The economics of crime



Why is there crime? What goes through criminals’ heads when they break the law? These are, I am sure, questions that go through every law-abiding citizen’s head whenever they see or hear about crimes being committed. In this article, I argue that some crimes are the result of a rational cost-benefit analysis on behalf on the criminal, and by using this knowledge, as well as free market ideals, our law enforcers will be able to draw out a roadmap for reducing crime across the country.

To truly visualise this theory, I use a graph to aid in demonstrating my points:

Along the horizontal, bottom axis is the prevalence of crime. Plotted on the vertical axis is the net benefit of crime. The net benefit of crime is the benefits of committing a crime (financial, social etc.) minus the costs of committing the crime.

The diagonal line running from the bottom left to the top right of the graph details how as the net benefit of crime increases, the amount of crime increases. For example, if the net benefit of committing a certain crime was 50 ‘units’, 5% of the population would commit crime. However, if the net benefit of crime was 100 ‘units’, the percentage of the population willing to commit crime would be, say, 15%. Of course, a straight diagonal line suggests that anyone would commit a crime if the net benefits were high enough; this is both empirically untestable and realistically not true. Moreover, it also infers that the net benefit of crime could be compressed to such an extent that no crime would be committed – this is certainly not true.

To account for this, our diagonal line has two protrusions: the small vertical line on the bottom left of the diagonal and another in the top right. The vertical line in the bottom left shows that there exists a natural minimum level of crime, known as ‘Pmin’; this is to account for crimes that will be committed no matter the cost. Examples of this could be so-called crime passionnel (crimes of passion), the typical example being a husband catching his wife in bed with another man and subsequently assaulting him. No matter how much the costs of committing a crime outweigh the benefits, sometimes people act irrationally and commit crimes anyway. The second protrusion is to show that there exists a theoretical maximum level of crime (Pmax), acknowledging the fact that there are many members of society who would never commit certain crimes, no matter how large the benefits and how low the costs.

Also on the diagram are horizontal lines, highlighting the net benefit of crime. This is simply the benefits of crime minus the cost. To understand how a crime level is set, we much match this diagonal line with the net benefit line. The crime level is distinguished by where the two cross. We can see from the diagram that when the net benefit of crime is given by ‘NB1’, the lines intersect at point ‘A’. This gives us a prevalence of crime level of ‘P1’.

As outlined by Milton Freidman in his seminal masterpiece Capitalism and Freedom, as well as other neoliberal thinkers such as von Mises and Hayek, it is a role of the government to enforce the rule of law and subsequently seek to reduce the net benefit of crime line thus reducing the prevalence of crime. This can be seen in our diagram as when the net benefit of crime are reduced to ‘NB2’, the two lines now intersect at point ‘B’ and the prevalence of crime has been reduced to ‘P2’.

With the mechanics now outlined, what tools does the government have at their disposal to bring down the net benefits of crime (NB)? Well, here the government has four options, split into two pillars: reduce the benefits of crime and/or increase the costs of crime. The rest of this article outlines these four measures which may be effective at reducing crime.

Decreasing the benefits of crime

Benefits of crime constitute the financial (or status) gains from criminal activity that exceeds what could be earned if they had ‘gone straight’. So how can this gap be closed? Here the key lies in two different aspects of education. The first lies in a good quality school education.  Not only does a quality secondary school education improve social mobility, equipping students with the skills necessary to climb as high on the employment ladder as they wish and strengthening the notion of equality of opportunity, but it reduces a criminological phenomenon known as status frustration. Status frustration was a concept developed by Albert Cohen in the 1950’s that hypothesised that certain groups, usually those from poorer backgrounds, found it virtually impossible to gain a good education and utilise this to enter professions that would improve their social status. Because of this, they would seek illegitimate ways to improve their status – through crime. If we are to expect children to participate legally in the free market system, it is vital that in return every child of every background in every county of this country is promised a seat in world class schools. Only then, can we improve equality of opportunity and reduce the status frustration experienced by so many young offenders just desperate to emulate those born into wealthier backgrounds.

Education also becomes vital in another context – prisons. Studies have suggested that ex-offenders list being employed as the single most important factor when it comes to preventing re-offending. Rehabilitation is a tool in the arsenal of the Police that must be leveraged to ensure that criminals can find good, honest work when they are released from prison. Education in prisons should be focused around equipping offenders with skills to pick up work in society as soon as they leave. That is not to say that prisons should only be geared towards rehabilitation, as we shall discuss in the next section, prisons have another function, serving as a deterrent. However, we must acknowledge the difficulties faced by most inmates who do turn their lives around in prisons yet who find themselves fighting a losing battle once they are released.

The logic behind both these entry points about education is that they both serve to increase the opportunity cost of crime. That is, the more money would-be criminals have the potential to legitimately earn, the greater the cost to them if they are caught and sent to prison.

Increasing the cost of crime

The other aspect of the net benefit of crime equation is the cost of crime. To bring the net benefit of crime down, the cost of crime must be increased. This was that focus of another recent article on FMC by Clare Golby, so I will not go into too much detail but it revolves around two central pillars: catching and punishing criminals.

Catching criminals is the first part of the puzzle. Before many crimes, one of the things a would-be criminal would weigh up is the likelihood of them getting caught. Of course, this makes logical sense – if a criminal is planning a bank robbery, the more likely they are to be caught, the less likely they are to rob said bank. Research suggests that for crimes that are premediated, the likelihood of being caught is given far more attention by the would-be offender than the implications if they were caught. At its most extreme if every criminal case was guaranteed to be solved, and the offender apprehended and charged, crime would plummet, with only the crimes of passion outlined above and other somewhat ‘illogical’ wrongdoings remaining. So, with this is mind, crime can be brought down by devoting more resources to the police. This is a trend acknowledged by every political party and hence why the increase in police numbers promised by the Conservatives is very welcome news. Of course, catching criminals is easier said than done, some studies suggest that in the UK only 2% of offences leads to a conviction. What does make a difference however, is the perception of risk from the eyes of a criminal. Hence, visible law enforcement itself serves as a powerful deterrent. 

The second part of the criminals’ rationale revolves around what is their sentence would be if they were caught. It is obvious to any reader that a citizen contemplating whether to steal a chocolate bar would factor in whether their punishment if caught would be a slap on the wrist or a broad fine. To use a similar extreme example to above, if every crime detected was punished by a prison sentence, crime levels would drop. Of course, I am not suggesting in any way that we reinforce the ‘Bloody Code’ on the people of Britain, but I am acknowledging that increased tendency to commit crime is linked with lax sentencing if caught. By following this logic, it is therefore vital that our law enforcement services utilise their powers to hand out appropriate sentences to act as a deterrent to criminals.

This model is by no means perfect; for example, due to its simplicity, it does not differentiate between different types of crime. There is a large psychological barrier between someone stealing a bar of chocolate and someone committing a murder, yet this model assumes the only real barrier between graduating from stealing to murder is the lack of incentive. Moreover, due to it modelling a ‘rational’ human, it does not cater to when humans act irrationally whether that be acts committed out of absolute desperation or inebriation or acts committed by those who are not of a sound mind. What the model does do, however, is outline a useful roadmap highlighting the mechanisms at a government’s disposal to reduce crime.

Jake Waterfield an incoming graduate analyst at a European investment bank.