Business

Economics has been a topic of conversation over the last few months b

ut from my warped perspective a great many of the people talking about economic have never studied the topic, have forgotten most of what they read or are just ignoring some of the basic principles. And this, I believe could lead to some very unfortunate decision over the next few years,

In my post on Megathreats, financial instability and the growing US debt was the number one issue. No one is paying attention to this that I can see.

Bank in the day when I was getting my MBA, Milton Friedman was the foundation for studying economics and was essential in forming policies for several presidents including Ronald Regan who leaned on his theories quite a bit.

But things have changed, and I read a book a couple of years ago that was eye opening on how different an approach to economics could be. This was Freakonomics by Steven Levitt and Stephan Dubner. The central premise of “Freakonomics” is that if morality represents how we would like the world to work, then economics represents how it actually works.

I thought rather than just doing a book report on Freakonomics that a comparison of Friedman and Levitt would be interesting. I am still a strong believer in Friedman’s models and wish our political leaders and all levels would go back and reread his books.

On the other hand, Freakonomics creates a different perspective based on data. This is a book the is well worth reading.

Below is a discussion of the two that should generate some interesting questions for you.

Different Approaches to Economics

Milton Friedman was a traditional economist with a strong belief in free-market principles. His work, particularly in books like Capitalism and Freedom and Free to Choose, focuses on the power of free markets, limited government intervention, and the importance of individual freedom in achieving economic and social outcomes. He’s known for his theories on monetary policy, inflation, and the role of government, arguing that less government interference generally leads to more efficient and beneficial outcomes for society. Friedman’s approach is largely macroeconomic and policy-oriented, with an emphasis on broad, system-level impacts.

On the other hand, Levitt and Dubner’s approach in Freakonomics is much less conventional. Levitt, as an economist, takes a microeconomic approach that zooms in on specific behaviors, incentives, and hidden patterns in everyday life. He’s less interested in big-picture theories about markets or government policy and more fascinated by data that reveals surprising insights about human behavior, whether in school systems, drug gangs, or parenting. While Friedman focuses on economic principles that can guide policy, Levitt uses economic tools to dissect real-life mysteries and quirks, often without any broader ideological agenda.

Different Views on Human Behavior

Friedman’s view of human behavior is grounded in the idea that individuals act rationally and make decisions based on self-interest, particularly when allowed to operate in a free market. His theories rely on the assumption that people, when given freedom, will make choices that benefit them and, in aggregate, society. He views incentives through the lens of how people operate within economic systems to maximize their utility, advocating for a structure that allows these choices to play out freely with minimal government interference.

Levitt, however, takes a more nuanced view of human behavior, especially around rationality and incentives. Freakonomics dives deep into situations where people don’t act purely rationally—or at least not in ways that are immediately obvious. Levitt shows that people’s actions are often shaped by hidden incentives, cultural pressures, or even the chance to cheat if they think they won’t get caught. He’s more interested in understanding the sometimes unexpected or irrational ways that people respond to incentives, even in “small” areas of life, like school testing or drug dealing.

Policy Implications and Social Impact

For Friedman, economic principles are tools to guide policy. He believes that society functions best when markets operate with minimal government control, as outlined in his influential “monetarist” ideas, which advocate for controlling the money supply to regulate the economy rather than relying on government spending or intervention. His ideas have had significant real-world impact, shaping policy in areas like taxation, welfare, and monetary policy.

In contrast, Freakonomics doesn’t advocate for any particular economic policy. Levitt and Dubner are less focused on policy recommendations and more on uncovering insights about human behavior and societal patterns. For example, when they discuss crime rates in the 1990s and propose a link to legalized abortion, they aren’t necessarily arguing for or against the policy—they’re presenting a potential consequence backed by data. This approach makes Freakonomics less ideological and more exploratory, inviting readers to question what they think they know about cause and effect in social issues.

The Role of Data and Theory

Friedman is known for his theoretical frameworks and for using empirical data to support these theories. He often started with broad economic principles and then looked for data to support his views, particularly in the areas of money supply and inflation. His ideas on the relationship between inflation and unemployment, known as the Phillips Curve critique, are a classic example of how he used theory to challenge established beliefs.

Levitt and Dubner, by contrast, often start with the data itself, looking for anomalies or patterns and then using these findings to craft their insights. They let the data lead to conclusions, even if those conclusions are unexpected or challenge common wisdom. For instance, their analysis of why drug dealers live with their moms doesn’t begin with a theory about the economics of drug dealing. Instead, it begins with raw data from Sudhir Venkatesh’s research and works backward to explain the gang structure. This approach is more investigative and relies less on traditional economic theories, prioritizing curiosity and questioning over theoretical consistency.

Influence and Accessibility

Friedman’s work is foundational in economics and has influenced generations of economists, policymakers, and even world leaders. His ideas contributed to the rise of neoliberal economics and shaped policies during the Reagan and Thatcher eras, emphasizing deregulation, privatization, and reduced government spending. His books are dense with theory, often requiring some background in economics to fully grasp their implications.

Freakonomics, on the other hand, is much more accessible to the average reader. By using everyday examples and a conversational tone, Levitt and Dubner reach a broader audience, making complex economic ideas understandable and engaging. Freakonomics popularized a new way of looking at economics as a tool for solving real-life mysteries and explaining unusual behaviors. While it doesn’t seek to influence policy, it has sparked curiosity and conversation about economics beyond academia, making it a cultural phenomenon in its own right.

Final Thoughts

In essence, Freakonomics and Friedman’s work represent two very different sides of economics. Friedman is about foundational principles, big ideas, and policy impact, all with a strong ideological stance favoring free markets. Levitt and Dubner are about curiosity, hidden truths, and the quirky side of human behavior, often without any particular policy agenda.

Where Friedman might ask, “How can free markets improve society?” Levitt might ask, “What unexpected things can data tell us about people?” Both perspectives have value: Friedman’s for understanding the big-picture forces shaping economies, and Levitt and Dubner’s for shining a light on the smaller, surprising details of our everyday lives. Together, they showcase the diversity and richness of economic thought and its power to reveal both the expected and the unexpected.