The Economics of Organized Crime
Organized Crime. A fascinating product of a society that has been the focus of many studies in the last century. Organized crime groups mostly engage in regular economic activity, the production and distribution of various services and drugs, gambling, and prostitution.
For that reason, we as bystanders are tempted to think that mafias and gangs are just like any other typical business firm and are therefore subject to the same economic understanding as they are. This assumption is incorrect due to the unique nature of such groups.
Let’s discuss why.
BIRTH OF ORGANIZED CRIME
Organized Crime is fundamentally a product of a specialized service and a power vacuum. Economics serves an ethical purpose to achieve an economic model with the perfect and costless enforcement of property rights.
If this fact/assumption was to hold then any potential victim would be capable of taking the extortionist to court and win, and therefore a “mafioso” (a member of the Mafia or a similar crime organization) can only exist when such property rights are costly to enforce or are imperfect in the society.
The Prohibition Era saw the biggest growth and birth of organized crime groups.
The importance of a strong Governance
Enforcement of effective property rights is the duty of the State. With fewer and imperfect enforcement measures, the efficacy and impact of laws, courts, police, and other agencies are destined to fail. Organized Crime is more likely to emerge and establish its control under these conditions due to the inherent weakness of the State.
By extension, if the State is unable to retain control over a certain activity, say the prohibition of narcotics - organized crime syndicates will exploit this gap to establish their monopoly/business. The absence of clearly defined rules is a breeding ground for criminal gangs.
The Socio-Economic Factor
For this factor, let us consider the American youth gangs who have traditionally flourished in low-income areas. These areas are often populated by a homogeneous (similar or uniform) ethnic group.
The residents of such areas usually view themselves as being ‘different’ and ‘discriminated against by the larger society. The state agencies, such as the police and the justice system primarily, are seen as indifferent to their problems or, at worst, as agents of repression.
The biggest reason for the birth of organized crime groups is due to the similar mindset and economic/social surroundings they find themselves in.
This results in ordinary crime becoming too difficult to control, and hence local gangs step up and fill this gap to establish some sort of ‘protection’ and justify an organized system.
Another example is of the Chechens in Russia who are both stigmatized and are seen as the major contributors of organized crime by the larger population.
The Power Vacuum
A power vacuum is a gap that develops due to numerous reasons to the organizational structure of a community. Often a result of revolutions, wars, and major political change, organized crime syndicates see this as an opportunity to establish pockets of monopolies.
With the previous political authority and institutions absent and new effective ones typically taking time to develop. There are usually periods during which people are faced with concerns regarding their physical security and basic amenities.
In such an environment, local gangs or some large-scale established syndicates lend their services in return for payment.
WHAT MAKES THE ECONOMICS OF ORGANIZED CRIME UNIQUE?
The Business of Protection
Every business has a unique facet that makes it all the more interesting, from online shopping’s easy-to-use interface to at-home deliveries hosted by Amazon. Similarly, something about an organized crime syndicate makes them fascinating.
Let me paint you a picture.
Every night, you and your friends stand guard at the doors of the homes on your street. Your father and the other seniors spend sleepless nights. This is a measure your community chose to take to make sure no more thefts or murders happen in and around your community.
However, this measure is not something that can be continued for a longer period.
Your personal lives are in shambles and the community feels unsafe even with the measures. The coordination and the organization of daily patrols are taxing the morale of the community, and you are simply unable to do it. Someone needs to do this job so that you and your family can lead normal lives.
And in this equation, a “mafioso” is born.
The protection that these self-proclaimed enforcers provide is very similar to what a social contract means: a mutual understanding between two parties for the benefit of both.
Conversely, this contract slowly becomes a reason for the gangs to demand higher pays and ‘tribute’ in kind to impart their services to a community.
The definition of an enforcer cannot be so close to what I have just defined in the aforementioned reality. This position is important, as no monopoly, drug operation, or business that exists at the line between legitimacy and illegality can exist without ‘protection’.
IMPACT ON A NATION’S ECONOMY
The economy of a nation is the product of the choices made by its industries, government, businesses, and citizens. The harmful activities that hurt a nation’s economy are but not limited to crimes such as murder, loan-sharking, arson, narcotics distribution, extortion, and labor racketeering. To add to that list, a few of the below-discussed activities pose significant ongoing threats to communities.
1. Infiltration of Unions
This aspect of a mafia’s economic interests happens to be the most predictable of all behaviors. Unions tend to make a lot of money as they facilitate the mafia to extort big business mortgage fraud schemes that are a kind of reaction to the collapse of the housing market.
Mobs and Organized Crime entities are usually in the driving seat of time-sensitive industries which allows them to control the timing and flow of goods. This gives them the ability to also moderate the labor force. This allows such entities to impose demands that more often than not harm the business/industry.
3. The resilience of Mafia /Crime Syndicates
A mafia-type lifestyle is something that many teenagers wish to experience. Glamour and power are normally promised in this context. This is a problem of the community to ensure that the younger generations are aware of the pitfalls.
On the other hand, from an economic lens, this is an interesting dilemma. Mafia and Organized Crime entities have an unlimited supply of willing participants, who would replace the existing members if they are caught, prosecuted, or even killed.
This cycle, in some way, ensures employment in many marginalized communities across the globe.
1. Internal Organization
Similarities between civilian organizations and organized crime groups are plenty, but their contrasts are what make it harder to fight its negative effects. Crime groups are typically hierarchical organizations that have established leadership.
Youth gangs, like the “Chicano” gangs in East Los Angeles, have a horizontal organizational structure where leadership is a product of informal respect. The most well-known mafia, the Sicilian Mafia, is hierarchically organized and recognizes formal procedures in terms of selections and appointment of those in power.
The basic understanding of the internal organization is that of a vertical separation of power with a core group at the top, who plan and maintain alliances and relationships with the supplier and affiliates.
Filled by this group are the members who handle the day-to-day activities of the syndicate in its area of influence. The functional organization is similar to a franchised company. The local leaders receive their supplies and protection from the central leadership while they in turn provide the center with the profits that they make.
2. Establishing an Image
The members of the gang slowly attain a role where their contributions directly advance the communities of their ethnic group. As more powerful criminal syndicates conduct business or forge alliances, it enhances the lifestyle of the society as well.
In most cases, gangs are born in regions of poverty and a hostile nation**—**a scenario that forces and reinforces their beliefs of being the judge, jury, and executioner of the small region they were born into.
This reality is evident in rural Sicily, where a “mafioso” would confer legitimacy to the community by performing a role of an intermediary in the day-to-day proceedings.
The crime boss of the New York mafia, Al Capone ran a soup kitchen during the years of the Depression.
As such syndicates expand and grow, whether out of genuine conviction, guilt, or narrow self-interest, they start to become involved in charity and public service. For instance, the leader of the Shanghai Green Gang, Du Yuesheng, became a major community leader and philanthropist.
Pablo Escobar (The Head of the Colombian Medellin cartel) had donated several hundred new homes to the poor slum dwellers of Medellin. Though these actions from Escobar did not help him escape a contrasting reality of his life, the provider-of-public-good image is often an important component of organizations.
However, in the case of the Sicilian Mafia, who saw themselves as public servants, such actions worked reasonably well for more than a century.
One of the most determining characteristics of a mafia is its monopoly on certain businesses. As discussed, organized crime yields profit from protection activities and the production of goods and services. It makes sense for us to understand the structure that exists and also understand how similar this ‘underworld’ is to the world we all live in.
There are two ways in which a local or even an international market is dominated by an organized crime syndicate: the first one is through a legitimate mean by lowering prices, enhancing the quality, and ensuring that the customers are loyal to the service; the other way is through the use of force, or ‘knee-cap’ the competition.
By carrying out punishments on the rival gangs and sometimes even on the customer to ensure a continuous stream of revenue. This allows such gangs to neglect quality or price but still enjoy the benefits of being the only seller.
For the first type of competition, assume that organized crime gangs offer a service for ‘protection’ to their customers. This service is carried out against local crime and disturbance in return for a fee from the said customers.
The protection service can vary in terms of its quantity (individuals present) and quality (commitment to their client). The higher the level of that protection service, the higher the cost/fee that is to be paid to the crime group.
The group that can monopolize the region’s need/demand for this protection service, is capable of extracting virtually any fee without repercussions.
This is because in the civilian world an individual who breaks a certain contract can be punished through the judiciary, while in the case of “mafiosos”, they are capable of more immediate punishments by destroying property or murdering the individuals in question.
This monopolist is threatened when another new rival gang also starts providing the same service, forcing the present gang to either reduce the cost or increase the quality. In some way, this model resembles that of a private company.
Competition is harmful to any business. This fact is interpreted in the world of the “mafiosos” through alliances and territorial claims.
If a gang has more muscles and weapons to spare, they will be able to hold and maintain larger territories and hence, a larger clientele - increasing their customers.
These alliances are unpredictable as, when the leader of such gangs leaves the scene, new ideologies and tactics replace such deals. The inherent volatile nature of the organized crime business is not beneficial in the long run.
Our growing understanding of how crime syndicates operate and grow can be a step closer in making better and stronger cases to ensure that the perpetrators are behind bars before they cause irreversible harm to a community, and in extension a nation.
Many examples of the Sicilian Mafia, seen as an organization that serves public interest can be debunked through a firm grasp of their economic nature. Growing and newly found crime gangs can be tackled early to prevent them from gaining traction in a region.
The nature of an organization's economy is similar to reading its future. The robustness and its ability to develop new measures to grow can also teach us a few lessons in the civilian world - riddled with market crashes and depressions. Effective planning seems to be a lesson that can be learned.
Contrarily, the very negative nature of people belonging to such crime syndicates impacts the healthy round development of the smallest and most vital unit of an economy - a family.
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