Economists behind bars

Prison cells are a fascinating economic laboratory, where for over a century thriving markets in goods, services, labor—and even money—have existed. Nowhere else do you find so many people craving entertainment and consumer goods, alongside so many innovative individuals willing to bend the rules to supply them. Everyday prison life also nicely illustrates how these underground markets function, and how regulation and central planning create inefficiencies, perverse incentives, and even health risks. From a free-market perspective, the prison cell is also a miniature example of how bans and monopolies distort supply and demand, while entrepreneurial behavior persists regardless of restrictions.

Seven dollars fifty

One of the rules of economics is that unmet demand eventually creates its own supply. And in prison, everyone has plenty of time.

As British journalist and filmmaker Chris Atkins (sentenced to five years for tax fraud) told VICE almost anything can be obtained behind bars—mobile phones, weapons, drugs, a geological hammer, even a PlayStation and flat-screen TV. A striking example came from a prison in Goiânia, Brazil, where inmates held (and filmed) a Christmas Eve 2021 party with twerking dancers.

To meet inmates’ needs, prison economies operate on three levels. The first is the “white economy”. It is legal, strictly regulated, and the least efficient. To put it simply, prisoners buy their goods and services in the prison canteen and earn money through prison labor.

In the U.S., however, the 13th Amendment bans slavery and forced labor—except as punishment for a crime. In practice, some prisoners aren’t paid at all, like those in Georgia making road signs and furniture. Slightly better are Missouri inmates, earning $7.50 per month in 2019—roughly the equivalent of the U.S. minimum wage for an hour. In British prisons, pay is about £10 per week.

Prisoners’ actual purchasing power is even lower due to the fact that prices in the prison commissary—the only official source of consumer goods—are inflated. The Guardian notes that while in the 1970s a prisoner could earn enough for a pack of tobacco in half a day, today it takes a week. Worse, JSTOR Daily reports that women earn two weeks’ wages for a pack of 18 sanitary pads. In an Idaho prison, candy bar prices were tripled, justified by an 8.5% measured “inflation.” Part of the problem is the commissary monopoly, run by Keefe.

In fact, the official prison market (i.e., the commissary) is centrally controlled, prices are regulated and bear no relation to supply and demand. Fortunately for inmates, where no official market exists, they create one themselves.

Massages and the candy shop

The second level is the gray economy—activities not fully legal but not strictly prohibited, which help inmates enrich life behind bars.

Prisoners quickly realize they’re in a giant supermarket: they can get haircuts, massages, tattoos, laundry or beautifully written letters prepared by a calligrapher. Each prison block typically hosts several unofficial shops run by inmates, while an informal banking system provides loans—at high interest and with the threat of violence for nonpayment.

Wilbert Rideau, who spent 44 years in one of Louisiana’s toughest prisons and edited its magazine for 20 of those years, told the story of an inmate making famous pecan pralines in his cell. Despite the high cost of ingredients and a steep price for prison standards ($2 per square), the pralines always sold out in advance. In prison, things that seem easy are hard, and things that seem impossible can be simple.

Prison is a fragile ecosystem based on negotiation between inmates and management. Prisoners are far from powerless—they can disrupt the administration through riots, violence, hunger strikes, or simply refusing to cooperate with guards. This creates space for trade-offs and tolerance of certain activities, whether contraband, tattoos, or praline-making. Participation in this market also boosts inmates’ well-being—not just by improving access to goods and services. It helps pass time, fosters self-expression, socialization, and even a relatively harmless form of resistance. Remove the gray economy, and you invite rebellion.

One of the main problems in prison economies is currency, due to the universal ban of cash—implemented partly to prevent bribing guards. From an economist’s perspective, it’s amusing that the search for money substitutes seems straight out of a textbook on the history of monetary systems.

Instant money

The first phase in the history of money—and of inmates trading among themselves—is barter. Prisoners sometimes have something others want and are willing to trade. But demand doesn’t often meet supply—what if you want a skull tattoo on your back, but the inmate with the tattoo machine doesn’t like the canned meat you offer? This “double coincidence of wants” problem was described by economist Stanley Jevons in the late 19th century.

In prison, commodity money is the dominant means of payment. For decades, cigarettes served as the perfect informal currency in prisons worldwide. They have all the qualities of money—widely available, durable, portable, non-perishable, divisible into smaller or larger units (packs, cartons), and intrinsic value: you can smoke them. As a bonus, cigarettes also function as a social lubricant and stress reliever in prison.

This efficient system was disrupted in the mid-2000s when most U.S. prisons banned smoking. A new alternative currency emerged: instant noodles. Packs of noodles are ideal money—they’re compact, durable, widely available, and have intrinsic value: you can cook and eat them when needed.

Sociologist Michael Gibson-Light noted this major economic shift—from cigarettes to noodles—in a 2018 article for Qualitative Sociology. He argued that the change reflects transformations in the U.S. prison system as well as inmates’ resistance to change. The old system portrayed prisoners as wards of the state to be “reeducated”. Cigarettes served as the perfect tool to resist this system and assert some control in an environment without personal freedom. Smoke breaks offered stress relief, socialization, and a way to defy this “treatment.”

In contrast, the new system—“neoliberal imprisonment”—portrays prisoners as consumers of a public service. Convicted criminals are forced to use this service—incarceration—which in the U.S. is often provided by private entities. After the Great Recession (2007–2009), cost-cutting measures heavily targeted the prisoners’ food. Vox reports that in some prisons, a single meal costs $1.77, and in others as little as 56 cents.

In this context, it’s clear why hunger strikes have become so common and why food is the main tool of inmate resistance. The use of instant noodles as currency in U.S. prisons (or canned mackerel in British prisons) proves this. Essentially, the prison commissary—where inmates buy noodles and mackerel—has become a de facto central bank.

Smoking ban harms health

This brings us to the final level of prison economies: the black market. Cigarettes and other banned commodities haven’t disappeared—they’re just more expensive and harder to obtain, as they now circulate on the black market and must be smuggled to customers.

Here, too, unmet demand eventually creates its own supply. Banned cigarettes returned through back channels, along with substitutes like drugs. With thousands of users sharing space with thousands of dealers, it’s hard to imagine a better place to obtain addictive substances at any time of day.

The prison economy is also shaped by the staff’s economic situation, as smuggling is often carried out by guards earning just above minimum wage. As Chris Atkins notes, a poorly paid guard may refuse an offer of several thousand pounds to sneak a package through the gate once because of his principles, but in the end he will give in because he knows that if he doesn’t do it, his colleague will.

Many sources report a new dangerous trend: synthetic cannabinoids, known in the U.S. as “spice”. It’s a drug tailor-made for prisoners—inducing relaxation, speeding up the perception of time, and, most importantly, undetectable in standard drug tests. Side effects include seizures and kidney problems, and its high cost often indebts inmates, who then serve their dealer-creditors by smuggling goods or taking the blame for discovered contraband.

And yes, the spread of this dangerous drug is partly driven by the cigarette ban—a push away from a safer, healthier alternative. Economically, this is predictable. However, as this article has shown, it’s usually the people in cells—not those with badges—who think like economists.

The lesson is simple: wherever governments impose monopolies, inflate prices, or introduce paternalistic rules (e.g. no-smoking policy, smaller wages…), markets adapt. If prisons are to function better, policymakers should stop treating inmates as passive dependents and instead allow real market mechanisms to operate. A freer prison economy would not only reduce violence and contraband but also improve well-being and responsibility among inmates.

This material is a result of a new collaboration between the Institute for Research in Economic and Fiscal Issues (IREF) and the European Center for Austrian Economics Foundation (ECAEF), focused on publishing a series of articles on economic and fiscal topics. It emphasizes our commitment to independent thought, academic freedom, and critical inquiry. The original was published here: https://en.irefeurope.org/category/publications/online-articles/