Freakonomics Revised and Expanded Edition

by Steven D. Levitt

  This was in fact the second reader to write with this same correction. We had asked the first reader for his source; he said he thought he “heard it once on ESPN,” but couldn’t be sure. After receiving this second e-mail, I decided to investigate. Here is my reply to reader no. 2, and to anyone else who may care:

  I looked into the Black Sox thing. It is true that the Wikipedia entry says this: Although many believe the Black Sox name to be related to the dark and corrupt nature of the consipiracy [sic], the term Black Sox had already existed before the fix was investigated. The name Black Sox was given because parsimonious owner Charles Comiskey refused to pay for the players’ uniforms to be laundered, instead insisting that the players themselves pay for the cleaning. The players refused, and the subsequent series of games saw the White Sox play in progressivly [sic] dirtier uniforms, as dust, sweat, and grime collected on the white, woollen [sic] uniforms until they took on a much darker shade. (does anyone have proof of this? sounds like urban legend to me)

  Two things to say about this: 1. The parenthetical phrase at the end was just added—by me. 2. In other words, let’s remember that Wikipedia is an open-access “encyclopedia” that can be contributed to (or vandalized) at will.

  Here’s a more reliable source: Eight Men Out: The Black Sox and the 1919 World Series, by Eliot Asinof (Holt, Rinehart and Winston,1963). Asinof writes that White Sox owner Charles Comiskey was indeed cheap when it came to his players: His generosity here [with reporters] was unmatched. Yet his great ball club might run out on the field in the filthiest uniforms the fans had ever seen: Comiskey had given orders to cut down on the cleaning bills.

  So is it possible that the White Sox were known, even slightly or colloquially, as the Black Sox before the 1919 scandal?

  Sure, it’s possible, but Asinof makes no such insinuation throughout the book. In fact, once you get past the book’s opening pages, I didn’t find the words “Black Sox”, where Asinof writes of the aftermath of the World Series scandal: “As the impact of the confessions sank in, the American people were at first shocked, then sickened. There was hardly a major newspaper that did not cry out its condemnation and despair. Henceforth, the ballplayers involved were called the Black Sox.”

  Note the key word: henceforth. Is it possible that Asinof was wrong? Sure. But his book is a good one, commonly accepted as the definitive biography of the affair. I don’t feel compelled to check this out further until someone comes up with contrary evidence that’s more reliable than Wikipedia. But if you do, I’ll be happy to research further, or make a change in future editions of Freakonomics.

  So please, dear blog readers: let us know if we’re right or wrong re the Black Sox. We’ll be a little sad to have been wrong, but a lot happy to correct the mistake. A Freakonomics T-shirt goes to the first person who offers hard evidence of the dirty-socks theory.

  —SJD (May 20, 2005, and Aug. 5, 2005)

  “‘Peak Oil’: Welcome to the Media’s New Version of Shark Attacks”

  The cover story of the Aug. 21 New York Times Magazine, written by Peter Maass, is about “Peak Oil.” The idea behind “peak oil” is that the world has been on a path of increasing oil production for many years, and now we are about to peak and go into a situation where there are dwindling reserves, leading to triple-digit prices for a barrel of oil, an unparalleled worldwide depression, and as one web page puts it, “Civilization as we know it is coming to an end soon.”

  One might think that doomsday proponents would be chastened by the long history of people of their ilk being wrong: Nostradamus, Malthus, Paul Ehrlich, et al. Clearly they are not.

  What most of these doomsday scenarios have gotten wrong is the fundamental idea of economics: people respond to incentives. If the price of a good goes up, people demand less of it, the companies that make it figure out how to make more of it, and everyone tries to figure out how to produce substitutes for it. Add to that the march of technological innovation (like the green revolution, birth control, etc.). The end result: markets figure out how to deal with problems of supply and demand.

  Which is exactly the situation with oil right now. I don’t know much about world oil reserves. I’m not even necessarily arguing with their facts about how much the output from existing oil fields is going to decline, or that world demand for oil is increasing. But these changes in supply and demand are slow and gradual—a few percent each year. Markets have a way of dealing with situations like this: prices rise a little bit. That is not a catastrophe; it is a message that some things that used to be worth doing at low oil prices are no longer worth doing. Some people will switch from SUVs to hybrids, for instance. Maybe we’ll be willing to build some nuclear power plants, or it will become worthwhile to put solar panels on more houses.

  But the New York Times article totally flubs the economics time and again. Here is one example:

  The consequences of an actual shortfall of supply would be immense. If consumption begins to exceed production by even a small amount, the price of a barrel of oil could soar to triple-digit levels. This, in turn, could bring on a global recession, a result of exorbitant prices for transport fuels and for products that rely on petrochemicals—which is to say, almost every product on the market. The impact on the American way of life would be profound: cars cannot be propelled by roof-borne windmills. The suburban and exurban lifestyles, hinged to two-car families and constant trips to work, school and Wal-Mart, might become unaffordable or, if gas rationing is imposed, impossible. Car-pools would be the least imposing of many inconveniences; the cost of home heating would soar—assuming, of course, that climate-controlled habitats do not become just a fond memory.

  If oil prices rise, consumers of oil will be (a little) worse off. But we are talking about needing to cut demand by a few percent a year. That doesn’t mean putting windmills on cars, it means cutting out a few low-value trips. It doesn’t mean abandoning North Dakota, it means keeping the thermostat a degree or two cooler in the winter.

  A little later, the author writes:

  The onset of triple-digit prices might seem a blessing for the Saudis—they would receive greater amounts of money for their increasingly scarce oil. But one popular misunderstanding about the Saudis—and about OPEC in general—is that high prices, no matter how high, are to their benefit. Although oil costing more than $60 a barrel hasn’t caused a global recession, that could still happen: it can take a while for high prices to have their ruinous impact. And the higher above $60 that prices rise, the more likely a recession will become. High oil prices are inflationary; they raise the cost of virtually everything—from gasoline to jet fuel to plastics and fertilizers—and that means people buy less and travel less, which means a drop-off in economic activity. So after a brief windfall for producers, oil prices would slide as recession sets in and once-voracious economies slow down, using less oil. Prices have collapsed before, and not so long ago: in 1998, oil fell to $10 a barrel after an untimely increase in OPEC production and a reduction in demand from Asia, which was suffering through a financial crash.

  Oops, there goes the whole peak-oil argument. When the price rises, demand falls, and oil prices slide. What happened to “the end of the world as we know it”? Now we are back to $10-a-barrel oil. Without realizing it, the author just invoked basic economics to invalidate the entire premise of the article!

  Just for good measure, he goes on to write:

  High prices can have another unfortunate effect for producers. When crude costs $10 a barrel or even $30 a barrel, alternative fuels are prohibitively expensive. For example, Canada has vast amounts of tar sands that can be rendered into heavy oil, but the cost of doing so is quite high. Yet those tar sands and other alternatives, like bioethanol, hydrogen fuel cells and liquid fuel from natural gas or coal, become economically viable as the going rate for a barrel rises past, say, $40 or more, especially if consuming governments choose to offer their own incentives or subsidies. So even if high prices don’t cause a recession, the
Saudis risk losing market share to rivals into whose nonfundamentalist hands Americans would much prefer to channel their energy dollars.

  As he notes, high prices lead people to develop substitutes. Which is exactly why we don’t need to panic over peak oil in the first place.

  So why do I compare peak oil to shark attacks? It is because shark attacks mostly stay about constant, but fear of them goes up sharply when the media decides to report on them. The same thing, I bet, will now happen with peak oil. I expect tons of copycat journalism stoking the fears of consumers about oil-induced catastrophe, even though nothing fundamental has changed in the oil outlook in the last decade.

  —SDL (Aug. 21, 2005)

  “Is America Ready for an Organ-Donor Market?”

  Probably not. But, in what is either a very odd coincidence or some kind of concerted effort to get out the organ-market message, there are op-eds in both the New York Times and Wall Street Journal today arguing the case.

  The first one, headlined “Death’s Waiting List,” is by Sally Satel, a psychiatrist and American Enterprise Institute scholar. Satel herself received a kidney transplant and is now arguing that the delivery system is terrible and that the Institute of Medicine’s new report, “Organ Donation: Opportunities for Action,” is even worse. “Unfortunately,” Satel writes, “the report more properly should be subtitled ‘Recommendations for Inaction.’” Satel’s main point is that the conventional argument against an organ market—i.e., that no part of the human body should ever be “for sale”—has been made obsolete, and then some, by the “markets for human eggs, sperm and surrogate mothers.”

  The WSJ piece, headlined “Kidney Beancounters,” is by Richard Epstein, the University of Chicago legal scholar and Hoover Institution fellow. Epstein is even more hostile to the IOM’s report (though maybe the Journal just let him get away with more than the Times let Satel get away with), saying the report is “so narrowminded and unimaginative that it should have been allowed to die inside the IOM.” Epstein writes further that “the major source of future improvement lies only in financial incentives; yet the IOM committee (which contains one lawyer but no economist) dismisses these incentives out of hand. … The key lesson in all this is that we should look with deep suspicion on any blanket objection to market incentives—especially from the high-minded moralists who have convinced themselves that their aesthetic sensibilities and instinctive revulsion should trump any humane efforts to save lives.”

  Though his op-ed doesn’t say so, I am pretty sure that Epstein is an advisor to LifeSharers, a self-described “non-profit voluntary network of organ donors” that seeks to use non-financial incentives to encourage organ donation. A while ago, we received an e-mail from David Undis, the executive director of LifeSharers. He wrote:

  Incentives are missing in organ donation. That’s one of the reasons so many people are dying waiting for organ transplants.

  A free market in human organs would save thousands of lives a year, but politically speaking it’s a pipe dream. There’s very little likelihood Congress will legalize buying and selling organs in the foreseeable future.

  I formed LifeSharers to introduce a legal non-monetary incentive to donate organs—if you agree to donate your organs when you die then you’ll receive a better chance of getting an organ if you ever need one to live.

  It is surprising to me, and to many people much closer to the subject than me, that so little headway has been made in reforming the organ-donation process. I have never heard a single person say they were happy with the way things are—and, while I am sure Undis is right when he writes that a free market in organs is, politically speaking, a pipe dream, it seems that things are starting to move at least a bit in that direction. As Satel writes in her Times piece today, “Ethics committees of the United Network for Organ Sharing, the American Society of Transplant Surgeons and the World Transplant Congress, along with the President’s Council on Bioethics and others, have begun discussing the virtues” of offering organ donors incentives such as “tax breaks, guaranteed health insurance, college scholarships for their children, deposits in their retirement accounts, and so on.”

  It is interesting that, while all these incentives are financial, none of them are in the form of cold hard cash, which may make them more palatable.

  I wouldn’t be surprised if, between these two op-eds, at least a few minds are changed today.

  —SJD (May 15, 2006)

  4. WHY PAY $36.09 FOR RANCID CHICKEN?

  A blog can also be a nice place to get things off your chest—rants (and, occasionally, raves) of a more personal nature.

  “Why Pay $36.09 for Rancid Chicken?”

  An old friend came to town not long ago and we met for a late lunch on the Upper West Side. Trilby ordered a burger, no bread, with Brie; I ordered half a roasted chicken with mashed potatoes. The food was slow in coming but we had so much catching up to do that we didn’t mind.

  My chicken, when it arrived, didn’t look good but I took a bite. It was so rancid I had to spit it out into a napkin. Absolutely disgusting gagging rotten rancid. I summoned the waitress, who made a suitably horrified expression, then took the food away.

  The manager appeared. She was older than the waitress, with long dark hair and a French accent. She apologized, said the chefs were checking out the dish now, trying to determine if perhaps the herbs or the butter had caused the problem.

  “I don’t think so,” I told her. “I think your chicken is rotten. I cook a lot of chicken, and I know what rotten chicken smells like.” Trilby agreed: you could smell this plate across the table, probably across the restaurant.

  The manager was reluctant to concede. They had just gotten the shipment of chicken that morning, she said, which struck me as not really relevant, like saying: No, so-and-so couldn’t have committed a murder today because he didn’t commit one yesterday.

  The manager left and, five minutes later, returned. “You’re right!” she said. “The chicken was bad.” She said the chefs had checked the chicken, found it rotten, and were throwing it away. Victory! But for whom? The manager apologized again, asked if I’d like a free dessert or drink. “Well,” I said, “first of all let me try to find some food on your menu that doesn’t seem disgusting after that chicken.” I ordered a carrot-ginger-orange soup, some French fries, and sautéed spinach.

  Trilby and I then ate, fairly happily, though the taste of the rancid chicken remained with me; in fact, it remains with me still. Trilby had had a glass of wine before we ordered, and took another glass with her meal, sauvignon blanc. I drank water. When the waitress cleared our plates, she asked again if we wanted free dessert. Just coffee, we said.

  As Trilby and I talked, I mentioned that not long ago I had interviewed Richard Thaler, the godfather of behavioral economics, a fairly new field of study that tries to explain why the psychology of money is so complicated. I mentioned the behavioralists’ concept of “anchoring”—a concept that used-car salesmen in particular know so well: establish a price that may be 100 percent more than what you need in order to ensure that you’ll still walk away with, say, a 50 percent profit.

  Talk turned to what we might say when our check came. There seemed two good options: “We don’t care for any free dessert, thanks, but considering what happened with the chicken, we’d like you to comp our entire meal.” That would establish an anchor at 0 percent of the check. Or this option: “We don’t care for any free dessert, thanks, but considering what happened with the chicken, would you please ask the manager what you can do about the check.” That would establish an anchor at 100 percent of the check.

  Just then the waitress brought the check. It was for $31.09. Perhaps out of shyness, or haste, or—most likely—a desire to not appear cheap (when it comes to money, things are never simple), I blurted out option 2: Please see what the manager “can do about the check.”

  The waitress replied, smiling, that we had already been given the two glasses of wine for free. To me in
particular this felt like slim recompense, since it was Trilby who had drunk the wine while it was I who still radiated with the flavor of rancid chicken. But the waitress, still smiling, duly took the check and headed toward the manager. She zipped right over, also smiling.

  “Considering what happened with the chicken,” I said, “I wonder what you can do about the check.”

  “We didn’t charge you for the wines,” she said, with great kindness.

  “Is that the best that you’re prepared to offer me?” I said (still unable to establish an anchor at 0 percent).

  She looked at me intently, still friendly. Here she was making a calculation, preparing to make the sort of slight gamble that is both financial and psychological, the sort of gamble that each of us makes every day. She was about to gamble that I was not the kind of person who would make a scene. After all, I had been friendly throughout our dilemma, never raising my voice or even uttering aloud the words “vomit” or “rancid.” And she plainly thought this behavior would continue. She was gambling that I wouldn’t throw back my chair and holler, that I wouldn’t stand outside the restaurant telling potential customers that I’d gagged on my chicken, that the whole lot of it was rancid, that the chefs either must have smelled it and thought they could get away with it, or, if they hadn’t smelled it, were so spaced out that who knows what else—a spoon, a sliver of thumb, a dollop of disinfectant—might find its way into the next meal. And so, making this gamble, she said “Yes”: as in Yes, that is the best that she was prepared to offer me. “All right,” I said, and she walked away. I left a $5 tip—no sense penalizing the poor waitress, right?—walked outside and put Trilby in a cab. The manager had gambled that I wouldn’t cause trouble, and she was right.