I just finished reading John Lott’s marvelous and entertaining book Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don’t. It is very well-written and it really reminds you of what an extraordinarily creative and interesting thinker Lott is. Much of the book is a translation of his many papers in different areas into prose and concepts accessible to general readers.
Peter Boettke, in the GMU Economics Department, is fond of observing that there are two places where you can find economics problems–by looking at the blackboard (theory) or looking out the window (the real world). What makes Lott such an interesting thinker to me is that he has a great knack for looking out the window for interesting problems and then coming up with original ways of thinking about them.
When I teach law & economics, one of the key puzzles I start with is Akerlof’s “lemons theory.” But the real question about the lemons theory, it seems to me, is why if it seems so theoretically sound, why don’t we actually see it more often in the real world? The answer, of course, is that there are a host of institutions that arise to address the lemons problem so that people can actually engage in trade, most obviously contract law, but other institutions such as reputations, repeat dealing, etc. Gordon Tullock similarly posed the question long ago about why there is so much stability in legislatures when theory seems to predict a much higher rate of cycling than is actually observed.
Lott’s book strikes a similar balance with Freakonomics. Now let me emphasize that I really enjoyed Freakonomics and thought it a very interesting and provocative book. Lott picks up on the point, however, that Freakonomics sometimes only seems to tell part of the story–in the same way that it would be a mistake to simply read Akerlof and assume that was the end of the story. Lott shows how formal and informal institutions arise that discipline much of the cheating and inefficiencies of the market that might otherwise prevail. He also does a very good job of providing an argument for why it is that certain market practices that may seem irrational (such as price mark-ups on liquor in restaurants) may actually have a sound economic logic to them. Even if one isn’t persuaded on some of these points, the arguments are logical and fun to read.
Probably the most interesting chapter to VC readers would be his central chapter on the law & economics of crime. This is one of the best overviews and literature reviews that I have read on the topic, both as to how to think about an economic analysis of crime as well as empirical work on the subject. His primary focus in the dramatic decline in crime rates in the 1990s and discusses the various theories that have been advanced to explain it. This chapter seemed to me to be extremely strong and touched on a lot of key issues–guns, capital punishment, etc. He also summarizes his critiques of Donahue and Levitt’s argument that legalized abortion generated a drop in the crime rate. The debate on this issue continues. It struck me more generally that for criminal law professors who wanted to introduce their students to the economic analysis of criminal law, Lott’s chapter provides an accessible and wide-ranging discussion of the issue that potentially would be a great teaching tool.
Overall, I thought this was a really fun and interesting book, one of those ones that has you saying every page or two “Hmm, I didn’t know that” or “I never thought of it that way.” For those who like this general genre of economic puzzle-solving (which I do), I highly recommend it.