book review

Why the Free Market Works and Other Half-Baked Theories Don't
John R. Lott
Regnery, 2007 (275 pages) Reviewed By

G overnment has the power to control every aspect aspect of our economy. So why not use that power to eliminate poverty, eradicate discrimination and social injustice, and create a paradise on earth? No unemployment ... no hunger ... no inequality ... no rich people exploiting their employees. Just everyone getting the same salary and doing the same amount of work.

If only. Even if we ignore the moral implications of allowing the state to become an engineer of society, in the real world this creates more problems than it solves. I worked in a large organization (which will go unnamed, except to say that they run a large country in the Western hemisphere), where the world of social engineering already exists, for 15 long years. (Yes, I was a naive liberal back in 'nem days). A paradise on earth it's not. What I saw convinced me that expanding the role of big government in managing the economy would be a disaster. I finally got a chance to dump my GS-something position-for-life, and moved to the private sector (or as close as you can get to the private sector in the People's Republic of Maryland, but that's another rant altogether).

One of the problems we had as government employees was that a lot of vendors refused to sell to us. They had learned there was a good chance they'd never get paid. If the government decided not to pay for what it had bought from them, for whatever reason--maybe someone lost a packing slip, or some required form was missing--it wouldn't pay them, and the vendor was basically screwed. And the forms, regulations, and requirements vendors needed to adhere to changed all the time. The vendors finally decided that they needed to see the "In God We Trust" in writing--and in advance.

Government employees, and those who do business with them, are also forced to do unethical things just to get around the layers and layers of rules imposed upon them. We had a rule, for instance, that said we had to buy from a woman-owned company that was a small business (fewer than 20 employees) if one was available. Guess what happened: all our suppliers suddenly became "small businesses" that magically just happened to have only 19 employees, and just by coincidence, there happened to be a woman "in charge." And their prices went up to pay for the overhead of this small business, whose only function was to buy from the big company and sell to us. And their catalog looked almost exactly the same.

If we wanted to hire or promote somebody, we were required to publish fake advertisements, knowing full well that the poor schlubs--I mean candidates--who responded to our ads would never be considered for the position. And few of the people to whom I complained about this practice knew, or cared, that it might be unethical.

And then there was the customer service, or rather the lack of it. Within the government, there are different branches that provide various services to each other. For instance, one branch might repair equipment, another might supply small parts, and so forth. It often happened that one branch would cheat another. You would order a part and it would never arrive. Or you would request a repair, and it would take six months before the repair happened. It turned out that there's a good reason for this.

When you're forced to use a particular person to perform some service, the only way to react to bad service is to provide bad service yourself. You can't retaliate directly, because you're forced to use that supplier, so you "lose" their paperwork, or you drag your feet. We would discover that the reason our table never got fixed was that someone in the repair department had once taken offense at something that someone in our department had said. But this guy was still obligated to repair our table. The only way he could express his irritation about his perceived insult was to provide really crappy service to us. And, in return, the only way we could register our dissatisfaction with him was to lose his paperwork, so that his department gets in trouble. In a government-controlled economy, there is no customer service, because there is no consumer choice. And revenge takes its place. Imagine the whole country acting like this.

True, there was equality, of sorts. No one who worked for the government was really rich. No one had a particularly big office. No one could ever be fired. But there was almost no freedom, and no way to improve your position. I couldn't wait to get out.

I mentioned this long anecdote because that is the kind of world the people who advocate greater government control are unwittingly building. It's inevitable for socialist systems to turn into little cesspools of envy, revenge, and inefficiency because the freedom to choose is inevitably taken away, bit by bit, for the greater good. One day those in charge decide to eliminate sex discrimination, so you're forced to buy from a woman-owned company. The next day another rule is added to achieve something else. Eventually, every decision you make is subordinated to the dictates of social engineering policy.

Before long, you stop caring about working efficiently. It even seems slightly crass to do so, as if filling out the right forms--maintaining bureaucratic harmony and only keeping the appearance of efficiency--is what's really important. In the end, your only response to bad service or bad products is to keep your own little list of whom to screw, and to live for the day when someone on that list needs something from you. Welcome to the world without free markets.

A new book by economist John R. Lott says the same thing, but takes a different approach: instead of warning people about how awful life is under socialism, Lott reminds people why capitalism is by far the world's most successful economic system. Freedomnomics bills itself as a rebuttal to Freakonomics, which attributed most of the world's problems to what, to its authors, S.D. Levitt and S.J. Dubner, considered to be the big three Causes of Everything (BTCOE): poverty, greed, and racism. In fact, says Lott, the real world is a little more complicated. Rich people have much more to lose than poor people for committing a crime. Contrary to what the cynical press would like you to believe, most businessmen really are honest. The free-market system creates strong incentives to ensure that they remain honest.

Lott's thesis is simple: socialism just doesn't work as well as the free market. Freedomnomics shows that in almost every case, a free market produces a better solution than government intervention. It's a task made even more important by the cynical claims in Freakonomics, which Lott systematically shows is full of inaccurate statements and faulty assumptions masquerading as "insightful" conclusions.

In particular, Lott throws cold water on the inflammatory claim made by Donahue and Levitt, the authors of a paper cited in Freakonomics claiming that abortion reduces the homicide rate, which dropped by up to 80% in America in the 1990s. Economists have long since concluded that Donahue and Levitt's study was methodologically flawed; recent, more accurate results show that legalizing abortion actually causes a 7% increase in the murder rate. The abortion theory also doesn't explain why a parallel decrease occurred in Canada, which legalized abortion 15 years later than America.

Lott says that crime rates jumped dramatically in cities that lowered testing standards to meet affirmative action requirements. For each one percent change in hiring caused by affirmative action, there is a 2 percent increase in murders. Some modern research also shows that reinstitution of the death penalty is largely responsible for the decline in homicide rates. But then again, how does that explain Canada? Part of the answer, suggests Lott, lies in mundane things such as increased arrests and right-to-carry laws. As gun advocates have claimed for years, gun control had no effect on crime, but right-to-carry laws reduced it.

Although Lott's theory has a certain intuitive appeal, it's not entirely convincing. Better theories exist. For example, some scientists have come to believe that lead poisoning may explain more of the crime rate than sociological factors. Many studies have linked lead exposure to impulsivity and violent behavior. Environmental lead decreased over the same period that crime decreased in both Canada and America. Note added: the invention of paramedics, who were permitted to treat patients en route to the hospital, was another major factor in reducing homicide rates.

Lott's focus, however, is on debunking Freakonomics, not on crime and the death penalty. Entire books are filled with speculation, most of it blind, biased and partisan, on the causes of crime. There's little chance of answering such an important question in this short book.

On other topics, Lott doesn't appreciate the degree of control that people are willing to give to the government. He gives an example of a girl named Anita, who contracted polio two weeks after receiving a polio vaccine. The strain of polio she contracted was different from the strain in the vaccine, and everyone acknowledged that she could not have contracted her polio from the vaccination. Yet the court awarded her $850,000 in today's dollars from the pharmaceutical company, Wyeth Laboratories.

Lott points out that this and other acts of "generosity" forced Wyeth to raise their prices to such an extent that over 1,000,000 other poor people are now unable to get the vaccination. But is this argument really going to convince a committed statist? Not a chance. He or she will just say, "We need a law to prevent companies from raising prices." Then, when the company lays people off because it's losing money, the statist will say, "We need a law to prevent companies from laying people off." And so on. Although liberals will never admit it, the amount of control they are willing to cede to the government is virtually unlimited. Lott is from Montana, where people haven't traveled down the path to socialism as far as they have in other places. Maybe that's why he doesn't recognize how bad things already are, and why his arguments are incomplete.

All in all, though, this book is far more credible and factual than Freakonomics, which concentrates mainly on counter-intuitive (and, as Lott shows, often wrong) results on the fringes of respectability. Freedomnomics tells us that the improbable, entertaining, but counter-intuitive findings that you read in Freakonomics and that you hear daily in the New York Times really are just mostly fiction. But then you probably already knew that.