Crises, Crack, and Capitalism

by | Jun 12, 2009 | In The News, Weekly Column

freakonomics.jpgThe principles of capitalism are everywhere. Just ask Steven D. Levitt and Stephen J. Dubner, the authors of Freakonomics. Not long ago I attended a talk where these two authors shared their eclectic brand of economic research.

One area they discussed was the structure of drug cartels and the “salaries” paid to their members. The typical cartel employs around 5,000 people. At the top is the “board of directors,” who each typically make about $500,000 a year. Next are “regional governors” at about $350,000. Under them are the local leaders with exclusive territories. They typically earn 20% of gross revenues, meaning they net perhaps $75,000 to $100,000. Finally, there are the foot soldiers, who typically are teenagers selling crack for around $5 an hour.

This structure isn’t all that different from other business organizations. The entry-level drug dealers are finding jobs in the dominant local industry, much as young people in Rapid City might find jobs in tourism. Of course, there is the fact that the drug industry is illegal. Also, the death rate of gang members is 7%, which is seven times the percentage of our soldiers killed in Iraq. “And why do they do this for $5 an hour?” asked Levitt. “They are simply willing to take a risk to improve their income and their lives.”

In contrast, Levitt turned to a recent Rasmussen poll on capitalism which found that only 53% of Americanscapitalism.jpg believe capitalism is the best economic model. “If you don’t like capitalism, you need to find a different economic model,” he suggested to the audience. According to Levitt, that alternative isn’t communism or even socialism, models which have failed in Russia, China, and Eastern Europe. Neither have proven to improve people’s lives and produce wealth.

Nevertheless, the current attitude of most Americans seems to be, “Let’s give socialism a try.” Shortly before his death in 2006, Milton Friedman predicted that, even though socialism is a discredited economic model, people would be seduced by its collectivist ideas again. And what’s going on right now? The U.S. Government has essentially nationalized Chrysler and General Motors. The President has just appointed a “czar” with broad authority to set and oversee pay levels for top executives at seven of the country’s largest companies.

During the presidential election, John McCain’s campaign was criticized for saying much of the financial crisis was psychological. Levitt suggested McCain actually got it right. “Bad economies can become self-perpetuating. It all depends on where a person is getting their data.” For example, someone reading The New York Times last fall, with its repeated references to “if” we would recover, would have concluded the end was near. The Wall Street Journal and BusinessWeek painted a completely different, more pragmatic picture of the crash by discussing “when” we would recover.

Levitt compared the current economic crisis to someone who gets sick. Their research shows that at the onset of an illness most people do nothing, not going to the doctor until they are feeling really sick. Typically, this is also the peak of the illness, so the patient is likely to improve regardless of what the doctor does. The doctor gets the credit, even though the patient was going to get better anyway.

burdon-of-debt.jpgIn similar fashion, he added, the American people are going to needlessly waste two to four trillion dollars to make themselves feel better. This socialistic “cure” may get the credit for our economic recovery. Its only real impact, however, will be to create a burden of debt that will reduce American’s standard of living for decades.

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