Saturday, 5 June 2010

Freakonomics - The Hidden Side of Everything

When I share that I am studying International Business, Finance, and Economics, I usually get three responses from people having no experience in this area:
1. "Isn't business, finance, economics, accounting, and management all the same?"
2. "This sounds really boring and dry. "
3. "Well, good for you but I always found this subject to be really distant from me."

I gave up long time ago trying to explain the differences between finance, economics, accounting, and business (yes, they are as different as physics, chemistry, and biology). I also gave up convincing others that my studies do not encompass only numbers, calculations, and graphs. After all I find my course quite interesting and stimulating and I am sticking to my point. 

Personally, I have my preferences and I have always found finance to be much more exciting and challenging than economics and accounting. The former for me was just dry theories about consumer behavior, demand and supply, inflation and exchange rates, GNP and GDP. The latter - well I hate accounting as soon as I think of the endless balance sheets, income statements, and cash flows I had to calculate. 

Reading Freakonomics by Steven Levitt and Stephen Dubner I realized I judged economics far too quickly. It has the potential to be a really exciting, amusing, and unpredictable subject. It just depends on your attitude, your approach, and the questions you ask yourself. I strongly recommend the book to all those, who have no idea what economics is about and quickly judge it  "by the cover" and to all those who actually study it but hate its strict theoretical models, implications, and rules. 

Freakonomics is the product of a rather strange cooperation: Levitt is a young, eminent, and unordinary economist and Dubner is a journalist. Levitt graduated from Harvard University with a BA in Economics and received his Phd in MIT. Currently, he is a professor in the University of Chicago. 

The two of them came together to prove 4 basic points about economics: incentives are the main causes in modern economics, conventionality is often wrong, events sometimes have distant and strange causes, and experts use their knowledge in their advantage. Instead of looking at endless statistical data, equations, or tables, Levitt attempts to defend these four postulates by asking weird questions: Why do all drug dealers live with their mothers?; What do schoolteachers and sumo wrestlers have in common?; What makes a perfect parent? You might consider these topics as far from economics as the sun is from the earth but do not be quick to judge before you read at least one chapter. Levitt is not just another mediocre economist, who decided to make some money by shocking people. He won the John Bates Clark medal, awarded to the most promising US economists under 40 (the equivalent of a Noble Price under 40, I would say) and was chosen by Time's Magazine as one of the "100 People, who shape our world". If this is not an inspiration to check Freakonomics out, than I do not know what is. 

Of course, this novel has many critics, who claim it is NOT really about economics as it parts from the conventional and strict economic theory. What I like about Levitt can be summarized in two points: 1) He found a way to show that economics is not a boring academic subject; in fact it is quite exciting and offers may new exploratory possibilities; and 2) He admitted he was terrible in statistics in university. Obviously, this did not affect his development as many consider him one of the most prominent and innovative economists of our generation. 

The Steven-Stephen tandem has published a sequel, Superfreakonomics, due to the unbelievable success of the first one. I can't wait to read what more startling questions and proves Levitt has prepared for us. What I will always remember from the first novel is how he defended and convinced that crime rates are not connected only to police control, laws, and income, but are highly linked to legalized abortion! Are you already running to the bookstore to find out why?



    Since the 1930's, every businessman has understood that a private capitalist economy must have massive state subsidies; the only question is what form that state subsidy will take? In the United States the main form has been through the military system. The most dynamic aspects of the economy -- computers, the Internet, the aeronautical industry, pharmaceuticals -- have fed off the military system. But the crime-control industry, as it's called by criminologists, is becoming the fastest-growing industry in America.

    And it's state industry, publicly funded. It's the construction industry, the real estate industry, and also high tech firms. It's gotten to a sufficient scale that high-technology and military contractors are looking to it as a market for techniques of high-tech control and surveillance, so you can monitor what people do in their private activities with complicated electronic devices and supercomputers: monitoring their telephone calls and urinalyses and so forth. In fact, the time will probably come when this superfluous population can be locked up in private apartments, not jails, and just monitored to track when they do something wrong, say the wrong thing, go the wrong direction.

    HT: House arrest for the masses.

    CHOMSKY: It's enough of an industry so that the major defense-industry firms are interested; you can read about it in The Wall Street Journal. The big law firms and investment houses are interested: Merrill Lynch is floating big loans for prison construction. If you take the whole system, it's probably approaching the scale of the Pentagon.

    Also, this is a terrific work force. We hear fuss about prison labor in China, but prison labor is standard here. It's very cheap, it doesn't organize, the workers don't ask for rights, you don't have to worry about health benefits because the public is paying for everything. It's what's called a 'flexible' workforce, the kind of thing economists like: you have the workers when you want them, and you throw them out when you don't want them.

    And what's more it's an old American tradition. There was a big industrial revolution in parts of the South in the early part of this century, in northern Georgia and Kentucky and Alabama and it was based mostly around prison labor. The slaves had been technically freed, but after a few years, they were basically slaves again. One way of controlling them was to throw them in jail, where they became a controlled labor force. That's the core of the modern industrial revolution in the South, which continued in Georgia to the 1920's and to the Second World War in places like Mississippi.

    Now it's being revived. In Oregon and California there's a fairly substantial textile industry in the prisons, with exports to Asia. At the very time people were complaining about prison labor in China, California and Oregon are exporting prison-made textiles to China. They even have a line called "Prison Blues."

    And it goes all the way up to advanced technology like data processing. In the state of Washington, Boeing workers are protesting the exports of jobs to China, but they're probably unaware that their jobs are being exported to nearby prisons, where machinists are doing work for Boeing under circumstances that the management is delighted over, for obvious reasons.

  2. HT: And most of these prisoners are nonviolent drug offenders.

    CHOMSKY: The enormous rate of growth of the prison population has been mostly drug related. The last figures I saw showed that over half the federal prison population, and maybe a quarter in state prisons, are drug offenders. In New York State, for example, a twenty-dollar street sale or possession of an ounce of cocaine will get you the same sentence as arson with intent to murder. The three-strikes legislation is going to blow it right through the sky. The third arrest can be for some minor drug offense, and you'll go to jail forever.

    HT: The Drug Czar's office estimates that Americans spend $57 billion annually on illegal drugs. What effect does this have on the global economy?

    CHOMSKY: Well, the United Nations tries to monitor the international drug trade, and their estimates are on the order of $400 to $500 billion -- half a trillion dollars a year -- in trade alone, which makes it higher than oil, something like 10 percent of the world trade. Where this money comes and goes to is mostly unknown, but general estimates are that maybe 60 percent of it passes through US banks. After that, a lot goes to offshore tax havens. It's so obscure that nobody monitors it, and nobody wants to. But the Commerce Department every year publishes figures on foreign direct investment -- where US investment is going -- and through the '90s the big excitement has been the "new emerging markets" like Latin America. And it turns out that a quarter of US foreign direct investment is going to Bermuda, another 15 percent to the Bahamas and the Cayman Islands, another 10 percent to Panama, and so on. Now, they're not building steel factories. The most benign interpretation is that it's just tax havens. And the less benign interpretation is that it's one way of passing illegal money into places where it will not be monitored. We really don't know, because it is not investigated. This is not the task of the Justice Department, which is to go after a black kid in the ghetto who has a joint in his pocket.