The Economics of Prohibition

by Mark Thornton

  No matter how deplorable the above activities appear to some, they are “leisure” to others. The only consistently successful method for raising the standards of leisure to higher levels is to allow economic development to take place. Individuals who use certain products or activities to self-destruct have problems far worse than the visible ones. Prohibition of these goods or services will have little impact in such cases.

  It is also important to recognize that the problems in these markets (disease, fraud, broken families, and so on) are not the result of a lack of government involvement. Indeed, these markets have been historically characterized by extensive government involvement prior to the enactment of prohibition.

  It is hoped that this book will stimulate debate, in both the academic and policy communities, even among those who disagree with aspects of it, and by that debate move us to a more rational public policy.

  1

  Economists and Prohibition

  I hold that there is nothing much wrong with standard economic methodology as laid down in the first chapter of almost every textbook in economic theory; what is wrong is that economists do not practice what they preach.

  —Mark Blaug, The Methodology of Economics

  Since economists have been leading the battle against drug prohibition, most people would be surprised to learn that they played an important role in establishing and defending the alcohol prohibition of the 1920s. It is still an open question whether economists set public opinion or mirror it, but the relationship between economists and prohibition provides interesting insights into the economics profession, the origins of Prohibition, and the current debate over drug legalization.

  In recent years economists have led the fight to legalize—actually, to relegalize—drugs. The Nobel Prize-winning economist Milton Friedman has been the outspoken leader of the relegalization forces. His open letter to “Drug Czar” William Bennett, published in the Wall Street Journal, is just his latest salvo against the prohibitionist establishment.1 Friedman began this battle in the 1960s, writing in Newsweek that the prohibition of drugs was ineffective and that more reasonable and prudent approaches to the problems of drug abuse were available. He (with his wife, Rose Friedman) later attacked drug prohibition in Free to Choose and The Tyranny of the Status Quo, linking the harm it causes with the experience of alcohol prohibition in the 1920s. The Friedmans are careful observers of history who oppose drug prohibition both on ethical and practical grounds.

  One of Friedman’s former colleagues at the University of Chicago, Gary S. Becker (1987), has also come out strongly against drug prohibition in the popular media. His support for the relegalization of drugs is significant because of his status in the profession, and for his potential as a Nobel Prize winner in economics. Becker argues that prohibition is not working and that the costs far outweigh the benefits. He bases his position both on current findings and on his own theoretical research. Becker is the foremost current authority and advocate of the rationality assumption regarding the study of human behavior. Among his numerous articles on the economics of human behavior is his recently published “A Theory of Rational Addiction” (with Kevin Murphy), in which addiction is modeled as rational behavior.

  Another important economist to announce support for legalization is the former secretary of state George Shultz. Since Shultz was a key member of the Reagan administration, his public statement is a major development in the debate over drug policy. The pro-legalization position of William F. Buckley, Jr., and Shultz’s conversion to legalization mark a major turning point in conservative thought.

  A survey of economists indicates that the majority oppose prohibition and favor moving policy in the direction of decriminalization. Economists who specialize in monetary theory and public finance are more likely to support decriminalization, while specialists in business administration are more apt to defend prohibition. Economists who work in the private sector generally support decriminalization, whereas government economists are more likely to support prohibition. It should be noted that economists overwhelmingly fall within the demographic grouping that exhibits the most support for legalization within the general public (middle aged, male, highly educated, upper income, Jewish or nonreligious). Most graduates of the top graduate programs and most economists trained in the Chicago, public choice, or Austrian traditions supported decriminalization of illegal drugs (Thornton 1991).

  The growing importance of and interest in prohibition has led some economists to include discussions of laws against alcohol, drugs, gambling, and pornography in their textbooks. Normally restrained and politically neutral, several writers of economic text books have taken a skeptical view of all prohibitions. For example, when examining the current drug prohibition, Edwin G. Dolan and John C. Goodman (1989, 35) present “misgivings raised on grounds of efficiency, equality, and liberty.” Robert B. Ekelund and Robert D. Tollison (1988, 108) find that “(e)conomic analysis casts doubts on the effects of directing increased resources into enforcement without careful analysis of the probable consequences of such programs,” and they suggest “that government expenditures would be better directed to the demand side of the problem.”2

  Richard McKenzie and Gordon Tullock (1989), too, place a warning label on prohibition. They find that “the costs of enforcement should, perhaps, be taken into account now in evaluating the efficacy of contemporary laws against hard drugs or pornography” (7). McKenzie and Tullock also assert that economists have always been in agreement against prohibition and have been aware of the tremendous costs, as if alerted by some standard economic model: “If backers of prohibition had consulted economists, we are sure they would have been told that the law would be very difficult and expensive to enforce. With this advice they might have decided not to undertake the program of moral elevation” (7; emphasis added).

  It is true that economists were in substantial agreement during the formative years of national alcohol prohibition. But they were for it—not against it.

  THE ORIGINS OF THE “ECONOMICS” OF PROHIBITION

  Economists helped establish the case for prohibition during the Progressive Era, a time when they were professionalizing their discipline and when a movement toward government interventionism and socialism, promoted by the German Historical School, was displacing the classical liberal approach to political economy. Members of the German Historical School rejected economic theory in favor of the study of history and institutions. Derived from German romantic philosophy (Hegelian determinism) the School advocated the use of laws as a means to social reform.

  Graduates of the German Historical School, principally Richard T. Ely, founded the American Economic Association in 1890. The association was modeled after German academic associations that allied themselves with the German state. Many market-oriented economists threatened to boycott the new organization because of its outwardly political bias. Once its socialistic statement of principle was dropped, however, the association became widely accepted.

  Many of the founding members were raised in puritanical households of postmillennialist pietism.3 During their days as university students many became atheists, substituting a secular approach to perfectionism for the religious approach of their parents. Some, such as Richard T. Ely, adopted a prosocialist orientation, while others, such as John Bates Clark, adopted a “dog-eat-dog” evolutionary perspective on capitalism. What they shared was an evangelical outlook and a strong dislike of such products as alcohol.4

  One of the founding members of the association and a leading proponent of prohibition was Simon N. Patten. Patten was a misfit. Handicapped by poor health and eyesight, he was unsuited for traditional pursuits and was considered the oddball of his prosperous family. Born into a traditional Yankee puritan home, Patten became an intellectual and agnostic. After several setbacks in his life he went to Germany, where he was trained by a leader of the German Historical School, Karl Knies. Upon returning to America he could not find a job until he was hired by fellow supporters
of protectionism and friends at the Wharton School of the University of Pennsylvania.

  A. W. Coats (1987) describes Patten as original and idiosyncratic, his publications unusual and eccentric. Patten’s contributions “were intriguing but puzzlingly novel and unsystematic, yet his awareness of the costs of growth and his concern for the environment anticipated late 20th century anxieties” (818–19). Despite extensive writings and his role as a founder (and later president) of the American Economic Association, Patten is remembered not for his theories but for his “prophecies.”

  One such prophecy was the advent of alcohol prohibition in America. Patten was a pluralist, believing that a policy is neither all good nor all bad and that a policy may very well be good for one country but disastrous for another. He wrote in 1890 that alcohol prohibition was a good policy for America and that abstinence would be the inevitable result of evolutionary competition.

  Prohibition was both desirable and inevitable in America from Patten’s evolutionary perspective. Patten based his conclusion on three main factors: (1) severe weather variation in America results in heavy and irregular alcohol consumption; (2) the custom of “treating” in America results in people consuming a greater quantity and variety of alcoholic drinks than if they relied solely on their own decisions; (3) technological advance resulted in the production of higher-potency and lower-quality alcoholic beverages. All three of these conditions were relative to conditions in Germany, where Patten was trained and where prohibition was apparently unnecessary.

  Patten seems to argue that prohibition must be adopted if we are to “survive.” Temperate people will “outcompete” heavy-drinking societies in terms of longevity, prodigy, and wealth. Temperate societies will overcome the intemperate because a given amount of land can support two temperate people or one heavy drinker. America will decline as the soil is exhausted in an attempt to support a nation of drunkards. For Patten, prohibition is a great evolutionary battleground because America must go dry if it is to survive and prosper: “Separate out the good in society from the bad, and you take from the bad many of the restraints which keep them from crime. In this way every measure that makes the good better makes the bad worse. The sharper the lines are drawn between the two classes, the more will the good progress and the quicker will the bad run through their downward course. With prohibition it is easier to be good and more dangerous to be bad” (1890, 65).

  For Patten, alcohol is a product with no equilibrium in consumption. One is either good and abstains from alcohol, or one becomes a drunkard and self-destructs. Patten even presented an early version of the escalating drug-use theory (that is, marijuana use leads to heroin addiction) when he referred to

  that graded series of drinks found in every saloon by which the drinker passes gradually to stronger drinks as weaker ones lose their attraction. This tendency divides society into two parts, and forces the respectable to join in a compact opposition to all drinking. The sharper this contest becomes the more have the abstainers to gain. Little by little will their economic advantage increase their strength, until their moral influence will keep the drinker from the saloon and their political power will take the saloon from the drinker. (1890, 67–68)

  Patten links virtually all the problems of modern society (real and imagined) with drunkenness. His obsession with drunkenness is indicated by his somewhat confusing concluding statement of his first English publication:

  The increase of drunkenness and other physical vices which have accompanied modern progress are the result of the extended division of labor, which destroys the ability both to produce and to enjoy most of those things that are sources of pleasure to man in an isolated state. We can obtain the advantage derived from the division of labor without losing the ability to enjoy all kinds of produce only by so educating all the faculties of man that he will have that independence and all those sources of pleasure which isolated men enjoy. Moreover, those qualities which increase the sources of pleasure are the very ones by which the field of employment is enlarged and the tendency to overpopulate is reduced, and only when education has developed all the qualities in every man can we expect this tendency to become so harmless that all men can enjoy the pleasures of an isolated state along with the efficiency of modern civilization. The End. ([1885] 1968, 244)

  On this argument, Patten formed the economic rationale for prohibition and helped set the alcohol agenda of American economists. Like William Graham Sumner and John Bates Clark, he perceived that survival of the fittest would eventually eliminate the drunkard from society. The interventionist bias in his education, however, propelled Patten to conclude that prohibition combined with evolutionary competition would achieve the desired results (total abstinence) much quicker than evolution alone.5

  IN DEFENSE OF PROHIBITION

  An important American economist, Irving Fisher, was the champion of Prohibition within the profession. He organized a roundtable discussion on the topic at the American Economic Association meetings in 1927. Here he claimed to have been unable to find even one economist to speak against Prohibition, despite a thorough search.

  I got a list of the economists who are supposed to be opposed to Prohibition, and wrote to them; they all replied either that I was mistaken in thinking that they were opposed to Prohibition or that, if we were going to confine the discussion to the economics of Prohibition, they would not care to respond. When I found that I was to have no speaker representing the opposite point of view, I wrote to all American economists listed in “Minerva” and all American teachers of statistics. I have not received from any one an acceptance. (I. Fisher et al. 1927, 5)

  Contrary to the belief of McKenzie and Tullock, if the supporters of alcohol prohibition had asked economists about it, they would have been heartily encouraged.

  In 1926 Fisher conveyed an optimistic, almost utopian view toward the elimination of the poisonous drink and the problems often associated with alcohol consumption. The 1920s was a time of great optimism, and Fisher best described the optimism concerning Prohibition:

  Prohibition is here to stay. If not enforced, its blessings will speedily turn into a curse. There is no time to lose. Although things are much better than before Prohibition, with the possible exception of disrespect for law, they may not stay so. Enforcement will cure disrespect for law and other evils complained of, as well as greatly augment the good. American Prohibition will then go down in history as ushering in a new era in the world, in which accomplishment this nation will take pride forever. (I. Fisher [1926] 1927, 239)

  Fisher’s staunch support of Prohibition helped to insulate the policy from criticism. He wrote three books on Prohibition in which his academic status and objectivity thinly cloaked his avid support.6 He promoted the claims that Prohibition would reduce crime, improve the moral fabric of society, and increase productivity and the standard of living. Indeed, he maintained that Prohibition was partly responsible for the economic prosperity of the Roaring Twenties.

  Fisher, a genius in many respects, was born into a Protestant family of Puritan stock. His father was a preacher and a graduate of Yale Divinity School, and his mother was at least as zealous as his father. The death of his father and two older siblings, as well as his own poor health, had a major impact on his views concerning social policy. He supported anything, such as Prohibition, that might extend life expectancy.

  Fisher’s atheism would appear to place him at odds with religious reformers, the principal supporters of Prohibition. Still, though Fisher gave up belief in God and religion, he remained convinced of the doctrines and methods of postmillennialist evangelical Protestantism. Men should work toward the goals of morality, progress, and order while on this earth, he believed, and government should be the main instrument of civilization. Method was secondary to achieving desirable ends. This outlook would typify his work in economics and social policy. “Men cannot enjoy the benefits of civilized liberty without restrictions. Law and Order must prevail, else confusion takes their place, an
d, with the coming of Confusion, Freedom vanishes” (quoted in I. N. Fisher 1956, 13).

  Fisher was most adept at mathematics and helped support himself through scholarships, academic contests, and tutoring. His dissertation was an exercise in a mathematical-theoretical reconstruction of utility theory that drew heavily on the method of Léon Walras.

  The thesis was applauded by Francis Yisdro Edgeworth, who repudiated aspects of his own theory after reading Fisher’s work. Vilfredo Pareto wrote Fisher an eight-page letter in which he spoke scornfully of the “adversaries of mathematical methods,” and praised Fisher’s distinction between utility of “that which cannot be useful, and that which is really useful.”7 It was this distinction that Fisher used later in the analysis of alcohol consumption.

  To admirers of Fisher’s more scientific contributions, he appears eminently scientific and objective. His work on Prohibition reveals a thin layer of scientific veneer that is important for evaluating all his contributions, for Fisher was clearly an advocate of government intervention in the economy. A key insight into his viewpoint is illustrated by an excerpt from his speech to the Yale Socialist Club in November 1941.8

  I believe [William Graham Sumner] was one of the greatest professors we ever had at Yale, but I have drawn far away from his point of view, that of the old laissez faire doctrine.

  I remember he said in his classroom: “Gentlemen, the time is coming when there will be two great classes, Socialists, and Anarchists. The Anarchists want the government to be nothing, and the Socialists want government to be everything. There can be no greater contrast. Well, the time will come when there will be only these two great parties, the Anarchists representing the laissez faire doctrine and the Socialists representing the extreme view on the other side, and when that time comes I am an Anarchist.”