Center for a Stateless Society
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The Weekly Abolitionist: Prisons and Entrepreneurship

Entrepreneurs, or people who are alert to profit opportunities and act in order to obtain profits for themselves, exist in all societies. But the profit opportunities they seek will vary. Some entrepreneurs may seek to profit by providing consumers with goods they value, such as pizza or beer. Others may attempt to profit by seeking government subsidies, suing their rivals, or robbing people at gunpoint.

As economist William Baumol argues in his paper “Entrepreneurship: Productive, unproductive, and destructive,” a society’s institutional environment shapes the incentives that sway entrepreneurs towards productive activities that produce mutual benefits or unproductive and destructive actions that involve profiting at the expense of others. Baumol contends that “it is the set of rules and not the supply of entrepreneurs or the nature of their objectives that undergoes significant changes from one period to another and helps to dictate the ultimate effect on the economy via the allocation of entrepreneurial resources.”

So how do prisons influence the allocation of entrepreneurial energies? Do they encourage productive entrepreneurship or unproductive and destructive entrepreneurship?

Under limited circumstances, prisons could be used to encourage productive entrepreneurship and discourage unproductive or destructive entrepreneurship. For example, by punishing thieves, murderers, and other aggressors, incarceration may raise the cost of unproductive entrepreneurship that involves theft or violence, thus encouraging entrepreneurs to direct their energies towards projects that respect individual rights. However, it should be noted that prisons are not the only plausible means to deter rights-violations. As Bruce Benson documents in The Enterprise of Law: Justice Without the State, customary legal systems have protected individual rights without states or prisons. These legal systems typically relied on torts that were backed up with threats of ostracism in order to demand financial restitution in response to plunder and aggression. This created economic incentives for victims to report aggression against them, and the reciprocal desire for others to help enforce one’s rights gave community members an incentive to help enforce rulings. So institutional arrangements that enforce rules in order to deter unproductive and destructive entrepreneurship can exist without prisons. Moreover, as we will see, the modern prison industrial complex creates numerous opportunities for rent seeking, legal plunder, and other forms of unproductive and destructive entrepreneurship. Prisons can also serve to criminalize or deter productive entrepreneurship.

Unproductive Entrepreneurship in the Prison Industrial Complex

America’s prison state creates numerous opportunities for the alert entrepreneur to make profits at taxpayer expense. Prisons require construction, operation, telecommunications, food, and medical care. All of these are provided by individuals and firms who are hired through political processes, so they work to manipulate the political system for their private gain.

For example, corporations like the Corrections Corporation of America, GEO Group, and the Management and Training Corporation profit by operating prisons, jails, and immigration detention centers. Mass incarceration has created opportunities for these firms to profit not by serving consumers, but by striking deals with politicians and bureaucrats in order to receive taxpayer money to lock human beings in cages. Rather than directing their entrepreneurial alertness to opportunities to use resources in ways that are valued more by consumers, prison profiteers like Jane Marquardt see profit opportunities in government contracting, political influence peddling, and human rights abuses. This reflects much more than a moral flaw on the part of individual prison profiteers. It reflects an institutional problem related to the incentives created by government policies of mass incarceration. These policies create profit opportunities, and those profit opportunities will be exploited by entrepreneurs who in a freed market would need to serve consumers’ desires in order to earn such profits.

Profit opportunities are created by mass incarceration regardless of whether prisons are privatized. Prisons require guards, and those guards will organize to ensure that more resources are diverted towards incarceration. This grants them job security and higher wages. So it’s no surprise that prison guard unions have organized and poured resources into the political arena to promote prison expansion and reduce the risk that guards might be held accountable for abusing prisoners.

Prisons also create entrepreneurial opportunities for politicians to gain votes by creating jobs in their district. Back in 2014, Democratic politicians Senator Dick Durbin and Illinois Rep. Cheri Bustos boasted about the jobs that would be created by spending $54 million in federal funding to re-open Thomson Correctional Center in Illinois. These politicians ingeniously exploited an opportunity for destructive political entrepreneurship, ingratiating themselves to voters in their district while dispersing costs on the rest of us. In the process, they likely created new opportunities for citizens in their district to become unproductive entrepreneurs as beneficiaries of the prison state who will likely seek new ways to profit from government largess. As Christopher Coyne, Russell Sobel, and John A. Dove have argued, non-productive entrepreneurship begets further opportunities for non-productive entrepreneurship, producing “new non-productive niches for profit.”

Mass incarceration also creates unproductive profit opportunities for prisoners. Heavily surveilled and controlled by guards, market exchanges by inmates are criminalized and leave buyers and sellers with no formal legal recourse if they are screwed over or defrauded by a trading partner. In small prisons, this problem can be resolved through reputation. But when prison populations become sufficiently large, no one can know the reputation of all other inmates. So a different mechanism of governance is required. As David Skarbek documents in The Social Order of the Underworld, prison gangs emerged to fill this governance gap. But in addition to producing governance, gangs engage in predatory and unproductive entrepreneurship. For example, they use threats of jailhouse violence in order to extract taxes from gangs outside of prisons.

Deterring Productive Entrepreneurship

In addition to diverting entrepreneurial talents into unproductive and destructive activities, prisons can criminalize, punish, deter, and otherwise prevent productive entrepreneurship. One obvious example is that criminalizing drugs and sex work ultimately means criminalizing mutually beneficial exchanges of illicit goods and services, which are a form of productive entrepreneurship. However, many people see these goods and services as sufficiently immoral that they refuse to recognize the entrepreneurship that vice laws prohibit as productive.

But the prison state deters more than just these obviously unlawful forms of entrepreneurship. For example, Robert Blandford, Diane Huang, David McNab, and Abner Schoenwetter were sentenced to eight years in prison for violating the Lacey Act, which prohibits importing fish or wildlife obtained “in violation of any foreign law.” As Gene Healey explains:

Three American seafood dealers and one Honduran lobster-fleet owner are currently doing hard time for importing lobster tails that were the wrong size and that were packaged in clear plastic bags rather than in cardboard boxes. They ran afoul of the Lacey Act, a federal statute that makes it a crime to import fish or wildlife taken “in violation of any foreign law.”

The U.S. government argued that they had broken Honduran law because some of the lobster tails—3 percent, to be exact—were less than five and a half inches long, and because a Honduran regulation required that the lobster tails be packed in boxes. Yet Honduran officials testified that no laws had been violated.

Nonetheless, Blandford, McNab (the Honduran national), and Schoenwetter, three small-business men with no previous criminal records, were sentenced in 2001 to eight-year terms. Their “partner in crime,” Huang, got off easy: two years’ incarceration for the mother of two young children.

This case reflects the pernicious problem of overcriminalization. Congress and regulatory agencies “have created so many criminal offenses that the Congressional Research Service itself admitted that it was unable to even count all of the offenses.” Overcriminalization deters productive entrepreneurship by making it impossible for entrepreneurs to know what is legal, leaving uncertainty as to whether one’s entrepreneurial activities will leave you with profits or a prison sentence. As Baumol emphasizes, the rules of the game shape entrepreneurial activity in society. When rules are stable, easy to understand, and protect property rights, then these rules tend to encourage productive entrepreneurship. But overcriminalization creates rules that are complicated, uncertain, and costly to navigate. This deters productive entrepreneurship, conceals entrepreneurial opportunities, and protects large firms that already have resources to spend on legal compliance.

Moreover, once prisoners are released they are highly constrained in their ability to engage in productive entrepreneurship. In many states, occupational licensing laws prohibit workers and entrepreneurs with a criminal record from practicing a wide range of professions. These laws ban former prisoners from turning their lives around by producing goods and services that others desire. They also create barriers to entry that benefit entrenched members of these professions at the expense of some of the most marginalized people in our society.

Entrepreneurship Lost: The Hidden Cost of the Prison Industrial Complex

Some costs of the prison industrial complex are fairly clear. There are monetary costs that we could calculate by adding up federal, state and local corrections budgets. There are dire human costs for prisoners, their families, and their friends.

But examining the impact of the prison industrial complex on entrepreneurship reveals a cost that is easy to miss. Prisons divert the energies of entrepreneurs towards unproductive activities like lobbying, rent-seeking, and abusing other people. Prisons are also used to enforce laws that deter productive entrepreneurship. This prevents innovation that could increase the possibilities available for consumers, and it prevents entrepreneurship that involves reallocating resources towards more efficient and valuable uses. The prison state makes us poorer and robs us of improvements to our well-being that we can scarcely imagine. By disrupting the entrepreneurial process, the prison industrial complex harms all of us.

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