Some Basic Thoughts on the Nature of Organized Crime: Part 2

In the last blog entry, I highlighted the differences between ordinary profit-driven crimes and those labeled “organized”. The main characteristic of the latter is that it seeks to dominate a specific market for illegal goods. In order to maintain constant presence on the market, a criminal organization needs some sort of a structure and personnel. From this perspective, it is not surprising that it is commonly assumed that organized crime resembles legal business entities both in behavior and structure, and that is why so many authors talk about some McMafias, Crime Inc. etc. However, a more careful analysis reveals that criminal “enterprises” are in fact very different animals to legal businesses, an approach put forward by R. T. Naylor and presented in this blog.

The most important problem with the with seeing criminal “firms” as similar to legal firms, is that the theory of profit maximization does not actually explain how they behave. In fact, even legal businesses do not do everything to maximize profits. While profit is certainly the main reason why organized crime exists, most of the criminal organizations tend to adhere above all to the principle of risk minimization. Hence, unlike a legal firm, a criminal enterprise will seek to increase the level of intermediation, to reduce the risk of the “entrepreneur” being caught by the authorities. Similarly, unlike a legal business, a criminal one is more likely to “fall” i.e. be destroyed by the authorities, when it grows bigger and when it expands beyond a very small territory. Indeed, if organized crime really was run by large Hollywood-style quasi-corporations, it would be much easier for the governments to get rid of them. The uncertainty inherent to the illegal business, makes illegal firms adopt a rather short time-horizon for its operations unlike the legal corporations that are much more likely to assume that they will be in the market for a long time. Furthermore, unlike legal firms, illegal businesses cannot count on any formal property rights protection and hence faces the constant risk of losing its assets (either to the authorities or to other criminals). Naturally, this makes such “companies” much less likely to stockpile resources for some further investment.

Hence, contrary to popular fears and imagination, criminal enterprises operating in more or less functional states hardly resemble legal firms. While, it is true that their actions are determined by market forces, their methods of operation and priorities are very different. This reality should be finally recognized by policy makers and law enforcement agents fixated on fighting “big crime”. What we need is a better understanding of criminal markets rather than criminal groups. Without this understanding, we would only be addressing the symptoms rather than the systemic causes of transnational crime.