Organized crime and the visible hand: A theoretical critique on the economic analysis of organized crime

Introduction

The illegal enterprise-model has become very popular in organized crime research. Illegal enterprise theory emphasizes the – sometimes remarkable – similarities between illicit activities and licit activities. It employs two key explanatory principles from economics: the model of ‘homo economicus’, the rational actor bent on his self-interest, and efficient markets, which co-ordinate the acts of these rational actors. Offenders are viewed as normal, rational, profit-oriented entrepreneurs, who are involved in activities that, although illegal, are driven by the same laws of supply and demand as legal activities. Some products and services have been criminalized by governments, such as drugs and prostitution, yet are still in high demand by some parts of the population; other products and services are subject to high taxes (e.g. cigarettes, oil and alcohol) or restrictions (e.g. import or export restrictions, quota and licences). According to economists, restrictions on supply do not eradicate demand, but merely alter market conditions for illegal entrepreneurs. Hence, to ban certain goods and services creates opportunities for criminal entrepreneurs to make a profit. In addition, EU taxes, VAT regulations and excises may result in a ‘price wedge’, which offers interesting opportunities to adventurous fraudsters (e.g. Levi, 2008; Passas, 1999; Van Duyne, 1993).

Several authors have used concepts from economics to explain behaviour in illegal markets (e.g. Block and Chambliss, 1981; Haller, 1990; Moore, 1987; Passas, 1999; Reuter, 1983; Schelling, 1965; Van Duyne, 1993). ¹ Although not the first application of the illegal enterprise perspective (e.g. Schelling, 1965), the best-known book is Peter Reuter’s (1983) Disorganized Crime. Illegality presents several problems to offenders: their contracts are not enforceable (as in legal business), illegal activities have to be concealed, people can be arrested and assets can be seized at any time. Due to these constraints of illegality, Reuter predicts that most criminal enterprises will be small and ephemeral. Reuter also uses several concepts borrowed from industrial economics (transaction costs and property rights theory) and concludes that, in illegal markets, small is beautiful and that illegal markets are characterized by competition rather than collusion. Reuter’s focus, however, is a limited one: he does not describe international criminal activities such as international drug trade or human trafficking, but very specific local markets regarding gambling, numbers, and loan sharking. Nevertheless, his book is lavishly cited in all sorts of contexts. By contrast, a venomous theoretical and empirical critique by Liddick (1999) is rarely cited.

In this article, I will argue that scientific progress can be made by distancing ourselves theoretically from the ‘under socialized’ perspective of illegal entrepreneurship. The shortcomings of the economic approach will be demonstrated by presenting findings from the Dutch Organized Crime Monitor (section one). These findings highlight social embeddedness, also in cases of transnational organized crime (section two), social relations and life events shaping involvement in organized crime and developments in criminal careers (section three), and manipulation and violence embedded in social relations (section four). These findings demonstrate that offender behaviour is not so much driven by market mechanisms (or the ‘invisible hand’), but by the ‘visible hand’ of social relations, and the ‘visible hand’ of manipulation and violence (section five).

Current Research

A basic problem in organized crime research is that sound empirical research is scarce and the empirical phenomena of research are ill defined: some researchers focus on long-established organized crime groups and the control of these groups over certain territories or economic sectors (protection and racketeering); some concentrate on complex, transnational illegal activities such as drug trafficking, human trafficking or fraud; and others restrict themselves to very local illegal markets, such as local drug dealing or gambling – topics that can all be captured by the broad umbrella term ‘organized crime’. Therefore, the history of organized crime research is not only the history of shifting theoretical perspectives, it is also the history of oscillating empirical phenomena that are at the forefront of public and scientific discussion: from the long-established dominance of Mafia groups in certain rural Italian areas and the threat of powerful Italian-American Mafia families in New York (e.g. Cressey, 1969), to the emergence of transnational organized crime in the 1970s and 1980s of the 20th century, involving large-scale drug trafficking, human trafficking, human smuggling and international fraud (e.g. Kleemans, 2007). During these periods, scientists have also continued studying various local markets of illegal products and services, ranging from drugs and prostitution to gambling, numbers and loan sharking (e.g. Reuter, 1983). These local illegal markets are also the most accessible research topics, whereas different phenomena mostly require (privileged) access to criminal justice sources, including the results of police investigations and statements of ‘defectors’.

The idea behind the Dutch Organized Crime Monitor is to collect solid empirical data on a wide cross-section of organized crime cases. The main sources for the Dutch Organized Crime Monitor are closed Dutch police files of criminal groups, often spanning a period of several years (for more information, see Kleemans, 2007). From 1996 to 2006, 120 large-scale investigations were systematically analysed (40 case studies per sweep). Each case study always starts with structured interviews with police officers and public prosecutors. After these interviews we analyse and summarize the police files (to which we have direct access). When describing and analysing these files, use is made of an extensive checklist. ² Unobtrusive police methods, such as transcripts of wiretaps and data obtained from police observations, and interrogations of victims and offenders, often provide a detailed picture of the social world of organized crime. Furthermore, it is important to note the absence of plea bargaining in the Dutch criminal justice system and the extensive use of wiretapping, which provides researchers with a lot of ‘unobtrusive’ evidence that can be checked by researchers themselves.

In the literature, we find a continually recurring discussion on whether organized crime should be defined in terms of characteristics of groups or of criminal activities (for an overview, see Fijnaut and Paoli, 2004). In the Dutch Organized Crime Monitor, organized crime is mainly distinguished from terrorism, corporate crime, group crime, and other types of crime by the characteristics of the groups involved. Following the Fijnaut research group (Fijnaut et al., 1998), groups are considered as organized crime groups when they are focused primarily on obtaining illegal profits; systematically commit crimes with serious damage for society; and are reasonably capable of shielding their criminal activities from the authorities. Shielding illegal activities from the authorities is made possible by using various strategies such as: corruption, violence, intimidation, storefronts, communication in codes, counter surveillance, media manipulation, the use of experts such as Notaries Public, lawyers and accountants.

Following three data sweeps, we collected a wide cross-section of 120 cases about various forms of organized crime. The strength of this data set is combining breadth with in-depth research, yet it should not be misinterpreted as a representative sample. As only intrusive policing techniques can shed light on a hidden phenomenon such as organized crime, any ‘complete’ or ‘random’ sample is inconceivable. Furthermore, any sample is in some way ‘selective’ and influenced by police priorities (as well as failures of criminal groups to escape police attention and shield their activities effectively). Therefore, the Dutch Organized Crime Monitor employs a ‘strategically selective sample’, paying attention not only to ‘traditional’ drug trafficking cases (cocaine, heroin and cannabis) (32 cases), but also to other – less frequently prioritized – phenomena such as synthetic drugs (production and export) (23), human smuggling (16), human trafficking (15), arms trafficking (six), car and motor theft (two) and fraud and money laundering (26). This way, we have collected a wide cross-section of cases regarding empirical phenomena which are covered by the broad umbrella term ‘organized crime’.

Several research findings of the Dutch Organized Crime Monitor speak directly to the central subject of this article, in a theoretical and empirical way. The case studies highlight empirical phenomena and mechanisms that can be discerned in our cases, yet are disregarded by the economic analysis of organized crime. From a theoretical point of view, these findings are very important in drawing attention to underexposed phenomena and mechanisms that are present in our data set and go beyond incidental case studies. For obvious reasons, we refrain from ‘quantitative’ statements, as the nature of the dataset makes this inconceivable. Nevertheless, these empirical findings underpin the theoretical thesis of this article in a meaningful way.

Social Embeddedness and Transnational Organized Crime

Social relations and social networks play a crucial part in many organized crime activities, as the financial stakes are high yet the conditions of co-operation are fundamentally different from licit business. Cocaine trafficking from Colombia to Europe may illustrate why this is different from common, legal trade. The economic logic is clear: a 300 kilo cocaine transport may yield approximately 16 million Euros on street level, while the purchase value has been only a fraction of that amount. However, this high value also presents the main problem: during this long journey, an illegal load of great value is on its way in an insecure and potentially hostile world. After all, the mechanisms that make conducting legal business easy are now absent: there is no stock exchange to buy or sell commodities, no contracts can be drafted, it is dangerous to pay through the official banking system, the cargo cannot be insured, and – in case of a disagreement – there is no official arbitration or administration of justice to which one can turn. How does the supplier get a guarantee of payment? Who suffers the consequences when the goods are seized? Who guarantees that transporters will not cheat and make off with the loot, pretending that customs have seized the load? Who prevents criminal investigators or competing offenders being tipped off? And who provides protection against the hazards of theft and fraud by other offenders? The difference with conducting licit business is huge, making building trust and curbing distrust a constantly recurring problem (see, for example, Gambetta, 2000; Von Lampe and Johansen, 2004).

The trust problem soon shows when we take a look at what happens when something goes wrong. This happens quite regularly, as is shown by the 120 large-scale criminal investigations, analysed in the context of the Dutch Organized Crime Monitor. ³ Purchased boats turn out to be unsuitable for their task or get in trouble through technical defects; ships put into the port later than expected or have already left when those who are to collect the load arrive; and sometimes it is unclear where the illegal load has been hidden, or the crew fails to get the smuggled goods ashore. In addition, unpredictability on the part of buyers plays a role. Fixed deals sometimes are cancelled at the last moment because a buyer is unsatisfied with the delivery location, the price or the quality of the drugs. On other occasions, buyers refuse to pay the (full) price because of a disagreement about price or quality. Finally, problems also frequently occur about loads that have gone missing. When a load goes missing, the trust problem comes to the fore in full. Conducting business in an illegal environment is no mean feat as it is, because lying and cheating is very alluring and offenders are aware of that. A missing load means that someone will have to pick up the cheque for it. However, it is difficult for offenders to differentiate between wilfulness, misunderstanding and incapacity. Has a package of cocaine, fixed under a boat, disappeared because it was not fastened well enough? Has it been seized? Or are senders, guardians or collectors cheating? Since big financial interests are at stake in a largely unregulated world, this kind of problem can escalate, ending in threats, kidnapping or violence.

Huge financial interests and the illegality of the activities are therefore very important ‘handicaps’. For this reason, social ties are vital. In economic science and sociology, increasing attention is paid to the essential role of social relations in the economy. Granovetter (1985) put forward the idea that, in normal economic transactions, problems of distrust are mitigated by the fact that these transactions are ‘embedded’ within networks of personal relations. Several sociologists and economists have elaborated upon this idea of ‘embeddedness’ (e.g. Burt, 1992, 2000, 2005; Buskens and Raub, forthcoming; Coleman, 1990; Granovetter, 1985; Guillén et al., 2002). These insights from the emerging field of economic sociology have also enriched the study of organized crime (see, for example, Bruinsma and Bernasco, 2004; Carrington, 2011; Kleemans and Van De Bunt, 1999; Morselli, 2005, 2009). Presently, not only ‘physical capital’ (money and capital goods) and ‘human capital’ (knowledge and skills) are examined, but the extra possibilities offered by ‘social capital’ for the attainment of particular economic goals are also studied. The rise of this ‘economic sociology’ is extremely relevant for the study of illegal activities.

Theoretically, social connections are important because co-operation is much easier when people have already known each other for some time, and know that they will meet again in the future. This way, they have information about each other and have already invested in their relationship. Furthermore, they know that present acts will have consequences for the future. They do not only deal with a ‘shadow of the past’, but also with a ‘shadow of the future’. This makes lying and cheating a lot less appealing. People must also take their reputation into account within social networks, because they are not only connected to one another but to a network of others (see for a review, for example, Buskens, 1999; Buskens and Raub, forthcoming; Gambetta, 2000).

The cases of the Dutch Organized Crime Monitor very often demonstrate that family, friends and acquaintances work together and provide each other with introductions to third parties. Offenders may find new opportunities through the use of their acquaintances’ resources, such as money, knowledge and contacts. Social ties also offer a solution to problems of co-operation in an environment dominated by distrust, suspicion and deceit. Offenders’ activities are thus much more often co-ordinated by the visible hand of social relations rather than by the invisible hand of market forces. After all, there are no stock exchanges or yellow pages, there are only people you know or do not know, and whom you either trust or mistrust. A fundamental aspect of criminal co-operation consists of searching for suitable co-offenders (Tremblay, 1993). Precisely this aspect is too often ignored in the criminological literature.

Many profitable criminal activities boil down to international smuggling activities – drug trafficking, smuggling illegal immigrants, human trafficking for sexual exploitation, arms trafficking, trafficking in stolen vehicles and other transnational illegal activities, such as money laundering and evasion of taxes (cigarette smuggling, European Community fraud, for example). Profitability is the major reason why ‘transit crime’ seems to be the main activity of many organized crime groups (Kleemans et al., 2002). This is true for drugs production, import and export, yet handsome profits can also be made by smuggling illegal immigrants and highly taxed goods (such as cigarettes, alcohol and oil), and from VAT-fraud and EU-fraud. Furthermore, in many developed countries, the opportunities for organized crime groups to get control of certain regions or economic sectors have always been quite low, while the opportunity structure for transit crime is excellent. Transit crime is profitable, but not easy. General ideas about the structure of social relations can also be applied to organized crime research. Social relations do not happen at random but often obey the laws of social and geographical distance (Feld, 1981): the closer people live, the more daily activities they have in common, and the less social distance exists between them, the more probable it is that ties will be forged between them. This produces clustering of people based on factors such as geographical distance, ethnicity, education, age and so on. The same kind of clustering exists within criminal networks. People, who have grown up together or who live in the same neighbourhood, may at a later date become companions in crime, whereas people sharing a similar ethnic background may also become members of the same criminal group.

Different parts of these networks, however, might be badly connected as a result of geographical and/or social barriers between different countries, between different ethnic groups and between the underworld and the licit world. These barriers produce ‘structural holes’ in networks that are difficult to bridge (Burt, 1992). For example, the main drug consumer markets are the United States and Europe, but there are few connections between Southern American cocaine producers and European or US drug importers. The illegal nature of criminal activities presupposes a high degree of mutual trust. Therefore, those offenders who are able to bridge these structural holes have all kinds of strategic opportunities to make a profit. Case studies from the Dutch Organized Crime Monitor show that offenders in such strategic positions often operate at an international or inter-ethnic level or somewhere between the underworld and the licit world: they provide ‘bridges’ between people in different countries, between people from different ethnic backgrounds and between criminal networks and the licit world (Kleemans, 2007; Kleemans et al., 2002). These offenders are the ones who make the necessary connections between networks that would otherwise remain apart. Because of the importance of trust in such activities, these connections are often forged through family ties or other strong social bonds. An example of how this works is a case from the Dutch Organized Crime Monitor about trafficking cocaine from Southern America via the Caribbean to the Netherlands. The vital link between the various countries was a man from the Netherlands Antilles, who was a ‘broker’ between Colombian suppliers and European buyers. His sister was married to a Colombian who occupied a fairly high position in a cocaine organization, which was mainly based upon family ties. The Antillean had been living in the Netherlands for a while, resulting in connections with Antilleans in the Netherlands who bought the cocaine and distributed it. Another old acquaintance was a native Dutchman, who shipped – with some friends – the cocaine to the Netherlands. Hence, ‘structural’ holes at a macro-level are bridged by social relations at a micro-level. These social relations at a micro-level are influenced by macro-factors such as migration patterns as well as individual factors, such as certain professions who give some people ‘privileged access’ to criminal opportunities (see next section). Economists, who conceptualize international smuggling activities as a product of market forces, simply miss the most important part of the story.

Social Relations and Criminal Careers

How do people get involved in organized crime? According to economists, anyone may enter a market, if benefits exceed costs. Often this choice is conceptualized as an individual, rational choice. Furthermore, the standard idea of recruitment draws a parallel to formal recruitment by legal organizations looking for personnel. Criminal organizations recruit outsiders who may move up in the hierarchy by proving their suitability. They start by doing a lot of dirty jobs and are ultimately rewarded. Behind this idea lies the assumption of a more or less static criminal organization (e.g. Cressey, 1969). Empirical research shows, however, that, much more often, the world of organized crime consists of criminal networks in which offenders may co-operate with one another in changing constellations (for a review, see for example, Carrington, 2011; Edwards and Levi, 2008; Morselli, 2009). Within these criminal networks there often are nodal actors, on whom many other offenders depend because of their money, knowledge and contacts. These nodal actors resurface time and again, in different criminal investigations and different collaborations. Still, other offenders may gradually become less dependent on these nodal actors because they accumulate money, knowledge and contacts for themselves, and subsequently develop increasingly more criminal activities of their own.

If we analyse starters in organized crime, the main research finding is that the job market for organized crime is not an open market. People involved certainly make choices, yet these choices are pre-structured, and the opportunities that present themselves are not presented to anyone. In the cases from the Dutch Organized Crime Monitor, four involvement mechanisms can be discerned, next to deliberate recruitment: social ties; works ties; leisure activities and sidelines; and life events (Kleemans and De Poot, 2008; Van Koppen et al., 2010).

Social Relations, Manipulation and Violence

Economic models do not only start with the inaccurate assumption of voluntary exchange. Many economists also add the assumption that costs and benefits can be measured on the same (economic) scale. This way, however, very important factors such as loyalty, fear and violence are often overlooked. A good example is research into human trafficking for sexual exploitation (for a review, see for example, Lehti and Aromaa, 2006; Zhang, 2009). Despite the fact that economists often describe prostitution and human trafficking as products of voluntary exchange, involuntary exchange is precisely what lies at the core of the offence of human trafficking. The 15 cases of human trafficking of the Dutch Organized Crime Monitor show that this involuntary exchange is often made possible by the fact that exploitation is embedded in multiplex social relations. Examples are men who become parasites on the prostitution activities of their female partners and human traffickers who gradually move vulnerable girls into (forced) prostitution through a perverted relationship characterized by a combination of grooming, bullying and violence. The ‘lover boy’ phenomenon is not a fabrication of the police or the media, but describes in fact a basic mechanism of the offence of human trafficking: all kinds of exchanges occur, yet the exchange is unequal and the manipulation of social ties is the key element. Offenders have quite a lot to offer: large muscles, good looks, a story about a better future (or a future that can’t be worse than the one with a former boyfriend), and sometimes very practical things, too, such as a journey to a safe and rich western country, a place to stay and a place to engage in prostitution. Yet, whatever the start of the relationship, human trafficking often ends the same: women cannot leave the relationship or the situation into which they have been manoeuvred, or only at a very high price. Offenders are aware of that. This explains why, in this context, free will is a very relative concept, and why victims of human trafficking sometimes do not wish to be ‘liberated’ by the police and the judiciary at all. Even when women have fallen victim to serious violence, it often is only with great difficulty that they can be persuaded to report it (see, for example, Helfferich et al., 2011). In court, they frequently change or revoke the statements they have made earlier. With all due respect to economists, it appears that they have little to say about these phenomena. That is so not only because this is about the manipulation of multiplex social relations, but also because it involves an element in people’s considerations that economists have difficulty dealing with: loyalty; fear; the threat of violence; actual violence; and the prospect of an early death, one’s own or that of one’s loved ones (see, for example, Amir, 1995; De Haan and Loader, 2002). With some people one should avoid quarrelling; the consequences they threaten you with, violence or death, too often turn out to be real options. There is also an effect when the threats are never actually carried out.

This is very different from ‘game theory’ and experiments that are often carried out to support claims about human behaviour (for a review see McCarthy, 2002; Wittek et al., forthcoming). These experiments have provided us with many insights into human behaviour under reasonably normal circumstances, but they do not tell much about human behaviour under more exceptional circumstances. They frequently consist of very innocent games that must be executed on payment by equally innocent students in laboratories, under the supervision of their own instructor. The first experiment is yet to come in which students get weapons and the permission to use them, or in which they get the opportunity to coerce other players to co-operate or to punish them through threats or physical violence. For good reason, one of the best-known experiments in criminology, the Stanford Prison Experiment, was prematurely terminated because the experiment was too realistic, causing students who played being guards to actually start using the power they had over fellow students who played being prisoners (e.g. Zimbardo, 2007). Hence, manipulation and violence, embedded in social relationships and social interaction, is another key element that is missing in the economic analysis of organized crime. It is not in the economic models and it cannot be modelled in the ways in which economists prefer to model human interaction.

Conclusion

It is clearly not the intention of this article to announce the end of the economic study of crime. After all, many good things have been accomplished in these areas, too. However, it is very important to raise the degree of realism of research conducted in these fields. Such realism starts with taking some empirical insights into the phenomenon of organized crime seriously and taking that into account from the beginning. First, the vital importance of social relations for the execution of transnational, illegal activities. Second, the fact that pre-structured options can explain at least as much as choice itself can. Not everyone is the same or is in the same position. Although everybody is a consumer and may become a shoplifter, not everybody has the option to become involved in or become successful in organized crime, not even all criminals. Third, the nature of these criminal activities distinguishes them from ordinary, ‘economic’ market transactions. The handicap of illegality has been mentioned before, next to the large financial interests at stake and the salient role played by trust in the successful execution of these offences. Fourth, there is the role played by manipulation and violence. It pays off to manipulate, threaten, lie and cheat, and offenders are aware of that.

In conclusion, there is nothing wrong with the assumption that economic motives may explain criminal activities. Nor is there anything wrong with the assumption that people make choices. There is something wrong, however, with the assumption that the actions of people involved in organized crime are co-ordinated by an invisible hand. In essence, organized crime is about criminal co-operation under difficult circumstances. Under such circumstances, the visible hand of social relations, and the visible hand of manipulation and violence is much more important. This means that the theoretical foundations of the economic analysis of organized crime can be criticized in a fundamental way, as two key explanatory principles, the model of ‘homo economicus’ and ‘efficient markets’, do not seem to fit the empirical phenomena that are to be explained.