The Economics of Prohibition

by Mark Thornton

  Drug prohibition represents a fundamental change in property rights, which are subject to the forces of rent seeking and corruption. By far the most important and direct source of corruption, however, is the black-market activity resulting from prohibition. Prohibition creates illicit profit opportunities that would not exist in its absence. The enforcement of prohibition creates profit opportunities for the agents of the government who are best able and most willing to take advantage of them. These profit opportunities result in corruption of public officials.

  Two results of the enforcement of prohibition play an instrumental role in the corruption of public officials. The higher price caused by increased enforcement enables suppliers to cover the costs of risk bearing and avoiding detection. Suppliers can lessen some of the risk by agreement with public officials. This reduction results from the public official’s failure to enforce the prohibition law against a supplier (the briber), his participation in the shipment of prohibited products, or his selective enforcement of prohibition against competitors of the briber. In return for this protection, the public official receives money, quantities of the illegal products, or if blackmail is involved, the silence of the briber.

  Corruption is a function of the price of the prohibited product. As enforcement increases, the price of a prohibited product and the costs of avoiding detection rise relative to the basic costs of production. We should expect that suppliers would be willing to pay to reduce their risk. A higher price involves both a greater risk of apprehension and a greater incentive to provide monetary payments to public officials.

  As enforcement increases, the risk of apprehension rises and the quantity of output decreases. The divergence between price and the basic costs of production increases. Increased enforcement therefore increases the ratio of costs of risk to the cost of production. The result is an increased profit opportunity for entrepreneurship in avoiding detection. Many avenues exist by which entrepreneurs can reduce detection risks. They can use faster boats and planes, smaller and easier-to-conceal products, or deceptive packaging. One way to shift the burden of risk is to corrupt the public officials charged with the enforcement of prohibition. As enforcement efforts increase, corruption (like potency) will gain a comparative advantage in avoiding detection over transportation, technology, and deception. We therefore expect corruption to increase with increased enforcement efforts, whether or not total revenues in the industry increase. This assumes that the underlying demand for the product, penalties for both prohibition and corruption, and the efforts to reduce corruption are held constant.

  Suppliers in black markets pay public officials to provide protection or risk reduction to them. Public officials are able to reduce the risk to suppliers, but they also face the risk of losing a prestigious and high-paying job. This higher cost to public officials is offset by a higher payoff from the suppliers, based on the value of illegal transactions. The value of drug transactions within the jurisdiction of a public official is typically hundreds of times larger than the official’s annual salary.

  The literature on crime suggests that the commission of one crime can have a tremendous effect on the subjective evaluation of the costs of committing additional crimes. The cost of the first criminal act is high due to uncertainty and lack of familiarity with crime. When an official commits one act of corruption, the costs of additional acts decline, in a fashion similar to the marginal cost of production in a firm.

  One important factor in the entry of public officials into corruption is their familiarity with rent seeking. Public-choice theory views the public official as being in the business of selling property rights to interest groups. Rent-seeking behavior is “corruption” in the broader sense. This exposure to “corruption” would seem to make politicians particularly vulnerable to the more narrowly conceived corruption.

  The incentives of both suppliers and government officials combine to form mutual profit opportunities. Moore (1977) and Rose-Ackerman (1978) provide a description of the actual forms of corruption and the constraints faced by suppliers and public officials.

  Increased enforcement also has an interactive effect on drug potency and bribery, since it changes capital requirements. More physical capital is required in order to increase the potency of existing drugs or to produce higher-potency drugs. Higher potency generally requires more refining and more complex capital equipment. Fixed capital, however, is susceptible to detection in an already risky environment. Again, bribery becomes a cost-effective technique for reducing risk compared with other methods, such as concealment.

  In addition to capital requirements, corruption accelerates for the reasons described by Benson and Baden (1985). In their analysis, growth in government increases the difficulty of monitoring and controlling employees. A diminished rate of detection combined with greater payoffs will accelerate corruption.

  Corruption during Prohibition

  The history of corruption in America dates back to the founding of the country. The literature on the history of corruption represents a variety of perspectives. Three major trends can be garnered from an examination of this literature. First, whether corruption is viewed as a “people” problem or as an institutional problem, it is both persistent and positively related to government control of society. Second, while persistent and “petty” corruption cannot be eliminated in government, it can be minimized through the use of controls and higher salaries for enforcement officials, as noted in Becker and Stigler (1974). Third, corruption is a pervasive factor in governments that attempt to enforce victimless crime laws. Because of the lack of a self-interested injured party, corruption due to prohibition is more difficult to detect than corruption associated with government contracts, minimum wage laws, or rent controls.

  Corruption was a major feature of Prohibition and many researchers have found a causal connection between the two. Gerald Astor (1971) noted the connection between police corruption in New York City and Prohibition during the 1920s. Emanuel H. Lavine (1936) provides a journalistic account of it. Edward D. Sullivan ([1929] 1971) found that a large segment of the criminal population consisted of law-enforcement officials and that the major corrupting influences were gambling and Prohibition. Mark H. Haller (1970), investigating corruption in Chicago in the early twentieth century, found that reformers who wanted control of prostitution, gambling, and alcohol were ineffective because they attacked police corruption. In contrast, businessmen achieved protection from property crimes, which generally did not lead to police corruption. Lear B. Reed (1941) showed that the nature of crime and corruption in Kansas City was different before and after Prohibition and recommended that politics be divorced from law-enforcement policy. Reginald W. Kauffman (1923) also concluded that the corruption found during Prohibition was inherent in bootlegging and was further stimulated by the political nature of law-enforcement officials. A. F. Brandstatter (1962) found that a general disrespect for the law resulted from the corruption that occurred under the Volstead Act.

  The Wickersham Report (1931) provides a review of the first ten years of Prohibition. The emphasis on corruption points to the fact that it played an important role in Prohibition. It should be noted that the original organization of Prohibition law enforcement was not satisfactory. Reorganization in 1927 placed employees under Civil Service requirements. By June 1930 more than 1,600 employees had been dismissed for causes often related to corruption or dereliction of duty. Detection of corruption and resulting dismissals did decrease in 1929 and 1930, “yet to the extent that these conditions have existed or may now exist, they constitute important factors in the problem of prohibition enforcement and are vital considerations as affecting the government generally” (Wickersham Report 1931, 17). As the report goes on to note, the number of dismissals represents only a fraction of the actual wrongdoing by enforcement officials and does not include wrongdoing by others outside the Prohibition unit. Civil Service reform, rather than reducing the amount of actual wrongdoing, may really reduce reporting of
wrongdoing in order to maintain the reputation of bureaucracies in the interest of lifelong bureaucrats.

  In evaluating the negative aspects of Prohibition the report begins:

  As to corruption it is sufficient to refer to the reported decisions of the courts during the past decade in all parts of the country, which reveal a succession of prosecutions for conspiracies, sometimes involving the police, prosecuting and administrative organizations of whole communities; to the flagrant corruption disclosed in connection with diversions of industrial alcohol and unlawful production of beer; to the record of federal prohibition administration as to which cases of corruption have been continuous and corruption has appeared in services which in the past had been above suspicion; to the records of state police organizations; to the revelations as to police corruption in every type of municipality, large and small, throughout the decade; to the conditions as to prosecution revealed in surveys of criminal justice in many parts of the land; to the evidence of connection between corrupt local politics and gangs and the organized unlawful liquor traffic, and of systematic collection of tribute from that traffic, for corrupt political purposes. There have been other eras of corruption. . . . But the present regime of corruption in connection with the liquor traffic is operating in a new and larger field and is more extensive. (Wickersham Report 1931, 44)

  Herbert Hoover had organized the National Commission on Law Observance and Enforcement (known as the Wickersham Commission from the name of its head, George W. Wickersham) to improve on the enforcement of Prohibition. Instead he received a report that questioned the effectiveness of Prohibition and in which many dissenting opinions were voiced. In the separate statements by members of the commission, almost all voiced opposition to Prohibition.

  The strongest statement against Prohibition was made by Harry Anderson, who noted the existence of pervasive corruption and argued that the problems of Prohibition would not improve with reorganization because they were systemic and might cause problems beyond the confines of the drink problem. He noted: “These principles of economic law are fundamental. They cannot be resisted or ignored. Against their ultimate operation the mandates of laws and constitutions and the powers of government appear to be no more effective than the broom of King Canute against the tides of the sea” (Wickersham Report 1931, 97). Anderson also admitted that effective enforcement was a possibility, but only at an expenditure beyond all practical limitations. He noted that even with complete enforcement, economic laws would prevail: “This would inevitably lead to social and political consequences more disastrous than the evils sought to be remedied. Even then the force of social and economic laws would ultimately prevail. These laws cannot be destroyed by governments, but often in the course of human history governments have been destroyed by them” (98). While many of the members of the commission agreed with Anderson on most points, enough of them wanted further experimentation with Prohibition that the commission’s final recommendations were diluted.

  The prohibition of narcotics, gambling, and prostitution has also been shown to cause a great deal of corruption. Ralph L. Smith (1965), Leonard Shecter and William R. Phillips (1973), Robert H. Williams (1973), and James Mills (1986) all show the prevalence of corruption due to these prohibitions. Corruption associated with narcotics has largely been associated with the biggest single market for heroin and other narcotics, New York City. The Knapp Commission on Police Corruption in New York City found “significant levels of corruption” within the Narcotics Division of the New York City Police Department and at other levels of government (Moore 1977, 193–95). Richard Kunnes (1972) provides some anecdotal evidence for the argument above as it relates to the prohibition of heroin: “Profits are so great that corruption of law enforcement officials has become pandemic. In fact, the more officials hired for heroin suppression work, the more are bribed, or worse, become distributors themselves. Thirty federal agents within the last eighteen months alone have been indicted for being directly involved in the heroin (i.e. junk) trade” (43). Ashley (1972, 136) adds that the enforcement of narcotics prohibition “has created a business whose profits make the rum-running of the Prohibition Era appear bush league by comparison . . . [and] these profits have corrupted our police.”

  The international scope of narcotics and marijuana prohibition has resulted in corruption at the highest levels of governments. The intense enforcement within the United States and at the borders has exported the problems associated with prohibitions, especially corruption, to foreign countries. Ethan A. Nadelmann (1988) has noted that this high-level corruption in foreign countries is the direct result of drug-prohibition policies:

  Government officials ranging from common police officers to judges to cabinet ministers have been offered bribes many times their annual government salaries, and often for doing nothing more than looking the other way. In addition, the limits on what can be bought with corruption have evaporated. Supreme court judges, high-ranking police and military officers, and cabinet ministers are no longer above such things. The ultimate degree of corruption is when government officials take the initiative in perpetrating crimes. This has occurred not just in the major drug-producing countries but throughout the continent as well. No country, from Cuba to Chile, seems to be immune. (86–87)

  Indeed, the number of countries affected by corruption because of drug-prohibition policies is substantial.1

  The Cost of Corruption

  Corruption imposes serious costs on society through its general effects and those on government and police organizations. By facilitating exchange in prohibited markets, corruption not only goes against the goals of prohibitions but also makes the reduction of consumption more difficult. Attempts to control corruption represent an additional cost of prohibition, and in places such as Hong Kong, strong corruption-control agencies have been shown to suppress political opposition groups and civil liberties. The existence of pervasive corruption results in a diminished respect for law in general, adding further to the problems of crime, productivity, and delinquency.

  Several authors have considered the potential benefits of corruption. Dorothy H. Bracey (1976) and Herman Goldstein (1975) note that increased mutual interdependence, the ability to overcome bureaucratic red tape, and the desire of bribe takers to be considered good employees may reinforce the chain of command and may reduce organizational problems in corrupt police departments. Sisk (1982) notes that bribery reduces the cost of government by supplementing salaries. Indeed, an examination of the vast literature on corruption, particularly in developing countries, indicates that economists should consider bribery as a primary method of public finance alongside taxation, borrowing, and inflation. James M. Buchanan 1973 has noted that monopolies in illegal goods are socially preferable because monopolies restrict output in order to increase profits.

  These “benefits” are, of course, more than offset by other considerations. Once a relationship is established between police officials and black-market monopolists, the police become responsive to the monopolist and are less responsive to the needs of the general public. The police officials may even become actively involved in the management and maintenance of the monopoly. The police may condone or participate in violent crimes against new entrants or third parties in the pursuit of maintaining the monopoly and its profits. Further, the police may act to extend the monopoly or to create new ones. As Sisk (1982) concludes: “If the true consequences of such laws, police corruption, and the possibility of using taxes to impose costs on these activities were well publicized, supporters of such laws could no longer hide behind a shield of morality” (403).

  Corruption leads police officials either to break the laws they are hired to enforce or to neglect their duties in favor of more profitable activities of supporting the monopoly. Therefore, the corruption resulting from prohibition not only reduces the effectiveness of prohibition, it may also cause an increase in the (victimless) crimes it was supposed to reduce and may increase crimes of a serious nature.


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  1 Countries with significant prohibition-induced corruption include Venezuela, Colombia, Brazil, Peru, Bolivia, Panama, Cuba, Mexico, the Bahamas, Lebanon, Morocco, Turkey, Iraq, Iran, Afghanistan, Pakistan, the countries of Southeast Asia, Italy, France, Spain, and the United States. This list is not intended to be complete, nor is it in any particular order.

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  The Repeal of Prohibition

  It seems certain, therefore, that the Eighteenth Amendment cannot be repealed, in whole or in part.

  —(Irving Fisher, Prohibition Still at Its Worst)

  The certainty Irving Fisher spoke of concerning the repeal of alcohol prohibition was also true of the first seventy-five years of narcotic prohibition. Repeal is only considered a viable option after all other measures have failed. Repeal and legalization have now come back into consideration, but they are still far from representing the views of the majority of the public.1

  The repeal of prohibition is a radical proposal only in the sense that it goes to the root of the matter. The “matter” in this case is some combination of the failure of prohibition to address the problems of drug use and the negative results that prohibitions create. It is not radical in the sense that it has never been tried, would be unusual in content or results, or would represent some form of communism. Alcohol and tobacco prohibitions have been repealed and similar prohibitions have been repealed in other countries. In fact, the eventual repeal of the current prohibition is quite likely; the interesting and important question is, what will replace them?