I just listened to David Skarbek‘s amazing EconTalk podcast, where he talks about his new book on the economics of prisons. I liked it so much I just ordered the book.

Some things I took away.

How California prison evolved away from smaller sized groups of people following informal rules and norms. As prison populations got larger and larger these informal systems that enforced good behavior broke down, and more formal institutions or government were needed.

But the formal prison system didn’t provide what inmates needed—be it security, or guarantees for credit, or systems of insurance. And so gangs formed semi-formal systems of protection from physical harm, of credit (through group liability), and insurance.

If you’re in one of these prisons, you need to affiliate with a gang even if you don’t really participate, because someone has to be responsible for your behavior. Sort of like the state government makes you take car insurance with a company if you drive. They don’t want uninsured people wrecking the system.

One thing that influences why gangs are race-based is that this makes it almost impossible to switch gangs, and so enforces commitment. It also lets people know who’s responsible for you at a glance. This is also why tattoos are so important.

As prisons make more things illegal, they cede more authority and tax income to the gangs. So banning tobacco for public health reasons, or banning mobile phones and making prison pay phones very costly, enlarges the underground economy for cigarettes and mobile phones. this not only empowers the gangs and increases demand for them to govern these markets and provide the goods, but also gives them a larger source of revenue.

You might summarize it like this: Where there is demand for government, someone will supply. Even it if the real government doesn’t.

For a similar take on the “hidden internet”, see Henry Farrell’s recent piece. One of my favorite articles of the year.

People familiar with Mancur Olson’s tale of stationary versus roving bandits, or Diego Gambetta’s work on the mafia, will see a familiar pattern. But it’s the details that are fascinating.

Related is the Barry Weingast EconTalk podcast on the origins of law. Also worthwhile.