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The Economics of Organized Crime-Book Review

Copenhagen, March 4 (RFE/RL) - Is organized crime like an octopus that's penetrated the state and has usurped many of its functions? Or is it operating more like a corporation that provides certain goods and services that just happen to be illegal? is it indeed actually useful, filling in an economic, legal or societal gap that the state can't or won't take care of?

A new book to be published by the Cambridge University Press on March 26 is analysing these questions from a purely economic point of view. And while popular culture, history, and modern mythology have long been preoccupied with mob-related issues, the main reason for their existence - making money - seems to have been largely ignored. 'Know thy enemy better'...

Edited by Gianluca Forentini of the University of Florence, Italy, and Sam Peltzman of the University of Chicago, 'The Economics of Organized Crime' is a collection of essays that draw mainly on the Italian experience. But as modern economics is international and works along rules that transcend state borders, so do the 'parallel' economics of organized crime: what is valid in Sicily can -- and has beeen -- transposed in Brooklyn - and its modus operandi is essentially the same in Russia and Romania.

According to 'The Economics of Organized Crime', there are three historical reasons for the formation of mafias: abdication of state power, excessive bureaucratic apparatus and the potential of illegal markets. It is easy to see that these factors combined have spawned the rise of mafias throughout Eastern Europe and the former Soviet Union. The post-Communist state, with its weak institutions and lack of a proper legal framework has nevertheless retained its excessive bureaucracy. Impoverished officials would eagerly receive kickbacks for illegal contracts or just to keep their eyes closed.

The next step is the use of these officials and the apparatus they stand for to keep competitors out, through either threats or violence. Finally, the mafia monopolizes whole industries that it operates outside publicly-recognized standards.

Mafia activities can include anything - from 'classic' crimes such as organized prostitution, drug-trafficking, illegal gambling, tax fraud and extortion, to newer and more sophisticated crime such as money-laundering, bankruptcy and insurance fraud, and counterfeiting.

'The Economics of Organized Crime' points out that there are two main concerns for mafia gangs: how to preserve their monopoly position and how to impose and maintain their own law and order. The thinking behind the mechanisms to achieve these aims is economic.

For example, if a criminal organization is involved in a relatively competitive market, it will likely invest in physical means to deter new entrants. If, on the other hand, the market is monopolized, the mob must ensure better ways to keep its internal discipline. Thus, in a relatively competitive field, a possible legalisation by the authorities may result in an increase of the output.

But, with the cartelised gang in mind, keeping the barriers will result only in increased profits for the mob.

It is not difficult to see how this works in, say, Bulgaria. Competitiveness between the so-called protection firms is high. Therefore, these firms invest in thugs who use violence to hamper 'colleagues'. The government has raised the entry barrier by making new requirements for the operation of the protection racket which now calls itself insurance business. However, this has not resulted in its eradication but in the increase of its profits.

Bulgaria is perhaps a good example - and so is Russia - as the 'parallel' economy operated by the mafia has, in many fields, taken over the legal economy. By proxy, those who operate the mafia have become a part of the government. In other words, the mob has come to fill an economic gap that the government is unable to do.

Furthermore, it has come to perform functions, such as security and the settlement of legal disputes, that are the prerogative of the government. Needless to say, it requires a more effective form of government to combat this kind of organized crime.

One way to do that is through economic means: imposing stiffer laws against tax evasion, or eliminating the need for mafia markets. History shows that the fight against organized crime is easier said than done. Even countries with well-functioning legal and police systems, like the United States, cannot cope effectively with the mafia. But hitting the problem at its core, 'The Economics of Organized Crime' suggests, is perhaps one of the best ways to combat it. After all, when all else failed, Chicago mobster Al Capone was indicted on federal income tax evasion charges in the thirties...