Platykurtosity

Posted on the blog: “Prohibition”

Whether blackandwtf.Tumblr.com correctly identifies this photo’s historical context I can’t say, but if it is indeed of “protestors of prohibition” in the United States it captures most of what I could say about knowledge, economics and prohibition all at once:

I am both an avid Bible reader and personally uninterested in most forms of drug use but this photo gave me a lot to think about in terms of prohibition economics.

The people who in 1921 derived so much utility from legal access to alcohol they were willing to sacrifice much of their lives to elaborate protest parades should have been taken as living evidence of the futility of prohibition. Indeed, in reality the people in this photo probably already had access to alcohol, and were merely protesting the artificial influence of regulation on its price. Their problems were, most likely, that alcohol presently sold was unsafe and expensive, and its consumption was by and large a miserable, lonely affair. If they were ambitious enough to lead a parade, their gripe was probably that they knew they could probably make a buck off the end of prohibition – and therein lies a powerful legalization argument.

The necessarily intrusive nature of prohibition – tacking a risk of arrest, infamy and loss of property onto every transaction – means black markets have widely distorted characteristics. Sellers charge more to cover risk of arrest. Buyers are slower to gather information about prices. The good can’t be consumed in or near public. The market equilibrium in terms of price is probably somewhere north of where it should be (“should” in the sense of “where it would be if left on its own”). We have good reasons to believe prices are too high.

Black markets have a tougher time forming contracts and long term agreements. The mafia represents an attempt to form liquor corporations during alcohol prohibition: a gang served as a nexus of contracts between distributors, police, drivers, brewers, coopers, salesmen, farmers, distillers, and the private armies necessary to enforce those agreements in the absence of stable property rights. In black markets force is an often-employed way to secure access to existing arrangements (“turf,” I suppose) cheaper than securing independent sources of reliable labor anywhere in the lengthy chain of black market drug sales. The absence of stable property rights is difficult to capture: Everyone without a gun can be squeezed for value until they can’t be squeezed anymore. We have a good reason to believe contractual arrangements are unstable an inefficient.

Consider the pockmarked landscape of prohibition laws in Canada. Why would anyone grow and distribute a drug illegally when there are places where it’s legal? A large part of the answer is that the kind of organization that sells prohibited substances is probably unequipped to do so legally. Drug sellers gather labor and capital from a special pool of risk-takers as different from their legal variant as Maine moonshiners are from SABMiller executives. The most sophisticated vendors of illegal substances probably have a kind of vertical integration that makes it difficult to simply pick up and move: Again, with no stable property rights, contracts are written in blood (as has historically been the case with property in general), and the ability to violate them by “going legit” elsewhere probably bears a high cost.

The point of consumption for an illegal good often must be secret, or secret enough depending on the veracity of local law enforcement. You can’t legally enjoy marijuana with a movie, with dinner, at a happy-hour, with coworkers, with prospective employers, at a concert, at the park, in a circus full of bright lights and junk food… This all sounds silly, but was once true of alcohol. The entire chain of consumption between you and a casual tour of a vineyard, from the gas you’d buy to get there to the sommelier the winery would pay to guide you around, would never occur. You couldn’t even explain this now-common social phenomenon to an American eighty years ago. It would fail to compute in the same way that a marijuana-laced baked goods store baffles me today. I’m not on the same planet as someone who would enjoy something like that, but I could not deny that such things productively employ people and capital around the world. We have good reason to believe there are economic opportunities available to places with open drug markets that a prohibition-based regulatory system could not so much as comprehend, much less anticipate. That in-creativity is an impediment to regulators’ claim that prohibition is “effective” in any meaningful way.

Many Americans have a cultural holiday coming up dedicated to the illegal abuse of a psychotropic substance in the United States without having so much as legal access to the stuff. Estimates are made far and wide for the costs and benefits of marijuana legalization. I want you to understand that standard economic methodology is largely unequipped to accurately capture those costs and benefits. One of the most famous statistics comes from the War on Drugs Clock, which puts the annual “cost of prohibition” at about $23 billion in 2011. One of the most famous estimates, Jeff Miron’s, puts annual savings at about $77 billion. We have good reason to believe both are wildly pessimistic.

This is because you and I are insufficiently creative to perceive the kinds of business those who have local knowledge of this stuff do. Most of all, our knowledge of drug sales – and its coloration by violent gangs, shameful arrests and costly military endeavors – is wholly outside the realm of drug sales that would occur had we not lived in an age of prohibition.