The Economics of Prohibition

by Mark Thornton

  The repeal of Prohibition in 1933 set the stage for policy experimentation.10 Some states remained dry, while others resorted to licensing requirements or state monopoly. The federal government employed taxes, tariffs, regulations, and license requirements. State governments imposed taxes and placed restrictions on the sale of alcohol. Regulations were placed on the potency of the product. For example, the potency of beer was limited to 3.2 percent in some states, although these regulations were primarily for taxation purposes. Additional interventions included age restrictions, advertising restrictions, local option, restrictions on the hours of sale, and price controls.11 Although legalization has been an improvement over prohibition, these interventions and the prohibition of other intoxicants, such as marijuana and cocaine, have resulted in mediocre results at best (see Sylbing 1985, and Sylbing and Persoon 1985). One benefit of legalization is the development of social institutions that deal directly or indirectly with the problems of addiction and drug abuse, such as Alcoholics Anonymous (formed in the mid-1930s), which today claims more than one million members.12

  THE FREE-MARKET SOLUTION

  Prohibition is effectively impossible in the economic sense. Alternative policies, such as government-sponsored maintenance programs, also exhibit problems but represent an improvement over prohibition. The free-market solution differs from these alternative policies in that it involves no government intervention.

  The free market has traditionally been viewed as the cause rather than the cure for the problems of drug abuse. I maintain that the free-market solution involves voluntary choices of individuals within an environment of free entry, property rights, and a legal system. Entrepreneurs hire labor and purchase resources to produce, promote, and sell products to consumers. Consumers choose among diversified products in an attempt to maximize utility. Exchange results in gains to both parties and an efficient allocation of resources. Charitable and self-help groups form to solve social problems.

  Prohibitionists would, of course, scoff at such a description as it applies to the market for drugs.13 Indeed, the market as it has been described here is not perfect. It is characterized by risk and uncertainty. Mistakes, such as addiction or overdoses, will no doubt occur in any system. The competition and the discovery process that characterize the development of a market promote solutions to the problems of drug abuse that prohibition seeks to solve.

  The free-market solution would have many benefits:

  1. A competitive price would ultimately free up resources for the consumption of such goods as food, clothing, shelter, and medical care.

  2. The profit motive would stimulate producers to introduce goods with characteristics that enhance consumer satisfaction. Deadly products that survive in black markets would be eliminated. Producers would compete by improving their products to meet the desires of consumers. The market for a particular drug, such as alcohol, marijuana, or aspirin would be characterized by diversified products.

  3. As with any dangerous product, suppliers would prefer regular customers who are familiar with the product, thereby reducing expenditures on marketing and their exposure to liability law. Suppliers would no longer enlist the services of minors to retail their products.

  4. Information about product availability, price, and product quality would be available. Advertising would convey information about the unique features of a particular brand.

  5. Producers would engage in product standardization, brand-name labeling, directions for use, product safety information, and so on.

  6. The crime and corruption that result from prohibition, taxation, regulations, and other policy options would be eliminated.

  7. Government expenditures on law enforcement, prisons, and courts could be reduced. Courts would not be as backlogged, prisons would be less crowded, and the police could concentrate resources on traditional crimes, such as murder, rape, and robbery. These changes might help promote respect for law and order.

  8. Individuals would be directly responsible for their own use or nonuse of drugs. More resources and public attention could be devoted to education, treatment, maintenance, and rehabilitation.

  9. Consumers would have access to the legal system to protect them against fraud and negligence on the part of the producer. Producers would no longer have to resort to violence to enforce contracts and ensure payments. Sales territories would be maintained by voluntary agreement rather than by violence.

  10. Many of the products that have been prohibited have “legitimate” uses and were important products in the development of modern civilization. Legalization would allow for their use in these and other areas, and would promote general economic development.

  This list covers many of the major benefits of the free-market solution. These benefits can be summarized as freeing up valuable resources, providing incentives for improvements, and eliminating the costs (both direct and unintended) of prohibition.

  THE EXTENDED FREE-MARKET SOLUTION

  The free-market solution as applied to one drug or all drugs would not achieve ideal results. Short-term adjustments to free-market conditions involve substantial costs. Discovering techniques to avoid and cure addiction and to develop new institutions and safer products would all take time. In fact, achieving “solutions” to the use of addictive products may take generations, rather than months and years.

  Extending the free-market solution to areas other than the immediate market for drugs would help in the development of such solutions. Circumstances such as war, poverty, discrimination, and a loss of economic opportunity are associated with drug abuse and addiction. Applying the market solution throughout the economy, or to such specific markets as insurance, medicine, housing, and labor, also allows opportunity for improvement. Some of the possible benefits of the extended free-market solution follow.

  1. Market economies use resources efficiently and produce higher standards of living. Market economies are characterized by capital accumulation and lower time preferences (longer time horizons).

  2. Removal of barriers to entry into the medical profession would reduce the costs of health care and treatment for addiction. Removal of government-subsidized medical care would place the entire cost of drug abuse on the abuser, rather than providing a subsidy for abuse.

  3. Insurance companies and employers could control and discriminate against persons who abuse drugs, placing a direct and visible cost on drug users and abusers.

  4. Economists have found that more economic discrimination occurs in nationalized and regulated industries and occupations. Removal of these barriers would create economic opportunities for the disfranchised.

  5. War has been found to play an important role in creating and stimulating the problems of drug abuse (and prohibitions). The absence of war would likely decrease the probability of prohibitions.

  The extended free-market solution is a complement to the free-market alternative to prohibition and an important component of the ultimate solution to the problems of drug abuse. Both policies share two shortcomings. First, neither would produce ideal or immediate solutions. In fact, some people other than bureaucrats and interest groups would be hurt by this change in policy: for example, black marketeers and certain politicians and government researchers. Prohibition, of course, is even further from solving the problems, and all policy changes involve short-term adjustments. Second, the prospects for such policies are rather limited. Substantive changes in policy are difficult at best, and when they do occur they are almost always a substitution of one form of government intervention for another. Political possibility is not a direct criterion of economic analysis or policy recommendations, however.

  After a century of experimentation with prohibition, solutions to the problems of drug abuse still elude our policymakers. The political infeasibility of the free-market solution, or any policy, has not deterred some economists from incorporating that policy into their analyses or their advocacy of reform. The changes in public sentiment that have occurred in the early 1
990s suggest that repeal of the prohibition on narcotics is likely, and that their relegalization is possible. As in many other cases, real solutions to serious problems may be found only at the root and may be solved only with a revolution of ideas and dramatic change.

  __________________________

  1 During the late 1970s, a substantial portion of the population supported the decriminalization of marijuana, and the Carter administration seriously considered this possibility. The fiasco that overturned the movement is described by Patrick Anderson 1981.

  2 Addicts and heavy users often do eventually end their use of addictive or harmful drugs, but this termination has mainly been attributed to aging or maturing rather than to higher prices or imprisonment.

  3 Prohibition of certain drugs increases the sales of legal intoxicants such as alcohol. This substitution cannot be considered socially beneficial even without making the dubious comparison of the harmful or potentially harmful effects of drugs produced in the market to drugs produced in the black market.

  4 It could then be argued that these decreased expenditures outweigh total costs and therefore effective prohibition is possible. Prohibition can reduce expenditures in only the most extreme and restrictive sense, however—that is, where demand is elastic and does not result in the substitution of other intoxicants. Most estimates of expenditures show that total expenditures during prohibition remain the same or increase from what would have been spent in the absence of prohibition. The first full year of National Alcohol Prohibition (1921) appears to be the only documented case of reduced expenditures (Warburton 1932, 170–71). He also noted, however, that “we must conclude that the adoption of national prohibition has failed to reduce the use of alcoholic beverages and has increased the sum spent on them.” No one argues that prohibition has reduced total expenditures on heroin, cocaine, or marijuana. In fact, it is well recognized that the national expenditure on products such as cocaine and marijuana are significantly higher with prohibition.

  5 Clague freely admits his ranking is highly subjective and that in two instances he is unable to assign an ordinal ranking. His rankings are based on the long-term effects of the policies and do not consider short-run adjustments or the relative weight of each criterion.

  6 He found that the quarantine scheme ranked high in several criteria but that serious problems in law, the Constitution, notions of justice, and increases in “resentment and alienation in many quarters” resulted in very low ranking in “legal deprivation of traditional liberties” and “respect for law.” Therefore, one would have to place little or negative importance on matters of justice, liberty, and respect for the law in order to rank quarantine above heroin maintenance.

  7 Providing subsidies to drug addicts is just as abhorrent to certain taxpayers as providing taxpayer-subsidized abortions. Musto (1987, 64 and elsewhere) showed that the early narcotic-maintenance programs were “unwieldy and unpopular” and were quickly closed. In addition to creating resentment and costs to taxpayers, this policy tends to condone heroin use and reduces the perceived and real costs of addiction to the addict.

  8 It should be noted that the difficulties associated with “free availability” were based on a “greatly increased addiction rate” and the public health and personal aspects associated with an increased addiction rate.

  9 See Rodney T. Smith 1976 on government’s tendency to maximize net revenues and its impact on the alcohol industry.

  10 For a history of the repeal movement, see Kyvig 1979. For an unsympathetic view on the repeal movement, see Dobyns 1940.

  11 For a history of the plethora of policies enacted after repeal, see Harrison and Laine 1936.

  12 A great deal of this organization’s success must be attributed to the anonymous status of its members. The organization does not advocate prohibition or severe restrictionism on the part of government to the problems of alcohol abuse.

  13 Some critics of the market view it as “too practical,” focusing only on consumers’ or producers’ direct interests, rather than on political (i.e., the majority’s) interests. Other critics claim that the market solution is too “impractical,” that it does not address the problems of consumers and producers, or that such a substitution is “politically impossible.”

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