Today I took my second trip to the Cato Institute. After sitting through an hour of interns spewing out talking points on why the free market economy works, I thought that this visit much produce some sort of higher level of intellectual stimulation. The event today featured economist John R. Lott, who wrote a book entitled Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't. If the theories he decries are "half-baked," than his theories are moldy at best. His book is intended to be a response to Freakonomics by Steven Levitt. Freakonomics was a book based on vague, statistic free theories that supposedly should make us think about the "hidden side of everything." Freedomomics, instead of being a rebuttal, took the same anti-analytical approach, but produced much more disturbing outcomes. 

    The thesis of the book is that in the long-run, the free market will produce the best possible outcomes for our economy, and incentive is essential. In essence, he stated that the higher things cost, the less likely people are to buy them. We must, then, maintain the incentives of the market. This is typical of free market economists: a vague theory not supported by hard evidence, which can be proven false by a college aged pseudo economist like myself. 

    He gave several examples of how government involvement can inhibit the benefits of the incentive-based market system. He talked about the current debate about Prescription drugs. He chastised Democrats for trying to let the Government negotiate for lower drug prices. In his view, the enormous profits of the drug industry are necessary. He believes that if making drugs weren't so profitable, there would not be incentive to make them, and as a result, people would die. This may be one of the shallowest arguments of all time. First of all, the drug companies profits do not come from drugs that produce the highest social benefit. Viagra may be profitable, but it is not going to save anyone's life. Secondly, even if the free market were to produce optimal societal results, many of these results would not come in the short-run. For example, it may not be profitable now to treat childhood obesity, but it will eventually save society some money. Therefore, while the market is determining the optimal outcome, many children will get fat in the mean time. 

    He really lost me when he started spewing out incredibly vague, unsubstantiated and toothless theories about crime. His first assertion, is that concealed carry laws lower crime because they make criminals worried about people having hand guns. Of course he fails to mention that criminals do not have the perfect information to make these rational decisions, and are certainly not rational economic actors. He then pathetically tries to assert that criminals will be less likely to commit crimes if we have tougher prison sentences and larger fines, because they know committing crimes will be more "costly." I don't even want to respond to that. Basically, if people like him spent more time investing in the real reasons crime exist (failing schools, lack of upward mobility, lack of institutional support), then people like John Lott wouldn't have to devote time to this garbage.

    There are two incredible shortcomings in Lott's arguments, as were pointed out by EPI's Jared Bernstein. First, as mentioned above, all of these theories assume that there is perfect information, which there almost never is. Secondly, and perhaps more importantly, Lott does not understand the economics of externalities. The idea behind externalities is that firms will produce so it is most profitable for them. This level of production is rarely the optimal level of production for society. Bernstein listed a couple of examples. The first was education. It would be very profitable for all schools to be private, but then those on the lower end of the spectrum, due to the rampant inequality of opportunity in our country, would not be able to afford them. Therefore, the Government must step in and create strong public schools so that all children have the chance to share in the American dream. The second example is the Environment. Protecting the planet is not profitable for most corporations, which is why they still produce excesses of fossil fuels and gas guzzling cars. While the market may correct this problem in the long run, global warming will have already taken its toll.

    I am probably missing many other ridiculous things this guy said, but the thrust of my argument is that these smug economists use vague theories to show that a system which benefits them directly, is also somehow beneficial to society as a whole. This is, unfortunately, just not the case. He implies causations from loose correlations, and he does not take into account institutional structures that prevent a truly "free" economy from existing. Most absent from the book is data to show what is actually happening, which is that our so called "free" economy produces winners and losers, and that many Americans are not able to reap the rewards of their hard work.