The Economics of Prohibition

by Mark Thornton

  Thomas A. Barthold and Harold M. Hochman (1988) contest Stigler and Becker’s view of the rational addict: “Whether addiction is rational behavior . . . seems beside the point” (90). They begin with the premise that addictive behavior is extreme behavior, “neither normal or typical.”29 They find that compulsion is the driving force behind addiction, but that an individual must be an “extreme seeker” for compulsion to develop into addiction. Consumption can have capital effects that will cause irreversible harm if they pass a certain threshold.

  Barthold and Hochman attempt to model multiperiod, multiplan, multiprice consumption by identifying addiction with concave indifference curves (atypical preferences). They find that changes in relative prices can lead to corner solutions (peculiar consumption decisions), that consumption decisions are “sticky” at low prices, and that consumption can lead to addiction.

  Robert J. Michaels (1988) models compulsive behavior through an integration of the psychological literature on addiction with the consumption model developed by Kelvin Lancaster (1966). Self-esteem is entered into the addict’s utility function. Michaels is then able to explain many of the observed behavioral patterns associated with addiction, such as the ineffectiveness of treatment programs, the agony of withdrawal, radical changes by the addict (such as conversion to religion), the use of substitutes, and the typical addiction pattern of use, discontinuation, and backsliding.

  The interpretation of consumer behavior in the Lancastrian consumption technology reasserts the rationality of choice by addicts. In addition, it does so without assuming unusual preferences of consumers or unusual properties of the “addictive” good.30 Michaels finds that prohibition is an inconsistent policy with respect to addictive behavior in the sense that a policy that attempts “to convince users that they are losers is more likely to fail . . . and may induce increases in the level at which it [consumption] is undertaken” (1988, 85). The model is lacking in several respects, however. It does not consider the supply side of the market (either legal or illegal), nor does it consider problems such as the externalities of the addict’s behavior.31 Finally, Michaels bases the utility function on one current understanding of addictive behavior, which, he points out, is subject to change.32

  Gary S. Becker and Kevin M. Murphy (1988) further develop the theory of rational addiction as introduced by Stigler and Becker (1977), in which rationality means a consistent plan to maximize utility over time. Their model relies on “unstable steady states” to understand addiction rather than on plan-alteration through time. They use consumption capital effects, adjacent complementarity between present and future consumption, time preference, and the effect of permanent versus temporary price changes to explain such nonnormal behavior as addiction, binges, and the decision to quit cold turkey.

  Becker and Murphy note, “Addiction is a major challenge to the theory of rational behavior” (1988, 695). They claim it challenges both the Chicago approach to rational behavior and the general approach to rationality in which individuals attempt to maximize utility at all times. Becker and Murphy successfully defend Chicago rationality and are able, through changes in economic variables, to explain behavior associated with addiction. The introduction of unstable steady states defends rational behavior against Croce’s original criticism and represents a marginal move toward the Austrian notion of rationality. In the Austrian view, plans are made by individuals under conditions of limited information and uncertainty. Plans are made at points in time, but choice cannot be independent of actual choice. Becker and Murphy adjust their notion of rationality from one of “a consistent plan to maximize utility over time” (1988, 675) to one where “‘rational’ means that individuals maximize utility consistently over time” (1988, 694).

  This literature explores the question of rationality with respect to addiction and dangerous drugs. For the most part, it shares the common heritage of the Chicago tradition. Rationality is a crucial issue for both prohibition and economic theory in general. While this literature is in general agreement with Fernandez on the difficulty of making prohibition work, its conclusions are based on the rationality of the consumer rather than the lack of it. As a result, prohibition is found to be costly, inconsistent, incomplete, or of limited value.

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  1See Friedman 1989.

  2Ekelund and Tollison’s conclusions are based in part on Thornton 1986, an earlier version of chapter 4 of this book.

  3Postmillennial pietists believe that there will be a thousand-year kingdom of God on earth and that it is man’s responsibility to establish the necessary conditions as a prerequisite for Jesus’ return.

  4In a sobering passage, Newcomb (1886, 11–13) used the drinking of alcohol (i.e., “gratifying the morbid appetite”) to distinguish correctly between the sphere of moralists and the role of political economists—to separate “the totally different . . . questions whether an end is good and how an end can best be attained.” Newcomb suggests that the “economist might say in conclusion” that he knows “of no way in which a man can be made to accept that which he desires less in preference to that which he desires more, except positive restraint.”

  5Boswell 1934, 48; also see Fox 1967, 104–5. Most American economists of this time took a dim view of alcohol use. It is interesting to note that Veblen built his concept of “conspicuous consumption” partly on the basis of goods such as alcohol, tobacco, and narcotics.

  6Fisher’s main contributions to the study of Prohibition include those published in [1926] 1927, and 1930. A biography of Fisher by his son, Irving Norton Fisher (1956), details Fisher’s activist approach to social problems.

  7The attention received for this distinction is described in Fisher’s biography (I. N. Fisher 1956, 48–50). Edgeworth’s review of Fisher’s dissertation appeared in the March 1893 issue of Economic Journal.

  8For further illustration of Irving Fisher as a technocratic-type socialist, see his presidential address to the American Economic Association in 1919.

  9Fisher himself considered the adoption of the Prohibition Amendment a premature act. He felt that more time was needed to establish a national consensus and to provide for education and policy development. Fisher often praised the indirect benefits of World War I, such as the collection of statistics by the federal government, the passage of Prohibition, the opportunity to study inflation, and the powerful jobs made available to economists. See I. N. Fisher 1956, 154; I. Fisher 1918 and 1919; and Rothbard 1989, 115.

  10By 1933 Fisher must have been thoroughly disheartened with the course of events. A new age of prohibition and scientific management of the economy—a permanent prosperity—had come crashing down around him. Not only had Prohibition been repealed and the economy devastated by the Great Depression, he had lost his personal fortune on his own advice in the stock market. With respect to alcohol he turned his attention to the temperance movement by publishing three editions of a book on the evils of alcohol consumption.

  11A search of the Index of Economic Journals showed Herman Feldman’s contributions were limited to two review articles and four monographs on labor policy.

  12A Boston rubber company which employed almost 10,000 workers reported that company nurses made 30,000 visits in 1925 but could not state with any certainty that alcohol was the cause in more than six cases (Feldman 1930, 203).

  13It is particularly interesting that Warburton was chosen to produce the entry on Prohibition, as Irving Fisher was one of the editors of the Encyclopedia.

  14Despite the role of this special-interest group in initiating this study, several prominent economists read and commented on the final work. Warburton thanks Wesley C. Mitchell, Harold Hotelling, Joseph Dorfman, and Arthur Burns for comments and advice in the preface.

  15Warburton does not appear to have been building a case against prohibition; for example, he omitted all discussion of the increasing cost of prisons and the congestion of the court system directly attributable to the enforcement of Prohibition.<
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  16He notes that the estimates for expenditures fall within a wide range, plus or minus one-quarter to one-third based on the underlying assumptions of the estimates. Proponents of Prohibition, such as Feldman 1930 and later T. Y. Hu 1950, argued that the estimates were too high, but modern experience with the prohibition of marijuana would probably produce the exact opposite reaction (i.e., that they were too low).

  17Warburton noted that the length of the average work week had declined dramatically since Prohibition began. It should also be noted that real wage rates increased significantly from the prewar years to the late 1920s. Higher wages normally result in a more responsible workforce and a higher opportunity cost of leisure, especially when the work week is shorter.

  18The average national work week declined 3.14 percent in the pre-Prohibition period, 9.19 percent in the transitional period, and did not change in the Prohibition period (Warburton 1932, 205).

  19See Buchanan 1973, 119–32. Also see Sisk 1982 for a criticism of this view.

  20Fernandez attempts to estimate the benefits of rehabilitating heroin addicts, and he explores the Marxian approach to heroin addiction (1971, 1973). He applies class analysis to the understanding of the origins of narcotics legislation and the allocation of enforcement resources to crime/class categories. He also inquires into the role of neoclassical (purely formal) rationality, modern approaches to criminology, and the Marxian notion of lumpenproletariat (the poor), for the study of addiction and prohibition. Also see Bookstaber 1976 on the market for addictive drugs.

  21Also see Moore 1973, 1976.

  22Moore cites Phares 1973 and Votey and Phillips 1976 as representative of the conventional analysis.

  23Moore notes, “Effectively prohibiting heroin (i.e., eliminating all supplies of heroin) is impossible without unacceptable expenditures and intolerable assaults on civil liberties. Hence, regulation is a more appropriate and feasible objective than prohibition” (1977, xxi).

  24Articles by various authors reprinted in Morgan 1974 suggest that prior to opiate prohibition, addiction and use spread from doctors and druggists. Morgan himself suggests that little has changed since the prohibition of narcotics in terms of the size of the American addict population.

  25Clague 1973 provides an ordinal ranking of five public policies toward heroin based on seven criteria: crime, number of addicts, well-being of addicts, police corruption, police violation of civil liberties, legal deprivation of traditional liberties, and respect for the law. The policies evaluated include prohibition, methadone maintenance (strict and permissive), heroin maintenance, and quarantine. By and large, heroin maintenance received the highest marks and prohibition received the lowest marks.

  26While rationality is fundamental to most schools of thought, it should be recognized that the meaning of rationality and the role it plays in economic analysis differs from school to school. See, for example, Becker 1962, 1963. Also see Kirzner 1962, 1963.

  27See Croce 1953, 177. For an early critique of Croce see Tagliacozzo 1945. For a general discussion and modern critique see Kirzner 1976, 167–72; 1979, 120–33.

  28For a full development of integration of habits into neoclassical economic analysis, see Ault and Ekelund 1988.

  29They find it neither typical nor normal despite the fact that they cite figures to suggest that heroin use among American soldiers during the Vietnam War was typical. They also cite figures which suggest that while no particular addiction is common throughout the population, some form of addiction or compulsion is normal, whether it be to wine, mystery novels, or chocolate.

  30Michaels criticizes Barthold and Hochman’s (1988) assumptions about consumer preferences “that there are a small number of repellent people in the world whose preferences are characterized by an extreme nonconvexity. Such an assumption would seldom be found acceptable in other areas of economics. Fortunately it is not needed here” (Michaels 1988, 86–87).

  31Michaels addresses many of these points (1987, 289–326).

  32As Barthold and Hochman (1988, 91) point out: “Psychologists and sociologists claim little success in describing an ‘addictive personality,’ finding at most that ‘alcoholics (and drug addicts) appear . . . different from others,’ according to Lang (1983, 207); but not in a discernible, systematic way (at least from the variable they examine).” There is currently a debate between the disease approach and the free-will approach to addiction. Within the free-will camp there is a disagreement on whether addiction represents a loss of will or simply the lack of it.

  2

  The Origins of Prohibition

  The strange phenomenon of Prohibition, after an appearance amongst us of over three years, is still non-understandable to the majority of a great, and so-called free, people. It is one of the most astonishing manifestations the world has ever witnessed. It came upon us like a phantom, swiftly; like a thief in the night, taking us by surprise. Yet the Prohibitionists will tell you that no one should be amazed, since for years—for almost a century—quiet forces have been at work to bring about this very thing.

  —Charles Hanson Towne, The Rise and Fall of Prohibition

  The episode of national alcohol prohibition is one of the most intriguing in American history. As Charles Hanson Towne (1923) suggests, the prohibition movement began long before the constitutional measure was ever contemplated. Alcohol was the stimulus of the entire prohibitionist movement, which promoted the use of the state to stamp out sin and impurity in order to shore up free will against the ravages of individualism. Present prohibitions against narcotics and the movement to outlaw alcohol and tobacco originated in the nineteenth-century battle against alcohol.

  Two aspects of the origins of prohibition play major roles in the current politics of prohibition. First, prohibitionists believe that, once started, prohibitions are difficult to stop. Even some opponents of prohibition view legalization as undesirable because, they believe, addiction and crime in illegal markets will spread throughout society. Second, opponents of prohibition allege that it is an attempt by a majority to discriminate against certain minorities. Evidence of such discrimination undercuts the moral authority of prohibition and brings into question the public-spirited aims of prohibitionists.

  In addition to these issues, answers to a number of important questions are necessary for a fuller understanding of the political economy of prohibition. For example, What is the source of the demand for prohibition? How are prohibitions adopted as public policy? What factors explain why some prohibitions become stable (narcotics) while others do not (alcohol)?

  I will use an interest-group approach to answer these questions. The advances made by Bruce Benson (1984) and Jennifer Roback (1989) enable an explanation of prohibition which captures both the profit-seeking motives of firms and industry associations, as well as the “non-pecuniary gains” and “psychic rents” pursued by reform groups. The success of prohibition rests on the ability of “public-spirited” groups, commercial interests, professional organizations, and bureaucracies to form effective coalitions against consumers and producers of certain products.

  Crucial for determining and evaluating the direction of public policy is the source of the “public-spirited” purpose of prohibition. Before Prohibition, the markets for alcohol, narcotics, marijuana, and tobacco were not free. Tobacco products were prohibited in many states during the 1920s. (See J. E. Brooks [1952] concerning intervention on tobacco.) On the contrary, they were the most heavily regulated and taxed markets in the economy. Much of the well-intentioned discontent with the consumption of these products will be shown to be linked to these regulatory policies.

  THE PROHIBITION OF ALCOHOL

  The development of prohibitionism will be broken down into three periods. The birth of prohibition covers the period from colonial times to the Civil War. The politicalization and growth of prohibitionism occurs from the Civil War to about 1900. The adoption of national prohibitions occurs during the Progressive Era, roughly 1900–1920. The nationa
l prohibition of marijuana, which did not occur until 1937, is treated as a consequence of the adoption of alcohol and narcotics prohibition and the repeal of alcohol prohibition.

  The Early American Experience

  In colonial America alcohol was generally viewed as a normal and practical matter. Three exceptions to this rule provide lessons concerning the control of alcohol consumption.

  First, while alcohol was an accepted part of society, the Puritan ethic did discourage excessive use of alcohol. Puritans established sumptuary legislation designed to limit alcohol consumption and to prohibit tobacco consumption. This type of legislation was found to be ineffective and self-defeating and was later abolished (Weeden [1890] 1963 and North 1988).

  Second, legislation was passed to prevent the sale of alcohol to Indians, slaves, servants, and apprentices. These restrictions proved to be ineffective and in some cases counterproductive. Free laborers were often provided alcohol rations on the job, while slaves, servants, and apprentices were told to do without. This encouraged them to run away from their masters or to consume alcohol under seedy conditions. The prohibition against selling alcohol to Indians was often avoided, overlooked, or repealed, because liquor opened up valuable opportunities in the fur trade.1

  Third, the colony of Georgia was organized as an experimental society by George Oglethorpe to promote temperance. In 1735, restrictions were placed on spirits, and subsidies were provided for beer. This experiment proved successful only with German immigrants, who were grateful for the subsidy on beer. The colony’s wood and raw materials were most eagerly demanded in the West Indies, which could offer little other than rum in exchange (Boorstin 1958, 91–92). The smuggling of rum proved to be an easy task, and even those apprehended had little to fear because juries regularly acquitted violators of the law (Krout 1925, 56–59).