Tag Archives: institutions

Government by gang

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America has more prisoners, some 2,240,000, than any other nation on earth – only China gets anywhere close; of the total, there are about three African Americans or Hispanics for every white. All round, the American criminal justice system is an ugly scar on the nation. President Obama said as much when he visited a prison last week, the first sitting US President to make such a visit.

David Skarbek’s [amazon_link id=”0199328501″ target=”_blank” ]The Social Order of the Underworld: How Prison Gangs Govern the American Penal System[/amazon_link], is a fascinating account of what happens inside the country’s huge and violent prisons. It uses the analytical tools of institutional economics – notably Douglass North’s and Elinor Ostrom’s explanations of how groups collectively organise themselves – to probe the internal gang-run pecking order in prisons, their drugs-based economies, and their links to external gang activity.

[amazon_image id=”0199328501″ link=”true” target=”_blank” size=”medium” ]The Social Order of the Underworld: How Prison Gangs Govern the American Penal System[/amazon_image]

The bottom line of Skarbek’s analysis is that “gangs thrive because of a demand for governance.” He traces the change from a prison social order based on conformity to social norms (the ‘convict code’), before the 1970s, to one run wholly by the gangs, with clear hierarchies and detailed rule books. Loyalty to the gang – all race-based – has to be total, on pain of death, and life-long. The gang structures connect those in prison to the outside drugs economy as well. The trigger for this shift in social order was the big increase in the prison population from the mid-1970s: “Norms will be effective at providing governance when the inmate population is relatively small, but as it grows norms will break down.” In addition to the size factor, the growth in the prison population meant a big increase in the proportion of new, inexperienced prisoners who did not know the norms, and many of them younger men who did not care, and were often more violent. Inmate violence rose dramatically in the early 1970s.

Prison officials were unable – in the large new facilities being built or in the old and increasingly over-crowded ones – even to observe what was happening, never mind control it. The gangs filled the governance vacuum. “Gangs are quasi-governments.” (Skarbek also quotes Will Baumol’s reversal of the point – governments are quasi-gangs.) What’s more, the gangs play the community assurance role in the contraband trade that has been documented among other trading communities – by [amazon_link id=”0521480442″ target=”_blank” ]Avner Greif[/amazon_link] for example. “All members of a gang are responsible for each member’s actions.” Somebody who cheats on a deal will be punished by his fellows.

Interestingly, there are no gangs in female prisons, and women’s prisons are not racially (self-)segregated either. Skarbek allows the absence of testosterone to play a role, but argues that the main explanation is that women’s prisons are much smaller and with far fewer women incarcerated. The social order that emerges there is sorting into small ‘families’.

The book ends with some wider reflections on the importance of understanding informal economic and social institutions. I couldn’t agree more. A third of the world’s population live in countries with collapsing states. Governments are often ineffective when they exist. The world’s shadow economy is huge. Even in well-governed, stable states, there are swathes of economic life that do not touch government. “To understand aggregate economic and social outcomes, we must understand the extent to which people rely on extra-legal governance.” Inside America’s prisons, there is a formal governance vacuum but economic exchange thrives and the violence is strictly controlled by the gang leaders.

From institutional economics, the conditions for informal governance to be effective are known: enough social or cultural homogeneity; small enough for reputation to leverage good behaviour; simple, easy-to-monitor economic exchanges, with stakes that are not too high; high self control, patience; and repeated exchanges. Yet as Skarbek shows even in the unpromising conditions of the prison world, effective governance can emerge.

How could America reform its prisons and reduce the power of the criminal gangs? Skarbek suggests making prisons smaller and safer, and incarcerating far fewer people. The unwinnable “war on drugs” and tough mandatory sentencing fuelled the increase in prisoner numbers, which created the power of the gangs.

This is a terrific book. Along with Diego Gambetta’s [amazon_link id=”0691152470″ target=”_blank” ]Codes of the Underworld[/amazon_link] (& his earlier [amazon_link id=”0674807413″ target=”_blank” ]The Sicialian Mafia[/amazon_link]), it is a model example of how to use economic analysis to highlight the illegal world, without falling into the trap of economic imperialism. [amazon_link id=”B00NBDJG76″ target=”_blank” ]The Social Order of the Underworld[/amazon_link] would be a great case study for a course on institutional economics. It is also a must-read for anyone concerned about America’s absolutely shameful record on criminalising and imprisoning young, non-white men.

Recent robot round-up

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I’m looking forward to reading Martin Ford’s [amazon_link id=”0465059996″ target=”_blank” ]The Rise of the Robots[/amazon_link] – it gets a good review in the FT today. Edward Luce calls it “well researched and disturbingly persuasive.”

[amazon_image id=”0465059996″ link=”true” target=”_blank” size=”medium” ]Rise of the Robots: Technology and the Threat of a Jobless Future[/amazon_image]

I’m still a robo-sceptic in the sense of thinking there is nothing inevitable about the employment and income distribution outcomes of skill-biased automation. It’s technological determinism to think otherwise, as the underlying technological waves are channelled through economic and political institutions. That’s not to say we shouldn’t be concerned. After all, there was a wave of automation in manufacturing in the late 1970s/early 1980s and the social consequences of that were devastating – the institutions handled the transition very badly.

There is an interesting recent (free) e-book collection of essays (including one of mine) from the IPPR, Technology, Globalization and the Future of Work. Also this recent paper, Robots at Work, by Georg Graetz and Guy Michaels. They find in a panel of data across industry in 17 countries, robotization increased total factor productivity and wages, although with some adverse effects on hours worked by low-skilled workers.

The puzzle of profit sharing (not)

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After I posted recently about the new book, [amazon_link id=”0691159475″ target=”_blank” ]Climate Shock[/amazon_link], by Gernot Wagner and Martin Weitzman, Frank Koller (author of the excellent book [amazon_link id=”1610390539″ target=”_blank” ]Spark: How Old-Fashioned Values Drive a 21st Century Corporation[/amazon_link] about Lincoln Electric) alerted me to an earlier (1986) book by Martin Weitzman, [amazon_link id=”B000YB7SP0″ target=”_blank” ]The Share Economy[/amazon_link]. This argues for linking wages to the success of the business – profit sharing. Frank wrote to me that recovering from prolonged slow growth: “[I]s only possible in an environment where employees can trust that over the long term, as they share with management in the firm’s ups and downs, everyone will bear the risk and rewards equally. That kind of trust is pretty rare, of course. It’s at the heart of the system I explored in my book about Lincoln Electric and others with no layoff policies.”

[amazon_image id=”0691159475″ link=”true” target=”_blank” size=”medium” ]Climate Shock: The Economic Consequences of a Hotter Planet[/amazon_image]  [amazon_image id=”1610390539″ link=”true” target=”_blank” size=”medium” ]Spark: How Old-Fashioned Values Drive a Twenty-First-Century Corporation: Lessons from Lincoln Electric’s U[/amazon_image]  [amazon_image id=”B000YB7SP0″ link=”true” target=”_blank” size=”medium” ]The Share Economy : Conquering Stagflation / Martin L. Weitzman[/amazon_image]

Many others have noted that this was of course Henry Ford’s great insight when he doubled the pay of (some of) his workforce – although he had to battle a lawsuit from his minority shareholder Dodge, as they argued it was damaging to shareholders’ interests to pay workers more and invest more in the business. (Ford lost the case, but bought them out.)

It’s interesting in political economy terms that profit sharing is so rare, despite the reasonable amount of economic evidence that it does increase productivity and profitability. The one UK example always given is John Lewis, a hugely successful business, but I can’t think of any others of large scale. Does anybody have an explanation other than short-sighted greed?

Rogues and capitalists

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“The whole life I place before myself is money, money, money and what money can make of life,” says Bella in Dickens’ [amazon_link id=”B00ES25UCY” target=”_blank” ]Our Mutual Friend[/amazon_link]. The Victorian novelists wrote a lot about money, not just Dickens, but Mrs Gaskell (remember the bank failure in [amazon_link id=”0199558302″ target=”_blank” ]Cranford[/amazon_link], the exigencies of factory life in [amazon_link id=”0141199725″ target=”_blank” ]Mary Barton[/amazon_link]), George Gissing ([amazon_link id=”0141199938″ target=”_blank” ]New Grub Street[/amazon_link], [amazon_link id=”1491261005″ target=”_blank” ]The Whirlpool[/amazon_link]), Trollope ([amazon_link id=”1853262552″ target=”_blank” ]The Way We Live Now[/amazon_link]) and, across the Channel, [amazon_link id=”0140440178″ target=”_blank” ]Balzac[/amazon_link] (famously referred to by Thomas [amazon_link id=”B00I2WNYJW” target=”_blank” ]Piketty[/amazon_link]), [amazon_link id=”0140444300″ target=”_blank” ]Hugo[/amazon_link], [amazon_link id=”0199538697″ target=”_blank” ]Zola[/amazon_link].

Bella’s line is quoted in Ian Klaus’s [amazon_link id=”0300181949″ target=”_blank” ]Forging Capitalism: Rogues, Swindlers, Frauds and the Rise of Modern Capitalism[/amazon_link]. An irresistible title. The book gives an account of the essential role played by trust as capitalist markets developed through the century:

“Here is a fundamental point about free market capitalism and trust within it: without social exclusion or extensive processes of verification, trust is hard to come by. Whereas other risks could be hedged or managed through new assets or new types of insurance, the risk of fraud became more prevalent as the market expanded. Simply put, trust was sometimes a market inadequacy but always a market necessity.”

[amazon_image id=”0300181949″ link=”true” target=”_blank” size=”medium” ]Forging Capitalism: Rogues, Swindlers, Frauds and the Rise of Modern Finance (Yale Series in Economic and Financial History)[/amazon_image]

This central argument is illustrated through a series of brilliant stories about both the evolution of new assets and commercial relationships but also about a series of colourful rogues and swindlers. They played on the importance of reputation to pull off their confidence tricks; in a kind of arms race, new methods of verifying information were devised, such as audits, or detailed prospectuses –  and new audacities were developed by the rogue fraternity. We ended with the modern system of ‘a series of overlapping institutions’ authenticating transactions.

The book starts with Adam Smith’s [amazon_link id=”0140432086″ target=”_blank” ]Wealth of Nations[/amazon_link], noting its pairing with the [amazon_link id=”0143105922″ target=”_blank” ]Theory of Moral Sentiments[/amazon_link]. It ends with Friedrich Hayek’s [amazon_link id=”0415253896″ target=”_blank” ]The Road to Serfdom[/amazon_link], a hymn of praise to markets, arguing that it has to be read alongside [amazon_link id=”041540424X” target=”_blank” ]The Constitution of Liberty[/amazon_link]. Klaus writes: “The greatest intellectual salesmen of free market capitalism all supposed the market would be buttressed by morality. You could not possibly unleash the power of the one without the support of the other.” Unfortunately, of course, that’s just what happened in every period of turbulence in capitalism’s history, including our most recent. Now, just as in the early Victorian era, reputation is everything – because morality and institutions have let us down.

[amazon_image id=”0140432086″ link=”true” target=”_blank” size=”medium” ]The Wealth of Nations: Books I-III[/amazon_image]  [amazon_image id=”0143105922″ link=”true” target=”_blank” size=”medium” ]The Theory of Moral Sentiments (Penguin Classics)[/amazon_image]  [amazon_image id=”0415253896″ link=”true” target=”_blank” size=”medium” ]The Road to Serfdom (Routledge Classics)[/amazon_image]  [amazon_image id=”041540424X” link=”true” target=”_blank” size=”medium” ]The Constitution of Liberty (Routledge Classics)[/amazon_image]

One final thought: will new technologies help bridge the gap? Dave Birch’s [amazon_link id=”1907994122″ target=”_blank” ]Identity is the New Money[/amazon_link] suggests the combination of ubiquitous mobile and social media means they might. Social connection, perhaps asset ownership and provenance, can in principle be verified now in a way the Victorians couldn’t have dreamed of.

[amazon_image id=”1907994122″ link=”true” target=”_blank” size=”medium” ]Identity Is the New Money (Perspectives)[/amazon_image]

Institutions and droughts

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Reading about the Californian drought in today’s Observer, I wondered what Elinor Ostrom would have made of it. The drying up of bore holes used in the agricultural lands of central California is discussed as a problem of simple over-use, along of course with the absence of adequate rains. Ostrom would have pointed out, though, that it is also an institutional problem. Her dissertation was on collective arrangements for managing scarce water supplies in California, and she did much subsequent work on irrigation and water management arrangements. I don’t know anything about the current institutions managing water supply, but am willing to bet they have changed a lot since the late 1940s and 50s.

Ostrom’s second main area of study was the policing of metropolitan America, something else much in the news lately that could have done with her insight. She overturned the prevailing wisdom that large, centralised police departments were most efficient. “For patrolling, if you don’t know the neighborhood, you can’t spot the early signs of problems, and if you have five or six layers of supervision, the police chief doesn’t know what’s occurring on the street,” she said. But centralisation in areas of policing like dispatch or forensic laboratories made sense to take advantage of economies of scale. Again, it would have been good to hear her analysis of what has gone wrong in those police departments that enter neighbourhoods as if they’re an occupying force.

[amazon_image id=”0521405998″ link=”true” target=”_blank” size=”medium” ]Governing the Commons: The Evolution of Institutions for Collective Action (Political Economy of Institutions and Decisions)[/amazon_image]   [amazon_image id=”0691122385″ link=”true” target=”_blank” size=”medium” ]Understanding Institutional Diversity (Princeton Paperbacks)[/amazon_image]   [amazon_image id=”1558151680″ link=”true” target=”_blank” size=”medium” ]Crafting Institutions for Self-governing Irrigation Systems[/amazon_image]

Anybody who still thinks the importance of institutions is exaggerated should consider access to electricity: a late 19th and early 20th century technology still not available to all in many countries – even some countries that electrified many decades ago can regress in the availability of power, as power cuts and brownouts in places from California to Italy demonstrate.