By: Aidan Attance
Freakonomics Chapter 2: Summary
Chapter 2 of Freakonomics analyses the operations of the Ku Klux Klan to develop a hypothesis about the utility of information in the power dynamic between various groups of people. Steven Levitt and Stephen Dubner, authors of Freakonomics, link the Ku Klux Klan’s tactics of secrecy and coercion to how real estate agents (and other similar experts) use their information advantage to gain better deals for themselves.
The Ku Klux Klan and Information Cloaking
The Ku Klux Klan as an organization was highly reliant on codes, cloaks, and procedures to maintain secrecy. Secrecy not only protected its members from government initiatives but also allowed the ideas they represented to permeate American culture. A black man living in the 1920s would have no clue which of his connections were members of the Klan or were associated with a member. This created an atmosphere of intense scrutiny, causing the majority of black citizens to stay in line with the Klan’s beliefs. The minority that didn’t adhere were terrorized, and this was a small minority. In other words, the Klan did not operate through force. They operated through fearful coercion. To put this into perspective, during the 1920s, at the height of clan membership, only 281 black lynchings occurred. This number is less than half of the lynchings that occurred when the Klan was entirely dormant between 1900 and 1909 (791).
If it was the monopoly of information that allowed the Klan to reign, it was the dissemination of it that caused them to fall apart. In 1946, Stetson Kennedy, a human rights activist, began spreading his acquired Klan Secrets on the superman radio show. This proved to be an incredibly effective measure against them. Members of society who opposed the Klan but had no means of identifying them were given new tools. Meanwhile, membership in the Klan started to fall drastically now that the secrecy which protected them was stripped away. Ultimately, the Ku Klux Klan die off, and it was due to a shift in the balance of information.
The Ku Klux Klan vs. Real Estate Agent Information Tactics
So then how do real estate agents use similar information tactics to levy an advantage on their market? Real estate agents have the advantage of information over their clients. They are hired for the express purpose that they know more about the housing market and can swing a better deal for the homeowner. It might seem in their best interest to find the highest price for their client considering they get a commission, but consider this: on a typical 5% commission, if a real estate agent were to get a house to sell for an extra $6,000, they’d only receive $300 of that. They might decide the extra effort isn’t worth the extra money when they’re better off selling the house quickly to secure their commission. It is only possible for them to do this when they know more than their client which the author claims in this chapter mirror the information cloaking done by the KKK.
In recent years, however, this information disadvantage has been lowered for the consumer. This is almost entirely due to the advent of the internet. Individuals now possess the same ability to compare prices that a real estate agent might. It’s true that they would lack expertise in the field and be less efficient, but access to the information has lowered a real estate agent’s ability to obfuscate reality. In 1996, when websites like Quotesmith.com presented dozens of insurance companies and their prices to the public, the total amount paid by customers for term life insurance dropped by one billion dollars.
Ultimately, this chapter discusses the power of information between any two groups that have something to gain from the other. Economically speaking, the spread of easily available information improves consumer surplus and benefits consumers by educating their decisions. The flip side of this causes an imbalance of power that allows supplier benefits and surplus to be improved.
My Take on Chapter 2
The idea presented here is a very intuitive one and interesting to explore on a statistical level. Whether this is better for the economy isn’t discussed here, but I would argue that it is. Considering the spread of information improves consumer decision-making, it would also improve their marginal decision-making. Consumers would choose the supplier that gives them the greatest value for their service. If every consumer is making a better choice for themselves, then resources are being allocated to the people that value them most.
I find the chapter itself to be unfocused. There is a through line of “information”, but this idea is so broad that linking the Ku Klux Klan to real estate agents feels rather arbitrary. The Ku Klux Klan operated the way it did because of legal restraints and an entirely different objective. They used information as a form of fear and protection. A real estate agent uses information for neither. And this difference is never really explored in the chapter.
To me, it felt as though the authors wanted to write a historical analysis of the Ku Klux Klan and then tacked some economic principles to it. The majority of this chapter is a history of the Ku Klux Klan, and while interesting, the real economic concepts aren’t discussed until the latter half when the Klan has been more or less abandoned by the authors. The Ku Klux Klan is just a hook for the chapter. It’s an introduction to the idea of controlling information. And it doesn’t justify itself for being discussed for as long as it is in a book about economics.