ECONOMIC CRIME: THEORY

There is no widely accepted definition of economic crime, and it is impossible to enumerate briefly the various definitions, theories, and offenses included in this category. We focus on the theoretical work that explores three aspects of economic crime: offender motivations, economic outcomes, and economic processes.

The first tradition refers to economic crimes as illegal acts in which offenders' principal motivation appears to be economic gain (e.g., Freeman). Here, an economic crime is conceived of as any offense in which individuals or collectivities of people purposively act in an illegal manner in order to gain financial returns (e.g., robbery, drug selling, tax evasion, computer crime, and abuses of economic aid). Although conceptually appealing, this tradition has several drawbacks. For example, it assumes that offenders' motivations are readily observable or knowable from the criminal act itself. Although the motive behind robberies may appear to be the desire for property, perpetrators' primary motivation may be different (e.g., thrill seeking or racial hatred). Some crimes have multiple motives and economic gain may be a secondary goal. Furthermore, offenders themselves are not always conscious of their motives and they may be unable to distinguish between the reasons that precipitated their actions and the rationalizations or justifications that follow them.

A second tradition avoids difficulties associated with trying to infer motives and focuses on illegal acts that successfully provide offenders with an economic return (e.g., Chamlin and Kennedy). However, excluding attempted crimes from analysis limits our understanding; successfully completed offenses may differ in important ways from those that are failures. A variation of this tradition defines economic crime as offenses for which victims incur an economic cost (e.g., Salvesberg; Reuvid ). Typical victims include individuals, groups, or organizations against which the act was directed; however, a much wider group of victims may have been indirectly affected by such crimes. This occurs in cases in which a criminal act subverts or undermines the commercial effectiveness of normative business practices and the negative consequences extend beyond those at whom the specific immediate harm was intended (e.g., computer hacking, insider trading in stock market transactions). This definition addresses a common oversight in criminology—ignoring or under-representing victim issues—nonetheless, it is too narrow in some respects and too broad in others. For example, it excludes "victimless" crimes that have economic implications (e.g., prostitution) and includes any offense for which victims experience a cost (e.g., an assault that results in medical expenses or loss of wages).

A third tradition contends that the processes that lead to criminal behavior are the same as those that guide consumer behavior in the marketplace. This approach informs most theoretical work on crime offered by economists since the late 1960s. Its most cogent statement is found in Gary Becker's neoclassical or "economic" approach to explaining crime (1968; repr. 1974). The remainder of this entry describes this approach and discusses its advantages and weaknesses; reviews other social science perspectives that address some of the shortcomings of the neoclassical approach; and summarizes recent directions in the study of economic crime.

Classical approach to crime

The classical approach to crime originated in the Enlightenment and is evident in the writings of Thomas Hobbes, John Locke, Jean Jaques Rousseau, and others. According to this perspective, intelligence and rational thought are fundamental characteristics of people and the principal basis for their behavior. In other words, people have free will, make choices and pursue their own interests. In the late 1700s, philosophers Cesare Beccaria and Jeremy Bentham applied these ideas to crime, arguing that people freely chose to offend. According to Beccaria and Bentham, people's decisions to offend are guided by calculations that weigh the pleasure they hope to obtain from criminal acts against the potential pain they would receive if they were caught and punished for their crimes. This perspective, known as the classical school of criminology, maintains that people's calculations involve their knowledge of the law and their perceptions of the likelihood of punishment (based on their experiences and knowledge of the experiences of others). It proposes that crime can be most effectively deterred by punishments that are certain, swift, and proportional to the harm caused. Punishments that met these criteria would discourage offenders from re-offending and would encourage others to be law-abiding. This "deterrence" philosophy was the preeminent explanation of crime for over a hundred years; yet, by the start of the twentieth century its popularity was eclipsed by positivist explanations arguing that offenders differ from nonoffenders in important ways (e.g., socialization).

Neoclassical or economic approach

In the late 1960s the economist Gary Becker questioned positivist approaches to crime, arguing that: "[a] useful theory of criminal behavior can dispense with special theories of anomie, psychological inadequacies, or inheritance of special traits, and simply extend the economist's usual analysis of choice" (repr. 1974, p. 2). Characterizing his approach as an effort of "resurrection, modernization, and . . . improvement" (p. 45) of the rational approach of Beccaria and Bentham, Becker argued that criminals were not biologically, psychologically, or sociologically different from noncriminals; and that the decision to offend did not originate in a unique set of motives but was influenced by the same factors that motivate all purposive behaviors. Becker and others developed these ideas in what is now called the neoclassical or economic approach to crime. According to this perspective, people choose criminal over noncriminal alternatives in the same way that they choose particular strategies when they act as consumers in the marketplace. This theoretical explanation (Becker, 1976) is based on the following assumptions:

1. People's actions can be understood as rational; that is, people are naturally motivated to pursue their own interests and their behaviors can be examined as attempts to meet these desires. This does not preclude people from acting irrationally, as for example when they choose something on the basis of its availability rather than its ability to meet a desire, nor does it mean that people are necessarily conscious of their attempts to maximize their self-interests. Instead, the economic approach simply assumes that most actions can be understood as rational.
2. Material gain is a common interest, but it is not the only, nor necessarily the primary influence in people's decisions. People have a much richer set of interests, and the actions they undertake reflect their attempts to maximize these. Unfortunately, it is all but impossible for people to meet or accommodate completely their interests: people's desires are unlimited, whereas wealth, income, opportunities, and other resources are finite.
3. Because they are rational and must make choices, people can always express preferences between outcomes and the things they desire (commodities). Their preference rankings reflect their expectations of how much satisfaction (utility) an outcome or commodity will provide (utility function) and how much it will cost (opportunity cost). When given a choice, rational economic actors choose actions that will provide an outcome or commodity that they believe will maximize utility (satisfaction, not necessarily pleasure) and minimize costs. People's preferences are stable over time and at any point can be hierarchically ordered from most to least valued.
4. Rationally economic actors prefer more of a desired outcome or commodity to less, and prefer a lower cost to a higher one; however, the more people have of an outcome or commodity, the less likely it is that further increases will contribute to their satisfaction (diminishing marginal utility). Thus people who have an abundance of something are willing to give up a lot for relatively little in return (money may be the one significant exception because, in essence, it can become any commodity).
5. People base their rational decisions on information they collect. They endeavor to know as much as is optimally possible about each potential outcome's and commodity's utility, availability, and costs; however, they recognize that gathering information is itself a cost (e.g., see the theory of optimal or rational accumulation of costly information). Thus, although rationally economic actors endeavor to use all available information in making decisions, many decisions will be made on incomplete information and may not serve to maximize utility.
6. People have imperfect memories and often miscalculate; these attributes can further compromise their ability to maximize utility.
7. The future is not completely predictable. All decisions are based on expected utilities and have an element of risk or uncertainty. Thus, people's attitudes toward uncertainty and risk affect their assessment of the satisfaction associated with various outcomes or commodities. As a result, people may agree about a commodity's or outcome's utility but vary widely in their comfort with the gambles involved in acquiring one of these; thus they will assign different utilities to the commodity or outcome. A person who generally refuses to accept what is calculated to be a "fair gamble" is said to be risk averse. Those who generally have a preference for taking fair gambles are referred to as risk seekers. Finally, between the extremes of risk seekers and those who are risk averse, there are those that are risk neutral ; those who are generally indifferent to accepting or refusing a fair gamble.

Although these assumptions are usually used to describe legal business decisions and actions, Becker (1974) and other neoclassical theorists argue that they can be extended to include criminal behavioral choices. Thus:

1. People choose to offend using the same cost-benefit analysis they use when choosing legal behaviors: a decision to offend reflects a normal, rational, calculation. Thus, this explanation of crime does not need to introduce personality characteristics, background experiences, or situational contingencies.
2. The decision to offend involves calculations based on estimates of a legal opportunity's availability, costs, and ability to provide a desired end (i.e., expected utility), versus an illegal opportunity's availability, costs, and ability to provide the same or comparable end. Both legal and illegal behaviors can provide an array of benefits that include material gain, approval or prestige, "psychic" or emotional returns (e.g., thrill, honor, revenge, a sense of equity), and other nonpecuniary returns. The potential costs of these behaviors include time, transaction, and "psychic" costs (e.g., anxiety). Crime, however, introduces a unique set of reputational (e.g., loss of respect), psychological (e.g., guilt, shame, anxiety) and punishment costs (e.g., fines and incarceration).
3. The decision to offend is also influenced by a person's tolerance or enjoyment of taking risks. Thus, all things equal, those who commit crime at relatively high rates are comparatively more risk seeking or risk tolerant, those who offend at moderate rates are relatively more risk neutral, and those who seldom, if ever, violate criminal laws are relatively more risk averse.
4. The most effective way to reduce crime is to increase people's perceptions that costs of offending will exceed its rewards, and that the benefits of legal behavior surpass its costs.

Advantages of the neoclassical approach

The neoclassical approach offers several challenges to alternative theories of crime. First, it simplifies the search for motives by assuming that self-interest guides all behaviors, criminal and otherwise. Second, it removes distinctions between offenders and nonoffenders, and reminds us that when we examine economic crime we must remember that "the greatest exponents of criminality in business are [often] business people" (Reuvid, p. 561). Third, it is generalizable: although most researchers used the theory to study crimes that provided a material return, the theory did not distinguish crimes by types and is as applicable to murder as it is to theft (Becker, 1976). Fourth, it unifies a group of materially based crimes that are often treated as distinct (e.g., common "street crimes" such as prostitution and breaking and entering, and white-collar offenses such as stock fraud and money laundering). Fifth, it introduces an array of economic concepts and approaches that enhance the study of crime. Several scholars study the extent to which decisions to offend resemble legal employment decisions, as well as the inter-connections between illegal and legal "work" (Ehrlich; Fagan and Freeman). Others use ideas about market forces to examine how internal and external market conditions influence crime (see Fagan and Freeman). And some writers add economic concepts to more sociological or psychological oriented theories. For example, Hagan, Gillis, and Simpson introduce propensity for risk-taking in their power-control theory of crime; Sampson and Laub address the consequences of conventional human and social capital in their life-course theory of offending; and Hagan and McCarthy focus on the effects of criminal capital in their capital theory of crime.

Problems with the neoclassical approach

A number of psychological, sociological, and criminal decision theorists and researchers have challenged the theoretical accuracy and empirical validity of the neoclassical approach (e.g., see Cornish and Clarke; Gottfredson and Hirschi). The most prominent critics argue that a theory grounded too deeply in instrumental rationality misrepresents people's basic nature. Some commentators argue that rationality is simpler than suggested by the neoclassical approach. They maintain that it is "bounded" or limited in ways unrecognized by neoclassical theory (e.g., by cognitive dissonance) and that people typically select from a few alternatives rather than considering a larger set of options (i.e., they use a "satisficing" rather than optimizing approach). Others argue that rationality is more complex and involves morals, norms, and forms of rationality other than the purely instrumental type. Critics also note that the neoclassical approach mistakenly portrays people as making decisions as individuals, independent of the influence of others.

Neoclassical theorists respond by reminding commentators that they do not assume that people necessarily always make explicit, rational cost-benefit calculations. Rather, they contend that one can make useful predictions by assuming that people act "as if " they made such calculations. For example, Milton Friedman argues that neoclassical theory should not be judged on the accuracy of its central assumptions of how cost-benefit calculations are made but on how well it predicts behavior. By this criterion, Friedman concludes that it performs quite well indeed. He maintains that we gain valuable and accurate insights into human behavior by assuming that actions, in general, occur "as if " they were governed by the rules of rational decisionmaking. By trial and error, people generally internalize such rules in the same manner that pool players eventually learn to play the game as if they understood the laws of physics.

Notwithstanding Friedman's optimism, the available evidence on the neoclassical or economic approach to crime is inconclusive. For example, Gary Lafree notes that longitudinal studies of postwar crime rates in the United States generally confirm that high levels of punishment reduce crime rates, as do some programs that increase the rewards of noncriminal behavior (also see Zhang); however, the effects on crime are not as large as predicted by the neoclassical approach, nor do they apply equally to all groups (e.g., members of racial minorities). Moreover, although the neoclassical approach is consistent with analysis of data in some other countries it does not explain criminal behavior equally well in others. For example, Tsushima's analysis of Japanese data is fairly consistent with the neoclassical perspective, whereas Reilly and Witt's analysis of data from England, and Scorcu and Cellini's (1998) study of Italian data, reveal several inconsistencies between the data and neoclassical predictions. The limits to the neoclassical approach are also evident in an analysis of aggregate data from several countries for the years 1979–1995 (Gould, Weinnberg, and Mustard in Fagan and Freeman). Consistent with the neoclassical approach, increasing wages and lowering unemployment reduced both property and violent crime rates; but in contrast to neoclassical predictions the effect was larger for property crime, specific to young and unskilled men, and varied considerably over time.

Researchers have also identified a variety of "anomalies" in which a significant proportion of subjects make decisions that appear to contradict the basic assumptions and predictions of neoclassical theory. For example, many decisions to offend appear to be made on impulse without any apparent rational calculations (Cornish and Clarke; Shover). In other settings, offenders' decisions appear to be based on limited knowledge and little or no effort is made to gather additional information. Research also suggests that most offenders have only the vaguest notions of the likelihood of being apprehended or of the probabilities of receiving different penalties if convicted. As well, many decisions are inconsistent with the notion of simple self-interest and for all intents and purposes appear to be irrational (i.e., inconsistent with the decision-maker's preferences), as for example when people make contradictory choices.

Several sociologically oriented criminologists sympathetic to some aspects of the neoclassical approach have suggested modifications to the economic perspective. In the following we review several of these advancements.

Ecological theory of illegal expropriation

In a series of papers, Lawrence Cohen and colleagues (see Cohen and Machalek) offer an ecological theory of illegal expropriation. This theory is consistent with the neoclassical assumption that the frequency of a behavior, including an illegal one, typically reflects its ability to satisfy people's preferences; however, an ecological approach to crime differs from the neoclassical perspective in two key ways. First, it does not assume that people necessarily know the benefits of behaviors before they act. Instead, it assumes that actions can have unintended positive results, consequences that encourage people to repeat their actions. Thus, people's behavioral choices do not necessarily reflect rational calculations based on complete information, nor are their behaviors always directed toward their most valued preference. Second, Cohen and Machalek's theory differs from the neoclassical approach in that it explicitly treats behaviors as strategies that are influenced by the actions of others. A strategy is simply a set of behaviors that yield benefits, whether the benefits were intended or not; the greater the benefits a strategy provides, the more likely that it will be repeated and proliferate within and across populations.

Drawing on behavioral biology and earlier work on routine activity theory (Cohen and Felson), Cohen and Machalek argue that expropriation is just one of many strategies that people can follow. They define illegal expropriation as a process whereby individuals or groups use coercion, deception, or stealth to usurp material resources or services from others. People may use an illegal expropriation strategy for a variety of reasons; however, they are most likely to continue to employ such a strategy because of its success. Likewise, others are most likely to adopt or copy an illegal expropriation strategy when they observe, or acquire knowledge about, its success. Note, however, that people often choose strategies impulsively, and can select one that is suboptimal. Thus, choosing an expropriative crime strategy may be inconsistent with a person's best interests.

The success of an expropriative strategy has two dimensions: the extent to which it provides valued returns for those who use it and the extent to which it proliferates in a group or population. Several characteristics influence a strategy's success: how it is executed, how it responds to the defensive counter-strategies of victims, and the manner in which it spreads. A strategy is most likely to succeed when it is (1) cryptic, (2) deceptive, (3) bold, (4) surprising, (5) evasive, (6) resistant, (7) mobile, (8) mutable, and/or (9) stimulating. A cryptic strategy is not detected by the victim until after the expropriation occurs (e.g., embezzlement). A deceptive strategy is one that is detected, but the victim interprets the strategy as benevolent or innocuous (e.g., a confidence game). In other contexts, a strategy may be more effective when it is bold; that is, it over-powers the victim (e.g., robbery). A bold strategy is often more efficient if it involves the element of surprise (e.g., highjacking). A strategy that is evasive moves easily from location to location, thereby avoiding or neutralizing victim recognition or retaliation (e.g., con games and telephone sales frauds) whereas a resistant strategy is impervious to victim retaliations (e.g., extortion or gang crime). A mobile strategy spreads easily: it can be transmitted from one person to another and can migrate from one group or population to another (e.g., computer crimes). A strategy that is mutable adapts to accommodate changing victim counter strategies, as well as to cultural and social transformations (e.g., the addition of alarm deactivation skills to a car theft strategy). Finally, a strategy that is stimulating or exciting may also proliferate because of the pleasure it provides (e.g., the thrill of shoplifting).

Several factors external to a strategy also effect its likelihood of success. For example, expropriative strategies may become ineffective in situations where the number of expropriators exceeds the number of producers, or when past victimizations educate people against further victimizations. Thus, the extent to which an expropriative strategy is used and is successful is the result of a dynamic process that involves the past and current experiences of exploiters and producers, and the nature of the social, cultural, and material world in which they live.

Game theory

A related extension of the neoclassical approach involves integrating it with ideas first developed by John von Neumann and Oscar Morgenstern (1944) in their work on game theory. The neoclassical approach suggests a world in which individual people gather information and make choices and decisions independently of others; yet, von Neumann and Morgenstern argue that people's choices are influenced by the decisions of others and that people consider these influences when they make their decisions. In other words, people's choices are interdependent, not independent. Von Neumann and Morgenstern's work on game theory, and subsequent research in this tradition, has developed this insight, revealing that people use various strategies when making decisions and that part of a strategy is anticipating the decisions of others.

Game theory research has several implications for crime. Bruce Bueno de Mesquita and Lawrence Cohen use game theory to explore how the decision to offend is part of a sequential process that involves various government decisions on the allocation of resources. Game theory logic suggests that governments that support economic inequality can sometimes encourage the poor to commit economic crimes even when the poor and the rich have the same preferences for legal behavior. Exploitative or unfair governments can also turn nonoffenders into criminals by destroying their confidence that the government will treat them fairly. Moreover, government policies that increase punishment and short-term transfer payments (e.g., welfare) will often have little effect on reducing economic crime among the poor. In contrast, policies that raise people's standard of living and their belief in a system's fairness will more often discourage them from choosing crime. Importantly, Bueno de Mesquita and Cohen note that game theory logic predicts that if people are abysmally poor, no increase in their trust in society's fairness will be sufficient incentive for them to choose legal over illegal behavior.

Criminal cooperation

Other scholars have used game theory research to understand a characteristic common to many economic crimes: the presence of co-offenders. For example, Bill McCarthy, John Hagan, and Lawrence Cohen argue that like other economic activities, co-offending requires people who recognize that, in some cases, the probability of attaining a desired outcome rises with a cooperative effort. Yet, working cooperatively with others typically involves uncertainty: there are often few if any ways to enforce people's pledges to cooperate, people may benefit from the actions of others and then fail to fulfill their commitments (i.e., they may cheat), and people may take advantage of the actions of others without providing any reciprocity (i.e., they may "free-ride").

Critics note that the neoclassical model offers little insight into the cooperative process. Criminal cooperation is typically more unpredictable than offending alone, and the neoclassical model offers few insights into the process by which people choose actions that have uncertain outcomes. As well, the assumption of instrumental rationality suggests an individual who makes decisions based solely on his or her preferences and is oblivious to those of others; such an individual is an unlikely cooperator. Social dilemma theorists resolve these problems, suggesting that people have both instrumental and "collective rationality." Like instrumental rationality, collective rationality involves cost-benefit analyses aimed at maximizing one's preferences; however, it includes the recognition that in some situations, one's interests may be best met as a result of the decisions and actions of others. Cooperation further requires that people, including offenders, "trust" others to fulfill their obligations.

Experimental research suggests that several conditions promote collective rationality, trust, and cooperation in economic activities. These include the type, history, and strength of the relationship between people; people's fear of reprisals for noncooperation; their beliefs about each other's honesty and cooperativeness; their knowledge other's past cooperation; and their tolerance for risk. Nonexperimental research also suggests that cooperation may be encouraged by mutual need. Consistent with some of these findings, McCarthy et al.'s research on theft among Canadian street youth indicates that need, associations with other offenders, and a willingness to take risks all increase criminal cooperation. Furthermore, offenders who cooperate steal more frequently than do those who steal alone.

Returns versus costs

A further extension of the neoclassical approach is critical of the tendency to focus on calculations that involve the costs associated with offending. Several scholars disagree with the suggestion that calculations of the probabilities and consequences of detection are based solely on the amount of information gathered; instead, they argue that calculations can be influenced by a number of demographic characteristics (e.g., Cornish and Clarke). For example, young people may have a greater tendency to disregard information about detection probabilities because they are more likely to believe that they are immune to negative consequences. Compared to adults, youth may be more likely to believe that they are the ones who will "get away with it."

Several writers also argue that, like the assessment of other economic options, the decision to offend is more profoundly influenced by beliefs about the possible gains rather than potential costs (e.g., Ehrlich). Thus, the decision to offend focuses on a crime's capacity to provide one or more valued resources including an emotional thrill, a means to impress others, and financial resources (e.g., Katz; Shover; Fagan and Freeman). This approach further suggests that people make offending decisions in ways that resemble their decisions made about noncriminal activities. For example, several studies of drug sellers and property offenders indicate that they increase their incomes by combining illegal work with work in the legal economy (see Fagan and Freeman). Offenders who are adept at making use of their resources are also more likely to succeed (Grogger). For example, success in noncriminal economic activities is influenced by a person's ability to make the most effective use of their human (e.g., knowledge and specialized skills), social (e.g., connections with others), personal (e.g., competency, entrepreneurial skills, or business acumen), and financial (e.g., wealth) capital. Research also suggests that people who effectively utilize these resources profit the most from their decisions to offend: thus, the most successful offenders learn from previous experiences. They specialize, use their associations as a source of information, are willing to work with others, and are competent entrepreneurs (e.g., see Matsueda, Gartner, Piliavin, and Polakowski).

Conclusions

The study of economic crime has had an uneven history. Over the last few centuries, writers have offered a variety of definitions of economic offenses and theories that use an economic approach to crime. Throughout this period, interest in economic crime and the economic approach to offending has ebbed and flowed. Its most recent revival begin at the end of the 1960s with Gary Becker's seminal work on a neoclassical approach to crime and more than thirty years later, economists, sociologists, and criminologists continue to use, revise, and argue about this perspective.

The debate over the economic approach to crime will undoubtedly continue as we learn more about the ways in which people interpret the costs and benefits of crime and how they use this information when choosing criminal behaviors over noncriminal ones. The relationships between crime rates, punishment patterns, and economic changes in the United States in the 1990s offer one example of this debate's longevity. From the mid-1970s until the early 1990s imprisonment rates expanded while the income disparity between rich and poor widened. Neoclassical theory suggests that these two trends would have opposite effects, with increasing imprisonment discouraging crime and increasing income inequality encouraging it. The latter effect may have been greater, as crime rates rose throughout much of this period. Moreover, some criminologists (see Fagan and Freeman) argue that the increase in imprisonment actually contributed to the increasing crime rate by diminishing its subjective costs (e.g., its perceived reputational and loss of income costs) even though its objective cost increased (e.g., actual certainty and severity of imprisonment rates). However, in the early 1990s crime in the United States began a long decline, a trend that began in an economic recession. To further complicate matters, the U.S. economic recovery of the midand late 1990s occurred in a period of continually expanding punishment. Only time will tell if the crime trends of ensuing decades support or refute the economic approach to offending.

Bill McCarthy

Lawrence E. Cohen

See also Corporate Criminal Responsibility; Crime Causation: Economic Theories; Criminalization and Decriminalization; Economic Crime: Antitrust Offenses; Economic Crime: Tax Offenses; Organized Crime; Strict Liability; Vicarious Liability; White-Collar Crime: History of an Idea.

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