Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't by John R. Lott Jr
Authors: John R. Lott Jr
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Introduction
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages.
—Adam Smith, The Wealth of Nations 1
The free market works. This notion was clear to Adam Smith in the early days of capitalism, but since then it has come under a great deal of skepticism. These criticisms are nothing new, of course. As far back as 1848, Karl Marx published a Communist Manifesto, advocating an alternative economic system that would replace the market with state planning. Communism was adopted in countries ranging from Russia to North Korea, but somehow the outcome was always the same—mass shortages. Most Communist regimes eventually scrapped their dysfunctional economic system, if their populations didn’t rise up and do it for them. Today, there are only a few remaining Communist countries, and the only ones that have any kind of economic success—like China—are the ones that are reestablishing free enterprise.
Meanwhile, countries that stuck with the free market have prospered. There is a simple reason for this—as Smith observed, the free market is based on the pursuit of economic self-interest. The market acknowledges that people’s behavior is largely determined by incentives,
whether in the form of carrots or sticks. Allowing people the freedom to improve their own economic condition helps to make society wealthier overall. Smith understood that free trade takes place because both parties in an exchange profit from it. Whether a person buys a new car, a computer, or a movie ticket, the customer values the good he purchases more than the money that he pays for it. The seller, for his part, values the money that he receives more than the product.
Yet, despite its proven success, a profound distrust of the free market has spread even among the citizens and governing elites of wealthy, free nations. In the United States, politicians convene hearings to rail against oil companies, accusing them of ripping off consumers and insisting on the need for price controls or higher taxes on the firms’ profits. Newspapers denounce “corporate greed,” arguing that the only thing keeping any big company from turning into another Enron is the watchful eye of government regulation. The general public grumbles that high medicine prices mean that drug companies are getting rich at their expense.
As a telling example of the prominence of this view, the book Freakonomics achieved phenomenal popularity, selling over a million copies. In it, authors Steve Levitt and Stephen Dubner purport to unveil the “obfuscation, complication, and downright deceit” that pervades our everyday life. 2 Naturally, suspicion of corporations is a paramount theme. But the authors’ misgivings go much further. They see experts such as doctors, funeral directors, and life insurance agents as unscrupulous sharks looking to cash in on their expertise by swindling their own clients. “If you were to assume that many experts use their information to your detriment, you’d be right,” they warn. 3 The pair even compare real estate agents to members of the Ku Klux Klan. In their world, almost everyone—from teachers to Sumo wrestlers to politicians—is cheating or lying to somebody. Whether it is Levitt and Dubner or Michael Moore, popular authors have found plenty of buyers for the argument that nearly all corporations are committing crimes. 4
But are free market economies really based on fleecing the consumer? Is the U.S. economy truly just a giant, Hobbesian free-for-all that encourages duplicity in our everyday transactions? Is everyone from corporate CEOs to your local car salesman really looking to make a buck at your expense?
The analysis presented in this book, based on dozens of economic studies spanning my entire
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages.
—Adam Smith, The Wealth of Nations 1
The free market works. This notion was clear to Adam Smith in the early days of capitalism, but since then it has come under a great deal of skepticism. These criticisms are nothing new, of course. As far back as 1848, Karl Marx published a Communist Manifesto, advocating an alternative economic system that would replace the market with state planning. Communism was adopted in countries ranging from Russia to North Korea, but somehow the outcome was always the same—mass shortages. Most Communist regimes eventually scrapped their dysfunctional economic system, if their populations didn’t rise up and do it for them. Today, there are only a few remaining Communist countries, and the only ones that have any kind of economic success—like China—are the ones that are reestablishing free enterprise.
Meanwhile, countries that stuck with the free market have prospered. There is a simple reason for this—as Smith observed, the free market is based on the pursuit of economic self-interest. The market acknowledges that people’s behavior is largely determined by incentives,
whether in the form of carrots or sticks. Allowing people the freedom to improve their own economic condition helps to make society wealthier overall. Smith understood that free trade takes place because both parties in an exchange profit from it. Whether a person buys a new car, a computer, or a movie ticket, the customer values the good he purchases more than the money that he pays for it. The seller, for his part, values the money that he receives more than the product.
Yet, despite its proven success, a profound distrust of the free market has spread even among the citizens and governing elites of wealthy, free nations. In the United States, politicians convene hearings to rail against oil companies, accusing them of ripping off consumers and insisting on the need for price controls or higher taxes on the firms’ profits. Newspapers denounce “corporate greed,” arguing that the only thing keeping any big company from turning into another Enron is the watchful eye of government regulation. The general public grumbles that high medicine prices mean that drug companies are getting rich at their expense.
As a telling example of the prominence of this view, the book Freakonomics achieved phenomenal popularity, selling over a million copies. In it, authors Steve Levitt and Stephen Dubner purport to unveil the “obfuscation, complication, and downright deceit” that pervades our everyday life. 2 Naturally, suspicion of corporations is a paramount theme. But the authors’ misgivings go much further. They see experts such as doctors, funeral directors, and life insurance agents as unscrupulous sharks looking to cash in on their expertise by swindling their own clients. “If you were to assume that many experts use their information to your detriment, you’d be right,” they warn. 3 The pair even compare real estate agents to members of the Ku Klux Klan. In their world, almost everyone—from teachers to Sumo wrestlers to politicians—is cheating or lying to somebody. Whether it is Levitt and Dubner or Michael Moore, popular authors have found plenty of buyers for the argument that nearly all corporations are committing crimes. 4
But are free market economies really based on fleecing the consumer? Is the U.S. economy truly just a giant, Hobbesian free-for-all that encourages duplicity in our everyday transactions? Is everyone from corporate CEOs to your local car salesman really looking to make a buck at your expense?
The analysis presented in this book, based on dozens of economic studies spanning my entire
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