Bryan Caplan  

Blood and Expectations: The Case of the American Liquor Industry

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Suppose you had a meeting with Al Capone in 1923.  He tells you, "The Irish are giving us trouble with their cut-rate beer, so we're gonna rub 'em out."  You'd probably feel a chill run down your spine.  You certainly wouldn't laugh.  No one would.

Now imagine a similar meeting in 2013.  Instead of talking to Capone, though, you're meeting with the CEO of Heineken.  He tells you, "The Coors brothers are giving us trouble with their cut-rate beer, so we're gonna rub 'em out."  How would you react?  Not with a chill down your spine, I'll warrant.  If you're anything like me, you'd laugh in his face.

What's the difference?  Murdering your rivals was just as illegal in 1923 as it is today.  More illegal really, given the prevalence of the death penalty.  True, the expected marginal cost of murder was probably lower for Capone because of (a) corruption of the legal system, and (b) the fact that he was already suspected of many other capital crimes.  But can that explain your utterly divergent reactions to these two hypotheticals?

I think not.  What makes Capone's plan so chilling, and Heineken's so risible, is expectations.  Capone operated in a niche where people expected murder.  When he proposed murder, his underlings took him seriously.  Since they took him seriously, his murderous intent quickly blossomed into murderous action. 

Heineken, in contrast, is part of civilized society.  No one expects Heineken to rub anyone out.  So if Heineken's CEO proposed murder, his underlings would laugh.  Since they wouldn't take such a proposal seriously, the CEO's words would not lead to murder even if he meant them.  Indeed, if he kept pushing the issue, the probable result is that the crazy CEO of Heineken would be fired.

How could expectations change so radically in eighty years?  The repeal of Prohibition obviously had a lot to do with it.  But the main reason probably wasn't the de jure change in the marginal cost of murdering the competition.  The main reason, rather, was that the legalization of alcohol put civilized men back in charge of the industry.  And for civilized men, advocating violence against your business rivals is a sign of dementia, not determination.



COMMENTS (20 to date)
Wallace Forman writes:

"The repeal of Prohibition obviously had a lot to do with it. But the main reason probably wasn't the de jure change in the marginal cost of murdering the competition. The main reason, rather, was that the legalization of alcohol put civilized men back in charge of the industry."

Dubious. If a genie replaced all the bad gangsters with civilized men, the most marginally murderous among them would have gradually evolved the equilibrium back to where it started. (Random thought, part of this is well depicted in the movie "City of God.")

Expectations are part of the puzzle, but they aren't fundamental. Expectations have to fit with a certain environmental equilibrium (expectations included), or they will shift - to the extent that people observe a reality different from expectations.

Sometimes expectations can be self-sustaining, but more often they require reinforcement from the system's ability to punish deviations from expectations/reward adherence to expectations.

This Garret Jones post is somewhat apropos:
http://econlog.econlib.org/archives/2013/02/hagel.html

Nathan writes:

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Richard writes:

Obviously, the main reason that the head of Heineken doesn't do that is because the costs of going to jail so far outweigh any marginal profits that could be made. His opportunity cost of being CEO of Heineken is not bad at all. He'd just go into another field or look for a new job. Al Capone was in a market where willingness to kill was a necessity.

This is far from a situation where "expectations" are the main causal agent.

Mike Hammock writes:

Art Carden and I wrote up something along these lines on the topic of The Third Man:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1139186
(Forthcoming as a book chapter)

In short, black markets attract people with a comparative advantage in violence. It's true, as Wallace Forman says, that there would be violence in black markets even if we replaced all the thugs with "civilized men", but the civilized men would not be as skilled at committing acts of violence.

Peter writes:

Reminds me of the man who warned the suitors of his daughters that they will never see it coming...

https://www.youtube.com/watch?v=cF2wjzkCT1U

jb writes:

A great post but it's 90 years.

Paul writes:

I was confused by the post. I understood that when Al Capone said "we're gonna rub them out" meant that at least a few murders were going to take place. But I did not see the humor in the hypothetical AmBev quote because I took the CEO to be saying "we're going to put our competitors out of business so we can have a monopoly." You wouldn't laugh in his face, because that is a good business strategy, one that might very well be successful and make you a ton of money if you are cut in on the deal. I think that it is something you would take just as seriously as something Al Capone said.

Granted, I understand the point of the post is about murder, not monopoly. I just thought it was poorly written, and that the defects in its execution were themselves funny.

Rohan writes:

Counter-example: Jimmy Hoffa

There was nothing illegal about unions and union organizing. Yet there was still a culture of violence surrounding that issue.

Similarly, mafia/organized crime involvement in legal activities such as construction, real estate development, sanitation, etc.

The reason we don't see more of this is because of the government's jealous monopoly on force, and because they come down hard on others who would use force for their own ends.

mahalakshmi writes:

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Tracy W writes:

Isn't this a circular argument? Civilised men don't murder their business opponents, because they don't.

Nowadays, civilised politicians don't have duels. 200 years ago, they did. The real question it strikes me is what leads to the change in opinions about what's civilised or not, and I don't think it's a matter of legalisation or not. It's not like being an American Vice-President or a British MP was an illegal occupation 200 years ago.

Joss Delage writes:

I think this has everything to do with the kind of business the person is in, criminal or legit, and very little to do with the times. Yes, Heineken's CEO would never credibly say that, but neither would have, say, a big tobacco CEO during the prohibition. On the other hand the head of a drug ring today could say that, to exactly the same effect Capone did then.

The day prohibition stopped, the criminal business was (will be) replaced by a legitimate market, where normal marketing rules apply because they're the most effective.

Finch writes:

Isn't it just that the government's monopoly on force has gotten more secure?

If Barack Obama sat down at a cabinet meeting discussing the North Koreans and pounded his fist on the table saying "we're gonna rub 'em out," people would take him very seriously indeed. No one seriously disputes that Obama is a civilized man. This kind of action is within his power, and it's not within the power of Jean-Fran├žois van Boxmeer.

Aaron Zierman writes:

It's far more about incentives than expectations. When something is driven underground by making it illegal (prohibition), the market remains, yet becomes a much more dangerous place. The free market constraints on business are no longer there.

There is a reason "civilized" men were not in the positions of men like Capone. The POSITION itself demanded a man like Capone. The incentives were all there for a man like him to be successful in that line of work. In the free alcohol market today, those incentives are most certainly not there. And surprise surprise, Heineken is not Capone.

egd writes:
Yet there was still a culture of violence surrounding that issue.
The use of the past tense is incorrect. The culture of violence in unions continues.

If a local union leader promises to "rub out" the owner of a local business, his members are going to take that at face value. They may agree or disagree, but they wouldn't laugh at the proposition of using violence to achieve their goals.

Ken B writes:

@Tracy W:
No it's not circular. Bryan will object but substitute "law abiding" for "civilized" and you can see the argument more clearly. In a legal business law abiding businesses have recourse to the law and the malefactors can be punished. It's easy to see that at least for some kinds of business this makes it easier for the honest man and harder fro the crook. If however the business is illegal then that recourse to law vanishes and in relative terms thuggery works better.

Now just loosen "law abiding" to "civilized" and add in things like reputation. You can see how prohibition works against the civilized.

Not circular.

Mr. Econotarian writes:

I believe the difference in your examples is the difference in expectations of provision justice.

When Bugs Moran hijacked Al Capone's beer shipments, Capone could not depend on the justice system to provide relief. So he provided his own (the St. Valentine's Day Massacre).

MingoV writes:

Finch wrote: "... No one seriously disputes that Obama is a civilized man...."

I seriously dispute it. Does a civilized man tell lies continually, even when they don't advance his agenda? Does a civilized man indiscriminately bomb innocent people in countries we aren't at war with because he might kill a suspected terrorist? Does a civilized man break his oath and repeatedly violate the Constitution he swore to uphold?

I believe that Obama successfully emulates a civilized man.

Doug writes:

This reminds me of a question that I've heard widely varying answers to:

What percent of Western billionaires have ever ordered a hit on someone?

I could conceivably see any answer ranging from none to 10%.

Tracy W writes:

Ken B: If you do substitute law-abiding for civilised then it's non-circular. But then it raises the question of why at some points in time a legal business would be run by generally law-abiding people and at some points in time a legal business isn't.

To give an example of a legal business being run by non-law-abiding people, being a British politician in the 19th century was legal, and duelling was illegal in the United Kingdom, but British MPs still duelled. So British politicians were civilised, but not law-abiding.

And of course, the law only gives recourse against behaviour that the law bans. If something is perfectly legal, such as setting up a competing brewery, or insulting a political rival, then the law is not going to lift a finger. So just a basic business being legal doesn't mean that the people involved in it have no reason to resort to illegal means. Legalisation creates an incentive to be more law-abiding, but it doesn't eliminate the incentives to break the law.

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