Freedomnomics

1. Free markets create incentives for honesty and quality

If someone can make a buck by treating his customers better than someone else, eventually someone will try it.

Markets reward honesty. Companies that cheat customers lose business and profits in the long run. The free market creates strong incentives for businesses to maintain good reputations and provide quality products and services. This is evident in mechanisms like eBay seller ratings, which allow honest sellers to charge higher prices.

Competition drives improvement. When firms compete freely, they are motivated to innovate, lower prices, and better serve customers. Regulations that restrict competition, like occupational licensing, often reduce quality and raise prices. Even in industries like radio broadcasting, entrepreneurs found ways to overcome "free rider" problems and provide valuable services profitably.

Examples of market-driven quality assurance:

• Brand reputations
• Consumer reviews
• Third-party certifications
• Warranties and guarantees
• Repeat customer relationships

2. Reputations are powerful economic forces that shape behavior

The reputational penalties suffered by a firm accused of fraud are substantial, even before the company is convicted.

Reputations have real economic value. For businesses, a good reputation allows charging premium prices. For individuals like politicians, a good reputation is crucial for getting elected. The desire to maintain valuable reputations creates strong incentives for ethical behavior, even without government oversight.

Reputation loss is a major penalty. When companies commit fraud, most of their losses come from reputation damage, not government fines. High-income criminals often face their harshest punishment in reputation and career losses, not prison time. Even for politicians, the incentive to maintain a good reputation explains why they tend to keep campaign promises even in their final terms.

Ways reputations shape behavior:

• Companies protect brand image
• Professionals guard career prospects
• Politicians maintain consistent positions
• Individuals cultivate personal reputations
• Reputation effects can persist across generations

3. Government intervention often creates unintended consequences

Because a modern economy is so complex, the wise men tasked with devising regulations frequently create more problems than they solve.

Good intentions, harmful results. Government interventions aimed at solving problems often backfire due to unintended consequences. Price controls on gas led to shortages. Subsidies for honey production reduced incentives to solve pollination problems. Government-run enterprises like the postal service engage in predatory pricing that harms private competitors.

Markets adapt, government struggles. Free markets tend to evolve solutions to problems over time as entrepreneurs identify opportunities. Government planners lack the local knowledge and incentives to allocate resources efficiently. Even well-intentioned regulations can stifle innovation and create perverse incentives.

Examples of government intervention backfiring:

• Rent control reducing housing supply
• Minimum wage laws increasing unemployment
• Occupational licensing restricting competition
• Farm subsidies distorting agricultural markets
• Public education indoctrinating rather than educating

4. Campaign finance regulations protect incumbents and reduce competition

If we want to make campaigns more competitive by limiting donations and expenditures, we should place such limits disproportionately against incumbents.

Regulations favor incumbents. Campaign finance laws like contribution limits and spending caps tend to benefit incumbents, who already have name recognition and established donor networks. This makes elections less competitive and entrenches existing politicians.

Money follows power, not vice versa. Contrary to popular belief, campaign donations don't significantly alter how politicians vote. Politicians tend to vote consistently throughout their careers regardless of donations. The growth in campaign spending is largely driven by the expanding size and scope of government, as more is at stake in elections.

Problems with campaign finance regulations:

• Reduce electoral competition
• Empower unaccountable interest groups
• Limit free speech
• Create complex rules that are easy to circumvent
• Fail to reduce the influence of money in politics

5. Women's suffrage led to larger government and higher taxes

Granting women suffrage explains at least a third of the expansion in the size of government.

Voting patterns differ by gender. Women as a group tend to vote differently than men, favoring more government spending and progressive taxation. This is partly explained by women's greater average risk aversion and lower average incomes.

Suffrage expanded government. The enfranchisement of women in the early 20th century corresponded with rapid growth in government spending and taxation. As women's voting rates increased over subsequent decades, the size of government continued to expand. This effect was magnified by rising divorce rates, which increased the number of single mothers reliant on government support.

Ways women's suffrage impacted government:

• Increased social welfare spending
• Led to more progressive taxation
• Expanded education expenditures
• Resulted in more regulations on business
• Corresponded with alcohol prohibition

6. Legalized abortion increased crime rates by changing social norms

Abortion, in fact, increases crime by increasing out-of-wedlock births.

Unintended consequences of legalization. While abortion was expected to reduce crime by culling "unwanted" children, it actually increased crime rates. This occurred because legalized abortion changed social norms around premarital sex and out-of-wedlock births.

More single-parent families. With abortion as a backup option, people became less careful about contraception and more likely to engage in premarital sex. This led to more unplanned pregnancies and single parenthood, which are associated with higher crime rates. The rise in out-of-wedlock births outweighed any crime reduction from fewer "unwanted" children.

Evidence contradicting abortion-reduces-crime theory:

• Crime fell first among age groups born before legalization
• Canada saw similar crime drop with later legalization
• Out-of-wedlock birth rates rose after legalization
• Adoption rates fell dramatically
• Studies showing crime reduction had methodological flaws

7. The death penalty, increased arrests, and concealed carry laws reduced crime

Overall, the rise in executions during the 1990s accounts for about 12 to 14 percent of the overall drop in murders.

Deterrence works. Policies that increase the risk or cost of committing crimes tend to reduce crime rates. The death penalty deters murders by raising the potential cost. Higher arrest and conviction rates make crime less attractive. Concealed carry laws increase the risk for criminals that victims may be armed.

Multiple factors drove crime reduction. The sharp drop in crime rates during the 1990s resulted from a combination of factors. Increased incarceration took repeat offenders off the streets. Economic growth reduced incentives for crime. However, other touted factors like the "broken windows" policing strategy showed mixed results.

Policies that reduced crime in the 1990s:

• Increased use of capital punishment
• Higher arrest and conviction rates
• Expansion of concealed carry laws
• Growth in incarceration
• Improved economic conditions

8. Gun control laws and affirmative action in police hiring increased crime

Crime rates jumped in cities using affirmative action policies that lowered testing standards.

Gun control backfires. Laws restricting gun ownership tend to disarm law-abiding citizens while having little effect on criminals. This makes crime less risky for criminals. Even well-intentioned policies like gun locks can backfire by making guns less accessible for self-defense.

Police quality matters. Affirmative action policies that lowered hiring standards for police officers led to increases in crime rates. This occurred not just from hiring less qualified minority officers, but also less qualified white officers as cognitive tests were eliminated. Physical strength requirements also impacted the effectiveness of female officers.

Unintended consequences of gun control:

• Criminals face less armed resistance
• Law-abiding citizens more vulnerable
• Black markets emerge for firearms
• Guns less accessible for self-defense
• Little impact on overall gun ownership

9. Media bias shapes public perception of economic performance

Media coverage better explained whether people thought that the economy was getting better or worse than did the underlying economic data.

Persistent liberal media bias. Studies of media coverage show a consistent bias in favor of Democratic administrations and liberal policies. This bias is evident in how economic news is reported, with more positive headlines during Democratic presidencies even when controlling for underlying economic conditions.

Impact on public opinion. Media bias significantly influences how the public perceives economic performance. People's views of the economy correlate more strongly with media coverage than with objective economic indicators. This can impact elections by shaping approval ratings for incumbents.

Evidence of media bias:

• More positive headlines under Democratic administrations
• Liberal bias in journalist surveys and political donations
• Selective coverage of economic statistics
• Framing of economic news to favor certain policies
• Impact on public perceptions exceeds actual economic changes

10. Public education was designed to spread government-approved values

Public education was actually designed to inculcate values supported by the government.

Indoctrination, not just education. Public schooling systems were originally established to instill government-approved values and worldviews in students. This remains a key function of public education, as evidenced by curriculum battles and restrictions on school choice.

Government has incentives to expand. Public school teachers and administrators have a vested interest in promoting bigger government, which funds their livelihoods. This creates a cycle where public education encourages support for larger government, which in turn expands public education funding.

Ways public schools promote government values:

• Curriculum choices on history, economics, civics
• Promoting trust in government institutions
• Discouraging critical analysis of government policies
• Restricting school choice and homeschooling
• Shaping social and cultural values

Last updated: September 21, 2024