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In Italy and the United States mafia has a more specific meaning than is implied by organized crime, even though the two are often considered to be synonymous. Many crimes are undertaken by gangs or groups with some division of labor, a hierarchical structure, and a distribution of the spoils.

Even small criminal groups, such as a gang that robs banks, have some organizational structure: someone drives the getaway car and someone else rides shotgun; positions in the structure may be vacant and need to be filled.

A gang that robs banks, however, is not a mafia, nor is a terrorist group, despite its use of violence. Neither organization nor violence associated with criminal activity is sufficient to define a mafia.

The term mafia is more often associated with illegal market enterprises providing drugs, illegal liquor, or gambling. These are usually ongoing enterprises in which arrangements and agreements that are not legal contracts are made among participants. To go beyond personal relationships in which deals are completed at face-to-face meetings, participants may need a larger organizational structure to enforce agreements among members of the group and outsiders and to punish or redress violations thereof.

The successful groups in such enterprises may be those who succeed in establishing such organizational structures. Such structures may greatly increase the size of the deals they can undertake, expand the scope of their market [the distance over which they can do business and the number with whom they can deal], and entail the use of violence or the threat of violence. An organization able to enforce agreements and punish violators is also likely to decide which agreements it will enforce. It may come to control entry into various lines of criminal activity and the behavior [at least to some extent] of those who come under its protection. Thus a characteristic of a mafia is that it performs governmental functions, law enforcement and criminal justice — in spheres where the legal judicial system refuses to exercise power or is unable to do so.

Law[less] Lands
Another characteristic of mafias is their influence in the legal law enforcement and criminal justice systems. Leaders of the mafia may succeed in bribing individuals anywhere in the criminal justice system – police, courts, corrections. Cases may be dismissed, juries bribed, sentences reduced, parole lifted. The mafia may agree in some cases to use its powers on behalf of others who are not generally under its protection. Thus a characteristic of a mafia is that it performs governmental functions — law enforcement and criminal justice — in spheres where the legal judicial system refuses to exercise power or is unable to do so.

It is my belief that mafias are usually a large-scale continuing firms with the internal organization of a large enterprise, and with a conscious effort to control the market.
What makes them monopolies is not that they control the manufacture of illegal goods, but that they take over the distribution.
Often under the neglectful eye of bribed police, mafias suppress rivals and extort from the criminal enterprises that actually supply illegal goods and services to the public.
The profit driven crime syndicates do not create goods, they simply sell them.

This monopoly can only be maintained if the participants in such an exchange do not cooperate with police.
In most cases local law helps mafia out. If the penalty for using an illegal good [for example a drug] is almost the same as for selling that illegal good there is no incentive to cooperate with police.

No one is about to walk into a police station and admit to a crime out of some misguided sense of civic duty.

As for the crime syndicate associates turning in their fellow business friends… that must be regulated internally.

Most crime syndicates enforce oaths that its members must take before joining.
But the key to maintaining is the repetitive nature of the crime.

Repetition as the Key
If you were caught shoplifting once… would you try to weasel out of it by naming names? Since the crime is a one night stand sort of an affair, you will most likely do so.
But if your livelihood depended on smuggling illegal drugs into a given market and you were suddenly caught… you might be tempted to shut up and ride out the prison term… since after it you have all the intention of returning to that same occupation.

Also, since your smuggling is a repetitive business… it is a good chance that your syndicate already ran into the police in the area where you were arrested… the more interaction occurs between police and crime syndicates, the more chances for bribery.

A fresh rookie full of hope and naïve beliefs will rarely be bought, but war weary veterans who have seen crime occur regardless of how many people they threw in prison will be most likely candidates to negotiate.

Corruption Rules
When legitimate governmental authority becomes corrupted, the government may lose, if it ever had, the power to protect citizens and legitimate businesses from criminal activity. For example, theft and fencing become more attractive than other crimes when those who fence stolen goods are not prosecuted. But worse, the subversion of the criminal justice system allows the mafia to run protection rackets, that is, to extract payments from, control entry into, and mandate conditions of operation of legitimate business enterprises. Under these circumstances the mafia uses its influence in the criminal justice system to perform activities comparable to the taxing and regulating powers of legitimate government. The corruption of the government may extend beyond the criminal justice system to other regulatory agencies or agencies that award contracts or grants.

A full-fledged mafia can therefore have serious consequences for the economic growth of the legitimate economy. The mafia may create monopolies in local enterprises, control entry, and maximize revenue by extracting monopoly profits us protection payments. New investment may be discouraged and old investment driven out. Risk-averse investors are likely to seek localities less arbitrary and dangerous.

It is this particular theory that I had a hard time backing up with facts, until stumbling upon Pino Arlacchi’s writings. Arlacchi, a sociologist and leading expert on the Sicilian mafia, points out that in the 1970s and early 1980s the areas of southern Italy with the highest growth rates were those with the lowest levels of both organized and conventional crime, whereas those areas with the greatest mafia presence were the only economically stagnant regions of Italy. In a survey designed by Arlacchi of young Italian industrialists, almost 27 percent of respondents in the three regions of Italy where organized crime is the most established claimed to have decided not to invest in their area because of criminal pressure [the average for the country was less than 3 percent]. In the same three regions 58 percent claimed that they had withdrawn tenders for public contracts as a consequence of criminal threats or political pressure.

The American and Sicilian mafias admit members, socialize them to their responsibilities, enforce the oath of noncooperation, and deliver the benefits of their influence over the criminal justice system. They may control entry into illegal and legal markets as well. But those organizations are not themselves the economic entities that undertake criminal enterprise. The criminal activity – the businesses operated by the members of the group that bring in the revenue – is undertaken by enterprises far less permanent than the group itself and often involving outsiders. The economic structure is not the same as the governing structure. For particular illegal markets the organization may function like a cartel, a franchiser, or a trade association, with the significant difference that it does not leave the monopoly of violence to the state.

Why Mafias Develop

Historically, three major conditions are associated with the origins and development of mafias:

  1. An abdication of legitimate government power, possibly encouraged by the population’s rejection of government authority,
  2. Excessive bureaucratic power,
  3. The financial potential of illegal markets.


The island of Sicily, with a long tradition of resistance to outside domination, saw the rise of the Sicilian mafia in the second half of the nineteenth century, especially after the unification of Italy in 1870.

What we see is not only traditional small kingdoms being overthrown, but also a kind of power vacuum created… laws and all things legislative now had to depend not on any legitimate authority… but on private individuals and their clans.

The state implicitly let local powers control peasant unrest.

In contrast to what had happened in the past, [violence] occurred within the framework of the weak authority of a state that formally held, but failed to exercise, the legitimate monopoly over violence. It therefore compelled the state to come to terms with those who exercised de facto power at a local level and to delegate to them the functions of exercising that monopoly. Indeed, in practice, the state deferred to their authority, for although it officially prohibited private violence, it nevertheless granted the power to govern on behalf of the central government to that same local ruling class that made use of it.

Owners of large estates hired gabelloti [custodians] to run the estates in their owners’ absence. The mafia put many of its men in gabelloti positions and thus achieved control over products and manufactured goods going to market as well as control of the peasants.
The mafioso played critical roles of mediation among peasants, landowners, and the state and between the countryside and the outside world.

Between 1925 and 1929 the Italian Fascists made a concerted effort to eliminate the mafia and reestablish government control of the use of violence, but Prefect Cesare Mori – the man implementing this effort – was dismissed when he targeted powerful people supporting the Fascist regime. Mori’s effort did replace mafia control of the relationship between peasants and landowners with state control, but it did not eliminate the problem. The mafia reestablished itself when fascism fell and was given a further boost when the Allied occupation in 1943 turned to local powers for assistance in governing.

One might be tempted to ask how did the Allies screw up this badly… the answer is simple, Italian countryside was a mess and somebody was required to do something about it.

While American generals contemplated how many Purple Hearts headless corpses of American soldiers should get, they had no time to think about food distribution and other economical things.

They turned to mafiosos, who returned from prisons where “they were unjustly held by a Fascist regime.”

Try to picture all authority stripped away… legitimate government covering in hole in Northern Alps where they were puppets of Germans… no police units available and trained killers prowling the countryside under the watchful eye of clan leaders who did nothing but sat in prison and waited for this day.

Revenge and power were the keywords to describe what happened.

The Italian government is not the only government that has fumed to nonstate violence to accomplish what it was unwilling to do for itself. The U.S. Navy turned to Lucky Luciano, the imprisoned leader of the American mafia, to protect the New York docks from Nazi sabotage during World War II . They were indeed protected, and it is reasonable to assume that the methods used were not ones the U.S. government would have been willing to employ.

Here we hit another keyword when dealing with mafias… they always have to have some kind of implicit okay from the ruling government.

Mafia is always in some way connected to the legitimate government it shares geographic location with.

Abdication of power is not necessarily a sign of a weak government… for example when United States declared liquor illegal… it abdicated the right to sell and distribute liquor to private criminal organizations.

US could no longer regulate liquor… since theoretically the good ceased to function.
When a government makes a product or service illegal, it also ceases to enforces some laws, such as contract law, in the illegal market.

There is also a larger issue at stake here… mafia as a primitive capitalistic state… a primitive states arising not out of cooperation but out of coercion. Initial endowment of resources are important in determining which people become the rulers, as is relative efficiency in producing the means of coercion [guns] rather than consumer goods.

Once again I want to stress that mafia did not produce illegal goods… they did not have to, all they had to do was control the way such a good entered the market.

In the resulting primitive state people more efficient at producing consumer goods will seek to migrate to less arbitrary and coercive states.

Flight of money/talent out of Russia is a prime example of this.


In general, excessive bureaucratic power and discretion provide the basis for corruption — for bribery, shakedowns, and extortion — especially when the criteria for bureaucratic decisions are unclear and difficult to monitor and evaluate. The corruption of a bureaucratic agency may begin with the clients of the agency, such as the members of a regulated industry. Thus building contractors may seek to speed up the work of the agencies that give building permits. More often, however, the bureaucrats originate the corruption by demanding payment. Getting a government contract may require a kickback; tips or bribes may be necessary to secure a wide variety of government services. In the Soviet Union bribes were necessary to secure everything from drivers’ licensee to medical care and even higher education, as well as goods.

This sort of corruption Is worldwide and does not necessarily lead to the development of full-fledged mafias. Rather, corruption may be sporadic and action to correct it possible, or a standard pattern of paying government bureaucrats for their services may emerge. Government positions may be awarded to favored people to give them access to a share of the political spoils — a form of bureaucratic mercantilism. Bureaucratic corruption takes on a mafia character when violence or threats of violence are used to exclude competitors and thus to control market entry or access to contracts (by fisher). At this point the efficiency benefits sometimes attributed to bribing government of officials to do faster or better what they ought to do anyway collapse. Corrupt bureaucrats in collusion with criminal gangs – “the mafia” – may monopolize industries, award inflated contracts, and operate outside public safety standards. The activity may be extraordinarily persistent, defying repeated investigation and prosecution, as has been the case in New York City’s construction industry.


In the United States, Prohibition created the potential for a major illegal market in alcohol, and America can trace the growth in scope and power of its mafias to the Prohibition years. Illegal market enterprises generate a good deal of cash that can be used for bribes and investment in other industries. It is easier for legal authorities to overlook voluntary trade among consenting adults, even if illegal, than it is to take bribes to permit crimes that involve victims. Law enforcement agencies may be able to meet their quotas for arrests more easily if they cooperate with the market leaders in illegal industry. The police may exclude new entrants or drive out competition by enforcing the law in cooperation with the dominant criminal group. Illegal drug markets have been a major factor in the virulence of the Sicilian mafia in the last several decades.

This small introductory essay that focuses on the economic interpretation of mafia phenomenon… the essay is no by means exhaustive and it’s generality will probably offend some of you.