This is a version of a paper issued in February 1993 as a
University of Bradford. Department of Social and Economic
Studies. Research Paper.
J.M.BUCHANAN'S 'DEFENSE OF ORGANIZED CRIME': FORM,CONTENT AND
INTENT
1.INTRODUCTION.
The literature of economics has not traditionally
contained in depth analyses of the style of presentation of
contemporary journal articles. The convention has been to
present an original paper which opens with a brief nod of
recognition to precursors. This form of exegesis reflects
economists' desire to be seen as scientific. In the scientific
milieu a new paper is worth publishing if it constitutes an
advance on an old paper. The content of older papers is regarded
as correct or incorrect on grounds of valid application of
mathematical and/or statistical methods. Mulling over the style
and form of economic writing has traditionally been restricted to
historians of economic thought. Even here the surest means of
publication has been evaluation of historical work in terms of
its contribution to a scientific flow towards greater
correctness. This is now changing, to some extent, due to the
influence of Donald McCloskey (1985) as evidenced by the papers
collected in Samuels (1990).
McCloskey's pioneering book contains a content analysis of
Muth's presentation of his original article on rational
expectations. The aim is to discover why economists found this
persuasive. McCloskey's position is that, far from being
scientific extracters of truth, economists are engaged in the act
of persuading readers to their point of view. Persuasion is
achieved through such strategies as appeals to authority,
mathematical formulation and proof, statistical techniques and
rhetorical use of language. Further, mathematical and
statistical techniques are often used in ways contrary to their
methodological underpinnings, for example hypothesis test results
are often deployed in a manner unacceptable in classical
statistics. This tension arises because economists wish to use
them to persuade rather than, according to received wisdom, as
divining rods in the pursuit of truth.
In this paper I provide a scrutiny of the form,content and
intent of James M. Buchanan's contribution to the economics of
organized crime. This is of interest for a number of reasons. It
allows us to see how a Nobel laureate engages in the act of
persuasion. It affords the opportunity to examine the congruity
between the author's avowed methodological position and his
analysis of specific policy problems. In recent times, 'empire
building' by economists has been robustly defended as
unproblematic. The subject of organized crime brings to light the
potential for contradictions when economists move their modus
operandi into areas of social and political controversy. James
Buchanan has gained distinction from winning a Nobel Prize for
contributions to economics which emphasize the relationship
between politics and economics [Sandmo(1990)]. He is also noted
for going against the mainstream of economics, to a degree, in
applying contractarian views to public finance [Congleton(1988)].
He makes many claims for his oeuvre which distance him from the
content and methodology of mainstream economics. The following
claims are of the greatest relevance for this paper:
1. A subjectivist approach is taken to preferences and costs in
contrast to the neoclassical assumption of well behaved,
exogenously given preference structures and objectively given
production functions. Following from 1 are points 2 and 3:
2. Buchanan has never carried out any empirical work and hardly
ever refers to that of others [ibid.p.62].
3. "He objects to the use of a social welfare function" .....
given that "it is wholly inappropriate to attribute goals to
society as such". [ibid.p.57]
4. In place of a social welfare function he stresses the
importance of efficiency where his "ideas about efficiency are
not the same as the ones that are current in neoclassical
economics." [ibid.p.57]. His notion of efficiency is basically
that embodied in the Coase theorem i.e. any contract arrived at
by voluntary 1 cooperation is necessarily efficiency enhancing.
Sandmo points out that this approach to efficiency does not
appear to take us to a fruitfully distinct alternative to the
neoclassical.
Determining the substance of these claims requires a
detailed consideration of Buchanan's treatment of concrete
problems. Sandmo(1990) does this for many areas although not for
that considered here. So, at one level this paper is complementary
to his. At another, it is significantly different as Sandmo's
paper is strictly in the 'economics as a positive science' mode.
2. THE CONTEXT OF THE PAPER.
In 1968 Gary Becker initiated crime and punishment as a new
sub-field of economics. His analysis was driven firmly by
conventional welfare considerations. The object was to derive
optimality conditions for social responses to crime [Stigler
(1970)]. The explanation of criminal behaviour operated on the
individual level and was a straightforward application of
mainstream utility-maximizing rational choice economics in a
risky environment. Becker's work was developed by others for the
most part empirically. The main thrust of this work was to
establish a deterrent effect of punishment in opposition to the
perceived received wisdom of earlier sociological work [see
Cameron(1988)]. Theoretical and empirical derivations of the
deterrent effect were premised on the notion of a rationa
individual making a decision, at the margin, on entering into
illegitimate activity.
Until Buchanan's paper appeared, the issue of criminal
firms had not been considered. Criminal acts had been treated as
individual choices analogous to the traditional problem of
determining optimal hours of paid labour. Given the themes
identified we can suggest that Buchanan's research agenda was to
determine whether the deterrence (punishment) approach to
organized crime provides an optimal policy response. A
supplementary question would be the precise amount of deterrence.
This does not come to the surface because of the (mainly)
negative answer to the first question. Given that Buchanan has an
allegedly different approach from Chicago methodology [as
expounded in Becker and Stigler(1977)] this should be revealed in
his handling of this topic.
3.CONTENTS.
Buchanan begins with the following quotation from Samuel
Butler:
"... we should try to make the self interest of cads a little
more coincident with that of decent people"
This is merely a figurehead to the paper as the discussion
starts without further reference to it. What is the purpose of
this quote ? Firstly it implies erudition on the part of the
author. Also it functions as as an appeal to authority by harking
back to the well known remark by Adam Smith on the role of self
interest of producers (butchers,bakers) in ensuring that we are
all fed, clothed etc. This theme is only picked up in section V
of Buchanan's paper by which time we will all, he hopes, be
convinced by the argument. There we find a potted history of the
idea (Mandeville,Hume,Smith) that individual selfishness can work
to the social good complete with a reference to the above cited
quote. Following this Buchanan links his own analysis to the
eighteenth century individualist position. He ends the paper by
reworking Smith's butcher's self-interest quote as follows: "It
is not from the public-spiritedness of the leaders of the Cosa
Nostra that we should expect to get a reduction in the crime rate
but from their regard for their own self-interests" (p.407). This
neatly rounds up the suggestion in the opening quote from Butler.
To the workaday economist all of this is just extra cream on the
cake as it is irrelevant to the 'scientific' content of the
paper. To Buchanan it is part of his agenda to establish himself
as a profound thinker, and to be seen as part of the great
tradition of free market thought. Indeed he refers to Smith's
butcher quote as containing the "philosophical foundations of
competitive economic organization" (p.406).
The paper proper commences with a basic exposition of the
neoclassical theory of monopoly. The simple idea presented is
that if this market structure restricts the output of goods then
it must also restrict the output of bads. There follows the
question of whether organized crime is a good thing through its
being a monopolization of 'bad' production. To concretize his
exposition the case of prostitution is seized upon as an area in
which to show the application of his arguments. This is used
early in the paper but later sections do not use any examples
whatsoever. Prostitution is discussed without reference to any
empirical evidence. Buchanan refers to what he believes other
people believe under the vague and sweeping label 'journalistic
discussion'. This term is not defined and there are no explicit
quotations to illustrate what it might be. It is typically used
in a way which suggests an attempt to denigrate the beliefs of
opponents.
The case of prostitution raises the problem of choosing a
social welfare function but this is not faced head on. This is
hardly surprising given point 3 above. Nevertheless an
implicit social welfare function can be gleaned from statements
that prostitution is a 'bad' in some 'social sense' (p.395)
because of 'almost universal legal prohibitions' but it must be a
good to those who pay for it. If we stand the argument on its
head we would have to say that a universally allowed activity
(say some noxious pollutant) is a good. There seems to be
a confusion here between the notion of marginal externalities
and the absolutist notion of goods and bads. For some reason,
Buchanan seems reluctant to treat explicitly prostitution/crime
as just another externality. This is quite unlike the mainstream
literature [Hahn(1972),Usher(1986,1987)]. It is also hard to
see how the application of contractarianism could clear up this
anomaly.
How do we get from individual goods to social bads? This
is not taken up; we might assume a simple majority rule or sum
of utilities function whereby any activity is a social bad if
aggregate social losses exceed aggregate social gains. Such a
function is rejected outright by Buchanan(1964). It implies the
inclusion of welfare losses from meddlesome preferences i.e.
those who object to prostitution per se rather than
externalities which might arise from it. It should be noted that
Buchanan fails to indicate any of the sources of externality in
the case of prostitution. The statement that an activity is a bad
because of almost universal legal restriction seems to imply that
the law is a straightforward manifestation of the social welfare
function (as revealed through voluntary exchanges) rather than
the preferences of dominant rent-seeking groups. This is in
apparent conflict with much of Buchanan's other writings which
not only reject the notion of a a social welfare function but
also emphasize the role of rent-seeking in public policy.
There are also contradictions between the method of
arriving at the notion of prostitution as a social bad and
Buchanan's views on efficiency. I.e. if the meddlesome offended
are not offended enough to engage in a voluntary contract with
the perpetrators then can we not conclude that the activity is
not a bad after all? Perhaps there is some impediment to
voluntary exchange in which case an optimal policy could
concentrate on its removal rather than prohibition of the
activity which is a bad to some people but not to others.
One thing which would help make an activity an absolute
social bad would be a fixed externality, in the case of
prostitution an objecter would suffer a large and equal loss of
utility whether there were one or a million prostitutes with
one or a million customers. Even in such a case the proportion of
objecters and others would determine whether the activity was a
marginal bad. If we take a more extreme case (such as religious
objecters), where no amount of monetary compensation can nullify
a perceived evil and the bad is still output invariant then
reductions of output would bring only losses [to those who enjoy
the good] and no gains.
Section II of Buchanan's paper presents the 'simple
geometry' of the analysis. Analogy with work in the fields of
international trade,duopoly,voting and public goods (p.396) is
used to promote the idea that the "reaction curve construction"
is both sound and useful. In fact, the empirical work on the
economics of crime which appeared contemporaneously with his
paper would see his diagram as a straightforward supply and
demand analogue [Cameron(1989)]. It may be that Buchanan
presents his geometry as a reaction curve construction rather
than a standard market supply and demand model because he wishes
to avoid being pushed into a distinctly non-subjectivist corner
of assuming given costs and preferences. Criminal activity is
shown as a negative function of the amount of resources devoted
to law enforcement. This presupposes a deterrent effect which
Buchanan does not even deign to discuss 2. The supply of law
enforcement resources is seen as a positive function of the
amount of crime. In supply and demand terms the former function
is the supply of crime and the latter is the demand for
protection against crime. Diminishing returns to enforcement
effort are assumed merely on the grounds that "it is reasonable
to hypothesize" (p.397) their presence. This is incorporated in
the diagram but plays no part in the central argument. Its
importance is as a persuasive device which reassures the
professional economist that s/he is on familiar ground whatever
discomfort the topic may engender.
The problem of aggregating over individual criminals to
obtain (what is in effect) a supply curve is not discussed
although subsequent discussion makes it clear that perfect
competition is being assumed. An obscure discussion (p.404)
almost says as much about the demand for law enforcement:
"The community enforcement-response function necessarily
describes outcomes generated by the interaction of many
behavioral components; in many respects such response are more
closely analogous to competitive, than to monopoly, behavior."
There is also no explicit statement that individual criminals are
utility maximizers. Presumably this is because an economist would
be expected to take this for granted. Nonetheless given
Buchanan's attachment to subjectivism there should be some scope
for disagreement with the Chicagoan penchant for applying
subjective expected utility [ pace Cameron(1989)].
The geometrical construction is given further credibility
by some 'intermediate micro' type informal stability analysis.
Again this is not strictly necessary to the central argument;
presumably it serves as further reassurance of familiar territory
to persuade us to go along with the author.
Section III of Buchanan's paper, titled "The Predicted
Effects of Criminal Monopoly" contains the heart of the paper. It
begins by distinguishing two types of crime. The first is
"socially bad" but constitutes a "good" to customers of
prohibited products; prostitution is again raised as a "typical
case" (p.396). Here we find an attack on "journalistic
discussion" for labelling this type of crime as 'victimless'. No
rationale for this attack is given. Perhaps this would have
exposed the pointlessness of distinguishing activities along the
socially bad/privately good dichotomy. All criminal activities
are presumably bad in some sense given that they are illegal (as
Buchanan points out; see above) but they must also be seen as
goods by some individuals, otherwise they would not rationally
have engaged in them. This applies equally well to Buchanan's
second type of crime which is a forced transfer in the absence of
mutual agreement. No additional light is shed in this part of
the discussion on the problem of the social welfare function.
The equilibrium conditions for factor inputs in perfectly
competitive and monopolistic industries are then stated. There
then follows the extraordinary claim that rational monopolists
are profit-maximizers (p.399). One could make the case that
criminal monopolists may be more likely to depart from profit
maximization given that they can not have shareholders exerting
pressure on them. This may lead to a greater or lesser output
than Buchanan expects depending on the precise form of the
objective function of the managers of the criminal cartel.
It is interesting to note on this point a lacuna in Buchanan's
treatment of public expenditure whereby [Sandmo(1990 p.55)]
he fails to advance an explicit characterization of the maximand
of supplying bureaux. The reluctance to explicitly analyze the
goals of organizations may be a reflection in miniature of his
stance on the social welfare function [try substituting the word
organization for society in the quote at point 3. in our
introduction].
With reference to his simple diagram Buchanan gets us
safely home to a standard claim that monopoly, for bads, is
Pareto superior in a partial equilibrium setting:
"Resources involved in enforcement may be freed for the
production of alternative goods and services that are positively
valued; the taxpayer has additional funds that he may spend on
alternative publicly provided or privately marketed goods and
services." (p.402).
This is a potentially uncomfortable position. Buchanan has
exercised persuasion to convince us of the correctness of his
analytical proposition. But, he is somewhat wary of the ethics of
being seen to endorse government supprt of organized crime. So,
section IV. is entitled "Possible Objections to Criminal
Monopolies". First, he sets up some very soft targets
(distribution, joint supply), purely in the domain of 'positive'
economics, that can be knocked down with some simple theory. He
sees the third case as more serious. It emerges from the
possibility that monopoly may be "more efficient" (p.403) than
competition. A precise definition of the intended usage of
efficiency is not given. Nor is there any empirical justification
for the argument beyond the claim that "It seems plausible (..)
at least under some circumstances" (p.403). Once again Buchanan's
resistance to empirical work goes further than mere generalizing
from the work of others (or any kind of 'casual' empiricism) to
pure back of an envelope quantification not dissimilar to that of
the bygone era of Keynes,Harrod,Hicks et al. From the following
statement (p.403) "To the extent that there are significant
economies of large scale in crime, monopoly organization will
tend to be relatively more efficient" it appears that the
argument is simply one of differently shaped cost curves for
monopoly and competitive crime organizations.
With the central proposition firmly established on
theoretical grounds Buchanan is quick to distance himself from
its real world implications. He says that some will worry that
the government is being asked to "deal with the syndicate" but
"I should emphasize that there is nothing of the sort implied in
the analysis to this point. In its strictest interpretation the
analysis carries no policy implications at all".(p.403-4)
How can this be? After all, the pivotal feature of the paper is
the claim that we should have a different policy stance towards
organized crime from that normally advocated. The next sentence
says "It merely suggests that that there may be social benefits
from the monopoly organization of crime". Surely if there are
benefits they ought to be seized?; this is the gospel of Pareto
optimality. The back pedalling might be due to doubt about the
form and membership of the social welfare function e.g. criminals
may or may not be included [see Cameron(1989a). It seems not,as
Buchanan steadfastly continues to confront this directly.
Despite the baldness of the above quote about the total
absence of policy implications, Buchanan sticks to his view that
criminal monopoly may be socially beneficial but is keen to
cleave a distinction between passive acceptance of criminal
monopolies by law enforcement agencies and pro-active
promulgation of such entities. On the face of it, it is hard to
see much of a distinction on pure economic theory grounds; so
some persuasion is needed. Buchanan adopts the twin-pronged
strategy of making technical sounding noises and 'telling a
story'. The technical argument is that the "trading" solution
"lies off the community's enforcement response"(p.404). This is
just a restatement of the traditional monopoly result that
equilibrium is on the demand schedule and off what would be the
supply schedule if there were competition . In the crime case what
this boils down to is a smaller outlay of resources by the
enforcement bureau than that voted to it by the community. The
story given is that this would lead to "pressure on politicians
to break the agreement"(p.404). Buchanan slips this in without
ever giving any hint of an explicit model of the relationship
between citizen-voters, politicians and law enforcement managers.
It is not obvious that the Buchanan story will come to pass.
Given the asymmetric information which is characteristic of the
bureaucratic scenario there is surely scope for the shortfall of
resource use to be hidden at some level of organizational
expenditures [Cameron & Golby(1992)]. Buchanan (p.404) throws in
an additional difficulty that pro-active promotion of criminal
monopoly may be difficult because it is hard to identify the
criminal syndicate. Having said this he simply repeats his
original position: "Passive acquiescence in the syndication of
crime is a wholly different policy stance from active
negotiations with identified leaders." (p.404/405). There still
seems to be no justification for the proposed asymmetry.
Deliberate passivity, in the pursuit of an optimum, surely
requires the same level of knowledge as active intervention.
Section IV of Buchanan's paper concludes with a very banal
paragraph about law enforcement techniques. Its presence is due
to the fact that Buchanan is extremely worried that readers may
be drawing anarchistic conclusions from his tacit endorsement of
organized crime. So worried is he, that he even feels the need to
remind us that the enforcement agencies will still be making
efforts to deter crime: "The analysis does nothing toward
suggesting that enforcement agencies should not take maximum
advantage of all technological developments in crime
prevention,detection and control" (p.405).
If the enforcement agencies are extracting rents then they would
not be taking maximum advantage (as far as the ultimate consumer
is concerned) from such shifts in the production function. As we
have indicated above, Buchanan thinks this would only be a
problem with an active stance of encouraging criminal monopolies.
So he would hope to have headed off this line of criticism in
part from his vague endorsement of the assumption that the voting
of resources to law enforcement follows some analogue of a
competitive process.
In Section V, Buchanan returns to the agenda of the Butler
quote. He re-states that "there is no argument for monopolistic
restriction .. whether this be done via governmental agencies ...
or by profit-seeking private entrepreneurs."(p.406) in an economy
of pure exchange of goods. No clarification is given on why it is
deemed fit that the state should have a monopoly in the
administration of law enforcement activities. Thorough-going free
market thinkers [cp. Rothbard(1973,1977)] would dispute this. The
elementary welfare proposition of the paper is reiterated in
slightly different words from earlier viz. that monopolization of
bads may shift us in the direction of social optimality. The
elementary welfare corollary that there is no guarantee that it
will get us to the optimum is then stated. Buchanan points out
that unambiguous conclusions cannot be reached "for the cases
here 'goods' and 'bads' are mixed" (p.406).
We then jump back to the solid ground of activities that
are "unambiguously 'bads' in the social or public sense" (p.407).
It will be apparent from our earlier discussion that Buchanan
does not make a very good job of conceptualising social/public
bads. He then simply assumes that pure bads exist so that the
'competition in goods is to the public good argument' "advanced by
Mandeville and Smith becomes applicable in reverse" (p.407).
4. SUMMARY AND CONCLUSION.
The most striking feature to emerge from the above
discussion of the content of Buchanan's paper is the presence of
contradictions. At the most basic level Buchanan seems at many
points to go against, or at least fails to follow up, the essence
of his avowed methodology. This is in accordance with McCloskey's
(1985) observation that neo-classical economists swear adherence
to a pseudo-Popperian modernism which they constantly violate in
the process of their day-to-day work.
Surprisingly, for someone whose contributions are notably
in the area of positive public sector analysis, Buchanan gets
into considerable confusion about the conceptualisation of crime
as an externality. As we have seen, he makes use of the notion
of a pure bad. It is hard to imagine the production of a pure
bad; why would anybody want to generate such an entity? The
activities regarded, by Buchanan, as pure bads are acts of
redistribution (albeit involuntary) rather than production. It
becomes impossible to make judgements about the optimal policy
responses toward such acts without passing judgement on
alternative distributions. A higher level of crime is better for
some people: criminals themselves, sellers of crime prevention
equipment and insurance recipients of stolen goods who receive
them at discounted prices. Who is to say that the gains do not
outweigh the losses ? The distribution of income is not a pure
public good although there have been highly problematic attempts
to characterize it as such [see Thurow(1971, p.328-329) and
Ng(1983,207-211) for a critique]. Buchanan's rejection of an
explicit social welfare function leaves a vacuum, as far as
distributional judgements are concerned, which he does not fill
with a meaningful alternative.
This paper makes it clear that the nub of the argument
could be presented, without doing it any great violence, in a
very short space of time. Indeed, there are two paragraphs (one
near the beginning and one near the end) which do so. The rest of
the material might be expected to flesh out the argument. This is
not the case; after all there is (quite deliberately) no
empirical evidence. So we might feel that the additional
material is irrelevant. It is not irrelevant once the primary
objective of persuasion is laid bare. The paper reflects an
intention to sustain the literary form in economics despite the
drive within the profession to alleged scientific status. The
essence of literary form is the use of rhetoric to attempt
persuasion.
NOTES
* I am grateful to Professor Murray Milgate for comments on an
earlier version of this paper.
1. A whole can of worms would be opened by debating the
definition of voluntary. A good example is to be found in the
debate on the use of the market to allocate bodily organs where
there is great disquiet about the poor selling crucial organs
whilst still alive [see Hilton(1990)].Buchanan desists.
2. The evidence on this is far from conclusive; see
Cameron(1988).
REFERENCES.
Becker,G.S.1968. Crime and Punishment: An Economic Approach.
Journal of Political Economy 76(2) 169-217
Becker,G.S. & Stigler,G.J.1977. De Gustibus Non Est Disputandum.
American Economic Review 67(1) 76-90
Buchanan,J.M.1964. What Should Economists Do?. Southern Economic
Journal 30 213-222
Buchanan,J.M.1973. A Defense of Organized Crime. in Rottenberg,S.
(ed.) The Economics of Crime and Punishment Washington American
Enterprise Institute. Reprinted in Andreano,R. & Siegfried,J.J.
1980. The Economics of Crime. Wiley,New York.
Cameron,S.1988. The Economics of Crime Deterrence: A survey of
Theory and Evidence. Kyklos 34 301-323
Cameron,S.1989. A Subjectivist Perspective on the Economics of
Crime. The Review of Austrian Economics 3 31-44
Cameron,S.1989a. On the Welfare Economics of Capital Punishment.
Australian Economic Papers 28(53) 253-266
Cameron,S. & Golby,D.1992. Public Goods and Policing. Economics
28 Pt.3. No.119 104-108 August
Congleton,R.D. 1988. An overview of the contractarian Public
Finance of James Buchanan. Pulbic Finance Quarterly 16(2) 131-157
Hahn,R.G.1972. Crime and the Costs of Crime: An Economic Approach
Journal of Research in Crime and Delinquency 9
Hylton,K.N.1990. The Law and Economics of Organ Procurement. Law
and Policy . 12(3) 197-224
McCloskey,D.1985. The Rhetoric of Economics University of
Wisconisn Press.
Ng,Y-K.1983. Welfare Economics . Revised Edition. MacMillan.
Rothbard,M.1973. For a New Liberty . MacMillan. New York.
----------.1977. Punishment and Proportionality. Ch.11. in
Barnett,R.E. & Hagel,J. 1977. Assessing the Criminal: Restitution,
Retribution and the Legal Process. Ballinger. Cambridge,Mass.
Samuels,W.J.1990.(ed.). Economics as Discourse. An Analysis of
the Language of Economists. Boston. Kluwer.
Sandmo,A.1990. Buchanan on Political Economy. A Review Article.
Journal of Economic Literature 28(1) 50-65
Stigler,G.J.1970. The Optimum Enforcement of Laws. Journal of
Political Economy. 78
Thurow,L.C.1971. The Income Distribution as a Pure Public Good.
Quarterly Journal of Economics 85 327-336
Usher,D.1986. Police,punishment and public goods. Public Finance
41(1) 96-114
Usher,D. 1987. Theft as a paradigm for departures from
efficiency. Oxford Economic Papers. 39(2) 235-252