The Economics of Prohibition

  The Economics of Prohibition

  The Economics

  of Prohibition

  Mark Thornton

  University of Utah Press

  Salt Lake City

  Copyright © 1991 University of Utah Press

  All rights reserved

  ∞ The paper in this book meets the standards for permanence and durability established by the Committee on Production Guidelines for Book Longevity of the Council on Library Resources

  Library of Congress Cataloging-in-Publication Data

  Thornton, Mark.

  The economics of prohibition / Mark Thornton.

  p. cm.

  Includes bibliographical references and index.

  ISBN 0–87480-375–6 (alk. paper).—ISBN 0–87480-379–9 (pbk. : alk. paper)

  1. Prohibition—Economic aspects. 2. Prohibition—Economic aspects—United States. 3. Narcotics, Control of—Economic aspects—United States. 4. Drug traffic—Economic aspects—United States. 5. Narcotics and crime—Economic aspects—United States. I. Title. HV5088.T48 1991

  338.4’336341’0973—dc20 91–50333

  CIP

  Contents

  Foreword

  Acknowledgments

  Introduction

  1. Economists and Prohibition

  The Origins of the “Economics” of Prohibition

  In Defense of Prohibition

  Prohibition’s Blue Monday

  The Economics of Heroin Prohibition

  The Economics of Addiction

  2. The Origins of Prohibition

  The Prohibition of Alcohol

  National Narcotics Prohibition

  National Marijuana Prohibition

  3. A Theory of Prohibition

  The Basic Analytics of Prohibition

  The Political Economy of Prohibition

  4. The Potency of Illegal Drugs

  The Economics of Potency

  Prohibition as a Tax

  The Impact of Prohibition on Potency

  Potency in Prohibited Markets

  Alcohol Prohibition

  The Prohibition of Marijuana: A Simple Test

  Beyond Cannabis

  5. The Corrupting Effects of Prohibition

  Crime

  Corruption

  6. The Repeal of Prohibition

  Is Effective Prohibition Possible?

  Alternative Policy Regimes

  The Free-Market Solution

  The Extended Free-Market Solution

  References

  Index

  Figures

  1. Prohibition’s Impact on the Consumer and Producer

  2. The Traditional Approach for Determining the Optimal Level of Prohibition Enforcement

  3. The Process of Progressive Interventionism (and exit)

  4. Effect of Improved Technology for High-Potency Drug Production

  5. Federal Budget for Enforcement of Drug Laws, 1973–1984

  6. Average Potency of Marijuana, 1973–1984

  7. The Impact of Prohibition on the Consumption of Heroin

  8. Prohibition’s Impact on the Heroin Addict’s Budget Constraint

  9. Prohibition’s Impact on (addict-related) Criminal Activity

  10. Federal Convictions of Public Officials, 1970–1988

  Tables

  1. Absenteeism Rates in a Delaware Gunpowder Plant

  2. Average Annual Percentage-Point Decline in Absenteeism in a Delaware Gunpowder Plant

  3. Shipping the Good Apples to New York

  4. Federal Expenditures upon the Enforcement of Prohibition

  5. Fisher’s “Alcohol Price Index,” 1916–1928

  6. The Effect of Prohibition on Alcohol Expenditures

  7. Per Capita Consumption of Alcoholic Beverages in Gallons, 1840–1919

  Foreword

  Foreign wars come and go, but the Drug War is a constant of U.S. domestic policy. For nearly eight decades the government has attempted to prevent American citizens from using one or more illicit substances. By the 1980s the government’s efforts had become truly draconian: more than one million drug arrests annually; minimum drug sentences that exceed the average punishment for murderers and rapists; increasing numbers of wiretaps; property confiscations and home evictions based on mere suspicion of drug use; ever more warrantless searches as part of the constantly expanding “drug exception” to the Fourth Amendment; growing involvement of the Central Intelligence Agency, Department of Defense, and National Guard; citywide curfews; and proposals for everything from shooting down unidentified planes at the border to declaring martial law.

  Yet these efforts have yielded few positive results. The U.S. now has more than one million people in prison, yielding the highest rate of imprisonment in the industrial world. Young blacks are more likely to die in gun battles in the criminal underground, funded by drug prohibition, than they were while serving in the army in Vietnam. Drug users seeking to pay the inflated prices of illegal substances commit thousands of property crimes in cities and their suburbs. Children, who receive lesser criminal punishments, are increasingly recruited into the drug trade, where many become users.

  Moreover, the law appears to have stopped few people from trying illicit substances. According to the National Institute on Drug Abuse, 74.4 million people over the age of 12 have tried drugs, despite decades of drug prohibition. Nearly 27 million use illegal substances at least once a year. Rates of drug use are now falling, but the declines started before the periodic escalations of the drug war during the 1980s.

  Given this record, it is time to fundamentally reevaluate America’s drug policy. To do so risks attack from publicity-minded drug czars and vote-seeking politicians. But not to do so acquiesces to a policy that is needlessly imprisoning, maiming, and killing tens of thousands of people for voluntarily using and selling substances that are demonstrably less harmful—particularly in the number of deaths they cause—than the legal drugs alcohol and tobacco, the latter of which is subsidized by the federal government.

  Courageously picking up the gauntlet tossed down by the drug war lobby is Mark Thornton. In a debate more often marked by emotion than facts, Professor Thornton looks at how illegal drug markets, for alcohol as well as today’s disfavored substances, really work. Particularly important is his conclusion that such problems as crime and corruption are natural outgrowths of drug prohibition, not drug use. As a result, the deaths of innocent bystanders in drug dealers’ gun battles, for example, create an argument for drug legalization, not stricter enforcement.

  Many readers may nevertheless disagree with Professor Thornton’s conclusions. But they will still have an obligation to respond to his evidence that the costs of prohibition are huge and obvious, while the benefits are few and dubious. The burden of proving Professor Thornton wrong, and thereby justifying continuation of the drug war, now rests on those who oppose drug legalization.

  Cato Institute DOUG BANDOW

  Acknowledgments

  During my study of prohibition I have been helped by many friends and colleagues. Their encouragement, suggestions, and corrections made this book possible.

  My gratitude and respect go to John D. Jackson, who provided the critical guidance so crucial to the completion of this project. The unceasing stream of comments and suggestions from Richard D. Ault and Leland B. Yeager contributed both insights and a broad perspective. Seth A. Anderson provided valuable suggestions and encouraged me in my efforts to find a publisher.

  It is to the credit of my teacher, coauthor, colleague, and friend Robert B. Ekelund, Jr., that the lessons and debates in his classroom turned my question into an answer—an answer that forms the foundation of this book.

  I owe a sp
ecial debt to the University of Utah Press, whose staff had the courage and foresight to bring this book to fruition. I am also grateful to the distinguished group of reviewers assembled for this project—Bruce Benson, Charles Maurice, and Murray Rothbard—each of whom provided valuable comments and corrections.

  Three institutions have provided support for this project. The Institute for Humane Studies at George Mason University provided my initial exposure to classical liberalism and academic research. I wish to offer my thanks for the 1990 F. Leroy Hill Summer Faculty Fellowship, and I give special thanks to Sheldon Richman for his assistance in preparing this manscript for publication.

  I also wish to acknowledge the H. B. Earhart Foundation for its financial assistance during the preparation of this book.

  My very special thanks go to the members and staff of the Ludwig von Mises Institute. The intellectual environment, continuous encouragement, and financial support they provided were invaluable. For their assistance and faith in me, I would especially like to thank Llewellyn H. Rockwell and O. P. Alford III.

  It is my hope that the publication of this book begins to repay all those who have shown so much confidence in me.

  Introduction

  Prohibition has an ever-increasing impact on our daily life. In the United States, prohibition against certain drugs, involving “wars” on them, has become one of our most visible and hotly debated national problems. The purpose of the following investigation is to improve our understanding of the origins and results of prohibition, and therefore indirectly to contribute to future policymaking, shifting it toward rationality.

  At the core of this book, one of the first theoretical investigations of prohibition, is an economic theory of prohibition, which defines prohibition as a government decree against the exchange of a good or service. Recent studies of decrees against cocaine, heroin, and marijuana suggest that these prohibitions impose heavy costs and are extremely difficult to enforce. Beyond such costs and enforcement difficulties, however, I argue that effective prohibition is impossible to achieve, because the unintended consequences of prohibition itself preclude any benefits.

  The only long-term solution to the problems engendered by the “misuse” of a product, I maintain, is legalization of that product. With legalization, as opposed to decriminalization and other forms of government interventionism, the government treats the misused product or service as if it were soybeans, computer chips, or pencils. The market is controlled by self-interest and normal legal constraints, such as product-liability law.

  This book may be viewed as a challenge to prohibitionists to present a theory that describes the benefits of prohibition. It may also be seen as a challenge to those who recommend that prohibition be replaced with some form of decriminalization. While it may be a good transition policy, decriminalization (government drugstores, high taxation, high fines, etc.) would maintain a black market, is an unstable policy, and does not create the necessary preconditions for reversing or limiting drug abuse.

  I have made use of historical analysis and applications of theory in this book, incorporating the disciplines of economics, history, criminology, sociology, and political science as needed. I have avoided using such items as estimates of elasticity and regression analysis because they are transient, unnecessary, and provide a false sense of certainty.

  The historical perspective transforms what might appear to be an implausible position into an eminently sensible one. The important historical aspects I examine include the role of economists in prohibitions, the origins of prohibitions, product quality, crime rates, and political corruption during prohibitions.

  There is little doubt about the importance of prohibition in American history and its role in social problems. The prohibition of alcohol sales was a crucial aspect of trade and tension with the indigenous Indian population. Temperance (along with slavery) was the primary reform movement in antebellum America, and prohibition was a determining political issue at the state and local level.

  After the Civil War, prohibitionism spread from New England both west and south. Although sometimes perceived as a lull in the drive for prohibition, the period from 1860 to 1900 saw the establishment of the building blocks of successful national prohibitions. Addiction was discovered, the Prohibition party was formed, groups such as the Women’s Christian Temperance Union and the Anti-Saloon League were established, and a wave of prohibitions at the state and local level were enacted on alcohol, cocaine, opium, morphine, gambling, and prostitution.

  The Progressive Era (1900–1920) marks the pinnacle of American prohibitionism. As America “progressed” to become an imperial power, it did so in part on the international prohibition of narcotics and the Harrison Narcotics Act. The act also helped the medical and drug industries “progress” toward the exalted monopoly status that they now enjoy.

  The Progressive Era also witnessed wartime prohibition of alcohol and National Alcohol Prohibition (the Eighteenth Amendment to the U.S. Constitution). Never have so many been deceived about so much by so few. The Eighteenth Amendment and the Volstead Act, which established the mechanism of the amendment’s enforcement, would be decisive and negative factors in American life and culture for over a decade.

  The failure of Prohibition helped remove it temporarily from public attention. Not only was the “noble experiment” an embarrassment, events such as the Great Depression and World War II dominated public concern. Marijuana prohibition in 1937 was relatively insignificant—a mere side effect of narcotics and alcohol prohibitions.

  The current prohibitions against narcotics originated with war and foreign-policy considerations in the Far East. In the 1960s foreign-policy considerations which resulted in war in Vietnam brought about increased consumption of drugs and the ensuing intensified war on drugs.

  One early lesson from American history is the unmistakable interaction between war, intemperance, and prohibition. Avoiding war is perhaps the most important thing a government can do to avoid intemperance, addiction, and drug abuse. Conversely, drug abuse and prohibitions are a significant long-term cost of war.

  History also supports the finding that prohibition is impossible to achieve in the economic sense. Legislatures do enact prohibitions and establish penalties and enforcement bureaus. The actions of these bureaus to enforce prohibition decrees have an effect, and when a prohibition survives long enough to be enforced it is successful in a political sense. I argue, however, that prohibitions have no socially desirable effect.

  Of course prohibition should not be evaluated against a higher standard than other laws. Murder is against the law, but not all murderers are apprehended, convicted, and punished. Likewise, to expect complete or perfect prohibition is unrealistic. Rather, prohibition will be measured against its public-spirited intentions, that is, to reduce consumption of a good in order indirectly to reduce social ills (such as crime, destruction of free will, drug-related deaths) and to promote social goals (family life, democracy, health, and economic development).

  To the extent that prohibitions result in increased prices, they produce increased crime and political corruption. Higher prices for a prohibited product also result in the substitution of related products and the innovation of more dangerous substitutes. Prohibited products tend to be more dangerous than legal substitutes in many respects, the result of prohibition, not the product itself. Therefore, to assume that more severe penalties or increased enforcement will result in the substitution of legal for prohibited products is to make an invalid conclusion. Prohibitions on drugs cause potency to increase. Therefore, the assumption that higher prices achieve the goals of prohibition is unfounded. Given all such considerations, the case for prohibition remains unfounded even if the indirect connection between the consumption of certain products and social ills does exist.

  The attempt to understand all human action (as opposed to just commercial activity) as rational represents a revolution in thought. Applied to policy decisions, this revolution is called publi
c-choice economics, and from this perspective it is unacceptable to present prohibition as an ignorant, irrational, or impossible social policy.

  Economists now suspect that any net losses to society produced by government policies are the result of rent seeking rather than ignorance or irrationality on the part of policymakers. Rent seeking is a search for privilege and personal gain through the political process. Rent seeking is distinguished from corruption in that rent seeking is legal and corruption is not.

  History reveals that prohibitions are indeed classic examples of the co-opting of public-spirited intentions by rent seekers within the political process, thereby explaining the existence of what at first appears to be irrational policies.

  This rationality-based method for the study of human action was labeled praxeology by the Austrian economist Ludwig von Mises. His student F.A. Hayek, a Nobel laureate, called it the logic of choice. Contemporary economists will recognize this approach as developed by Gary Becker. Other social scientists, notably political scientists, criminologists, and psychologists, will no doubt recognize this rationality-based approach as one which has become part of their own disciplines.

  Although such an outcome is unintentional on my part, this book will prove threatening to many. Some will label the theory in it doctrinaire, apologetic, capitalistic, or liberal. Specialists may find it lacking for neglecting the role of addiction or for failing to consider certain estimates of elasticity, particular chemical compositions, or the role that unusual circumstances have played in particular markets at points in time.

  In fact, however, many of the problems that economists and other social scientists have had with prohibition is that they have proceeded with investigation of specific markets without the benefit of a general theory.

  One last warning is in order, and it cannot be emphasized enough. The markets in which prohibition has been deployed, such as gambling, intoxicants, and prostitution, have existed for a long time and will continue long after I and my book turn to dust. Prostitution is the world’s oldest profession; people have been using intoxicants for as long as history can record; and men and women are risk-taking, fun-loving creatures. Most human beings live for leisure, not for labor. Labor is merely a means to an end.