Tuesday, January 10, 2006

Why Do Gangs Specialize in Crime?

Looking over a review of Freakanomics--I haven't yet read the book--I noticed the very plausible claim that inner city gangs are not all that different from other businesses. That suggests an interesting question: Is there a reason why they have to limit themselves to crime? Gangs may have comparative advantage in illegal activities since they have a structure that does not depend on using courts to enforce contracts and the like, so if there are sufficient opportunities in illegal markets, it is not surprising that they exploit them. But suppose the illegal market vanishes. Suppose we legalize drugs, prostitution, and gambling, as some of us think we should. What then?

One possibility is that gangs can only compete in illegal activities--deprived of their current revenue sources, they will turn to extortion and robbery. Another is that they are a form of social organization that works well at employing resources--inner city youths--that ordinary firms can make little use of. If so, there is no obvious reason why they cannot use them for legal as well as illegal activities.

14 Comments:

At 4:14 AM, January 11, 2006, Blogger Charles Johnson (Rad Geek) said...

My understanding is that there are some aboveground markets in which organized crime outfits have historically been successful -- for example, in vending machines, and in the financing and distribution of pornography.

Pornography is a special case, given that during the period of substantial Mafia involvement, it was constantly under legal threat, and social pressures contributed to a lot of economic features that made the market similar to black markets even when it wasn't formally one. As for vending machines, I'm not sure where exactly the organized crime element came from -- although I've heard plausible suggestions that coercive control over restaurants and bars (through various forms of racketeering) played a role, and also that getting into businesses oriented around large amounts of cash in small denominations aided in money laundering.

 
At 4:36 AM, January 11, 2006, Blogger Gabriel Mihalache said...

If we saw crime increase with incrimination of more and more activities, would we be so far off by assuming that crime will decrease with the legalisation of certain markets?

In other words, why not expect the bulk of trafficking criminality to go bankrupt? (to the degree that many gang members can't switch to violent crime)

 
At 6:04 AM, January 11, 2006, Blogger TJIC said...

I'd suggest comparative advantage, based on a cultural lack of certain skills and habits.

According to _Freakonomics_, average gang "work" pays less than minimum wage.

...but minimum wage jobs require punctuality.

The price to me (born and raised in the middle class) of being punctual is pretty low - I'm already being punctual with my toothbrushing, my laundry, etc. The price to someone not in the habit of being punctual is much larger: they have to make a conscious effort to look at clocks all the time, remember when their job is, try out the newish experience of subtracting the current time from the target time (while allowing for commuting), etc.

Given this, the benefit from a $6/hr job might be lower than the benefit from a $4/hr drug dealing job.

Additionally, the "lottery economics" presented as the answer in _Freakonomics_ is a nice argument; check it out.

 
At 6:46 AM, January 11, 2006, Blogger autodogmatic.com said...

If drug trade is less costly than outright violence/extortion (although my understanding from Freakonomics was that extortion/protection dues were part of the monthly revenue for the gang although a considerably smaller piece), legalizing drug trade wouldn't cause a substitution of increased violence/extortion.

I would argue that drug trade is less costly than violence/extortion because the latter is more risky, distasteful and shorter-lived. The bully/wimp balance likely would come into play, as well.

Where are crack users getting the funds to purchase more crack, anyway? I imagine one source must be through stealing. Thus, crack dealers are exchanging an illegal good for illegally obtained funds. However, the work to obtain the funds for the crack dealer is less distasteful (and less dangerous) than that of the crack user. It is the difference between stealing and working. A dealer simply exchanges a good for cash whereas the user has to do the "dirty work."

Drug trade is also less risky than violent crime/extortion. Drug wars are bad for business because people stay indoors and dealers are killed by rival gangs. Also, drug trade has customers come to you whereas violence requires finding customers and threatening/engaging in violence. One "business" is self-inflicted violence whereas the other is gang-inflicted, which is more costly to the gang.

Finally, a drug user represents an annuity which is likely only to end by the death of the user. This isn't necessarily a long-lived annuity, but violence/extortion is likely to upset the bully/wimp equilibrium. Alternatively, a beat up customer is less likely to earn wages or more likely to earn lower wages. Thus, harvesting these customers becomes difficult under V/E compared to drug trade. Summed up: violence is bad for business.

Perhaps gangs specialize in crime because the relative skillset of the labor force is better suited for illegal activities. Training a potential gang member to be a legit businessman would be significantly more costly than training him/her in drug trade if such recruit grew up around gangs, which is likely the case. Also, gang members are not paid much ($3/hr, if remember correctly from Freakonomics). They work because they see the huge payoff for being the leader (At least six figures). This is more a difference of power than anything else: power maintained through violent behavior. If violence is a prerequisite for gang-related business, than it only follows that crime will be the primary activity of the gang.

Finally, gangs don't participate in legit businesses likely because their comparative advantage is in illegal behavior. Why divert resources to arenas that don't utilize their comparative advantage?

 
At 6:52 AM, January 11, 2006, Anonymous Anonymous said...

If drug trade is less costly than outright violence/extortion (although my understanding from Freakonomics was that extortion/protection dues were part of the monthly revenue for the gang although a considerably smaller piece), legalizing drug trade wouldn't cause a substitution of increased violence/extortion.

I would argue that drug trade is less costly than violence/extortion because the latter is more risky, distasteful and shorter-lived. The bully/wimp balance likely would come into play, as w

 
At 8:26 AM, January 11, 2006, Anonymous Aaron Krowne said...

Jason:

Some people get crack money from being mayors or councilmen.

 
At 11:46 AM, January 11, 2006, Blogger Kent said...

One possibility is that gangs can only compete in illegal activities--deprived of their current revenue sources, they will turn to extortion and robbery. Another is that they are a form of social organization that works well at employing resources--inner city youths--that ordinary firms can make little use of. If so, there is no obvious reason why they cannot use them for legal as well as illegal activities.

The two are not mutually exclusive. The Freakonomics chapter you allude to points out that gang members make much less than minimum wage. The gangs are making use of inner city youths that ordinary firms cannot -- because the law will not let them pay a wage commensurate with their productivity.

Paying the youths less than minimum wage would be illegal even if the activities themselves were as innocuous as placing vending machines in willing businesses.

In fact, I would guess that any attempt to defeat gangs by legalizing certain activities will fail -- not only because there will always be illegal activities, but because there will always be an illegal market for sub-minimum wage workers.

 
At 1:55 PM, January 11, 2006, Blogger David Friedman said...

"In fact, I would guess that any attempt to defeat gangs by legalizing certain activities will fail -- not only because there will always be illegal activities, but because there will always be an illegal market for sub-minimum wage workers."

Some of us don't regard the latter case as failure.

 
At 1:58 PM, January 11, 2006, Blogger markm said...

My understanding is that Mafia vending machine and jukebox businesses were far from legal operations. Competitors were discouraged by violence and placement for the machines was often obtained by extortion. At the higher levels of the Mafia (at least), you find men who, absent a criminal record, could succeed as corporate executives in legal businesses, but prefer the higher profits and risks of operating illegally, and don't have much conscience. So, if they happen to acquire a perfectly legal business (e.g., when the owner signs it over to settle a gambling debt), they'll probably look for a way to cut corners and increase the profits, if not to use it as a cover for existing illegal businesses.

 
At 2:32 PM, January 11, 2006, Blogger markm said...

Could gang members (such as are described in Freakonomics, not the Mafia executives I described above) be employed in an otherwise legitimate business by using gang management techniques? My grandfather had a story about that, from at least 50 years ago when the legal environment was somewhat different.

The owner and manager of a small factory hired only ex-convicts. He was a huge and tough man. He dealt with tardiness, slacking on the job, and employee theft by beating the malfeasor up. For a certain type of person, this evidently works as a motivator while the fear of being fired doesn't. He did get hauled into court for assault and battery regularly, but being a (mostly) legitimate businessmen who helped prop up the local economy, the penalty was always a fine. He obviously considered those fines just a cost of doing business, which cheap, hardworking labor more than made up for.

I imagine that real gangs do even better with such a work force. Their employee motivation program is not just "screw up and get beat up", but also "screw up too much and die". However, if you are going to commit capital crimes in one end of the operation, why restrict yourself to selling legal products?

 
At 4:49 PM, January 11, 2006, Anonymous js290 said...

So, if they happen to acquire a perfectly legal business... they'll probably look for a way to cut corners and increase the profits, if not to use it as a cover for existing illegal businesses.


Yeah, I wonder what inner city gangs Ken Lay and Bernie Ebbers were a part of... MBA Mafia, Harvard Crips, Wharton Bloods? ;-)

 
At 10:03 PM, January 11, 2006, Anonymous Anonymous said...

The japanese Yakuza are probably the closest example to a "legalized gang". They are tolerated by the police and civilians alike. They even have posh business offices.

I would venture to say that most US gangs are not disciplined enough to manage a transition to a Yakuza like status. So while it works in Japan, I don't believe it could work very well here.

 
At 4:18 AM, January 14, 2006, Blogger Stephen M. St. Onge said...

David:

        Interesting analysis, but you neglect personality and cultural factors.

        The late Eric Hoffer said he frequently saw tramps (of which he was one for a time) who got a job, prospered, possibly worked up into a foreman's job — and then, they screwed up and got themselves fired.  Being respectable too long was a strain they didn't endure.

        And of course, in a sub-culture that prizes toughness and capacity for violence, showing up on time and doing as you're told is likely to be despised, and attract those who would victimize you.

        And of course, things like minimum wage laws are lied about by their advocates.  They claim that the minimum wage law says that people have to be paid X per hour, when of course the law actually says that people have to be paid either X per hour or nothing.  Quite a few end up with nothing.  Similarly, the kind of management techniques necessary to socialize many people to working for a living are illegal, the kinds of managers they require are themselves somewhat rare and composed of people who lack access to capital, the people who'd respond to such employment practices live in high-crime areas which would impose other costs on the business.  All these factors interact to produce a system that encourages illegality, and is very hard to break out of.

 
At 8:31 AM, January 17, 2006, Anonymous Anonymous said...

No taxes, it is all pure "profit", not a legal business in the world that can match the margins of illegal ones--drugs, guns, whores,... good $ when you can get it

 

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