by Richard “Chip” Peterson, PhD, Sept. 21, 2010


            I find it interesting that many functions of government parallel functions of organized crime. Consequently, if a government is weak or absent, certain governmental functions will be performed by organized crime-- as when the mafias exerted their influence in Russia after the fall of Communists from power in the USSR. This essay looks at ways in which governments and organized crime perform similar functions, and may compete with one another in some spheres of activity. Areas to be considered include: extortion, protection rackets, robbery, enforcement of contracts, selling forbidden products, establishment of monopolies, regional defense, and wars of expansion.



            Extortion rackets are often run by organized crime. In such a racket, people are required to make a payment to the organized crime syndicate lest something bad happen to them or their wealth or family.  I initially thought that extortion  threats only applied to organized crime. However, I changed my mind after testifying before a state legislature.

            I had been asked to testify as an expert witness to explain why low limits on interest rates that creditors could charge would not be a good idea. I cited information regarding Arkansas with its low interest rate (usury) law requirements. In that state people often had as much credit as in other states but they often received it indirectly by buying goods on credit. When they did so, they had to pay more for the goods. Less credit-worthy people were not able to obtain credit from banks at all, and might have to obtain credit from less savory sources.  I thought that most people were aware of these findings since people had known for many years that Arkansas's usury law had distorted credit markets and caused durable goods prices to rise. Thus, I presumed that I would be educating legislators who were unaware of the problems that usury laws could cause.

            However, after my testimony, I realized that that was not the case. The consumer finance company and bank lobbyists who had arranged my testimony left the room with me and a number of legislators who had proposed the law. They all got along wonderfully and it was clear that the legislators already knew what I had tried to tell them. The whole arrangement had been a charade since it was an election year and the legislators up for reelection had to refill their campaign coffers. Thus, by threatening to pass a law that would harm certain industries, the legislators assured themselves that they would get attention and campaign contributions from the industries that would be harmed if the proposed law were to pass.

            Generalizing, I realized that it was most likely not uncommon for legislators to propose potentially harmful laws for certain industries and then withdraw the proposed laws once they had been “educated” and, most importantly, after they had received adequate campaign contributions from the groups that would be harmed if the legislation were to pass. In a way, their threat to pass harmful laws was a legal mechanism of “extortion.” Such activities ( i.e., the introduction of potentially threatening legislation for various interest groups, which may not be acted upon after legislators are sufficiently “informed”) are most likely to occur prior to elections when legislators want to secure funding for their upcoming campaigns.


Protection Rackets

            Organized crime syndicates not uncommonly engage in protection rackets. Without making explicit direct threats, they offer to protect businesses or people who regularly make contributions to them. People who don't make such contributions may find their business burned or trashed or people close to them harmed physically, so people may choose to pay for “protection” if they live in crime ridden areas. As opposed to extortion where a direct threat of potential harm is made, a protection racket only provides a promise to protect the purchaser of the “insurance” from unspecified potential future harm.

            Politically, many politicians strive to serve the interests of the people who regularly provide them with large campaign contributions and/or other political support (such as labor union members to walk the neighborhoods or sponsor get out the vote drives for favored candidates). By contributing significant amounts either financially or otherwise, an entity with a vested interest can ensure that his or her interests will be taken into account and protected by the politician who has been a recipient of his or her favors. Such protection in advance may prove to be effective not only in preventing potential extortion by that political entity  but also in countering potentially harmful or extortionate moves made by other political entities, including regulators. Thus, such campaign contributions may protect the “donor” in advance from potential legislative or regulatory harm. Because legislators can provide such preemptive protection, many businesses and individuals who fear potential legislative harm contribute generously to both sides in legislative political campaigns.



            A potential robber is likely to approach people  with a gun and threaten them with harm if they do not surrender their money to the robber. First the gun appears, then the money is requested and taken. If the money is not forthcoming, something bad may happen.

            When a government levies taxes, it first requests that a person surrender some of their money. If the person does not surrender it, you may rest assured that eventually someone with a gun will appear (sheriffs and many federal agents carry guns, and they or their deputies may be requested to collect unpaid debts) and either seize the individual's money or more likely, require that the individual appear in court where either his or her money will be legally seized or he or she will be incarcerated. In short, in this case, first the money is requested, then a person with a gun appears, and then the money is lost or something bad happens. The process is similar to robbery in its effects, in that either the money is lost or something bad happens, but the sequence of events is slightly different since the person with a gun doesn't appear until later in the process.


Selling Forbidden Products

            Often a government will declare that some products cannot be purchased by potential consumers. This occurred most notably after passage of the 18th Amendment that introduced “prohibition” of the consumption of alcohol in the United States. Other government dictates may prohibit betting on “numbers” or betting on horse races, etc.

            Because many people like to drink or gamble or do other prohibited things, organized crime has often filled the public's demand for goods or services that have been prohibited by government laws or fiat. Thus, the illegal mafia and rum runners thrived during prohibition. The mafia (organized crime) not only provided alcohol to people who wanted to drink, they also provided illegal drugs, prostitutes, numbers rackets, off-track betting and other prohibited goods and services that the public wanted to purchase.

            Because the government found that it was hard to keep people from satisfying their desires, alcohol prohibition was repealed by the 21st amendment. However, organized crime, having grown in strength during the era of prohibition, continued to provide other forbidden goods and services.

            Eventually, governments' learned that they, too, could profit from the baser desires of members of the public. The federal government and most states levied substantial taxes on beer and liquor. Some states required that people only purchase alcohol from government chartered ABC (Alcohol Beverage Control) stores. In addition, many states found that they could profit by running various “numbers rackets” called “lotteries.” In addition, a number of states allowed race track gambling and took a substantial cut of the monies bet. Now that California is financially strapped, it seems to be about to legalize marijuana in order to obtain additional tax revenues.

             In short, governments have taken over some of the markets for “forbidden” goods and services that were formerly served by organized crime. Governments may either directly provide formerly prohibited goods (numbers rackets or ABC store sales of alcohol) or may levy heavy taxes upon those they allow to do so (race track betting, alcohol sales, and, potentially, marijuana sales).


Enforcement of Contracts

            One of the primary and most beneficial functions of government is to enforce the performance of contracts entered into by private individuals or parties. By so doing, the government allows people to be able to count upon agreed terms of exchange. As a result,  people can enter into complex exchange and trading arrangements with each other that allow complex economic relationships to evolve that benefit all concerned. Because gains from specialization and trade accrue to all members of the society, it is worthwhile for each society to support legal and judicial bodies that enforce the rule of law and private contractual relationships..

            In the absence of a strong government role, however, private contracts may not be easily enforceable. For instance, contracts that relate to dealing in prohibited  items such as drugs, alcohol, prostitution, etc., are not enforceable in governmental courts. Consequently, organized criminals who provide such items often also provide a method for contract enforcement. Organized criminals such as the mafia often have a code of conduct that requires that contracts be honored lest the violators be punished. Since incarceration is not available as a form of punishment for the violation of contracts not enforceable under the governmental legal system, often organized criminals use physical harm or death as a way to ensure that people will honor their contracts.

            In the absence of a strong and effective governmental legal system, organized crime syndicates may arise to ensure that contracts are honored and people can benefit from economic exchange. This happened in Russia after the fall of the Communist government when the Russian “Mafia” developed to enforce contracts in different areas. The Russian mafia was not uniform across the country since it had many aspects of local warlordism, where local bosses could enforce their will on the populace by force. Different mafia organizations might hold sway in different parts of the country. They may be accepted by the people if the  nominal governmental structure is absent or weak since economic exchange and the benefits it brings are more beneficial if contracts can be enforced, even if the enforcement mechanism is outside regular legal channels.

            Furthermore, where governments are weak or do not enforce codes of conduct desired by the people, organized crime may arise and prosper by providing the judicial authority that the government  does not provide. For instance, the Italian mafia is strong in some parts of Sicily because it enforces informal mores that the public desires—such as requiring young men who impregnate unmarried women to marry them or else. Similarly, the Taliban may be strong in some parts of Pakistan or Afghanistan because it enforces Sharia codes that strong Muslim adherents wish to have enforced in their areas, and which the secular government does not enforce.

            Thus, both legal governments and criminal organizations can gain favor with and support from the people by enforcing either implied or actual contracts, whose enforcement is desired either by the people in general or by participants in economic exchanges.


Establishment of Monopolies


            People who own monopoly rights to offer a good or service can make extraordinary profits because they can charge whatever the market will bear to obtain those goods or services.

            Sometimes the ability to obtain monopoly profits is useful. For instance, our founding fathers allowed for people to obtain patents for their new inventions so they would have an incentive to innovate and could profit by doing so. By encouraging research and innovation, the granting of patent rights in the U.S. has  importantly encouraged our subsequent economic growth and prosperity.

            Other times, the granting of monopoly rights allows private interests favored by the government to benefit at the expense of the people who have to pay higher prices for a good and service that otherwise would be available at lower cost if competition were more prevalent. For instance, when Lyndon Johnson served in the Senate, he served on committees that oversaw the Federal Communications Commission. That commission assigns allowable radio and TV spectrums to different stations. Lyndon's wife, Lady Bird Johnson was able to obtain the only TV station license in Austin, Texas. Consequently, she was able to become a wealthy woman since her station could charge more for advertising since it did not have competition in the local area. Was it Lyndon's political influence that helped her obtain the monopoly TV broadcasting rights in Austin for a while? Who knows for sure? What is clear is that someone granted monopoly rights by government fiat is protected from a great deal of competition and, therefore, is able to earn extra profits. Thus, it is not unlikely that politicians will reward favored individuals (possibly even large campaign contributors) with government guaranteed and enforced monopoly rights if they have the ability to do so.

            Free markets with unlimited entry will tend to erode monopoly profits over time as more potential competitors see that excess profits can be earned and, therefore, enter the market and bid down selling prices of the good or service in question. Thus, durable monopolies require that something prevent new competitors from entering the market to provide a highly profitable good or service.

            Government, with its courts and police powers, can often create and enforce monopolies. In fact, most monopolies will not last long without governmental support. In turn, the government agents who provide the grant of monopoly power may be able to extract “monopoly rents” from the owner of the monopoly in the form of a sharing of monopoly profits through campaign contributions or other side payments.

            Organized crime may also grant monopoly rights to enhance the profits of those who provide illegal goods or services to the public. Different arms of the “mafia” may hold sway in different cities. Furthermore, at a lower level, different gangs, such as the “crips” and the “bloods” or others may control different “turfs” and control the distribution of illegal substances in their areas. By limiting competitive offerings of the same good or service  in the immediate area, the gang or organized crime syndicate may be able to obtain higher selling prices and greater monopoly profits than would otherwise be available. That is one reason that gangs may seek to consolidate their turfs and prevent other competitors from entering their market areas without their permission.


Regional Defense

             From the viewpoint of a gang or criminal enterprise that is trying to protect the monopoly rents it is able to earn on its “turf” through extortion, protection rackets, or the monopoly provision of illegal goods or services, it is essential that that enterprise be able to protect its monopoly rents. In the absence of government guaranteed protection of monopolies, criminal enterprises generally must use force to protect and maintain the “turf” in which they exercise their monopoly privileges. Thus, gang wars are not uncommonly fought to protect a criminal organization's turf from encroachment by another criminal enterprise. In addition, the criminal enterprise may try to use governmental authorities to help maintain their turf. They may pay off law enforcement officers or judges so they will go easy on the gang in question while cracking down on any potential interlopers into the area.

            An important function of governments is to provide protection for their citizens. Citizens are willing to pay for protection so the governing class is often able to profit by providing protection for residents in their area. Protection can be provided  informally through feudal arrangements, via local warlord organizations, or even through “mafia” organizations that dominate an area in the absence of a strong formal government. Protection can also be provided formally by governments that tax and/or conscript their citizens and use tax proceeds to pay for a defense force.

            People are willing to pay taxes for defense since they live their lives and pursue their economic endeavors in the area and fear they might lose either their lives or their livelihood if another authority were to assume jurisdiction over their area. In addition to funding a defense force, residents' tax payments may also provide a substantial profit for the government members or other agents who promise to defend them.

            Thus, both the government entity and the citizens often have a vested interest in defending their region against encroachment by another potentially hostile force. That may not be true, however, in cases where the people feel they have been exploited by their overlords and would do no worse, and probably better, if the controlling authority in their region were to be replaced.


Wars of Expansion

            Criminal enterprises that are able to earn monopoly profits from being the sole provider of illegal goods or services in an area may realize that they can enhance their earnings by expanding their authority and monopoly powers to other areas. Thus, they may try to expand their region of influence and/or consolidate a monopoly position where they will not have to share their markets with competitors.  This can lead to turf wars as one criminal organization tries to take over exclusive control of new areas and eliminate competition from other providers of illegal services in those areas. Thus, criminal organizations my engage in wars of expansion in order to try to enhance their power and their ability to earn monopoly profits. Their wars usually require that other potential competitors either be killed or co-opted into cooperating with the expanding institution.

            Government authorities may also try to expand in order to enhance their power and influence. In the Roman empire, the Roman authorities often co-opted leaders of  subjugated tribes by giving them Roman citizenship and power and authority over the subjugated peoples. The Romans levied taxes upon the subjugated peoples and used force to make them pay the taxes, become slaves, or otherwise do what the Roman authorities required. By exploiting the subjugated peoples either directly, through enslavement and conscription, or indirectly, by collecting a portion of their work product with tax levies, the Romans were able to enhance the power and wealth of their empire. Thus, the Romans profited by fighting wars of expansion and growing their empire.

            Other governments may also try to fight wars of expansion in order to benefit the governmental leaders, and possibly others in the expanding force, who precipitate the expansion. In some cases the expansion may be motivated by the desire to have more subjects, and their potential work product and subservience, under the control of the aggressive governmental leaders. In such cases, the expanding force will try to co-opt local leaders, as the Romans did, so the work effort of their subjects can be exploited. In other cases, the expansion may be motivated by the desire to seize assets that are presently being controlled by others. Such an expansion can be motivated by a desire to obtain “living room” so the dominant population will have more property to occupy or lands to farm, or it may be motivated by the desire to have more vital resources, such as water, or farmland, or oil, or precious minerals (for instance, Saddam Hussein invaded Kuwait because Kuwait had many valuable oil resources). In the case where the expansion is motivated by the desire to seize resources, the present occupants of the land might be slaughtered or, at best, enslaved. As long as some governments feel that they can benefit by expanding and that the cost of doing so is relatively low, it is likely that wars of expansion initiated by government entities will continue.

            In both the criminal case and the governmental case, a war of expansion is likely to occur if the leaders of the expanding entity believe that substantial profits from a successful expansion will significantly exceed the expected costs to the expanding party. One difference, however, is that, unlike some aggressive tyrants of the past, criminal enterprises generally will not try to decimate the population of the area into which they wish to expand, as a criminal enterprise's success depends upon having a source of additional customers for its illegal products.


Email Chip with any questions.,

Richard Peterson Campaign, Richard Peterson treasurer