In March 1959, a promising young Harvard economist delivered a lecture in Boston on "The Theory and Practice of Blackmail," drawing on the then-young branch of economics and mathematics called "game theory." Strictly speaking, his subject wasn't just blackmail—the threat to reveal damaging information in order to get what you want—but the broader practice of extortion or coercion.
The lecturer emphasized a central problem in coercion, which is to make the victim believe that if the coercion is unsuccessful, the threat will be carried out nevertheless. That is not straightforward, but it is possible. For instance, in December 1958, a "little old lady" walked into a bank, placed a glass of colorless liquid on the counter, and passed a note to the teller. "I have acid in a glass, and if you don't give me what I want I'll splash it on you," said the note. It continued, "I have two men in here. I'll throw the acid in your face and somebody will get shot. Hurry. Put all the fives, tens and twenties in this bag."
What would you have done in the teller's shoes? A quick-thinking teller might well have thought that it was safe to refuse, because the lady's best option would then be to pick up the glass and walk out in search of another bank. She would have nothing to gain from hurling the acid except a longer prison sentence.
Yet the teller handed over a bagful of money. It was, after all, not his. Other bank robbers of the day enjoyed similar success. One convinced a teller that a comb in his waistband was a gun. Another walked away with $5,000, quite a sum in 1958, after brandishing what looked like a grenade; surely he cannot have intended to blow himself up. A third robber managed two holdups armed only with a polite note. The little old lady herself was arrested on a second heist and found to be equipped with a glass of tap water.
One lesson is that bank tellers have little to lose by complying, which is why banks started introducing locks, alarms, cameras, and other systems that could not be overridden by staff. Another lesson is that small doubts over the rationality of the coercer can go a long way in enforcing a threat. After all, if Grandma walks into the bank and starts trying to extort money, she's already demonstrated herself to be a little out of the ordinary.
Blackmail proper is a more difficult threat to make credible. Judge Richard Posner, a pioneer on the frontier between law and economics, has pointed out the basic difficulty: Unless the blackmail victim is himself a criminal, he has the powerful counterthreat of a complaint to the police. If the victim's secret is revealed, he has nothing to lose by then reporting the crime. If the victim goes to the police immediately, the blackmailer cannot reveal the secret without risking a longer sentence. Small wonder that blackmail seems to be a rare crime.
An epilogue: The economist who gave his 1959 lecture on blackmail later ended up with more practical experience of it than anybody would want. His name is Daniel Ellsberg. After his early contributions to economics, he became far more famous as the military analyst who risked a life sentence for espionage after leaking the Pentagon Papers to the press in 1971 in the hope of obstructing the Vietnam War. It was a memorable instance of blackmail's heroic twin, whistle-blowing.
The Watergate burglars then broke into the office of Ellsberg's psychiatrist, perhaps with the hope of obtaining blackmail material. That burglary was one reason that the trial of Ellsberg collapsed. Blackmail is a difficult business—but even back in 1959, Ellsberg had known that very well.