2 septembre 2007

'Freakonomics' by Steven Levitt

A best seller in the UK, this American book by young economist Steven Levitt is quite entertaining. No big picture theory on inflation, growth or trade – Levitt is much more into micro-economics, individual economic behaviour and more specifically, how we respond to incentives. Lots of counter-intuitive outcome from economic anecdotes. Once a kindergarten decided to start charging $2 parents who pick up their kids late, and guess what happened? Well there were more parents coming late. Why that? Because a $2 penalty on top of a $50 monthly fee is too small to be a deterrent AND the penalty freed parents from any sort of embarrassment or guilt – they would not try their best to come on time any more. Carers are paid for the extra time waiting for late parents aren’t they, so why worry? The most ironic bit is that when the fee was finally cancelled, the late rate did not come to what it was previously but grew even higher. Parents had lost the sense of obligation they used to have and now it was without financial consequence anyway. The lesson? Unless you are ready to create significant monetary incentive, keep the moral incentive that works.

The most interesting part is the story of this young student economist who spent years hanging around with a Black drug gang in Chicago for years. Because the local boss was an educated man before turning a thug, the student had serious business discussions with him; ultimately he also accessed the full accountability of the gang for five years. Local gangs in Chicago work like franchises. A ‘Board of Directors’ of 12 big bosses gives the monopolistic licence for crack dealing in a given neighbourhood in exchange of a 30% of revenues. Just like white upper class is mimicking Black ‘gangsta’ looks, real gangsters like to mimic white corporate America. The gang accounting showed that only the local boss makes good money ($150,000 per year) while – contrary to conventional wisdom - the many ‘foot soldiers’ hardly make a living. Far from driving fancy cars, they usually live at their mother’s. And they take enormous risks. One chance out of five to get killed by a rival gang, one chance out of two to go to jail, in a period of five years. So why in the world would you want to become a drug dealer? Simply because you have a chance to become a boss if you are good and lucky. Although the probability to become one is very small and does clearly not the risk, young unqualified boys try their chance, just like pretty Wisconsin farm girls go to Hollywood – nothing rational in it, just an act of faith.

1 commentaire:

JCM a dit…

I haven't read the book, but was quite disapointed by his blog which seemed all about auto-promotion. This said the guy won the Bates Clark medal in 2003 (the Nobel of economists under 40).