The Economics of Prohibition

by Mark Thornton

  First, Anslinger was a commissioner of Prohibition during the National Alcohol Prohibition. When Prohibition was repealed, the Great Depression was already creating budgetary pressure, and the Federal Narcotics Bureau required additional justification for its existence.

  Anslinger had learned important lessons during Prohibition. First, bureaucracies that have difficulty in securing enough money to enforce their mission, are eventually exposed as ineffective. Second, Anslinger promoted the idea of punishing the consumer, as well as producers and distributors. He believed that Prohibition would have been effective had such penalties existed. Marijuana prohibition provided him with the opportunity to test his approach. Third, Anslinger was convinced that publicity and public support were crucial and that any means should be used to achieve this support.

  In the Anslinger model of prohibition, a substantial majority should be pitted against a small and mistrusted minority. This would provide a stable level of public support and therefore continual funding for the bureaucracy. The federal bureaucracy should not be responsible for the actual enforcement of prohibition. Its role should be restricted to setting policy and to creating public support for the prohibition. With enforcement concentrated at the local level, problems and failures of enforcement would be less noticeable than at the national level.

  Alcohol prohibition affected the market for marijuana. As the price of alcohol products increased during Prohibition, the relative price of marijuana fell and its consumption began to rise. It proved to be particularly popular with the lower-income classes who could not afford the high price of alcohol. Marijuana use spread more quickly in the Southwest and Midwest. It was also available in hashish form in several big-city speakeasies. Without the exposure that Prohibition provided, marijuana would likely have not become a matter of public concern or national legislation by 1937. In addition, the Harrison Narcotics Act of 1914 proved to be valuable for the bureau. Before the Harrison act, it was difficult for prohibition legislation to remain within constitutional guidelines. The precedent of using federal taxation powers and the experience of past court challenges to the Harrison act helped to establish the legality of marijuana prohibition.

  This historical-theoretical perspective on the origins of marijuana prohibition achieves a comprehensive explanation that incorporates both the Anslinger and Mexican hypotheses. The Mexican (discrimination) hypothesis is valid in part. Most prohibitions involve an element of bigotry, and discrimination helps explain, for example, the decrease in penalties for marijuana during the 1970s, when middle-class white teenagers were arrested in large numbers for marijuana possession. The Anslinger (bureaucratic) hypothesis also helps explain the expansion of prohibition to marijuana and the manner in which it was executed. The historical and empirical implications of the two preceding prohibitions, however, are necessary to provide a consistent and complete account of the origins of marijuana prohibition.

  The more traditional, rent-seeking explanation also contributes to our understanding of marijuana prohibition. Marijuana (hemp) has been one of the most important crops in human civilization. It was used extensively as a fiber, animal feed, medicine, oil, and in other ways throughout the world. By the twentieth century, substitutes such as petroleum and cotton had largely replaced hemp as the number-one source of these materials. Nevertheless, eliminating hemp as a substitute would be consistent with rent-seeking activity.

  For example, the chemical industry and companies such as E. I. du Pont de Nemours that produced artificial fibers and petroleumbased drying oils (used in paints and shellac) would potentially benefit from the prohibition of marijuana. A prohibition against marijuana would provide chemical-based production and alternative natural sources of oils and fibers with an economic advantage. Despite the du Pont family’s active involvement against alcohol prohibition, their company held a new patent on a process for wood pulp paper which would have had to compete against hemp-based paper had marijuana not been prohibited in 1937. See also Larry Sloman (1979) on the historical background of the marijuana issue.

  Prohibition is a strange phenomenon, but no longer a mysterious one. Its origins can be found in the good intentions of evangelical Protestants and the discrimination against minority groups.13 Politics offered the impatient members of the temperance movement a more direct and less costly method of achieving their goals—resulting in the loss of its voluntary and public-service nature.

  Prohibitionism became an opportunistic special-interest movement joined in the public forum by a coalition of commercial-interest groups and professional organizations. While traditional rent seeking has been played down as an explanation for prohibitions, it was doubtless an important factor. Among the lasting effects of prohibitionism is the establishment of powerful medical interest groups. The American Medical Association became the dominating force during the drive for prohibition. Their monopoly power allowed them to close medical schools, control the remaining schools, and limit new entry. A major segment of doctors (homeopaths who used less expensive means of treatment) were shut out of the industry. Rubin A. Kessel (1958, 1970, 1972, 1974) describes some of the negative consequences that have resulted from the establishment of this monopoly. Burrow (1977) and John B. Blake (1970) also show that the medical and pharmaceutical organization gained control over the medical industry through licensing requirements and control over drug dispensing during the drive for prohibition. The organization, or monopolization of medicine has had important ramifications for health, innovation, price competition, and income distribution.

  One of the most important conclusions of this study is that prohibitions were not enacted on previously unregulated products but on products that had already been subjected to massive government intervention. The worst problems with alcohol, such as those associated with inns and saloons, or in the case of narcotics, patent medicines, were actually the unintended consequences of interventionist measures, not the free market.

  It was found that bureaucracies, once established, promoted and extended the policy of prohibition. This was especially true with narcotics prohibition and the prohibition of marijuana. Wars (Revolutionary, 1812, Civil, Spanish-American, and particularly World War I) were also shown to encourage the consumption of alcohol and narcotics and to play a major role in the establishment of prohibitions.

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  1This prohibition benefited fur traders willing to circumvent it, which might explain its existence.

  2Military service, particularly in the Revolutionary War, increased individuals’ desire to drink and exposed soldiers to strong drink and raucous behavior.

  3See Hampel 1982, chaps. 6–9.

  4Minimum-purchase restrictions required that a person buy at least a certain (large) quantity of spirits, such as fifteen gallons. The requirements were designed to discourage spirit consumption among the low- and middle-income classes.

  5See Blocker 1976, 44–47.

  6Professional organizations will be discussed at greater length later. Professional medical organizations were an important component in the drive for drug and alcohol prohibitions. For example, in 1914 a group of psychiatrists and neurologists condemned alcohol as a “definite poison” and urged state legislatures to ban its use. In 1915 whiskey and brandy were removed from the United States Pharmacopoeia as a medicinal drug. In 1918 the American Medical Association (AMA) unanimously passed a resolution which called for an end of the use of alcohol as a beverage and urged that its use as a therapeutic agent be further discouraged. At that same convention of the AMA, its president, Dr. Charles H. Mayo, expressed support for a national prohibition on the use of alcohol (Timberlake 1963, 47).

  7A survey of these scientific studies is provided by Timberlake (1963, 39–47). The weight of these studies helped prompt the AMA to take a strong stand against alcohol and to favor prohibition.

  8Timberlake (1963, 118) provides a long list of services supplied by various saloons, including free food, card tables, exercise rooms, pool tables, a
nd reading materials. The saloon was also the center of political life. “In short, [the saloon] was the poor man’s, and hence the immigrant’s, club par excellence.”

  9The only support for the alcohol industry came from its bankers, and its own labor unions. Other industrial leaders supported Prohibition for either moral, economic, or self-interested reasons. Very little was made of the “rights” of the alcohol industry.

  10It is widely acknowledged that many religions oppose alcohol and alcohol sales on Sundays because alcohol competes for the attention and money of church members.

  11Estimates of the amount of narcotic addiction vary widely, but most early estimates put the population at 0.5 percent or less of the total population. See Courtwright (1982, 9–34) for an in-depth discussion and review of the evidence.

  12At this time the general substitutability of intoxicants was again recognized. Dr. Hamilton Wright, the father of American narcotics laws, noted that in Prohibition states, opiate use had increased by 150 percent (Musto 1987, chap. 1, n. 42). Further, the decrease in opiate-based patent medicines (25–50%) might have been responsible for the notable increase in per-capita consumption of alcohol.

  13Many of the progressive thinkers of the time were racists in the sense that they viewed the white race as superior and dominant and therefore responsible for the welfare of inferior races. Also see Warburton 1934 on the role of the Progressive thinkers.

  3

  A Theory of Prohibition

  The historical, biological, and statistical sources, however, yield little in the way of verifiable facts or properly constructed data. The conclusions typically drawn after a reading of this literature vary about as widely as the alleged facts and are frequently derived without the aid of elementary logic.

  —Robert J. Michaels, “The Market for Heroin before and after Legalization”

  Despite the heated debate little progress has been made toward a theoretical understanding of prohibition. Economists and other social scientists have spent much more effort on empirical investigations and cost-benefit analyses than on theory. Historical experience has added somewhat to our understanding, but only at the cost of decades of misguided public policy.

  Legal prohibitions are legislative acts which forbid the production, exchange, and consumption of a product. To provide a solid foundation of understanding from which particular events and historical episodes can be studied, and as a basis for the formulation of public policy and law, where permanence rather than transience is desired, a theory of prohibition should remain general. It should not refer to a particular product, whether “addictive” or not, or a particular time, any more than a theory of price controls or inflation should do so.

  In chapter 2, rent-seeking interests were discovered to be the key element in the adoption of prohibitions. To establish the argument for prohibition, these interests will be assumed to coincide with the public interest.

  The arguments in favor of prohibition include:

  1. Expenditures formerly made on prohibited goods would be put to better use on items such as life insurance, food, shelter, and savings.

  2. Sobriety of the worker increases efficiency, reduces absenteeism, and reduces work-related accidents.

  3. Consumption of prohibited products causes harm to the health of the consumer. Illness reduces time on the job, increases the demands on health-care facilities, and increases the cost of government-provided health care.

  4. Addiction, compulsive behavior, and habits are problems beyond individual control and must therefore be placed in the control of the state.

  5. Use of certain products causes violence and criminality in individuals who otherwise would not indulge in such behavior. Prohibitions help reduce crime, corruption, and social vices.

  6. Use of certain products impairs education, family life, and participation in the democratic process. Therefore, prohibition is a way of defending the American way of life.

  7. Use of certain products is infectious and would quickly spread to all socioeconomic groups, possibly leading to the addiction of substantial segments of the population.

  8. Use of these drugs is unnecessary and has no beneficial social function.

  9. Prohibition is the best possible policy available for the problems set forth above. It is effective, and the benefits of enforcing the policy far outweigh the costs.

  10. Given a properly established policy with appropriate penalties and adequate resources, potential users will be discouraged from experimenting, and current users will be isolated or forced to abandon their habits. In the long run, then, prohibition can virtually abolish the product from the market.

  The first eight statements offer plausible reasons for prohibition. Many of the expressed goals are laudable, but most would draw a great deal of disagreement.1 Points 9 and 10 claim the superiority of prohibition over alternative policies and establish the necessary conditions for success. It is to these points that I address the following analysis. Ludwig von Mises described the economic approach of analyzing public policy:

  We are exclusively concerned with those acts of interference which aim at forcing the entrepreneurs and capitalists to employ the factors of production in a way different from what they would have done if they merely obeyed the dictates of the market. In doing this, we do not raise the question of whether such interference is good or bad from any preconceived point of view. We merely ask whether or not it can attain those ends which those advocating and resorting to it are trying to attain. ([1949] 1977, 734)

  Before analysis, it is no more the job of economists to argue with government dictates than it would be for them to argue with the tastes and preferences of consumers. Rather, it is the job of the economist to analyze policy and determine its ability to achieve intended goals.

  THE BASIC ANALYTICS OF PROHIBITION

  Prohibition is designed to curtail the production, exchange, and consumption of a good with the ultimate goal of extinguishing it. While prohibition is an unusual and extreme form of government intervention, its effects can be analyzed within the framework of other interventionist polices such as taxation or regulation.

  Penalties such as fines, confiscation of assets, and jail terms are established to discourage activity in the market. Enforcement of prohibition requires the use of resources to make the penalties effective in discouraging these activities. The diversion of existing enforcement facilities may involve some savings but does not eliminate the need for additional resources. The amount of resources devoted to the enforcement of prohibition will (with a given penalty structure) determine the degree of risk placed on market participants and therefore the effects prohibition will have on production and consumption.

  Figure 1. Prohibition’s Impact on the Consumer and Producer.

  Prohibition is a supply-reduction policy. Its effect is felt by making it more difficult for producers to supply a particular product to market. Prohibition has little impact on demand because it does not change tastes or incomes of the consumers directly. As supply is decreased, however, the price of the product will rise, the quantity demanded will fall, and demand will shift to close substitutes. For example, consumers of narcotics might shift their demand to alcohol and tranquilizers as their prices become lower in relation to narcotics as a result of prohibition.

  The direct consequence of prohibition is to harm the consumers and producers of the product. The consumers lose utility because of the higher price and the substitution of goods of lower value. Producers lose income and utility by accepting occupations which differ from those dictated by their comparative advantage. These results are shown on figure 1.

  As resources are allocated to enforcement, and prohibition becomes effective, the supply of the product is reduced (shifts to the left). Consumers are now worse off as a result of higher prices, loss of consumer surplus, and the substitution of lower-valued substitutes. Producers are likewise worse off as they suffer from increased production costs and risks, or from the transition to less desir
able occupations.

  The ultimate goal of prohibition is to eliminate supply of the good. It is difficult to imagine this result without fundamental changes in the “American way of life” that prohibition is designed to preserve. As a practical matter, an optimal, or cost-effective level of enforcement, rather than complete enforcement, is sought.

  Efficiency in economics is the search to equate the marginal cost of an activity with its marginal benefit. For the individual, this means that the number of apples consumed depends on each apple’s being valued at more than its cost. In public policy the situation is more problematic.

  In simple terms, the marginal cost of prohibiting one unit of a product is the cost of the law enforcement necessary to bring about this result. Every dollar spent on prohibition enforcement means one less dollar that can be spent on alternative public policies such as national defense, shelters for the homeless, or Congressional postal privileges. If taxes are increased to fund prohibition enforcement, individuals will have less to spend on food, medical insurance, and lottery tickets. Initially, the declaration of prohibition, the use of excess law-enforcement capacity, and the existence of marginal users make expenditures on prohibition enforcement highly productive. Also, these resources can be diverted away from the least important policies or consumer expenditures and therefore can be obtained at a low cost. After these initial conditions, the price of additional enforcement increases, its productivity declines, and the cost of expended resources increases. The marginal cost of increased prohibition is therefore increasing, as illustrated in figure 2.

  Disregarding the losses to consumers, the benefits of prohibition can also be generalized. The value of the first unit of a good is of the highest value. Additional units provide an individual with decreasing levels of satisfaction (utility). This law of decreasing marginal utility is a basic economic proposition on which this description of the benefits of prohibition is based.2