Economics v Politics, a question of choices

I read the following snippit in one of my pro-legalization newsletters:

Let’s pretend that the real number of dollars is somewhere in there in some currency or other. It’s a lot of money. And that’s all I really wish to establish for the debate: it is a lot of money. The actual value isn’t important.

In politics, we like choices, hence, democracy. In economics, we like choices, hence, capitalism. And no where else have the two clashed so fiercely as in illegal substances like drugs. Because think about that vague (but big) sum of money for a moment: it is that big, and yet it is pretty much constituted of money spent by people willing to break the law. So, we can suggest that the price of drugs is artificially high, but then we can also suggest that the demand is artificially low.

Obviously a great many people around the world have chosen to exercize their ability to procure these drugs regardless of the politics, and obviously a great many people have chosen to exercize their politics regardless of the economics.

What is happening here? What case can we make for prohibition in general? Let’s not nitpick over marijuana or alcohol, or suggest “LSD bans are obvious but…” Let’s face the “intoxicating substance” angle straight on from an economic sense. Why should there be prohibition in a society that otherwise wishes to found itself on the power of free choice? We can later, in some other thread, nitpick specific drugs. But what is the general motivation for prohibition? Seeing this kind of global trade, is there any economic motivation for its ban, as there would be for, say, the ban of protection rackets?

Well, one that I can think of (although not necessarily a compelling one) - the ban protects products that are already legal. Think of the economic implications that brewers/distillers/tobacco growers would face if marijuana became legal. In other words, there would be one more product on the market that consumers could choose from. Hence greater competition for cosumer spending and a likelihood of declining market share for alcohol and tobacco products. Market share would be further diluted if cocaine, heroin, and other illegal substances were made legal and introduced into the market.

Well, for one thing, are we not obligated to make sure that criminals can make a good living? We’re not? Beats me, then.


Note: I should point out that keeping the ban on current illegal drugs pushes the costs involved in obtaining those drugs onto the consumer (in terms of higher prices being charged to buyers by sellers, lack of product quality assurance, increased risk/hassle in procurring product, and the like). If the ban were lifted, this would force producers to bear some of the costs involved in a society where consumers are afforded a greater choice of legal drugs. If I can buy marijuana legally, then alcohol and tobacco companies have to increase their costs (in terms of advertising, promotions, etc.) to attract my consumer dollars. As long as the cost of obtaining a product falls primarily on the consumer (however one defines cost in this context), then it appears that it would be in the best interests of alcohol/tobacco producers to maintain the status quo (keeping their costs as low as possible - legalizing more drugs pushes the consumer-producer cost burden more onto the producer rather than the consumer).

More importantly, legalized drugs would interfere with the pharmaceutical industry. Would I ever shell out substantial amounts of dough for painkillers if I could legally consume marijuana at a fraction of the cost?

Economically, Drugs have a negative externality, that is, they have a negative effect on people other than the person consuming them. Governments judge this negative externality to be big enough such that some drugs should be banned and others should be taxed.

A couple of things:

First, we don’t make things legal just because there is an economic benefit to do so. I’m sure there could be a big market for babies and organs. That does not mean that it should be legal to sell them.
Second, lets please dispense with this idiotic notion that the pharmaceutical industry is lobbying to make narcotics illegal because it competes with legal drugs. What legitimate use does cocaine, ecstacy, heroine or LSD have? Even if they did have legit uses, that does not mean that they should be sold over the counter so people can pop them like asperin.

No legitimate use? Heroin, addictive as it is, is a hell of a painkiller. If I were in a long process of dying in screaming, horrifying pain of some sort, and nothing was going to help but heroin, you bet your ass I’d buy it. Of course, I’d also have tried to score some Seconal so I could shorten the process, but that’s a whole nother debate.

Seems to me the main negative externality is caused, not by the drugs themselves, but by their illegality. That is, their illegality makes them far more expensive than they’d be if legal. This high expense results in users turning to crime to get the money to buy the drugs.

An economic case can be made.

Start from the position that choice is useful in promoting welfare, not for its own sake. Generally letting people choose what they want will promote welfare. If there are problems due to externalities they can be fixed with taxes and subsidies.

But there are times when the presumption that an individual is the best judge of his own welfare starts to look shakey. With heroin use, it’s possible that an individual is choosing the best way of self-medicating an unhappy life (Becker’s "rational addiction story). IMHO, that’s a stretch. Perhaps the individual has a “defective telescopic faculty” (Pigou’s phrase) that means that they are incapable of discounting the future consistently. Or perhaps - like Ulysses - they lack self control and require someone to bind them to the mast lest they succumb to temptation.

When an activity involves costs and benefits about which there is good information that is known and understood by the individual and the individual makes decisions that are plausibly explained by whatever tastes they might have, then the case for letting them choose what they want is pretty strong.

Where the activity involves large and irreversible long-term consequences; the individual does not know importat information about the activity and makes inconsistent choices (including over time), then there’s a strong case for saying that the individual is not making choices in their best interests.

At least for some people, this looks pretty much like what occurs with gambling and drugs. Of course to get from there to a case for prohibition would take several more steps.

Please excuse the terse and disjointed post - I’ve a screaming baby in one hand.

What makes you believe that drugs would be any cheaper if manufactured by Phizor or Merck instead of Columbian drug cartels? If they can already sell them at the current high prices, why should they reduce their profits?

The main “externality” as I see it is that the addictive nature of many narcotics basically creates a vicious circle - the more you take drugs, the more you devote youself to acquiring drugs at the expense of things that you should be focusing on - school, work, family, relationships.

The point isn’t whether they have legitimate purposes. The point is that they still should not be taken to make the pain of going to work go away. I agree that banning legitimate usues of narcotics does not really make any sense. But they still should be controlled substances due to their powerful side effects.

The obvious answer to the OP’s question is that, on the whole, people believe that drugs usurp the freedom to choose. So while you may have been “free” to choose the first few times, after that it becomes less of a choice or at least more difficult to exercise your freedom to choose. A democracy could limit alot of things if the majority so wants it.

But would the newly decriminalized drugs be manufactured by Philzer or Merck? I don’t think so. They can’t patent them, can they? Therefore not enough profits. I’d think they’d be in the public domain. Anyone could manufactor them, anyone could sell them. They’d be made and sold by new start up enterprises. Competition would keep prices reasonable (cost [which as I understand it would not be very hign] plus a fair profit). Competition would allow the better brands to win out. And some people would “brew their own”.

Re the externality of drugs crowding more worthwhile things out of the users’ life, yes, that’s a problem. It’s a problem with (legal) alcohol, too. Outlawing alcohol did not solve this problem. Outlawing heroin, cocaine, etc. has not solved this problem. If we ended this failed, futile war on drugs, we could use some of the money that is now being spent on the war and instead spend it on treatment. Imagine if anyone who sought treatment could get it instantly?

Best arguments pro I’ve ever read were in The National Review’s issue dedicated to the subject, a piece of which, including Buckley’s own essay, can be found here:

The War on Drugs Is Lost

Great stuff, IMO.

As an example, btw, of the absurdities involved in outlawing drugs, there is the fact that poppy seeds can be bought and planted legally, but marijuana plants, of course, can’t. One is addictive, the other isn’t. But the addictive one is legal, while the non-addictive one isn’t.

I’m not a big fan of “social” programs, but I would take your “solution” over the drug war any day of the week. As you pointed out, it didn’t work before and it doesn’t work now. At least most social programs can point to some good to offset the bad. The drug war is an unmitigated abomination.


That’s a strange thing to say. Without the crime that backs up the drug trade, genuine competition will lower the price of a good just like it would in any other industry. I know in my hometown growing up there were a few dealers of various products, and they themselves did not engage in any crime against each other. Prices were more or less low and only jumped up in specific circumstances (big arrest hurting supply, being at a party, etc.). One guy with a chemistry degree and another guy with farming capabilities could rake in several hundred thousand dollars a year on an acre of land with LSD–sold at a buck a hit (current street price is probably $5-$7). How are you going to keep the price high with that kind of competition?

Interesting thoughts, hawthorne, that apply directly to the topic at hand and also could serve to guide us in hypothetical threads addressing specific drugs.

I think what gets to me is that I cannot find those steps. I do not expect there to be mushroom clubs as an analog to establishments which sell liquors, but it seems that there is still a ground there which makes economic sense.

Of course, we could also run into what I’ll call the “oxycontin problem,” that being that too much control also encourages a black market just as surely as prohibition. But is this a problem particular to drugs? --wherever there is enough demand, and enough profit to be made from skirting regulations, don’t we see people skirting regulations? (Just thinking out loud.)

I guess you’d be looking down the public health approach as an alternative to the criminal approach. Seems sensible enough to me, but I was talking about the additional steps needed to get from a situation where clearly there is a problem with people’s behavior in this demerit good case to a justification for doing something about it.

Things like “is the cure going to be worse than the disease?” and “how bad does the problem have to get before we’d trust governments to overule these people’s bad choices?” and “if 90% of people can enjoy a bet without problems, when can the problems of those who can’t control themselves trump the harmless pleasures of the rest of us?”