Pre-reading book review: Freakonomics by Levitt & Dubner

I discovered this book while reading some economics blogs, and decided to read it after many praises for one of the authors; Levitt who was awarded the American Economic Association's John Bates Clark Medal, awarded every two years to the best American economist under forty.


This is not a very common review; while most people write reviews after reading a book, I decided to write a review after reading only its first 50 pages. I will write what I think about freakonomics as far as I understand now, and when I finish reading, I will write a second review which will reflect how my thoughts have changed.

So far I have read the explanatory note, the introduction, The Hidden Side of Everything, and the first essay, What do Schoolteachers and Sumo Wrestlers have in Common? As far as I can understand, freakonomics is about explaining the modern life using simple economics concepts. I love the idea, as I also try to explain things in a very positive way and I normally prefer the positive views rather than the normative one (this is rather useful for example when trying to explain the failures of communism). Freakonomics is about looking at some events and trying to explain them in an unconventional way, by using the economic logic, rather than equations. You will however need to have an idea of the principles of economics and its fundamental elements to really enjoy the book and connect the dots. I know some people might recommend this book to anyone who wants to learn about economics, but I personally don't think this is a great idea. It would be better to do it the other way around; learn about economics and then read the book.

The first essay 'Schoolteachers and Sumo Wrestlers' is about the morals. The topic is very nicely demonstrated by the story of a man who operated a bagel business based on voluntary donations on bagels taken. The story is also linked with 'The ring of Gynes' which also reminds me of Lord of the Rings and Harry Potter. All stories have in common something; invisibility: a ring in the case of LOTR, a mantel in Harry Potter. The question is: Would you be immoral if no one was able to see you? A strong incentive for being morally acceptable is of course society, but up to what point is it? According to the story of bagels, Levitt says that at least 87 percent of the time, a man would resist temptation to be evil if nobody can witness their acts. Is it so easy to measure the morals? Can we draw conclusions from a single case of bagels sale? I wouldn't, but this is of course a very original way of trying to measure the morals. Having an unbiased answer about this would have an unimaginable impact on our understanding of the modern world.

The most important part of the introduction is the listing of the fundamental ideas on which the book is based. I will shortly comment them as far as I understand now and given my background knowledge.

1. Incentives are the cornerstone of modern life. 
I believe that incentives are the cornerstone of any civilisation from the beginning of time. They do not only belong to the modern life, and they do not only belong to human beings (animals fight for territory and partners). This is a fundamental idea that is also linked to private property and liberty, two concepts much loved by me. I see the link in the fact that free incentives are bound to create a more efficient allocation of resources. Levitt rightly says that understanding these incentives solves any riddle, from violent crime to sports cheating. I totally agree with the concept in the fundamental level, however this is also linked with questions such as how can you discover the real incentives of people as some incentives might be obscured and some are just irrational.

2. The conventional wisdom is often wrong. 
I have mixed views about this, however in general I tend to agree. I link this second point with the incentives; conventional wisdom is often wrong because it serves to the agenda of specific people. Information is however subject to supply and demand, therefore it is contradicting that the conventional wisdom does not represent the information that serves better to its users. One may argue that the wrong wisdom serves better to its users; information doesn't have to be always right. The conservative view would suggest that the actual conventional wisdom is not perfect, but it is better than what it would have been if it was different and/or true.

3. Dramatic effects often have distant, even subtle, causes. 
I agree with the idea of the butterfly effect. It is often said that the best way to solve a problem is to break it down and look at its fundamental causes. When facing social and economic problems, this sounds acceptable, even though much more time consuming and difficult. It is therefore helpful to have big cross-sectional data and resources which may help you to identify causes. Levitt clearly shows this in the book by putting together a wide variety of stories from the past and the present, making connections between seemingly disconnected events and demonstrating an economic explanation behind it.

4.Experts use their informational advantage to serve their own agenda. 
This point is again covered by the first one, because experts have different incentives from their costumers. The agency theory also covers this point, and the idea of information asymmetry, insider trading, and finally market efficiency are the equivalent in terms of economics. Market efficiency is a million dollar question for economists of all times, therefore the fourth point is inevitable for any economics or freakonomics book.

5. Knowing what to measure and how to measure it makes a complicated world much less so. 
The importance of good data can never be stressed too much. I come from a country in which I can barely believe any official statistic. I cannot believe most of the empirical results from any Albanian researcher. I cannot believe any study based on companies financial statements, not only in Albania but in most countries. I have therefore a mixed view on empirical studies; while I tend to believe them more than qualitative studies, I also pay a lot of attention to the methodology, which is the most boring part for the majority of people. Data is so easily manipulated with or without knowledge that for me it is almost impossible to assume they are error-free in a satisfactory level. I therefore prefer primary sources vs secondary in any type of research. While there is a trend that the academic research is not very considered by most policy makers, we shouldn't be very worried if the research results are biased. This is the sad reality of how policies are undertaken these days.

How will my views change about these five fundamental ideas that the book is based on? The second part of the review will come as soon as I finish the book.

0 comments:

Post a Comment

 

Blogger news

No news this time

About the blog

The best and most clever blog you have ever came across. Invisible hand? is a blog that features political ideas and debates on economic and social liberties. Occasionally you will find books and research papers reviews and other fun stuff.

About me

I have been reading economics since 2012.

Tirana-Cardiff-London-Reading.