FREAKONOMICS (AND MUSINGS THEREON)

I have just read Freakonomics, by Stephen Levitt and Stephen Dubner. Levitt is a very talented economist, who has won the John Bates Clark medal, often a step on the way to a Nobel prize, and who is interested in quirky aspects of life such as cheating, guns, and crime. Dubner is the New York Times journalist, who first brought Levitt to the attention of the general public.

Their collaboration, which I found both interesting and thought-provoking, is founded on four basic premises. First, incentives matter. People react to incentives, both monetary and non-monetary; and if you want to change behaviour, then you have to change the incentive structure. Secondly, there is no substitute for hard facts. Facts may be uncomfortable for people with axes to grind or interests to defend, but so be it. Thirdly, many economic situations involve an aysmmetry of information, where one party knows more than the other (or, at the least, the other party thinks that they do). This asymmetry means that there may not be optimal outcomes. And fourthly, whatever economics may say about the efficient use of resources, it says - and can say - nothing about the morality of that result. Slavery may be abhorrent, but it may quite possibly also be economically efficient.

To take but one example from the book. Crime rates fell sharply in all American cities during the 1990's. The received wisdom was that this was due to better policing, particularly in New York City, with its "no broken window" policy (i.e. show intolerance for small crimes, and this sends a strong message to criminals that they won't get away with big ones). Levitt showed that this was, in fact, rubbish. The drop was due to a combination of more police, tougher jail sentences, and the January 1973 Supreme Court decision Roe v. Wade, which legalised abortion in the U.S. The two biggest indicators of future criminality are being poor and/or the child of a single mother. Poor, single mothers were the women most likely to take advantage of Roe v. Wade, so giving them an alternative to an unwanted child reduced the number of unwanted children in situations highly likely to give rise to criminality. That duly reflected itself in the crime statistics 18+ years later.

A controversial finding. But it says nothing about Levitt's views on the morality of abortion.

This potential conflict between economic efficiency and morality has already started, and will - I believe - increase as the world works its way out of the current economic mess. Economic efficiency requires strong banks, which have duly been saved the world over by a combination of nationalisation, implicit or explicit state guarantees and vast dollops of liquidity at near-zero interest rates. Yet near-zero interest rates all but guarantee the banks fat profits, which in turn allow them to pay hefty bonusses to the very people who made the bad decisions that started the rot. This causes outrage, and not just to people who find themselves laid off or turfed out of their homes.

In most countries, the economic way forward is, or soon will be, clear. The great challenge for politicians and other leaders will be to deal with the moral and social conflicts that will inevitably occur as the pain is shared out in some way. Employed v unemployed, workers v. pensioners, taxpayers v. consumers, healthy people v. unhealthy people, rich v. poor, nationals v. immigrants. The fault lines will be many and difficult.

The last time the world faced a similar situation was in the 1930's. The social outcomes that resulted then in some countries were appalling. Let's hope that we have learned our lessons well.

Walter Blotscher