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European
Economic Perspectives 23
Protection
Rackets
Who
provides protection when the state breaks down? New CEPR research uses
the tools of modern economics to explain the emergence of organized
crime.
Many societies face
enormous difficulties in establishing even the most basic level of
protection of life and material goods. From Colombia to Sierra Leone,
Somalia, Russia, Albania, even in the inner cities of the United States,
there is an apparent shortage of the good variously known as security,
order, protection of property rights – or simply protection. This good
is the quintessential collective good provided by the state. It is also
a precondition for the provision of ordinary infrastructural public
goods and, more generally, for facilitating trade and economic
development.
When protection is not
provided effectively by state institutions, it is typically provided by
organized crime – mafias, gangs and similar groups. But why do such
groups emerge in a power vacuum? And why are they autocratically
organized, run for the benefit of their leaders in the same way that
most states in history have been run?
To put it differently,
why is the provision of protection by self-governing, democratic
community groups and states so difficult? Is competition in the
provision of protection as beneficial as it is in the provision of other
goods and services? Or is a monopoly preferable? These are some of the
questions examined by Kai Konrad and Stergios Skaperdas in a recent CEPR
Discussion Paper.
In thinking about the
market for protection, it is important to take account of a
characteristic that makes protection very different from other goods and
services: the inputs used in its production – soldiers and policemen,
swords and guns – contain the seeds of the good’s own destruction.
At times, these seeds can sprout very fast: by virtue of their
positions, policemen and soldiers can extract from the people who employ
them even more than the robbers and bandits against whom they are
supposed to guard.
Rulers who provide
protection against internal and external threats can use their powers of
extraction on an even grander scale. Army generals and colonels,
ostensibly at the service of democratic governments, can – and
regularly do – topple such governments. Clearly, protection is not an
ordinary economic good.
The analysis developed
by Konrad and Skaperdas to explore these phenomena goes through a series
of scenarios. It begins with a simple and fragmented economy without a
state or any other form of organized protection. Some individuals become
producers – ‘peasants’ – who spend part of their initial
resources to protect their own production. Others become full-time
bandits who prey on the peasants. The overall outcome is highly
inefficient since the bandits contribute nothing to material production
while the peasants spend much of their resources and time protecting
themselves against bandits.
The researchers next
consider a scenario in which peasants form small self-governed groups in
which protection for the whole group is provided by voluntary
contributions to collective protection. Compared to the first scenario,
welfare is higher under self-governance. But the incentives to
‘free-ride’ in such groups – to enjoy the benefits without
contributing – lead to underprovision of protection.
In the next scenario,
a ‘for-profit’ protection agency – Leviathan, the tribal chief or
the mafia don – arrives and monopolizes protection. The result is that
the agency uses the machinery of protection to keep its subjects in
conditions that are no better than in the absence of a state. But
because of the efficiency of collective protection that Leviathan
employs, output can be much higher than in the absence of the state,
with all the surplus appropriated by Leviathan.
In the final scenario,
the profits earned by Leviathan attract competitors – ‘competing
lords’ – who attempt to set up their own protection businesses. What
happens here is that in the long run, the number of protection agencies
reaches a level where no further entry to the protection market is
profitable, implying that all lords who are abstaining from entry obtain
the same net income as agents who did enter and now run a protection
agency. This outcome is called the ‘competing lords’ regime.
Konrad and Skaperdas
compare these different scenarios and conclude that the most likely
outcome is one of competing lords without further entry. Whether this
outcome means higher or lower welfare than in the absence of a state
depends on the lords’ power to extract revenue. If their power is
similar to that of bandits in the absence of a state, then everyone
earns the same net income as in the absence of a state. But although the
lords’ protection technology is superior to what exists in the absence
of a state, this does not translate into higher welfare. All the savings
from the provision of collective protection are dissipated in contests
between lords, and welfare can be as low or lower than in the absence of
a state. This is called the ‘tragedy of coercion’.
The environments the
authors describe are very abstract and not, of course, intended to serve
as models of the political organization of modern industrialized states.
But the approach does illuminate the nature of power in many developing
and transition economies – and in those parts of modern states where
power vacuums allow gangs and mafias to emerge.
The scenario with the
peasants and bandits, for example, helps to explain interactions between
shopkeepers and robbers in Moscow, inner-city Los Angeles or Lagos. In
such cases, genuine community policing is very difficult. Instead,
hierarchical gangs come in to fill the gap vacated by the modern state,
supplanting legitimate government and creating a near-monopoly of force.
This article discusses
research reported in ‘The Market for Protection and the Origin of the
State’ by Kai Konrad and Stergios Skaperdas, CEPR
Discussion Paper No. 2173 (June 1999). Konrad is at Freie
Universität Berlin and a Research Fellow in CEPR’s Public Policy
programme; Skaperdas is at the University of California, Irvine.
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