Law Markets: Leave the Gun Take the Cannoli

Chris Blattman reviews The Sicilian Mafia by Diego Gambetta, an Oxford Sociologist:

The book tells a fascinating tale of the mafia, traced mostly from court transcripts, investigator files, and some interviews. He essentially advances an economic theory of the mafia: they are entrepreneurs and firms who collude and compete; the good they sell is not violence, or stolen property, but protection. That is, they enforce contracts in places the government can’t or won’t, like illegal and illicit markets, or areas where the police and courts are weak. They actively compete with the police to provide protection, and this good is in high demand. Every transaction done under the table cannot seek protection from the courts, and the mafia step naturally into this gap. Their name is their trademark, and they prevent new entry by force but also by complex social rules and ethnic identity.

Naturally the mafia also help create demand for the product, through intimidation and threat, but the real demand for services comes from government regulation or government failure. Every tariff or ban or rule creates an incentive for a black market, and the market evolves contract enforcement mechanisms where the state does not.