Are entrepreneurs and criminals cut from the same cloth? Some evidence suggests that the answer is yes.
In a paper entitled “Drug dealing and legitimate self-employment”, economist Rob Fairlie shows a statistical relationship between being a teen-aged drug dealer and being self-employed as an adult that can’t be explained by incarceration, education, capital or other structural factors that might drive those who dealt drugs out of the labor force. Fairlie’s argument is that the same characteristics of people that lead them to become self-employed as adults also lead them to deal drugs as teenagers.
A sizable psychological and sociological literature also shows that attributes like a desire for independence and autonomy and a willingness to disregard rules and conventions lead people to both engage in criminal activity and to start businesses.
And much evidence shows that people often go into business for themselves when what they can earn from wage employment is low. Some researchers have found that people in low wage jobs see starting their own legal businesses as a good alternative to those jobs. Other researchers have found that people in low wage jobs see starting their own illegal businesses as a good alternative to those jobs.
Almost 20 years ago, William Baumol, an economist at NYU, wrote a very provocative article called “Entrepreneurship: productive, unproductive and destructive” in which he argued that a certain portion of the population has the skills and preferences to become entrepreneurs. The number of people starting productive companies depends a lot on the incentives society creates for entrepreneurship to be productive. In places where the incentives aren’t very good for productive entrepreneurship, people with the desire and talent to become entrepreneurs often turn to crime.
If Professor Baumol is right, then policy makers need to think hard about how they encourage more entrepreneurship. Increasing the number of productive entrepreneurs may depend a lot on creating better incentives for those with entrepreneurial preferences and talent to become productive entrepreneurs instead of turning to a life of crime.
This makes me wonder how many gang leaders, drug dealers, and mafia kingpins in prison could have been entrepreneurs doing the next new, new thing if they had been exposed to the right incentives.
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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of eight books, including Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.
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I love this — weighing the choices:
Life of crime? Or start a business?
It’s no wonder that some criminal enterprises are run like businesses. The people behind them apparently have a natural talent for entrepreneurship. Who knew?
Very interesting. As a matter of fact, there is a franchise concept that just launched that is..well..a “cousin” to what you are suggesting. See the most recent post on upper right of:
The Franchise King Blog
This really is a fascinating concept, as not many would think of both criminals and entrepreneurs in the same light. I concede that while both entrepreneurs and criminals might share similar character traits, it is quite a stretch to draw a link between them and conclude that criminals could become entrepreneurs under the right conditions. There are plenty of differences between criminals and entrepreneurs as well, but these are not exposed in the article. To also propose a solution of using incentives to convert criminals to entrepreneurs is also a little too simplistic. Firstly, incentives could help any criminal become more productive, and not just the entrepreneurial ones. Secondly, criminals are not formed simply due to lack of incentives, but due to everything from upbringing to their environment. Society would have to change all these factors before criminals can be made more productive members of the community.
Disclaimer- I do not support criminal activity of any kind but I do recognize that some strategies and business decisions as universally intelligent.
I definitely disagree. I don’t think that there are plenty of differences between criminals and entrepreneurs. As Anita stated, “many criminal enterprises are run like businesses.” This is because a lot of the basic principles of making money are the same whether your business is legal or not. Drug dealers obviously understand concepts like supply vs. demand, distribution, marketing, location, etc…. What most of them lack is a realistic view of their choices. However, this is not true for all of them. Some of them use money from criminal activities to actually jump start successful businesses. Nonetheless, you are right on when you say that “criminals are not formed simply due to lack of incentives, but due to everything from upbringing to their environment.” What you did not admit, however, is that this upbringing is the only thing that makes them a criminal and not an entrepreneur.
This is a very interesting thought that never occured to me. I guess in a lot of ways, certain criminals could be considered a type of entrepreneur. Some come up with very innovative ways of commiting their crimes too. If only they used their creativity for a more positive outlet.
Tony Soprano’s businesses were all about innovation, managing the competition, charging what the market could bear, managing credit, keeping staff happy and productive, recruiting new staff and customers, keeping an eye on the legal bounaries…even managing the balance between home and work!
How funny you should bring this up. There I was earlier, out in my garden watering flowers, thinking about this topic. And the Sopranos popped into my head.
Just like you said, Tony Soprano faced all the same issues of any business owner. His crime family was just like a small business — a dysfunctional and bizarre business — but a business. 🙂
Theron @ Schmoozii Business Networking Community
Very interesting comparison. Probably both also have an independent streak that prohibits them from being a successful team member, which leads them to going independent or becoming a leader.
Great theme !
That often happens to legit businesses …….
They start the “right” way ; then often figure out a way to counter taxes, cheat and cook the books …….
Look at all the recent events on Wall Street ; Enron, Worldcom, etc ……..
Creativity can often lead people to do the wrong thing …..
I am not that surprised about this outcome, to be honest. People tend to not see that selling drugs is a profitable business. Most people only see the negative side and forget the target for the dealer is not selling drugs, but earning money. And margins are through the roof.
@Anita – why do you say Tony Soprano’s business is dysfunctional? A lot of money is coming in all the time, sometimes more than others, but is is a fully functional business. Bizarre, yes, obviously. I was just going to comment about the mafia – funny you brought it up.
Long time no talk — good to see your new site and your business.
Well, by “dysfunctional” I meant more about how the people in that business interact. Tony runs around moody. He snarls at his people half the time (in a typical business most employees would have left a long time ago just because of his interpersonal skills or lack thereof).
The consequences for disloyalty are a lot greater in that business — you could get “offed” if you are seen as disloyal — no progressive discipline or written warnings or grievance hearings there like in a typical business. Their work premises are a strip club. And there are no women in management or in Tony’s trusted inner circle.
So in one sense it is a “functional” business because it operates and gets good fiscal results. But how it functions is … strange. 🙂
It gets better…or worse. Amazon has not one, but two books on Soprano-style leadership eg ‘Leadership Sopranos Style: How to Become a More Effective Boss’. Anita – you make some great points – it might be business, but of the deeply old-fashioned type.
This is a fine post – I always wonder why people doing illegal things make a lot of money – is it because the high risk or the biz-savvy?
I, too, think that some legit entrepreneurs are even ‘criminals’ – they do deals under the shadow of the law, make private arrangement, and so on.
But then, I think that EVERY entrepreneur is criminal! That includes me and you 😀 We tend to find loopholes and seek for higher yields for our investment. We often do business in a grey-ish area – especially if you are doing online business.
Hmm.. something to think about?
You have freedom of choice and free will. You could end up as a crook, or you could do something productive with your life. I wouldn’t call the Soprano family “business” as a real entrepreneurial activity. Their business is only a facade. The mafia and mob with their “protecting services” is a parasite thing, sucking out the lifeblood of the producers.
I have personally met several people who call themselves for businessmen, but in the real meaning, they are only dabbling with all kinds of shady stuff. But still the correct use of the concept of an entrepreneur does not have anything to do with criminals according to my book.
Then we could have another discussion if some activities should be legal in the future, that is not legal nowadays. I am for legalizing the use of drugs, but it is not an important question at the moment. Nota Bene: I would never use drugs myself, due to the fact that it is an irrational act. You could end up as a criminal if you start using drugs…
Hi Scott – You’ve done it now — I’m going to expenct mind-bending posts from you EVERY time! 🙂 Outstanding observations.
My husband and I love to watch action flicks – which often features criminals in one way or another and more often than not, I find myself in awe of their ingenuity and creativity and how much society could benefit if only they were legit.
That makes me ask the question why they chose NOT to do this. And in my mind, I find the traditional business world a little closed to outsiders. As I write this, I guess there criminal parallel and Tony Soprano come to mind again.
I was watching Jon Stewart last night and an author talked about how we, as a country, tend to cluster with people who behave the way we do – we self select into our own communities where we can be comforted by being with people who are like us. I wonder what that says about this topic?
Bottom line: business is business. Drug dealers are in it to make a buck and so are entrepreneurs.
You have to be a good businessman to make money dealing drugs. You have to have a team of “employees” and staff working for you on the streets. You have to make sure that your “staff” won’t rip you off, steal from you or use your product instead of sell it. You have clients and customers to satisfy in the hopes that they will return to you for your product. You have to partner with other dealers and hustlers. You have to appeal to your target market, advertise your wares and even provide free samples. You have to source out suppliers. Gesus . . . I could go on and on.
The parallels are all there. Common sense tells you that. It’s a business bottom line – just an illegal one. Successful drug dealers have the same qualities that any good businessman has – even ruthlessness 🙂
Forgot to mention . . . if you’re not aware just exactly how much the two are the same – watch the movie “Blow” that depicts the life of George Jung and how he built his cocaine empire in the 80’s.
It WAS a business – and a BIG ONE at that. A muti-million dollar empire (which eventually came crumbling down around him.)
I’d say they are 99% identical mold.
The first commentator says “It’s no wonder that some criminal enterprises are run like businesses”.
I would, add it’s no wonder some (wall street et al) businesses are run like criminal enterprises under benevolent eye of the Bush (and other) administrations.
Theron @ Schmoozii Business Networking Community
Chris’ comment is very true. It reminds me of that show the Wire. The Wire is a HBO show that illustrates the different perceptions of the drug and police worlds. But the creator tries to show that there are ways of doing business on both sides and they are not so dissimilar. You need to be smart on both sides to succeed.
I just read the post and all the comments. I am really surprised that all you guys are well educated and experienced businessmen, yet, you do not see any difference between drug business and regular honest business. Yes, illegal drug trade brings money and lots of it. I agree, but remember, if you are making money that means you are removing or supplanting someone. That someone is also an illegal businessman and he will use all necessary illegal means to take you out. Meaning, that person will kill you. In the process you will lose the one you love. Ladies and gentlemen, is that is business or money is worthed for which you lose the one you love? Your wife, your children or other loved ones. Did you ever think it in this way? What good that money would do to you? Just think what happened at the third chapter of ‘God Father’ when Al Pascino saw his daughter getting killed in front of him. That is also a reality of illegal business. Are you ready pay that kind liability?
Theron @ Schmoozii Business Networking Community
Whoaa, is English your 2nd language? I’m not sure where your comment is coming from. None of the comments says they don’t see a difference between criminal and business. No one is saying they want to switch. No one is saying they are ready to start taking illegal risk.
The comments are saying there are “similarities” between the two.
Yes, English is my second language and I wrote the comment in a hurry and I made lots of mistakes. I am sorry. Everybody is saying that there is ‘similarity’ between these two types of businesses but this is where I disagree very much. There is one major dissimilarity between regular business and drug trading. In drug trading, killing people is obvious. You have to kill people to grow and expand your business. At the same time, you have to kill to survive, to take out those who pose threat to your business. It is a must. May be criminal enterprises are run like regular business organizations but killing is a part and parcel of that organization. Will you deny it?
Theron@ Schmoozii Business Networking Community
I do agree that drug dealers are more violent than businesses, but there are many businesses that are destructive in other ways. Sometimes even indirectly killing people.
Remember the early cases of the tobacco industry where they knew it led to cancer, but hid the evidence. How about Ford when they knew the Pinto was exploding or the Explorer was flipping over and they did cost benefit analysis on a recall versus a lawsuit. I’m sure there are many cases in the pharmaceutical industries where they knew their drugs were causing deaths but let them stay on the market. And let’s not even start talking about the defense industry because we will be here all day.
Again, I’m sticking with the original statement that there are similarities in the mindset that it takes to succeed in both areas, but they are not the same.
@Mehdi, there is no need to apologize here for English being a second language. 🙂
Thanks for your comments.
Yes, I agree with your point about a major dissimilarity being that in criminal enterprises the people are knowingly breaking the law. Breaking the law is in fact the point of a criminal enterprise, whereas it is not the main point of a legit business.
Still, wouldn’t you also agree that it is possible to share similar traits and a similar mindset, even while that difference exists?
In that limited sense I can see the similar mindset as Theron mentions, about risk taking and the kind of “build something from nothing” behavior that so many entrepreneurs exhibit.
A few years ago I was part of a pilot project where we attempted to “convert” criminals to entrepreneurs. I helped design and facilitate the program. We did such interesting exercises as preparing Proformas, P&L statements, and Balance Sheets for the participant’s criminal activity (they were all part of an innovative community sentencing program). I had 4 drug dealers, a forger who also had a sideline in identity theft, 3 grow operators (I’ve had my own greenhouse business – completely legit so I could really sympathize with their business problems) and six unique criminals. One posed as a famous actor and got away with it for years despite looking nothing like him.
What we were able to establish is that most of them actually weren’t doing that well financially. Any reasonable set of financials demonstrated these people were making stupid, short term decisions, woefully under paying their workers (who frequently turned into competitors – sometimes violent ones), grossly underestimating their costs, and had terrible cash handling policies. Crime, we discovered, really doesn’t pay. If my students were entrepreneurs they weren’t very good at it. By and large we were able to convince most of them to try legitimate entrepreneurship. We taught them some basic skills to improve their odds of business success and sent them out into the world. Most went straight and have remained that way, more or less.
However, our top student took what we taught him and built the most successful gang in town. They have a very clever business model in which they throw lavish parties for young people as a loss leader, not looking to hook anyone on drugs but looking for local franchise operators. The recruitors who run these parties are incredibly good at spotting promising young drug dealers. They sell these dealers drugs outsourced from other gangs…well you get the idea. They are running a nearly virtual company.
In four years my former student has established operations in 51 regional centres. I did far too good a job of explaining to him about environmental scanning, spotting the opportunity, marshalling the resources and exploiting the gap. He realized most drug gangs didn’t have a presence in mid sized centres and nobody served small towns. Now his gang fills that niche. Though they have a growing number of competitors.
This gang leader thinks the day is coming where many street drugs will be legalized, here in Canada who knows he may be right, and he’ll be perfectly placed to be a serious player in the distribution of these drugs. Now lest you think he is crazy, the Bronfman’s (one of Canada’s wealthiest families for many decades) built their fortune doing exactly this with booze during Prohibition. When prohibition ended they went legit and never looked back.
Of course my student’s behaviour bugs the hell out of me as the person who was charged with encouraging him to do something productive with his life. However, if we define entrepreneur as someone who organizes, operates and assumes the risks for a business venture then he is certainly an entrepreneur. On the other hand most of my students couldn’t have organized their way out of a paper bag, couldn’t operate a DVD player, and had no idea what the real costs and risks of their activities were (and cared even less).
So I’d posit;
some criminals are entrepreneurs though by no means all
some of these criminal entrepreneurs are successful
if you could get that last subset to turn to legitimate business they could probably move mountains since;
the illegal economy is huge and the biggest players in the field are significant businesses in their own right.
By the way Anita, my students would tell you that legal restrictions always create economic opportunities ie. laws create criminals by making their behaviour economically advantageous.
Talk about unintended consequences! The outcome was NO Entrepreneurial conversion and the emergence of a fully corporatized underworld organization. Bravo!
In a sense I think that they can be. I don’t know how many reviews I have read that are simply spiced up to make the product sound amazing just to make a sale. It’s sad because many people don’t understand how the internet works. But if you know what affiliate marketing is, then you know what I am talking about .