In Economics, Marginal Analysis is a useful tool when discussing consumer choice. The same concept can also be applied to criminal behavior. by Bill Gee
(centrist)
Tuesday, May 31, 2011
What if someone were to tell you that you can be perfectly healthy no matter how badly you ate? That there is a new medical procedure that will keep your body in perfect harmony no matter how many pizzas, tacos or french-fries you ate? Do you think that would that change your behavior? Do you think you would start ignoring the ingredient lists on food packages? Do you think you would you find yourself going out to your favorite fast-food restaurants more often? Would you even care anymore about the possible consequences of eating badly?
That seems to be the place we are in when it comes to economic crime in this country.
Marginal Utility vs. Marginal Cost
According to basic economic theory, consumer choice is governed by the law of Marginal Utility verses Marginal Cost. To get a better understanding of the theory, we need to first understand the terminology.
Utility is defined as the enjoyment or satisfaction from a choice or action. Cost is defined as the consequences of that choice or action. The term Marginal refers to the additional or extra enjoyment or cost associated with a choice or action.
For example, if I am hungry and I purchase a taco, I will derive a certain amount of extra enjoyment or Marginal Utility from purchasing a second taco. Since the taco is not free, that extra taco will come with an extra or Marginal Cost. As long as my satisfaction (utility) is greater than my perception of the consequences (cost), the rational consumer will choose to purchase another taco. Costs are usually in the form of money, but they can also be in the form of other consequences such as fat and sodium content or a whole host of other social and societal consequences depending on your individual circumstances.
Economic Crime
The FBI Uniform Crime Statistics recently reported that the instances of violent crime is down in this country. However, property crime, specifically organized property crime has gone up sharply since 2007. Part of the problem appears to be lack of severe consequences for those who have been caught, which reduces the marginal costs of committing these types of crimes.
When we think about Organized Crime, we tend to have an overly romanticized notion of what it actually is. In order to be guilty of Organized Crime, one only needs to involve two or more individuals and these individuals must be involved in the criminal activity over an extended period of time. In other words, they have made it their profession to engage in criminal behavior. These criminals seek to find weaknesses in our security systems and exploit them for their own economic gain. The smartest ones rarely engage in violence because they know that as long as nobody gets physically hurt, they will likely be able to avoid prosecution or be able to plea down their sentences. The really smart ones never see the inside of a courtroom.
Marginal Utility of Economic Crime
Those who engage in economic crime generally receive two major benefits from their activities. Economic gain and the personal thrill of taking something that they know does not belong to them. If you have ever done anything expressly forbidden by your parents as a teenager, then you can understand the rush of adrenaline that comes from doing something bad. For some people, the rush is downright addictive. For most of us, that rush of adrenaline goes down each time you commit the wrong until ultimately it no longer becomes worth it. This is the Law of Diminishing Marginal Utility in action. The economic gains derived from criminal activity are far more addictive, especially from those who believe that it would be impossible for them to achieve the same economic benefit from legal or ethical behavior. For these individuals, the Law of Diminishing Marginal Utility takes a lot longer to take effect, if ever. In fact, some individuals may get to the point of feeling remorse for those they have wronged but continue to engage in the criminal behavior because they feel as though they have no choice.
Marginal Cost of Economic Crime
As we have already established, if the Marginal Utility of a choice or action is greater than the Marginal Cost, then the rational person will continue to engage in that behavior. In the case of criminal behavior, it is the job of law enforcement, the courts, and corrections to establish the Marginal Costs of economic crime.
Cases in Point
Bernard Madoff (New York) Ran a massive Ponzi scheme that defrauded investors of over $7.2 billion since the early 1990s was ignored by the Securities and Exchange Commission despite numerous tips by concerned auditors and investors. He was only brought to justice when the scheme finally fell apart and he turned himself in to the authorities. Madoff will spend the rest of his life in prison, but at 72 years of age and in relatively poor health already, it is unlikely he will be in prison very long.
Servando Gomez (Florida) Helped to run a truck and warehouse robbery scheme that started in 2006 and ran until he was caught and pleaded guilty. At the time of his arrest, his house had over $13 million worth of stolen goods, most of which were bound for Mexico and South America, including several millions worth of stolen pharmaceuticals. His sentence was only three years probation while the ringleader, Denis Perez De Castro, has eluded police and is still at large. The investigation involved the coordinated efforts of local and state police who refer to themselves as the Tomcats, and 16 months of evidence gathering. (Source: Bloomberg BusinessWeek, May 30 - June 5, 2011)
Raj Rajaratnam (New York) Ran one of the biggest insider trading schemes on Wall Street that made him a billionaire. On May 11, 2011 he was found guilty on all 14 counts mostly due to his fellow conspirators testifying against him. The majority of the states case is based on wiretapped conversations with his contacts whom he obtained his insider information. He plans to appeal for a retrial based on the admissibility of the wiretaps. If he is successful, the prosecutions case will be significantly weakened and Rajaratnam should be able to plea down his case for a lighter sentence. In the meantime, he remains under house arrest in his lush New York City apartment.
Utility Wins over Cost
In the case of Economic crimes, it is fairly clear that the case for engaging in criminal behavior outweighs the potential consequences. With tight budgetary constraints, the FBI along with state and local police find themselves fighting a zero-sum game when it comes to investigating and prosecuting criminal behavior. When more resources are given to violent crime, then economic crime will go up, and if more resources are given to economic crime, then violent crime goes up. On the sentencing end, when prisons are already stretched thin in terms of maintaining a large prison population, the temptation is to release as many non-violent offenders as possible, in which the vast majority are those who are guilty of committing economic crimes. Once free, most will go right back to work.
As long as the Marginal Utility of economic crime is greater than the Marginal Cost, this trend will continue and will likely expand as future criminals realize that a life of crime will likely provide them a better life than they would otherwise have. In order to change this trend, as a society we must simultaneously increase the Marginal Costs of criminal behavior while also increasing the Marginal Utility of legal forms of work.
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