Economic Understanding of Prison Gangs

By Jacob C. Maichel

To the average person prison gangs seem like the epitome of chaos. Prison customs and beliefs appear completely irrational to the average person, however when understood through the rational choice paradigm we can begin to understand this robust illicit economy. There are two components to rational choice theory that help us interpret inmate actions. First people are self centered and pursue what they value. This does not mean that people do not help others as some pursue altruistic ends they find valuable. The second point is that individuals respond to changes in costs and benefits. If an action gets more costly people will do less of it, and vice versa. Subjective preferences help people decide how to weigh costs and benefits, and can not be ignored when looking at peoples decisions. It is not helpful to ignore inmates preferences just because we do not share them. Economics sheds light on how people satisfy their unlimited desires with limited resources without naively assuming only money matters. Prison gangs have not always been present in the American penal system so understanding the factors that give rise to their growth is key to seeing prisoners as rational actors. 

One explanation for prison gangs is the demand for services that they provide. Governments exist to provide many vital services to the people. Three of these services allow our markets to operate; defining private property rights, promoting voluntary exchange, and encouraging collective action. Those in prison lack formal access to the governance mechanisms that we enjoy. The absence of a  legitimate government allows for organizations or norm based systems to fulfill these needs. Historically decentralized norms have been sufficient to self govern prisoners prior to the rise of prison gangs. 

Norms help to identify what is socially permissible behavior, such as holding the door open for others. There is no official law to decide on these informal rules but instead they develop over time, an inexpensive way to govern. This style of governance works until populations get too large and it becomes too costly to remember all the information of what is and isn't acceptable. Organization can then arise to solve many of the problems norms address, but through centralized processes. 

Prior to the 1970's the set of norms that existed in the US prison system is generally referred to the "convict code", based on the ideals of never helping officials while respecting other inmates. These norms arose as prisoners had to find ways to engage in mutually beneficial behaviors with strangers, without this contraband markets would be nonexistent. Prior to prison populations proliferation in the 1960's decentralized punishment was easy and served as a powerful way to discourage dishonesty. While populations got larger they also became younger and more violent, breaking down the effectiveness of the convict code.

These shifting prison cultures derailed the convict code and paved the way for the rise of prison gangs. Gangs do not randomly form and instead fill power voids by creating mutually beneficial bonds between gang members. When normal governance does not work to protect private property rights organizations can instead offer protection and this happens outside of prison as well (historically the Italian Mafia is a strong example). David Skarbek in Social Order of the Underworld identifies The Mexican Mafia as the first prison gang, comprised of Hispanics largely from California street gangs. As they moved among prisons in California their influence spread and other gangs formed for protection and competition in illicit prison markets. 

Another factor leading to the formation of gangs is the increasing demand for contraband. According to the California Department of Corrections and Rehabilitation in 1959 26% of inmates reported a drug addiction compared to 82% in 1978. This large increase was caused in part by president Nixon's war on drugs which restructured many sentencing practices. These inmate consumers offer a massive profit motive for prison drug dealers who must be able to deter opportunistic behavior and ensure quality. Due to the inherent dangers of dealing contraband in prisons gangs have a comparative advantage in selling drugs over the individual. Gangs are very successful at making credible threats of violence to deter opportunistic behavior while enjoying extensive trafficking networks, benefiting from underworld economies of scale. 

Prison gangs have many trading problems and solve them in a similar fashion to medieval towns. Medieval merchants typically were unsure of the trustworthiness of other traders, unaware of future transactions, and had no way to tarnish the reputation of dishonest traders. This was overcome with the community system where individual reputations were based on the reputation of their respective communities. This encouraged impersonal exchange and monitoring the behavior of your peers. Prison gangs serve the same purpose by facilitating trade with unknown partners based on gang reputations. The free rider problem arises in this situation where people will try to falsely claim membership for benefits. For this many different signals exist to distinguish members from non members, handshakes and tattoos being strong examples. 

With the large prison populations and competing factions it should maybe come at no surprise that gangs have a strong foundation in race. Race is something that is very easy to identify and incredibly difficult to change. In a place where everyone is dressed the same 24 hours a day race offers a cheap method of identification. Groups could have formed around other similarities, such as religions. Alternative methods are much more difficult to learn and identify, making race one of the strongest ways to distinguish communities. Inmates with no previous racist behaviors are thrown into a segregated world and have to adapt or suffer. Skarbek, again in Social Order of the Underworld, suggests that new inmates are often approached within days of their arrival to inform them of the rules. 

Prison gangs today play an important role in penal life. Gangs allocate valuable resources, such as recreational space. Some areas are preferred over others for quality of equipment or strategic reasons. Gangs often see violence as an effective way to resolve conflict over the use of such common areas. This further incentivizes gang membership for individuals to help time pass more comfortably. Prison gangs are also in charge of their members behavior, and it is in their best interest to maintain a healthy collective reputation- even if that means being feared.  Punishment has internal mechanisms inside of gangs to resolve conflicts and disputes between individuals as well as in illicit markets. Due to the existence of these markets and the profitability of trade gangs have an incentive to actually minimize violence. Violence attracts attention and hinders ability to carry on normal operations, making nonviolent solutions the most profitable. 

While gangs do provide many of the same functions as mutual aid societies they undeniably engage in a number of predatory acts as well. Rising populations and changing demographics have eroded the effectiveness of the convict code and gave rise the status quo. Gangs did not just come about, but rather met the demand for governance while also increasing the efficiency of the contraband market. Understanding supply and demand factors helps us understand why prisons gangs exist and why rational actors will engage in seemingly senseless acts. Afterall, it is not from the benevolence of the gang member that inmates expect their contraband, but from their regard to their own self interest. 

Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University

Opportunity Cost of Thought

By Jacob C. Maichel

Opportunity cost is one of the most fundamental concepts in economics. Opportunity cost can be thought of the next best alternative to a given choice. Resources such as money, production inputs, and time are scarce. So when we decide to spend our time and money to go a movie instead of staying home and enjoying a book, our opportunity cost is the book we have foregone reading. Once that time and money is gone it cannot be spent again. 

So why is opportunity cost so important in economics and life? Limited by scarcity of resources we have to find ways to satiate our unlimited desires. Opportunity cost not only helps allocate resources but also can give insight into peoples values. The choices we make reveal our preferences. Recently, I have begun to fully understand how encompassing opportunity cost truly is. Every second we make decisions with our time and our thoughts. While reflecting on my relationship with technology (check out my post about limbic capitalism) I have began to really question my relationship with my phone. This brings me to the point of this blog; the opportunity cost of thought.

We in the United States and beyond have become attached to our phones. This attachment is so deeply ingrained that 44% of people sleep with their phone, and unfortunately I am one of them. Not surprisingly younger people (ages 18-24) are typically the most attached to their phone.

What is even more alarming to me is the fact that 81% of those ages18-24 check their phones even if they do not hear an alert. When we sit and constantly think about the next update, what are giving up? Could we think about a new business? Some deep question that has been troubling us? Perhaps we would be able to engage with the stranger next to us rather than standing awkwardly scrolling through forgettable posts. 

Phones help to dull our mind and remove us from the real world. Books were not only a source of knowledge; they were a form of escape from the daily grind. With this in mind I don't think it's a stretch to say that reading books is more mentally productive than social media. Over seventy-five percent of internet users are social media users - all of whom may be sacrificing productive thoughts. While not all social media consumption is negative, is it still more beneficial than the real world?

Another concern is whether social media itself is a disincentive to conversations. Major social media platforms have become a crutch for getting to know people, which is not a bad thing in and of itself. The danger comes when these platforms create incentives to predominately socialize virtually. Personally, I find myself checking on my friends less and less as I see their continual updates on social media. I think I know how people are doing and what they have been up to, but the truth is we have a tendency to present only the good parts of our lives on social media. This can give our friends a false confidence in our well-being. It is ironic that statuses are meant to create conversations but could be doing the exact opposite. It appears the more connected we get, the more alone we feel.

The most troubling thing to me, however, is what we give up in our meaningful relationships with other people. People use their phones during conversations in real life, hide texting during class, complain about their phone being dead or not around every day. These new norms have transformed interactions with not only strangers but the most familiar people in our lives. An example of this is the family who all sit on their phone during dinner, or perhaps the parent who watches their phone throughout their child's soccer game. These actions would have been not only unthinkable but socially odd in the not-too-distant past.

Actions speak louder than words. Many people wouldn't say that they value their phone over other people close to them, but it happens everyday. It is hard to completely remove yourself from someone you care about but marginally distancing yourself from others in social settings can have real world impacts. Why is it so easy to pay so much attention to our phone and make us struggle to forget it in daily conversations? Even car rides with family and friends are precious moments that mean more with undivided attention. If actions highlight our individual preferences we should start to realize what it means when we snap chat and text through our real world conversations. 

We have to allocate our scarce time on this Earth with the people we are blessed to share it with and I think we take it for granted. Delusions caused by technology have hampered our ability to analyze the costs of neglecting our relationships, promoted by technology that preys on our attention. While this doesn't mean that we all need to ditch our phones, maybe forgetting it at home is a good thing. Time truly is the most non-renewable resource that there is and we need to consider the trade offs of devoting our precious moments to technology.

Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University

Regulation's Impact on Rationality

By Jacob C. Maichel

Economists have a tendency to throw together models and talk about the decisions of rational actors inside of market places- but is that even possible? It is clear to some that aggregations of decisions reflect the best available knowledge, but is that actually true? Are there perhaps ways to allow for more rational decisions with government help?

Behavioral economics argues that people rarely make theoretically optimal decisions. In fact, they assert that individuals react more based on heuristics (shortcuts) than rational processes. Experiences aggregate to form heuristics, or biases according to behavioral economists; these heuristics, not economic signals, explain behavior in the marketplace.

 Some of the most important biases I want to point out are:

Hindsight bias- A situation in which people put unrealistic belief in an event occurring because it has happened before. A classic example is seeing a shark attack on the news and fearing a similar situation when you travel to the beach (despite the statistical basis of that fear).

Overconfidence bias- The overconfidence bias is not only dangerous, but likely the most common. Those who suffer from this often think they know the markets better than most. They believe they have some system or knowledge that makes them immune to market forces. They highly overestimate their ability and/or knowledge.

Confirmation bias- This bias asserts that individuals collect, or recognize, only information which confirms their initial position; it causes a discounting of true information.

Optimism bias- The belief that everything will always have a good outcome.

Status Quo bias- Individuals have a preference for their present state, despite a change which would improve their state.

We experience these biases everyday in our lives without realizing it. It gets increasingly more dangerous when these biases begin to affect us in our investing strategies. I do not think it would be a stretch to argue that many of these biases are related to a lack of information available to the individual. 

For example, regulation tends to impose transaction costs on industries which prevents the open entry and exit we would see in a free market. However, history argues that opinions of regulation should be approached with more nuance. For example, particular  regulations in finance, which has an incredible amount of existing regulation, may actually benefit the consumers.

Let's look first to the Great Depression to help shed some light on the topic. Before the stock market crash of 1929, almost any investor was allowed to engage in margin trading. This meant that investors started to purchase very overpriced stocks at the advice of trusted "financial advisers". The average investor did not have the ability, or likely the desire, to monitor his investments. When things started going south in financial markets, the lack of knowledge became apparent.

I think particular banking and corporate disclosure regulations probably help us to overcome some of these biases by increasing the information available, or at minimum make better decisions. Admittedly there is a significant amount of regulations that are not needed, but some are undeniably beneficial. The Securities Act of 1933 and 1934 made the marketplace significantly more transparent. Investors got access to better information on the markets they were trading in and the companies they were investing in. With both of these Securities Acts came the creation of the Securities and Exchange Commission (SEC) which functioned as an authority in financial markets. The SEC also gave people the ability to file injunctions through them to prosecute negligent companies.

The overconfidence bias tricks us into thinking that with all this information, we can make the best decision. But, I think that it is better than the environment we had 90 years ago. Without reporting and transparency, it would be a result of luck to find any success in the market. Companies now must be even more particular with reporting and it is easier than ever to see how leveraged companies are. Leverage helps to indicate how much of the business is funded through debt rather than equity. Highly leveraged companies have to deal with large interest payments leading to decreased financial stability, possibly insolvency. While the overconfidence bias is not removed, investors are more likely to draw on relevant information as opposed to assuming it.

Banks are also safer than they have been historically, and more profitable since the repeal of Glass-Steagall. With the creation of reserve requirements and FDIC insurance, everyone was able to put more faith into the banking system. Even small town banks now can meet FDIC requirements and guarantee whole communities safety. I think this is vital for two reasons. First it encourages economic strength in rural areas by promoting savings within the community. Second, and perhaps more important, it offers a source of capital that is absent otherwise. Large branch banks have moved away from small business loans and instead opt for more attractive larger investments. You can see this phenomenon in the figure below from the FDIC:

The size of the average lender caused the massive consolidation of banks that we experienced in the past 15 years. Rural banks have loan officers that are part of the community, changing the social and economic incentives behind granting loans.

While these changes shifted the incentives within the banking system, some economists would argue it perverted the incentives. Their concerns are not without grounds, but I do believe that the additional regulations improved the existing environment. Good economics is comparative economics.

Once again, I admit, that I am not a fan of most regulation. I do, however, believe that there are some regulations that directly address behavioral flaws in investors. When viewing regulation maybe we should quit thinking about people as rational actors in economic models and perhaps rather think about what type of regulations may enhance our lives.

Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University

Limbic Capitalism: Article Review

By Jacob C. Maichel

I have been reflecting a lot on technology and it's role in our lives, as well as how our consumption of the internet and its impact on our social relationships. I recently came a across an article by David Courtwright, How 'Limbic Capitalism' Preys on Our Addicted Brains, which was a thought provoking read and I suggest you check it out. If you do not however I plan to discuss it and share some thoughts.

The first thing I found interesting was the concept of "limbic capitalism," a fresh use of capitalism to explain pyscological consumption. I do not want to discuss the traditional idea of capitalism in this review, strictly this specific nuanced interpretation provided by Courtwright. These same advances which provide an abundance of conveniences also pervert previous business models by promoting excess consumption, often leading to addictions. Such societies are run by governments or underground organizations whose products are focused on consumer's biological limbic system. The limbic system influences behaviors such as motivation and emotional responses and, yes you guessed it, addiction.

Courtwright next takes a step back to examine historical examples of simplified understandings of vices, exemplified by Victorian-era reformers. These reformers are said to have thought vices were dependent on the local culture, as well as noticing that all vices seemed to have a few things in common. The first was monetizing vices is often big money, the second is that vices are often linked. Rarely is a brothel without booze or an opium den far from a casino, Courtwright claims.

Contemporary neurologists now confirm the Victorian beliefs on vices through our understanding of how dopamine promotes pain and pleasure. These subconscious responses condition people’s reactions to similar stimulation in the future. What this means is that people tend to do what their brain tells them is rewarding even if they know it is bad for them. This is why addicts continue to crave something even after they do not want to do it anymore, in a sense, your brain is stuck
So what does all of this have to do with technology? It is undeniable the amount of luxury and conveniences brought by technology, however, understanding it in the context of limbic capitalism is an interesting thought (the irony of this being typed on a computer is not missed on me). Courtwright states:

The more rapid and intense the brain reward they [the product] imparted, the likelier they [the consumer] were to foster pathological learning and craving, particularly among socially and genetically vulnerable consumers.

Internet technology and products that evolved based on its existence were developed at unprecedented rates since its inception. This greater accessibility and affordability of the internet has made new products available, good and bad, bringing with them new vices and addictions. Think of the gamer who now sits down slurpin' Mountain Dews all day, or the average person who scrolls through thousands of tweets. Not only can entrepreneurs exploit new vices that come by chance but rather create and market products by playing into addictive behavior to increase demand. While I am not sure if he is right or wrong on this question I can't think of a video game that is made to be played for 15 minutes a day.

I do highly recommend giving the entire article a read. The discussion on both the monetization of addiction and how technology fits in is very thought provoking to say the least. My concern is how these psychologically damaging practices which target our limbic system are omnipresent in our daily life. It is without question that technology has brought tremendous advances in many aspects of our lives, such as communication and the spread of information. The unanswered question is this: although we are reaping the benefits at what cost to our personal relationships and psycologial wellbeing?

Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University