Sowell Applied Economics Thinking Beyond Stage One (revised and enlarged ed)

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earners at some point over the next 16 years. The turnover of individuals has been especially high in the highest income brackets. Internal Revenue Service data on the 400 highest income tax payers show that between 1992 and 2000, only one-fourth were in that category more than one year, and only 13 percent were among the top 400 more than two years. In other words, most of the people who were in the top 400 in income were in that category just one year. Between 1992 and 2000, there were thousands of people in the top 400, because of the high turnover during that period.

Crime as an Occupation

Perhaps the freest of all occupations is that of the career criminal, who simply ignores the restrictions that the law attempts to impose. Probably few, if any, people go through their entire lives without violating some law, but while many crimes may be committed by people in a moment of passion or a moment when temptations overcome both morality and logic, the person whose whole livelihood depends on the continuing commission of crimes is a very different phenomenon. Various studies over the years have shown that a very small percentage of the population commits a very large percentage of all crimes. Moreover, this has been true in country after country, as noted by one of the leading scholars on crime, James Q. Wilson:

In studies both here and abroad it has been established that about 6 percent of the boys of a given age will commit half or more of all the serious crime produced by all boys of that age. Allowing for measurement errors, it is remarkable how consistent this formula is— 6 percent causes 50 percent. It is roughly true in places as different as Philadelphia; London; Racine; and Orange County, California.

Very similar patterns have been found for adult criminals.

Criminals are not a random sample of the population at large. They are typically younger on average than the general population, disproportionately male and, at least among those caught and convicted, have lower than average IQs. Nor can we assume that criminals as a whole have much higher IQs than those who are caught, since most of the serious crime committed is accounted for by those who pass through the criminal justice

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system, and there is not enough additional serious crime unaccounted for to indicate a large number of additional criminals. However, the career criminal cannot simply be dismissed as irrational, because there is too much evidence from too many countries that he is indeed quite rational. It is easy enough to say that “crime does not pay,” but the real question is: Does not pay whom— and compared to what? It is doubtful whether Bill Gates could have done nearly as well financially as he has by becoming a burglar or even a hit man for organized crime, but those who do pursue these criminal occupations are unlikely to have had the same alternatives available that Bill Gates had because of his particular talents and circumstances.

Given the low educational and IQ levels of many who become career criminals, crime may well be their best-paying option. Given the short time horizons of many of those who make crime their occupation— especially young people and people from lower social classes— such things as selling illegal drugs may seem lucrative in stage one, whether or not it leads to prison in stage two or perhaps never living to see stage two. Crime is one of those occupations, like sports and entertainment, in which a relatively few at the top achieve very high incomes, while most of those who enter the occupation receive very low incomes. For example, many ordinary young sellers of drugs on the street live at home with their mothers, often in public housing projects— clearly not an indication of affluence— while the lavish lifestyles of drug kingpins attract many young people into this occupation, in hopes of rising to that level.

Again, the rationality of the choices being made depends on the alternatives available. Someone with a bad record in school, and perhaps an arrest record, is likely to have very limited options in the legitimate job market. Even someone with a clean record may be prevented from earning some much-needed money by child labor laws or by minimum wage laws that set a pay scale higher than an inexperienced teenager would be worth. But crime is an occupation that is always open to everyone.

The rationality of the career criminal is demonstrated in many ways, including variations in the amount and kinds of crime committed as the costs of committing those particular crimes vary. These costs include not only the legal penalties but also the dangers faced by criminals from their

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potential victims. For example, burglary rates tend to be affected by the proportion of homeowners who have guns in their homes. The rate of burglary is not only much higher in Britain than in the United States— nearly twice as high— British burglars are far less likely than American burglars to “case” the premises before entering, in order to make sure that no one is home. Even if someone is at home in Britain, there is far less danger that the person at home will have a firearm, given the far more strict British gun control laws. Moreover, people convicted of burglary are treated more leniently in Britain, seldom going to jail.

British and American burglars are both behaving rationally, given the respective circumstances in which they operate and consequently the different dangers which they face. While only 13 percent of burglaries in the United States occur while the home is occupied, more than 40 percent of the burglaries in Britain, the Netherlands, and Canada occur while the home is occupied. These latter three countries have much lower incidences of gun ownership than the United States, due to more severe gun control laws. After the Atlanta suburb of Kennesaw passed an ordinance requiring heads of households to keep a firearm in their homes, residential burglaries there dropped by 89 percent.

Another major cost to a criminal career is the danger of incurring legal penalties, usually imprisonment. Here criminal activity in general has tended to vary over time inversely with the risk of imprisonment— which includes the risk of detection, conviction, and sentencing. In the United States, various legal reforms of the 1960s had the net effect of reducing the likelihood that anyone committing a given crime would actually spend time behind bars as a result. Crime rates skyrocketed. The murder rate, for example, was twice as high in 1974 as in 1961, and between 1960 and 1976 an average citizen’s chance of becoming a victim of some major violent crime tripled.

Data from other countries show similar trends. On a graph showing the rate of crime in Australia from 1964 to 1999 and the rate of imprisonment per 1,000 crimes committed over that same span, the two lines are virtually mirror-images of one another, with the rate of crime going up when the rate of imprisonment went down, and vice versa. The graphs for England and

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Wales, New Zealand, and the United States are very similar. In the United States, the crime rate peaked in the 1980s and began falling as the rate of incarceration rose. In England and Wales, the crime rate peaked in the early 1990s— which is when the rate of imprisonment hit bottom— and then began a substantial decline as the rate of imprisonment rose. In New Zealand, the high point in crime was reached in the early 1990s while the low point in incarceration was reached about 1985 and then began to rise again, with the crime rate falling with a lag of a few years.

Another example of the rationality of criminals is their response to the unusual American institution of the private bail bondsman, a system used by only one other country, the Philippines, once an American colony. In the United States, indicted criminals can pay a bail bondsman to post a bond in their behalf to guarantee their appearance in court on their trial date, so that they can stay out of jail pending trial. Typically, the charge is about ten percent of the total bail posted, all of which is returned to the bail bondsman when the client shows up for trial as scheduled.

When the client fails to show up, however, the bail bondsman forfeits the bail unless he can find the client and turn him over to the court within a short specified time. The bail bondsmen— sometimes called “bounty hunters”— are authorized to go capture those who do not show up in court. The rationality of the criminal is shown by the fact that the rate of court appearances is higher when a bail bondsman is used than when criminal defendants are released pending trial in other ways. Because a bail bondsman has a vested interest in a particular individual, he is more likely than the police to focus on capturing him and is less likely to be inhibited in his methods of doing so. Criminals, being aware of this, are quite rational to show up for trial.

The same rationality among criminals is shown in other ways and in other countries. In pre-World War II Britain, for example, when both criminals and the police rarely carried firearms, even an accomplice to a firearms murder was subject to hanging. Therefore criminals planning a robbery together would frisk one another, to make sure no one was carrying

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a gun that could get all the others hanged if there was a killing and they were caught. That was a very rational thing to do under the circumstances.

While the amount and nature of crimes have varied with the likelihood of punishment, this is not to say that crime rates are unaffected by cultural or other differences among countries. There are serious cultural differences which are no doubt reflected in the absolute levels of crime among countries, though the similarity in trends already noted is very striking. As one example of substantial differences between countries in the absolute levels of crime, despite similarities in trends, in the nineteenth century guns were freely available in both London and New York City, and yet the murder rate in New York was several times what it was in London.

Early in the twentieth century, severe gun control laws were passed in New York State, years before such laws were imposed in England— and yet New York City continued to have several times as high a murder rate as London, as it has for two centuries. Clearly it was not such laws, or the absence of such laws, which made the difference. Eventually, Britain’s gun control laws were tightened far more than those in the United States, especially after the Second World War. However, because New York’s murder rate continued to be far higher than that in London, and that in the United States far higher than that in Britain, this differential was often attributed to differences in gun control laws, even though large differences in murder rates existed long before either country had gun control laws, and persisted even when the United States had gun control laws before Britain did.

While there are undoubtedly many complex factors behind the absolute crime rates in any country, the trends strongly suggest that changes in crime rates reflect rational reactions to changes by criminals in the costs they pay, both in punishment inflicted by the law enforcement system and the risks of being harmed by their intended victims. The asymmetrical effects of gun control laws on criminals and law-abiding citizens have been reflected in the fact that, as gun-control laws tightened in late twentieth century Britain, rates of murder and armed robbery increased, which is consistent with the

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	fact that such criminal activities became safer when there was more
	assurance that potential victims were unarmed.
	With criminal economic activities, as with legal economic activities,
	behavior differs when there is free competition in a given field as compared
	to monopolistic control of that field. With both legal and illegal activities,
	there tends to be more production with competition than with monopoly.
	That is, the incentives and constraints tend to lead to more crime being
	committed when the criminals are individual independent operators than
	when they are part of an organized crime syndicate. For example, a small-
	time criminal may find it expedient to kill some local store owner for the
	small amount of money in the store’s cash register, if only to keep the store
	owner from identifying him, even though this might make no sense to
	organized crime.
	Public outrage at such a murder could result in more law enforcement
	activity in the area, reducing the profitability of the crime syndicate’s
	business in illegal drugs, prostitution, and other activities by making local
	customers more hesitant to engage in such activities when there was an
	unusually large police presence in their neighborhoods. This could easily
	cost the crime syndicate far more money than there was in the store owner’s
	cash register.4 Such repercussions can be largely ignored by individual
	criminals operating independently, since the killer of the store owner may
	lose little from the increased law enforcement, compared to what criminals
	as a whole are losing in that area. However, when the criminals in a given
	area are more likely to belong to a crime syndicate, their activities are
	restrained by organized crime leaders who have to take wider repercussions
	into account.
	In other words, the monopolistic firm has incentives to produce less
	than competitive firms would have produced in the same industry, just as
	with legal economic activity. In this case, that means producing less crime.
	4 As with a conventional legal business, a crime syndicate will not produce beyond
	the point where the incremental gain in revenue is exceeded by the incremental cost.
	In this case, the incremental costs include the loss of revenue when there is
	increased law enforcement activity in response to a killing of an innocent civilian, as
	compared to the public’s lesser concern when mobsters kill each other.

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When there is strong organized crime control of a given neighborhood, even independent criminals operating in that neighborhood have to take into account whether some of the things that they would do otherwise might displease organized crime leaders and bring retribution.5 In some cases, independent criminals may have to split their earnings with the syndicate for permission to operate, thereby reducing the rewards of crime and the incentives for being an independent career criminal.

One of the more dramatic examples of the restraining effects of a crime syndicate occurred in New York City in the 1930s, when crusading federal prosecutor Thomas E. Dewey was cracking down dramatically on organized crime, costing the crime syndicates considerable money and sending many of their members to prison. Crime boss Dutch Schultz thought that Dewey should be killed but other crime syndicate leaders decided that this would provoke too much public outrage— and consequently increased law enforcement activity that would discourage patrons of their prostitution, gambling, and other illegal activities, further reducing incomes from these enterprises. When Dutch Schultz announced that he was going to kill Dewey anyway, the syndicate had Schultz assassinated instead. They were well aware that the killing of a mobster would provoke far less public reaction than the assassination of a popular law enforcement official.

Decades later, there was a report of a desire of some crime leaders to assassinate Rudolph Giuliani when he was a federal prosecutor who sent many mobsters to prison in the 1980s. But, if so, no one repeated the mistake of Dutch Schultz. As the New York Times reported:

For one thing, assassinating a prosecutor would go against decades of tradition. American Mafia leaders have generally treated their organizations as businesses primarily concerned with making money. Killing law enforcement officials, in this view, would only draw unwanted scrutiny.

5 Many years ago, I lived in a New York neighborhood where organized crime leaders lived. That neighborhood was so safe that, when my wife happened to be awake in the middle of the night while I was asleep, she did not hesitate to walk several blocks to an all-night newsstand to buy a morning paper. The fact that a newsstand was open in the middle of the night suggests that many other people in that neighborhood also felt safe going there at that time.

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The same reasoning that would lead us to prefer competitive producers, when what is being produced is what people want, would lead us to prefer monopolistic producers— organized crime— when what is being produced is an activity that most people do not want. Ideally, we would prefer that no crime at all be produced but, since the ideal is seldom realized, a more realistic goal is the optimum quantity of crime. Both law enforcement and organized crime tend to reduce the total amount of crime. Even if it were possible to reduce all crime to zero by providing vastly more resources to law enforcement agencies, that would not necessarily be economically optimal. While most citizens would probably welcome more government expenditures on crime control if that in fact reduced felonies, no one would be likely to be willing to spend half the country’s income— that is, reduce the standard of living in half— to prevent occasional shoplifting.

UNFREE LABOR

Involuntary labor can range from jury duty to military draftees to inmates of forced labor camps to outright chattel slavery, in which people are bought and sold like cattle.

The power of American courts to force citizens to serve on juries has even been used to send out law enforcement officers to seize customers at random in shopping centers, taking them directly to court to fill in as jurors, when there have been inadequate numbers of jurors on hand to conduct trials. While this is an extreme example, it demonstrates the government’s power to compel involuntary labor. According to a news item in the Wall Street Journal:

Michael Kanz was pushing a grocery cart toward the checkout lane at the Wal-Mart Supercenter here when a woman wearing a gun walked up and told him to follow her orders— or face the consequences.

It wasn’t a mugging, but a jury summons to report to court within an hour. And it’s a perfectly legal way some judges have in recent years been getting jurors at the last minute.

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The various categories of involuntary labor differ not only in duration but also in severity. Jurors do not usually serve as long as military draftees, and inmates of forced labor camps may serve for years but not necessarily for a lifetime, as slaves usually did. The severity of treatment also varies, being more severe for draftees than for jurors, and often more severe for inmates of government-run forced labor camps than for privately owned slaves, whose long-term productivity would be jeopardized by very severe treatment. But, because people in forced labor camps are not owned by anyone, their long-term productivity matters less— if at all— to the decision-makers directly in charge of them, who have no incentive to think beyond stage one.

Productivity of Involuntary Labor

In some forced labor camps, especially those run by the Nazis and the Japanese during World War II, the inmates were often simply worked literally to death. The same was true of most Chinese indentured servants sent to Cuba in the nineteenth century. In both cases, as well as in the Soviet Gulags of the twentieth century, total control and an absence of individual ownership meant that the long-run productivity of these workers meant nothing to those in charge of them, who had no incentive to think beyond stage one. It was much the same story in North Africa in the sixteenth and seventeenth centuries, when at least a million Europeans were enslaved along the Barbary Coast. The worst treated were the galley slaves owned by the governments of that region to row their warships. Slaves who died on board or who collapsed from the heavy work and brutal treatment were simply thrown overboard at sea to lighten the vessels. The years of potential labor left in a galley slave who collapsed meant nothing to those in charge of the galley, who had no incentive to think beyond stage one.

Only where privately owned slaves were very cheap and easily replaced were they likely to be worked at a literally killing pace or subjected to dangerous working conditions. Where they were expensive and not easily replaced, as in the American antebellum South, the need to preserve the existing slaves often led their owners to hire Irish immigrants to do work

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considered too dangerous for slaves. During Frederick Law Olmsted’s celebrated travels through the antebellum South, he was puzzled to see black slaves throwing 500-pound bales of cotton down an incline to Irish workers who were at the bottom, catching these bales and loading them onto a boat. When Olmsted asked about this surprising racial division of labor, he was told that slaves “are worth too much to be risked here; if the Paddies are knocked overboard, or get their backs broke, nobody loses anything!”

It was likewise common to use the Irish for other work considered too dangerous for slaves, such as draining swamps that might be malarial, building levees that might collapse on the workmen, building railroads, or tending steam boilers that might blow up.

How does involuntary labor in general affect the allocation of scarce resources which have alternative uses— and therefore the economic wellbeing of the country as a whole? Because involuntary labor, by definition, does not have to be paid a price reflecting the value of the alternative uses of the workers’ time and capabilities, such labor is often used for work that is less valuable than alternative uses. A chemist may be drafted into the army and then used as a clerk handling clothing supplies in the quartermaster corps. But, in an all-volunteer army, it would be cheaper for the military authorities to hire a civilian to perform such clerical duties than to pay enough to attract chemists or other highly skilled people to do this routine work.

If military personnel were used for such work in a volunteer army, these would more likely be individuals whose civilian skill levels were low enough that the army could attract them at considerably lower pay than would be required to attract people like chemists. Such financial considerations taken into account by military authorities would reflect more fundamental underlying realities from the standpoint of the economy as a whole: Involuntary labor is a less efficient way to allocate scarce resources which have alternative uses.

People summoned to jury duty may have great amounts of their time wasted waiting around to be told whether they will in fact be seated as jurors for pending cases on a given day or ordered to keep coming back on subsequent days until their tour of jury duty expired. Moreover, what they