CRIME and ECONOMICS:

Excerpts from a paper, delivered by Thomas C. Schelling, professor of Economics, at the Association for the Advancement of Science's recent annual meeting, are printed below. These sections, constituting about a third of the entire paper, are his introduction and his concluding remarks. Intervening sections dealt with market organization, incentives, and various other practices of underworld crime.--Ed.

I.

At the level of national policy, if not of local practice, the dominant approach to organized crime is through indictment and conviction, not regulation, accommodation, or the restructuring of markets. This is in striking contrast to the enforcement of anti-trust or food-and-drug laws, or the regulation of industries affecting the public interest. For some decades, anti-trust problems have received the sustained professional attention of economists concerned with the structure of markets, the organization of business enterprise, and the incentives toward collusion or price-cutting. Racketeering and the provision of illegal goods (like gambling) have been conspicuously neglected by economists. There exists, for example, no analysis of the liquor industry under prohibition that begins to compare with the best available studies of the aluminum or steel industries, air transport, milk distribution or public-utility pricing.

Yet a good many economic and business principles that operate in the "upperworld" must, with suitable modification for change in environment, operate in the underworld as well, just as a good many economic principles that operate in an advanced competitive economy operate as well in a socialist or a primitive economy.

In addition to sheer curiosity there are good policy reasons for encouraging a "strategic" analysis of the criminal underworld, an analysis that might draw on modern economics and business administration. Such an analysis, in contrast to "tactical" intelligence aimed at the apprehension of individual criminals, could help in identifying the incentives and the limitations that apply to organized crime, in evaluating the costs and losses and in restructuring laws and programs to minimize the costs, wastes and injustices that crime entails.

Many Points for Study

A number of questions need to be pursued. What market characteristics determine whether a criminal activity becomes "organized"? Gambling, by all accounts, invites organization while abortion, by all accounts, does not. In the upper-world automobile manufacture is characterized by large firms, machine tool production is not; collusive price-fixing occurs in the electrical-machinery industry but not in the distribution of fruits and vegetables; retail-price maintenance can be legally enforced in the branded-liquor industry but not in the market for new cars. The reasons may not be entirely understood but they are amenable to study. The same should not be impossible for illegal gambling, extortion, abortion, and contraband cigarettes.

A related question is how much organized crime depends on at least one major market in which the returns to tight and complex organization are large enough to support a dominant monopoly firm or cartel. Not all businesses lend themselves to centralized organization; some do, and these may provide the nucleus of well-financed entrepreneurship and the extension of organizational talent into other businesses that would not, alone, support or give rise to an organized monopoly or cartel.

A strategic question is whether a few "core" criminal markets provide the organizational stimulus for organized crime. If the answer turns out to be yes, then a critical question is whether the particular market so essential for the "economic development" of the underworld, and the emergence of organized crime, is one of the black markets dependent on "protection" against legitimate competition or instead is an inherently criminal activity. This question is critical because black markets always offer, in principle, the option of restructuring the market, or increasing competition as well as reducing it, of compromising the original prohibition in the larger interest of weakening organized crime, of selectively relaxing the law or its enforcement. If, alternatively, the core industry is one that rests principally on violence, compromise and relaxation of the law are likely to be ineffectual and unappealing. Restructuring the market to the disadvantage of such criminal business is thus a good deal harder.

II.

It is usually implied, if not asserted, that organized crime is a menace and has to be fought. But if the alternative is "disorganized crime"--if the criminals and their opportunities will remain, with merely a lesser degree of organization than before--the answer is not easy.

There is one argument for favoring the "organization" of crime--the one about "internalizing" some of the costs that fall on the under-world itself but go unnoticed, or ignored, if criminal activity is decentralized. The individual hijacker may be tempted to kill a truck driver to destroy a potential witness, to the dismay of the underworld, which suffers from public outrage and the hightened activity of the police. A monopoly or a trade association could impose discipline. This is not a decisive argument, nor does it apply to all criminal industries if it applies to a few; but it is important.

Organized Abortion

If abortion, for example, will not be legalized and cannot be eliminated, one can wish it were better organized. A large organization could not afford to mutilate so many women. It could impose higher standards. It would have an interest in quality control and the protection of its "goodwill" that the petty abortionist is unlikely to have. As it is, the costs external to the enterprise--the costs that fall not on the abortionist but on customer or on the reputation of other abortionists--are of little concern to him and he has no incentive to minimize them. By all accounts, criminal abortion is conducted more incompetently and more irresponsibly than the illegal control of gambling.

It is customary to deplore the "accommodation" that the underworld reaches, sometimes, with the forces of law and order, with the police, with the prosecutors, with the courts. Undoubtedly there is corruption of public officials, bad not only because it frustrates justice but also because it lowers standards of morality among the public officials. On the other hand, officials concerned with law enforcement are in the front line of diplomacy between the legitimate world and the underworld.

Aside from the approved negotiations by which criminals are induced to testify, to plead guilty, to surrender themselves, or to tip off the police, there is a degree of accommodation between the police and the ciiminals--tacit or explicit understandings analogous to what in military affairs would be called the limitation of war, the control of armament, and spheres of influence.

In other criminal business--criminal activity by legitimate firms--like conspiracy in restraint of trade, tax evasion, illegal labor practices or the marketing of dangerous drugs, regulatory agencies can deal with the harmful practices. One does not have to declare war on the industry itself. Only on the illegal practices. Regulation, even negotiation, are recognized techniques for coping with those practices. But when the business itself is criminal it is harder to have an acknowledged policy of regulation and negotiation. It involves a kind of "diplomatic recognition."

Like Foreign Affairs

In the international field one can cold-bloodedly limit warfare and come to understandings about the kinds of violence that will be resisted or punished and the activities that will be considered non-aggressive, or domestic, or within the other side's sphere of influence. Maybe the same approach is necessary in dealing with crime itself. And if we cannot acknowledge it at the legislative level, it may have to be accomplished in an unauthorized or unacknowledged way by the people whose business requires it of them.

We have to distinguish the "black market monopolies," dealing in forbidden goods, from the racketeering enterprises. It is the black market monopolies that depend on the law itself. Without the law and some degree of enforcement there is no presumption that the organization can survive competition--or, if it could survice competition once it is established, that it could have arisen in the first place as a monopoly in the face of competition. Some rackets, too, depend on the law itself--some labor rackets, some blackmail, even some threats to enforce the law with excessive vigor. But it is the black market crimes--gambling, dope, smuggling, etc.,--that are absolutely dependent on the law and on some degree of enforcement. Without a law that excludes legitimate competition, the basis for monopoly probably could not exist.

There must be an "optimum degree of enforcement" from the point of view of the criminal monopoly. With no enforcement, either because enforcement is not attempted or because enforcement is infeasible, the black market could not be profitable enough to invite criminal monopoly (or not any more than any other market, legitimate or criminal). With wholly effective enforcement, and no collusion with the police, the business would be destroyed. Between these extremes there may be an attractive black market profitable enough to invite monopoly.

Cigarette Black Market

Organized crime could not, for example, possibly corner the market on cigarette sales to minors. Every 21 year old is a potential source of supply. No organization, legal or illegal, could keep a multitude of 21 year olds from buying cigarettes and passing them along to persons under 21. No black-market price differential great enough to make organized sale to minors profitable could survive the competition. And no organization, legal or illegal, could so intimidate every adult that he would not be a source of supply to the youngsters. Without any way to enforce the law, organized crime would get no more out of selling cigarettes to children than out of selling them soft drinks.

The same is probably true with respect to contraceptives in those states where their sale is nominally illegal. If the law is not enforced there is no scarcity out of which to make profits. And if one is going to intimidate every drugstore that sells contraceptives, in the hope of monopolizing the business, he may as well monopolize toothpastes unless the law can be made to intimidate the druggists with respect to the one commodity that organized crime is trying to monopolize.

What about abortions? Why is it not "organized?" The answer is not easy, and there may be too many special characteristics of this market to permit a selection of the critical one. The consumer and the product have unusual characteristics Nobody is a "regular" consumer the way a person may regularly gamble, drink, or take dope. (A woman may repeatedly need the services of an abortionist, but each occasion is once-for-all.) The consumers are more secret about dealing with this black market, secret among intimate friends and relations, than are the consumers of most banned commodities. It is a dirty business, and too many of the customers die; and while organized crime might drastically reduce fatalities, it may be afraid of getting involved with anything that kills and maims so many customers in a way that could be blamed on the criminal himself rather than just on the commodity that is sold. We probably don't know which reason or reasons are crucial here, but it would be interesting to know.

Prohibited Commodities

A difference between black-market crimes and most others, like racketeering and robbery, is that they are "crimes" only because we have legislated against the commodity they provide. We single out certain goods and services as harmful or sinful; for reasons of history and tradition, and for other reasons, we forbid dope but not tobacco, gambling in casinos but not on the stockmarket, extra-marital sex but not gluttony, erotic but not mystery stories. We do it for reasons different from those behind the laws against robbery and tax evasion.

It is policy that determines the black markets. Cigarettes and firearms are two borderline cases. We can, as a matter of policy, make the sales of guns and cigarettes illegal. We can also, as a matter of policy, make contraceptives and abortion illegal. Times change, policies change, and what was banned yesterday can become legitimate today. What was freely available yesterday can be banned tomorrow. Evidently there are changes in policy on birth-control; there may be changes on abortion and homosexuality, and there may be legislation restricting the sale of firearms.

The pure black markets, in contrast to the rackets, reflect some moral tastes, economic principles, paternalistic interests, and notions of personal freedoms in a way that the rackets do not. A good example is contraception. We can change our policy on birth control in a way that we would not change our policy on armed robbery. And evidently we are changing our policy on birth control. The usury laws may to some extent be a holdover from medieval economics; and some of the laws on prostitution, abortion and contraception were products of the Victorian era and reflect the political power of various church groups. One cannot even deduce from the existence of abortion laws that a majority of the voters, even a majority of enlightened voters, oppose abortion; and the wise money would probably bet that the things that we shall be forbidding in fifty years will differ substantially from the things we forbid now.

Competition in Crime

One of the important questions is what happens when a forbidden industry is subjected to legitimate competition. We need more study of this matter. Legalized gambling is a good example. What has happened to Las Vegas is hardly reassuring. But the legalization of liquor in the early 1930's swamped the criminal liquor industry with competition. Criminals are alleged to have moved into church bingo, but they have never got much of a hold on the stockmarket. What happens when a forbidden industry is legitimized needs careful analysis; evidently criminals cannot always survive competition, evidently sometimes they can. A better understanding of market characteristics would be helpful. The question is important in the field of narcotics. We could easily put insulin and antibiotics into the hands of organized crime by forbidding their sale; we could do the same with a dentist's novocaine. (We could, that is, if we could enforce it, the black market would be too competitive for any organized monopoly to arise.) If narcotics were not illegal there could be no black market and no monopoly profits; the interest in "pushing" it would not be much greater than the pharmaceutical interest in pills to reduce the symptoms of common colds. This argument cannot by itself settle the question of whether (and which) narcotics (or other evil commodities) ought to be banned, but it is an important consideration.

The greatest gambling enterprise in the United States has not been significantly touched by organized crime. That is the stock market. (There has been criminal activity in the stock market, but not on the part of what we usually call "organized crime.") Nor has organized crime succeeded in controlling the foreign currency black markets around the world. The reason is that the market works too well. Furthermore, federal control over the stock market, designed mainly to keep it honest and informative, and aimed at maximizing the competitiveness of the market and the information of the customer, makes it hard to tamper.

Ordinary gambling ought to be one of the hardest industries to monopolize, because almost anybody can compete, whether in taking bets or providing cards, dice, or racing information. "Wire services" could not stand the ordinary competition of radio and Western Union; bookmakers could hardly be intimidate if the police were not available to intimidate them. If ordinary brokerage firms were encouraged to take accounts and buy and sell bets by telephone for their customers, it is hard to see how racketeers could get any kind of grip on it. And when any restaurant or bar or country club or fraternity house can provide tables and sell fresh decks of cards, it is hard to see how gambling can be monopolized any more than the soft-drink or television business, or any other. Even the criminal-skilled-labor argument probably would not last once it became recognized that the critical skills were in living outside the law, and those skills became obsolete with legislation.

We can still think gambling is a sin, and try to eliminate it; we should probably try not to use the argument that it would remain in the hands of criminals if we legalized it. Both reason and evidence seem to indicate the contrary.

Costs of Consumption

Essentially the question is whether the goal of somewhat reducing the consumption of narcotics, gambling, prostitution, abortion, or anything else that is forced by law into the black market, is or is not outweighed by the costs to society of creating a criminal industry. In all probability, though not with certainty, consumption of the proscribed commodity or service is reduced. Evidently it is not anywhere near to being eliminated, because the estimates of abortions run to about a million a year, the turnover from gambling is estimated in the tens of billions per year, and dope addiction seems to be a serious problem. The costs to society of creating these black markets are several.

First, it gives the criminal the same kind of protection that a tariff might give a domestic monopoly; it guarantees the absence of competion from people who are unwilling to be criminal, and guarantees an advantage to those whose skill is in evading the law.

Second, it provides a special incentive to corrupt the police, because the police not only may be susceptible to being bought off, but even can be used to eliminate competition.

Third, a large number of consumers who are probably not ordinary criminals--the conventioneers who visit houses of prostitution, the housewives who bet on horses, the women who seek abortions--are taught contempt, even enmity, for the law, by being obliged to purchase particular commodities and services from criminals in an illegal transaction.

Fourth, dope addiction may so aggravate poverty for certain desperate people that they are induced to commit crimes or can be urged to commit crimes because the law arranges that the only (or main) source for what they desperately demand will be a criminal source.

Fifth, these big black markets may guarantee enough incentive and enough profit for organized crime so that large-scale criminal organization comes into being and maintains itself. It may be--this is an important question for research--that without these important black markets crime would be substantially decentralized, lacking the kind of organization that makes it enterprising, safe, and able to corrupt public officials. In economic-development terms, these black markets may provide the central core (or "infra-structure") of underworld business, capable of branching out into other lines.

A good economic history of prohibition in the 1920's has never been attempted, so far as I know. By all accounts, though, prohibition was a mistake. It merely turned the liquor industry over to organized crime. In the end we gave up, probably because not everybody agreed that drinking was bad, or if it was bad, that it was anybody's political business, but also because the attempt was an evident failure and an exceedingly costly one in its social by-products. It may have put underworld business in the United States in what economic developers call the "take-off" into self-sustained growth