Understanding how criminal markets work is important if we want to understand the power and the limits of markets in the absence of state-enforced property rights. A recent Wired magazine article written by a mafia computer expert has some revealing information. The anonymous author writes:
…there’s the misconception that if you don’t pay your debts, the mob will break your legs. I’ve seen that on TV but never in real life. Sure, some agents make their collection runs with a bodyguard, but wouldn’t you want some muscle around if you were carrying tens of thousands of dollars in cash? Breaking people’s legs is bad business. If somebody doesn’t pay their debts because they’re broke, maiming them isn’t going to put cash in your bank account. Still, the threat of pain remains a valuable deterrent. Tell your customers that you’re breaking people’s legs and there’s no reason to actually do it. Truth is, when people don’t cover their debts, we put them on a payment plan. If that doesn’t work, we spread the word that they’re a bad risk. Basically, we fuck up their underground credit rating.
The whole business of taking bets and paying out is based entirely on trust. The wagers are a form of credit, advanced on trust between the agent and the players. The people placing the bets trust that they’ll get paid if they win. Everyone trusts that nobody is going to call the cops.
In this context, markets appear very robust. In other areas, however, especially in the drug markets we don’t see cooperation and trust but terrible violence – we get anarchy instead of anarcho-capitalism. Why the difference? I don’t think anyone has written much on this but it strikes me that an imporant clue is that the first market is between a buyer and seller with largely compatible interests while the latter interaction is between competitors with less compatible interests. We may need the state more to govern the actions of competitors vis a vis one another than vis a vis their customers. (Alas, this does not speak well for the anarcho-capitalist dream of competitive private-defense firms.)