John Lott Loves Markets

Posted: Aug 21, 2007 12:01 AM

Reacting to the way the free market was misrepresented and disrespected in the best-seller "Freakonomics" -- as a place where trickery, deceit and predatory behavior rules -- economist John Lott has given us "Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't."

Lott, a prolific op-ed writer, is perhaps best known for his books "The Bias Against Guns: Why Almost Everything You've Heard About Gun Control Is Wrong" and "More Guns, Less Crime: Understanding Crime and Gun-Control Laws." He was at his office near Washington, D.C., when I talked to him Thursday, Aug. 16.

Q: There are lots of good economics books that extol the virtues of free markets -- why did you think we needed another one?

A: I’d like to think I have a lot of interesting applications and ideas other people haven’t thought of. A lot of this is based upon 25 years of academic research that I’ve done. I’d also like to think I have some advantage in maybe writing things and explaining things that other people have, too. To me, the basic notion of economics is that if something becomes more costly, people do less of it. Of course, the converse is that “incentives matter” -- the greater the incentive you get from something, the more that you do.

I really think that simple idea, over and over again, can explain so much of the world, whether it’s explaining why crime rates fall because it becomes riskier for criminals to commit a crime with higher arrest rates or higher conviction rates, to why out-of-wedlock births and single-parent families soared during the 1970s because premarital sex became less risky for people to engage in (there was a lower cost of engaging in it), to the impact that campaign-finance regulation has on getting incumbents re-elected, because it makes it relatively more costly for challengers to run relative to incumbents.

Q: What is the main point or theme of your book?

A: The main point is just to show how that simple idea in economics -- that if something is more costly you do less of it and that incentives matter -- can explain so much of the world around us. The other point is the fact that one of the benefits of the market is how it concentrates the costs and benefits of making decisions on the people who are making them.

Often when we see a problem with the market -- and I don’t argue that markets are perfect -- people often automatically say, “Well, we should have the government do something to fix it.” My point would be that many of the problems you can point to with regard to the market probably exist in spades with regard to the government doing it. The question is not the flawed, actual, real-world markets versus some perfection of an idea of the government doing it. You’ve got real-world situations in both. And often when you have some bureaucrat in Washington -- whose salary doesn’t vary on the basis of whether or not he makes the right or wrong decision -- making a decision that affects billions or tens of billions of dollars, there are some real-world problems that you have to take into account before you’d want to have the government make decisions on these things.

Q: How do you describe your politics and economics?

A: I suppose in many ways I probably agreed with the late Milton Friedman. Again, I think people make mistakes; markets make mistakes. The thing to remember, though, is that there are profits to be made in trying to solve those mistakes in different ways. While there are problems with the market, it’s kind of like the statement that people make about democracy -- there are lots of problems with it, but it’s better than the alternatives that are there. When we talk about regulation, we have to realize there are problems with the markets but there are also lots of problems that we have to remind ourselves exist with the government. So in many ways, I’d classify myself as a limited-government-type person who tries to make it so people are allowed to make decisions for themselves.

Q: What is the free market?

A: The free market is allowing individuals to make decisions for themselves. When you’re talking about trade, when I see two people trade, I assume that they both are made better off as a result of the trade. If you’re running a store and I give you money, I value the product you are giving me more than the money I am giving you, and the reverse is true for you. It’s the extent that we let people make decisions for themselves. In that case you bear all the costs and benefits of buying the product. That’s not saying you don’t make a mistake. I’m not saying that later on you don’t say, “Jeez, I wish I hadn’t bought that product.” But what I would say is that you are less likely to make a mistake because you know what your preferences are better than some guy in Washington is going to know, and you bear the costs and benefits of making that decision.

Q: What besides education and health care is an area where this country desperately needs a free market to operate?

A: I don’t even know where to start. Whether it be the discussions we have about energy -- we just had a huge energy bill come out from Congress that does everything from impose massive fines of $150 million supposedly for every count of so-called price gouging that companies engage in -- to the debate we’re going to be having this fall on what prices drug companies should be able to charge for their products. There are lots of areas where the first reaction has often been to get the government to decide what should be done. One of the ironies is, we see a problem, we pass a government regulation, the problem gets worse and rather than going back and saying, “You know, maybe we should have got rid of that original regulation,” the solution seems to constantly be some new, additional regulation to solve the problems that I would argue in many ways were created by the first regulation put in place.

Q: What happens to crime rates when government prevents or outlaws free markets the way it did during alcohol prohibition in the 1920s and today with drug prohibition?

A: Crime rates go up. The highest murder rate we ever had in the United States was in 1933. That was the last year of Prohibition. Essentially what happened then was that if you controlled alcohol distribution in an area, and if another mob came into your area, it wasn’t like you could call the police and tell them, “These guys are on my turf. Can you get them to leave?” What you’d end up doing is setting up your own military, essentially, to go and protect your area. So you’d have these huge gang wars. I don’t think people appreciate completely how much of the murder rate these days is drug-gang related. Over 70 percent of the murders in the United States occur in about 3 percent of the counties; 50 percent of the counties in the U.S. have zero murders in any given year and 25 percent of the counties have one murder in any given year.

Q: What is the most damaging myth or unfair untruth about the free market that we are constantly hearing from the media or liberal politicians?

A: I think it’s really a combination of two things, but they are tied together. One is that it is the problems that make news -- the plane crashing rather than the plane taking off. It’s understandable why certain things are more newsworthy than others, but I think it’s useful for people to have in the back of their minds, “How common is this? Is this something that we really should be concerned about or not?” Take something like corporate fraud. There are five real corporate fraud cases that have occurred in the last four or five years. We know the names -- Enron, WorldCom, what have you. But there are 11,000-plus publicly traded firms in the U.S. I would argue that those are real problems, and they should get a lot of attention. But somehow it should be made clear to people what the rate is we’re talking about for firms generally being accused or convicted of these kinds of fraud; they are extremely rare.

The second thing is how frequently whenever a problem is put forward it’s automatically assumed the government should do something about it. The government has lots of problems in figuring out what to do about these things. One thing is how legislation is put forward whenever there is a problem. It’s like, whatever is on the news right now generates a race to see who could put forward legislation to change things. Whether it’s the change in accounting rules like the Sarbanes-Oxley Act of 2002, or whether it’s anything dealing with crime or gun control, I don’t think people think through the implications of the bills they are putting forward and don't realize that they actually can make things worse.

Q: In your book you explain how women’s suffrage led to a massive increase in government. How did that happen?

A: It’s been a puzzle among academics for decades about why government started to grow when it did. In the United States the federal government was pretty much the same size from the beginning of the country up until the 1920s -- about 2 percent to 3 percent of GNP. You’d have a war, it’d go up, and then it’d come right back down. You’d see the same phenomenon worldwide. There’s basically a 50-year period of time around the world where governments started to grow, where they had been the same size for hundreds of years prior to that. I noticed that it seemed like in every case this growth started right after women were given the right to vote. I looked at the data for states in the United States and it’s pretty amazing if you graph it out. ... If you look at state government expenditures and revenue, accounting for inflation and number of people living in the state, governments were not growing up until women were given the right to vote -- and then the next year you can start to see an increase. In ten years it’s more than doubled.

Q: This is a causal thing, not a coincidental thing?

A: Right. It takes about 45 years before women end up voting at the same rate men do. You can see the growth in government corresponding very closely with women’s increased share in the voting population. ... And that takes you to the '60s. What happens there is you have a big increase in the divorce rate -- and divorce makes women much more liberal. If you look at a woman over her lifetime, single young women are liberal relative to single young men (men pretty much stay the same over the course of their lives in terms of their political views, for better or worse). When women get married they get more conservative -- about half of the gap between men and women is eliminated. If they get married and then have kids, about half of the remaining gap -- or about 75 percent of the original gap -- gets eliminated. But then if they get divorced, with kids, they become much more liberal than they were to begin with. You can see, in terms of the polls, how they support different issues like income taxes, higher taxes, or more progressive taxes. Single women, or particularly women with kids, are much more supportive of that. Also their support for different social programs -- safety net, social welfare, etc. -- become much stronger when they are on their own than when they are married.