Economics & the War on Drugs

“The reign of tears is over. The slums will soon be a memory. We will turn our prisons into factories and our jails into storehouses and corncribs. Men will walk upright now, women will smile and children will laugh. Hell will be forever for rent.” -Rev. Billy Sunday1920 after the passing of the 18th amendment.

My last article focused on and built the moral and legal case against drug prohibition. Namely that there is no specifiable rights of property or life being violated, hence no victim, and therefore no standard for measurable retribution to be judged as just or unjust in a human court. Since however most arguments for drug prohibition are made on utilitarian-consequentialist ground it is important also to address these arguments. It is important to observe not just what is seen but what is unseen, the unintended consequences of benevolent actions. Austrian economics with it’s micro-analytical foundations, distaste of overly simplistic aggregates, and an emphasis on the entrepreneur, risk, and calculation provides the perfect tools for seeing just what drug prohibition does. Black markets are fundamentally unorganized, informationally decentralized, and secretive. Due to the nature of prohibitions black market lack bookkeeping, easily identifiable prices and costs of production, and generally desire for anonymity mainstream economics empirical fervor has long been frustrated and only the Austrian school’s focus on a priori rational explanations of human action have been able to construct a viable theory of prohibition.

Generally it is argued by prohibitionist (whether of alcohol or drugs, for economic analysis it makes no difference) that a substances proclivity to insobriety, addiction, criminality, slothfulness, health issues, and socioeconomic consequences is such that the benefits of prohibition outweigh the cost of enforcement. With a proper policy, penalty for violation, and the right amount of law enforcement resources the State can limit the supply of the substance and increase its opportunity costs discouraging the young from experimentation, current users will be forced to abandon their habits, and in the long run the product will nearly disappear from society. The goal of prohibition is to disrupt the supply chain and ultimately cease the production and consumption of a good.

Again, it is important to state as I said in the first article, analysis or advocacy for legalization is not an endorsement, legal does not mean good. As Ludwig von Mises said of public policy analysis:
“We are exclusively concerned with those acts of interference which aim at forcing the entrepreneurs and capitalists to employ the factors of production in a way different from what they would have done if they merely obeyed the dictates of the market.” Dr. Sproul Jr. noted his disapproval of so-called value-free analysis on our podcast, but in this case it is important to establish that in merely analyzing market reactions to prohibition we are not endorsing bootlegging or drug-dealing.

What are the effects of prohibition? What changes? In the Austrian analysis everything changes.  Most evident is the supply reduction and increased price/cost. The limited supply and increased cost and risk of production/distribution to the dealer means a dramatic increase in price and a corresponding fall in quantity demanded. However since prohibition does not change the taste or income of consumers the demand either does not move or mostly shifts to cheaper alternatives, in our case alcohol and legal prescription drugs.This is because drugs/alcohol have a fairly inelastic demand curve, that is to say increases in price do not have a proportionate fall in demand. People simply want them and are willing to pay the price.

This issue is hard for conservatives to analyze in this way since it seems to remove it from the moral sphere. We have an aversion to thinking of drug dealers as entrepreneurs, but like it or not entrepreneurs they are. Like an entrepreneur they take risk (great risk in the case of black markets) and engage in a rivalrous dynamic process of profit discovery. That is they are those who see a demand for certain things and believe they can attain, produce, distribute, and sell those things for a large profit. Prohibition in many cases is as much a restriction of competition as it is a restriction of supply. In fact with increased prices, restricted competition, and artificial reduction of supply the drug economy presents itself as a worthwhile alternative to the stagnant socioeconomic conditions of inner cities. Where government education, minimum wage laws, and occupational licensing have put young men with little experience of out the labor market the sizable profit margins of the black market become extremely tempting. What kind of entrepreneurs are attracted to such a business? A conservative might be tempted to say “the sleaziest of entrepreneurs!” and be done with the question, but this is not satisfactory. It certainly attracts those with lower ethical standards or respect for law but more specifically it attracts those have the fewest legal opportunities to make a comparable amount of money, are willing to take great risks, and have little aversion to violence. This means young inner city men with little education or experience. Even further seemingly legitimate laws that alleviate drug sentence for minors have spurred an outgrowth drug dealers hiring and using young teenage boys to handle transactions and distribution because of the much lighter sentences. This essentially gives young men the law of comparative advantage.

Prohibition increases connections between the substance prohibited and crime. Legal and peaceful avenues are cut off as a means for property disputation. This is why for instance we have not had rival beer distributors involved in a shoot out since the 1920’s. When legal avenues of dispute resolution are cut off they can only be solved by violence. Prohibition increases, not decreases violence in society. simply observe the murder rate before and after prohibition. The year prior to prohibition the murder rate was 6 out of every 100,000 of the population. During prohibition the number rose to 12 out of every 100,000, and  taking two years to recede back to prior levels and even lower to 5 out of every 100,000. Some people are perplexed why downtown Chicago is plagued by African American gangs involved in shootouts over drug-selling territory today but few people are perplexed why downtown Chicago isn’t plagued by Italian mobsters doing drivebys over bootlegging disputes.

Homicide Rate: 1910-44

murder rate

Source: U.S. Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970 (Washington: Government Printing Office, 1975), part 1, p. 414.

This is not to say that in the case of legislation that Bloods and Crypts would now simply settle their disputes in court. Bloods and Crypts would simply find themselves out of the drug business entirely; out-priced by pharmaceutical companies offering safer product. This is not because of government regulation of the newly legalized product but because of the natural functions of the market. There are several reasons for this. Prohibition is what actually pushes consumers toward higher potency and less safe products. Stricter sentencing laws create a greater incentive for risk aversion by distributors. Higher potency means lower volumes which increase the ease and cost of distribution in a black market in addition to consumer demand for stronger product.

Prior to alcohol prohibition out of every $1 spent on alcohol 40 cents of it was spent on hard liquor whereas 60 cents was spent on beer. During prohibition that number rose to nearly 90 cents out of every dollar spent on alcohol being spent on hard liquor, and no longer was it simply american whisky or bourbon (about 35-40% abv) but now it was on moonshine, 151, and something called bathtub gin in which they often used poisons like wood alcohol that could make you go blind. Similarly at the beginning of Nixon’s war on drugs the THC percentage level in marijuana was about .5%. By the mid eighties it would be 4.5% and today the average THC content is 14-18%.

Total Expenditure on Distilled Spirits as a Percentage of Total Alcohol Sales (1890-1960)


Per Capita Consumption of Alcoholic Beverages (Gallons of Pure Alcohol) 1910-1929

consumption lvl

Source: Clark Warburton, The Economic Results of Prohibition (New York: Columbia University Press, 1932), pp. 23-26, 72.

It is also evident that prohibition and not the substances themselves cause the gateway effect,not the other way around. As Nixon cracked down on marijuana inner cities experienced a cocaine epidemic followed a crack influx whose repression later gave way heroin, methamphetamines, and legal prescription drugs. The fact is that prohibition really does very little in terms of consumption. Now, keep in mind saying a law against murder didn’t radically decrease murders is no reason to legalize murder, but since most arguments for prohibition rest on utilitarian argument about the effects on society, violence, and consumption than observing those effects, murder rates, and consumption levels is quite relevant. Similarly, as Mark Thornton has pointed out here and here, as Portugal has started to decriminalize drugs they have seen a dramatic in deaths from use and a large reduction in the use of hard drugs.


In addition to potency prohibition changes the entrepreneurial nature of branding, reputation, and legal tort. On the black market you really have no idea what you are really receiving in terms of quality or potency. Dealers themselves rarely know the origin or true composition of their product. Often drugs come mixed, diluted, or spiked with unknown substances. If you are have ill-effects due to misrepresentation or spiking of the purchased substance no legal retort can follow. In the legalized marked however the product is advertised by a brand. The brand relies on name recognition and reputation for its sales revenue which means it cares about knowing the quality of its own product in all stages of production and distribution. It is within the brand’s own interest to ensure the products quality for the sake of their own reputation, advertising, and consistency. There are quality controls from batch to batch, crop to crop, even research and development to reduce undesirable characteristics and effects, and is in the end legally liable for all it’s products. It is even often in the brands interest (as has happened to Colorado) to take down the potency and addictive characters and advertise its products as such. It is in the interest of the brand to have strict labeling, safe dosage recommendations, and warnings.  If a consumer is injured by impure product or improper dosage he may very well sue the company and damage their reputation before the public and turn away further business. Firms will also have a natural incentive to show that they are making proper attempts to keep drugs out of the hands of children, black market distributors have no such interests.

As libertarians assert, and I argued in the last article, drugs are a victimless crime. Now this sounds very heartless and cold and there is no doubt deep emotional and spiritual anguish over a friend or a loved that accompanies drug use, but not in the traditional legal sense of a material violation of property or life. Since there is no victim there is no one to report the incident. There is no need to worry about people reporting burglaries, victims are obviously going to want justice and will alert the proper authorities. But with a victimless how do we know when it has been committed? Since no victim steps forward law enforcement must aggressively employ the search power, which gives rise to nearly irresistible tendencies for abuse.

This also entails a waste and misallocation of resources, as I have written about here on the Keynesian Police State. Security and law enforcement could take a nearly infinite number of shapes and forms depending on services demanded by consumers and market outcomes. However without competition and consumer response of demand to indicate price level there is no way to settle what value should be placed on different types of services. The fact that the search power is one of the only ways of enforcement shows that “consumers” (the public) really don’t value drug enforcement. In addition hundreds of grant programs, equipment aids, subsidies, and law enforcement budget allotment have been established to aid in the drug war. However mostly, as in the other areas of the market, these essentially act has distortions in the security market. Measurable enforcement of the drug war becomes the sole determining factor of funding. Federal grants and subsidies act as a sort of demand side stimulus package to create artificial diversion of resources in the “security market” from more valued areas (violent crimes) to wherever the government cheap money is (the drug war), creating a type of bubble. A demand side crime economy for drugs is created resulting in bursting prison populations of non-violent criminals, no-knock raids (up to 160x a day), asset forfeitures, clogged courtrooms, sting setups, and myriads of entrapment cases. The drug war can turn their department expense into a revenue generator. In addition to their parasitically lucrative nature these strategies actually serve as PR stunts for the State. Headlines about guns and drugs recovered by the ATF soothe and the assure the public, while neglecting that it was the ATF and FBI who doctored the deal through false start up operations. Such stings operations even become arguments for increasing each department’s budget. Imagine being able to create your own demand for your services! Any amount of law enforcement resources for drug prohibition are resources that are necessarily diverted from actual crimes like theft, fraud, and murder towards the drugs war to the point that in 1980 we were twice as effective at prosecuting murder charges than we were by 1990 after Reagan declared a renewed charge in the drug war.

In cost/benefit analysis the war on drugs is all cost no gain. It does not significantly affect consumption or supply levels, it increases crime, violence, potency, safety risks, and disrupts law enforcement from seeking proper and laudable goals. The war on drugs is just that–a war. It establishes morally and domestically the collective spirit and quasi-fascism  of war usually only  possible during short bursts of foreign wars. On top of this Murray Rothbard pointed out it is “a war they can never win – it’s perfect! It’s perfect for the establishment because it can just go on forever.” The whole military-industrial leviathan can simply be switched over and rolled out domestically against drugs along with the collective spirit that endorses it as the price for safety and stability. Ultimately these things may not be convincing to the prohibitionist, and we must show that the drug war is an immoral use of force and relies on the theft of innocent, productive, non-criminal individual’s wealth to enforce, prosecute, and jail offenders and pay the vast bureaucracy of drug enforcement and education agencies that has been established to fight drugs. It is as Upton Sinclair said “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”