Review Of Economic Concepts In Book "Freakonomics"

When people learned the truth about what the KKK was actually doing, including their nicknames, people openly mocked the organization. The Klan lost their fear grip on society. This mockery led many in the group to leave. Levitt said on this insider information, “The Ku Klux Klan-- much like politicians or real estate agents-- was a group whose power was derived in large part from the fact that it hoarded information. Once that information fell into the other hands, much of the group’s advantages disappeared.” (p.62) Kennedy used the precious information he had against the Klan.

The New Palgrave Definition of Economics describes talks about this type of asymmetric information, “There may be a good which can vary in quality and whose quality will be known only by the owner.” The owner in this case, Stetson Kennedy, understood the quality of the good (insider information on the KKK) and used it to his advantage. Kennedy, by sharing the withheld information to the public, exposed the KKK and changed the public’s opinion about the entity. What was once a tension-filled fear entity, crumpled into a men’s escape group in the public’s eye. All because of information and how it was used.

This is also somewhat observed in chapter three, Why Do Drug Dealers Still Live With Their Moms. In this instance, it is J.T., the gang leader who holds the power. J.T. is aware of the income that the gang brings in, and has an advantage from having a degree in business. Having been one of the only gangsters to graduate with a degree in general, it allows J.T. to climb the ranks and rake in the money. This crack-dealing gang J.T. is a part of is a branch of the Black Gangster Disciple Nation, and operates in Chicago. Sudhir Venkatesh discovered this gang as a graduate student at the University of Chicago. After living with the gang, with J.T.’s permission, for about four years he had seen it all- death, drugs and cash. Lots of cash. Venkatesh got to even see the billing and accounting for the gang over his time there. He was unsure if the information he had would get him in trouble, so he held onto it for a period of time but shared it in the book. He claimed that the gang, for a specific but unstated month, had revenues total $32,000. Of that money, $24,800 were from drug sales, $5,100 were from gang dues and the remaining was extortionary taxes. Looking at the sales first, the gang collected this from strictly crack sales. Venkatesh learned that J.T. did some side selling of members to sell heroin. However, this was under-the-table money that only he got profit from. On the expenses side, the gang incurred total monthly non wage costs of $14,000. This included mercenaries, funeral expenses, and the wholesale cost of drugs.

When observing, Venkatesh discovered the reason why J.T., who previously had a job at a business working and making good money, would leave that and get involved with crime. On the “businesses” statements, a line read “Net Monthly Profit Accruing to leader…. $8,500.” This would mean that J.T. is making roughly $100,000 tax free money; much more than he was making elsewhere. Sure, there are a lot more risks that are involved with this business, and J.T. did end up going to prison in the end, but it was the ease of the job and cash flow he obtained that made it so appealing to him. Now the gang, or J.T. really, paid $9,500 to his employees on staff. This included his three officers, who made $2,100 combined, and his hundreds of foot soldiers a combined $7,400. J.T. earned $66 an hour, while his officers and soldiers earned $7 and $3.30 an hour. No one but J.T. knew, except for J.T. The textbook defines asymmetric information as, “one party to a transaction has relevant information that another party lacks.” Here, we come to learn that because there are no legal checks, and because no one else in the gang understands how money works, J.T. was able to use this information and others, to gain an unfair amount of money in comparison to his employees.

Using asymmetric information, J.T. not only takes advantage of the drug buyers in the city but he takes advantage of the people actually selling crack. Because he possesses greater material knowledge than the workers, he is able to get away with making so much more money than him. Simply by being one of the few, if not the only, gang member to understand how to properly count or handle money, he is able to skim money from his employees. This is a minor economic role played here in comparison to that of adverse selection from the employers side.

The New Palgrave Definition of Economics states, “Adverse selection refers to a negative bias in the quality of goods or services offered for exchange when variations in the quality of individual goods can be observed by only one side of the market.” Forget about the market being the street crack users. Think about the market of those desperately wanting to sell crack and not understanding how little they will be paid. The chapter goes on to describe the street job, the lowest paying dealer one, as having a 25% mortality rate. The dealers knew it was dangerous, and some even lobbied to be paid more because of that, but J.T. never really had to change his ways. J.T. knew they were desperate, and therefore kept their quality relatively low. This helped him maintain a cheap labor force which often times only he saw the truths of. He sometimes lost control of his workers, but overall, by withholding information from them regarding their salaries in percentage to the product they are selling and maintaining a poor quality of work, J.T. was able to keep his expenses low while maintaining profit. Levitt and Dubner used these chapters to briefly give examples, and sometimes explain, the economic concepts of asymmetric symmetry and adverse selection as it pertains to the daily lives of some. Using asymmetric information and adverse selection to their advantages, J.T. was able to effectively maximize his profit within the gang while Stetson Kennedy was able to expose the Ku Klux Klan for who they really were.

As each chapter begins a new question is asked, chapter four begins with, “Where Have All the Criminals Gone?”. So far with the video we watched in class I knew there will be a big analytical and bizarre reason and answer for this question, so I tried to think to myself before I started the chapter and maybe I could think of a good point myself. The only real economic reason I could think of was increased taxes and putting the taxes to the police force and to pay for incarceration.

Now, for some background information, Nicolae Ceausescu was the dictator of Romania and he made it very clear that abortion and even contractions was for deserters and those who abandon continuity for their nation. Meanwhile, he abandoned agriculture to build manufacturing instead in hopes of increasing income for a better future. Really, all he did was starve and neglect his citizens from lack of food and proper housing. Sounds bad enough, but now as a female you were literally taxed if you weren’t pregnant. So now with all these new children and hungry people, life wasn’t as valuable as the children born a few years earlier. The point of this was that these children born from the abortion ban would perform worse in almost every possible way including school, labor, but would prove more likely to be criminals.

I picked a few of the topics that were popular and had a effect on the topic, but not fully. This topic we will discuss is increased number of police and innovative policing strategies. In the 1990’s we have an increase in officers per capita by about 14%. Just taking a general thought, more police means less crimes. Proving it isn’t as easy because in places with more police there is more crimes. But if we used the scenario played by politicians always wanting more police for safer citizens then we can see it. Even though these places where they are campaigning aren’t having increases in crime, they push for more police because people want to be safe. So, when these new police come in, the crimes rate does drop. But this is expensive to do for every single city. In total during the 1990’s our increase of police accounted for about 10% a good number but still doesn’t give an answer.

Another explanation to recall was “the bursting of the crack bubble”. Cocaine was a drug that became #1 pretty much overnight. However, it was only the main leaders who were getting rich while the small street dealers were struggling. So, it made a huge rivalry in the streets to advance themselves up the chain. There were very valuable corners where drug purchases were high meaning dealers would go here. Also causing a lot of trouble from those dealers being desperate. Many drug gang wars, shootings on the street for turf. A study happened and saw that more than 25% of homicides were crack related in 1988 in New York city. However, it was the price of crack that caused its own demised. It began as high priced and so popular that the demand was high for it and as more and more supply came in the price began to slowly fall. Less dealers were selling because it wasn’t getting them money and then it busted its own bubble. This crash in the market caused about a 15% drop in the crime rate. This was a very big amount yet, still doesn’t give us our answer.

Now, let's get to the real reason. In Eastern Europe around 1950 abortion wasn’t exactly illegal, they had to be given approval by a judge. Researchers concluded that the woman who were denied and abortion ended up resenting her baby and didn’t provide it needs as much as a loved and wanted baby. These babies grew up more likely to be criminals. The united states around 1900 it had been made illegal in the country to have an abortion. There was uncontrolled birth up until the late 1960’s where states began to allow abortion in certain circumstances. By 1970 five states made it fully legal to have an abortion and then by 1973 all states had full ability. By 1980 the number of abortions reached 1.6 million which was about 1 abortion per 2.25 births. After Roe v Wade an abortion was only $100 opposed to its normal $500, so those who were taking advantage of this where most likely poor teens and unmarried. These children would have been living in poverty and in a single parent home which are the two biggest factors of a criminal future. A single parent home will double a child’s chance of being a criminal. However, it was until late 1990’s that proved this whole theory. Currently this was when the children who were birthed after abortion was legal were in their late teens, their criminal peak. From the 88- 94 violent crime fell 13% and from 94-97 murder rates fell 23%. States with lower abortion rates experienced lower crime rate drops, meaning there were more criminals than those states with high abortion rates. To summarize, Incentives by a greedy dictator is the perfect example behind why the criminals came about in the first place. The banning of abortion was what the driver for the dictator to get his way.