16 August 2013

RE: A Challenge to Michael Emmett Brady

Updated 31 August 2013 to address a misreading of what I wrote.  Revision is in boldface type.

In the course of researching Keynes, probability theory, and other matters pertaining to economic theory, I've encountered a lot of book reviews by a person named Michael Emmett Brady. A link to his profile on Amazon is here; and here is his page on the Social Sciences Research Network (SSRN). He wrote over 700 reviews, mostly in very dense and hastily-typed bursts that are often difficult to follow, mostly of books on economics—in fact, usually on Keynesian economics or attacks on Keynesian economics. He has been published in the History of Economics Review, History of Political Economy, The British Journal for the Philosophy of Science, International Studies in the Philosophy of Science, Psychological Reports, and Synthese.. His book reviews are usually mild, but he has sparred with a school of economics called Post-Keynesianism, whose most famous adherent is probably Paul Davidson. 

This is not the sort of thing that attracts screaming headlines or anything, but I could never help wondering if there was something to Mr. Brady's allegations that the Post-Keynesians failed to understand Keynes's Treatise on Probability, and this affected their understanding of The General Theory

Then someone named Philip Pilkington wrote a general rebuttal to Michael Emmett Brady here. The essence of the rebuttal is that Mr. Brady is a mysterious person who is saying everyone of repute is wrong about what John Maynard Keynes said, particularly with regard to decision theory. Or, as paraphrased by the blogger "Lord Keynes" (a pseudonym),
Post Keynesians have not understood Keynes’s Treatise on Probability properly, and in particular his idea that of relegating frequency interpretation of probability to a highly limited domain and that non-objective probabilities (in the sense of non a priori probabilities or non relative frequency probabilities) can nevertheless be mathematically represented with imprecise interval estimates (apparently called“approximation” by Keynes). This leads into a Keynesian decision making theory with some mathematics behind it superior to the Ramsey/Savage/neoclassical EUT and consistent with Daniel Ellsberg’s decision making theory.
Mr. Pilkington argues that, if Mr. Brady is so confident of his judgment about decision theory, he ought to put his theories to the test at a hedge fund. 

The problem with this is that, of course, Mr. Brady is not a full-time trader by profession. A common argument by some economists is that if a theory is valid, it ought to survive a test in a real time exchange (although this almost never actually happens). But in this case, Mr. Brady's gloss of Keynes pertains to the nature of inferences about the future by people with the data they have. That's the whole point of the first three chapters of Keynes's Treatise on Probability. Which means, if Mr. Brady knows he doesn't understand financial markets, he knows his foray would be a disaster. 


In other words, Mr. Brady's field of expertise is on J.M. Keynes as a philosophically-minded mathematician that later turned to economics, not the trading of stocks. Any choice he would make in the milieu of the trading floor would be less valuable than it would have been if his life's work was as a market-maker or seasoned day-trader. It will no doubt be objected that this is special pleading: Mr. Brady ought to be able to explain his theory to a hedge fund manager, who could then apply the theory and use it to beat the market (according to Mr. Pilkington). 

One well-known problem is, of course, that efforts to exploit different mathematical models and techniques—all questions about their logical foundations and accuracy being put aside—have long ago been stretched to the breaking point. As soon as an improved model is developed, financial experts use it to harvest rents as fast as possible. The rents never disappear, but neither do massive failures—major busts and panics. The reason is that the technique of weighted hedging of risk becomes itself an investment vehicle, and hence another data point. Data processing, mathematics, and leverage are the limiting factors, while practical application of weighted hedging is the driving force. 

I don't pretend to speak for Mr. Brady, but I think this explains why his arguments on Keynes's probability theory are unrelated to the business of hedge funds. In fact, Mr. Brady has spared no opportunity to denounce speculation on the basis of virtue ethicsanyway. Saying that one's opponent's entire Weltanschauung rises or falls based on some application of one's own choosing is an argument that is unlikely to change anyone's mind. Another point of concern for Mr. Pilkington is this:

Brady appears to be making the claim that buried within Keynes’ Treatise on Probability is some sort of theory of microeconomic behavior. This has always seemed to me a bizarre assertion. Surely for someone to make decisions in line with Keynes’ work on probability they would have to have first read and understood this work. Given that such an argument is coming from a scholar that complains that not enough people read the Treatise the irony is, of course, enormous. Indeed, in many ways Brady’s argument is structured in the same way as a rational expectations argument in that the economist assumes that people act in line with his model of them — so, it implicitly assumes that such a model exists “in their heads”,which seems unlikely unless they have deeply studied and adopted said model.
Something has to be said about this. One is that any theory about human behavior could be, to the same degree, accused of tacitly assuming that everyone it purports to describe "knows" the theory. By this reasoning, Freudian psychology, likewise, "assumes people have first read and understood Freud"—for surely, for someone to make decisions in line with Freud's work on psychology they would have to have first read and understood this work. This does not work as a rebuttal.

Another is that the Rational Expectations Hypothesis differs in so far as it uses the "stylized" or "schematic" assumption that people's estimates of the future will not be consistently wrong. For the record, defending rational expectations is one of the last things I would ever do, but claiming that it is so obviously wrong that no sensible person would embrace it is probably not a good idea. I would definitely agree that it is wrong, but I would also agree that debunking it is not easy.

Mr. Pilkington writes,

I don’t believe in mathematical decision-making theories, [no] matter what type of probability theory they’re based on. A useful decision-making theory has to say something about the real world. Since the most relevant place where such a theory can be applied is the financial markets then this, for me, is the ultimate test of any theory. Indeed, this is what the Efficient Market Hypothesis does; it posits a theory of decision-making and then makes actual market predictions (no one can beat the market etc.).
Belief in mathematical decision-making theory probably ought to depend at least in part on what the mathematics purports to explain. If the mathematics purports to explain what people are compelled to do based on available evidence and logical necessity, then a case-by-case assessment is in order. If you really take the position that no decision theory can have any pertinence to real decision making, then I'd say you've repudiated the field of economics because you've rejected any logical inference about economic behavior.
"Since the most relevant place where such a theory can be applied is the financial markets then this, for me, is the ultimate test of any theory."
The problem with this point of view is explained above: if a theory's inferences are orthogonal to questions like the frequency distribution of outliers, then no, that's an unreasonable opinion. Believe it or not, there are wiser economists who know better than claiming to predict stock market behavior off-the-cuff.

"[T]his is what the Efficient Market Hypothesis does; it posits a theory of decision-making and then makes actual market predictions"—no, the EMH posits a theory of what markets are capable of, viz., capturing all relevant information immediately after it becomes available. The EMH has been discredited, but doing so was not easy. If the EMH was a decision theory (which it is not, although it does have behavioral descriptions and assumptions), it would not appeal to common sense, because it is not reasonable to assume people are always making correct decisions about the future of volatile prices, but it is reasonable to assume the market, in the aggregate, is extremely difficult to outperform and requires something like inside information to do so. Again, for clarity, it's reasonable but mistaken.

One can finally ask, So James, in what sense is Michael Emmett Brady circulating a useful decision theory? In what sense does it have something to say about the real world? And I would have to say that Mr. Brady has always discussed its value in the realm of public policy, and I would also say that if his reading of Keynes is correct—something I am not qualified to arbitrate—then its value lies there.



Sources and Additional Reading

The blogger known as "Lord Keynes" has addressed Mr.Brady's criticisms more rigorously here: "Post Keynesians and Degrees of Uncertainty."

Ammons Scientific - Psychological Reports (for future reference)

The British Journal for the Philosophy of Science

International Studies in the Philosophy of Science

Synthese (an International Journal for Epistemology, Methodology and Philosophy of Science)

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01 March 2013

The Night Watchman Nonstate (Appendix)

(Part 1 & 2)

SUMMARY OF SECURITY FIRMS



G4S, plc (London, England)
Publicly limited company; listing (Yahoo finance)
Employees:  657,200 (Dec 2011)
Revenue: £ 7,522 million (2011) = $11,668 million
Operating profit: £ 375 million (2011) = $582 million

(Conversion from British pounds based on GBP:USD forex as of 2 January 2012)
Acquisitions:
2008       ArmorGroup International (UK)
2004       Securicor (UK)
2002       Hashmira (Israel)
2002       GEO Group (fmrly Wackenhut; USA)

Securitas AB (Stockhold, Sweden)
Privately held by Investment AB Latour
Employees: about 300,000 (Dec 2012)
Revenue:  SEK 66,458 million (2012) = $10,260 million
Net Income: SEK 1,212 million (2012) = $187.1 million

(Conversion from Swedish kroner based on USD:SEK forex as of 2 January 2013) 
Acquisitions:
2011       Chubb Security (UK)
2010       Reliance (UK)
2001-     Loomis Armored (USAàdivested, Sweden 2008)
1999       Pinkerton (USA)
ISS A/S (Copenhagen, Denmark)
Privately held by EQT Partners, Goldman Sachs Capital Management (GSCM), Kirk Kristiansen Foundation (KIRKBI), & Ontario Teachers' Pension Plan (OTPP)
Employees: 537,300  (June 2012)
Revenue:  DKK 77,675 million (H2-2011 to H1-2012) = $13,226 million
Net Income:  (DKK 364 million) (H2-2011 to H1-2012) = ($62.0 million)

(Conversion from Danish kroner based on USD:DKK forex as of 2 July 2012)
Acquisitions:
2006       Tempo Services (Australia)
1999       Abilis Solutions (Canada)
Corrections Corporation of America
Publicly held; listing (Yahoo finance); Fortune profile
Employees: 16,750 (Dec 2011)
Revenue: $1762.8 million (2012)
Net Income: $151.8 million (2012)

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28 February 2013

The Night Watchman Nonstate (2)

(Part 1)

THE NIGHTWATCH

There are conflicting versions of the story, even among company publicists. In 1901, one Marius Hogrefe, a [draper? lawyer?] founded the Kjøbenhavn Frederiksberg Nattevagt (Copenhagen-Frederiksberg Nightwatch).1 The nightwatch was a fairly commonplace business entity in Europe at the time, and similar organizations in Hälsingborgs (1934), London (1935), and elsewhere would become ancestors of AB Sercuritas and G4S, plc.2 Securitas' own corporate website claims "Erik Philip-Sörensen founded Hälsingborgs Nattvak," which is unlikely. What is mentioned by all accounts of Securicor (London), Falck (Copenhagen), Securitas AB (Stockholm), and ISS A/S (Copenhagen) is that they grew by absorbing very large numbers of nightwatch companies, in a process that was mostly completed by 1964.

(In this essay I frequently use company names anachronistically; ISS A/S adopted that name in 1973, while Securitas AB adopted its name in 1972. Securicor, plc, took that name in 1953, and no longer exists. Moreover, there are several companies in the Scandinavian/German-speaking countries that have "securitas" in their name, which are unrelated to the entity known as Securitas AB.)

A common theme is the Philip Sørensen name: the Kjøbenhavn Frederiksberg Nattevagt eventually became ISS A/S; Erik Philip-Sørensen was responsible for a wave of nattvakt acquisitions in Sweden that latter became Securitas AB (initially an ISS A/S subsidiary, later bought out by the Philip-Sørensen family).3 Later, Jørgen Philip-Sørensen moved to the UK in 1964 to establish Group 4, yet another security company.  In 2000, Falck merged with Group 4; the Falck family involvement was long gone but the Philip Sørensen clan remained in control of the merged entity (G4F, plc).  In 1983, Sven Sørensen sold his stake in Securitas AB to Skrinet and Cardo, and Jørgen did the same.4 Cardo AB is a Swedish lock and armored door producer; Skrinet was an investment group.  Both were later absorbed into Investment AB Latour.

The nattvakt/nattevagt businesses of Scandinavia had been funded by subscriptions for beneficiaries; households and businesses had paid the local nightwatch to protect their premises, but there was presumably spillovers. Copenhagen, in particular, first had a permanent (state-run) nattevagt around 1783, and an English-style police force after 1863.5 But ISS A/S's precursor, DFVS, was able to bundle security with a large number of other services, viz., cleaning. In fact, in the case of DFVS (i.e., the future ISS A/S), even its prominent DDRS was pitched as an augmentation to its security services. DDRS was the public face of the company: single women, usually younger, using modern Swedish equipment (DDRS had a special agreement with Electrolux), maintaining cleanliness. Possibly--but this is conjecture--the larger DFVS, with its selective policing on behalf of private, wealthy clients suggested a disturbing violation of Scandinavian egalitarianism.6

Click for larger image


RESCUE CORPS TO RENTA-COP

Concurrent with the commercialization (?) and business consolidation of the nattvakt/nattevagt was the appearance of professional Redningskorps.  Unfortunately, I was unable to find out much about the history of the Redningskorps besides the corporate histories for Falck.7 Basically, the Redningskorps were similar to modern fire departments, with emergency rescue and repair services. Sophus Falck is claimed to have founded the Redningskorpset for København og Frederiksberg (1906).  Later, the by-subscription RKF changed its name to Falck, and by the late 1950s, covered the whole of Denmark with over 106 stations.  Its fleet of motor ambulances--the earliest in Scandinavia, if not the world--accounted for 80% of medical transport in Denmark.

Initially, Falck's business consisted of fire salvage: rescuing valuable items from burning structures while fire crews fought the fire. The business model included immediate assistance for everyone, with billing for nonsubscribers. Subscribers, presumably, paid less or nothing extra for service. The business grew rather slowly (Denmark is a tiny country, and it required about fifty years to saturate the country). By the time the Falck family sold the firm to Baltica Insurance (1988), it was probably the most respected firm in Denmark.

It's hard for an outsider to tell what the effect was on Falck. At the time, subscribers were mostly Danish, the firm was still quite small, and coverage of Falck in the business press was probably confined to Scandinavia. Baltica later sold a major stake in Falck, and in 1995, the firm was listed on the Copenhagen SE. By then, it had gone into empire building in a big way. It bought the Danish business of ISS, ISS Securitas (which Securitas AB bid for as well), plus several regional firms.8

The share issue permitted Falck to finance a merger with the remaining Sorensen holding, Group 4. Thereafter, Falck was no longer separately traded; it would be listed on the stockmarket as G4S. In the new entity, Falck had the advantage (institutionally) of not having family ownership; Lars Nørby Johansen had been brought in well after Baltica's purchase and partial divestment but had managed to secure himself there despite the absence of any loyal shareholder.9 In contrast, Jørgen Philip Sørensen (who died in 2010) remained in the minor role of chairman of the board, still damaged by the many scandals Group 4 suffered during the first couple of years as a correctional contractor in the USA.

One of the reasons why rising productivity over the last twenty five years has not translated into rising wages is that firms consolidate to capture external spillovers, i.e., market power over suppliers, consumers, employees, even financial markets and governments.  This is expensive, and absorbs an immense amount of revenue.  Firms respond, as did Falck, by cutting back personnel, reducing targets for customer satisfaction, and availing themselves of more advanced financial instruments.  Efficiency methodologies sometimes make a difference, but the larger (i.e., merged) firms don't seek efficiency so much as market power. Too much efficiency, after all, can reduce the systemic consequences of the firm's failure on affected governments, and cause them to become indifferent to the firm's comparative success.

Group 4 Falck soon after bought Wackenhut, the second largest US security firm (as well as its second largest private prison operator), Hashmira (the largest Israeli security firm), and Securicor.10 The newly created entity today has 657,000 employees and ongoing scandals over high-profile contracts it has mismanaged, such as the 2012 London Olympics; still, its operations globally make all of that inconsequential: in the Global South, it is very successful.

BIG AND BIGGER

That leaves Securitas AB, the Danish-originated, Swedish-based firm where I left off above: the Sørensen clan dissolving its ties to the company, whence it became a part of Investment AB Latour, a financial vehicle for Gustav Douglas.  Count Douglas is, according to Forbes (March 2012), the world's 418th richest person.

When I first began researching for this article, I had been startled to notice that Wackenhut was now the GEO Group, and it was owned by Group 4 Falck; then I noticed that, no, the GEO Group was now a tiny speck in the vastness that is G4S, plc.   More amazing still was that the old core of G4S, Group 4, had been the London side of a family empire whose other side was Securitas AB of Stockholm; and that Securitas had gone through a second phase of international growth, snapping up Pinkerton, Burns Security, and Loomis Fargo (USA) and Reliance (UK)--entities I remembered as fearsome hired guns. 

Now Securitas AB employed 309,000 employees in 50 countries.  The two old halves of Philip Sørensen's empire employed over a million people, a majority of them guards of some time.  Another piece--ISS A/S, once managed by Philip Sørensen and his son Erik--had 390,000 more. All three had grown with amazing speed to their present size.  ISS A/S was privately held, G4S, plc, was institutionally owned (at least, the re-listed Falck part is), and Securitas AB was... one of 70 companies wholly owned by Investment AB Latour.11

To be sure, not all of the firms are on the same order of magnitude as Securitas AB. And it's possible that in another year, G4S, plc, will partly unravel, Latour sell Securitas, and ISS be reduced to listing itself.  But for now, the empire of the Sorensens is opaque at both ends.

UPDATE: Falck A/S was spun off from G4S, plc, in 2005 and sold to Nordic Capital Fund V and ATP Private Equity Partners.  It continues to be mostly ambulance services, in seven countries of Europe.  In April 2011, Nordic Capital sold its stake in Falck to the Lundbeck Foundation. Today, 57% is owned by Lundbeck and 20% by the Kirk Kristiansen Foundation (KIRKBI Invest A/S). KIRKBI's most famous holding is the LEGO Group (toys, entertainment) and Lunkbeck's most famous holding is the pharmaceutical company H. Lundbeck. All of these organizations are Danish.12

ISS A/S, as I mentioned above, is also privately held. In 2008, a pair of private equity firms "took the company private," meaning they bought all the shares outstanding and delisted it: EQT Partners and Goldman Sachs Capital Management (GSCM).  In 2012, the Ontario Teachers' Pension Plan (OTPP) invested $437 million and the Kirk Kristiansen Foundation (KIRKBI Invest A/S) invested $187 million in ISS A/S. Afterward, this investment was regarded as 25% of ISS A/S's equity, implying that the entire firm was worth $2.5 billion.13


Notes 

  1. "The ISS Story" (p.1) refers to founder Marius Hogrefe as a draper; Dahlgaard, Khanji, & Kristensen (2007) merely refer to "a lawyer"(p.288).  Abrahamsen & Williamson (2010, p. 43) say Marius Hogrefe and Philip Sørensen. "The ISS Story" precludes this by claiming (p.2) that it was long after that the company was founded that Philip Sørensen was hired.  Group 4, Securitas AB, and ISS A/S were all founded or managed by members of Philip Sørensen's family; Falck came under Philip Sørensen control after it merged with Group 4.

  2. "History: G4S can trace its roots back to 1935 in the UK, making 2010 its 75-year anniversary," corporate history of G4S, plc, hosted at G4S's website (accessed 27 Feb 2013).
    [G4S]'s earliest roots in the UK appeared in 1935 when a former cabinet minister launched "Night Watch Services"--a modest enterprise with four bicycle-riding guards in old police uniforms. In 1951 it was renamed Securicor and it floated on the London Stock Exchange in 1971.
    With respect to Securitas AB,
    In 1934, Erik Philip-Sorensen brought the company into Sweden, buying Hälsingborgs Nattvakt, based in Helsingborg...
    (From Jay P. Pederson, International directory of company histories, Volume 42, St. James Press (2001), p.336.  I am not sure when or by whom, the original Swedish nattvakten were founded, but the ones mentioned are all for towns bordering the Øresund.

  3. "The family bought out the larger company in 1938, taking full control of the Swedish Securitas (ISS maintained the Securitas name elsewhere). Sweden now became the family's primary activity." Jay P. Pederson (2001), p.166.

  4. Kemp Powers, "Still sore," Forbes (4 Jan 2002; accessed 27 Feb 2013).  Powers was unable to reach Sven, who unilaterally decided to sell his 75% state in Securitas AB.  Displeased, Jørgen felt he had no choice but to sell his 25%. At the time, Securitas was worth far more than Group 4. AB Latour notes on its history page that it absorbed Skrinet.

  5. For the original Copenhagen nightwatch corps, see Sven Håkon Rossel, A History of Danish Literature, University of Nebraska Press (1993), p.107. It was founded by Ole Rømer, who is most famous for determining that light had a finite speed. For the reorganization of the Copenhagen municipal police, see Lester B. Orfield, The Growth of Scandinavian Law, University of Pennsylvania Press for Temple University Publications (1953), p.37. 

  6. I became aware of collaboration between DDRS and Electrolux via "The ISS Story" (PDF), but that article says it began with a 1976 plan to acquire and operate cleaning companies (globally?), p.5.  According to Electrolux's 1971 annual report (PDF), p.13, the two companies had shared ownership of ASAB for several years.

    My conjecture about the marketing strategies employed by DDRS/DFVS is drawn from reading between the lines of "The ISS Story." The author seems utterly befuddled by some unnamed storm that broke around DDRS in the early 1970s, leading to it changing its name and shifting its focus to the Global South. Unfortunately, Dahlgaard, Khanji, & Kristensen (2010) shed no light on the subject.

  7. My main source for the history of Falck prior to 1961 is Robert Rigby, "Denmark's Remarkable Rescue Corps," The Rotarian (Sept 1961 issue), p.14.

  8. Skaarup (2011), p.9

  9. Schmidt, Adler, Weering (2003), p.18. Schmidt, et al., are extremely favorable in their discussion of Falck & Group 4 management; arguably Schmidt had an interest in depicting another private security firm management team as positively as possible. According to the Danish Wikipedia entry for Johansen, he became CEO in 1998, not 1988. In an interview he tells Schmidt, et al. that that he has "been in the business for 15 years," implying perhaps that he spent ten years at Falck before becoming CEO.

  10. M&A activity after Group 4 Falck's creation in 2000 has been heavily covered in the Guardian Online. For the Wackenhut purchase, see "Denmark-Based Security Firm Group 4 Falck/Wackenhut Assailed by Transatlantic Union Alliance for Poor Practices in United States," PR Wire (9 October 2003).  Regarding Hashmira, see Peter Lagerquist and Jonathan Steele, "Group 4 security firm pulls guards out of West Bank," The Guardian Online (22 Oct 2002). For the new role of the firm once known as Falck, see "A fate worse than prison," The Guardian Online (11 Nov 2002).  Perhaps most unfortunately for Falck, Wackenhut's extraordinary notoriety comes from the behavior of one of its subsidiaries, the Australasian Correctional Management (based in Australia).  But Wackenhut has plenty to be embarrassed about on its own, which may explain why it changed its name the next year to GEO Group (All stories accessed 27 Feb 2013).

  11. Re: ISS A/S, see: "Company Overview of ISS A/S," Businessweek (accessed 27 Feb 2013); Re: G4S, plc, see Skaarup (2011), p.10; re: Securitas AB, see Latour: Holdings (website accessesed 27 Feb 2013).

  12. John Acher & Ole Mikkelsen, "PE-Backed Falck Explores IPO," Reuters (22 April 2010).  For H. Lundbeck A/S's foundation buying much of Falck from Nordic Capital, see Will Waterman, "Nordic Capital exits Falck," Reuters (28 April 2011).  On the current composition of Falck's ownership, see "About Falck: Owners," official webpage of Falck A/S.

  13. For the delisting of ISS A/S, see "PurusCo A/S completes the recommended tender offer for shares of ISS A/S" press release hosted at EQT Partner's website (9 May 2005; accessed 28 Feb 2013).  For the details of the later buy-in by OTPP and KIRKBI Invest A/S, see ISS A/S's 2012 Annual Report (PDF), p. 4. PurusCo was a Danish entity created by EQT and Goldman Sachs as a vehicle for the buyout.  As always, currencies are converted at the approximate date of the announcement.  In Oct 2011, G4S, plc, made an abortive bid to buy ISS from its owners; it offered £5.2 billion, or $8.1 billion ("EQT Partners and GS Capital Partners exit ISS," Invest IQ, 17 October 2011). 



Sources and Additional Reading

Rita Abrahamsen & Michael C. Williamson, Security Beyond the State: Private Security in International Politics, Cambridge University Press (2010)

"The ISS Story" (PDF), anonymous, hosted by ISS website (no date; accessed 27 Feb 2013)

Jens J. Dahlgaard, Ghopal K. Khanji, & Kai Kristensen, Fundamentals of Total Quality Management, Psychology Press, (2007)

Kemp Powers, "Still sore," Forbes (4 Jan 2002; accessed 27 Feb 2013). About the Philip Sørensen clan.

Robert Rigby, "Denmark's Remarkable Rescue Corps," The Rotarian (Sept 1961 issue), p.14.

Waldemar Schmidt, Gordon Adler, Els van Weering, Winning at Service: Lessons from Service Leaders, 1st Edition, Wiley (2003); note one author, Waldemar Schmidt, is a former CEO of ISS (whose main competitor, G4S, plc, is profiled in this book). 

Thomas Skaarup , "Strategic analysis and Valuation of Falck A/S" (PDF) Masters Thesis, Copenhagen Business School (Nov 2011)

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26 February 2013

The Night Watchman Nonstate (1)

In political science there is a very old principle of ideal governments doing the absolute minimum; all social roles are delegated to churches, Gesellschaftsstandzu'amajāti, or comparable social groups.  Among philosophers, this has traditionally been known as the "night watchman state," i.e., a state restricted to protecting its citizens from violence or fraud.  But the USA has been engaged in a strange experiment to delegate precisely this one function to the private sector--a sector now almost wholly in foreign hands.

My exposure to the this topic begins with an article article1 about UAVs (or drones, as they are universally known). Studded with links, it included one referring to a story about Adelanto, California--more specifically, about a facility there and the company that runs it:2 GEO Group, formerly known as Wackenhut Corrections Corporation.

Wackenhut acquired notoriety as a huge security firm turned private jailer. In 1983, thanks in large measure to lobbying by organizations such as Wackenhut and Corrections Corporation of America (CCA), the State of Tennessee privatized the management of several prisons; soon, states and federal agencies were outsourcing incarceration to a booming sector of for-profit, private prisons. By 2001, the soon-to-be-renamed WCC "managed 61 contracts and awards worldwide that represented a 22 percent share of the U.S. private correctional market and 56 percent share of the international private correctional market."3

THE CARCERAL LANDSCAPE

Most people are probably well aware of the fact that, for the last 30 years, the USA (and some other countries) have been privatizing their jails and prisons. The first carceral system to fully privatize entire facilities was Tennessee's, in 1986. Prior to that, Florida had privatized its entire inmate employment system.4 Subsequently, the for-profit carceral complex boomed.

Much has been written about the private prison business.  In 2003, a Judge Michael Conahan of Luzerne County, PA, used his authority to defund a publicly administered juvenile detention facility, then sent thousands of teenaged children to its private rival for petty allegations.  He and a colleague, Judge Mark Ciavarella Jr., were paid $2.6 million to do this by the facility's owner, Atty. Robert Powell (PA Child Care LLC).5 At the same time, this sort of manipulation is often not quite illegal, as members of Congress receive huge "donations" from the carceral sector, and shunt undocumented residents of the USA to CCA facilities.  In reality, there is little difference.6 Persons detained in the for-profit prison-industrial complex, especially for immigrants seized without proper documents, are of all humans in the developed nations, the most wretched and disregarded.  They are routinely denied medical care, access to legal representation, and even adequate food.7

But what are the orders of magnitude involved?

At years end of 2011, the total incarceration of the USA was 2,239,751; overall, this reflected a 1.3% decline since 2010.  The decline had been caused by a fiscal crisis in California, which was compelled to trim its incarcerated population by 13%; otherwise, the incarcerated population continued to increase.8 This figure more than doubled during the 1980s, then slowed down somewhat as the system started to come apart.  The explosion in inmate populations was universally cited as a motivator for privatization (for-profit prisons were not unionized), but in fact after 2000 the for-profit share of the incarcerated population remained about 7% (for the states).  Federal incarceration, which is still growing rapidly, rose from 7% private to 14% private; the federal system accounts for slightly more than 9% of the national total.

That's 122,121 people.

Next, we have US Marshall Service and the Immigration and Customs Enforcement (ICE); the average daily detention population by the ICE in 2011 was about 33,000;9 for the US Marshall Service it was 63,112.10 Privately-held detainees in 2010 were 14,814 and 17,154, respectively.11 In fact, statistics are not perfectly comparable, because the last statistic is for 2010 (the next year federal inmates rose), there is a huge disparity in significant figures, and we are not certain if the privately-held detainee figure is computed the same way (is it the average daily population too?  or capacity at year's end?).  But this boosts the total private incarcerations to around 155,000 for 2011.

OVERSEAS


Click for larger image
The USA is widely understood to account for a quarter of the world's population of corrections inmates: a penal colony--by coincidence--very close in the number of residents to that other very large penal colony, the Occupied West Bank. If the entire population of Frankfurt-am-Main were thrown in the slammer, it would create a prison population of equal magnitude. And so far I've been focused on the most palpably sinister aspect of it: entire prisons commissioned, financed, and maintained by private entities, subject only to such inspections as the (presumably scandal-averse) state government dares to make.  In other words, a recipe for regulatory capture.

But long before there even was a Corrections Corporation of America (CCA), there was Wackenhut and Fluor Daniels and many other entities, receiving government contracts to manage the logistics of construction, food services, and site security.  Quite apart from the business of actually performing government functions is supplying the government as it does them.  No one raises their eyebrows at the government commissioning the construction of prisons by Turner Construction Company, or purchasing supplies from Cornerstone Detention Products.  And while the USA remains the world's biggest jailer, many other countries are catching up.

Country Incarcerated
(2003)
Population
(2003)
Ratio
(2003)
Incarcerated
(2010)
Population
(2010)
Ratio
(2010)
Incarcerated
(2010-2003)
USA 2,033,331 290.00 701 2,292,133 308.40 743 258,802
Brazil 284,989 178.50 160 496,251 196.40 253 211,262
China * 1,512,194 1294.40 117 1,650,000 1354.10 122 137,806
Mexico 154,765 98.90 156 222,330 110.90 200 67,565
Russia 806,100 141.93 568 864,590 142.70 606 58,490
Vietnam 55,000 77.6 71 108557.00 89 122 53,557
Colombia 54,034 42.80 126 84,444 46.61 181 30,410
Venezuela 19,554 25.70 76 43,461 29.17 149 23,907
Argentina 38,604 36.23 107 60,611 40.14 151 22,007
Peru 27,493 26.50 104 47,164 29.75 159 19,671
Chile 33,098 15.60 212 52,563 17.22 305 19,465
Spain 56,140 40.65 138 73,459 46.20 159 17,319
El Salvador 10,278 6.50 158 24,283 6.21 391 14,005
Italy 56,574 56.30 100 67,615 60.68 111 11,041
UK 82,241 60 138 94,511 62 151 12,270
Japan 67,255 127.50 53 74,476 127.90 58 7,221
* Data for China includes only sentenced prisoners
SOURCE:  Walmsley (2003) & Walmsley (2010)

While the USA added over a quarter million incarcerated between 2003 and 2010, the next 20 largest national prison populations grew by 860,000 (data for China do not include jails, which hold 21% of the incarcerated population of the USA). Brazil's prisons are among the world's most crowded;12 since 1999, at least five states have opened correctional facilities operated by private companies. Already, about 3.5% of Brazil's incarcerated are held in privately run prisons.13

Surprisingly, France, with its well-known distaste for the private sector (more alleged than true), has about 36% of its carceral population in privately run institutions--massively greater than the USA.  While the USA has a prison population 38 times that of France, its private-sector prison population is about eight times as large.  Moreover, studies of French prisons suggest that, while privately-run institutions in the USA are markedly worse than their state-run counterparts, the opposite is true in France.14

In part two of this post, I plan to write about the non-state actors who dominate this global network of private prisons.

(Part 2)

Notes
  1. Yasha Levine, "Welcome to Drone Country," Not Safe For Work Corporation (7 Feb 2013)

  2. Yasha Levine, "The Deportation Corporation," Not Safe For Work Corporation (5 Feb 2013).

  3. Wackenhut Corrections Corporation website, corporate profile; mirrored by "American Buddha"; probable date of profile is early 2002. Identical text appears in a statement by MP Ben Skosana, Minister of Corrections, Republic of South Africa, on the opening of Kutama-Sinthumule Maximum Security Prison (August 2001).

  4. Joel (1988). Regarding Florida:
    Florida in 1981 became the first state to contract out the entire state prison industry to private management. Prison Rehabilitative Industries & Diversified Enterprises Inc. (PRIDE), a firm based in Clearwater, Florida, now manages all 53 Florida prison work programs as a for profit operation. PRIDE made a $4 million profit last year.
    Regarding Tennessee:
    Corrections Corporation of America (CCA), based in Nashville, Tennessee, and founded in 1983, is the largest private corrections organization in the country [JRM notes: it still is as of 2012]. A spinoff of Hospital Corporation of America, CCA designs, constructs, finances, and manages both secure and non-secure facilities. [...] In 1985, CCA proposed to operate the entire Tennessee state correctional system for 99 years. Governor Lamar Alexander supported the idea. It was blocked, however, by lobbying [sic] by some state officials and groups like the American Civil Liberties Union.
    Joel's article, for the conservative thinktank Heritage Foundation, is a transparent plug for the privatization "movement." I object to his use of "lobbying" to describe legal activity by the ACLU; according to Hacket, et al. (1986), p.62, the ACLU was not of a consensus at the time on privatization (since then, the ACLU has become opposed to privatization). The deal with CCA was rejected by the Tennessee State Legislature, but was allowed for a new Carter County facility to be built by CCA (Hacket, et al. (1986), p.36).

  5. "Court Tosses Convictions Of Corrupt Judge" Associated Press (accessed 24 Feb 2013). In August 2011, Ciavarella was sentenced to 28 years in federal prison for his involvement in the Kids for Cash scandal; on September 23, 2011, Michael Conahan was sentenced to 17.5 years in prison and ordered to pay $874,000 in restitution. See Robin Young, "Corrupt Juvenile Justice Leaves Mark On Pa. Kids" WBUR, Boston (15 Jan 2013).  A little-noted aspect of this case is the extremely widespread cooperation of police, court officials, et al. in what they must have known were widely disproportionate responses to petty misbehavior: for the criminal justice system, this sort of behavior is extremely commonplace, if not the norm.

  6. See Greene & Mazón (2012). My contention that there is no meaningful difference between the views of CCA's & GEO Group's Congressional patrons, and the judges in the "Cash for Kids Case" relies on the following inferences: (a) Ciavarella & Conahan were ideologically supportive of a draconian approach to juvenile offenders; (b) politicians continue to be unanimous in expressing the same attitude (see Frank (2009); so it would be a leap of faith to assume Ciavarella & Conahan were behaving very differently because they were bribed); (c) Ciavarella & Conahan's ideological position was in fact [Draco]nian, after the 7th cent. BCE Athenian lawgiver  who argued that all transgressions of the law were worthy of death.

    In recent decades, this attitude has been a staple of conservative ideology regarding undocumented foreign-born residents--that "illegals" (i.e., people lacking valid bureaucratic documentation allowing them to perform their jobs in the country where they reside) lacked any rights, and ought to be punished by deportation regardless of their social usefulness or moral conduct.

  7. Greene & Mazón (2012), p.7; for issues outside the USA, see Global Detention Project, Programme for the Study of Global Migration (2007-2011).  As of 2011, only the UK retained private firms to manage immigration detention centers.  The largest detainee populations in Europe is Spain (nearly 17,000) followed by the UK (with 3,500); by contrast, the USA has over 400,000 immigrants in detention, of whom about half are in for-profit facilities.  All figures are for detainees at any given time; most governments deport detainees as fast as they are able.

  8. BLS tables; "Corrections Population." Incarceration rates are much lower than "imprisonment rates," which exclude people serving terms of less than 1 year (that includes people who have not been sentenced). Data for imprisonment is far more complete.  Although it is an extremely interesting topic for many reasons, this post cannot address the huge problem of probations.  Incarceration rates in 2011 were almost 1% of the adult population of the USA, but only one third of the total penalized population. Another 3,971,319 were on probation and 853,852 were on parole.

  9. Written testimony of U.S. Immigration and Customs Enforcement Office of Detention Policy and Planning Assistant Director Kevin Landy for a House Committee on the Judiciary, Subcommittee on Immigration Policy and Enforcement hearing on Performance-Based National Detention Standards (PBNDS) 2011; released (27 March 2012)

  10. "Office of the Federal Detention Trustee," Department of Justice (accessed 24 Feb 2013)

  11. Mason (2012), p.6

  12. "World Prison Populations," BBC (20 June 2005; accessed 24 February 2013); "Prisons in Latin America: a journey into hell," The Economist (22 September 2012; accessed 24 February 2013).  The article in The Economist notes that criminal gangs overwhelmingly control the majority of prisons in Latin America.

  13. "Brazil to Open First Public-Private Prison," The Rio Times (18 December 2012; accessed 24 February 2013); Sandro Cabral & Stéphane Saussier, "Organizing Prisons through Public-Private Partnerships: A Cross-Country  Investigation" (PDF), Brazilian Administration Review (June 2012). Cabral & Saussier note that Brazilian PPPs are very different from privatization contracts in the USA; the key difference is that, in the USA, privatization is absolute whereas in Brazil and other countries, contract administration is under state supervision (p.21ff).

  14. Cabral & Saussier (2012); see table 3, "Table 3: Effects of participation of private actors in prison services."  In France, "privately-run" prisons are under far more direct government supervision than in either Brazil or the USA.  In the USA, they are almost completely ceded to the operator.  France's rate of incarceration is about average by European standards: 96 per 100,000 population.


Sources and Additional Reading

Rita Abrahamsen & Michael C. Williamson, Security Beyond the State: Private Security in International Politics, Cambridge University Press (2010)


Thomas Frank, "Lock 'Em Up: Jailing kids is a proud American tradition" Wall Street Journal (1 April 2009)

Judith Greene & Alexis Mazón, "Privately Operated Federal Prisons for Immigrants: Expensive. Unsafe. Unnecessary" (PDF), A Justice Strategies Report (September 2012)

Judith Hackett, Harry Hatry, Robert B.& Levinson, Joan Allen, Keon Chi, & Edward, D. Feigenbaum Issues in Contracting for the Private Operation of Prisons and Jails (PDF), Council of State Governments, Lexington, KY (1986)

Henry Hoffman, "Corrections Corp. of America Can Help Right Your Portfolio," Seeking Alpha blog (6 August 2010; accessed 24 Feb 2013)

Dana Joel, "A Guide to Prison Privatization," Heritage Foundation Backgrounder #650 (24 May 1988; accessed 24 Feb 2013)

German Lopez, "Liberty for Sale: Should Ohio inmates be commodities in a for-profit venture?" City Beat, Cincinnati (19 September 2012)

Cody Mason, "Dollars and Detainees  The Growth of For-Profit Detention" (PDF), The Sentencing Project   (July 2012)

Caroline Sawyer, Brad K. Blitz, Statelessness in the European Union: Displaced, Undocumented, Unwanted, Cambridge University Press (2011) 

Julia Sudbury (editor), Global Lockdown: Race, Gender, and the Prison-Industrial Complex, Psychology Press (2005)

Emilio C. Viano, " America’s prison system" (PDF), Prison policy and prisoners’ rights, Proceedings of the Colloquium of the IPPF, Stavern, Norway, 25-28 June 2008, Nijmegen, Wolf Legal Publishers (2008.)

Roy Walmsley, "World Prison Population List" (PDF), International Centre for Prison Studies, University of Essex (2010)

Bureau of Justice Statistics (BJS) - "Corrections"  (accessed 24 Feb 2013)

"The Influence of the Private Prison Industry in the Immigration Detention Business," Detention Watch Network (May 2011; accessed 24 Feb 2013)

"Children in Confinement in Louisiana" (PDF) Human Rights Watch Children's Rights Project (1995)

"The Math of Immigration Detention:  Runaway Costs for Immigration Detention Do Not Add Up to Sensible Policies" (PDF), National Immigration Forum (August 2012)

Global Detention Project, Programme for the Study of Global Migration (2007-2011; accessed 24 Feb 2013).

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29 January 2013

Unlearning Economics--Series on Steve Keen's Debunking Economics

A year ago I read Steve Keen, Debunking Economics (2nd edition, Zed Books, 2011).  I have been meaning to analyze his book in detail, but progress has been slow.  An anonymous graduate student has posted a series of posts on the book, explaining the concepts discussed.

For the convenience of everyone interested, I am posting a table of contents to Unlearning Economics' series on Debunking Economics. A special thanks to the blogger known as UE for un beau travail.

  1. Debunking Economics: Overview & Opening Notes
  2. ‘Debunking Economics’, Part I: Demand Curves Can Have Any Shape
  3. ‘Debunking Economics’, Part II: Perfect Competition, Profit Maximisation and Non-Existent Supply Curves
  4. Debunking Economics, Part III: “Uninformed and Inexperienced Armchair Theorisers”
  5. Debunking Economics, Part IV: The Many Ways to Debunk Labour Economics
  6. Debunking Economics, Part V: The Holy War Over Capital
  7. Debunking Economics, Part VI: Assumptions, Assumptions, Assumptions
  8. Debunking Economics, Part VII: Against Statics
  9. Debunking Economics, Part VIII: Macroeconomics, or Applied Microeconomics?
  10. Debunking Economics, Part IX: Interest, Stocks & Debt Deflation
  11. Debunking Economics, Part X: Causes of the Great Depression (and Great Recession)
  12. Debunking Economics, Part XI: Predicting the Crisis
  13. Debunking Economics, Part XII: Keen’s Minsky Model
  14. Debunking Economics, Part XIII: Alternatives to the EMH
  15. Debunking Economics, Part XIV: In Defence of Mathematics
  16. Debunking Economics, Part XV: (Not) Keen on the Labour Theory of Value
  17. Debunking Economics, Part XVI: The Search for Alternatives
  18. Debunking Economics, Part XVII: Response to Criticisms (1/2)
  19. Debunking Economics, Part XVIII: Response to Criticisms (2/2)
  20. Debunking Economics: Closing Notes

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