Externalities, Perverse Incentives, For-Profit Prisons

I realize, on reflection, that this feels a little John Oliver-y.

It’s something I’ve thought about for a long while. It’s also related to a creative project I’m working on with a friend. Maybe I’ll have more on that here later.

For now, let’s start very zoomed out. Let’s cover some basic questions and concepts before we dive deeper.

Why have a market? What does market competition create that wouldn’t exist if the state provided the service / produced the good instead, without market competition?

Markets—in their idealized and only sometimes achieved form—maximize the efficient production of value within the constraints imposed on them. They reward those companies able to do more, and especially those which do more while spending less. In an ideal market, a company succeeds—winning customers (and thus market-share and greater income) from other companies—by making a better product or service, or offering comparable quality more efficiently than their competitors. Thus, ultimately, success is about maximizing income and minimizing cost.

But companies are only incentivized to minimize the costs they can’t ignore.

This means that, barring external enforcement, no competitor in a market is likely to minimize any cost that can be dismissed as an “externality,” an ignorable cost. For example, prior to the existence of government regulation of pollution, that pollution was an externality (and some pollution still is). So long as there weren’t costs associated with producing toxic ash and soot, few companies bothered to minimize their production of those things.

Those pollutants harmed people working at those companies. They harmed people living nearby, and even people far away. They have poisoned water supplies, killed wildlife, increased the prevalence of disease in humans (and likely caused human deaths). But so long as companies bore no associated costs for these outcomes, they were externalities. Those associated costs didn’t directly harm a company’s profit margin.

This is a pattern. Read about the Tragedy of the Commons, if you want to know more about similar dynamics.

Sometimes those externalities are a direct result of something which produces value for the company. The Cosmos episode “The Clean Room” discusses that to some extent, covering the topic through the history of leaded gasoline.

But sometimes those externalities actually produce additional value for the company, down the line. When this is the case, the company—possibly every company in a given market—is incentivized to create a cost that others must bear because this cost will eventually result in additional value for the company. If this abstraction isn’t clear enough yet, let’s talk about for-profit prisons.

For-profit prisons are paid to house inmates. Generally, they’re paid by the government.

The arguments in favor of for-profit prisons largely revolve around the idea that a for-profit institution will compete in a market, and thereby be incentivized to perform a service more efficiently—i.e. at lower cost to the government & taxpayer—than a non-profit or state-run institution will. For-profit prisons, after all, are strongly incentivized to cut costs wherever and however they can. The benefit of this cost-cutting, the reasoning goes, will be passed on to the taxpayer. Taxpayers will thus pay less for the incarceration of convicts than they would otherwise.

There is a related argument made in favor of for-profit prisons combining this idea of free market efficiency with two other ideas. First, (because of the aforementioned efficiencies, as well as for other reasons) that the free market should provide all goods and services, and second that the government should not compete with companies in the free market. That argument is more ideologically based. It also requires significantly more discussion of how one defines the term “free market.” Thus I’m not going to focus on it at the moment. Right now, I’m just going to talk about incentives and externalities.

For-profit prisons, then, would focus entirely on the service they provide: incarceration. The lives of their inmates after those inmates leave prison would be externalities.

Setting aside those externalities for the moment…

For-profit prisons, like other companies, are incentivized to find additional sources of income available to their business. With prisons, that income could come from the labor of their prisoners, or from charging prisoners for services and goods (phone calls, stationery and writing supplies, stamps, better food, etc.). It could also come from increasing the number of inmates they house. And if they wanted a more reliable level of income (as most companies do), they would be incentivized to ensure that there’s a steady supply of new inmates.

But how could that be done?

In a world where lobbying exists, for-profit prisons are strongly incentivized to pressure lawmakers on multiple fronts. They profit when lawmakers expand the powers of the police and those police secure more convictions. They profit when more behavior is criminalized. They profit when prison sentences are longer. They profit when more people in the criminal-justice system are more likely to be housed in prison. 

In short, for-profit prisons benefit when the criminal-justice system treats people harshly.

Let’s bring those externalities, the lives of ex-convicts after leaving prison, back into focus.

For-profit prisons have no incentive to reduce recidivism. They have every reason to want inmates to be returned to prison after they finish their sentence.

When an inmate leaves prison at the end of their sentence, the for-profit prison stops being paid by the government for housing them. The for-profit prison cannot earn money from the ex-convict’s labor, and cannot charge the ex-convict for goods and services. An inmate who leaves the system is lost income. If that inmate eventually returns to prison, that’s more income.

So an inmate’s life-after-prison might not actually be an externality. It might be a resource. Recidivism is good for for-profit prisons. Rehabilitation is bad.

I’ll spell it out. If a for-profit prison did a good job of helping inmates avoid future problems, helped them to find steady jobs and stable housing and healthy social connections, helped them to avoid being charged for another crime after they leave prison—in short, helped convicts rejoin society at large—that would hurt the for-profit prison’s bottom line. In fact, the harder it is for ex-inmates to readjust to society outside of prison—the harder it is for them to avoid being sent back to prison—the better it is for for-profit prisons.

For for-profit prisons, people who are re-incarcerated create additional profit. They’re repeat customers. At best, with these incentives, an intelligently run for-profit prison would be entirely neutral about whether their current inmates successfully reenter society after leaving. Anything less than the most ethical for-profit prison might be reluctant to help ex-convicts rejoin society.

I don’t know about you, but those incentives seem pretty perverse to me. 

People in prison are at the mercy of the prison. For-profit prisons may not be omniscient or omnipotent, but they have incredible influence over the lives of their prisoners. And as things stand they have very little reason to make those prisoners’ lives better, or to help those prisoners succeed after they leave.

With the current system, there is every reason for a for-profit prison to house prisoners as efficiently as possible, sell their labor, and charge them for basic goods and services. There is every reason for that same company to create environments that harm convicts’ ability to remain connected with the outside world, or to improve their chances of leading successful lives and remaining unincarcerated after leaving prison. There is every reason for those companies to lobby in favor of making life after prison as difficult as possible—because anyone who is re-incarcerated is just more income.

This means that the government is paying money to companies that benefit from having more people behind bars, and benefit from having those people re-incarcerated after they eventually leave. We’re achieving efficient imprisonment at the cost of incentivizing the incarceration of more people. It’s bad.

See, markets don’t automatically produce the best possible outcome. They encourage companies to efficiently deliver a product within the constraints of the system. They encourage companies to expand their market… and in this case, that means increasing the number of people in prison.

I’ve had to trim back a number of side arguments. I’m not responding to all the possible disagreements I can see with what I’ve written here. Not yet. But fundamentally, I think we have too readily asked “how can we do this through the market?” and failed to ask “should we do this through the market in the first place?”

I can imagine some theoretical way to structure a for-profit prison industry that isn’t incentivized to trap people in a cycle of incarceration, but improving outcomes here would be a whole lot easier if we took the profit-motive out of the equation instead.

Anyway.

You have, to some extent, comics to blame for this brain worm. Maybe I’ll have more on that front for you later.

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