More economics made human
BOOK REVIEW
Eighteenth-century mathematician Joseph-Louis Lagrange is believed to have said no mathematician can comprehensively understand his own work until he can go out and lucidly explain it to the first man he meets on the street. Replace mathematician with economist and — voila! — much of the arcana surrounding the dismal science suddenly appears, well, human. Stephen D Levitt and Stephen J Dubner seem to have made it their life mission to achieve this seemingly insurmountable task.
The unprecedented success of their debut act — Freakonomics: A Rogue Economist Explores the Hidden Side of Everything — catapulted Levitt and Dubner (the first a much-awarded economist from University of Chicago and the other a writer from The New York Times) into the stratified status of rock stars. The economist-journalist combo was able to infuse fresh life — and some meaning — into the dull, grey stories that lie behind the vast mountains of data generated by myriad research efforts. And, as a bonus, they made the reading fun.
Defying critics and sceptics, the double billing has come back with a repeat performance, a second book that picks up from where they left off. The second book adds new features, some muscle, interesting design elements as well as lots of illustrations and photographs. All this adds a sharper edge to the mordant humour that characterised their first book, but never detracts from the task they have set out to accomplish. There is also some plain home-speak to underline the point they made the first time: that many untold stories lie behind the mass of data and interpreting these numbers need not be reserved for nerds. And, that behind these numbers lie hidden revelations that can stand some current, popular perceptions on their head. Just lift the veil, look around the corner, shake it up well and what looked like an indecipherable heap of numbers stacks up in a meaningful manner.
Despite the visual differences between the two books, the sequel (not strictly though, but only in a manner of speaking) and its predecessor have one common, central theme running through them: people respond to incentives. But, while doing so many of the incentive programmes can lead to what the authors call “unintended consequences”, or outcomes that were hardly expected when the programme was structured. Therefore, the relationship between incentives and outcomes is hardly linear.
The global financial crisis of 2008 has spawned a flurry of post-mortems. Many critics of the meltdown laid the blame on the doorstep of the pay-and-incentive structure. Here was a reward design that was thought to be the perfect inducement for employees to deliver their best for the company’s shareholders. But that incentive structure was seen as upending the entire financial system. An example of unintended consequences? You would have thought the book would have jumped at the opportunity to dissect the financial crisis, but it steers clear. Why? “Mainly because the macroeconomy and its multitude of complex, moving parts is simply not our domain.”
Therefore, by focusing on how different individuals respond to motivation, or to a given set of values or preferences, the book waltzes jauntily into the realm of micro-economics, specifically the layered zone of behavioural economics. It’s an area that straddles the grey zone between economics and philosophy and has laid low many a hoary reputation. But SuperFreakonomics tip-toes around the theoretical minefield and concentrates on decoding the jumble of numbers that provide some stunning insights into economics of the humdrum.
Here is an example. The book tears through the data on drunken driving fatalities and concludes that perhaps it is more dangerous to walk drunk on the streets than to drive drunk. They also make a strong and cogent argument about why suicide bombers should buy life insurance. A marker (among many others) being used to identify a terrorist is to look for people who have a bank account but don’t buy life insurance. Reason? Because, insurance companies will most likely refuse to honour the claim arising from a suicidal death and, therefore, most terrorists feel paying an insurance premium is a waste of money. There’s another story on how certain regulations in the USA skewed the market for human organs while monetary incentives has enabled Iran to meet the demand for kidney transplants.
The book is definitely not for those wishing to know more about the twist and turns in the theoretical discourse. On occasion, the conclusions might seem a bit hasty, a bounding leap of faith. Indeed, some critics have panned the book for jumping to conclusions. Some self-righteous readers might find some statements objectionable too: “If you had the option of being born anywhere in the world today, India might not be the wisest choice. Despite its vaunted progress as a major player in the global economy, the country as a whole remains excruciatingly poor.”
But the allegation about convenient conclusions can be a bit of a quibble also. Since this book eschews all things theoretical, the authors can be pardoned for taking some liberties. They even admit it upfront: “Many of our findings may not be all that useful, or even conclusive. But that’s all right. We are trying to start a conversation, not have the last word. Which means you may find a few things in the following pages to quarrel with. In fact, we’d be disappointed if you didn’t.” Go ahead, take the invitation.
The author is Head-Policy & Research with Dhanlaxmi Bank. The views expressed are personal
SUPERFREAKONOMICS
Stephen D Levitt and Stephen J Dubner
Allen Lane (A Penguin imprint)
281 pages; £20