Freakonomics

Freakonomics Chapter 3 Summary & Analysis

Summary
Analysis
When economists try to answer complex questions about the world, they often contradict the “conventional wisdom.” The phrase “conventional wisdom” was coined by the economist John Kenneth Galbraith. Galbraith considered “conventional wisdom” to be the enemy of truth. It is too easy, Galbraith argued, to believe something simply because one’s peers believe it, too. Thus, conventional wisdom is often simple and convenient—but not necessarily true.
In this important passage, the authors bring up the concept of “conventional wisdom”—the theories and superstitions of the general public. If there is a villain or antagonist in this book, it’s conventional wisdom—the enemy of logic, science, and reason.
Themes
Irrational Behavior, Experts, and “Conventional Wisdom” Theme Icon
Related Quotes
Advertising is a powerful way to create conventional wisdom. Listerine advertisers were responsible for popularizing a little-known medical term halitosis (bad breath). They successfully convinced millions of Americans that having bad breath was a disease, for which Listerine was the only cure.
Advertising agencies are especially adept at manipulating conventional wisdom; by influencing millions of radio listeners and TV watchers, they created a new “disease” out of thin air.
Themes
Irrational Behavior, Experts, and “Conventional Wisdom” Theme Icon
One interesting challenge to the conventional wisdom was the statistic that the majority of crack dealers in the 1990s lived with their mothers. In the late 1980s, at the height of the so-called “Crack epidemic,” a sociology Ph.D. candidate named Sudhir Venkatesh decided to research poverty in poor neighborhoods of Chicago. Sudhir visited apartment buildings on Chicago’s South Side, many of them very dangerous. On one occasion, he encountered gangs who threatened to kill him. Sudhir met a gang leader named J.T., a college graduate who’d briefly worked as a manager. J.T. agreed to let Sudhir study how he ran his gang. Sudhir got to interview gang members and even record gang meetings. One of Sudhir’s most important interviewees was a gang member named Booty. Booty gave Sudhir some priceless information: four notebooks full of the gang’s financial records: drug sales, business strategies, death benefits for dead gang members’ families, etc.
Sudhir exemplifies the commitment to truth, rationality, and empiricism that the authors celebrate. He was even willing to risk his own life in order to study the drug trade in Chicago. J.T.’s success as a drug dealer suggests that the drug business, contrary to popular belief (or rather, conventional wisdom), isn’t all that different from any other business—as we’ll see, the same management and business techniques can be used to sell crack cocaine or McDonald’s hamburgers. And like any successful business, J.T.’s crack gang kept good financial records—an invaluable tool for Sudhir.
Themes
Incentives Theme Icon
Irrational Behavior, Experts, and “Conventional Wisdom” Theme Icon
Nature vs. Nurture Theme Icon
Crime Theme Icon
Later, Sudhir went to study at Harvard. It was there that he met Steven Levitt (one of this book’s authors). Levitt was fascinated with Sudhir’s research, and particularly the business records the Chicago drug gangs kept. The organization methods that Chicago gangs appeared to use were almost indistinguishable from the organization methods of a McDonald’s franchise. Much like a McDonald’s franchise, J.T. ran one branch of the Black Disciples gang. J.T. was a manager, who reported to a centralized “board of directors.” J.T. paid his board 20 percent of his gang’s revenues, in return for the right to sell crack in his territory. J.T. had different employees, including enforcers, foot soldiers, and runners. J.T had to compensate his employees and pay his board a monthly fee—but after these payments, he enjoyed an annual salary of about 100,000 dollars.
The authors aren’t saying that crack gangs are the same as McDonald’s franchises, but they are suggesting that the same business methods can be used to sell either crack or fast food. One important principle of business management is that local businesses can make a higher profit by working on behalf of a larger business—a board of directors. In the case of J.T.’s gang, the local gang represented itself as a “franchise” of the Black Disciples. In return for the Black Disciples leaders’ approval, J.T. had to pay 20 percent—a small sacrifice, considering how much money he made as a Black Disciple gang leader.
Themes
Incentives Theme Icon
Irrational Behavior, Experts, and “Conventional Wisdom” Theme Icon
Morality and Prescriptive vs. Descriptive Thinking Theme Icon
Crime Theme Icon
Related Quotes
Get the entire Freakonomics LitChart as a printable PDF.
Freakonomics.pdf.medium
J.T. made a good living as the head of his gang. But his employees didn’t do so well. The lowest level employees, foot soldiers, were responsible for doing business with crack users. Many foot soldiers made such small amounts of money that they had to live at home with their mothers (answering the question posed in this chapter’s title). At times, foot soldiers had to fight to protect their supplies of drugs, and they often went to jail. Sudhir calculated that foot soldiers had a one in four chance of being murdered.
J.T.’s gang isn’t so different from other businesses: almost all the profits flow to the “top of the pyramid.” This seems especially unfair in the case of a crack gang, since the people who assume the greatest risk (the foot soldiers) are also the most underpaid—they’re not just working long hours doing menial labor (as in most businesses), but even risking their lives for minimal pay.
Themes
Crime Theme Icon
Why would anyone take a job that offered a one in four chance of being murdered? For the same reason that people move to Hollywood or wake up early to lift weights: because they want to succeed and “make it to the top.” Furthermore, many of the people who became foot soldiers in Chicago had no clear alternatives—they couldn’t get an education or find a safe, well-paying job. So the problem with crack dealing is the problem with so many other professions: a lot of people vie for a small number of “prizes.” One consequence of this feature of the crack business is that being a foot soldier doesn’t pay very well—because the demand to be a foot soldier is so high, wages are low. Many of J.T.’s foot soldiers left the job after they realized they weren’t going to be promoted—but more foot soldiers would always replace them.
If it’s irrational for foot soldiers to risk their lives for a meager salary, then it’s also irrational for aspiring actors to move to Hollywood and wait tables. There are hundreds of businesses with enthusiastic applicants at low-level positions—so enthusiastic that they’re willing to work long hours for minimum wage, in the hopes that they’ll be promoted and make more money. Of course, it doesn’t take time for these employees to lose their enthusiasm, once it becomes clear that they stand almost no chance of getting promoted. Thus, J.T.’s foot soldiers tended to leave the crack business early on.
Themes
Incentives Theme Icon
Irrational Behavior, Experts, and “Conventional Wisdom” Theme Icon
Crime Theme Icon
Related Quotes
At one point, J.T.’s gang got into a drug war with a rival gang. During this war, J.T. saw many of his foot soldiers leave the drug world altogether, since their chances of being killed were much higher. J.T. also saw his profits going down, since people were frightened of buying drugs (since they could get caught in the middle of a gunfight between the two gangs). In the end, J.T. managed to avert a full-scale drug war by ordering his foot soldiers to use force as sparingly as possible. In this way, he increased his profits, and, by “leading by example,” he convinced the rival drug gang to limit its use of force as well. At the age of 34, J.T. was promoted to be a member of the Black Disciples’ board of directors. But soon afterwards, he was sent to prison for dealing drugs.
Although the foot soldiers’ behavior could be described as irrational (since they were endangering their lives every day), the authors suggest that even irrational behavior can be analyzed in terms of incentives. Thus, when the danger of getting shot while selling crack increased, more foot soldiers left the gang. The sudden ending of J.T.’s story reminds us that, even if the drug trade works like any legitimate business, it’s not a legitimate business—drug dealers can easily go to jail just for “working.”
Themes
Incentives Theme Icon
Irrational Behavior, Experts, and “Conventional Wisdom” Theme Icon
Crime Theme Icon
What, the authors ask, does crack cocaine have to do with nylon stockings? In 1939, nylon stockings were becoming trendy in the U.S. They were affordable, attractive, and long lasting. Most importantly, they looked almost the same as classier silk stockings: thus, they were marketed as an affordable alternative to silk. By the same token, in the late 1970s and early 1980s, crack cocaine was “marketed” to Los Angeles drug users as an affordable alternative to cocaine, the most glamorous and expensive drug in the United States.
One of the most important reasons that people buy products is because they’re trying to seek the approval of their peers through the pursuit of social status. Thus, people buy apparently fancy products like nylon stockings and crack cocaine in the hopes of gaining some of the status associated with silk stockings and “regular” cocaine.
Themes
Incentives Theme Icon
Crime Theme Icon
Related Quotes
In the 1980s, crack cocaine had become a hugely popular drug in the U.S. In response to the drug epidemic, the courts modified the criminal code to allow for harsher sentences for drug dealers. In a bitter irony, however, the growing number of drug dealers who went to prison established new contacts with their fellow inmates, including Colombian drug dealers, so that when the drug dealers were released from prison, they returned to selling crack with greater sophistication. The crack epidemic strengthened gangs throughout the United States, because it became increasingly profitable to become a gangster. Before the crack epidemic, gangs would often break apart as gangsters started to raise families: it was impossible to be a gangster and make enough money to support a wife and children. But following the rise of the crack epidemic, gangs began making enough money to support families, and they sold so much crack that it devastated entire neighborhoods. The crack epidemic probably increased the “gap” between white and black Americans: greater numbers of black people went to prison, the achievement gap between black and white schoolchildren grew, etc.
In this important section, the authors give a history of the so-called “War on Drugs” in the U.S. As the authors point out, the federal government’s attempts to eliminate the drug trade by sending more dealers to jail ultimately backfired, strengthening the drug business by allowing dealers to make useful connections while they were behind bars. Another important thing to notice in this section is the discussion of the achievement gap between black and white Americans. The achievement gap has been the subject of much economic analysis in the last fifty years, and in the following chapters of the book, Levitt and Dubner will try to study it using the concept of incentives.
Themes
Incentives Theme Icon
Irrational Behavior, Experts, and “Conventional Wisdom” Theme Icon
Crime Theme Icon
Many criminologists predicted that the crack epidemic of the 1980s would continue to cause major violence in American cities in the 1990s. But in fact, this did not happen: the crime rate began to decrease in the 90s. This was because “another remarkably powerful ripple effect—this one moving in the opposite direction—had just come into play.”
Although this is a serious work of economics, it’s also designed to be entertaining; thus, the chapter ends on a note of suspense, encouraging us to keep reading.
Themes
Incentives Theme Icon
Irrational Behavior, Experts, and “Conventional Wisdom” Theme Icon
Crime Theme Icon