Destroying the Rationale for Government Growth

Published October 1, 2007

Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don’t
by John Lott
Regnery Publishing, Inc. (June 4, 2007)
256 pages, hardcover ISBN 596985062, $27.95

I’m an economist, and believe me, during my single days women were not impressed. Here I am 30-plus years later, and suddenly it’s the in thing: Seemingly everyone is an “economist” these days. Politicians. Pundits. Preachers. Even some actual economists are “economists.”

Now, by “economists,” I refer to the growing class of sophisticates producing semi-clever and half-baked analyses of various everyday phenomena using the tools of economic analysis–alas, poorly. In particular, a certain purveyor of freaky theories comes immediately to mind.

The dominant theme among such writings is the ubiquitous, inescapable, depressingly constant presence of “market failure”–alleged flaws in the outcomes yielded by market forces driven by the choices made by myriad buyers and sellers every day. That theme almost always is accompanied by a prescription for government action–make that coercion–as an antidote.

Government Failures Exposed

This must change, and now there are grounds for hope. Leading the way is John R. Lott, whose new book, Freedomnomics, is well written, rigorous, and utterly destructive of the “market failure” rationale for endless expansion of government power.

Anyone not slumbering knows Big Government is a monstrosity barely capable of delivering mail, operating schools, and guaranteeing that public facilities such as bridges will not kill. And let us not forget the utter incompetence that was the government effort–federal, state, and local–to organize timely aid for residents of New Orleans in the wake of Hurricane Katrina.

Government by its very nature has only weak incentives to pursue such activities effectively, because government policies must be driven by the politics of wealth redistribution, as resources must be acquired by taxing and distributed by spending. Those bearing the tax burden and those enjoying the largesse cannot be one and the same; what would be the point?

And so the old argument that government systematically will act to correct market failures is just silly, and no one thinking seriously about economic policy believes it.

Market Solutions Explained

Freedomnomics does far more than merely illustrate the government failure that the “economists” tend to sweep under the rug. It cuts the Gordian knot of choosing between market and government failures by showing that competitive markets have powerful incentives to find solutions to the alleged failures to which the “economists” are so addicted.

A good example is the way many sellers of used autos put their business reputations on the line by inspecting and then guaranteeing the quality of used cars, a market response to the information problem faced by buyers. Another is the reputation constraint faced by real estate agents who otherwise might be more interested in a quick commission than the best price for their clients.

A third is the use of advertising revenues to pay for goods such as broadcast entertainment from which it is difficult to exclude those who do not pay. That may seem trivial now, but it was not when the market for radio broadcasts was in its infancy.

Myths Debunked

While describing these phenomena, Lott–who relies substantially upon his own careful work published in peer-reviewed journals–illustrates the surprising power of economic analysis by explaining phenomena that appear anomalous at first glance.

An example is the price difference between full- and self-serve gasoline. Why is that difference smaller for premium fuel than for regular? The answer is simple but intriguing: Autos that run on premium usually require bigger fill-ups, so the smaller price difference per gallon covers the cost of providing full service.

In this way Lott debunks several myths that have come to enjoy the status of conventional wisdom in no small part because of the writings of the “economists” and the accompanying applause of journalists devoid of any rigorous training.

Political Change Explained

It is in the analysis of government growth and crime that Lott’s scholarly work really shines, a fact reflected in this book. Many of us for years have been befuddled at the growth of government; Lott shows that the extension of the voting franchise to women–who have stronger demands for income security provided collectively–yielded an increase in the political demand for government spending.

That is consistent with my own view that the political system offers the right to vote to new groups only when current majorities see themselves as endangered. But the new voters have to be bought off. Why else would the current majority offer to share the spoils among a larger group while at the same time finding itself with a smaller minority from which to steal?

With respect to crime, Lott debunks the poor analysis and weak statistical approach of that freaky “economist,” who has made a reputation for himself by arguing that the legalization of abortion yielded the decline in crime in the 1990s. Lott shows the legalization of abortion yielded fewer unwanted children but more children born out of wedlock, with the latter effect outweighing the former. As a result, he shows, the actual outcome of legalized abortion was an increase in crime.

Full disclosure: Lott and I overlapped in graduate school, and we have been friends for 30 years. But it simply is incontrovertible that this well-written book, reflecting a body of rigorous research over many years, is important and extremely useful, particularly at a time when innumerable “economists” peddle silliness that various publishers are only too happy to endorse. Now, that is a market failure.

Benjamin Zycher ([email protected]) is a senior fellow at the Manhattan Institute for Policy Research.