CONTROVERSY: The economics of prohibition

By Lunar Loops · Feb 15, 2007 · ·
  1. Lunar Loops
    Interesting little piece from The Daily Times (Pakistan) where apparently their parliament recently had a debate on prohibition:

    CONTROVERSY: The economics of prohibition —Nadeem Ul Haque
    [​IMG] Prohibition did not control addiction, the causes of which do not lie in availability of addictive substances. In addition to patent medicines, consumers switched to narcotics, hashish, tobacco, and marijuana, substances that they would have been unlikely to encounter in the absence of prohibition

    A recent parliamentary debate on the subject of prohibition has created the space for some serious thinking on the issue. There is considerable international research available on prohibition and its consequences and Pakistan should understand it. Let’s consider some basic points.

    The United States prohibited alcohol from 1920-33 in what was called “a Nobel Experiment”. The prohibition was expected to reduce crime and corruption, solve social problems, reduce the tax burden created by prisons and poorhouses, and improve health and hygiene in America.

    Economic theory argues that curtailing an economic activity for which there is demand will lead to ‘underground’ sources of supply for that demand. But driving economic activity underground has consequences; among other things, it allows criminals to collect large rents who engender corruption and criminalize the society. The government not only loses revenue because of prohibition, it also diverts resources from other more productive activities to deal with the crime that has resulted from the prohibition. The prohibition also means that government loses control of the prohibited market and cannot tax it or set standards for it. Most importantly, economic theory suggests that prohibition will fail in its intended objectives.

    Research has vindicated the economic theory to show that prohibition in the US failed on all counts.

    Consumption of alcohol fell at the beginning of the prohibition, but then increased. Illicit production and distribution continued to expand throughout this period despite ever-increasing resources devoted to enforcing prohibition.

    Alcohol became more dangerous to consume. When drugs or alcoholic beverages are prohibited, they become more potent. Suppliers augment their potency and adulteration with unknown or dangerous substances also increases. This basically means that market discipline vanishes with prohibition.

    Before prohibition, Americans had spent a falling share of income on alcoholic beverages, purchasing higher quality brands and weaker types of alcoholic beverages. During prohibition, there was a switch to more potent forms of alcohol. The typical beer, wine, or whiskey contained a higher percentage of alcohol by volume during prohibition than it did before or after. Prohibition made it more difficult to supply weaker, bulkier products, such as beer, than stronger, compact products, such as whiskey, because the largest cost of selling an illegal product is avoiding detection.

    Prohibition did not improve health: “the death rate from poisoned liquor was appallingly high throughout the country. In 1925 the national toll was 4,154 as compared to 1,064 in 1920.”

    Prohibition also led many people to drink more ‘legitimate’ alcohol, such as patent medicines (which contained high concentrations of alcohol), medicinal alcohol, and sacramental alcohol. The amount of alcoholic liquors sold by physicians and hospitals doubled between 1923 and 1931. The amount of medicinal alcohol (95 percent pure alcohol) sold increased by 400 percent during the same time.

    Prohibition glamorised alcohol and by doing so, attracted the young. The government lost control of the alcohol market allowing the young easier access. This is evidenced in the fact that the average age of people dying from alcoholism fell by six months between 1916 and 1923, a period of otherwise general improvement in the health of young people.

    While crime had gradually declined by the 19th and early 20th centuries, during prohibition it increased. The homicide rate in large cities increased from 5.6 per 100,000 population during the first decade of the century to 10 per 100,000 population during the 1920s, a 78 percent increase over the pre-prohibition period. More crimes were committed because prohibition destroys legal jobs, creates black-market violence, diverts resources from enforcement of other laws, and greatly increases the prices people have to pay for the prohibited goods. The result was that all crime statistics were up, expenditures on police increased and prisons were overflowing with criminals. When prohibition was ended in 1933, there was a dramatic reversal in the rates for robbery, burglary, murder, and assault.

    It was no wonder that corruption in the police customs service and coast guard increased significantly during prohibition and efforts to curtail corruption consumed valuable government resources.

    Contrary to expectations, productivity did not improve, nor was absenteeism reduced.

    Prohibition also removed a significant source of tax revenue. The alcohol industry was estimated to account for about USD 2 billion in 1902, was one of the more important taxpayers and employed about 600,000 people. After prohibition, the bootlegging industry and the mafia began to collect the tax that the government should have collected and the authorities had to spend money to try to stop their growing power.

    Sadly, prohibition did not control addiction, the causes of which do not lie in availability of addictive substances. In addition to patent medicines, consumers switched to narcotics, hashish, tobacco, and marijuana, substances that they would have been unlikely to encounter in the absence of prohibition. Those products were potentially more dangerous and addictive than alcohol, and procuring them often brought users into contact with a more dangerous, criminal element. Once again criminalization increased.

    These results are from several serious economic studies of the prohibition era. Ironically, most economists and social scientists of the era supported prohibition. Subsequent serious research has informed us of the true costs and benefits of prohibition. Based on this research Nobel Laureate Milton Friedman even argued for the legalisation of all drugs.

    Perhaps we in Pakistan too should be informed by serious research!

    The writer is an economist

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  1. ramjet
    Excellent article. It's often one of the first arguments I give when challenged as to why I believe drugs should be legalised - organised crime receives the vast majority if its income from the sale and distribution of illegal drugs. A violent gang sub-culture is built around this underground market. Purity/quality of distributed subtsances is sub-par, prices are sky high, due to the risk of negotiating around the law, which makews the economic and social costs of addiction much higher and the government loses out on billions of pounds/dollars worth of potential tax revenue, which could be re-invested in schools, healthcare and other social programmes. If the drugs trade was legitimate, the government would be in a much better position to monitor, moderate, control and regulate sale and distribution.

    If an individual wants to accept the risks associated with drug use, that should be there business. Sure, ABUSE of drugs can damage others, but not necessarily, and this is important. A number of legal activities and products MAY harm other people if the person undertaking the action or consuming the product is irresponsible. Theft, robbery, assaul and murder NECESSARILY lead to harm to others, by their very nature. The same cannot be said of drug use. USE and ABUSE are two totally different things, and most if not all drugs can be used responsibly, if the user him/herself is responsible, knowledgeable, mature and posseses sufficient will power.

    IMO an economic activity should not be prohibited (perhaps discouraged) unless, by its very nature, it necessarily involves other people being harmed or detrimentally affected in some way.
  2. Alfa
    So we actually have US prohibition of alcohol and prohibition in general to thank for the availability of such a wide array of drugs, that we can find today.

    Someone send Nadeem Ul Haque an invitation here!
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