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)

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

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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

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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). 

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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)

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, Gesellschaftsstand,  zu'ama,  jāti, 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 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

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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)

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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 and 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 and Conahan were behaving very differently because they were bribed); (c) Ciavarella and 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.

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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).

What's Wrong with the Edgeworth Box? (2)

(Part 1)

In Part 1, I explained my view that the Edgeworth Box is used to convince students and other consumers of economic theory that certain social arrangements are inevitable.  It's not so important itself as a pedagogical tool, since others have developed and the issues it was meant to settle have long ago become stare decisis.  But I think it's worth examining as an economic approach to describing reality.

ECONOMICS AS A HEURISTIC METHOD

The literature of economics is full of definitions of economics; readers are invited to use their preferred search engine and find a few.  In recent decades, economics has become much more pugnacious about being a science, with a (a) unique purview over the whole scope of political choice, and (b) comprehensible only to experts in the field.  In other words, as research project, economics have taken upon itself pretensions of universal authority, while pre-emptively rejecting the right of any outsider to criticize its positions.

Economists have implied, in doing so, a sort of motivational force-field around themselves, in which the doctrines they preach are impervious to the corrosive self-interest they impute to others.  While lawyers are quite open about the fact that they are paid to make arguments about legal doctrine by the expected beneficiaries of that doctrine, economists refuse to accept any such second-guessing.  "Markets" are presented as unimpeachably pure, sui generis, and uniquely fit to distribute wealth.  Economists may protest that they are merely engaged in abstractions of a reality too complex to present in fuller detail, but people should notice the bizarre implication that public choice is, ultimately, treated as insidious, while the power of business interests is presented as wholesome and self-policing.

So I propose to answer the question: as a research project, what does economics seek to do?

Economics is a process of binding decision-making to accounting.  Economics tries to explain and improve decisions by presenting them as causing, and caused by, conditions of scarcity, preference, and accumulation.  Humans have agency over their own access to wealth through the ability to produce and accumulate rather than merely hunt and gather.  Production and accumulation bring scarcity into the realm of something humans can control, leading to accounting and commerce, hence to the creation of markets.  This chain is not meant as a history, but as a heuristic.

The effort to link decisions specifically with certain objective, measurable conditions imposes a lot of simplification-by-average; while individuals are crammed with confusing idiosyncrasies, those particular quirks have effects that are much too small to matter with large groups. Likewise, confusion, doubt, and ignorance will cloud the decisions of individuals, but on average, the crowd is expected to know what it needs to know about objective conditions, and not make consistent errors about the future.

On average, preferences define a well-behaved utility function.  On average, expenditures are consistent for categories of goods, and not affected by unit price. And so on.  In most cases, these are not just simplistic, but unrealistically simplistic.  If you see a mountain from a distance of a meter, you see the grains in the granite and the twisted scrub growing out of cracks; back up 20 kilometers, and you see a massive peak that's generally triangular, probably with pale-lavender at the top and darker chiaroscuro near the base.  You do not see a polished cylinder or sphere.

This is justified as producing tolerably good predictions, but it doesn't.  It produces tolerably effective political justifications.

THE EDGEWORTH BOX IN CONTEXT

This brings me back to my abuse of the Edgeworth Box.  The idea was presented in Edgeworth's book, Mathematical Psychics (PDF; 1881), and later wedded to the concept of the Pareto Optimum: a condition where no one's utility can be enhanced without reducing the utility of another.  It's a somewhat nuanced view of conflict, because it implies human relations, even over the very short-run, are neither zero-sum nor yet nonzero-sum; in many cases, there may be distributional problems that can be resolved to everyone's benefit.

At the same time, though, an odd corollary is that, once the market has worked its magic and arbitrage opportunities are exhausted, then social factors are innately hostile to each other.  Solidarity plays no role in this; there is no chance for a group of people to get together and enhance their condition in the face of some powerful force, because the Edgeworth Box implies that they're as unified as they will ever be. Likewise, there's no scope for change.

To be clear: I'm not saying the Edgeworth Box needs to explain any change in the endowments of A and B, or suggest that A is really A₁, A₂,..., A_n, and these guys just need to get together and drive a harder bargain.  That's not for me to say, and I don't think it.  But the whole scheme excludes this as a concept.

(I need to pause here and mention that Frances Ysidro Edgeworth himself had a very sophisticated an nuanced idea, which is not closely related to the usual discussions of welfare economics where one is likely to find an EB.)

We can consider different contexts in which the EB applies:

1. Trade disputes: here, A and B are "rival" countries.  They are knocking out a trade pact, but the pact is very unpopular domestically.  Why?  Because A and B have at least three rival constituencies, specifically, those who are export-obsessed (workers and some business managers), those who are consumption-obsessed (households and investors), and those who are incentive-obssessed (activists for the environment, human rights, etc., who hope to use the trade pact to mandate some common policy in both countries).  While the three groups have massive membership overlap, they also can alter the final outcome.


2. Political disputes:  acknowledging that the USA is unusual in its bilateral polarization (C.f. most other OECD countries with four political poles, or Japan, with a single pole of varying valence), consider the problem of political disputes between Republicans and Democrats.  The absence of common ground is the result of experts and party caucuses seeking a new constituency to recruit for either side, until there are no loose interest groups. The purpose is not some new modus vivendi; it's the permanent eradication of the rival's potential for control.    The conflict is asymmetric because the Democratic Party itself consists of a huge number of constituencies that are watchful, if not positively enraged, with each other.


3. Labor disputes: Again, mine is a US-centric view, but the lengths to which management will go to prevent unions from being organized not in the realm of economic behavior.  Unions have been a successful partner of management in Scandinavian countries and postwar Germany; one can dispute the purity of company unions in Japan, but they are prone to actually showing a flicker of independence.  I suspect this has to do with the evolution of the large American industrial corporation into a quasi-sovereign entity, often with its own (de facto) law enforcement and court system,

Here are three common conflicts that attract a lot of attention, They are modern and plausible. Readers of this blog are unlikely to find themselves in an actual shooting war, and pay negotiations are pretty much random confusion or else unilateral decrees on the part of the employer.  The Edgeworth Box is, in that sense, not applicable to anything real. 

Enterprise Groups: Notes

This post is dedicated to notes from Aoki & Patrick (1994; see "Sources" below). Note the book is now 14 years old and it's mainly of historical interest, since the Japanese financial system has experienced such drastic transformation since. For future reference, I have used the terms "business group" and "enterprise group" interchangeably.

The enterprise group (held together largely by the financial system) is not merely a Japanese phenomenon:

In Korea, for instance, the top thirty business groups, known as chaebols, accounted for 40 percent of Korea's output in the mining and manufacturing sectors and 14 percent of GNP in 1996. In Thailand, Malysia, Singapore, and Taiwan, business group affiliates [...] that were listed on these countries' stock exchanges accounted for 24.3, 24.9, 39.6, and 56. percent, respectively, of those exhanges' total market capitalization in 2002. Further, many East Asian business groups have a significant international presence.
(Chang, 2006-p.1)

My interest in business groups (or enterprise groups) arises from their great importance in economies outside of the USA. Except for the USA and a few other countries, enterprise groups have been the predominant means of business organization.

Since the 1997 Asian Financial Crisis, the Japanese galaxy of enterprise groups has been severely disrupted.¹ Likewise, several of Korea's major chaebols have been sharply reduced in size and cohesion.²

However, outside of Japan and Korea, enterprise groups have been paramount to national development strategies.³ In most cases, this seems to reflect later "globalization" of the economy: while Japan went through a century-long period in which its economy was dominated by enterprise groups, it has now been a global trading nation for even longer and enterprise groups are in decline. Korea, likewise, experienced five decades of enterprise group-dominated development, which is gradually winding down. China's enterprise group experience dates back to 1987. India has long experience with enterprise groups, but South Asia is generally a special case; Russia's "oligarchs" are defined by their mastery of large industrial agglomerations similar to business groups.⁴

Japan and Korea (and Taiwan?) as B-Group Killers
While the most famous and powerful business groups in the world are from Korea, Japan, and Taiwan, several defining features of their host countries made them particularly vulnerable to reform. One was technical sophistication of the economies: Japan and Korea, dominated by high-tech industries, require transparent administration. The USSR could function with both a space program and opaque business governance because it didn't export consumer goods into competitive markets, and because it had vast natural resources. In some cases, a highly disciplined management and labor force can do without transparency, but eventually the bad decisions become insuperable.

In the 1980s, serious literature on the Japanese "miracle" acknowledged a distinction between effectiveness and efficiency: Japanese enterprise seemed capable of absolutely anything, provided cost was no object--and it never was. It was effective, but burned through resources. The export sector, in particular, was reliant on an indirect subsidy from the rest of the economy (in the form of a severely undervalued yen). In 1986-87, this subsidy was abruptly withdrawn, but instead of "market pressure" maneuvering Japan's economy away from exports, enterprise management "tried harder" against unfavorable winds. It broke into more technically demanding sectors by substituting capital for labor. Eventually the strain was more than Japan's industrial system could manage.⁵

The effect of endaka on Japan's kigyō shūdan was complex. First, Japanese firms were compelled to adapt to remain competitive, and most did--heroically.⁶ In other words, the firms became even better at their old jobs than they had ever been. It was the financial engineering required to make this possible that instigated the bubble.

Second, the firms faced with the bubble and the challenges it posed performed quite differently from each other. The onset of endemic financial distress (and great financial successes) placed fresh strains on the informal mutual assistance arrangements of the kigyō shūdan, while punishing keiretsu whose leading firms were loyal to 2nd and 3rd tier members. In effect, companies like Sharp, Sony, and Matsushita (which tended to keep production in Japan) lost out to companies like Mitsubishi Electric and Hitachi.⁷ And the informal mutual assistance arrangements of the Japanese economy tended to become more obvious as they were strained. They were more vulnerable to WTO complaints lodged by major trade partners.

Third, the financial system bore an unusually large share of the damage from the economic crisis.

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Notes

1. Lincoln & Gerlach (2004), Chapter 6; Lincoln & Shimotani (2009) is available online. The literature (including my article on enterprise groups) sometimes distinguishes between kigyō shūdan (horizontal enterprise groups) and keiretsu (vertical enterprise groups). Lincoln & Gerlach analyze the evolution and structure of the entire enterprise groups as interlocked. The decline of the vertical component was correlated with the decline of the horizontal one.
2. Kim, Hoskisson, Tihanyi, & Hong (2004); Lee (2008). Chaebols in the Republic of Korea have never been comparable in size to the kigyō shūdan of Japan; they are closer in size (measured by assets, turnover, or employees) to keiretsu. Informal estimates suggest that the "enterprise group sector" in both Japan and Korea was about 40% of GDP, and this represented a more passive component of enterprise. For example, group affiliates were more risk averse (Lincoln & Gerlach, 2004, "The Structural Analysis of the Network Economy").
3. For example, in Taiwan, see Chung (2003); Chung, incidentally, cites a far higher estimate of GDP-share for chaebols in the Republic of Korea (p.6) than the one I gave in the previous footnote. Here I will only say that I strongly suspect the lower figure is more accurate. For China, see Ma & Lu (2005) & Huang (2008), who also mention that qiye jituan in the PRC are almost entirely agglomerations of state-owned enterprises (SOEs).
4. For enterprise groups in India, see Chakrabarti, William L Megginson, & Pradeep K Yadav (2007); for the Russian oligarchs, see Guriev & Rachinsky (2005). The first paper is critical of India's overall business climate, but concludes that business groups facilitate access to credit. The second makes surprisingly favorable judgments of the performance of oligarch-controlled enterprise.
5. R. Taggart Murphy, The weight of the Yen: how Denial imperils America's Future and ruins an Alliance, W. W. Norton & Company (1997), "Coping with Endaka," esp. after p.198. "Endaka" is Japanese for "expensive yen," which it had become after 1986-87.
6. Chikara Higashi, Geza Peter Lauter, The internationalization of the Japanese economy, Springer, (1990), "Endaka or the High Yen," p.184. Note the date of publication. Higashi & Lauter were impressed by managers' use of zaitech (financial engineering) to finance the massive technical investments required to do this.
7. Megumi Oyanagi, "Japanese Global Electronic Companies – Why Winners and Losers?" Those in Media blog (2012). Readers will notice an anachronism here--Ms. Oyanagi was writing about winners and losers in 2011, whereas I am alluding to 1988-1995. But the general idea applies.

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Sources & Additional Reading

• Berhanu Abergaz, "The Diversified Business Group as an Innovative Organizational Model for Large State-Enterprise Reform in China and Vietnam"  , Working Paper (2007)


• Masahiko Aoki & Hugh Patrick, The Japanese Main Bank System, Oxford University Press (1994). Extremely diverse collection of articles on peculiarities of the city banks of Japan. Includes a brief selection of monographs on main banks in other economies. Mostly very dated even at the time of publication.


• Rajesh Chakrabarti, William L Megginson, & Pradeep K Yadav, "Corporate governance in India" , CFR working paper, No. 08-02 (2007). Highly favorable overview of enterprise groups in India.


• Chi-Nien Chung, Managerial structure of business groups in Taiwan: the inner circle system and its social organization" ,The Developing Economies, XLI-1 (March 2003). Looks at the decline of family control in Taiwanese business groups.


• Sergei Guriev & Andrei Rachinsky, "The Role of Oligarchs in Russian Capitalism" ,Journal of Economic Perspectives—V.19:1 (Winter 2005). Unusually, treats the oligarchs as organizers of a peculiar form of enterprise group.


• Yasheng Huang, Capitalism with Chinese Characteristics: entrepreneurship and the state, Cambridge University Press (2008)


• Roselyn Ying-Yueh Hsueh, China's New Regulatory State: The government's bifurcated strategy toward foreign investment, ProQuest (2008)


• Hicheon Kim, Robert E. Hoskisson, Laszlo Tihanyi, & Jaebum Hong,"The Evolution and Restructuring of Diversified Business Groups in Emerging Markets: The Lessons from Chaebols in Korea"_{The Origins of the Business Groups in China: an Empirical Testing of the Three Paths and the Three Theories}

" , Business History, Vol.51 (1): 77-99 (2008). Tests three alternative (and non-exclusive) motivations for the transformation of Chinese state-owned enterprises into business groups.

Sook Jong Lee, "The Politics of Chaebol Reform in Korea: Social Cleavage and New Financial Rules" , Routledge (2008)

James R. Lincoln & Michael L. Gerlach, Japan's Network Economy: Structure, Persistence, and Change, Cambridge University Press (2004). This is an exhaustive statistical analysis of Japanese enterprise structure during the high-water mark of the kigyō shūdan (1964-1997). One interesting feature (not discussed here) is the use of blockmodel (network clustering) analysis to determine the connectedness and benefits of various enterprise groups.

James R. Lincoln & Masahiro Shimotani, "Whither the Keiretsu, Japan's Business Networks? How Were They Structured? What Did They Do? Why Are They Gone?" _{Clans for Markets: the Social Organization of Inter-Firm Trading Relations in China's Automobile Industry}

" ,Korea Institute for International Economic Policy, Seoul National University (August 2006)

Xufei Ma & Jane W. Lu, "The critical role of business groups in China" , Ivey Business Journal (May/June 2005)

Sea-Jin Chang, Business Groups in East Asia: Financial Crisis, Restructuring, and New Growth, Oxford University Press (2006)