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The Economics of the Drug War

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Does America have a drug problem? Yes. Is the drug problem undermining a part of the country’s social and economic fabric? Yes. Are there steps that can be taken to help overcome America’s drug problem? Yes. Should government be given more power and greater financial wherewithal to halt and reverse the drug crisis? No!

For many Americans, the answer to the last question will seem inconsistent with the answers to the preceding questions. Unfortunately, this only demonstrates a pervasive misunderstanding of exactly what kind of drug crisis America is actually facing. And it is a misunderstanding that is often caused by the press and news media through their visually sensationalist coverage and biased reporting.

First, some good news. America is not a drug-crazed society. In fact, most studies, including those of the government, suggest that experimentation and use of many drugs, even among the young, are on the downswing. Death from illegal drugs is one of America’s smallest problem areas. In 1988, hospitals reported slightly over 3,300 cocaine-related deaths; in the same year, there were 100,000 deaths related to alcohol and 390,000 connected to the use of tobacco. While drug abuse is a nation-wide problem, the violence in crime associated with the illegal drug market is predominantly in larger metropolitan areas, and usually concentrated in only a few sections of these communities.

Now, for some bad news. Police studies suggest that 40 to 60 percent of reported crime (e.g., burglaries and, physical violence) is drug-related. Having been led to believe that drug-related crime requires government solutions, sizable numbers of Americans have stated in public opinion polls that they are willing to accept abridgments of civil liberties and property rights so that police and Federal agents can have a freer hand in dealing with the problem. Corruption of police and public officials is notorious. In poorer neighborhoods, many of the young enter the illegal drug market in search of job opportunities and huge incomes. And worst of all, there is no light at the end of the tunnel in terms of government’s ending in traffic in illegal drugs.

And, finally, some simple economics. It is a fundamental principle of economic analysis that markets are demand-driven. This means that whenever profit opportunities are present, producers will have incentives to bring forth the supply to satisfy consumers’ desires. The larger the profits to be earned, the greater the incentives and the bigger the supply forthcoming over time. Under conditions of competition, a producer can continue to make profits only if he successfully uncovers new market opportunities, e.g., either discovers improved methods to lower his costs of production, or discerns new consumer demands of various sorts that others have failed to see. The only other method by which existing producers can secure profits is through protection from new competition by government laws and regulations.

Illegal drug dealing is a government-protected monopoly, and this is the real source behind America’s drug problem. Those who passed the drug laws in the United States did not have this as their intention, but it is nonetheless what the economist calls “the unintended consequence” of government intervention. The only way to enter the market is as a criminal. The only way to gain a market share of the business is to make a deal with the existing drug dealers or to gun some of them down in a “turf fight.” The only way to stay outside the hands of the law is to pay bribe money to law-enforcement agents and government officials or set an example for the others by occasionally killing one of them.

And what makes the problem even worse is that unless the United States moves toward controls more applicable to a totalitarian state, there is no way to stem the supply. The plants from which heroin and cocaine are extracted are grown in many parts of the globe. A crop destroyed in one part of the world is easily replaced by a crop in another part of the world. A little bit of heroin or cocaine goes a long way. This means that as a small, easily transported product, the closing of one supply route will always be replaced by another. The attractively high profits to be made also means that those who are captured or killed by law enforcement agents will readily be replaced by alternative criminal entrepreneurs willing to satisfy the market demand.

Then there is the human side of the economic dilemma. The unfortunate people who use narcotics are denied all avenues which assure product safety. Many of the drug-related deaths are caused by the impure ingredients mixed with the drug. But none of the usual market protections for consumer safety and brand name reputation exist in this shadowy underworld. Furthermore, the high, monopoly-generated price for maintaining the drug habit often means that the user has only one avenue for obtaining the amount of money needed for his daily fix: crime in the form of burglaries and armed assaults. A major burden of the drug laws, therefore, falls on the shoulders of the innocent in society: those who are the victims of these criminal acts.

Finally, it is important to appreciate the interdependency between government interventions. For many of the poor, particularly in the minority communities, government regulations and laws have blocked market opportunities for economic improvement. Licensing laws make it extremely difficult to open a small business; minimum-wage laws price many of the young and unskilled out of the job market; and welfare programs contain disincentives to go off the welfare rolls once a person is on them.

Where does a person turn, then, to make a living or a better one? The black market. When young people find it impossible to find employment at the minimum wage, or when the next best alternative to a minimum-wage job is standing on a comer as a look-out for a drug dealer for $200 a day, it is not surprising that many of these young people choose the latter. These young people are responding to market price signals which are telling them the alternative wages to be earned in different employments; and they respond to the best offer.

What then is the solution? The repeal of all laws prohibiting the production, sale, and use of drugs. Taking the crime out of drug dealing would overnight take the criminal aspects out of the drug business. No longer would there be an incentive or need for the bribing or murder of law-enforcement agents. Competition in the drug market would be peaceful, rather than violent, by being subject merely to the same laws as all other forms of business. No longer a protected monopoly, profits to be earned in the production and sale of these drugs would fall dramatically, which would remove the glamour and the high wages to be made from this type of work.

But isn’t this a strategy of renunciation? A giving up of the good fight for a better America? Not in the least. Instead, it means recapturing the fundamental principles upon which American freedom is based. The idea of human liberty is grounded in the belief that each individual has the inviolate right to live his life according to his own conception of the “good life,” even when others may believe, and believe strongly, that the road he has chosen is leading him to hell. As long as he respects the rights of others to follow other — perhaps more noble — paths, his destiny is to be left in his own hands.

The freedom philosophy has also argued that the best chance for individual and social improvement is an environment in which peaceful persuasion and exemplary example act as the avenues for change. That many in the society rely upon drugs to various degrees cannot be denied. But force and prohibition are never good arguments or solutions. The drug-use problem is ultimately a moral and psychological problem. And the answer for it can only be found in the family, the church, the community and, most important, within each individual himself, with the assistance and support of these social institutions.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).