In the cases I'm thinking of, the patients were labeled paranoid - and ultimately schizophrenic - chiefly because they were angry and believed others were out to harm them. (They did not have hallucinations.)

Their "paranoia" may have had something to do with: a. being watched 24 hours a day, b. being chased around by some sociopathic fellow inmates, c. being subject to the rule of arbitrary and capricious guards, or perhaps some combination of the 3.

Also, from the prison's perspective, prison is not a nice place, and psychiatric labels and medications are useful for keeping inmates in line.

I should note that blacks in the general population are disproportionately diagnosed with schizophrenia, and it's probably from overdiagnosis due to race-based misunderstandings. Check out http://www.medscape.com/viewarticle/768391 and this study http://archpsyc.jamanetwork.com/article.aspx?articleid=11510..., which confirms on a small scale what I've seen anecdotally in the prison context