Book club_27 January 2016
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The economics of crime examines criminal behavior through an economic lens, viewing crime as a choice influenced by incentives and sanctions. Economists have found that for most street-level drug dealers, the work pays less than minimum wage, promotion opportunities are extremely rare, and the risk of death is high. While crime rates have substantially fallen in the UK in recent decades, defying public perceptions, economics research seeks to understand why through analyses of factors like policing levels, incarceration rates, and economic opportunities.
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Book club_27 January 2016
- 1. The economics of crime Book Club Irene Dell’Orto Wednesday 27 January 2016
- 2. Introduction Structure of the session BBC News: «Crime in England and Wales falls to new record low» The Guardian: «Crime rate in England and Wales falls 7% to lowest level since 1981» Brief history of the economics of crime The enigma of falling crime rates in the UK Does crime pays? The economics of crime The economic model of crime stresses the trade off between legitimate and illegitimate activities and the role that incentives and sanctions can play in affecting crime decisions for individuals. What have economists contributed to our understanding of criminal behaviour and crime control? "Freakonomics" author Steven Levitt presents data on the finances of drug dealing. Contrary to popular myth, he says, being a street-corner crack dealer isn't lucrative: It pays below minimum wage. And your boss can kill you.
- 3. The enigma of falling crime rates UK’s ‘riddle of peacefulness’ Statistics show that there has been a substantial fall in rates of property theft and violent crime in the UK – what BBC home editor Mark Easton has labelled the country’s ‘riddle of peacefulness’. Public perceptions of crime rates and discussions in the popular media tend to suggest that crime is a growing problem in the UK. Yet the statistics tell different story: crime has fallen according to both the measure officially recorded by the police and the measure based on ‘crimes committed’, as reported by individuals in the British Crime Survey. Figure 1. Long-term trends in crime incidents in E&W Figure 2. Trends in crime since 1981, Crime Survey How can economics help out understanding of criminal behaviour and crime control? Source: ONS, number of incidents (million) Source: Crime Survey for England and Wales, number of offences (million) 1981 20101990 2000 20 15 10 5 0 25 20 15 10 5 0 1990 20001981 2010 Property crimesTotal crimes
- 4. A short history Economists’ first steps Jeremy Bentham Adolphe Quetelet 1789 Sur l‘Homme et le Developpement de ses Facultés A Belgian statistician and sociologist who was the first to base observations on data and statistical approach. E.g. Initial description very predictive age- crime relationship from court appearance data Utilitarian approach of the Principles of Morals and Legislation • Criminal law should be subject to the principle of “the greatest happiness of the greatest number” (definition of utilitarianism) • Every human act should be first evaluated in terms of whether it will cause pleasure or pain • To deter a crime, the amount of pain derived from the forbidden act should be greater than the amount of pleasure 1835 A simplistic but common understanding of crime is that the population can be divided neatly into two groups: good guys and bad guys. In this view, the bad guys commit crime unless they are incapacitated, and the good guys are reliably law abiding. Figure 3. Number of crimes (1826-1844, France) 0 10 20 30 40 50 Age 16 25 35 45 55 65 75
- 5. A short history The legacy of Gary Becker Gary Becker Crime as a rational choice Becker was first to apply economic modelling to understand a lot of human behaviour which may at first not appear rational: e.g. marriage, children, discrimination, crime (Nobel Prize 1992). The economic model of crime shifts the focus from character to the choices available to individuals. While certain aspects of character (or what economists are inclined to call ‘preferences’) are surely not irrelevant, criminal activity represents a choice or set of choices that is available to everyone. Criminal behaviour results from individual choices influenced by perceived consequences. 1968 Steven Levitt 2004 Recent developments New generation of economists apply econometric methods to investigate all kinds of predicted of economic relationships in all kinds of settings. E.g. Crime drop was really unexpected and most researchers were expecting things to get worse in 1990s Figure 4. Homicide rate (1950-2001, US)
- 6. Regional (west side) leader Local leader (franchisee) Does crime pays? The freakonomics of drug dealing Organised crime is Britain's fourth-largest industry with an annual turnover in excess of £20 billion. It's all very well knowing that you can buy a kilo of cocaine in Colombia for £2,000 and sell it in London for nearer £40,000 but unless you have the connections to buy the stuff and bring it into the country, it's a business idea that will never get off the ground. But does crime really pays off? Steven Levitt compares the organizational structure and the salary of drug dealing gangs to McDonalds and consulting firms. How likely is a promotion? Drug operations have roughly 3,000 street level salesmen but only 16 gang leader. The odds of promotion are only 0.005%. Foot soldiers Board of directors Regional (south side) leader Local leader (franchisee) Figure 5. The organizational chart of a crack gang Treasurer Local leader (franchisee) Street salesmen Wholesale leader
- 7. Does crime pays? Findings $20 $30 $40 $50 $60 $70 $10 $0 Gang leader (1 per gang) $24-$62 Officers (3 per gang) $5 Street level salesman (25-75 per gang) $3.5 Rank & file (60-200 per gang) -$50/mo 1) Most street drug dealers make less than minimum wage. Very few executives and upper level managers prosper from the work of 1000s of minimum wage or low wage workers. 3) Finally, the chance of being killed is 1 in 4 (7% death rate per year), higher than being a year on death row (2%) or a year as a soldier at war (0.5%). Figure 7. Sentences for selling drugs 20 30 Life 1st offence 2nd offence 3rd offence 0 10 $45 $60 $75 $0 £30 $15 10 20 Life Maximum fines in $ millions Years in prison $50 $75 $75 2) Dealing drugs is getting more risky. In 2010 there were 80% more arrests for drug possession or use compared to 1990. Figure 6. The distribution of wages (hourly rate)
- 8. Bibliography & suggested readings • Gary Becker (1968), Crime and Punishment: An Economic Approach, Journal of Political Economy 76 • Mirko Draca, Stephen Machin and Robert Witt (2011), Panic on the Streets of London:Police Crime and the July 2005 Terror Attacks, American Economic Review • Mirko Draca (2013), The UK’s Riddle of Peacefulness: What Explains Falling Crime?, CentrePiece • Steven Levitt (1997), Crime and police, American Economic Review • Steven Levitt (2004), Understanding Why Crime Fell in the 1990s, JEP • Steven Levitt (2005), Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, William Morrow • Stephen Machin and Olivier Marie (2011), Crime and Police Resources: The Street Crime Initiative, Journal of the European Economic Association • Stephen Machin and Costas Meghir (2004), Crime and Economic Incentives, Journal of Human Resources • Olivier Marie (2010), Reducing Crime: More Police, More Prisons or More Pay?, CEP Policy Analysis No. 12
Editor's Notes
- Discussion How can we explain the falling crime rates in UK? What have economists contributed to our understanding of criminal behaviour and crime control? Brief history of the economics of crime Case study: does crime pay? The ‘Economics of Crime’ field is concerned with investigating two related topics from an economic angle: Can we explain individual criminal participation as any other economic decision making behaviour? What are the most efficient policy tools available to reduce offending at the lowest cost to society?
- Although most people don’t think so, crime in England and Wales has been falling since it peaked in 1995. There were substantial falls in crime until 2004/05. From then until 2009/10, crime decreased more slowly. Over the last three years crime levels have stabilised. Since then there have been steady declines and the year ending March 2015 CSEW showed reductions of over 60% since the mid-1990s. This trend is consistent with that seen in many other countries. Particularly notable is the fall in property crime by around 40-50% between the late 1990s and the late 2000s. While changes in record-keeping make it difficult to pin down long-run trends in violent crime, there were still very clear drops in the late 2000s.
- History of economics of crime 1/2 Of course, social scientific study of crime was well established by the time of Gary Becker’s contribution. Prior to that, from the 1920s, the dominant disciplines were sociology and psychology, and that continued as criminology departments and schools were established in the post-war period. Becker chose to bypass rather than engage with that tradition, stating that ‘a useful theory of criminal behaviour can dispense with special theories of anomie, psychological inadequacies, or inheritance of special traits and simply extend the economist’s analysis of choice.’ Economists were initially not so welcome in criminology and, for the most part, were unconcerned, feeling that they had little to learn from the ‘natives’. More recently, that separation between economics and criminology has begun to break down, an encouraging trend that can be traced in part to the growth of multi-disciplinary public-policy programmes and think-tanks.
- Crime as a rational choice Becker was first to apply economic modelling to understand a lot of human behaviour which may at first not appear rational: e.g. marriage, children, discrimination, crime (Nobel Prize 1992). Therefore, the choice of whether to commit crime is driven by the consequences, which differ among individuals depending on the opportunities available to them. Example of the parking ticket at the University. People with something to lose are less likely to view criminal participation as attractive, and crime reduction can therefore be achieved by influencing the life opportunities of potential offenders. However, the economic focus on choices and consequences does not preclude the possibility that character is also important in influencing criminal involvement. Efforts to rehabilitate criminals may focus on either increasing the quality of legitimate opportunities (typically by improving human capital or clearing away barriers to earning a legitimate living) Economic approach used to test crime fighting policies with assumed effects on crime not rigorously tested. - Major problem to measure causal relationship rather than correlation is endogeneity or reverse causality: Countries with low prisoner numbers per population usually have lower crime rates so incarceration does not work? Areas with more crimes have more police officers which lead some research to conclude that police increase crime!? - Solution is to find event which caused a change to the crime fighting policy of interest which was independent of crime. Two classic methodologies to solve endogeneity problem: Differences in Differences: areas or individuals are treated with a policy but not comparable others, across time (The SCI example) Instrumental Variables: changes are brought about by third factor not aimed at fighting crime (elections and police numbers; birth control and fertility decision; school leaving age laws and qualification level; age and sanction policies…)
- Various researchers have asked, “Does crime pay?”, both generally and for drug dealing in particular. So far as home-grown talent is concerned, in the 1960s and 1970s it was simple. You did a big robbery, made loads of money and spent the rest of your days in Spain. In the 1980s, armed robbery started to get dangerous so you did one or two, went to Spain and invested the money in drugs. Nowadays, thanks to improved security measures, the average armed robbery nets only a few hundred pounds and newcomers to crime have no choice but to start right at the bottom and work their way. Up Drug dealers are associated with money and power… In reality drug dealers make only $3,640 per year Chart Gang leader – controls operation Officers – protect gangs Street level salesmen – sells drugs
- Costs vs wages in a drug operation - 60% of a drug operation’s revenue goes towards COSTS 20% - payment to higher levels of organization 15% - costs of buying drugs from the suppliers 15% - buying weapons and misc. expenses 5% - payments to mercenary fighters 5% - funeral costs and payments to families of the deceased - 40% gets split up as WAGES Wages Rank & file - aspiring street salesmen (pay dues of $50/mo) Legal fees of getting caught 276,000 dealers get into legal trouble each year The national average rate for a lawyer is $284/hour The average drug dealer makes only $3.5/hour That means that a drug dealer would have to work for 40 months to pay for just 1 week of lawyers fees So… Why so many people deal with drugs? No alternatives (for young black & poor male in a bad neighbourhood) Fooled by history: members of the gang hope in a turnover Good marketing strategy: the gang leaders show off fancy cars (on leasing), jewellery (fake)….