ECON 4415: Participation Assignment 2 Review by: Tanveer Singh Chandok

AN ECONOMIC ANALYSIS OF A DRUG-SELLING GANG’S FINANCES

Steven D. Levitt and Sudhir Alladi Venkatesh

This paper serves as a study into the economic activities of drug gangs after “crack” became widely

available in the mid-1980s. The “corporatization” of street gangs leads to an interesting economic

analysis of the day to day operations of its members. This paper concentrates on one gang in particular,

for which the authors have detailed financial information. The paper looks into the background of the

communities from which gang members come, and those communities within which gangs are active. The

paper talks about the competitive environment within which gangs operate, and this correlation to violent

crime rates. The study finds that the environment within which these gangs are usually operating is quite

homogenous along socioeconomic lines. While this seems to be a simple statement, the implications are

vast. One would believe that gang violence arises in those areas where there are vast socioeconomic gaps,

but this is mostly untrue. The study shows that it is the homogenous neighborhoods within which gang

violence is rampant. This leads to the conclusion that people join gangs for reasons other than “unfair”

living conditions or discrimination based on relative poverty. The study also finds that the neighborhoods

that harbor gangs generally are 99.6% black (U.S average is 12% black) and consist of a high percentage

of unemployed men (35.8%, U.S average is 6.5%). The median income in these neighborhoods is less

than half that for the rest of the U.S ($15,077 compared to $35,225 U.S average). Most citizens within

these neighborhoods have at educational attainment (at age 25) of less than high school. All of this leads

to children not being brought up within the correct surroundings to be deterred from gang related

activates. It is within the youth that the tides of change lay, this is discussed towards the end of the paper.

Structurally, gangs seem to be organized in a very “corporate-like” scheme. With central leadership

branching off to local leaders, money (power and security) moves up the chain of command. Under the

local leaders are different officers who take up various duties based on skill levels (“Enforcer”,

“Treasurer”, “Runner”, etc.). Under the “Enforcer” are the lowest-of-low gang members: the “Foot-

soldiers”. While it is the foot-soldiers that are responsible for most of the physical activities of the gang,

they not do benefit (monetarily) proportionally.

The paper then goes on to providing data sets and descriptive statistics. The data set contains detailed

financial information on the activities of the gang described. This data was provided by an informant in

the gang researched. The gang currently does not exist after a police raid exposed its activities. From the

data (and analysis), it can be seen that gang members (at a lower level) are not making enough money to

justify their actions. Lower rung gang members make minimum wage (or slightly above), while higher

tanking members make around $50,000 - $130,000 (local gang leaders). Out of the entire gang, there are

very few members who make this kind of money. As mentioned earlier, power, safety and money, moves

up the chain. Even though the foot-soldiers risk their lives (literally) every day, they only see a small

fraction of the income they generate by selling drugs. The members who make the higher bracket of

money can never expect to command such incomes working legitimate jobs. This is attributed to their

dismal education and skill levels. This is why higher-up members stay within their gangs and make it

their lives. One intriguing question still remains though: why do members who earn subpar incomes still

stay within gangs? These members risk their lives every day and are more prone to violent crime than

regular citizens. The answer to this is uncovered by removing typical consumption and demands of a

normal society. Lower gang members find comfort in the fact that they can maybe one day command the

ECON 4415: Participation Assignment 2 Review by: Tanveer Singh Chandok

salary of a local gang leader. This sort of pyramid scheme attracts youths and makes it lucrative enough to

sell drugs even though they are in tremendous amounts of danger. Promotions do take place in gangs

(much like in a corporation) hence gang members think that it may be their turn next. This causes

members to accept the low hourly wage, the imminent threat to their lives and the backward living

conditions.

Gang wars are of great concern to law makers, police officers, and every day citizens. This paper however

looks at the effect of gang wars on the gangs themselves. It was found that the gang was at war 25% of

the time. During these time periods, expenses were high, and income was very low. Regular customers

would stay away in times of war, fearing their safety. Gangs have to protect their members, and this is an

expensive task. When a member is killed during a war, gangs are obliged to take care of their families

(monetarily) for a few years. This adds up when wars are turn out to be worse than usual, and gangs can

be crippled by their economic losses after a war ends. The paper discusses causes and consequences of

gang war in all its gory detail.

Towards the end, the authors suggest methods to curb the growth of gangs. The first suggestion is to

make life outside the gang much better for high-risk youths. This is a difficult proposition and generally

would vary on a case by case basis. An alternative would be to ensure that joining gangs is even less

profitable than current situations. This would include mandating harsher punishments towards drug

purchasers. The paper suggests “purchasers” and not “sellers” because it is the only way to curb demand

and lower the costs. This would not generate enough income for gangs and that could help deter youths

from joining them. Lastly, the authors suggest that drug legalization could create so much competition

that gangs would have no reason to exist. All of these suggestions must be taken with a grain of salt as

there are plenty of unintended consequences that would arise by implementing these ideas. In closing, the

authors suggest that the only way to understand gangs is to obtain further data and analyze them on a

more macroeconomic scale.