Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't John Jr. (the dot read aloud .txt) 📖

major impact on me, and I’d like to acknowledge in particular Armen Alchian, Gary Becker, Harold Demsetz, David Friedman, Ben Klein, Ed Leamer, Earl Thompson, Thomas Sowell, and Finis Welch. Among the many others who influenced my work are Bill Landes, Sam Peltzman, Richard Posner, George Stigler, and James Q. Wilson. Finally, I would like to thank the late M. Bruce Johnson. I became an economist only through a series of unlikely events that all began with my conversations with Bruce after he moved next door to me in Florida when I was sixteen years old.

Notes

Introduction

1 Adam Smith, The Wealth of Nations, edited by Edwin Cannan, (Chicago: University of Chicago Press, 1976), 18.

2 From the official Freakonomics website: http://www.freakonomics.com/the-book.php.

3 Steven Levitt and Stephen Dubner, Freakonomics (New York: William Morrow, 2006), 63.

4 Regarding corporate crime in the early 2000s, Levitt and Dubner argue that the feeble justification given by corporate criminals that “everybody else was doing it,” in fact, “may be largely true.” See Freakonomics, 69. In addition to attacking corporate America in books like Downsize This!, Michael Moore introduced viewers to the character “Crackers,” a corporate crime-fighting chicken, in his series TV Nation.

5 Paul Resnick, Richard Zeckhauser, John Swanson, and Kate Lockwood, “The Value of Reputation on eBay: A Controlled Experiment,” Experimental Economics, June 2006, 79-101.

6 In a Gallup Poll, only 14 percent of respondents rated the honesty and ethical standards of congressmen as “high” or “very high.” Senators received a 15 percent rating, while business executives registered at 18 percent. The Gallup Poll, “Honesty/Ethics in Professions,” December 8 to 11, 2006. Http://www.galluppoll.com/content/?ci=1654&pg=1.

7 One example involved a famous paper by Orley Ashenfelter and Robert Smith that was published in the Journal of Political Economy. The study drew attention to a puzzle: that minimum wage laws only punished violators for a fraction of the underpayment to the workers, but at the same time few people seemed to violate the law. Their paper generated many attempts by economists to explain this conundrum. It was only in talking to some people involved in enforcing minimum wage laws while I was at the Sentencing Commission that I learned the authors’ claim that the penalties were small, in fact, wasn’t true. Ashenfelter and Smith had simply misread the law, which provided for much bigger penalties than they assumed. All the succeeding economists who addressed the issue took it for granted that Ashenfelter and Smith’s figures were correct. See Orley Ashenfelter and Robert Smith, “Compliance with the Minimum Wage Law,” Journal of Political Economy, April 1979, 333-350. Among the many papers that attempted to explain this puzzle were Gilles Grenier, “on Compliance with the Minimum Wage Law,” Journal of Political Economy, February 1982, 184-187. See also John R. Lott, Jr. and Russell D. Roberts, “The Expected Penalty for Committing Crime: An Analysis of Minimum Wage Violation,” Journal of Human Resources, Spring 1995, 397-408 and John R. Lott, Jr. and Russell D. Roberts, “Why Comply: One-sided enforcement of Price Controls and Victimless Crime Laws,” Journal of Legal Studies, June 1989, 403-414.

8 Milton and Rose Friedman, Free to Choose, (New York: Harcourt Brace Jovanovich, 1979) 214.

9 Jac C. Heckelman, “Economic Freedom and Economic Growth: A Short-run Causal Investigation,” Journal of Applied Economics, May 2000, 71-91.

Chapter One: Are You Getting Ripped Off?

1 Jad Mouawad, “2 Senate Committees Interrogate Wary Oil Company Executives,” New York Times, November 10, 2005.

2 The concern among politicians is bipartisan. For example, after Katrina in August 2005, Republican governors such as Missouri’s Matt Blunt, Georgia’s Sonny Perdue, and Kentucky’s Ernie Fletcher, as well as Democratic governors like Illinois’ Rod Blagojevich, Pennsylvania’s Ed Rendell, and Michigan’s Jennifer Granholm all advocated prosecuting gas companies who profited from the price increases. The Bush administration got into the act by ordering the Justice Department and the Federal Trade Commission to investigate allegations of price-gouging and expressing concern that retail and wholesale gasoline prices were “too high.” See “In Praise of ‘Gouging, ’ ” editorial, Wall Street Journal, September 7, 2005, and John R. Lott, Jr. and Sonya D. Jones, “A Look at the Positive Side of Price-Gouging and Greed,” Houston Chronicle, August 31, 2005.

3 Armen A. Alchian and William R. Allen, Exchange and Production: Competition, Coordination, and Control, Belmont: Wadsworth Publishing Co. (3rd edition), 1983. See also John R. Lott, Jr. and Gertrud Fremling, “Time Dependent Information Costs, Price Controls, and Successive Government Intervention,” Journal of Law, Economics, and Organization, vol. 5, no. 2, Fall 1989: 293-306, and John R. Lott, Jr. and Russell D. Roberts, “A Guide to the Pitfalls of Identifying Price Discrimination,” Economic Inquiry, vol. 29, no. 1, January 1991: 21.

4 The prices may not be exactly equal due to storage and interest costs, but the current price plus storage and interest rate costs should equal what the price is expected to go up to.

5 “As Prices Rise, Car-Pooling Begins to Win Out Over Privacy,” New York Times, September 8, 2005.

6 Jad Mouawad, “2 Senate Committees Interrogate Wary Oil Company Executives,” New York Times, November 10, 2005.

7 Alchian Allen, Exchange and Production. See also John R. Lott, Jr. and Gertrud Fremling, “Time Dependent Information Costs, Price Controls, and Successive Government Intervention,” Journal of Law, Economics, and Organization, vol. 5, no. 2, Fall 1989: 293-306.

8 Leonard Theberge, “Coverage of the Oil Crisis: How Well was the Public Served?,” vol. 1, Washington, D.C.: Media Institute, 1982, 24.

9 U.S. drug companies just can’t say that they won’t sell drugs to these companies. If they don’t, they risk losing their drug patent and foreign companies in those countries will be able to sell generic versions of the drugs. The American companies will not receive any compensation for this loss. In their view a small profit is better than no profit. James