlikely.

If only everything were so simple.

Consider these questions: What makes a good parent? What factors in childhood lead to strong academic performance throughout school? What led to the sudden crime drop in the 1990's? These are complicated questions, each affected to differing degrees by thousands of competing variables. How does one tease out the true causation? This concept is the core of the book and this is where Levitt excels. Simply put he is just damn good at extrapolating and then articulating the relevant variables. In a step by step, logical deconstruction, Levitt dissects some of the more explosive social issues of the day and reveals their true causations. In the book, he describes this sort of regression analysis as more of an art than science and his analysis proves that out.

My personal favorite section was "Why Do Drug Dealers Still Live with Their Moms?" Where can you find a real insiders view of the inner workings of the Chicago street gang The Black Gangster Disciple Nation? Not in a movie, not in a college class and certainly not from Jesse Jackson, but you can find it in 'Freakonomics.' Through an interesting set of circumstances Levitt crossed paths with someone who had spent a good deal of time 'embedded' with the gang and was also able to walk away with years of the gang's financial records. It was a data gold mine. You'll see that street gangs are (not surprisingly) structured much like a corporation, they have a hierarchy, they do public relations and turning a profit really is their raison d'etre. Individual members respond to salary, incentive structures (financial and otherwise), and weigh the opportunity costs just like the rest of us. One of the more interesting statistics of the chapter was that a crack dealer in Chicago housing project stands a greater chance of dying than a death row inmate... in Texas. Seriously.

One caveat: This book is not profound, at least an economic scholar wouldn't find it so. But Freakonomics was not written for the economic scholar, and that is where its real value lies. The book goes beyond asking those boring macro questions of national savings rates, trade deficits, and inflation that makes the average persons head spin... and then fall asleep. In short, Levitt puts a spotlight on the fun side of economics and in some sense I would describe this book as teaching the philosophy of econometrics. It is so accessible and so popular - it's the number 1 best seller in Brazil, has spent several months on the NYT best seller list, and is selling well in the UK - and it's about economics! When was the last time a book on economics had such broad appeal?!?! Those types of things should warm the heart of anyone who has ever lamented the economic illiteracy of the general populace. Overall, great book, I especially recommend this if you aren't an econ nerd like myself.

posted by Paul  permalink | |