The Economics of Prohibition

by Mark Thornton

  If prohibition does reduce certain types of criminal activity while at the same time inducing other criminal activity, then further analysis is required. Several factors, however, argue against reliance on an explicit cost-benefit analysis. First, public policy, I believe, should be based on a generalized approach to prohibition; the specific elasticities examined by cost-benefit analysis are by their very nature unstable and subject to change over time. Second, data on criminal activity are unreliable and in some cases unavailable. Third, the type of criminal activity that prohibition hopes to reduce differs in some cases from the type of criminal behavior induced by prohibition. Fourth, we might expect declines in traditional crime and corruption as prohibition opens up new opportunities and diverts law-enforcement resources.

  CRIME

  Crime is an important social problem, and a variety of perspectives and theories have been developed to explain its causes. These various approaches can be divided into two categories, economic and environmental, both of which have served as the foundation for public policy.

  The general understanding of human action provided by the market-process method is particularly valuable for developing an evaluation of these approaches. It also provides a framework in which the empirical investigations and policy pronouncements can be evaluated and incorporated. Prohibition provides a valuable case study for improving our understanding of crime and social control.

  Two Views of Crime

  Early notions concerning the causes of crime were firmly grounded on economic factors. Thomas More, Beccaria-Bonesana, Adam Smith, and Frederick Engels all found crime to be associated with poverty and economic conditions. The utilitarian philosopher-economist Jeremy Bentham (1896) argued that criminal behavior was entirely rational. Bentham’s pleasure-versus-pain analysis implicitly incorporates both the low opportunity cost of crime to the poor with the relatively high-value opportunities provided by crime. W. A. Bonger (1916) found that the work of several early French statisticians supported the relationship between crime and economic conditions.

  Although crime was viewed as individualistic and economic in nature, all these early commentators called for solutions which were primarily governmental in nature. Even Adam Smith ([1776] 1976) argued for governmental intervention in the area of crime, deeming it one of the three fundamental duties of government, although he had argued the opposite earlier.

  Nothing tends so much to corrupt mankind as dependency, while independency still increases the honesty of the people. The establishment of commerce and manufactures, which brings about this independency, is the best policy for preventing crimes. The common people have better wages in this way than in any other, and in consequence of this a general probity of manners takes place through the whole country. Nobody will be so mad as to expose himself upon the highway, when he can make better bread in an honest and industrious manner. (Smith [1763] 1956, 155–56)

  Smith’s remarks in 1776 apparently held more sway with English authorities. Experiments in the use of a police force began in 1786 in Ireland and, in a less ruthless form, in England beginning with the Metropolitan Police Act of 1829. As Stanley H. Palmer (1988) has shown, many of the national police forces were formed to deal with those opposed to the government, rather than to fight common crime.

  A second theory of criminal behavior emphasizes environmental and genetic factors, disputes the relevance of the economic theory of crime, and claims that criminal behavior is related to characteristics such as the configuration of the skull, reflex activity, race, age, sex, and social class. This sociological paradigm began to displace the early economic approach around the turn of the nineteenth century. For example, Cesare Lombroso argued that criminals were a subspecies of man possessing special characteristics such as unique facial structure or unusually long arms (described in Pyle 1983, 5).

  The association of drug use with crime would be classified with the sociological approach to criminal behavior because it is based on observation and probability rather than theory. This sociological theory differs from earlier versions in that it attributes the cause of crime primarily to environmental factors, rather than to genetic ones.

  Timberlake (1963, 56–61) noted that progressive sociologists and criminologists who espoused this view opposed liquor use because of its association with a large number of criminal acts and undesirable behavior. For example, in a study of prison inmates, John Koren (1899) concluded that alcohol was the sole cause of 16 percent of all crimes, the primary cause of 31 percent, and a contributing cause of 50 percent. This theory was a two-edged sword, however; it helped establish prohibitions, but it removed cause and guilt from criminal acts. Prisoners began to exaggerate the role that alcohol played in their commission of crimes and to ignore the more serious causes (Timberlake 1963, 58). During the early years of marijuana prohibition, some convicts petitioned for leniency on the basis of their use of marijuana, which, they said, had caused their crimes rather than they themselves.

  The Marxist perspective on crime has been a traditional justification for Marxist theory. As a branch of the environmental approach, it contains an element of the economic approach, viewing crime as a reaction of the proletariat to economic development. Rather than genetics, physical features, or drug use, social class is the factor that identifies potential criminals.

  Contrary to the early Adam Smith ([1763] 1956), economic development is viewed as the cause of crime rather than a cure. Marxists point to increased crime rates in “capitalist” countries and urban areas as evidence of the viability of the overall Marxist philosophy and beliefs.

  The Economics of Crime

  According to Paul H. Rubin (1978, 38), “Until about 1968 most academic research on crime was done by sociologists. The basic premise of this work seems to have been that criminals were some-how different from noncriminals, and the major research consisted of searching for the ways in which criminals differed.” Gary S. Becker (1968) reestablished the study of crime and punishment as rational and economic. His contribution has been challenged, refined, tested, and extended. This body of research has come to dominate the modern approach to crime and has had some visible effects on public policy. For example, Isaac Ehrlich’s publications (1973, 1975) based on Becker were cited by the Supreme Court in reestablishing the death penalty. Three law professors who helped extend Becker’s economic approach to crime (Robert Bork, Richard Posner, and Antonin Scalia) received high judicial appointments.

  Becker’s (1968) time-allocation model of criminal behavior is formulated in terms of the subjective expected utility of the individual. The individual is shown to form subjective expectations about the probability of arrest and the severity and likelihood of punishment. The potential criminal weighs the subjective value of the expected gain from crime against these costs. The results derived from this model imply that increases in the probability of capture and severity of punishment will deter crime.

  The explicit modeling of crime in economic terms presents some problems. For example, it is difficult to speak of a market supply of crime, and even more difficult to speak of a market demand for crime. Markets of crime rarely if ever exist, and crimes such as rape, robbery, and murder simply cannot be called voluntary transactions. These models convert the benefits of crime into purely monetary terms, despite the fact that the benefits of crimes of passion and violence are primarily nonmonetary and extremely difficult to translate into monetary terms.

  These models are based on subjectively determined evaluations, but in econometric “testing,” objective or actual measures of the probability of capture and expected punishment are employed. These deviations from theory that are necessary to obtain empirical verification of theory tend to cloak important nuances of criminal behavior, punishment, police behavior, and the criminal firm, thereby limiting our understanding of crime. Samuel Cameron (1989) and others have found, for example, that the puzzling correlations between crime, arrest rates, and police resources “are to be explained in large part by the
failure of economists to measure the criminal’s subjective expectations in the subjective expected-utility model” (36).

  The Economics of Prohibition Crime

  Prohibition creates new profit opportunities for both criminals and noncriminals. For people already engaged in criminal careers, prohibitions provide new and enhanced profit opportunities that may increase the number of crimes they commit or alter the type of crimes they commit. Robbers may become bootleggers, or loansharks may expand into drug dealing. For example, Al Capone expanded his business from gambling and prostitution to bootlegging during Prohibition. The new and expanded profit opportunities will also bring new players into criminal pursuits; these new entrants are likely to come from the consumers of the prohibited product.

  The enforcement of prohibition results in higher prices for illegal products, which in turn has a detrimental effect on the consumers of the prohibited product. Some consumers will respond to higher prices by reducing or eliminating their consumption of the product in question—others will not. Consumers who have formed habits, or addictions, to a particular good will remain in the market. They could be classified as having an inelastic demand for the prohibited good in the relevant price range. These consumers will therefore consume less of all other goods (food, clothing, shelter, medical care) as a consequence of prohibition.

  For example, a heroin consumer responds to a 1000 percent increase in price by reducing consumption by 50 percent (figure 7). This inelastic response entails a reduction in the consumption of all other goods, shown by a shift in the budget line in figure 8.

  The consumer’s initial budget constraint in figure 8 was predetermined by the choice between labor and leisure. The labor-leisure trade-off, however, is also affected by prohibition in a nonconventional way. The tremendous increase in the price of heroin during prohibition results in a new budget constraint. For the individual who has a highly inelastic demand for heroin, prohibition is akin to a famine which increases food prices several hundred percent. The increased price of prohibited products will have little or no effect on nominal wage rates, so real wage rates (purchasing power) fall. Falling real wage rates normally increases leisure time (little consolation for heroin addicts), but here we might expect more labor time or a switch to a job that pays higher wage rates in order to compensate for greater risks (for example, crime). In any case, the heroin user is much worse off and under stress.

  In figure 9, income from legal and illegal activity is measured against the amount of risk from criminal activities undertaken by heroin users. Legal income (in terms of purchasing power) is measured along the vertical axis. Illegal income is measured as an expected income line from the vertical axis. Expected income from crime is assumed to increase with the level of criminal activity. Reuter et al. (1990) have completed a study of drug dealers in Washington D.C., which indicates that dealers trade risk for money. They find dealing drugs on the streets presents high risks, while the “profits” are modest.

  Number of Doses Consumed per Day

  Figure 7. The Impact of Prohibition on the Consumption of Heroin.

  Consumption of All Other Goods

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

  Level of Criminal Activity

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

  Indifference curves that indicate crime (risk) as bad have been superimposed on the graph. In the absence of prohibition, consumers with high incomes will be more risk-averse to crime due to the threat of losing their freedom, income, future income, reputation, and so on. Prohibition’s depressing effect on the real wage rates of heroin consumers will induce them to become criminals as their opportunity cost of illegal activities declines.

  At the initial income level the individual will engage in little or no illegal activity. As the price of heroin increases, real income falls. At this lower level of income the relative rewards of illegal income are enhanced. The individual will increase their level of criminal activity. Therefore, prohibition will induce some noncriminals into illegal activities such as drug dealing or robbery.

  The supply of criminal activity from noncriminal drug users can be viewed as function of the severity of prohibition enforcement. The level of prohibition enforcement is positively related to the price of the prohibited product, and therefore it is negatively related to the real income of addicts and habitual users. The decreased real income from prohibition makes illegal income more attractive. Therefore the higher price for heroin results in more criminal activity. George F. Brown and Lester P. Silverman 1974 presented evidence of this relationship in the short run. Changes in the level of enforcement may also affect the type of criminal activity. For example, as more resources are devoted to prohibition enforcement, property crimes such as burglary become less risky and therefore increase in number. Benson et al. (1990) have shown that increased efforts to suppress illegal drugs have resulted in decreased enforcement efforts against property crime and thus an increase in it.

  The Historical Trend in Crime

  Theoretically, prohibition increases crime from both the “supply” and “demand” side. Statistically, we would also expect crime to increase because of prohibition “crimes” and the incidental crimes of the underground economy such as those connected with defining market territories and enforcing contracts. Empirical investigations of the causes of crime and changes in crime rates have been notoriously difficult and inaccurate. An overview of the historical trend in crime provides an opportunity to evaluate various theories of crime and the neglected relationship between it and prohibition. According to the economic (market-process) approach to crime, economic development will result in less criminal activity and prohibition will result in greater amounts of crime (in addition to violations of prohibition law). The expected increase in crime due to prohibition is a function of the degree of both enforcement and the underlying demand for the prohibited product.

  The Marxist theory of crime has been a major focus of the study of criminal behavior. This theory holds that economic development results in an increasing gap between the rich and the poor and an increasing rate of “crises.” Workers respond to exploitation, alienation, urbanization, and crisis by committing more crimes against capitalism and the upper classes. In support of their theory, Marxists point to the increasing crime during the nineteenth century and recent times in capitalist countries. Lynn McDonald (1976) showed that consensus, biological, and conflict theorists all agree that crime is related to economic development (for different reasons) and that crime rates rose during the nineteenth century.

  The nineteenth century was indeed a period of fruition for capitalism, but it was not a pure market economy. In banking, transportation, and education, the seeds were sown for tremendous increases in government interventionism. Also, several points must be raised concerning the evidence on crime that supposedly supports Marxism. First, the urbanization and economic development that occurred between the 1830s and the twentieth century were accompanied by decreased rates of severe and violent crimes. Second, increases in crime rates were largely due to increases in minor crimes, such as public drunkenness. Urban societies apparently become less tolerant of mischievous behavior as population concentrations increase and economic activity becomes more organized. Third, police forces were established in major urban areas during the middle of the nineteenth century. This unquestionably led to an increase in both the awareness of criminal activity and the collection of statistics on crime (Lane 1968). Fourth, and most important, crime rates have been found to have declined, rather than increased, during the nineteenth century in the major capitalist countries, including the United States (McDonald 1982). These latter two points suggest that, contrary to the Marxian explanation, capitalist development results in decreased crime and more social-control mechanisms.

  An early example of the impact of prohibition on crime (and a deviation from capitalism) was the liquor control legislation in Mas
sachusetts from 1838 to 1840. While this prohibition actually established the requirement of a fifteen-gallon minimum purchase and was only in effect for two years, several instructive lessons endure. The fifteen-gallon minimum can be viewed as an attempt to use the political process to achieve immediately the social control that only slowly and methodically develops under capitalism. This impatience with capitalism does, however, reflect the general decreased tolerance of disruptive public behavior mentioned earlier.

  If prohibition was an outgrowth of intolerance, its intended effect—in the short run—was not achieved. In this more rowdy era, antitemperance forces countered what they considered aggression against their rights (for example, temperance legislation) with aggression. Robert L. Hampel (1982, 90) notes that the severity of criminal activity was correlated with the severity of temperance legislation. “Before and after the experiment with prohibition, vandalism and ridicule were the principal means of harassment. Shaving horse tails, girdling trees, or defacing the front of houses were standard from anti-temperance rowdies. But with the passage of the 15 Gallon Law, physical assaults and mob demonstrations became more common. Where an 1834 Taunton incident involved the tarring and feathering of several homes, the same criminals in 1839 might have gone after the homeowners instead.”

  The fifteen-gallon law was both difficult and costly to enforce. The total number of crimes, especially alcohol-license violations, increased significantly. The increased number of violations in turn caused delays in the court and a rapid decline in the conviction rate on all crimes (Hampel 1982, 99–100). This short episode with prohibition resulted in more crime, more violent crime, delay in the courts, and a lower conviction rate on all crimes.