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Freaked Out: Liberty, Choice, and Rogue Economics

It is a rare thing for an economist to write a bestselling book, but Steven Levitt is a rather rare economist. Winner of the Clark Medal for the best American economist under forty, Levitt does not practice economics as most of his colleagues at the University of Chicago do. Indeed, he is something of maverick, as is made clear by the subtitle of his bestseller, Freakonomics: A Rogue Economist Explores the Hidden Side of Everything .

Levitt does not seek to explain price theory, monetary policy, or trade relations. He turns his attention to rather more quirky questions: Why do crack dealers live at home? Do real estates agents really seek the best deal for their clients? Do abortions lower the crime rate? Do schoolteachers cheat?

Freakonomics has become the most noticed economics book of the year because of the explosive answers Levitt provides to those questions. But for those interested in the nature of economics as a discipline, Freakonomics is a marvelous reminder that economics is not about money, it's about man. And for those who are concerned about restoring the human person to the center of economic inquiry, Levitt is an ally, albeit a rogue one.

As any undergraduate economics student will tell you, the further one progresses in economics, the more the human person seems to disappear from view, obscured behind an increasingly complex mass of mathematical models and equations. No one doubts the value of the math, but what separates economics from, say, engineering, is that the subject of study is the human person. Lose the human element and you have lost the best in the tradition of economic thinking.

At the heart of economics is how people seek to satisfy their needs, wants, and desires by balancing costs and responding to incentives. The premise of economics is that human beings are rational and make perfectly understandable choices by taking into account competing incentives. Economics does not argue that everyone's crazy Uncle Fred is rational; but it does argue that, in the main, we make rational choices in the face of incentives. It is, despite being known as the “dismal science,” a rather lofty view of the human person and his dignity.

That being said, Levitt turns his powerful analytical tools upon the more dismal realities. He concludes that crack dealers live with their mothers because, apart from a few drug kingpins, the profit margins in dealing crack are actually quite low—too low to allow a street-corner hood to have his own place. He demonstrates how the marginal increase in real estate commissions is not sufficient to motivate agents to secure the best price for their clients. He traces the process by which upper-class parents choose novelty names for their children, only to be imitated by lower-class parents seeking some sort of upper-class cachet, at which time the upper-class parents abandon the names. It's all fascinating stuff, demonstrating that otherwise perplexing outcomes can be explained by looking carefully enough at the information people use to make choices.

The most notorious chapter of his book stands out from the others. In exploring the relationship between abortion and crime rates, Levitt does not look so much at how choices are made, but rather at the (unintended) consequences of such choices. He argues that the drop in crime rates in the 1990s was due to the increase in abortion rates eighteen years earlier—in 1973, the year of Roe v. Wade. After sifting through the data, Levitt concludes that while other factors contributed to the drop in crime rates—more police, the fall in the price of crack cocaine—the most powerful cause was a demographic one.

Levitt writes:

The most dramatic effect of legalized abortion, however, and one that would take years to reveal itself, was its impact on crime. In the early 1990s, just as the first cohort of children born after Roe v. Wade was hitting its late teen years—the years during which young men enter their criminal prime—the rate of crime began to fall. What this cohort was missing, of course, were the children who stood the greatest chance of becoming criminals.

The argument is carefully made and somewhat complex. It remains always a descriptive argument, not a prescriptive one. He does not advocate eugenics, but simply argues that, in fact, rising abortion rates have contributed to declining crime rates. Of course, at this point the reader is already considering the moral implications arising from the swirl of data. Levitt deliberately absents himself from consideration of these moral implications.

“Morality, it could be argued, represents the way that people would like the world to work—whereas economics represents how it actually does work,” he writes. That's a little rough around the edges, but there some wisdom in that. Especially for those concerned with the foundations of a free society, this twofold focus—economics and morality—on human choices is fruitful.

Morality teaches us that some things should not be chosen—aborting babies to lower the crime rate, for example. But economics teaches us that given certain incentives, almost anything will be chosen by those not restrained by moral discipline.

The consequence for public policy then is clear: it is important to structure incentives so that economic behavior reinforces moral behavior. There was much discussion of this during the welfare reform debates of the 1990s. Broad economic policy also teaches us the same thing. If incentives point toward less saving and more consumption (e.g., inflation), then there will be fewer thrifty savers to fuel investment. Day-to-day experience confirms this, too. The wise business owner provides incentives for the employees to contribute to the well-being of the company—profit-sharing, stock savings plans, rewards for finding efficiencies. Likewise, incentives are put in place to discourage immoral behaviour—penalties for absenteeism, policies to discourage petty theft.

The goal of good public policy is to bring incentives into line with moral behavior so that a society can be both free and virtuous.

“Incentives are the cornerstone of modern life,” writes Levitt. “And understanding them—or, often, ferreting them out—is the key to solving just about any riddle, from violent crime to sports cheating to online dating.”

Incentives are not just the cornerstone of modern life—they are the data upon which human freedom does its work. Levitt has done a service by bringing that truth to light, albeit in a somewhat freaky way.

The mission of the Acton Institute is to explore that same freedom. Our interest in economics is not because we are interested in economics or prosperity per se, but because like Levitt and a long tradition of economists before him, economics attempts to look hard at the human person exercising his freedom in making choices. Economic analysis and ethical reflection begin with the same starting point—the rational, choosing, and acting person.