Research Paper on Unconventional Economics of Levitt & Dubner's Freakonomics

Introduction

Freakonomics is a book that was designed by Levitt and Dubner in 2011 to pose fundamental questions about economics by use of different imaginative comparisons. The questions and comparisons can be seen in the titles of the chapters of the book such as "How is the Ku Klux Klan similar to a group of real estate agents?" and "What Do Schoolteachers and Sumo Wrestlers Have in Common?" Making the titles attractive is one of the strategies that have been employed by the duo to make the book more appealing to the readers bearing in mind that economics could not be attractive to everyone. One of the major themes that have been explored by Levitt and Dubner in their book is the power of incentives. This essay will analyze the first three chapters of the book, "What Do Schoolteachers and Sumo Wrestlers Have in Common?", "How is the Ku Klux Klan Like a Group of Real Estate Agents?" and "Why Do Drug Dealers Still Live with Their Moms?" and how the theme of incentive is covered in the three chapters.

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Analysis of Chapter One

Levitt and Dubner explore the concept of incentives that was highlighted in the introduction and offers its in-depth analysis. According to them, social, economic, and moral incentives have a significant influence on how one behaves. The incentive is a recurrent topic in Freakonomics, and the duo believes that it forms an integral part in the study of economics. Strong incentives make even the honest in society to cheat to gain financially or be promoted in their workplaces. According to Levitt and Dubner (3), incentives are means of urging someone to do more of a good thing or minimize their wicked deeds. Moral incentive as discussed in the chapter defines how people behave out of conviction or consciousness, actions that enhance business. They distinguish economic incentive from social incentive by stating that the latter is propels one to cheat or act benefit financially which is in contrast to the former which drives one to seek glory or be ashamed of their actions.

The explanation of different types of incentives in the book is achieved by Levitt and Dubner by using three anecdotes: cheating of school teachers, Sumo wrestlers and the Israeli day-care center and ultimately recapitulating the chapter wit the bagel seller, Paul Feldman. In the case of Sumo Wrestling matches in Japan, there are numerous cases of incentives being used negatively by competitors to maintain their ranks. The highest-rated fighters typically receive royal treatments while those with lower rankings tend to be inferior and do lesser desirable jobs. Inferior opponents are often tempted by superior soldiers to throw their matches to help the latter to maintain their profile. They are usually offered social and economic incentives for them to cheat. Through the story of the Israeli day-care center, one learns that people use incentives to buy off their moral guilt. For instance, parents continued with their late pick-ups since economic incentives in terms of fine substituted the moral incentives of reducing late pick-ups by eliminating the sense of guilt. In this example, the parents determined that the costs and the benefits of the fine did not have any impact on their financial status; hence the extra $60 penalty was worth the additional time that they were granted. Incentives can be applied in different ways to gauge a society in terms of honesty. For example, cheating teachers reacted to incentives in a way that would yield personal gains. These teachers inflate students' marks for economic benefit, which comes in the form of maintaining their jobs or avoiding reassignment. Another fundamentally good example of incentive at work is the Sumo wrestlers who bribe their opponents to cheat in their fight so that they can maintain their rankings.

Cheating enables one to increase the marginal utility in that they can gain more for less input in the effort. This is one of the primary reasons that drive even teachers to cheat. Levitt and Dubner employ different examples to attract readers' attention to the role of federal regulations in combatting the effects of incentives. The government offers both social and economic incentives not to facilitating cheating such as losing one's house, freedom or job, as shown in the case of Chicago Public Schools test of high stakes. It is also imperative to note that the powerful negative nature of incentives elaborates on the indented honesty of human beings as analyzed in Smith's book "The Theory of Moral Sentiments."

Analysis of Chapter Two

The chapter focusses on the asymmetry that exists in the information. Asymmetry is a situation where a person is exposed to more information than others. This phenomenon instills fear in clients who believe that they might fail to secure better deals since someone else is in control of the knowledge. There are different examples provided by Levitt and Dubner concerning information asymmetry. The duo believes that information played a fundamental role in the rise and fall of Ku Klux Klan, how life insurance companies were advantaged when the public could not compare the pricing between different competitors, how funeral managers take advantage of the vulnerable and how people create a fake profile on dating websites. All these examples demonstrate how some people use the power of information to manipulate others. The two authors use these examples to show how incentives are used in modifying one's behavior since it is the primary determinant of how one behaves. By looking at the economic perspective of incentive, consumers naturally look for means of satisfying their satisfaction while the sellers are more concerned about how they can maximize the profit. This point explains why a funeral manager sells an expensive casket to a bereaved person.

The two authors of the book also claimed that people tend to develop fear when pursuing information asymmetry. Although society typically propagates sincerity and smartness among people, the exploitation of information by some people for personal gain usually results in mistrust and fear in it. Additionally, Levitt and Dubner noted that anyone is capable of doctoring report for selfish gains. The duo also observed that the misuse of information has drastically changed with the advent of the internet, which has reduced the cost of acquiring and providing information. The authors of the book employ informative tone in this chapter to portray the unawareness and naivety of most American citizens. The information provided by the duo could be instrumental in helping readers from being misused by experts with an information advantage.

Analysis of Chapter 3

The main objective of Levitt and Dubner in this chapter was to inform the readers that conventional wisdom is not valid. Using the research that was done by Venkatesh, the duo reveals the truth about financial distributions of the crack dealers, which offers enough proof to their assertion that drug dealing is only profitable to the few individuals who are at the top of the pyramid scheme. Most Americans believe in the conventional wisdom that drug dealers make a lot of money with their business. However, based on the lack of the right information about the amount of money they generate in their trades, the information provided by experts blind them, and they fail to realize that majority of drug dealers live with their mothers since they cannot afford a house on their own. A drug dealing business has a pyramid structure in terms of ownership and payment. The few top owners are the ones who receive a lot of money from the industry, while the majority at the bottom of the pyramid earn peanuts, amounts that cannot pay their bills. Hence, most crack dealers resort to living with their mothers. Based on the explanation about the actual financial status of most drug dealers, both Levitt and Dubner are right to reason out that conventional wisdom is not always correct.

Levitt and Dubner use the similarity that exists between the crack enterprise and capitalist organization to enlighten their readers further on revenue distribution among drug dealers. The drug dealers case is similar to an organization where the managers get a massive amount of salaries while the staffs share the remaining amount of revenue which is always little. The authors of the book portray to the readers how instrumental incentives are in information ownership by using the story of the Black Disciples. J. T promised his foot soldiers social and economic gains if they could remain in the business. However, the same incentives that he offered his soldiers are his means of avoiding war so that he can stay in power and continue receiving his profits. This chapter demonstrates how people use others to satisfy their own needs by offering incentives to them. Based on the story of the foot soldiers, one can learn that incentives are instrumental in making other people meet their objectives. Incentives are essential in the current world, as shown by the foot soldiers who were ready to suffer from the aim of earning more money in the drug business.

Conclusion

In summary, the theme of incentives is widely covered in the book, especially the first three chapters that are analyzed above. In the analyses included, it is evident that people use incentives for their selfish gains, and it is something that cannot be ignored in the current society. There are different incidences in which incentives have been used in the three chapters. The school teachers used economic incentives to cheat on the students' marks to avoid losing their jobs, and the Sumo wrestlers bribed their opponents to maintain their rankings. Information asymmetry is another source of incentives that enables people to use others for their selfish gains. Levitt and Dubner also discussed how conventional wisdom which is always not true is used by some people to offer incentives that facilitate the achievement of their objectives. The duo explains this phenomenon by using the example of foot soldiers who were ready to go hungry for days to meet the promises that were made by J.T. who in turn benefitted from the incentive.

Works Cited

Levitt, S. D., and S. J. Dubner. Freakonomics: A Rogue Economist Explores the Hidden Side of Everything. HarperCollins, 2011.