A thought on Steven Levitt...

The Physics of Finance 2014-05-24

Professors of economics at the University of Chicago like being provocative. Following the tradition of Milton Friedman, they enjoy causing a stir by making crazy, freaky claims in public. So it is really no surprise to hear economist Steven Levitt of Freakonomics fame make the claim that “it doesn’t take a whole lot of smarts or a whole lot of blind faith in markets to recognize that when you don’t charge people for things (including health care), they will consume too much of it.” This is why, he suggests, a country such as the UK would benefit by replacing their silly publicly funded healthcare system with a truly free market where people would have to pay for everything — the market could then through the price mechanism work its miracles and produce a vastly superior outcome, without anyone being tempted to over-consume.

I suspect that Levitt cannot possibly believe this — at least I hope not. If he does, then he has an embarrassingly woeful knowledge of the literature in his own field, as it doesn’t take a lot of smarts to realize that this statement ought to come with about 10 pages of qualifications and conditions. For a dose of reasoned good sense on the topic, see commentary by Noah Smith, and also this excellent insight from Cameron Murray. Makes you wonder by how many decades the Freakonomics series has actually set back the public understanding of economics.

But in the spirit of “Thinking like a Freak” — a new book pushing bold thoughts of this kind by Levitt and co-author Stephen Dubner — I thought I’d try to see if Levitt’s idea, taken seriously, might lead to something interesting. I think it does. Perhaps Levitt really is on to something freaky big and astonishingly brilliant, if we’re only brave enough to follow the logic through to its end without fear or trembling. Let’s suppose Levitt is right that “when you don’t charge people for things… they will consume too much of it,” and let’s think about the causes of climate change, as well as possible remedies. Read more at Medium.