The known unknowns.(Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't)(Book review)

Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't, by John R. Lott Jr. (Regnery, 256 pp., $27.95)

ECONOMISTS John Lott and Steven Levitt are in the midst of a feud of somewhat operatic proportions, and Lott's recent book Freedomnomics--billed as a direct reply to Levitt's massive bestseller Freakonomics--is the latest salvo. It has one great strength that is undercut by two weaknesses.

The strength of Freedomnomics is Lott's defense of the spontaneous order generated by the interlocking improvisations of people who do things like run restaurants and sell real estate. Lott has clearly spent time listening to them, and he is at his most convincing when he uses these conversations to provide simple but devastating counter-examples to Levitt's broad assertions.

For example, Levitt claimed that a car loses as much as a quarter of its value as it leaves the dealership because any potential buyer would assume that it must be a lemon if it is put up for sale right away. Lott found a pretty simple way to falsify this theory: He reports that he looked up the price of 50 used cars with very few miles on them, and discovered that they actually sell for more like a 3 percent discount to new. Lott goes on to outline such practical mechanisms as refunds and transferable warranties that have been developed to get around the perceived-lemon problem, and makes the sensible observation that obvious, sustained profit opportunities tend to get converted into businesses.

The first weakness of Freedomnomics is simply an understandable excess of zeal. Levitt's shtick that most business transactions are hidden con games can get pretty annoying in its tone of moral superiority (to businesspeople) and intellectual superiority (to their customers), but Lott's counter-descriptions of human behavior in the face of economic incentives are often unrealistically sunny. Both authors can come across as surprisingly naive about how real markets work.

Levitt made the argument that realtors take advantage of their customers by trying to get houses sold quickly, rather than holding out for the best price. His evidence was that realtors tend to keep their own houses on the market ten days longer and sell them for 3 percent more than those of their clients. (With this bill of indictment, Levitt's explicit and extended analogy between realtors and the KKK seems a little overheated.)

Lott responds by putting forward non-nefarious possible explanations for this 3 percent price difference, and continues by explaining the economic role of a middleman, including an extensive discussion of why it is often rational for a service provider to forgo some short-term profits to maintain a good reputation. Lott goes too far though: He paints a picture of a typical realtor that sounds more like Mother Teresa than anybody who has ever sold a house for me.