Friday, November 20, 2009

Cutie Economics: A Review of SuperFreakonomics

The title of this blog is the same as the book review I wrote for the Hong Kong Economic Journal's web version (not available in its hard copy). Here is the acutal URL. A good friend told me that as the paper would take the piece out in a couple of days, so in case you miss it, I have it all here for the record.

Cutie Economics: A Review of Superfreakonomics

Suppose you were an economics professor. Let's say you run into a colleague down the hall and start commenting on how cute his economic research is, your eyes would most likely turn black as soon as you done talking. Your colleague most likely would reciprocate your praise with jabs straight to your face. The reason for the violence is simple: you just don’t describe an economist's work as cute. It would be treated as an insult, period. After all, have you ever heard anyone describing John Maynard Keynes' or Milton Friedman's work as cute? Even just once?

Economists have used their skills to answer some real hard answers. During World War II, Milton Friedman used technical economics to find out the optimal size of fragments of an anti-aircraft shell to maximize its effectiveness. Another Nobel Laureate Tom Schelling applied game theory to the armament race between the US and the Soviet Bloc during the cold war era. One could label such novel applications of economic theory as cool, but certainly not cute.

Some economists did try to write books that attempted to project a different image about economics, to “cutify” economics so to speak. "New World of Economics" written by economists Dick McKenize and Gordon Tullock, came to mind as a prime example of that genre. The result, nevertheless, could hardly be described as a big and lasting success.

That changed in 2005. Steven Levitt, a professor of economics at University of Chicago paired with New York Times writer Stephen Dubner hit it big with their new pop economics book entitled “Freakonomics” that year. Their formula of success? Well, let's just say they successfully project an image of economics that no authors before them have done before or dare to do so. They make economics looks cute. Four years later, Levitt and Dubner do it again with a sequel called “Superfreaknomics.”

The message of the new book is clear: Incentives matter. With that message, it immediately follows that people would choose the least costly way to achieve their goals given a menu of alternatives. In many real life situations, however, it simply is hard for the untrained eyes to figure out what the least cost action is. Now what is so intriguing about the book and what makes it such a good read is the authors' ability to walk the reader through a maze of seemingly impenetrable facts and render them comprehensible. It is Sherlock Holmes at his best. An example might help illustrate what I am talking about here. Combing through accident statistics, the authors convincingly reveal the counter intuitive result that it is actually safer to drive home drunk than to walk home drunk. In other words, the expected cost of driving home drunk in terms of the chances of losing one’s life in accidents is actually smaller than that of walking home.

Similar style of analysis is also at the heart of the controversial Chapter 5. This chapter, dealing with topics on global warming and possible solutions to the problem, draws fire from all quarters including Nobel Laureate Paul Krugman. To its critics, this chapter portrays an inaccurate picture of the urgency of global warming and makes exaggerated claims of the potential effectiveness of eco-engineering. There are other environmental issues covered in the book that critics also find wanting. I think these criticisms miss the mark. The message in that chapter, as in others, is that we need to do some hard thinking whether the current ways of dealing with global warming are indeed the least cost methods of doing so. Nothing more, nothing less.

Further elaborations and extension of material already covered in the book could have made it a better one. In Chapter 1 on prostitution, for instance, the authors report that customers who purchase prostitutes' services pay an extra 16 US dollars if they have to go through a pimp (p.38). The authors then go on to point out that those customers who use the pimps as middlemen also tend to purchase more expensive services.

Now the authors could have further explored the relationship between paying extra for a pimp’s services and getting more expensive services from the prostitutes. Two economics professors Armen Alchian and Bill Allen have pointed out decades ago that if a fixed charge per unit is applied to both cheap and expensive variants of a good, the expensive variant becomes relatively cheaper. As an implication of the Law of Demand, a larger quantity of the more expensive variant of the good would be sold. Economists call this the “Alchian and Allen Theorem." A wide range of phenomena like why relatively more expensive apples are exported relatively to cheaper ones can be explained by this theorem. This theorem seems to apply with equal force in the market for prostitutes' services.

Similarly, the authors could have used the story with regard to the police's effort to arrest pimps (p.40) as a real world example of rent dissipation. A rookie cop who tried to crack down on prostitution thought arresting pimps an effective means of achieving his ends. His acts backfired. For once the original pimps were put behind bars, the value of being a pimp was then up for grab. The ensuring competition to be the next pimp turned brutal, and the value associated with the vacant pimp job was competed away.

But those are minor quibbles of an otherwise freaky book. As an added bonus, if you care to read about "the first instance of monkey prostitution in the recorded history of science," there it is on P. 215. And no, I like the book not because my favorite economist Professor Steven N. S. Cheung's work (the paper they cited is "The Fable of the Bees: An Economic Investigation," Journal of Law and Economics, April 1973) is cited on p. 175 when the authors discuss the problem of externality. Go get it and prepared to be freaked out.

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