David Friedman and organized crime

I went to an informal seminar of David Friedman’s tonight based on his academic workshop and developing book about Legal Systems Very Different from Ours. I encourage you to read the available material so far, as it’s very interesting law & economics. He mostly talked about the section on Amish law, with some comments also about Gypsy and Somali law. During the Q&A he solicited feedback about other possible areas to explore for the book, and somehow organized crime came up.

Friedman’s thinking about organized crime is that it’s not quite as organized as it’s made out to be. The optimal size of the firm is determined by economies and diseconomies of scale. One of the things larger organizations need is constant information flow between the different levels, and one problem with organized crime is that this information can put people in jail, so it would tend to flow less. This would be a minimizing tendency on the size of the firm. [I am paraphrasing his words here.] As he writes in Price Theory:

My own conjecture is that what the Mafia really is, at least in part, is a substitute for the court system; its function is to legitimize the use of force. To see how that might work, imagine that you are engaged in some criminal enterprise and one of your associates pockets your share of the take. Your obvious response is to have him killed–murder is one of the products sold on the market you are operating in. The problem with that is that if people who work with you get killed and it becomes known that you are responsible, other participants in the illegal marketplace will become reluctant to do business with you.

The solution is to go to some organization with a reputation, within the criminal market, for fairness. You present the evidence of your partner’s guilt, invite him to defend himself, and then ask the “court” to rule that he is the guilty party. If it does so–and he refuses to pay you appropriate damages–you hire someone to kill him; since everyone now knows that he was in the wrong, the only people afraid to do business with you will be those planning to swindle you.

That, I suspect, is one of the functions that the Mafia and similar organizations serve on the criminal market. This is a conjecture about organized crime, not something I can prove; but it is not, so far as I know, an implausible one.

This came up at the talk, and he suggested that organized crime, far from being a large group (or several) is more likely a lot of smaller “family businesses” that deal with each other as more-or-less independent groups.

All of this so far is very reasonable, and I wouldn’t dispute it entirely. But I brought up the Mexican drug cartels as a possible counterexample. It seems to me that these organizations actually might be fairly large. I think immediately of Amado Carrillo Fuentes, “the Lord of the skies”. Carrillo earned this nickname by having a fleet of 27 Boeing 727’s for drug distribution. This, of course, suggests a fairly large and somewhat hierarchical organization, even if the actual street-level distribution is carried about by smaller, related but separate groups.

Carrillo is dead—allegedly—but several cartels are still operating, shipping really massive amounts of drugs at this very moment. Based on what I know and have observed, I have no trouble believing that the organizations really can be quite large.

A cause of skepticism is that most of the information about these groups comes from various government agencies, and it’s in the best interests of these agencies to inflate the power and numbers of their opponents. That’s certainly true. But Mexican news agencies view this as more of a domestic issue and don’t fetishize the DEA and CIA in the way that American news agencies do. A lot of the ideas I’m suggesting here come from them, so it’s not obvious that I’m way off base here.

(Yet another reason is in considering the gruesome warnings that cartels routinely leave for others: hacked-up, tortured bodies with messages attached. These are always signed with the names of the large organizations, even if they happen over fairly large geographical areas. It could be that the Zetas, for instance, are more of a confederated franchise system, but I don’t see messages indicating subunits within the Zetas, just the Zetas. I haven’t thought this one out as much, but at first glance it seems ok.)

I briefly mentioned at the talk, and can expound here on another reason why his objection might not hold for the cartels, which is that the free flow of information dangerous to the organization is less of a problem in Mexico. The legal system is so corrupted by Prohibition, with so many members on the take or too intimidated to speak out, that loose lips don’t sink near as many ships there as they would here. (Note that this could also apply in other relatively corrupt legal systems like Russia’s, Colombia’s, or Afghanistan’s.)

This is perhaps a minor point, but one worth thinking about.

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2 thoughts on “David Friedman and organized crime

  1. This discussion seems strange to me. Surely organized crime can differ in size of the firm and in degree of vertical integration. Pirates have a flat organization; mafia have a more hierarchical one. A certain gang in California the name of which escapes me (David Skarbek wrote about this) is vertically integrated from retail to wholesale in a chain of command. Costs differ and organizations differ depending on the cost structure.

    Your comment about the Zetas is interesting. A franchise system is a system with many owners at the retail level and controls on these owners placed on them by the supplier to maintain the value of his reputation capital. I don’t know what would make a franchise system optimal form of organization in drug distribution offhand but I would like to know it. Or rather, setting aside possibly empirically irrelevant models, I’d like to know more about this provided that this is actually a useful model for the Zetas.

  2. Harry,

    What the discussion centered on was more Mafia-style organized crime. I don’t think the Zetas (or any other player in the Mexican Prohibition fiasco) have that kind of franchise system. I was suggesting that they might actually be as unitary as they’re made out to be. American street gangs, as I understand, do have some kind of franchise, but I don’t know that much about it, and no American street gang is even remotely as powerful as the cartels are.

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