Freakonomics Explores Life??¢â???¬â???¢s Hidden Incentives

Half a century ago, President Harry Truman lamented that his economic advisers never gave him conclusive advice. It was always, “On the one hand this, on the other hand that.” What he needed, he said, was a one-armed economist. That economist, figuratively speaking, is here at last.

Steven Levitt, author of Freakonomics and economics professor at the University of Chicago, deals in no ifs, ands or buts as he plows his iconoclastic way through a dazzling variety of examples of his central theme: Incentives are the cornerstone of modern life. Understanding incentives, he says, “… is the key to solving just about any riddle, from violent crime to sports cheating to online dating.” For him, economics is the study of incentives.

Levitt says there are three types of incentives: economic, social and moral. Sometimes the three are combined as in the anti-smoking campaigns. High “sin” taxes on cigarettes are an economic incentive to quit smoking. Banning smoking in public places is a social incentive. Government reports that terrorists get money from black market cigarette sales create a moral incentive.

A corollary to his theme is that “conventional wisdom is often wrong.” He sets out to prove this through analysis of statistical data combined with deductive reasoning. The cases he takes up make for riveting reading, and his conclusions are plausible, if not 100% certifiably correct.

Levitt devotes a good many pages to demonstrating that cheating in various guises is spurred by incentives, or at least perceived incentives. For example, he says that on April 15, 1987, about 7 million American children vanished. No, they weren’t spirited away by kidnappers in the night. That was the date on which, for the first time, federal income tax returns had to include the Social Security numbers of dependent children. When the IRS personnel toted up the data after April 15, they discovered that filers had reported 7 million fewer children. Those children had never existed.

In the 1980s, the late Mitch Snyder campaigned tirelessly for “the homeless.” He routinely asserted that there were 3 million “homeless” Americans. He so testified before Congress and liberal advocacy groups accepted his statement at face value, campaigning for ever more public money to address this seemingly huge and growing problem. Snyder also said that 45 homeless people died every second. That would add up to 1.4 billion people annually at a time when the U.S. population was approximately 225 million. Ultimately, Snyder was forced to admit that his “statistics” were fabrications.

In a chapter titled, “Drug Dealers Living With Their Moms,” Levitt tells us the story of Sudir Venkatesh, a University of Chicago graduate student who was sent out to do a survey among crack cocaine dealers. After a harrowing experience with a gang, he gained the confidence of its leader and ultimately was given spiral notebooks containing all of its transactions. Venkatesh and Levitt teamed up to analyze the data and found that the gang was part of a 100-gang national “franchise” and was structured much like a corporation. The members of the national gang’s “board of directors” each pulled down $500,000 a year. The head of the local gang took in about $100,000 (tax free) plus money from various other off-the-books transactions. The “foot soldiers,” who bore most of the day-to-day risks, “earned” $3.30 an hour, well below the minimum wage in legitimate work. No wonder they lived at home with their moms.

Perhaps his most arresting conclusion has to do with the dramatic drop in the crime rate—against all predictions—in the 1990s. To tell you what it is would be to deprive you of reading a fascinating skein of logic. You may not agree with his conclusion, but you won’t soon forget it.