The Economic Consequences of Crime

I receive a weekly newsletter from an economist. This week he applies the principles of economic theory to crime. In so doing he points out the beneficial aspects of crime for the country, along with some not so obvious negative consequences. If you enjoyed this type of application of economics then you will probably also enjoy ‘Freakonomics‘ by Levitt & Dubner.

I have posted this essay on on our blog in light of much of the debate currently circulating around SA, crime, & the blogosphere.

The Economic Consequences of Crime
Weekly Comment by Dr Cees Bruggemans, Chief Economist First National Bank
5 September 2006

It is a popular notion that crime undermines economic growth. Perhaps reality is more complex than that.

Firstly, crime is a form of self-employment or self-help (also known as proletarian shopping). It directly levies a social tax on the community through the actions of possibly hundreds of thousands of people.

Whereas taxation is popularly depicted as highway robbery, taking from the well-off and distributing among the poor, it does so efficiently at very low collection costs, with at least a partial sense of universal agreement among the victims that any good will come of it (if the state is efficient in using the resources so collected and enhances the general welfare over time).

Not so crime, which in essence is also a Robin Hood activity, but a totally inefficient, often utterly destructive and devastating one.

But whereas the actual crime of stealing doesn’t add economic value, many of the consequences most certainly do (as yet another, mostly unremarked, form of ‘creative destruction’).

A virtual army of security personnel has been created throughout the country, attempting to offer peace of mind, as much at home as in the parking lot. Whereas a secure society wouldn’t necessarily have found reason to employ the additional hundreds of thousands so engaged, the act of crime has ensured the direct and indirect absorption of a part of society’s labour surplus.

Another aftereffect concerns replacement of what has been stolen. Not so long ago, the number of cars stolen annually equaled nearly half all new car sales. With car sales more than doubled, this ratio is probably down to 20%, still a high ratio.

To this must be added all personal effects, household furnishings, cellphones, furniture, computers, other electronic goods and what have you that keep on disappearing, but tend to be replaced.

We tend to emphasize the expansion of the middle class as the great growth engine of our time, but this remarkable crime-induced replacement cycle should not be so easily forgotten or underrated.

Then there is physical security generally. It used to be that a lock on the door and a doggy or two would do the trick. Then came walls, burglar bars, security gates, intercoms, electric wires, lasers, alarm systems of all kinds, sealed off (boomed) suburbs, gated estates, anti-hijack and tracker systems, bodyguards (the latter nowadays apparently one of the ultimate status symbols).

And once-off investments don’t prove adequate. One has to upgrade, with the cycle getting shorter and more expensive over time, imitating build-in obsolescence in real consumer products.

Crime has greatly intensified the search for security, even encouraging the abandonment of good housing (often selling such heightened security risks to the next round of house buyers), with the frantic house hopping adding to the sense of an unending property boom.

The next time there is reference to households borrowing and spending too much, one can quietly point out crime-related replacement costs and security upgradings, which often tend to buy only short-lived peace of mind, until the next breaching of the walls or gate.

Yet these outlays do create many jobs and profits for people supplying such goods and services. Thus, these activities greatly boost measured economic growth and tax collection, directly and indirectly, seeing the enormous extent of crime and its visible consequences.

Now for the downside.

All crime brings psychological costs and often physical loss, creating an army of walking wounded, much of it unrecognisable. Increased anxiety means loss of lifestyle and a greater sense of risk, and possibly less risk-taking. It may encourage emigration, may discourage foreign direct investment, and may inhibit the hiring of more people for productive activities.

Crime is a serious emotional drain and inhibitor of economic activity, but most of that goes unseen, or may be experienced as an opportunity loss. It goes mostly unrecorded in the economic statistics.

If the definition of crime is widened yet more to include corruption, then all crime is like a cancer that starts to obstruct the efficient working of society. With its important institutions decaying from within, a society’s many market mechanisms can no longer function properly as information is distorted, the wrong prices imposed, the wrong activities rewarded and called forth, scarce resources wastefully squandered, unto paralysis and untimely death.

Economic performance ever so steadily becomes undermined even as the bean counters keep on noticing more economic activity, only measuring the replacement and security-focused efforts and not subtracting from GDP the anxiety increases, the helplessness, the physical abuse, the misdirection of resources, the loss of incentive, the heightened sense of risk, the skill drain, the things no longer undertaken that otherwise would have added to useful GDP (defined as enhancing the general welfare, not just of the criminals concerned).

It could be argued that crime taken to its ultimate level would cause (over hundreds of generations) regression in the human gnome, where our DNA would hardwire core survival instincts. These ‘rules’ would no longer have to be learnt to ensure survival of the species, these reactions becoming automatic, with the basic and ancient reptile part of our brains potentially resurfacing with a vengeance. One is most reminded of predator species.

This would be a great tragedy, as our great success as a species could be fundamentally jeopardized, for instinctive action would come to crowd-out the reasoning ability that has so hugely contributed to our success over the eons behind us.

But try telling the politicians and the criminals that they are tapering with what has been our evolutionary pinnacle, until now!

Successful crime means the failure of the state to offer security to its citizens.

As things stand, crime’s burden rests where it falls, not unlike long-term unemployment, HIV/Aids, bureaucratic and infrastructure shortcomings.

Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics

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