# Freakonomics Summary and Analysis of Chapter 3

## Summary

This chapter asks the question, "Why do drug dealers still live with their moms?" It begins by explaining the phrase "conventional wisdom," which economist John Kenneth Galbraith describes as information that reinforces a person's own interests and well-being. This means that, while conventional wisdom must be comforting and convenient, it does not necessarily need to be true. Despite this, though, it is often difficult to get people to doubt conventional wisdom. Levitt then spends the rest of the chapter disputing one particular point of conventional wisdom: that drug dealing, particularly crack dealing, is one of the most profitable jobs in America.

While administering a survey throughout housing projects in Chicago in 1989, University of Chicago PhD student Sudhir Venkatesh got to know members of the Black Gangster Disciple Nation and became intrigued by their operation. The gang's leader, named J.T., was a college graduate as well, and his business background made him perfectly suited to be the boss. Venkatesh spent six years getting to know the gangsters and their operation, practically living in their projects with them. Venkatesh gained access to notebooks full of the gang's financial transactions, which proved to be invaluable knowledge for him.

After Venkatesh's time living with the gang, he was awarded a three-year stay at Harvard's Society of Fellows, where he met Steven Levitt, and the two decided to collaborate on a paper about the gang. The rest of the chapter explains how the gang operates.

The organization of the gang is a lot like any business, particularly McDonalds. Venkatesh had been living with one of about a hundred branches of the Black Disciples organization. J.T. headed this branch, and reported to a central leadership called the board of directors. He paid nearly 20 percent of his revenues to these men for the right to sell crack in his area, and the rest he distributed at his discretion. He had three officers under him, and beneath the officers were street-level salesmen called foot soldiers. At the bottom of the organization were the rank-and-file members of the gangs, who were not employees but who paid dues to the gang, hoping to eventually become foot soldiers.

During the crack boom, J.T.'s branch of the gang brought in $32,000 in monthly revenues, but the cost of bringing all of that in was$14,000. J.T. himself got $8,500 per month, making his annual salary about$100,000 tax-free. The top bosses on the board of directors earned about $500,000 per year. People like J.T. and the other bosses could afford to live large, but everyone below them made very little. J.T. paid his three officers and around 50 foot soldiers only$9,500 per month, leaving his officers to take home about $700 a month and his foot soldiers only$3.30 per hour, less than the minimum wage.

This dispels the conventional wisdom that all drug dealers are making a lot of money, and explains while they still live with their moms. Just like any capitalist enterprise, you must be near the top of the pyramid to make a big wage. According to J.T., he kept his foot soldiers' wages low in order to show them who is the boss. Things were difficult for foot soldiers, though, who risked arrest and violence every day, with a 1-in-4 chance of being killed. Despite this danger, though, dealers still took the job in the hopes that they could move up in the ranks and make it big, especially since these were often people who grew up below the poverty line and did not have many prospects for other careers.

The dynamic in crack dealing fits with the notion that when there are a lot of people willing to do a job, the job does not usually pay well. Foot soldiers remained foot soldiers because they were hoping to move up, and often when they realized they were not advancing, they quit the dangerous profession. This leads into a discussion of the things that determine wages: first, the number of people available to do a job; next, the specialized skills required; then the unpleasantness of a job, and the demand for the services that a job fulfills.

The last part of the chapter moves to another strange question: what crack cocaine has in common with nylon stockings. The invention of nylon stockings took a product typically reserved for the high-class—expensive silk stockings—and made them affordable enough for the masses. The creation of crack cocaine did the same thing: people took cocaine, a classy drug for the rick and famous, and found a more inexpensive way to produce tiny rocks of smokeable cocaine, which was called crack. This started a crack boom that led to the rise of crack gangs like the Black Disciples.

The advent of crack also hit black neighborhoods much harder than white neighborhoods, causing addiction that led to infant mortality, imprisonment, violence, and a widened education gap between black and white schoolchildren. This was when everyone expected the youth crime rate to skyrocket, but instead it fell—this paves the way for the in-depth discussion on the abortion topic proposed in the introduction that will happen in the next chapter.

## Analysis

One of the main aims of this book is to prompt readers to question their everyday experiences and dig deeper beneath the fabric of their daily lives to uncover novel truths. It makes sense, then, that Levitt would challenge the idea of conventional wisdom, insisting that it must not always be trusted. The word "wisdom" in the phrase might suggest that conventional wisdom is always true, but Levitt dispels this myth with his analysis of the Black Disciples gang, which combats one piece of conventional wisdom that paints all drug dealers as making exorbitant amounts of money.

The biggest takeaway from this chapter is the similarity between the crack dealing empire and corporate America. Levitt uses this unconventional example to teach readers about the structure of business firms and corporations, with a few high-level individuals at the top of the pyramid making the vast majority of the money, and hundreds and hundreds of lower-level workers below who support the higher-ups and split whatever small amount of revenue is left. This is the way most businesses in corporate America are structured, from Wall Street firms to McDonalds and everything in between.

One of the primary ideals that drive American capitalism is the belief in a meritocracy, or the idea that hard work will allow anyone to rise and be successful. This mentality pulls low-level workers like foot soldiers into the organization, all under the assumption that they will be able to move up and reach those coveted positions as long as they work hard. An organization like the Black Disciples is a "winner-take-all" labor market, in which a lot of workers compete for very few high-level jobs. Most do not succeed in reaching these positions, but when they do, they take in an enormous amount of money for themselves, like the board of directors in the Black Disciples do. Other winner-take-all labor markets that Levitt describes are the entertainment and spots industries, where talented individuals compete to be among the elite few who "make it" in these industries.

Like the previous sections, this chapter also includes a discussion of incentives, showing how they play into every facet of economics. Low-level workers like foot soldiers are incentivized to stay in the business by the tantalizing promise of moving up in the ranks and reaching a position of greater power. But their incentives do not always match up with the people in charge: while foot soldiers are incentivized to start turf wars so that they can get themselves noticed, a boss like J.T. wants to avoid this, to keep foot soldiers subordinate to him so he can continue to pay them what he pays them, and keep the rest of the profits for himself.

Another important discussion in this chapter is the various factors that contribute to wage determination. Jobs that have a lot of people available to do them generally pay lower, while jobs that require a specialized skill not commonly found will pay higher. Obviously, jobs that are less desirable or even dangerous must pay higher, in order to give laborers enough incentive to remain in the position. Finally, if there is high demand for a certain service, jobs in that service industry will have higher pay, since more consumers are seeking it out.

The chapter ends with a discussion that combines economics with sociology, and considers the impact that certain products like crack cocaine have on local communities. While the advent of crack cocaine certainly created a booming economy as well as opportunities for people to earn livable wages in an unconventional way, it also set many impoverished communities back because of the catastrophic effects of addiction or imprisonment. It also affected black communities far more than white communities, contributing greatly to the widened gap in racial achievement. This presents a nuanced view of the social impact of certain products entering the market.