Corporate crime: basic economics

Unlearning Economics says that capitalism gives us "institutionalized law-breaking":

Corporations have long history of force, fraud and theft...In a system based on private accumulation, they will use their profits to corrupt the legal system, hijack public funds, get the best lawyers, and make their operations as opaque as possible to avoid prosecution, no matter the charge. None of this is a bug of capitalism; it is a feature.

If this sounds like a lefty rant, it shouldn't. It's just elementary economics.

This tells us that firms supply things up to the point at which the marginal benefit equals the marginal cost. But this doesn't merely apply to the supply of goods and services. As Gary Becker showed (pdf) it also applies to crime. Companies (like individuals) will commit crime up to the point at which the benefit of doing so - higher profits - exceeds the cost. In the amoral world of econ 101, the cost is the penalty for being caught (criminal punishment plus loss of business from irate customers), multiplied by the probability of being caught*.

We should, then, expect there to be a positive level of corporate crime and bad behaviour: fraud, money-laundering, breach of health and safety laws, the silencing of critics and so on.

However, it's not just companies for whom the optimum level of crime is positive. The same is true for society as a whole, because the cost of detecting and prosecuting some crimes might exceed the social cost of their commission; there is a reason why the government doesn't employ the whole population as policemen. As David Friedman wrote:

Theft is inefficient—but spending a hundred dollars to prevent a ten-dollar theft is still more inefficient. Reducing theft to zero would almost certainly cost more than it would be worth. What we want, from the standpoint of economic efficiency, is the optimal level of theft. We want to increase our expenditures on law enforcement only as long as one more dollar spent catching and punishing thieves reduces the net cost of theft by more than a dollar. Beyond that point, additional reductions in theft cost more than they are worth.

But here's the thing. The relative cost of investigating corporate crime is very often high; 90 officers are employed by Operation Weeting, for example.If Stephen Green didn't know about HSBC's dealings with money launderers, what chance would the average plod have of finding out?

Given these costs**, we'd expect scarce policing resources to be directed towards lower cost activities such as arresting cyclists.

We would therefore expect companies to commit crime and the state to tolerate this, up to a point. You don't have to be a leftist to see this. You just need to know very basic economics.

* In a world where morality matters, we can add to the cost term a "psychic cost" of the sense of shame and guilt of doing bad things. But there's no reason, a priori, to assume that this psychic cost is so high as to prevent all crime.

** One caveat here is that public outrage about corporate crime might increase the benefits to the state of devoting more resource to its detection. But efficiency requires that such resources be sufficient to placate public anger, not that they be sufficient to prevent all crime.

Comments

[Luis Enrique]

this has nothing to do with "corporations" in particular does it? What here does not apply to firms in a market-socialist utopia or state officials in a communists state or whatever.

[Farmer Jack]

Your discussion shows why basic moral maxims like 'crime is wrong' or 'pollution is wrong' sit uneasily with fundamental economics. What you say about an optimal level of crime (for the criminal) and police spending (for society) apply equally to risky, wealth-creating but potentially polluting activities like resource extraction.

You put your finger on it, though, when you acknowledge that levels of public 'outrage' about crime will fluctuate and alter the equation governing the allocation of resources to punishment. We can decompose the disutility of crime into two elements: the direct social costs borne by the victim, and the more diffuse costs of living in a society where criminals are seen to get away scot-free. Who measures these second costs? What demand-finding mechanisms are there to determine the degree to which we collectively want to see white-collar crime chased down?

[Tim Worstall]

This tells us that firms supply things up to the point at which the marginal benefit equals the marginal cost.

As Luis E points out, this applies to all actors in any type of economy.

Nowt specific to capitalism about it.

[UnlearningEcon]

Luis and Tim's comments remind me of a debate I had a few days ago with a couple of people, where I pointed out that most criticisms of socialism tend to focus on the fact that socialism wouldn't be as good at being capitalism as capitalism.

Market socialism, it could be argued, is inherently contradictory for the reasons espoused by Louis. His idea of Stalinist style state-firms is similar, because they used wage labour.

The point of 'utopian' socialism is that people aren't behaving with the same motives as capitalism, either intrinsic or extrinsic. If, say, there were a low level of inequality, then fewer people would be able to do the lefty rant things that Chris quotes me saying, because they'd have less relative financial influence.

Of course people will always break rules a certain amount but I'd say capitalism exacerbates this.

[SR819]

I hate the way economists model issues like crime using their overly simplistic "cost-benefit" marginalist framework. As a sociologist we understand that crime doesn't just occur in a vacuum, but is influenced and moulded by deep seated socioeconomic and cultural factors that interact with the existing structure of society. Economists treat criminals as making a "choice" to commit crime, which fits well with the neoliberal ideology of taking personal responsibility for your actions (which they use to bash the "underclass").

Where in the economic model of crime is the influences of class, power relations, social conditioning and propaganda (benefit claimants are criminals, but corporate tax avoiders are not)? This is why the rest of the social scientists despise economics as a discipline. It strips away all relevant aspects of a particular topic, and what remains is a ridiculous conception of human motivations, and based on the behavioural assumptions imposed on homo economicus, you model his actions based on simple heuristics that bare no relation to the real world.

[SR819]

And UnlearningEcon's point about socialism not being as good as capitalism in terms of capitalist objectives is spot on, and is something the neoliberal economics profession choose not to get. This is why we get bogus criticisms about socialism that complain that it doesn't achieve allocative or productive efficiency, or that it doesn't offer consumer choice, that trade is restricted, that economic growth is disappointing etc.

Well, that is not the purpose of socialism. Only economists believe in infinite exponential growth in a world of finite natural resources. Socialists don't care about economic growth, the point of socialism is to help man achieve his true potential, unhindered by class divisions or social disadvantages. This self realisation of man is not dependent on consumer choice or economic growth, or efficient market production.

A socialist system is based on the mantra of "From each according to his ability, to each according to his need". The aim is not acccumulation and exploitation, two goals that capitalism is undoubtedly the market leader in.

[Farmer Jack]

@SR, I see no reason why these other factors influencing behaviour (e.g. stigma, fear of upsetting parents etc.) could not be expressed in terms of the utility functions of an economic model.

@Tim, theoretically the misalignment of private utility and social benefit is greater in capitalism than for more collective forms of ownership. Private firms will use the capital they accumulate to make their activities as opaque and resistant to regulation as possible. Like 'marketing' aimed at consumers, this can be understood as an attempt to prevent a market in information forming. So my sense (as opposed to Chris Dillow's, which may be different) is that it is the 'market', rather than 'socialist', part of 'market socialism' that promises a lower level of corporate crime than that tolerated by capitalism.

[Tristan]

@SR819

As a total layman when it comes to economics, I'd say that economics does take into account those influences - they alter the (perceived) costs and benefits.

No economist worth his salt would claim that such things do not affect choices made, but economists also tend to consider things in isolation, fixing other variables where possible.

As for choice - what else is it when there are multiple options and one is taken (chosen)? The failure of neo-liberal politicians is not to say people make choice, but to ignore the factors which lead to that choice (the power relationships, class etc).

[SR819]

You're right they could be incorporated into the model, but it's the same way economists incorporate altruism into models of utility maximisation. It makes the concept of utility maximisation pointless, because you can simply justify anything in terms of utility maximisation or (in terms of crime) include all sorts of factors into the marginalist cost-benefit computation. But this is not how real people behave, and it individualises concepts like class, culture, stigma when in reality they are interconnected.

[chris]

@ Luis, Tim - you're right, up to a point.
One might argue that the salience of the cash nexus under capitalism weakens moral codes and so reduces the shame/guilt cost of crime. This could be via the abundance effect:
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2008/07/crime-the-abundance-effect.html
Or it might be that the emphasis upon cash motives crowds out intrinsic motives.
But this is one for another day.

[UnlearningEcon]

Farmer Jack, SR819 is correct. Utility functions so broadly defined are meaningless and completely unfalsifiable.

[Steve]

Is there any description anywhere of how a true socialist system would resist these pressures? We've conceded that both market socialism and state socialism would also suffer from them, but we really need a convincing narrative for how a real socialist system would resist such pressures.

[Farmer Jack]

@SR, so your objection to economists' models is that people do not behave as they do on a balance of positive and negative utility, but because of social forces that are not well-expressed in subjective-utility terms? Is this connected to a preference for explaining social phenomena like crime as the interaction of large-scale forces, rather than as individuals' decisions?

@Unlearning, why is a utility function with multiple factors unfalsifiable? Is the problem that we can't measure or observe sub-factors, like fear of stigma in the case of disposition to commit crime? If we could observe all these inputs, would a multi-factorial model of subjective utility still be inappropriate? What if we could adjust factors for cognitive biases e.g. in the perception of risk?

[SR819]

@Farmer Jack, that's exactly it, yes.

[Jason]

SR819

"I hate the way economists model issues like crime using their overly simplistic "cost-benefit" marginalist framework."

I hate the way people make gigantic generalisations against millions of people, despite not actually knowing what they're talking about.

"As a sociologist we understand that crime doesn't just occur in a vacuum, but is influenced and moulded by deep seated socioeconomic and cultural factors that interact with the existing structure of society."

I would say that I hate the way sociologists love to point out the obvious and obfuscate with obnoxious and fundamentally uninteresting rhetoric, but I'm not as unbearably smug as you as to make such a gigantic generalisation.

"(which they use to bash the "underclass")."

More insane, unsourced, unjustified hyperbole.

"Where in the economic model of crime is the influences of class, power relations, social conditioning and propaganda (benefit claimants are criminals, but corporate tax avoiders are not)?"

Which economic model? I don't see any reason why any of these can't be included in an economic model. You seem to be attacking Chris for explaining how corporations might commit a crime because it is in their interests to. The fact that he didn't mention class or propaganda seems like an unbelievably mundane and trivial critique, he did nothing to actively exclude these factors as being a potential explanation, just offered a motivation for their crime.

"This is why the rest of the social scientists despise economics as a discipline."

I would say that almost everyone despises sociologists for their unbearable intellectual masturbation consisting of mostly non rigorous verbiage, but again.. generalisations and all.

" you model his actions based on simple heuristics that bare no relation to the real world."

Really? I don't think it's unrealistic to think of firms looking at the risks and rewards to crime, and choosing to commit crime based on these factors. I actually know people who have committed white collar crime (tax fraud); they obsessed about the risks in a meticulous fashion, Chris' approach seems to appropriately fit in here, whereas propaganda or class does not seem to offer an insightful explanations for his action in this case.

Of course this is just an anecdote, it can't match your... oh wait, you used literally nothing; not a single shred of evidence to support any of your claims, just rhetoric. You must be the worst ambassador for your discipline I have ever seen. Keep it up.

[SR819]

I wasn't attacking Chris at all, but the way economists model complex socioeconomic problems like crime in such a reductionist, atomistic manner which completely ignores the social context in which such phenomena is observed. If we followed the economists' way of modelling crime, it appears to occur in a vacuum, which is totally divorced from reality.

You mention sociologists point out the obvious, and yet economists don't seem to take into account the theories that sociologists have produced on topics that both disciplines study. If our insights are obvious and yet economists ignore them, what does that say about economics?

You claim that my line about bashing the underclass is unjustified hyperbole. I simply ask you to read any of the main newspapers and its frequent attacks against the "underclass" or "chav" population of the country. They may use coarser language, but the underlying philosophy is based on this idea that individuals make a concious choice to commit crime (promoted by economics), and therefore deserve all the opprobrium heaped on them by the right wing media. They, like economists like Becker, fail to point out that the so called "criminal underclass" are actually subject to many social and cultural pressures and have suffered immensely due to an unjust economic system, so in some ways are also victims.

The fact that you criticise sociology for intellectual masturbation is hilarious, given that same criticism is much more relevant for economics. Your discipline comes out with paper after paper using obscure, arcane mathematics to "prove" to yourselves that your theorems are actually correct if you assume about 100 different things. At least sociologists study topics that are relevant to people in the real world.

You mention "non rigorous verbiage". Well, perhaps our way of studying social phenomena is not rigorous, but neither are economists' mathematical models. The economist Yanis Varoufakis says this in his introduction to his blog,

"Quite clearly economics was only interested in putting together simplistic mathematical models. Worse still, the mathematics utilised were third rate and, consequently, the economic thinking that emanated from it was atrocious."

My final retort to your post is related to your belief that the concepts I mention (class, power relations etc) can be included into economic models. Let's ignore for the time being the fact that the way these concepts are included make the models unfalsifiable and therefore unscientific. A more fundamental point would be why, in the economics of crime literature, are these concepts not included if they are so easy to incorporate? IMO, it's probably because economists are simply in the pay of neoliberal corporate interests and therefore decide to self censor themselves so as not to upset their paymasters.

[Account Deleted]

Re "The relative cost of investigating corporate crime is very often high". But that high cost reflects the design priorities of the criminal justice system, not the intrinsic difficulties of that class of crime. There was a wealth of evidence of HSBC's criminality, not to mention whistle-blowers. Far more evidence than you'd get in a typical burglary.

If the police only recruited trained accountants and data analysts, you could expect the investigation of white-collar crime to increase and for its relative cost to decline. They'd probably still be competent at investigating burglaries as well.

The police in most countries focus on public order and property crime, with a few marginal obsessions over drugs and sex. That's a political choice, not the result of a cost-benefit analysis. Preventing riots and looting is deemed more important that preventing fraud or tax evasion, even though the latter has a potentially greater ROI.

The point then is not that capitalists are more prone to crime than state officials, but that the law is designed to turn a blind eye to the crimes of the powerful.

[Luis Enrique]

Chris,

Yep, there's no reason to think that the level of economic crime is constant under all kinds of economic organisation. I'm sure some systems are more prone to it than others. But I think certain varieties of capitalism, say Nordic style with strong social norms, might be amongst the lowest feasible crime levels. I don't think capitalism is necessarily any more prone to the sorts of crime u see discussion here.

[Jason]

SR819, I don't have time to respond to everything you said point by point right now, maybe later, but it seems to be attacking my generalisations against sociology, except I never said they were true, I made the point of saying that I don't believe them because unlike you I know better than to make sweeping generalisations I cannot prove.

You fail to appreciate that economics is actually a very diverse subject with many different approaches, most modern economic literature is empirical in nature, not some esoteric maths you decide to generalise it to (your 'proof' being the rhetoric of ONE economist). And the empirical nature of economics is doing rather well in most fields: http://ftp.iza.org/dp4800.pdf

I wasn't even aware there was an extensive 'economics of crime' literature, however the idea that economists socio-economic factors is just flat out false. For gods sake, my undergraduate econometrics project was an analysis of how inequality and unemployment can affect the levels of crime in a society; there was no marginal utility, it was a purely empirical paper.

I think that you attacking economists for having the audacity to say that "individuals make a concious choice to commit crime" is ridiculous, this is said by all sorts of people, it is said by cognitive science, there is nothing unique about it to economics, and its not even inherent to economics. The only thing unique is the extreme focus some sociologists might have on the malleable nature of humans in response to changes in society, completely ignoring human consciousness and action. And in no way does this add credence to any bashing of the 'underclass' in anyway, it does not add credence to the notion that they don't suffer themselves.

Lastly, you're rhetoric about 'neoliberal paymasters' is hilarious, are you actually a troll trying to adhere to the most vulgar stereotype of sociologists possible? The vast majority of economists are academics at universities, their 'paymasters' are the university administration.

[Frances Coppola]

The underlying assumption is the amorality of both those running corporations and those tasked with investigating crime.

Assuming that there are no moral reasons why corporate leaders should not commit crimes, then of course they will commit as much crime as they can get away with. In this respect they are no different from any other type of criminal. And if cost-effectiveness is the sole driver of those tasked with bringing criminals to justice, then of course they will not bother to investigate crimes where the anticipated return is less than the cost of the investigation.

The question of whether corporate leaders "should" be allowed to get away with crime is thus a question of morality and the social importance of the rule of law, not economics.

[Farmer Jack]

Would worker-owned collectives commit fewer crimes that private firms? The utopian answer is 'yes', because socialism would have reformed human nature or allowed its fundamental decency to emerge. However, to me this is too absolutely theoretical.

Another answer is more tentatively 'yes', but only because they would have amassed a level of capital consistent with greater efficiency and would have less to spend on obfuscation. Capitalist firms use their capital to maintain their dominance or monopolies. This is the sense in which their obstructiveness and tendency to crime is not merely the obverse of the priorities of the criminal justice system. A corporate fraudster will spend more on legal defence than a bike-thief. This makes the costs of investigating white-collar crime relatively high and effects a shift of police resources towards easier targets.

[UnlearningEcon]

FJ,

You have failed to realise that socialism is not trying to be capitalism. I touched on this and SR819 explained it more.

[Keith]

Surely this debate confuses crime with morality in an unrealistic way? Most misconduct by firms or their servants arise as a result of the central belief that greed is good. It is the Capitalist theory of uncle Milton Friedman that the social duty of firms is to maximise profits which explains why firms act badly and the state is often ineffective at promoting morality. The state itself often is infected by the same greed is good attitude. This assumption makes it hard for those who hold it to see their own action as wrong. A society that does not worship gain what ever you care to call it would be less prone to this. One of the ideological functions of market economics is to justify the idea that society benefits from allocation of resources mainly based on personal gain rather than some other method. This flies in the face of all the factual evidence of how for example banks and other financial organisations miss sell products repeatedly again and again through out economic history as a result of arrangements such as commission based pay systems. The same scandals keep happening and no one in public or private sector does any thing to stop it.

[Farmer Jack]

Unlearning, how have I suggested that socialism (or a market variant thereof) is trying to replicate capitalism? Isn't socialism also concerned above all with capital creation?

[UnlearningEcon]

"Isn't socialism also concerned above all with capital creation?"

It's not concerned with increasing capital accumulation, no. It's concerned with producing enough for everyone, though.

You say a lot of things about efficiency. I might agree that under capitalism, worker run firms might even be more inefficient. But under socialism producers would not be looking to constantly expand, and increase production and profit.

I'm not providing a blueprint. I'm just saying that if you want to critique socialism, 'it wouldn't be as productive/efficient as capitalism' is not the way to go about it.

[Ibrahim Zeradust]

Why not read this?
http://www.scribd.com/doc/101798027/The-Pseudoscience-of-Economics

[Jeremy Scott Wings]

As Luis E points out, this applies to all actors in any type of economy.

Nowt specific to capitalism about it.

[John Steinsvold]

An Alternative to Capitalism (if the people knew about it, they would demand it)

Several decades ago, Margaret Thatcher claimed: "There is no alternative". She was referring to capitalism. Today, this negative attitude still persists.

I would like to offer an alternative to capitalism for the American people to consider. Please click on the following link. It will take you to an essay titled: "Home of the Brave?" which was published by the Athenaeum Library of Philosophy:

http://evans-experientialism.freewebspace.com/steinsvold.htm

John Steinsvold

“Insanity is doing the same thing over and over and expecting a different result."~ Albert Einstein