The Business Ethics of Incarceration: The Moral
Implications of Treating Prisons Like Businesses
Daniel J. D’Amico
Loyola University New Orleans

1. Introduction
Historically, punishment theory has attempted to resolve questions
such as: What is a just penalty for crime? How severely should society punish
criminals? And what are the nature and causes of criminal behavior? More
recently, a subfield of punishment theory has focused upon the moral and
practical implications of prison privatization—the use of privately owned and
operated firms to produce, manage, and allocate the services of incarceration.
Greatly debated by economists and moral theorists alike, prison privatization
debates have both consequentialist and deontological components. 1
Consequentialists at heart, most economists have characterized
incarceration as a public good. The services of law and order (imprisonment
being one key component) produce positive externalities to non-payers. 2 If an
individual paid for the production of criminal law—say, hired a security
officer to patrol his house—his neighbors would presumably be safer in
person and property. The logic is similar for incarceration. If a victim were to
pay for a criminal to be punished as a service, 3 non-payers would also
1

See Hugo Adam Bedau, “Punishment,” Stanford Encyclopedia of Philosophy,
accessed online at: http://plato.stanford.edu/entries/punishment/.
2

See Tyler Cowen, “Law as a Public Good: The Economics of Anarchy,” Economics
and Philosophy 8 (1992), pp. 249-67.
3

Under present institutional arrangements (government provision or government
contracting-out of prison services), incarceration is costly. As of 2004, the United
States spent over $60 billion on correctional services; see Lynn Bauer and Steven
Owens, “Justice Expenditure and Employment in the United States, 2001,” Bulletin,
NCJ 202792 (Washington, DC: United States Department of Justice, Bureau of Justice
Statistics, May 2004). Were prisons completely privatized, some conclude that the

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Reason Papers Vol. 31
supposedly be better off. The law-breaker could not commit further crimes
while he was in jail, which is the incapacitation effect. 4 And other potential
criminals would be deterred from engaging in crime for fear that they would
also be punished, which is the deterrence effect. 5 When third parties benefit
from punishment services but are not made to pay for them, it is said that
punishment is a non-excludable good. Non-excludable goods are often thus
said to be under-provided by voluntary markets. David Friedman explains,
“nobody pays and nobody gets, even though the good [in this case, additional
units of incarceration services] is worth more than it would cost to produce.” 6
Economists typically conclude that state subsidies can and should resolve the
problems associated with sub-optimal output, 7 but recent contributions to the
theory of public goods have explained that it does not necessarily follow that
government provision will be more efficient than the presumably inefficient
market. 8 This article takes seriously this recent development in the theory of
costs of imprisonment would be negative; see Bruce L. Benson, “Customary Law with
Private Means of Resolving Disputes and Dispensing Justice: A Description of a
Modern System of Law and Order without State Coercion,” Journal of Libertarian
Studies 9, no. 2 (1990), pp. 25–42. That is, the revenue earned from the productivity of
inmates would be greater than the overhead costs of operating prisons. Many
libertarian philosophers support criminal-justice paradigms based upon restitution
from criminals to victims as an alternative to retributive- or rehabilitation-punishment
paradigms; see Randy Barnett, “Restitution: A New Paradigm of Criminal Justice,” in
Assessing the Criminal: Restitution, Retribution, and the Legal Process, ed. Randy
Barnett and John Hagel (Cambridge: Ballinger Publishing Company, 1977).
4

Steven Levitt and Daniel Kessler, “Using Sentence Enhancements to Distinguish
between Deterrence and Incapacitation,” Journal of Law and Economics 42 (1999), pp.
343-63.

5

See Isaac Ehrlich, “The Deterrent Effect of Criminal Law Enforcement,” Journal of
Legal Studies 1, no. 1 (1972), pp. 259-76; Isaac Ehrlich, “The Deterrent Effect of
Capital Punishment,” American Economic Review 65, no. 3 (1975), pp. 397-417; and
Isaac Ehrlich, “The Deterrent Effect of Capital Punishment: Reply,” American
Economic Review 67, no. 3 (1977), pp. 452-58.
6

David Friedman, Hidden Order: The Economics of Everyday Life (New York:
HarperCollins, 1996), p. 278.
7

See any standard microeconomics textbook, e.g., N. Gregory Mankiw, Principles of
Microeconomics, 5th ed. (Mason, OH: South-Western Cengage Learning, 2008), pp.
226-30.

8

This critique is relevant for public goods theory in general. See Tyler Cowen, Public
Goods and Market Failures: A Critical Examination (New York: Transaction, 1991);
David Schmidtz, The Limits of Government: An Essay on the Public Goods Argument

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public goods and applies it specifically to the topic of incarceration in order to
make progress in the debates concerning prison privatization.
The traditional moral analysis of incarceration arrives at a conclusion
similar to the consequentialist analysis, namely, that prison services should
not be left to the private market, but that these results are reached through a
nearly opposite rationale. Criminal justice institutions are said to possess
some unique metaphysical quality—they involve determining matters of
justice and they require inhibiting the liberty of autonomous individuals. 9 In
the hands of private actors these mechanisms of force can have a corrupting
influence. It was not a concern for under-provision but over-provision which
motivated the moral case against market involvement in punishment. 10
These arguments supporting the view that the realm of criminal
(Boulder, CO: Westview Press, 1991); and Randall Holcombe, “A Theory of the
Theory of Public Goods,” Review of Austrian Economics 10, no. 1 (1997), pp. 1-10.
On the social provision of law specifically, see Bryan Caplan and Edward Stringham,
“Market Provision of Law, Networks, and the Paradox of Cooperation,” Review of
Austrian Economics 16, no. 4 (2003), pp. 309-26; and David Friedman, “Law as a
Private Good,” Economics and Philosophy 10 (1994), pp. 319-27.
9

Richard Harding, in his “Private Prisons,” Crime and Justice 28 (2001), pp. 265-346,
cites the following authors as representative of the view “that imprisonment is an
intrinsic or core state function that by definition cannot legitimately be delegated in
any of its aspects to a nonstate agency” (p. 266): H. Jung, “Introductory Report,” in
Privatization of Crime Control: Collected Studies in Criminological Research, vol. 27,
ed. H. Jung (Strassbourg: Council of Europe, 1990); J. DiIulio, No Escape (New York:
Basic Books, 1991); Nils Christie, Crime Control as Industry: Towards GULAGS
Western Style? (London: Routledge, 1993); R. Sparks, “Can Prisons Be Legitimate?
Penal Politics, Privatization, and the Timeliness of an Old Idea,” in Prisons in Context,
ed. R. King and M. Maguire (Oxford: Clarendon, 1994); and M. Ryan, “Prison
Privatization in Europe,” Overcrowded Times 7, no. 2 (1996), pp. 16-18.

10

Randy Barnett (in his “Pursuing Justice in a Free Society: Part Two—Crime
Prevention and the Legal Order,” Criminal Justice Ethics 5, no. 1 [1986], pp. 30-52)
summarizes this perspective held by Hobbes and Locke: “When one seriously
compares the potential responsiveness of each system [government versus marketbased criminal justice], many readers may concede the point and offer the opposite
objection: Competing jurisdictions would most likely be too responsive to their
customers . . . creating serious social disruption” (ibid., p.40). See also Randy Barnett,
“Pursuing Justice in a Free Society: Part One—Power vs. Liberty,” Criminal Justice
Ethics 4, no. 2 (1985), pp. 50-72. Robert Nozick explains the same position: “Men
who judge in their own case will always give themselves the benefit of the doubt and
assume that they are in the right. They will overestimate the amount of harm or
damage they have suffered, and passions will lead them to attempt to punish others
more than proportionately and to exact excessive compensation”; see Robert Nozick,
Anarchy, State, and Utopia (New York: Basic Books, 1974), p. 11.

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justice is the appropriate domain of the state and not the market are the
dominant perspectives in the literature and in practice. At present, the vast
majority of criminal justice institutions in the United States and nearly all
developed countries are owned and operated by governments or under their
authorities.
There are two major reasons to question the dominance of the stateonly prison perspective. First, the long historical record of criminal justice
institutions is a direct challenge to these accepted views. 11 Economic historian
Bruce Benson points out that government’s dominant role in criminal justice
is a uniquely modern phenomenon. 12 For the majority of human history,
criminal justice services were produced, funded, and managed functionally—
dare one say, efficiently—by private means. 13 In various times and places,
private entities creatively overcame the challenges of under-provision and
non-excludability. 14 Incentivized by the competitive process of profit and
11

Unrelated to criminal justice per se, Ronald Coase offers an empirical challenge
through historical evidence to traditional public goods arguments; see Ronald Coase,
“The Lighthouse in Economics,” Journal of Law and Economics 17, no. 2 (1974), pp.
357–76. This publication has been subjected to historical criticism by E. Bertrand,
“The Coasean Analysis of Lighthouse Financing: Myths and Realities,” Cambridge
Journal of Economics 30 (2006), pp. 389-402. However, William Barnett and Walter
Block argue that the potential for privately operated public services such as lighthouses
still holds; see their “Coase and Van Zandt on Lighthouses,” Public Finance Review
35, no. 6 (2007), pp. 710-33; and their “Coase and Bertrand on Lighthouses,” Public
Choice (forthcoming).

12

Bruce Benson, The Enterprise of Law: Justice without the State (San Francisco, CA:
Pacific Research Institute for Public Policy, 1990).

13

For historical examples of functioning private sector criminal justice services, see
David Friedman, “Private Creation and Enforcement of Law: A Historical Case,”
Journal of Legal Studies (1979), pp. 399-415; and Terry Anderson and P. J. Hill, The
Not So Wild, Wild West: Property Rights on the Frontier (New York: Stanford
Economics and Finance, 2004). This list is not exhaustive.

14

This includes prisons, and much else as well. For more on this, see Barnett and
Block, “Coase and Van Zandt on Lighthouses”; Barnett and Block, “Coase and
Bertrand on Lighthouses”; Walter Block, “Public Goods and Externalities: The Case of
Roads,” The Journal of Libertarian Studies 7, no. 1 (1983), pp. 1-34; Tyler Cowen,
ed., The Theory of Market Failure: A Critical Examination (Fairfax, VA: George
Mason University Press, 1988); Anthony De Jasay, Social Contract, Free Ride: A
Study of the Public Goods Problem (New York: Oxford University Press, 1989);
Holcombe, “A Theory of the Theory of Public Goods”; Hans-Hermann Hoppe,
“Fallacies of the Public Goods Theory and the Production of Security,” The Journal of
Libertarian Studies 9, no. 1 (1989), pp. 27-46; Jeffrey Hummel, “National Goods vs.
Public Goods: Defense, Disarmament, and Free Riders,” The Review of Austrian

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loss, private criminal justice systems have been seen to promote innovation
and discovery. 15 While fascinating, such examples have had little influence
upon real criminal justice policy today, neither in the United States nor
abroad.
A second reason to doubt the state-only perspective of incarceration
is that governmental dominance over criminal justice institutions has
produced a wide variety of mixed results. Governments have not assured
efficient, high-quality, or necessarily just outcomes. In contrast, it has been
argued that quality improvements in government criminal justice institutions
occur only insofar as they confront hard budget constraints. 16 Criminal justice
scholar Michael Tonry explains that “[w]ithout resource constraints many
politicians will argue for more imprisonment for every kind of offender as if

Economics 4 (1990), pp. 88-122; David Osterfeld, “Anarchism and the Public Goods
Issue: Law, Courts, and the Police,” The Journal of Libertarian Studies 9, no. 1 (1989),
pp. 47-68; E. C. Pasour, Jr., “The Free Rider as a Basis for Government Intervention,”
The Journal of Libertarian Studies 5, no. 4 (1981), pp. 453-64; Murray N. Rothbard,
The Logic of Action: Applications and Criticism from the Austrian School, vol. 2
(Cheltenham, UK: Edward Elgar, 1997); Schmidtz, The Limits of Government; Larry
Sechrest, “Privateering and National Defense: Naval Warfare for Private Profit,” in
The Myth of National Defense: Essays on the Theory and History of Security
Production, ed. Hans-Hermann Hoppe (Auburn, AL: The Ludwig von Mises Institute,
2003), pp. 239-74; Larry Sechrest, “Public Goods and Private Solutions in Maritime
History,” The Quarterly Journal of Austrian Economics 7, no. 2 (2004), pp. 3-27;
Larry Sechrest, “Private Provision of Public Goods: Theoretical Issues and Some
Examples from Maritime History,” ICFAI Journal of Public Finance 2, no. 3 (2004),
pp. 45-73; and Larry Sechrest, “Privately Funded and Built U.S. Warships in the
Quasi-War of 1797-1801,” The Independent Review 12, no. 1 (2007), pp. 101-13.
Rothbard’s reductio ad absurdum of public goods is as follows: “A and B often
benefit, it is held, if they can force C into doing something. . . . [A]ny argument
proclaiming the right and goodness of, say, three neighbors, who yearn to form a string
quartet, forcing a fourth neighbor at bayonet point to learn and play the viola, is hardly
deserving of sober comment”; see Rothbard, The Logic of Action, p. 178.
15

Bruce Benson, “Crime Control Through Private Enterprise,” The Independent
Review 2, no. 3 (1998), pp. 341-71.
16

Janos Kornai developed the terms “hard” and “soft” budget constraints to explain the
shortages and inefficiencies of production in the Soviet Union and other socialist
countries; see Janos Kornai, “The Soft Budget Constraint,” Kyklos 39, no. 1 (1986),
pp. 3-30; and Janos Kornai, “The Concept of the Soft Budget Constraint Syndrome in
Economic Theory,” Journal of Comparative Economics 26, no. 1 (1998), pp. 11-17.
Shortages do not imply that a given good or service is not being produced altogether,
but they do signal that demand is exceeding supply and there is no movement in the
direction of equilibrium.

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imprisonment were a free good.” 17 In fact, Tonry notes that legislative
references to state budgets and fiscal constraints help explain the few
successful cases of criminal sentencing reform. In desperate times there is
little room to be concerned about public goods theory or moral legitimacy.
Policy makers will implement what works, or that is, what they think will
work, or what voters think will work.
Rising crime rates from the 1960s through the mid 1990s, and the
“war-on-drugs” begun in the 1980s, led to a vast expansion of prison facilities
and populations. 18 Earlier debates concerning the philosophy of punishment
had concluded that the state was the rightful source of incarceration services,
but they were resolved at times when state authorities could afford to expand.
Financial conditions and public opinion have since changed. Growing crime,
tighter budgets, and larger prison bureaucracies have forced decision-makers
to entertain the prospect of efficiency gains via private prisons. 19 Today the
modern punishment discussion must resolve more nuanced questions than
previously: What is the appropriate role of the state in providing incarceration,
and inversely what is the proper role of the market? In other words, should
prisons be privatized; how and to what extent?
At first, it was thought that market incentives would result in a “raceto-the-bottom” in terms of prison quality standards. 20 As firms seek ways to
17

Michael Tonry, “The Politics and Processes of Sentencing Commissions,” Crime &
Delinquency 37 (1991), p. 324.

18

See Jesper Ryberg, The Ethics of Proportionate Punishment: A Critical Investigation
(Boston: Kluwer Publishers, 2004), pp. 3-5; P. L. Griset, Determinate Sentencing
(New York: State University of New York Press, 1991); Barbara Hudson, Justice
Through Punishment (Hong Kong: Macmillan Education, 1987); Andrew von Hirsch,
K. A. Knapp, and Michael Tonry, The Sentencing Commission and Its Guidelines
(Boston, MA: Northwestern University, 1987); Andrew von Hirsch, Censure and
Sanctions (Oxford: Clarendon Press, 1993); Martin Wasik and Ken Pease, eds.,
Sentencing Reform: Guidance or Guidelines? (Manchester, UK: Manchester
University Press, 1987); and Michael Tonry and Kathleen Hatlestad, Sentencing
Reform in Overcrowded Times (Oxford: Oxford University Press, 1997). All of these
authors describe the recent empirical trends of crime and punishment similarly, which
place stress and tension upon the previously established and accepted moral
punishment paradigms.

19

See Glenn C. Loury, “Why Are So Many Americans in Prison? Race and the
Transformation of Criminal Justice,” Boston Review (July/August 2007), accessed
online at: http://www.bostonreview.net.

20

See Oliver Hart, Andrei Shleifer, and Robert Vishny, “The Proper Scope of
Government: Theory and an Application to Prisons,” Quarterly Journal of Economics
(1997), pp. 1127-61. See also, Charles H. Logan, “The Propriety of Proprietary
Prisons,” Federal Probation 51 (1987), pp. 35-40; and Samuel Jan Brakel, “Prison

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reduce costs, they may erroneously cut needed portions of the production
function as well. For example, too few guards coupled with too many inmates
can lead to excessive violence. 21 But the lower operating expenses of private
prisons, even if only marginal, are empirically non-ambiguous. By harnessing
the incentives of profit and competition, it has been shown that private prisons
can hold operating expenses down while increasing the quality of operation. 22
Rather than a race to the bottom, quality controls can explicitly be defined in
contracts. Thus when comparing public with private prisons on the
specifically empirical margins of escape rates, physical health resources,
mental health programs, counseling, the amount of recreational facilities,
recidivism, and other proxy variables, the latter perform no worse and
sometimes marginally better than the former. 23 However, such findings have
not swayed the staunch moral opposition against private prisons.
At this point we should make clear an important distinction. Those
institutions referred to as “private” prisons in popular discussions do not
function completely within a free-enterprise system, but are rather contractedout through government funding. They successfully avoid the majority of
free-rider and public goods problems, but they are constrained in their
decision-making by the fact that earlier production processes within the
criminal justice system (police, courts, legislations, and criminal sentencing
agencies) are still monopolized by state control. 24 From here on, this article
Management, Private Enterprise Style: The Inmates’ Evaluation,” New England
Journal on Criminal and Civil Confinement 14, no. 2 (1988), pp. 175-244.
21

See Steven Levitt, “The Effect of Prison Population Size on Crime Rates: Evidence
from Prison Overcrowding Litigation,” The Quarterly Journal of Economics 111, no. 2
(1996), pp. 319-51.

22

See Lonn Lanza-Kaduce, Karen F. Parker, and Charles W. Thomas, “A Comparative
Recidivism Analysis of Releases from Private and Public Prisons,” Crime and
Delinquency 45 (1999), pp. 28-47; and Harry P. Hatry, Paul J. Brounstein, and Robert
B. Levinson, “Comparison of Privately and Publicly Operated Corrections Facilities in
Kentucky and Massachusetts,” in Privatizing Correctional Institutions, ed. G.
Bowman, S. Hakim, and P. Seidenstat (New Brunswick, NJ: Transaction, 1993). pp.
193-212.

23

Kenneth Avio, “The Economics of Prisons,” in Changing the Guard: Private
Prisons and the Control of Crime, ed. Alexander Tabarrok (Oakland, CA: Independent
Institute, 2003), pp. 9-56.

24

See Alexander Tabarrok, “Introduction,” in Changing the Guard: Private Prisons
and the Control of Crime, ed. Alexander Tabarrok (Oakland, CA: Independent
Institute, 2003), pp. 1-9.

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will refer to these arrangements as contracted-out prisons and reserve the term
private prisons for incarceration services nested within a completely marketbased criminal justice system. 25 Admittedly, this distinction is overly
semantic for some of our purposes because the arguments currently pressed
against contracted-out prisons attempt to take issue with the essentially
“market-like” features of these contractual arrangements. Profits, incentives,
and lack of democratic representation would presumably all be characteristics
of actual private prisons as they are characteristics of currently contracted-out
prisons. Thus our analysis informs both debates.
The consequentialist debate has been fought on predominantly
empirical rather than theoretical grounds. Few speculative descriptions of
purely free-market prison systems have been described, argued for, or
compared across institutional lines. Instead, the current literature (as surveyed
above) compares contracted-out prisons with government prisons on a variety
of margins pertaining to technological efficiency. The general summary of
this literature is that contracted-out prisons have a marginal lead over
government prisons. On the other hand, when the normative debates compare
contracted-out prisons against government prisons, their predominantly
theoretical observations and arguments apply not only to contracted-out
prisons, but to all and any application of markets to the criminal justice
system. The conclusion from the current literature awards a marginal victory
to contracted-out prisons on consequentialist grounds, but it awards a
significant victory to governmental prisons over both contracted-out and
private prisons on deontological grounds. In other words, opponents of
applying markets to criminal justice may admit to the marginal technological
gains achieved by contracted-out prisons, but they view these benefits as
small and insignificant compared to the overwhelmingly negative moral
25

Anarcho-capitalists apply privatization arguments to the minimum operations of the
state—the provision of justice. This literature began in 1849 with Gustave de Molinari,
“On
the
Production
of
Security,”
accessed
online
at:
http://www.panarchy.org/molinari/security.html, and received new attention by
Murray N. Rothbard, For A New Liberty: The Libertarian Manifesto (San Francisco,
CA: Fox and Wilkes, 2002 [1973]); Murray N. Rothbard, The Ethics of Liberty (New
York: New York University Press, 1998 [1982]); David Friedman, The Machinery of
Freedom: Guide to a Radical Capitalism (La Salle, IL: Open Court Publishing, 1989);
and many more recent publications. On the provision of private police, see Patrick
Tinsley, “Private Police: A Note,” Journal of Libertarian Studies 14, no. 1 (1999), pp.
95-100; Rothbard, For a New Liberty, pp. 201-5 and 215-22; and Friedman,
Machinery of Freedom, pp. 114-20. On the provision of private courts, see Benson,
The Enterprise of Law, pp. 349-78; Rothbard, For a New Liberty, pp. 222-34;
Friedman, Machinery of Freedom, pp. 114-20; and Edward Stringham, “Market
Chosen Law,” Journal of Libertarian Studies 14, no. 1 (1999), pp. 53-77. Very little
has been done explicitly to describe the potential for purely free market prisons.

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essence of running prisons and any other criminal justice services as if they
were businesses. It is this staunch moral opposition which is isolated and
specifically adressed in this paper. One must first try to understand what are
the morally essential features of state-based incarceration services compared
to market-based incarceration services, and then determine whether opponents
of non-governmental prisons (who are against both contracted-out and private
prisons) have calculated accurately the moral costs and benefits of each.
It has been argued that there is something inherently wrong with
contracted-out incarceration. 26 Contracted-out prisons are said to “profit off of
other people’s misery.” Prison activist Paul Wright explains, “at least in
public prisons, when prisoners are raped due to inadequate staffing, [etc.] no
one can say prison officials did so to line their own pockets and personally
profit from the misery of others.” 27 As best we can detect, activists against
non-governmental prisons have attempted to pinpoint three characteristics of
contracted-out and private prisons that they deem as essentially immoral: (1)
The existence of profits. Judith Greene states that “the huge profits to be made
by incarcerating an ever-growing segment of our population serve the system
well. Profits oil the machinery, keep it humming, and speed its growth.” 28
And according to Nils Christie, “[p]rison means money. Big money. Big in
building, big in providing equipment. And big in running.” 29 (2) Bad
incentives. Closely related to profits, there is a concern that prison managers
will seek their own interests at the expense of the social welfare:
“Corporations with a stake in the expansion of private prisons invested $3.3
million in candidates for state office and state political parties in forty-four
26

See Christie, Crime Control as Industry; and Jeffrey Reiman, The Rich Get Richer
and the Poor Get Prison: Ideology, Class, and Criminal Justice (Boston, MA:
Pearson, 1979), pp. 217-20. See also references in note 3 above. In addition, Charles
Logan writes, “Organizations that have either opposed or called for a moratorium on
private prisons include the American Federation of State, County, and Municipal
Employees (AFSCME), the National Sheriffs’ Association, the American Civil
Liberties Union (ACLU), and the American Bar Association (ABA)”; see Charles H.
Logan, Private Prisons: Cons and Pros (New York: Oxford University Press, 1990), p.
11.
27

Paul Wright, “Introduction to Section 4: The Private Prison Industry,” in Prison
Nation: The Warehousing of America’s Poor, ed. T. Herivel and P. Wright (New
York: Routledge, 2003), p. 137.

28

Judith Greene, “Banking on the Prison Boom,” in Prison Profiteers: Who Makes
Money From Mass Incarceration, ed. T. Herivel and P. Wright (New York: The New
Press, 2006), p. 26.
29

Christie, Crime Control as Industry, p. 98.

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states over the 2002-04 election cycle.” 30 In theory, these lobbying efforts can
be an obstacle to lowering crime. (3) Anti-democratic. Lastly, they interpret
private companies as anti-democratic insofar as they fail to be responsive to
the public will.
Bruce Benson relies upon methodological individualism to criticize
the moral case against private criminal justice services. 31 Individual people
act; groups do not act, and society does not act. When one argues that the
government must provide the services of incarceration, in real terms, she
contends that a network of individuals—who happen to take on the role of
government—must produce the services of incarceration. But individuals—be
they private or governmental agents—can suffer from the same behavioral
shortcomings as do buyers and sellers on the market. They do not have access
to perfect information, nor are they motivated by perfectly benevolent
incentives.
The incentives of private interest transcend the boundaries between
markets and politics. Given different institutional arrangements, different
expressions of these incentives emerge. It is only with reference to the
systematic tendencies of different institutional arrangements and their
predictably different outcomes that one can evaluate the net costs and benefits
of government versus market or quasi-market prison services. Demonstrating
the existence of profits, incentives, and a lack of direct responsiveness does
not immediately imply a morally negative essence of non-governmental
prisons, nor does it lend direct moral support for governmental prisons.
We do not directly answer the following question: Which
institutional structure produces incarceration services better—governments or
markets? This is mostly because we do not have sufficient answers to more
particular questions: Better according to whom or to what criterion? How are
the margins of quality prison services to be defined and communicated by the
citizenry? How are they to be detected by institutional suppliers? How are
good technological and logistical incarceration methods discovered and
implemented? And lastly, how are such methods adopted and improved upon
over time? We merely contend that the systematic tendencies of market
processes to produce good outcomes, such as social cooperation through the
division of labor, are under-recognized by anti-market prison activists.
Inversely, the systematic tendencies of government to produce good outcomes
through incarceration institutions are overstated within this literature.
30

Greene, “Banking on the Prison Boom,” p. 4.

31

Bruce Benson, “Do We Want the Production of Prison Services to Be More
‘Efficient’?” in Changing the Guard: Private Prisons and the Control of Crime, ed.
Alexander Tabarrok (Oakland, CA: Independent Institute, 2003), pp. 163-217.

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The remainder of this article is organized as follows. Section 2
defines and explains privatization. It is a transition policy aimed to achieve
social cooperation and economic prosperity. Section 3 is an explicit response
to the morally charged phrase, “profiting off of other people's misery.” Such a
phrase is meaningless when one recognizes that all for-profit businesses fulfill
consumer preferences with regard to various forms of misery. States are not
immune to the same accusation; they, too, profit from other people's misery.
The parallel concepts of capture and rent-seeking used throughout publicchoice economics recognize this inherent fact of government action. 32 Section
4 offers concluding remarks.
2. What Is Privatization?
Privatization is a free-market reform policy used to transfer
production lines from the public sector into private hands. The rationale
behind privatization is straightforward: Command and control economies
failed to implement rational exchange, production, and distribution throughout
society. Central planning repeatedly produced catastrophe. Without property
rights, prices, profits, and losses, central-planners lack the incentives,
information, innovation, and calculative abilities necessary to produce goods
and services in proportionate qualities and quantities as they are demanded by
society. 33 Without market prices to coordinate production, goods that are
highly demanded are in short supply while goods that no one necessarily
wants abound. Market processes are coordination devices; they dovetail the
plans of otherwise unrelated and unfamiliar people with one another while
avoiding conflict. On the other hand, market-based societies with high levels
of economic freedom have experienced peace and prosperity at various times,
around the world, and over time. 34
32
See James Buchanan and Gordon Tullock, The Calculus of Consent: Logical
Foundations of Constitutional Democracy (Ann Arbor, MI: The University of
Michigan Press, 1962); and Gordon Tullock, “The Welfare Costs of Tariffs,
Monopolies, and Theft,” Western Economic Journal 5 (1967), pp. 224-32.

33

See Friedrich A. Hayek, “Economics and Knowledge,” Economica 4 (February
1937), pp. 33-54; Friedrich A. Hayek, “The Use of Knowledge in Society,” American
Economic Review 35, no. 4 (1945), pp. 519-30; Don Lavoie, National Economic
Planning: What Is Left? (Cambridge, MA: Ballinger Publishing Company, 1985);
Ludwig von Mises, “Die Wirtchaftsrechnung im socialistischen Gemeinwesen,”
Archiv fur Sozialwissenschaften und Sozialpolitik 47 (1920), pp. 86-121; and Ludwig
von Mises, Socialism (Indianapolis, IN: Liberty Fund, 1981 [1951]).

34

See James Gwartney, Robert Lawson, and Walter Block, Economic Freedom of the
World, 1975-1995 (Vancouver: The Fraser Institute, 1996); and James Gwartney and
Robert Lawson, Economic Freedom of the World, Annual Report (Vancouver: Fraser
Institute, 2008).

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The socialist calculation debate was framed as a comparative
research agenda until the actual collapse of the Soviet Union. Then, policy
makers and reformers were in loose agreement as to the productive merits of
market-based societies over central planning. (Though the agreement was
loose, it was significantly more so than in previous years; agreement was thus
sufficient to implement social change.) The field of transition economics arose
to investigate the question: How do we move from here to there? Privatization
is one specific form of transition policy. The argument for privatization begins
with the realization and admission that many of the goods and services that
the centrally planned administration used to produce were in fact crucially
important. Food and clothing production in the Soviet Union may have been
terribly inefficient and of poor quality, but that does not change the fact that
food and clothing are vitally important to human survival. Privatization
simply takes production lines that were previously owned, funded, and
managed by the state and gives them over to private firms and/or individual
owners. As the market process unfolds, some of these will likely expand and
others contract. 35
Once owned and operated in the private sector, producers rely on
prices to harness the dispersed, tacit, and sometimes incomplete knowledge of
consumers’ tastes and preferences. 36 As consumers want more of a good or
service they bid up prices, and vice versa if they demand less. Investors and
producers allocate their capital assets to those items with the highest profit
potential. They are sometimes consciously, but more often unconsciously,
guided to make what society wants by responding to their own self-interest
and profit motives. It is the rearrangment of incentives away from inefficiency
and decline and toward innovation and competitiveness that matters most.
Thus Peter Boettke argues in favor of freely giving away state-operated
industries and assets in post-Soviet countries. 37 Either they stay in business as

35

One must be careful to resist the notion that a privatization has failed, judged only by
the fact that the firm constructed out of the government entity goes under. For
example, say that a Soviet steel mill is spun off into a business firm, whereupon it
promptly goes bankrupt. A failure of privatization? Not necessarily. Capital has
successfully been turned over to the private sector, which is all the privatization
process can accomplish. That the company later disappears from the scene (perhaps its
equipment sold off to others) means, merely, that it could survive only while protected
by subsidy; it was not able to satisfy customers.
36

See Hayek, “The Use of Knowledge in Society.”

37

See Peter Boettke, Why Perestroika Failed: The Politics and Economics of Socialist
Transformation (New York: Routledge, 1993); and Peter Boettke, “An ‘Austrian’
Economists Perspective on Transitional Political Economy,” Ama-gi: The Journal of
the Hayek Society at the London School of Economics 6, no. 2 (2004), pp. 12-14.

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a sign of efficient operations, go under as a sign of failure, or sell off the
factory to more responsive business people. In any case, improvements are not
guaranteed but seem to hold more potential than previous arrangements.
In practice, privatizations have had various results and therefore
mixed reviews. 38 Clarifying the terms of debate in a transition analysis is very
important. If transitions are a matter of moving from here to there, then an
effective and efficient transition is often determined by one’s presuppositions
as to what is so bad about here, so good about there, and the degree of
patience that one is willing to afford in making the transition. 39 Thus some
examples of privatization have been judged negatively only because they did
not succeed, based on the expectations of some, in degree or speed. Such
debates have resulted in a particular heuristic called the J-curve. The
immediate effects of radical policy changes are often disorienting, especially
to the lowest economic classes of society. As state-operated industries adjust
to the new competitive climate, consumer prices and unemployment rates
increase. Thus transition policies are better when they are implemented
quickly with minimal opportunities for political reconfigurations and
adjustments. Many of the successful transition cases have been cases of shock
therapy—where significant crises allowed for wide-scale and pervasive
institutional reforms to be implemented quickly, thoroughly, and credibly.
The general conclusion of several transition cases and attempts
supports the theoretical insights of privatization: Privatization harnesses
incentives and information toward peace and prosperity and away from
scarcities, conflicts, and strife. 40 Short-term downturns are consequential and
perhaps necessary steps to converging upon new trajectories of progress and
prosperity, hence the J-like shape of J-curve graphics. One could even say that
this theoretical lens helps to make sense out of the privatization literature and
debates to date. The short-term results of privatization reforms were thought
to be and have been empirically estimated to be negative races to the bottom.
Cost-cutting was closely related to corner-cutting. When the agents within the

38

See Jeffrey Sachs and Andrew Warner, “Economic Reform and the Process of
Global Integration,” Brookings Papers on Economic Activity 1 (1995); and Jeffrey
Sachs and Andrew Warner, “How to Catch Up with the Industrial World: Achieving
Rapid Growth in Europe’s Transition Economies,” Transition 7, nos. 9-10 (1996).

39
See Boettke, “An ‘Austrian’ Economists Perspective on Transitional Political
Economy.”
40

See Boettke, Why Perestroika Failed; and Timothy J. Yaeger, Institutions,
Transition Economies, and Economic Development (Boulder, CO: Westview Press,
1998).

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model are guards and inmates and their social behaviors range from isolated
fights to full-out riots, the real short-term effects can be violent and unsavory,
difficult to endure without modifying public policy. But in the longer run it
seems that states have gotten what they contracted for. For-profit prison firms
have learned and adopted logistic strategies for marginal improvements.
Converting America’s prison system from public to private control is
slightly more complicated, but not fundamentally different from other such
cases. Incarceration and other criminal justice services are likely crucial to
human civilization and a prosperous economy, but the production of criminal
justice services in general and incarceration services in particular is marred by
moral stigma in ways that the production processes of menial consumer goods
are not. There are good reasons to presume that organizing incarceration (and
perhaps the entire criminal justice system) by markets rather than politics will
carry technological efficiency gains. But are such marginal efficiency gains a
sufficient reason to support market-based prisons in the face of the
deontological shortcomings raised by theorists such as Christie and Paul? It
seems obvious that the answer to this question depends upon the magnitude
that one awards such deontological claims, but are these deontological
concerns sound and valid?
There are two main problems with Christie’s, Wright’s, and others’ 41
perspective. First, their imputed moral case against markets rests upon an
inaccurate understanding of how markets function. Market processes are
characterized by profits and private incentives, but markets also possess an
ability to harness these phenomena toward social harmony and a
representative system of production and distribution. It is the explicit presence
of profits and incentives and their interaction within competitive markets that
align self-interest to the satisfaction of others’ preferences. Second, in
pointing out the existence of profits and incentives within markets and
subsequently preferring governmental production processes, such
commentators have failed to explain how governments systematically avoid
the supposed moral dilemmas imputed to such qualities.
3. “Profiting Off of Other People’s Misery”
Profit is the positive difference between costs and revenues. One
subtracts all of the costs of operating a business from all of the money
gathered by sales (price per unit times quantity sold), and the remainder is
41

Admittedly, Christie and Wright are less academics and more activists, but their
general portrayal of market processes runs parallel to many prominent theorists within
the field. See, e.g., sociologist David Garland, The Culture of Control: Crime and
Social Order in Contemporary Society (Chicago, IL: University of Chicago Press,
2001), p. 204, who fails to recognize that goods and services can increase in quality
and decline in price when produced in competitive markets.

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profit. The expectation of earning a profit is the motivating force behind
upfront investment costs. Individuals act, expend resources, and employ
means so as to achieve ends. The value an individual gains from the ends he
achieves in excess of the value that he imputed to the costs he endured, is
another form of profit. In this sense, individuals act rationally insofar as they
only partake in those behaviors in which their ends produce value in excess of
costs. Given several opportunities to make a profit, an individual chooses the
lowest cost and maximal benefit course of action—she strives to maximize
her profits. Profit is not necessarily pecuniary, nor does it have to relate to
money at all. Profit can be psychological, spiritual, moral, reputation-based, or
in the forms of authority and power.
When firms compete with one another within a free-enterprise
system, they bid down each other’s profits over time. Holding other things
constant or assuming that transaction costs are zero, all profits are eliminated.
If a capital owner recognizes that other owners of similar resources are
earning profits by making sales, then she too can earn profits by making sales
at or below the current market price. Thus prices in competitive markets are
bid down, and all firms price at the market-clearing rate. 42 With profits
defined on the one hand, and an understanding of the competitive market
process on the other, it becomes easy to recognize the essential, original, or
“genetically causal” source of lasting and sustainable profit levels for
individual firms. 43 Those businesses that continuously provide value, as
perceived by their customers, in excess of the prices that they charge will
stand the test of time. Value-producing firms are profitable and succeed while
inefficient alternatives go bankrupt. Entrepreneurship stands out as the driving
force of the market. 44 A profitable company is one which possesses the best
foresight into the changing and contextual tastes of consumers. Over time, the
market is characterized by higher quality goods and services at lower prices.
To say that a company profits off of the misery of others is a
tautology. Consumers purchase goods and services when they perceive that
the value of that good or service is greater than its costs, including the
opportunity costs of forgone alternatives, which is to say that consumers are
rational in a similar fashion as are suppliers and firms within the market.
When a consumer buys a good or service, presumably she experiences some
42

See any standard microeconomics textbook, e.g., Mankiw, Principles of
Microeconomics.

43

See Mario Rizzo, “The Genetic-Causal Tradition and Modern Economic Theory,”
Kyklos 49, no. 3 (1996), pp. 273-317.
44

See Israel Kirzner, Competition and Entrepreneurship (Chicago, IL: University of
Chicago Press, 1973).

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need or desire, some “felt uneasiness” or “misery” which she presumes will be
abated by possessing the good in question. Trade is said to be mutually
beneficial when it is voluntary. If a consumer did not prefer a good she
purchased to the value of wealth she gave up, then she would not have
voluntarily engaged in the exchange. Trade is a choice where options of lesser
value (misery) are given up for options of greater value (alleviation). In this
sense, a private prison company profits off of the misery of their consumers
(victims) in no distinctive way (other than perhaps a degree of magnitude)
compared to a restaurant that profits off of the misery (hunger) of its
customers.
We argue that the assumption to treat political actors as rationally
self-interested is valid and necessary in order to assess accurately the
institutional tendencies of both governmental prison systems and contractedout prison systems. Financial profits are the guiding motive for investments,
expenses, purchases, and sales in the marketplace. But non-pecuniary sources
of value instigate rational behaviors in non-market realms as well. Happiness,
desire, love, or vengeance can serve as profit-like motives for noncommercial
behaviors. Noncommercial behaviors, when understood from an accurate
frame of reference, are also characterized by rationality: individuals attempt to
maximize benefits while minimizing costs. 45
Public Choice economics, begun by James Buchanan and Gordon
Tullock, seeks to understand political actions and political decision-making as
guided and motivated by behavioral characteristics similar to market
processes. 46 Individuals within the political sphere are well-explained when
they are held to act rationally. They maximize their personal interests to be reelected, seek political authority, and maximize political revenues while
minimizing costs; they seek rents, hence the term rent-seeking. 47 Such
assumptions have been helpful in explaining political history and courses of
events in a variety of applied-topic fields. 48
45

See Gary Becker, The Economic Approach to Human Behavior (Chicago, IL:
University of Chicago Press, 1976); and Israel Kirzner, “Rational Action and
Economic Theory,” Journal of Political Economy 70, no. 4 (1962), pp. 380-85.
46

See Buchanan and Tullock, The Calculus of Consent.

47

See Anne Krueger, “The Political Economy of Rent-Seeking Society,” American
Economic Review 64, no. 3 (1974), pp. 291-303; and Gordon Tullock, The Politics of
Bureaucracy (Lanham, MD: University Press of America, 1965), pp. 120-220.
48

Some recent examples include, but are not limited to, the following: Eric Helland
and Alexander Tabarrok, Judge and Jury: American Tort Law on Trial (Oakland, CA:
The Independent Institute 2006), who have shown that the number of civil case rulings
and their size of awards are correlated with rational political motivations; and Peter
Leeson and Russell Sobel, “Weathering Corruption,” Journal of Law and Economics

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At this point our distinction between contracted-out prisons and
private prisons is more important because the customer bases of the two
institutions are different from one another. Understanding how a completely
private prison would operate requires a bit of creative imagination. For
example, conceptualize a world where individuals and/or victims of crime are
required explicitly to enlist punishment and/or incarceration as paid-for
services on the market. In such a case, consumers’ preferences—revealed by
their expressed willingness to pay—would shape the qualities and quantities
of prison services. How insecure and how pained by the occurrences of crime
that victims perceived themselves to be, would determine their degree of
unease when entering the market. Lastly, their perceived benefits and value,
obtained by investing in incarceration or other punishment services, would
determine their demand for such services.
On the other hand, contracted-out prisons attempt to satisfy the
preferences of government officials, central planners, and individuals in state
bureaucracies as their bases of customers. If we take seriously the
presumption that both providers of prison services and their political
customers are motivated by rational private interests to maximize benefits and
minimize costs, then we recognize that such institutions can and likely do take
on a different structural form from their market-based counterparts.
Contracted-out prisons would be operationally and technologically efficient
only insofar as the amount of prison contractors within the industry was plural
and relatively competitive. 49 Contracted firms maximize profits by
minimizing costs of operation; they under-bid each other to compete for fixed
amounts of state-budgets. Contracted-out prisons represent the tastes and
preferences of society for punishment and incarceration only insofar as
political processes are accurate in detecting, perceiving, designing, and
enforcing those preferences within contractual arrangements.
Several key concepts throughout the public-choice tradition expose
sources of unresponsiveness in the political processes. Voters are said to be
rationally ignorant, that is, unwilling to invest time and energy to inform
themselves of the full content and consequences of political issues. 50 Political
51, no. 4 (2008), pp. 667-81, who have similarly shown that federal aid funding after
natural disasters flow faster and fuller to states who actively lobby and support current
political authorities.
49

There are only a small handful of companies within this industry today and since its
development in the late 1970s. They include, but are not necessarily limited to,
Corrections Corporation of America (CCA), the GEO Group (formerly Wackenhut
Securities), Cornell Companies, and Community Education Centers.

50

See Anthony Downs, An Economic Theory of Democracy (New York: Harper,
1957).

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processes and voting elections can induce political business cycles, where
appointed decision-makers exploit the value of resources during their tenure
only to impose costs on later regimes. 51 Politicians appeal to median voters
where they support the lowest common denominator of public policy, perhaps
in conflict with costs and consequences. 52 Elections contain voting paradoxes,
when the number of platforms and candidates lead to deterministic outcomes
as a principle of mathematics rather than social preferences. 53 Voters also fail
to update their false perceptions of political phenomena because they bear a
disproportionately small portion of the costs compared to the benefits—they
are “rationally irrational.” 54
In addition, a purely governmental prison system without private
corporate providers would be similar to a contracted-out institution, except
that they would lack the incentive for operational efficiency motivated by
competing agencies. Similar competition may come from other sovereign
governments attracting citizens with superior public services. 55 Finally, one
would expect the flaws of political processes explained within the Public
Choice literature listed above to be exaggerated when political processes were
used as decision-making criteria for the sum total of all prison operations.
How do these concepts operate specifically within the criminal
justice system and the practices of incarceration? Benson explains that the
incentive structures produced and insulated by government bureaucracy have
impeded rather than facilitated the efficient production of security in person
and property. 56 Robert Higgs argues that the war on drugs is fueled by

51

See Michal Kalecki, “An Essay on the Theory of the Business Cycle,” in Collected
Works of Michal Kalecki, ed. J. Osiatynski, vol. 1 (New York: Oxford University
Press, 1990 [1933]), pp. 65–81; and Patrick Minford and David Peel, “The Political
Theory of the Business Cycle,” European Economic Review 17, no. 2 (1982), pp. 25370.

52

See Roger Congleton, “The Median Voter Model,” in The Encyclopedia of Public
Choice, ed. C. K. Rowley and F. Schneider (The Netherlands: Kluwer Academic Press,
2002).
53

See Kenneth Arrow, “Alternative Approaches to the Theory of Choice in RiskTaking Situations,” Econometrica 19, no. 4 (1951), pp. 404-37.

54
See Bryan Caplan, The Myth of the Rational Voter: Why Democracies Choose Bad
Policies (Princeton, NJ: Princeton University Press, 2008).
55

See Charles Tiebout, “A Pure Theory of Local Expenditures,” The Journal of
Political Economy 64, no. 5 (1956), pp. 416-26.

56

See Benson, “Crime Control Through Private Enterprise.”

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political interests. 57 Russell Sobel, Matt Ryan, and Joshua Hall show a
correlation between criminal case decisions and political cycles. 58 Specifically
on the topic of incarceration, Kenneth Avio summarizes research by Peter
Nardulli and Fred Giertz: “Citizens of the local government derive benefits
(protection and retribution) from longer sentences, which happen to be
specified by local authorities. . . . The tendency to prison overcrowding in the
federal part of the system and to underbuilding in the local part follows
directly.” 59 And Daniel D’Amico describes the process of calculating criminal
sentencing lengths to suffer from knowledge problems, rent-seeking, capture,
and political interests. 60 Public servants in the prison industry respond to
incentives; they act according to subjectively determined profit motives. The
expression of these private interests within the political/public sphere have led
to outcomes that conflict with many commentators’ perceptions of social
welfare.
What systematic tendencies are at play in a purely private prison
system? A variety of case studies have recently emerged that offer a partial
vision of private criminal law enforcement and incarceration without
governmental control. First, David Friedman researched ancient Iceland’s
privately operated legal system, where punitive sentences were apparently
held in proportionate check by social norms and a price system of
restitution. 61 Similarly, classicists Danielle Allen and Virginia Hunter posit
that criminal punishments and the practices of incarceration pre-dated formal

57

See Robert Higgs, “Lock ‘Em Up!” in Robert Higgs, Against Leviathan:
Government Power and a Free Society (Oakland, CA: The Independent Institute,
2004), pp. 95-100.
58

See Russell Sobel, Matt Ryan, and Joshua Hall, “Electoral Pressures and the Legal
System: Friends or Foes?” in Law Without Romance: Public Choice and the U.S.
Legal System, ed. E. Lopez (Oakland, CA: The Independent Institute, forthcoming).
59
Avio, “The Economics of Prisons,” p. 16, summarizing Peter F. Nardulli, “The
Misalignment of Penal Responsibilities and State Prison Crises: Costs, Consequences,
and Corrective Actions,” University of Illinois Law Review 2 (1984), pp. 365-87; and
J. Fred Giertz and Peter F. Nardulli, “Prison Overcrowding,” Public Choice 46 (1985),
pp. 71-78.
60

See Daniel J. D’Amico, “The Imprisoner’s Dilemma: The Political Economy of
Proportionate Punishment,” Ph.D. Dissertation (George Mason University 2008).
61

See Friedman, “Private Creation and Enforcement of Law.”

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governance in ancient Greece. 62 Stephen Schafer surveys a variety of similar
restitution-based criminal justice systems. 63 Historian David Rothman argues
that many of the ends currently sought by America’s incarceration institutions
were traditionally accomplished by private individuals and organizations
during the colonial periods of American history; most of them avoided the
bureaucratic inefficiencies that plague their modern counterparts. 64 Most
recently, scholars are investigating the rational decisions and economic
implications of organized crime with surprising results. There appears to be
much order among thieves, even in calculating and doling out punishments
amid thieving social groups. Diego Gambetta, Maerk Kaminski, Sudhir
Venkatesh, and Peter Leeson all expose a structure similar to retaliatory and
punitive processes in stateless contexts. 65 It is the explicit presence of profits,
losses, and incentives that interact in order to constrain punishment levels,
avoid escalating violence, and maintain social order. Informal social norms
and emergent institutional rules in various contexts can maintain a link
between the preferences of society, on the one hand, and the functionally
constrained level of law enforcements/punishments, on the other.
These case studies are not presented as viable alternatives to the
current political provision of criminal law. They are merely presented in order
to expose how punishments and criminal incarceration procedures operate
62

See, respectively, Danielle Allen, “Imprisonment in Classical Athens,” The
Classical Quarterly 47, no. 1 (1997), pp. 121-35; Danielle Allen, The World of
Prometheus: The Politics of Punishing in Democratic Athens (Princeton, NJ: Princeton
University Press, 2000); and Virginia Hunter, “The Prison of Athens: A Comparative
Perspective,” Phoenix 51 (1997), pp. 296-326.
63

See Stephen Schafer, Compensation and Restitution to Victims of Crime (Montclair,
NJ: Patterson and Smith, 1970).

64
See David Rothman, Discovery of the Asylum: Social Order and Disorder in the
New Republic, rev. ed. (New York: Aldine Transaction Publishers, 2002).
65
See Diego Gambetta, The Sicilian Mafia: The Business of Private Protection
(Cambridge, MA: Harvard University Press, 1993); Maerk M. Kaminski, Games
Prisoners Play: The Tragicomic Worlds of Polish Prison (Princeton, NJ: Princeton
University Press, 2004); Sudhir Venkatesh, Off the Books: The Underground Economy
of the Urban Poor (Cambridge, MA: Harvard University Press, 2006); Peter Leeson,
“An-arrgh-chy: The Law and Economics of Pirate Organization,” Journal of Political
Economy 115, no. 6 (2007), pp. 1049-94; Peter Leeson, The Invisible Hook: The
Hidden Economics of Pirates (Princeton, NJ: Princeton University Press, 2009); Peter
Leeson, “The Calculus of Piratical Consent: The Myth of the Myth of Social
Contract,” Public Choice (forthcoming); and Peter Leeson “The Invisible Hook: The
Law and Economics of Pirate Tolerance,” New York University Journal of Law and
Liberty (forthcoming).

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without the oversight of government and are more directly infused with the
qualities of profits and private interests. Here in these cases, one notices that
profits and private incentives interact to constrain and check power rather than
exaggerate it. When comparing the institutions of state-only prisons with
contracted-out prisons and purely private prisons, one recognizes that profits
and private interests operate in all three contexts; it is the way they operate
that makes all the difference. Whereas several commentators have derided
private prison firms as unchecked by public oversight, our analysis casts the
same accusation against the state, and perhaps in greater magnitude.
4. Conclusion
This article has produced neither a consequentialist nor a
deontological case in support of current prison privatization, nor one for a
fully free-market criminal justice system, though such arguments have been
presented by others. 66 Instead, we offer a comment on the current moral
component of the modern private-prison debate. While several theorists have
concluded that public prisons are morally preferable to contracted-out prisons
because of the unsavory tendencies for private firms to “profit off of other
people's misery,” we contend that the latter may be true but the former does
not necessarily follow therefrom.
While discussing Logan as a supporter of prison-privatization,
Christie asks, “Why is it that what is so clear to Logan is so utterly unclear to
me?” 67 The answer to Christie is revealed in part by explaining that his
perception of human rationality is short-sighted. Individuals act rationally
insofar as they are purposeful. They choose means to pursue their subjectively
valued ends; this holds true for politicians as well as businessmen. Christie
erroneously upholds government agents as behaviorally distinct: “The civil
servant represents more than himself, she or he represents the community, that
is me. The servant of the state is thus under greater responsibility and control
than those who only serve the private firm.” 68 His description of the
incentives and motivations behind government representatives suffers from a
nirvana fallacy. We can only make accurate comparisons between the market
setting and the governmental alternative when we use realistic models for
both.
First, the ethical focus of private-prison debates should be re-aligned
66

See Barnett, “Pursuing Justice in a Free Society: Part One”; Barnett, “Pursuing
Justice in a Free Society: Part Two”; Rothbard, The Ethics of Liberty; and Morris
Tannehill and Linda Tannehill, The Market for Liberty (Lansing, MI: Tannehill, 1970).
67

Christie, Crime Control as Industry, p. 100, discussing Logan, Private Prisons.

68

Christie, Crime Control as Industry, p. 102.

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with Feeley’s topical question: “[T]o what extent does privatization expand
and transform the state's capacity to punish?”69 Second, one must recognize
such effects in both the short and long run. And lastly, one must take account
of how various institutional structures—purely state, contracted-out, and
purely private—may each bear their own unique influences to “expand” or
“transform” the fundamental practices of punishment in society.
Many commentators have attempted to identify the moral dilemma of
private prisons by attacking the profit motive, but we have presented theory
and alluded to evidence gathered elsewhere which suggests that the profit
motive transcends the boundary between public and private incarceration.
Thus if one is confident in her net assessment that modern punishment
institutions suffer a significant degree of immorality, then she must look
elsewhere beyond the profit motive for a culprit. Such issues have caused
moral philosopher David Boonin to conclude that it is the punishment
paradigm itself which is morally flawed. 70 As Buchanan writes, “good
economics is better than no economics . . . [but] applied within a bad or
misguided conception of legal process need not promote the structural,
procedural changes that may be urgently required.” 71 It may not be the
existence of profits and incentives which sully the moral legitimacy of private
incarceration practices, but rather, that profits exaggerate the negative moral
qualities of the presumed institutional environment already set in place by
legislative fiat.
The field of comparative institutional analysis began during the
socialist-calculation debates. Within those debates and in its several
subsequent applications, comparative analyses have continuously shown
consequentialist support for market processes over political decision-making.
For example, Friedrich Hayek’s closing insights of the socialist-calculation
debate describe markets as dynamic and adaptive systems. 72 Entrepreneurs are
continuously inclined to search for and discover innovative profit
opportunities. Such incentives are explicitly disrupted when politics replaces
markets in certain decision nodes. Thus the costs and unintended
69

Malcolm M. Feeley, “The Privatization of Prisons in Historical Perspective,”
Criminal Justice Research Bulletin 6, no. 2 (1991), p. 109.
70

See David Boonin, The Problem of Punishment (Cambridge: Cambridge University
Press, 2008).
71
James Buchanan, “Good Economics, Bad Law,” Virginia Law Review 60, no. 3
(1974), p. 484.
72

See Friedrich A. Hayek, “Socialist Calculation: The Competitive ‘Solution’,”
Economica 7, no. 26 (1940), pp. 125-49.

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consequences of central planning are inherently shortsighted. Christie’s
presumption that government agents are more attuned to societal preferences
than are market agents is a natural conclusion, but it is drawn from a biased
and incomplete understanding of social structures. If similar institutional
characteristics held for the task of providing incarceration services, they
would set a radically different stage for deontological conclusions to begin
from.
Take Wright’s pointed concern which opened our discussion: “[A]t
least in public prisons, when prisoners are raped due to inadequate staffing,
[etc.] no one can say prison officials did so to line their own pockets and
personally profit from the misery of others.” 73 Could we not say, instead, that
at least in private prisons, when prisoners are raped due to inadequate staffing,
etc., no one can say that improvement will never occur so long as the citizenry
remains apathetic. At least he will have endured his suffering in a context
where his offenders systematically suffer losses and their competitors are
systematically rewarded. At least he suffered in a system that appeared to be
enjoying a trend of innovation and improvement over time. 74

73

Wright, “Introduction to Section 4,” p. 137.

74

We would like to thank Walter Block, who provided helpful comments and
criticisms throughout the writing process.

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