The Economics of Prohibition
Page 4
Source: Warburton 1932, 205.
Feldman obtained only one company’s records on absenteeism that contained data from before and after Prohibition. He noted that the company which supplied this information indicated that the improvement in attendance was not due to Prohibition but rather to improvement in labor. His data along with the 1929 update provided by the Bureau of Prohibition are presented in table 1.
Feldman’s cautions and clarifications concerning the data were not sufficient to prevent the data from being used to support the case for the economic benefits of Prohibition enforcement. “All of us know that industrial efficiency was one of the chief reasons for Prohibition” (I. Fisher 1927, 158). The report of the National Commission on Law Observance and Enforcement (1931) began the section on the economic benefits of Prohibition with the statement: “The subjects upon which there is objective and reasonably trustworthy proof are industrial benefits—i.e., increased production, increased efficiency of labor, elimination of ‘blue Monday,’ and decrease in industrial accidents” (71). The report goes on to emphasize the reliability of these facts with respect to absenteeism: “There is strong and convincing evidence, supporting the view of the greater number of large employers, that a notable increase in production, consequent upon increased efficiency of labor and elimination of the chronic absences of great numbers of workers after Sundays and holidays, is directly attributable to doing away with saloons” (71).
The Bureau of Prohibition took Feldman’s data one step further by obtaining data for 1929 and publishing the results in The Value of Law Observance (1930, 11). These data were purported to show the decline of “blue Monday” as evidence of the economic benefits of Prohibition.
Americans were becoming increasingly aware that while Prohibition had eliminated the open saloon, it had not stopped the liquor traffic. The costs of enforcing Prohibition were increasing, and economic prosperity, purportedly the main benefit of Prohibition, ended with the stock-market crash in 1929. Establishing the link between Prohibition and reduced absenteeism was vital to sustaining public support of the policy.
By far the most thorough study of Prohibition was by Clark Warburton. His two main contributions were The Economic Results of Prohibition (1932) and his entry on Prohibition in the Encyclopedia of the Social Sciences (1934).13 Warburton’s book was initiated at the request of the Association against the Prohibition Amendment, from which he received financial support during the early stages of his investigation.14
Warburton’s book was a statistical analysis of the economic arguments for and against Prohibition. Primarily he examined alcohol consumption, expenditures on alcohol, and the impact of Prohibition on industrial efficiency, public health, income and demographic groups, and public finance. He used all available statistics, produced estimates from underlying conditions, and in many cases used more than one estimating technique. Warburton cautiously alerted his reader to weak links in estimation techniques and data collection.15 “In these circumstances no study of the results of prohibition can claim high precision and unquestionable proof. The conclusions stated here can claim, however, to be reasonable inferences, after intensive study and analysis, from such data as are available” (Warburton 1932, 259).
Warburton concluded that consumption of all alcohol per capita declined nearly one-third from 1911–14 to 1927–30, but that consumption of spirits increased 10 percent during the same period. He found that expenditures for alcohol during Prohibition were approximately equal to what expenditures would have been had the pre-Prohibition conditions existed.16 Expenditures on beer fell dramatically, while expenditures on distilled spirits increased. He was unable to establish correlations between Prohibition and prosperity, saving, insurance costs, or the purchase of consumer durables.
Warburton found that the data did not show a measurable relationship between Prohibition and the decrease in industrial accidents. He also found that Prohibition had no measurable effect on the observed increase in industrial productivity and that statistical evidence was lacking to establish the influence of Prohibition on industrial absenteeism. With regard to Feldman’s survey, Warburton noted that the reduction in absenteeism was more plausibly the result of the reduction in the number of hours worked and the lightening of actual work tasks (less manual, more mechanical), as well as the introduction of new and greater quantities of recreational and leisure activities as substitutes for alcohol.17
Warburton went on to criticize the applicability of the data on absenteeism from the single gunpowder plant that was cited by the government in support of the economic benefits of Prohibition. Using the original data, Warburton calculated the average annual percentage decline in absenteeism (table 2). He showed that the annual percentage decline in absenteeism on Mondays did not differ much in the pre-Prohibition period, the transitional period, and the Prohibition period. It seems the reduction of absenteeism is difficult to attribute to Prohibition but easy to associate with other factors, such as the reduction of the work week, increased real wages (during the 1920s), and improved labor-management techniques.18
Table 2. Average Annual Percentage-Point Decline in Absenteeism in a Delaware Gunpowder Plant
Day 1907–13 1913–24 1924–29
Monday 0.21 0.23 0.26
Tuesday 0.28 0.21 0.15
Wednesday 0.05 0.24 0.15
Thursday 0.10 0.24 0.15
Friday 0.06 0.27 0.04
Saturday 0.06 0.24 0.20
Total 0.76 1.43 0.87
Source: Warburton 1932, 205.
Greater experience with Prohibition resulted in increasing skepticism among economists. This trend can be traced to three factors. First, the black market continued to grow and develop despite increased enforcement efforts and reorganization of the Prohibition bureaucracy. Second, as data were collected over a longer period, trends of increased consumption and crime became evident. Third, the longer Prohibition was enforced, the more knowledge spread concerning the adverse consequences and the difficulty of enforcement (also see Thornton 1991 B for more details concerning the results of alcohol prohibition).
THE ECONOMICS OF HEROIN PROHIBITION
The sale of heroin and other opiates has been illegal at the federal level since the passage of the Harrison Narcotics Act in 1914. Most states had already enacted prohibitions and restrictions on these products prior to the federal legislation. While narcotics were mentioned by economists such as Patten, Veblen, and Fisher, economists paid little attention to narcotic prohibition for the first fifty years of its existence. Simon Rottenberg’s article (1968) on the economics of illegal heroin was published at a time when the general public and social scientists were beginning to examine the results of this prohibition.
In his seminal article Rottenberg (1968) described the options available to authorities, noting some of the factors that influence the activities of the law-enforcement bureaucracy. He also described the market structure, organization, and competitive forces but seemed to find the application of traditional economic analysis to the illegal market for heroin difficult because of the market’s complex interaction with law enforcement. As a result, Rottenberg raised more questions than he answered.
Rottenberg found the heroin market more organized and monopolized than other illegal markets. He examined the impact of crime on society, particularly in connection with the allocation of police resources. Society faces a trade-off between enforcing narcotics laws and enforcing other criminal laws. Rottenberg detailed the corruption and the corruptive process in illegal drug markets and at one point anticipated James Buchanan’s argument for organized crime.19
A theme that hindered Rottenberg’s analysis was that the product which defined the market changed as it moved from production to consumption. He noted that heroin was diluted as it passed through the distribution chain to the consumer and that the final product was subject to wide variations in potency. He offered three hypotheses to explain changes in potency. The first, which he considered questionable, wa
s that consumers were very responsive to price changes but not to changes in potency. His second hypothesis held that lowering potency was a rationing device when heroin was in short supply. While this may help explain the variation in potency, it does not explain either the systematic changes or “the apparent secular tendency for dilution to occur” that Rottenberg noted. The third hypothesis was that dilution allowed for differentiation of the product so that the consumer could be better served. Again, Rottenberg found this hypothesis unsatisfactory in explaining an important trend. On the subject of drug potency, Rottenberg noted: “It is like explaining why Falcon automobiles will be manufactured, as well as Continentals, but would not explain why the fraction of Falcons rises and the fraction of Continentals falls” (1968, 83).
In summary, Rottenberg’s contribution is descriptive and institutional, but it contains little of lasting theoretical or empirical value. He developed more questions than answers, but this is precisely why his contribution is important. Answers to his questions, extensions of some of his points, and corrections of others characterize much of the research on prohibition since the publication of his article.
Two noteworthy comments that raised important matters of substance and questioned the basic validity of prohibition followed Rottenberg’s article. Edward Erickson (1969) indicated that efforts to decrease the supply of euphoric drugs resulted in important social costs, such as higher production costs per unit of euphoria produced, increasing redistribution of income through theft by addicts, and debasement of drug-law enforcement. Given these costs, society should move to less enforcement.
Raul A. Fernandez (1969) discussed two related points concerning the market for heroin that Rottenberg did not explicitly examine. First, the status of heroin addicts as user-sellers leads to important difficulties and complexities in applying economic theory to this market. Addiction is also important for Fernandez because addiction reduces the deterrent effect of prison sentences. It is the question of addiction to heroin which would lead economists again to question the fundamental axiom of individual rationality in connection with the use of illegal “addicting” drugs. Fernandez suggests that the proper approach to addiction is not prohibition but treatment for addiction.20
Mark H. Moore (1977) provides a detailed analysis of the illicit market for heroin and law enforcement in New York City.21 His analysis uses economic theory, law and law-enforcement analysis, and direct empirical observation of the workings of the heroin market in New York City. These tools allow Moore to present a realistic picture of the complexities of the heroin market and to debunk several commonly held beliefs concerning the illicit heroin market. Indeed, his work represents what is now the conventional wisdom on public policy toward the heroin market.
Prior to Moore’s study, conventional wisdom said that the demand for heroin was perfectly inelastic and that higher prices would not result in decreased consumption. Higher prices served only to increase the costs to society and the profits for drug dealers. Higher profits stimulated drug dealership and new consumption, and therefore worked against the goals of public policy.22 Moore effectively argues against both the assumption of perfectly inelastic demand and the notion that drug dealers are better off as a result of increased law enforcement (1977, 5–15).
Moore recommends effective regulation of heroin by continuing the current policy of prohibition.23 In raising the effective price of heroin, prohibition discourages “not-yet users” from trying the drug, but has only a marginal effect on “current users.” Moore notes that heroin use is initiated and spread through friends and neighborhood groups and that it is difficult for law enforcement to infiltrate these tight-knit groups. He postulates that if access to heroin could be prevented by raising the cost of acquiring heroin, the spread of heroin use could be stopped and “not-yet users” discouraged from trying the drug.
It is erroneous, however, to claim that prohibition is necessary to discourage access to heroin because of the particular system by which it spreads (small social groups) when prohibition itself is responsible for this system. Moore himself argues that it is prohibition that is responsible for the peculiar organization of the illegal heroin market: “It is almost certain that the single most important factor influencing the structure of heroin-distribution systems is that producing, importing, selling, and possessing heroin are all prohibited in the United States. Why, for example, isn’t the industry organized into larger and more impersonal marketing systems”? (1977, 3; emphasis added). Further, he makes no attempt to justify prohibition as the only or best way of preventing consumers from experimenting with heroin.24
Moore recommends that a variety of programs be established for current users of heroin. He recognizes that prohibition is harmful to current users and that higher prices lead addicts to inflict costs on the general population in the form of muggings, robbery, and burglary. To avoid these problems, Moore recommends that addicts be given a low-cost source of heroin or methadone; that addicts have access to treatment facilities, jobs, reasonable living standards, recreation, and entertainment; and that arrested users be allowed to enter treatment facilities rather than prison (1977, 258–61).
Moore’s reasons for trying to reduce the effects of prohibition on current users are well founded. His recommendations are flawed in several respects, however. His attempt to establish price discrimination would have important drawbacks and be difficult to carry out. For example, his recommendations would reduce the cost of becoming an addict and therefore would act to stimulate experimentation with heroin. Moore himself recognizes the contradiction in his policy recommendations:
Note that the dilemma faced in enforcing narcotics laws is common to all negative incentive systems. The problem is fundamental: The desire to have the incentive conflicts with the desire to minimize the damage done to people who do not respond to the incentive. One cannot lessen the adverse effects on current users without having some effect on the magnitude of the incentives facing nonusers. One cannot alter the incentives facing nonusers without having some effect on the consequences for current users. (1977, 237)
Moore’s recommendations would also involve large increases in government expenditures. His claims that there is general support for the policy of prohibition (1977, xxi) fail to give adequate consideration to the taxpayers’ toleration of the cost of his recommendations.
With respect to prohibition, Moore seems to be his own best critic:
The single, most important objective of a narcotics-enforcement strategy is to discourage people who are not now using heroin from beginning to do so. If the police cannot achieve this objective at a reasonable cost in terms of public resources and maintenance of civil liberties, the prohibition policy ought to be abandoned. There are too many bad side effects of the policy and too few direct benefits other than preventing new use to warrant continuation of the policy if it cannot discourage new use. (1977, 238)
Finally, Moore reminds his reader that his study focused on but one illegal drug within New York City and, further, that his methodology was insufficient completely to analyze the problem at hand:
There are serious limitations to the methodology employed in this book. The methodology is similar to that used in developing intelligence estimates. Bits of unverified, half-verified, and fully verified information are assembled into a systematic picture by combining arbitrary definitions with assumptions about how reasonable men behave. . . . It [the methodology employed] has the disadvantage of providing only good guesses about the nature of the phenomenon. Moreover, the guesses may be radically altered by the introduction of a single, verified piece of information. (1977, 4)
Therefore, while Moore’s contribution is important in extending the literature concerning the heroin market, weaknesses in methodology and scope undermine the applicability of his policy recommendations.25 By defeating the conventional approach of the 1960s, Moore reestablished the viability of prohibition as a policy to control heroin use.
THE ECONOMICS OF ADDIC
TION
The history of economic thought is strewn with attacks on individual rationality.26 The consumer has been criticized for consuming on the basis of imperfect information, as well as not consuming because of imperfect information (that is, hoarding). The consumer has been criticized for steadfastly maintaining a consumption plan despite changing circumstances, problems, and severe difficulties (habits, addictions), as well as not maintaining established consumption plans due to changing circumstances, information, and evaluations (impulse buying, binging). According to Israel Kirzner, “The concept of rationality in human behavior has long been a topic for discussion in the literature on the methodology of economics. Attacks on the undue reliance which economic theory has been accused of placing upon human reason are as old as attacks on the very notion of an economic theory” (Kirzner 1976, 167).
The irrationality claim has been made with respect to addictive goods such as alcohol and narcotics since at least the time of Vilfredo Pareto. Pareto made a distinction (similar to Fisher’s) between logical actions, which are rational and economic, and illogical actions, which are not. Irrational action was found in the case of a man who established a detailed budget devoid of wine expenditures and then proceeded to binge on wine. Benedetto Croce explained that this act was an economic error because the man yielded to a temporary desire at odds with his established plans.27 Such notions of logic and rationality are primary theoretical justifications for prohibition. The type of “irrationality” described by Raul Fernandez (1969), however, forms a basis of attack, rather than a justification for prohibition.
In defining the Chicago school’s position on tastes, George S. Stigler and Gary S. Becker (1977) have also commented on the nature of addiction. They find that beneficial and harmful addictions depend on whether prolonged use enhances or diminishes future consumption. Good addictions involve the consumption of goods, such as classical music, that increase utility over time and do not disrupt utility derived from other goods. Bad addictions involve a reduction in future consumption ability. Alcohol decreases future utility because it reduces the utility of a given amount of future consumption as well as the utility from other goods. Addiction is a rational habit that is consistent with preferences and opportunities but one that hinges on the type of capital effect the good produces.28