Mon May 23, 2005

A Wealth of Notions

Review of Freakonomics, by Steven Levitt and Stephen Dubner.

I’ll admit that I rolled my eyes a little at first. Behold the Freakonomist! “Politically incorrect in the best, most essential way,” said the blurb. A “rogue economist,” who goes out of his way in the first few pages to say he is “afraid of calculus” and doesn’t know how to do theory. Amazing! Incidentally, he trained at Harvard and MIT, was at the Harvard Society of Fellows, won the John Bates Clark medal and teaches at the University of Chicago. Now there’s a sociologically interesting kind of maverick. If only my own fear of calculus had propelled me towards the same peripheries. But this is unfair. Steven Levitt does first-class work that’s reliably provocative in the most productive sort of way. The packaging of the book—the silly title, the song-and-dance to make Levitt himself seem a little, well, freakish—seems mostly the result of getting a journalist and a marketing department on board and turning out the goods a little too fast. The product is a bit thin. But the underlying material is terrific.

Bearing in mind that each step is a hell of a lot easier to say than to do, Levitt’s standard operating procedure is as follows: 1. Find an interesting puzzle. 2. Get hold of a relevant dataset (the bigger the better). 3. Come up with a really clever instrumental variable, or measurement technique, or natural experiment, or other methodological move that extracts evidence from the data in a surprising and compelling way. 4. Voila! You can now demonstrate an elegant, usually counterintuitive, social mechanism. The book gives a tour of Levitt’s many successes in applying his enormous talent for this kind of work. The topics vary from gun violence to cheating in Sumo wrestlng, from the long-term effects of Roe vs Wade on crime to patterns of free-riding on a bagel delivery service, from the social structure of drug-dealing to the sources of changes in popular baby names. His knack for finding striking answers to tricky problems using recalcitrant data is remarkable.

Nothing about this approach to research is unique to economics. In this respect, Levitt’s protests that he’s not a regular economist are more than just marketing talk. As Freakonomics moves from topic to topic, it’s clear that empirical puzzles about social action interest Levitt much more than a desire to elaborate or extend the theoretical framework that characterizes modern economics. Now, what makes for a distinctively economic approach is itself a contentious problem. There are several answers available from within the field, and economists tend to go back and forth between them as the circumstances demand. They often like to think of themselves as the hard-headed realists of the social sciences. On this view, social life is about rational agents selfishly and unremittingly pursuing their goals under conditions of scarcity. Thus, economics is about building rigorous models that capture these facts of life. The contrast is with woolly-headed humanists and sociologists, who allegedly prefer altruism to self-interest and social norms to individual rationality. At other times, though, economists play the role of hand-wringing rationalists. In this interpretation, individuals frequently fall short of the rational ideal. Thus, economics is prescriptive rather than descriptive, telling us how we ought to act, if only we were clever enough to think straight. And at yet other times, they claim an instrumentalist middle-way, freely acknowledging that their models make unrealistic assumptions, but arguing that as long as people in the aggregate act as if they were rational utility maximizers, then economics is the best game in town. For its advocates, this is an ideal position, a way to have your theoretical cake and eat it. To critics, it makes it impossible to reject the null hypothesis in research: If people don’t seem to be acting in a rationally self-interested way, you’re obviously not looking hard enough.

Where does Freakonomics stand? On the face of it, it’s in the realist camp:

What this book is about is stripping a layer or two from the surface of modern life and seeing what is happening underneath … Incentives are the cornerstone of modern life … Economics is, at root, the study of incentives: how people get what they want, or need, especially when other people want or need the same thing.

Unless you already know what an incentive is, however, it’s hard to make any sense of this last definition. Although the book does a good job conveying the findings of Levitt’s research, its treatment of important concepts is breezy, even allowing for the fact that its goal is to reach a big audience. Initially, the book’s story is straightforward: people respond rationally to incentives, and the data reflect this if you look at them the right way. Levitt’s research on realtors is like this. He is able to show that realtors generally sell other people’s homes for less money than they sell their own. This is because the extra commission they stand to make from getting a house to sell for $310,000 instead of $300,000 is too small to make the extra time and effort worth their while. But it turns out that, much more often, it’s very tricky to figure out where the incentives really are, or what form they take. Careful scrutiny of the right data can reveal unexpected or perverse outcomes, as when teachers cheat on behalf of their students in response to new rules about student performance in examinations. In still other cases, such as patterns of baby-naming, the incentives are very unclear and the precise nature of the process is very difficult to specify.

As Levitt’s empirical concerns broaden, the notion of incentives is forced to do more and more work. Incentives can be financial, social, murky, moral, perverse, hidden, planned, misplaced, other-directed, and so on. Like the “positive reinforcement” of behaviorist psychology, or the “functional imperatives” of 1960s sociology, “incentives” threatens to become an all-purpose placeholder having a specific meaning in each particular case, but without adding up to a distinctive explanatory concept. The danger is that you’ll always be able to explain things in terms of incentives, as long as you’re prepared to make your concept of incentives broad enough to include whatever it is that gives people reason to act in the situation under study.

A reader who just wants to learn about the many neat findings doesn’t have to worry about the way the theme of “It’s all incentives” is twisted this way and that, or care that it begins to fray under the stress. But there are implications for the kind of economics that Levitt is doing. At the very beginning of Freakonomics, we get a glimpse of the book as it might have been:

We did consider, for about six minutes, writing a book that would revolve around a single theme—the theory and practice of applied microeconomics anyone?—but opted instead for a sort of treasure-hunt approach.

A book called Explorations in the Data-Driven Search for General Social Mechanisms probably wouldn’t have gotten very far either. But that’s essentially what Freakonomics is. Most of the distinctive themes of economics are absent from it, most notably the preoccupation with efficient markets and the commitment to the rationality of individuals, narrowly conceived. Moreover, Levitt freely draws on hypotheses and theory from elsewhere, notably sociology and psychology, and his work can be seen as contributing to those fields as much as to economics. This becomes clearer as the book progresses. In cases like the realtors, Levitt’s contribution is to find a very clever way to empirically estimate something that economic theory straightforwardly predicts. Elsewhere, though, the connection to this kind of economic theory is much less direct (repeated reference to incentives notwithstanding), and Levitt’s contribution rests on his more general talent for connecting good research questions to data. Here he has taken a methodological approach that has become very popular in econometrics—the use of instrumental variables—and applied the method to a much broader class of problems than economists usually concern themselves with. In an ideal world, Levitt would represent a new breed of empirically-oriented researcher working across the boundaries of social science disciplines, expanding our knowledge of a wide variety of social processes and perhaps laying the foundations of a new kind of social science, alongside people working at equivalent boundaries in other fields, like cognitive psychology and economic sociology.

I hope that’s what the future holds, but there is cause for pessimism. Economics has a bad habit of routinely re-discovering (and taking credit for) ideas that are well-established elsewhere. Sometimes, whole fields are victimized in this way — social networks, institutional analysis, culture — as smart economists assume an idea that’s new to them is new to everyone and go off and reinvent some wheels. Freakonomics does have some sociologists and psychologists lurking in its footnotes (a stronger engagement with Stan Lieberson’s work on names would have made Chapter 6 a lot more interesting, for instance), but to be fair there are only one or two instances where a well-researched idea is presented as though no-one had ever thought of it before. Roland Fryer’s working paper on “The Economics of Acting White” is cited as the source of the notion that “some black students ‘have tremendous disincentives to invest in particular behaviors … due to the fact that they may be deemed a person who is trying to act like a white person.’” This idea was articulated in just this form in the mid-70s by John Ogbu (as the “oppositional culture” hypothesis) and arguably also by James Coleman in The Adolescent Society, published in 1961. A mention of the large literature on the topic would have detracted from the Freakonomic buzz, I guess. The broader point: Economics is well-positioned to innovate in the social sciences, because it attracts very talented graduate students and provides excellent training in formal modeling and quantitative methods. But it is hamstrung by its lack of interest in teaching the same students much of anything else (such as its own intellectual development as a field) and its tendency to look down on cognate disciplines as poor relations, even as it borrows some of their ideas. The result is that Economics farms out reflections on its own foundations to a small cadre of methodologists and philosophers, who talk amongst themselves, and to occasional “We Can’t Go On Like This” speeches by Presidents of the AEA or Nobel Laureates. Meanwhile, it’s business as usual for everyone else.

In many ways, Levitt is the successor of people like George Akerlof and Thomas Schelling, thinkers with a broad interest in social processes and a creative approach to understanding them that is rooted in their training in economics but not limited by it. Levitt differs from them in his preference for quantitative data analysis over model-building, but the similarities are otherwise strong. In particular, Levitt shares their attraction to and feel for systems of social interaction that involve incentives and co-ordination, broadly defined, but that are not markets. Yet Schelling’s main intellectual influence has been outside of economics, in political science, public policy and sociolog y. It may be that Levitt’s career will develop in a similar way. Or it may be that the trend toward rewarding a more interesting empirically-minded socioeconomics (evinced by recent Clark medal winners like Daron Acemoglu and Levitt himself) will provide incoming graduate students with, well, an incentive. This can only benefit economics and social science in general. The history of interaction between these disciplines is perhaps better characterized by sociological concepts like social closure, network density, opportunity hoarding, boundary-maintenance and symbolic violence, than by economic ideals like free trade, efficient exchange and mutual gain. But the possibility for great things is there. Just don’t call the result “Freakonomics,” is all I’m asking.