The Economics of Prohibition

by Mark Thornton

  Contrary to Marxist views and early impressions, crime has decreased during economic progress. Eric H. Monkkonen (1981) has reviewed the studies of crime during the nineteenth and early twentieth centuries and has found that only two studies (using individual city data) contradict the trend toward decreased crime. It is only during the Prohibition era that anomalies in national criminal statistics start to occur. For example, Monkkonen (1981, 555) notes that the percentage of crimes that were appealed decreased from before 1870 to 1939, except during the decade of the 1920s. It can be reasonably assumed that the rate of serious crimes was declining because appeals generally represent crimes of a serious nature.

  Some observers have suggested that the “crime wave” during Prohibition was just a mere impression, a fabrication of media hype. Even a leading wet, Dr. Fabian Franklin, stated that the “crime wave is a state of mind” (quoted in Fisher 1928, 76). Observers such as Franklin, however, fail to address the nature of changes in the composition of crime, the long-run decline in crime rates before Prohibition, and the social upheaval beginning with World War I.

  For example, Franklin notes that crime declined by 37.7 percent during the period 1910–23. This is, however, attributable to a decline in less serious crime—crimes involving violence or theft of property increased by 13.2 percent. Homicide increased 16.1 percent and robbery rose by 83.3 percent over the period, while crime such as vagrancy and malicious mischief decreased by over 50 percent (Fisher 1928, 77). While dismissing the significance of alcohol and drug-prohibition crimes, Franklin does note that the increased homicide rate may be related to “the illegal traffic” (quoted in Fisher 1928, 80).

  Fisher himself hints that changes in criminal statistics may have resulted from the new profitable opportunities created by Prohibition and the Harrison Narcotics Act. Fisher’s “interesting suggestion” is essentially to interpret criminal statistics of the Prohibition era using the economic, or market-process, perspective. First, serious crime had been on the decline over a long period of economic development (approximately 1800–1910), while less serious crime was increasing. Higher standards of living, increased expectations of living standards, and increased urbanization had made people less tolerant of unseemly public behavior. The growth in minor crime was thus partly the result of a greater number of unlawful offenses. The subsequent decrease in petty crime and increase in serious crime can therefore be explained by the impact of prohibitions on criminal opportunities.

  Warburton (1932) provides evidence which indicates that homicide rates (in large cities) increased significantly from 1910 to 1933; this period includes the third wave of state prohibitions (1910–19), the Harrison Narcotics Act (1914), wartime restrictions on alcohol (1918–19), and Prohibition (1920–33). The greater number of federal prisoners provides further evidence of more serious crime during Prohibition. The number of prisoners in federal prisons, reformatories, and camps grew from 3,889 in 1920 to 13,698 in 1932 (Wooddy 1934, 90–99).

  The increase in crime during the 1920s has been described without reference to Prohibition. For example, John A. Pandiani (1982) noted: “A major wave of crime appears to have begun as early as the mid 1920’s [and] increased continually until 1933 . . . when it mysteriously reversed itself” (349). The sudden change in the direction of crime rates was mysterious to many observers because they were predisposed to the Marxian and business-cycle approach to crime. The description of crime statistics put forth by Theodore A. Ferdinand (1967) also recounts a dramatic and “mysterious” decline beginning in 1933 that lasted throughout the 1930s.

  Andrew F. Henry and James F. Short (1954) attempted to show that the increased crime from 1929 to 1933 was the result of variations in business activity. Philip J. Cook and Gary A. Zarkin (1985), however, have found that the “major movements in crime rates during the last half century cannot be attributed to the business cycle” (128). Pandiani (1982) attempted to account for the decrease in crime starting in 1933 by showing that the Civilian Conservation Corps (CCC) removed many potential criminals from society.

  Fluctuation in economic activity and major government programs such as the CCC no doubt played some role in these criminal statistics, but Prohibition appears to be the significant explanatory variable for changes in the crime rate and the composition of crime. The repeal of Prohibition appears to be the best explanation for the dramatic reversal in 1933 and the return to the long-run decline in crime rates. The two alternative theories have a difficult time explaining the continuous decrease in crime during the remainder of the 1930s.

  The resumption of the decline in criminal activity after 1933 is not the result of the absence of all prohibition, but rather the repeal of the most significant prohibition—alcohol. The Harrison Narcotics Act still applied, and marijuana was prohibited in 1937. The use of narcotics and marijuana, however, was insignificant compared with the consumption of alcohol. Budgets for the enforcement of narcotics and marijuana prohibitions were curtailed and enforcement was lax. In addition, after the repeal of Prohibition, the falling price of alcohol provided a low-priced substitute for illegal substances.

  According to the theory that crime is based on its association with intoxicants such as alcohol, easy access to alcohol after repeal should have led to increased crime. As Cook and Zarkin (1985, 117) note, “intoxication has long been thought to be an important cause of crime, particularly violent crime.” The evidence they present, however, suggests that the rates for murder, burglary, robbery, and auto theft declined after the repeal of Prohibition, resuming the long secular decline. The national homicide rate declined from the last year of Prohibition to the early 1960s. Eric H. Monkkonen (1981, 556–57) notes that the return to increasing consumption per capita after repeal is associated with fewer arrests for drunk and disorderly conduct. In any case, the consumption of alcohol appears to be a poor explanatory variable; often it is negatively related to crime rates.

  Crime rates again deviated from long-run trends in the mid-1960s, when prohibition once again became a significant public policy. Increased exposure of servicemen to drugs during the Vietnam War, resistance to the war, demographic factors increased the demand for drugs such as marijuana. Increased efforts to suppress these markets began what has become known as the war on drugs.

  James Q. Wilson and Richard J. Herrnstein (1985, 409) note that the homicide rate began increasing in the mid-1960s and then increased at an alarming rate. According to national crime statistics, the number of murders, burglaries, robberies, and auto thefts, which had been decreasing, began to increase during the 1960s. The rise in crime became dramatic during the late 1960s, leading the Nixon administration to begin its crackdown on drugs. Crime rates continued to increase throughout the 1970s and 1980s.

  Prohibition is not the only explanation for the increase in crime over the last quarter century. For example, the philosophy of the justice system has undergone a change from the punishment, restitution, and isolation of criminals to their rehabilitation and reintegration into society. The state, therefore, now acts as a surrogate victim in the absence of a true victim, and the criminal has become a victim of society. The increased use of plea bargaining, probation, commuted sentences, release on bail, community-based correction programs, and the insanity and diminished-capacity defense have made crime easier and have been justified in part by the overcrowding of prisons (see Bidinotto 1989).

  Black markets become more organized over time just as legal markets do. Two manifestations of the greater degree of organization are crime syndicates and street gangs. Organized crime has long been associated with prohibition. Prohibitions against prostitution, gambling, “high” interest rates, and the consumption of drugs have served as the basis for virtually all known crime syndicates. Humbert S. Nelli (1985) shows that syndicates that developed during Prohibition survived long after repeal. Street gangs profit and expand based on their role in organizing retail drug sales. Their violent criminal activity has been a growing and very visible result of the wa
r on drugs during the 1980s and 1990s. Gangs also developed in the late 1920s in response to the profit potential provided by Prohibition. In 1930 Frederick Thrasher, a sociologist, warned of the growing threat of gangs. He noted that the economic incentive led gangs to work for criminals and racketeers (Pandiani 1982, 349).

  As predicted by Adam Smith, capitalistic economic development tends to reduce the rate of crime. As economic development and its concomitants (for example, urbanization) proceed, new rules, guidelines, and controls on antisocial public behavior are established to deal with the greater complexities of economic life. Deviations from capitalism, such as prohibition, have disrupted the long-term trends toward decreased crime. Crime was shown to increase and become more violent during the time of the fifteen-gallon law in Massachusetts, during Prohibition, and since the late 1960s when enforcement of the prohibition on narcotics and marijuana began to be more rigorous. Further, crime was shown to decrease during nonprohibition periods, although consumption of intoxicants was increasing per capita.

  In addition, the theory that prohibition causes crime has been confirmed by the observations of Johnson and his colleagues (1985). They found explicit empirical evidence that narcotics prohibition could be directly related to crimes other than illegal drug sale and use. Sociologists, however, have tended to isolate prohibition from the general study of crime and have failed, along with criminologists and economists, to consider prohibition a worthwhile variable in the explanation of crime rates. While prohibition is certainly not the only cause of crime, its inclusion would improve both the empirical study of theories of crime and the study of the trends in crime rates. The empirical evidence examined in this section indicates that prohibition has increased crime and has imposed a significant cost on society.

  CORRUPTION

  The control of corruption is of vital interest in any free and democratic society. An important goal of prohibition is the reduction of corruption. Timberlake (1963) claims that political corruption by the alcohol industry was the major reason for establishing Prohibition: “Like many other businesses, the liquor industry sought to influence or control all levels of government in order to promote its interests and to protect itself against unfavorable legislation. But unlike most businesses, it had a special reason to engage in politics: no other enterprise paid such high taxes or contributed such large sums to government” (106). Prohibition seeks to reduce corruption in both the specific sense of the bribery of public officials and in the general sense of maintaining individual integrity, virtue, and moral principles. Experience, however, shows that, on the contrary, the corruption of public officials increases. As Mises notes, “Unfortunately the office-holders and their staffs are not angelic. They learn very soon that their decisions mean for the businessmen either considerable losses or—sometimes—considerable gains. Certainly there are also bureaucrats who do not take bribes; but there are others who are anxious to take advantage of any ‘safe’ opportunity of ‘sharing with those whom their decisions favor’” (1949, 734). This corruption, in the case of prohibition, represents a failure to achieve the goals of prohibition and a major impediment to the enforcement of prohibition.

  Academic interest in the corruption of public officials has been growing and appears to be related to the amount of corruption that occurs. The first flurry of research on corruption occurred during the latter half of Prohibition and in the aftermath of repeal. The rate of publication began to increase substantially in the 1960s and apparently peaked in 1975 (Simpson 1977 and Duchaine 1979). The rate of publication remained high throughout the rest of the 1970s, although it seems to have declined somewhat in the 1980s.

  The amount of corruption detected has been increasing in recent years. Federal convictions of corrupt public officials has increased from 44 in 1970 to 1067 in 1988 (figure 10). The substantial jump in indictments and convictions in 1983 has been explained by an increased focus on corruption and better reporting of lower-level corruption. While corruption due to prohibition occurs in all areas of government, the federal efforts seem to have been most successful in convicting state and local enforcement officials. Based on the representative cases, 75 percent of state and local law-enforcement corruption is directly related to prohibition (U.S. Department of Justice 1989, 30).

  The Economics of Corruption

  The literature on corruption generally agrees that corruption is rational, systemic, and functional. The individual participants in corruption are viewed as pursuing their self-interest at the expense of the general, or public, interest. Corruption has also been found to be a characteristic feature of government, particularly of the law-enforcement function. The “function” of corruption is to facilitate transactions when control over transactions has been delegated to government.

  Source: U.S. Department of Justice, Criminal Division, “Report to Congress on the Activities and Operations of the Public integrity Section for 1981,” p. 20; “1988,” p. 29, U.S. Department of Justice, Washington, DC, (mimeographed.)

  Figure 10. Federal Convictions of Public Officials: 1970–1988.

  Many general definitions of corruption have been put forward. In the legal world corruption is a failure in the principal-agent relationship. The economics of the legal approach is best illustrated in the work of Banfield (1975). This definition is open-ended and applies to both government and the market. In another definition corruption occurs anytime an agent of the government acts to promote self-interest over the public interest. Modern economists, on the other hand, view all action as self-interested, and thus this definition is inappropriate. Interest-group legislation is self-interested, but economists view it as rent seeking, not corruption.

  Economists such as Murray N. Rothbard (1970), Susan Rose-Ackerman (1975), and Bruce L. Benson (1981) have defined corruption as the illegal sale or purchase of property rights. In this definition corruption is rational, systemic, and functional. It is legalistic, but not universal in scope. For example, it once was legal to sell one’s vote, but it no longer is. Therefore, vote buying is now viewed as a corrupt practice. It is illegal for law-enforcement agents to accept tips and compensation directly from the people they serve in the United States, but it is both legal and acceptable in other societies. The lack of universality does not affect the analysis of corruption; in fact, it facilitates recommendations for reform.

  While most disciplines have sought to discover the function of corruption, economists have searched for the source or cause of corruption. Rothbard (1970) views corruption as a consequence of government intervention. Activities in the market that are similar to corruption are either transactions or crimes, such as theft. Far from dismissing the possibility of private individual involvement in corruption, however, this perspective suggests that private citizens do become corrupt, but only as a consequence of government intervention. Even the opponents of the view that corruption is solely the result of government intervention, such as Rose-Ackerman (1978), fail to provide an example of corruption in a purely competitive market.

  Corruption is therefore a cost of government intervention. Most modern research on corruption and its control seeks as its objective the optimization or minimization, rather than the elimination, of corruption. Bruce L. Benson and John Baden (1985, 393) claim that “it is impossible to drive the level of government corruption to zero.” If all the costs of government intervention, however, including corruption and its control, are considered (and Benson and Baden make a point of this [410]), it is conceivable that zero corruption could be achieved by eliminating all government (or nearly so) or by eliminating the tax-based foundation and property-rights-determination functions of government.

  Corruption occurs at all levels of government, and it involves politicians, bureaucrats, law-enforcement officials, and private individuals. Corruption can be associated with four areas of government activity: government procurement, public finance (taxation), election fraud, and regulation. In the first three categories, corruption is a function of the size of
government. Prohibition, along with price controls and building codes, would come under the heading of regulation. This type of corruption is related to the stringency of regulation on property rights and the resulting profit opportunities. Therefore, to understand corruption resulting from prohibition, an analysis of property rights and their value must be undertaken.

  The economics of corruption is best developed in the work of Benson (1981, 1988) and Benson and Baden (1985), in which corruption is seen as the result of government control over property rights. Political corruption essentially is the illegal sale of property rights by those in government to private individuals. The incentives for corruption are adapted from Becker’s (1968) analysis of crime. Corruption depends on its expected payoff, the probability of detection, and the severity of punishment. The extent of corruption is shown to be an increasing function of the size of government (408–10).

  Benson (1988) applied the property-rights approach to the corruption of criminal justice officials. He found the criminal justice system to be a major source of corruption. He also found that corruption accelerates if law-enforcement budgets, the number of crimes, and police discretion continue to increase. Not only are the number of officials who can allocate property rights increasing, the incentive to sell these rights is increasing. Detection is also less likely as the criminal justice system expands while resources to monitor the system are “relatively fixed” (157–59).

  Corruption and Prohibition

  In addition to these contributions to the economics of corruption, several contributors to the economics of heroin prohibition, such as Rottenberg (1968) and Moore (1977), have described in detail the role and effects of corruption in prohibition enforcement, the costs and benefits to the corrupting parties, and methods of reducing corruption.