Monday, February 15, 2010

On the limits of price theory as punishment theory

When debating theories of punishment, frequently one hears metaphors rooted in free-market capitalism's classical price theory, where punishment is considered the "price" for certain aberrant behavior and (theoretically) a higher price supposedly deters the unwanted behavior.

In financial circles, though, critiques of those very theories have been thrust to the center of national debates over the economic collapse and a road to recovery less reliant on bubbles and unsustainable debt loads. Former Fed Chair Alan Greenspan famously recanted from the laissez-faire worldview that animated and drove his entire career. Even 7th Circuit Judge Richard Posner, the judiciary's most radical free market advocate, has taken to reading and advocating ideas from John Maynard Keynes and frankly discussing the limits of theories of "perfect competition" based on rational action by self-interested consumers.

For those who didn't waste much of their college years, as I did, sitting in economics classes, here's the boiled down list of seldom-satisfied assumptions which must be true for classical economic theory to work (adapted from Wikipedia):
  • Large Numbers of Buyers and Sellers – Oligarchies or monopolies among either producers or consumers skew results and reduce efficiency.
  • Zero Entry/Exit Barriers – It's relatively easy to enter or exit as a business in a perfectly competitive market.
  • Perfect Information - Prices and quality of products are accurately known by all consumers and producers.
  • Transactions are Costless - Buyers and sellers incur no costs in making an exchange.
  • Profit Maximization - Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit.
  • Homogeneous Products – The characteristics of any given market good or service do not vary across suppliers.
So "perfect competition" in economic theory assumes a number of conditions are true that, in practice, frequently are not.

Often there are only a few large producers or, in the case of services provided to government, only a single consumer. Some businesses - drug companies, for example, have multi-billion startup costs for anyone who wants to directly compete with the pharmaceutical oligarchs.

"Perfect information" is the most ridiculous assumption on the list - the biggest reason for "bubbles" in the market is that nobody knows the real quality or value of investments like "derivatives," real estate, or many other products. In oligarchical settings (where there are few producers), "profit maximization" may go out the window in deference to other goals like driving competitors out of the market and maximizing market share. And deviations among products (the relative perceived quality of Honda vs. Toyota vs. Ford vs. Chrysler, for example), make the model inapplicable to many products compared to, say, agricultural commodities where, at the end of the day, wheat is wheat. (See a longer list of criticisms here.)

Viewed through this lens, free-market price theories don't even work well in most real-world consumer markets. But they apply even less so to crime and punishment, where none of these assumptions are true. According to this ill-conceived metaphor, the crime rate represents demand for illegal behavior, the "price" for which is the level of punishment. What's more, the government is the supplier not of the thing "demanded" by consumers, but of punishment (read: price), which uncouples the relationship between supply and demand beyond recognition in traditonal economic terms. Let's run through the various, flawed assumptions on punishment as price-setting in the criminal justice system.

First, while there is near-infinite demand for illegal behavior, there is a monopoly on punishment vested with the government. Moreover, "barriers to entry" are not just high but insurmountable: Private interests by law cannot mete out justice, only the government.

Debates over "innocence" show that the justice system no more enjoys "perfect information" than participants in commercial markets. And not only are transactions not "costless," it costs an increasingly large amount to bring forward and adjudicate cases.

Further, the goal of the justice system is not profit maximization, but an array of more subjective social goals - from public safety to retribution to pandering to special interests - that frequently, readily ignore cost-benefit goals. And far from a "homogenous product," punishments meted out in the justice system are, and should be, individualized to the defendant.

Finally, and most importantly, since the "price" paid by consumers of illegal behavior is mostly loss of liberty - not money - a price theory of criminal justice presents the unique situation where the supplier of justice (the government) pays, not the consumer (the defendant, for whom the "price" of punishment is set), turning economic theory on its head.

Given these flawed assumptions behind punishment as the "price" for misbehavior, it's little wonder that higher "prices" don't generate the best results in terms of reducing crime. In fact, though crime has been declining nationally in recent years, that trend appears to be disconnected with incarceration rates, or even inversely related.

Adam Gelb of the Pew Center on the States points out (pdf - p. 8) that from 1997 - 2007, Nevada, Louisiana and Minnesota all saw their crime rates decline 25%. By contrast, Nevada's incarceration rate declined 3% over the same period, Louisiana's increased by 29%, and Minnesota's increased by a staggering 60% to achieve the same result. What's more (p. 9) states that reduced their incarceration rates saw the biggest drops in crime, even though nationally incarceration rates skyrocketed over this period.

So the price theory of deterring criminals doesn't work any better for reducing crime than it does establishing the value of derivatives in the financial market. Like derivatives that had to be bailed out by the feds as "toxic assets," everyone believes the criminal justice system has value, but it's difficult to concretely define what that is and by all appearances, we've been paying to much for it, with diminishing benefit to the public from greater expenditures.

We're at the end of a three-decade long incarceration "bubble" that dwarfs that witnessed by any other society in history. Perhaps, just as folks are rethinking their reliance on free-market ideology for analyzing the economy, the criminal justice system should be rethinking its reliance on this primitive, flawed metaphor based on the same principles. After all, it's taxpayers paying the price, which it turns out is not the same thing as enduring the punishment.

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11 comments:

Anonymous said...

Grits, I doubt that most criminals think in terms of macro or micro-economics. Some of them might think briefly that if they get caught they'll likely be punished. Most of them just don't think they'll be caught. The whole notion of a "price" generally only comes into play after the fact and then is set by the court system within the punishment parameters set by the lesislature. I understand what your trying to suggest by comparing crime and punishment with free market economic theory. However, in reality, I think you're only comparing apples to oranges. Our justice system need only be based on one singular and simple principle. It's the one we learn from our parents when we're two or three years old. If you take cookies out of the cookie jar without permission, you're going to get a spanking. How many swats you might get is pretty much beside the point. But most chidren, and criminals, understand this basic concept.

Anonymous said...

Thank you for this insightful piece. I couldn't help but think of WilCo and wonder what is really going on up there. Even a few probation officers in WilCo have had concerns about the Center for Cognitive Education, a treatment provider who offers various programs for various offenses. There is little "competition" in WilCo for this particular provider. This treatment provider provides various treatment programs to the WilCo CSCD, operates in offices located in Georgetown and Taylor. Provider also provides services to Bell & McLennan Counties. This group also functions as a "court approved" treatment provider used by the courts to determine if a defendant should be in treatment, and if so, what treatment programs are recommended. The same treatment provider provides expert testimony for the WilCo courts. The treatment provider's agreement to the county is vaguely written and there seems to be little financial accountability. Provider repeatedly refuses to give receipts for services rendered and accepts only cash or money orders.

All assessments, evaluations, and treatment classes are paid by the defendant and are not included in the fines, court costs and probation fees the offender will also be expected to pay. Probation fees in Wilco are usually set at the maximum allowed under state law.

It is difficult for many offenders to keep up with the legal costs and the treatment costs in addition to the cost of living in today's economy. Failing to pay for treatment results in dismissal from the program, and possible "theft of services" charges prosecuted by the District Attorney's Office. Typically a motion to revoke probation will follow.

I for one question WilCo's "tough on crime" stance. We should question how many WilCo probationers and parolees are being bled dry by the Center for Cognitive Education for "therapeutic" as well as "court" services.

I am wondering what is the costs to taxpayers for incarcerating individuals who are unable to meet their financial obligations. Consider the 18 year old boy sentenced to 4 years prison time because he was struggling financially, and his family was unable to help him. His probation officer did nothing to help this boy even though she could have filed for indigent assistance and notified the court of the financial burden and ask the court's assistance. The boy was working at Taco Bell and was a senior in high school. He was dismissed from treatment after being unable to pay for 3 weeks treatment (a total cost of $105) and 2 months behind on probation, fines, court costs. How much will his 4 year sentence cost the taxpayers?

NOTE: The theft of service charge against the 18 year old boy was dropped.

Pirate Rothbard said...

The alternative to free market theory is that the world is filled with dumb people and we need an educated elite filled with people like Grits to tell us what to do. I'd say the free market still works pretty well if you look at the alternatives.

Grits builds a straw man argument by picking Alan Greenspan as the top free market advocate. Alan Greenspan was a whore who lived off taxpayer dollars as chairman of the Federal Reserve, a quaisi(hahaha)government institution.

If we stop food stamps, some of these criminals will starve to death before they are born. If we privatize the roads and allow discrimination in housing, then those of who belong to the middle class can avoid crime by just watching where we drive. The free market could do a lot to protect high value targets from crime.

Put your faith in property rights. Capitalism is like Coca-Cola, you can't beat the real thing.

Anonymous said...

5:51,---Sounds like a really good reason not to commit a crime in Williamson County. Problem solved!

Anonymous said...

6:07,---sounds like a typical response to be expected of a wilco official.

Anonymous said...

I’m not altogether sure how economic theories fit into the social arena of crime and punishment and the relative cost to both criminals and society in any way, other than metaphorically, so for me personally, it’s rather difficult to follow the comparison here.

I understand the thought that our beliefs of how a price should be paid for criminal behavior have become archaic in that we simply can not sustain the path we are on, but not because I feel punishment should be any more or less sever for real criminal behavior, but rather in what we consider real criminal behavior to be, for example being intoxicated should not be crime, driving while intoxicated should be. Alcohol and drugs are both dangerous to our personal health and safety and the safety of others, however it becomes a crime when we put others in danger; self destruction should not be criminal, it is a health issue and should be treated as such.

I am not an economist but after reading the links you placed on this topic it seems again (to me) that the focus of Keynes in simple language is that everything is relative to what is happening now, here, today and that the abandonment of common sense solutions in order to maintain the status quo for which history has proven to be sustainable should be in question because circumstances do in fact change.

I think the overreaching power of government and their strong-arm tactics of forcing financial institutions into providing for sub-prime loans sparked the free market capitalist into believing the big lie and that government not capitalism is to blame for our current plight. The attack of 9-11 was the death needle injected into America and the rest of the world.

China is thriving today in part because social issues do not drive the interests of their government, there is no liberal agenda constantly seeking to suck tax dollars for social projects, or conservative earmarks to benefit their interests, in short the government doesn’t waste money for anything but what the government wants.

America for all of its flaws continues to offer society and the world the hope of a free thinking and evolving society for liberals and conservatives alike and all sides of the political arena need to stop the spending on anything other than those things that will truly help spark the economy. Our politicians are completely out of touch with reality and do not appear to care one bit.

The underlying implication intended or not that the free market capitalistic ideals that have been America and the unique quality that has enabled Americans to live a better quality of life than that of any other people on the planet does not work and is ready for a change toward socialism is a stretch that has sent the supporters of our current administration to the showers.

Americans have seen what it looks and feels like to have a Progressive in the White House and the uncovering of the tactics they have supported and used through tax dollars like Acorn to their benefit to take office. The current surmounting tidal wave is to throw them out as quickly as is humanly possible and the only side benefit to this is an America that is sending a message back to politicians that we are fed up with their actions. Maybe through this message a change in the drug laws are next on the horizon which would give a great deal of relief to the cost associated with the criminal justice system.

Gritsforbreakfast said...

5:01 writes: "Our justice system need only be based on one singular and simple principle. ... If you take cookies out of the cookie jar without permission, you're going to get a spanking."

Yeah, that always works. You've obviously never been, nor raised, a rebellious teenager.

Pirate, you miss my point entirely: I'm saying the "free market" model isn't applicable in criminal justice, that the producer-consumer/payor-payee relationship doesn't track at a basic level with the free-market model, which is why a higher "price" doesn't necessarily reduce "demand" for illegal behavior. Punishment is not the "price," that's what taxpayers pay. The basic metaphor is flawed.

Also, just redefining Greenspan as a turncoat doesn't change the fact that he, Posner, and other free market icons are questioning these "rational actor" assumptions. Given recent history, anyone who honestly thinks about it in much detail would have to.

And 12:41 writes, "The underlying implication intended or not that the free market capitalistic ideals that have been America and the unique quality that has enabled Americans to live a better quality of life than that of any other people on the planet does not work and is ready for a change toward socialism is a stretch."

And where did I imply that? Please point out specifically my call for "socialism"? I feel no need to defend positions I've never taken, even if (always anonymous) commenters would like to attribute them to me.

Anonymous said...

My apologies sir, as stated I’m not sure I follow the comparison, your last statement above helps me to clarify, and also that’s why I said, “intended or not,” these days its seems the ideals of socialism like to sneak into the mainstream and I question the meaning and purpose of a lot more things than I used to.

Your statement “In financial circles, though, critiques of those very theories have been thrust to the center of national debates over the economic collapse” and your comparison, gives me reason to ask myself questions like what is it he is trying to imply by that statement. Were you making that statement to support your comparison or were you trying to insinuate that the free market capitalistic ideals are at fault? And if the later is true then the comparison suddenly turns to free market capitalism VS socialism.

If I misinterpreted your meaning, “And where did I imply that? Please point out specifically my call for "socialism"? I feel no need to defend positions I've never taken, even if (always anonymous) commenters would like to attribute them to me,” and clearly you think I have, then I simply suggest that when you use these kind of statements and give reference to the statements of others that appear to question free market capitalism to support your argument it should not be surprising that others may interpret that you may feel this way and so therefore support something other than the ideals of free market capitalism.

Gritsforbreakfast said...

RE: "Were you making that statement to support your comparison or were you trying to insinuate that the free market capitalistic ideals are at fault? And if the later is true then the comparison suddenly turns to free market capitalism VS socialism."

This is a very odd leap that tells us more about you than anything I've written. I didn't say capitalistic IDEALS are at fault, but the conflict between ideals and reality - specifically the (frequently false) assumptions that must be in place for markets to optimize price under the standard theoretical model. Similarly, the related notion that a higher "price" (punishment) for crime reduces unwanted behavior, like theories of "perfect competition," is true under limited, narrow circumstances, but just as often not supported by empirical, real-world results.

That does not mean I support socialism or want to eliminate punishment. It means I DON'T ignore reality in deference to ideology. There is a middle ground between credulous acceptance of every free market shibboleth and promoting "socialism." It's not an either-or deal.

Pirate Rothbard said...

Your basic point is cogent, many criminals don't have a lot of planning ability so the price/deterrence analogy night not work so well. I say might, because certainly there a lot of studies saying deterrence does work, so it goes back and forth.

But faulting capitalism is like faulting Christianity, or something else which someone finds sacred it turns off many readers.

Well all know turning the other cheek doesn't work. Does that mean Christianity doesn't square with reality? No, it depends on your definition of Christianity. The same issues exist with capitalism.

You've gone way overboard with the straw man fallacy, attacking a cartoon version of capitalism without examining any of the answers to your objections, which are all over the internet.

It is true that we could have a hybrid capitalist/socialist society(in fact, nearly every society in the world already is a hybrid).

But why should we limit ourselves? Capitalism creates wealth, socialism destroys it. The more we move towards capitalism the better we will all be.

scott in Dallas said...

First, while... there is a monopoly on punishment vested with the government. Moreover, "barriers to entry" are not just high but insurmountable: Private interests by law cannot mete out justice, only the government.

I dare say the NRA would strenuously disagree. I wonder where you stand on concealed carry?

I was against it when Bush/Richards were fighting it out. Yet, I have to admit I was wrong, it didn't result in a bunch of drunk yahoos firing with abandon.

I also appreciated your economic critique.