Why do economists have so little to say about crime?
Let me start by making clear that I’m not saying economists have nothing to say on the subject of crime. There is a field of ‘crime economics’, much of which can be traced back to a seminal paper by Nobel laureate Gary Becker in 1968. But, while it’s undoubtedly a rich area of investigation, there’s a few tendencies that seem odd.
First, we think of modern economics as having started in the late 1700’s and gathered pace alongside the Industrial Revolution with, for example, the UK’s Royal Economic Society being founded in 1890. Strange then, that it took until 1968 for economists to become interested in crime.
Second, the implicit assumption in most of the economic work on crime that I’ve seen is that the crime being studied is not white collar in nature. There tends to be a focus on drug dealing, murder, robbery and similar, rather than those areas where you would have thought economists might have more of a grounding, such as tax evasion, rigging of the London Inter-Bank Offered Rate (LIBOR) and corporate fraud such as that practiced by Enron, AIG, Worldcom, Bernie Madoff and many, many more.
Third, although it’s researched, it doesn’t seem to be widely taught. I didn’t come across any modules on crime in my economics degree and I would be willing to bet that most other undergraduates — and postgrads for that matter — didn’t either. The exception was the coverage of cartel behaviour in certain types of markets but that was only by way of examining how different types of market structures work, rather than a focus on the centrality of criminal behaviour to the functioning of some markets.
Fourth, in my experience, when economic analysis of policies is undertaken, unless that policy is specifically designed to tackle a criminal aspect of society, the potential for criminal activity in response to that policy is almost never considered. There’s perhaps a view that crime is an aberration at the edges of the economy. It doesn’t fit the standard economic models, which never consider criminal behaviour, so we assume it away.
But crime is central to the global economy. The LIBOR I mentioned earlier underpins $350 TRILLION of financial transactions. The UN estimates that 2–5% of global GDP is laundered and the tax havens where this happens are also the places where much of the money owned by the super-wealthy and multinational corporations is funnelled through. The tax dodges, secrecy and lax regulations created by legitimate businesses to increase their profits are taken advantage of by international criminals and vice versa. There is no clear blue water separating the legitimate from the criminal in the offshore world, instead the two mingle together; muddying the water you might say. At one end of the spectrum is the laundering of money made from such wholesome activities as smuggling drugs, weapons and people, somewhere near the middle is the use of a web of complex trusts to hide money from illegal cartels formed in legitimate industries and at the other end is the simple expedient of shifting all your profits to low or zero tax locations despite none of your activities taking place there.
And economic crime has real world consequences. The London housing bubble is a good example. You can get a good overview of the issues in this nice — albeit slightly dated — UK Parliament Briefing Paper. It’s studiously neutral, but when even pro-market think tanks are saying that foreign ownership, almost all of it via anonymous offshore companies, is responsible for ever-higher price rises throughout the residential market then it’s clear where the balance of opinion lies.
The weird thing about the London housing bubble is how, in any article that isn’t specifically focused on money laundering and tax evasion, it’s as though those crimes aren’t happening. It becomes a simple tale of supply and demand, told through the lens of middle class homeowners — or aspiring homeowners — who have never heard of Mossack Fonseca. Why is that?
There are lots of reasons, but, just as in the enormous corruption cases I referenced at the start of this article, and in the really big one — the Financial Crash itself — a really crucial problem is that economists aren’t close enough to what is going on to understand it. That of course begs further questions, ‘why aren’t they more curious?’ ‘Why aren’t they getting closer?’ Here are my thoughts.
To be a little more generous to my profession, there is a problem with data here. The raison d’etre of the offshore system is to hide information, and improving data flows is never going to be at the centre of a barnstorming election-winning speech. But then that’s the nature of crime right? If economists have rolled up their sleeves to study street-level drug dealing, why not do the same for the system that launders the money made from those deals?
To be less generous to my profession, I think that some economists simply don’t want to know that the system they are ideologically committed to is rotting from the inside out. After all, economics was the intellectual midwife to the laissez faire global capitalism that permits the current state of affairs. There’s also a certain lack of imagination at play. Most economists are (probably) law-abiding and think everyone else is a lot like them despite much evidence to the contrary. They literally cannot conceive of the criminal mindset that, for example, leads someone to willingly confess to a crime they did not commit and take the resulting jail sentence in exchange for money. This is something we in the Environment Agency deal with when it comes to waste crime for example.
And finally, there aren’t that many employers looking for white collar crime economists. This seems to be changing with, for example, the creation of the National Economic Crime Centre in the UK in 2018; a mere ten years after the biggest financial crash in history caused by a mix of criminal and complacent behaviour. To be frank, as any Oxbridge maths or physics graduate will tell you, there’s a lot more money to be made in the sorts of organisations that enable economic crime than there is to be made in the sorts of organisations fighting it. And economists act rationally…