A few years ago, I was invited to give a talk to 30 German Chiefs of Police. I took the opportunity to talk about social entrepreneurship and my perspective on criminal entrepreneurship.
The interesting part was that all of them agreed that criminals have an entrepreneurial personality. When you think about it, it makes sense. Criminal entrepreneurs react to price signals, exploit opportunities, manage organizations often across borders and are among the first adopters of technologies. The United Nations Office on Drugs and Crime has recently published a report how the pandemic has provided new opportunities for organized crime organizations.
There is also an interesting link between criminal and social. There is considerable societal damage done by mafia-like organizations but still there are people praying for Pablo Escobar. When I was living in Rio de Janeiro in 2005/2006, I was always astonished to see the positive reputation favela gangs manage to have. Other examples are organizations in the Middle East which combine terrorism and welfare services. Just think about it. It is intriguing how this can possibly work.
To add a complexity layer, there are even criminal organizations which use the cover of charity for money laundering or drug smuggling.
What is the theory behind it? Baumol makes the point in a research paper “Entrepreneurship: Productive, Unproductive, and Destructive” that the pool of entrepreneurs is relatively constant, but entrepreneurs choose between productive, unproductive or even destructive activities. The self-selection depends on the relative payoffs the society can offer. He describes it in the following way:
Let us now turn to the central hypothesis of this paper: that the exercise of entrepreneurship can sometimes be unproductive or even destructive, and that whether it takes one of these directions or one that is more benign depends heavily on the structure of payoffs in the economy-the rules of the game. The rather dramatic illustrations provided by world history seem to confirm quite emphatically the following proposition.
PROPOSITION 1. The rules of the game that determine the relative payoffs to different entrepreneurial activities do change dramatically from one time and place to another. These examples also suggest strongly (but hardly “prove”) the following proposition.
PROPOSITION 2. Entrepreneurial behavior changes direction from one economy to another in a manner that corresponds to the variations in the rules of the game.
I am currently reading Tom Holland’s Rubicon about Rome in the first century BC and entrepreneurial talent at this time was drawn to the military and the political field. Today, Caesar would probably be running a tech start-up … or his own kingdom.
Nowadays, you have entrepreneurs in all fields: political entrepreneurs, non-profit entrepreneurs, cultural entrepreneurs, migrant entrepreneurs, high-impact entrepreneurs, social entrepreneurs and criminal entrepreneurs. Just ask yourself where we want to have more entrepreneurial talent. My preference would be towards administrative processes managing the current pandemic and other services with a social value.
Entrepreneurs are usually associated with innovation. Criminal entrepreneurs are also exploiting new innovations and ways to do things differently. Whenever there is a new technology, it is likely that there will be some criminal entrepreneurs trying to exploit potential loopholes. Think of cryptocurrencies, online file-sharing, money laundering or hacking. Organized crime organizations are also among the first to adopt new technologies. Drones are cheap options to cross borders and there is a fabulous podcast episode how the French telegraph system was hacked in 1834.
Dees has used the description “acting boldly without being limited by resources currently in hand” to characterize social entrepreneurs and entrepreneurs in general. It means that entrepreneurs start working on a certain venture without knowing how they will be eventually reaching the target.
This leads us the question of finance. Is there any way that criminal entrepreneurs can fund their operations using external capital sources?
In principle, crime is relatively inexpensive. Think of hacking, car theft or burglary. There would be no need for external finance. Financing itself would also be complicated. The criminal would not want to be transparent about his activities, the capital provider would have difficulties monitoring the activities and claims would not be legally enforceable. Admittedly, it is an extreme case for the principal-agent problem.
The following chart shows an idea how to think about it.