The Economics of Prohibition

by Mark Thornton

  Did Prohibition lead to the innovation of new products that were highly potent and dangerous? Fisher’s “alcohol price index” provides some evidence of this (table 5). Several new products, such as “White Mule” bootleg whiskey contained 50–100 percent more alcohol than the average market whiskey. Fisher noted that highly potent and dangerous products were responsible for distorting statistics, such as arrests for drunkenness. “I am credibly informed that a very conservative reckoning would set the poisonous effects of bootleg beverages as compared with medicinal liquors at ten to one; that is, it requires only a tenth as much bootleg liquor as of pre-prohibition liquor to produce a given degree of drunkenness. The reason, of course, is that bootleg liquor is so concentrated and almost invariably contains other and more deadly poisons than mere ethyl alcohol” (1927, 28–29, emphasis added). Friedman and Friedman (1984) also note that producers of these new products often used dangerous substitutes, such as wood or denatured alcohol, to increase the potency of the product: “Under Prohibition, both bootleggers and do-it-yourselfers producing bathtub gin sometimes used wood alcohol or other substances that made the product a powerful poison, leading to the injury and sometimes death of those who drank it” (140–41, emphasis added). Producers tended to practice poor distilling techniques and conducted little testing of the product. Adulteration is expected in prohibited markets because of a lack of a market for reputation, which Hayek (1948, 97) argues is necessary to ensure competition and contract performance. In addition to precluding recourse to negligence and liability law, prohibition also violates the conditions described by Klein and Leffler (1981) that ensure such performance and maintenance of quality in a pure market environment. With the consumption of alcohol declining, the increase in potency and the use of adulterants may indeed help explain why statistics on drunkenness and alcoholism did not also decline significantly during Prohibition.5

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

  Source: Johnson 1917, 321, and Warburton 1932, 24.

  It is reasonably clear from evidence provided by both opponents and proponents of Prohibition that changes in relative prices were the result of Prohibition and these changes led to increased consumption of higher-potency drugs (spirits), as well as other higher-potency and dangerous products (moonshine).

  THE PROHIBITION OF MARIJUANA: A SIMPLE TEST

  The effect of prohibition on relative prices, potency, and consumption patterns of alcohol also applies to illegal drugs such as marijuana, cocaine, and heroin. Cannabis (marijuana) is an ancient crop, grown for commercial, medicinal, and recreational uses. Essentially it has been illegal since the Marijuana Tax Act of 1937. Marijuana became a major public-policy concern in the United States during the 1960s, when its recreational use increased significantly. In 1969, resources devoted to federal drug-law enforcement were expanded to curtail the importation and sale of illegal drugs such as marijuana and heroin. The commitment to prohibition has resulted in increased budgets for many federal agencies, such as Customs, Coast Guard, Drug Enforcement Administration, the Federal Bureau of Investigation, and the Internal Revenue Service. The combined budget of these agencies (attributable to drug-law enforcement) is used to represent the federal law-enforcement effort in figure 5.6

  Source: Adapted from, The Budget of the United States Government: Appendix, U.S. Bureau of The Budget, USGPO: Washington, D.C., 1973–1985 editions.

  Figure 5. Federal Budget for Enforcement of Drug Laws, 1973–1984 (millions of 1972 dollars).

  One effect of more intense law-enforcement effort is to increase the risk of supplying illegal drugs. A price-theoretic model based on the change of relative prices due to risk would predict increases in the average potency of illegal drugs such as marijuana. Information about the potency of marijuana is limited because of the illegal nature of the market, but data have been collected since 1973 by the Potency Monitoring Project sponsored by the National Institute on Drug Abuse (see ElSohly and Abel 1986). The increase in average potency of marijuana from 1974 to 1984 can be clearly seen in figure 6, but the complex nature of this market and severe data limitations preclude a detailed statistical investigation.

  To explore the relationship between law enforcement and marijuana potency, I have employed a simple regression using the total drug-law-enforcement budget of selected federal agencies as an explanatory variable for the potency of marijuana. This variable was found to have considerable explanatory power for describing changes in the potency of marijuana (1973–84).7 The coefficient of the independent variable indicates that an expenditure increase of one million (1972) dollars will result in an increase in potency of .01 of 1 percent. The t statistic of 11.4 indicates that this positive relationship is significant at the .01 level. The R-square statistic indicates that the federal budget devoted to interdiction explains 93 percent of the observed increase in potency (F = 129.8). Although problems with simple regression, such as data limitations and specification errors, should of course be recognized, these results indicate that there is more here than just data anomalies.8 While this test does not provide unquestionable proof, it does establish “reasonable inferences” about the connection between the enforcement of prohibition, relative prices, and the potency of marijuana.

  Source: Quarterly Reports of the Marijuana Potency Monitoring Project, National Institute of Drug Abuse, Oxford, Miss: University of Mississippi, 1974–84.

  Note: THC (tetrahydrocannabinol) is the active ingredient in marijuana.

  Figure 6. Average Potency of Marijuana, 1973–1984 (percentage THC).

  BEYOND CANNABIS

  The potency of many illegal drugs besides marijuana, such as cocaine, has also increased, and new, highly potent forms of cocaine, such as “crack,” have become available.

  Another feature of the modern prohibition of drugs is the substitution of one drug for another. While each drug has some unique characteristics, most illegal drugs also have some similar attributes. Changes in relative prices can therefore induce substitution of lower-priced for higher-priced illegal drugs. For example, Rottenberg (1968, 89n.) argued that individuals were willing to substitute barbiturates for marijuana on the basis of price.

  The recent trend of increased consumption of cocaine may, in part, be a result of changing relative prices. In 1973 the price of cocaine was $410 per pure gram, whereas the price of marijuana was $0.63 per gram (651:1). By 1983 the price of cocaine had fallen to $110 per pure gram, and the price of marijuana had increased to $2.50 per gram (44:1). Even the increased potency of marijuana cannot offset the tremendous decline in the relative price of cocaine (U.S. Department of justice Bureau of justice Statistics. 1985, 437).9

  Another significant aspect of the modern prohibition of drugs is the formulation of new, highly potent products. Both the new products and the increased-potency versions of existing drugs were produced largely with preexisting techniques and technology. Synthetic opiates, for example, can be readily produced using existing techniques. The chemical composition of these extremely powerful drugs can be changed by suppliers to avoid punishment altogether (in the short run) (see Gallagher 1986). It is clear that the availability of extremely potent and dangerous drugs, such as synthetic opiates, is the result of prohibition—not of technological factors.10 The technology exists to produce the active ingredient in marijuana, THC (tetrahydrocannabinol), in pure form, but the penalties are too low to justify the expense.

  The probable cause-and-effect relationship between prohibition and potency is one of the problems that arise with the use of prohibition as a public-policy tool. It may also help to explain the “common wisdom” that marijuana use can lead to heroin addiction. Changes in relative prices in favor of high-potency drugs would lead consumers from marijuana to cocaine and from cocaine to heroin. In the extreme, prohibition, law enforcement, and the penalty structure may be more important than the physical properties of drugs in determining what the most dangerous drugs are.

  Fo
r example, marijuana prohibition is the youngest prohibition, imposes the weakest penalties, and is arguably the least stringently enforced. Methods do exist to increase the average potency of marijuana by five times. In fact, the active ingredient in marijuana, THC, can be produced chemically in nearly pure form, through methods that now appear uneconomical. Nonetheless, these methods could reduce 100 pounds of pre-prohibition marijuana to a sixteen-ounce cola bottle. One would expect that the ingestion of such a quantity to be extremely dangerous, if not fatal. One could further speculate that such a product, produced and consumed in a nonmarket environment, would be nearly as dangerous as heroin. Conversely, heroin prohibition is the oldest of the major prohibitions, involves the most stringent penalties, and is arguably the most strictly enforced given the size of the market.

  Compared to their legal predecessors, prohibited products are dramatically lower in quality and higher in potency. The severity of penalties and the intensity of enforcement of the prohibition also determine, in large part, the relative health dangers associated with consuming illegal drugs.11 Such findings raise fundamental questions about the advisability of employing prohibition of a product to reduce the quantity consumed.

  _________________

  1Rottenberg’s article contains no references to economists or economic journals. Much of the recent research on illegal drug markets contains corrections, improvements, and extensions of Rottenberg 1968. The modern literature has generally ignored the economic analysis and experience of National Alcohol Prohibition.

  2T. E. Borcherding and E. Silberberg (1978) found the Alchian and Allen theorem empirically reliable. They noted that the income effect could destroy most economic propositions. In prohibition the income effect strengthens the potency effect, and addicts attempt to hold income constant by resorting to criminal activities. Also see Gould and Segall 1968.

  3An example of such an attribute would be a substance used to reduce cocaine from a pure product to a potency that consumers would desire in the absence of prohibition. This is referred to as the “cut.” This “cutting” of potency does take place but does so as the product proceeds to the ultimate consumer and the risk of capture and penalties decreases. The cutting may be done by several different individuals along the chain of distribution, and several different “cuts” may be used to adjust the potency.

  4According to Warburton (1932, 247) no evidence exists which suggests that state and local governments spent larger sums during Prohibition than they spent formerly on regulatory or prohibitory laws.

  5 While the number of deaths per thousand due to cirrhosis of the liver did decline during the 1920s, it was declining prior to 1920. Changes in the age distribution (as a result of the men killed during World War I) and improvements in medical diagnostics and care also contributed to the decline. It should also be remembered that some people gave up alcohol altogether, so that the number of deaths due to cirrhosis and alcoholism per drinker was likely higher during Prohibition.

  6State and local enforcement of drug laws is an important consideration for which no detailed information exists. It can be noted, however, that inflation-adjusted, per capita police expenditure increased 37 percent between 1970 and 1980 (“Police Employment and Expenditure Trends,” Bureau of Justice Statistics Special Report, February 1986). Drug-law enforcement is a subcategory of “police protection,” and these expenditures increased 85 percent at the federal level, 90 percent at the state level, and 108 percent at the local level over the period 1976–85 (“Justice Expenditure and Employment, 1985,” Bureau of Justice Statistics Bulletin, March 1987). Although no statistics are available, drug-law enforcement as a percentage of total “police protection” has increased over the period of this study (telephone interview with Ernie O’Boyle, Bureau of Justice Statistics, September 1987).

  7No information on potency is available before 1973. The budget for drug-law enforcement increased in 1985–86 (and after), but information is incomplete and is complicated by a large but undisclosed amount of military resources devoted to drug-law enforcement. Potency also continued to increase through 1985–86. The reported average potency did decline as a result of increases in domestic, season-long eradication programs, which greatly increased the percentage of immature and unusable marijuana that was tested for potency. Beginning in 1985–86, most categories of cannabis did increase in potency. These results were originally presented in Thornton 1983 and 1986.

  8The RESET test was developed by J. Ramsey to detect specification errors. The test was run at the strongest level of significance available. At the .10 level, the F-critical value was 3.07, while the F-statistic was 3.00, indicating no specification error. In order to check further for specification error and time-trend problems, a time-trend variable was added to the original regression. Although the coefficient of this explanatory variable fell, it remained significant at the .05 level (t = 2.4).

  9That the absolute price of cocaine would fall in price as enforcement increased may be counterintuitive. The change in absolute prices is a change in relative prices. In 1984 a drug task force dramatically increased its efforts in the Miami area and virtually eliminated the supply of marijuana, but the price of cocaine fell substantially, as marijuana smugglers quickly converted to cocaine smuggling.

  10In 1967 Arthur D. Little Inc. warned of the potential of these drugs: “If United States law-enforcement policies become so efficient as to prevent altogether the smuggling of heroin, the black market can readily convert to narcotic concentrates that are a thousand or even ten thousand times more potent, milligram for milligram. A few pounds of these concentrates might supply the entire United States addict market for a year. The skills required are not beyond those possessed by the clandestine chemists who now extract morphine from opium and convert the morphine to heroin, or of better chemists who might be recruited” (quoted in Brecher 1972, 96).

  11Data collected by the Drug Abuse warning Network established by the National Institute on Drug Abuse indicate that deaths and emergency-room episodes with the higher-potency drugs such as cocaine and heroin have been increasing, but not with other abused drugs.

  5

  The Corrupting Effects of Prohibition

  Heroin abusers are infamous within U.S. society as persons who criminally victimize others. Involvement in nondrug criminality among our heroin abusers was indeed common and even more frequent than has previously been documented.

  —(B. D. Johnson et al., Taking Care of Business:

  The Economics of Crime by Heroin Abusers)

  Corruption is a regular effect of interventionism. An analysis of interventionism would be incomplete if it were not to refer to the phenomenon of corruption.

  —(Ludwig von Mises, Human Action)

  Several studies have shown an association between the consumption of certain drugs, such as alcohol and heroin, and criminal behavior. This relationship was a crucial reason for the implementation of several prohibitions, including National Alcohol Prohibition, the prohibition of cocaine in several southern states, and the prohibition of marijuana in 1937.

  Another motive for enacting prohibition legislation is to reduce corruption of both public officials and the democratic process. People have sold their votes for money or drugs, and the alcohol industry tried to influence elections and public policy. Politicians could also be subject to corruption and blackmail because of alcohol and drugs, and drug use can have a corrupting influence on the actions of political leaders. For these reasons, prohibition was promoted as a means to maintain the integrity of democracy and government.

  In general, however, prohibition results in more, not less, crime and corruption. The black markets that result from prohibitions represent institutionalized criminal exchanges. These criminal exchanges, or victimless crimes, often involve violent criminal acts. Prohibitions have also been associated with organized crime and gangs. Violence is used in black markets and criminal organizations to enforce contracts, maintain market share, and defend sales ter
ritory. The crime and violence that occurred during the late 1920s and early 1930s was a major reason for the repeal of Prohibition (Kyvig 1979, 123, 167). The nondrug criminal activity of heroin addicts has been associated with the economic effects of prohibition laws and is viewed by Erickson (1969) and others as a major cost of heroin prohibition.

  Corruption of law-enforcement officers and other public officials is also a familiar manifestation of prohibited markets. Experience with prohibition has shown it to be a major corrupting influence. The corruption of the Prohibition Bureau proved to be a major stumbling block to the effective enforcement of Prohibition and was also cited as a reason for repeal. Most important, this corruption penetrates beyond the enforcement bureaucracy to government in general. Recent experience has shown that worldwide multidrug prohibition is a major corrupting force in several national governments, such as Colombia and Mexico.

  Historical evidence therefore appears to conflict with, or at least to present evidence contrary to, the claims of the prohibitionists. For prohibition to achieve its goals of reducing crime and corruption, several conditions must be met. First, consumption of the product must indeed cause criminal acts and corruption. Second, prohibition must achieve a significant reduction in the consumption of the product without increasing the consumption of other products that cause crime and corruption. Third, prohibition must not lead to significant increases in other forms of crime and corruption.

  The use of certain drugs can be considered a contributor to crime. This association along with various other factors may help us describe crime and crime statistics, but they have yet to be established as a sound basis for public policy. First, the use or abuse of certain drugs is not a necessary cause of crime, since crime and corruption can occur without drugs. Second, drugs are also not a sufficient cause of crime because drug use is not by itself able to generate it. Drug use is therefore neither a necessary nor sufficient condition of the criminal activities that prohibition seeks to eliminate or reduce.