Freakonomics

Steve Levitt appeared on The Daily Show with Jon Stewart on Comedy Central last evening to discuss his new book, Freakonomics (buy website), written with Stephen Dubner (who profiled Levitt a couple of years ago in The New York Times).

Steve is the next generation of the "Chicago School" of economics, in which the basic price theory of economics is inserted into every social environment imaginable. The original generation--Friedman, Becker, and Stigler--focused on what are by now traditional areas like education, the family, and the law. But I'd wager that even the founders of the School would have to admit that Steve's ability to see the economics in unusual situations is without equal, past or present. The next generation also comes armed with modern computing power and thus a much greater ability to analyze data in support of their claims. I will soon get my copy of Freakonomics and enjoy my chance to read it.

What does it mean to "see the economics" in a given situation? Economics consists of exactly two ideas: optimization and equilibrium. Optimization is the process by which all economic agents--households, workers, firms, governments--achieve their objectives subject to constraints on their resources. It leads to the familiar condition that an activity is undertaken until its marginal reward equals its marginal cost. Equilibrium is the process by which the competing efforts to optimize by these agents form a stable arrangement. An equilibrium is defined by relative prices, and those prices typically form the basis of either the marginal reward or the marginal cost in the individual agents' optimization processes. So "seeing the economics" means figuring out what is driving the optimization and equilibrium in a given context. As I often tell my students, if you cannot see the optimization and the equilibrium in what I am saying, then I am not talking about economics.

Here are the book's chapters, from the Freakonomics website, showing where the authors are looking for optimization and equilibrium:

• Chapter 1: What Do Schoolteachers and Sumo Wrestlers Have in Common?
  In which we explore the beauty of incentives, as well as their dark side-cheating.
• Chapter 2: How Is the Ku Klux Klan Like a Group of Real-Estate Agents?
  In which it is argued that nothing is more powerful than information, especially when its power is abused.
• Chapter 3: Why Do Drug Dealers Still Live with Their Moms?
  In which the conventional wisdom is often found to be a web of fabrication, self-interest, and convenience.
• Chapter 4: Where Have All the Criminals Gone?
  In which the facts of crime are sorted out from the fictions.
• Chapter 5: What Makes a Perfect Parent?
  In which we ask, from a variety of angles, a pressing question: do parents really matter?
• Chapter 6: Would a Roshanda by Any Other Name Smell as Sweet?
  In which we weigh the importance of a parent's first official act-naming the baby.

On The Daily Show, Jon Stewart thought Chapter 4, in which the book supports a hypothesis that the reduction in crime in the late 1990s was attributable to fewer "unwanted" children in the wake of Roe v. Wade entering their prime criminal years, was the most interesting. He then asked Steve how he "controlled" for other factors that might affect the crime rate, like the number of police. Steve then tried to give an answer based on multiple regression (which he did in an excerpt from the book, shown here). That's got to be a first for late night television.

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