Mises Daily

Home | Library | The Economics of Prohibition

The Economics of Prohibition

September 15, 2006

Tags Free MarketsInterventionismPolitical Theory

[This article is excerpted from chapter one of The Economics of Prohibition.]

Prohibition has an ever-increasing impact on our daily life. In the United States, prohibition against certain drugs, involving "wars" on them, has become one of our most visible and hotly debated national problems. The purpose of the following investigation is to improve our understanding of the origins and results of prohibition, and therefore indirectly to contribute to future policymaking, shifting it toward rationality.

At the core of this book, one of the first theoretical investigations of prohibition, is an economic theory of prohibition, which defines prohibition as a government decree against the exchange of a good or service. Recent studies of decrees against cocaine, heroin, and marijuana suggest that these prohibitions impose heavy costs and are extremely difficult to enforce. Beyond such costs and enforcement difficulties, however, I argue that effective prohibition is impossible to achieve, because the unintended consequences of prohibition itself preclude any benefits.

The only long-term solution to the problems engendered by the "misuse" of a product, I maintain, is legalization of that product. With legalization, as opposed to decriminalization and other forms of government interventionism, the government treats the misused product or service as if it were soybeans, computer chips, or pencils. The market is controlled by self-interest and normal legal constraints, such as product-liability law.

This book may be viewed as a challenge to prohibitionists to present a theory that describes the benefits of prohibition. It may also be seen as a challenge to those who recommend that prohibition be replaced with some form of decriminalization. While it may be a good transition policy, decriminalization (government drugstores, high taxation, high fines, etc.) would maintain a black market, is an unstable policy, and does not create the necessary preconditions for reversing or limiting drug abuse.

I have made use of historical analysis and applications of theory in this book, incorporating the disciplines of economics, history, criminology, sociology, and political science as needed. I have avoided using such items as estimates of elasticity and regression analysis because they are transient, unnecessary, and provide a false sense of certainty.

The historical perspective transforms what might appear to be an implausible position into an eminently sensible one. The important historical aspects I examine include the role of economists in prohibitions, the origins of prohibitions, product quality, crime rates, and political corruption during prohibitions.

There is little doubt about the importance of prohibition in American history and its role in social problems. The prohibition of alcohol sales was a crucial aspect of trade and tension with the indigenous Indian Population. Temperance (along with slavery) was the primary reform movement in antebellum America, and prohibition was a determining political issue at the state and local level.

After the Civil War, prohibitionism spread from New England both west and south. Although sometimes perceived as a lull in the drive for prohibition, the period from 1860 to 1900 saw the establishment of the building blocks of successful national prohibitions.

Addiction was discovered, the Prohibition party was formed, groups such as the Women's Christian Temperance Union and the Anti-Saloon League were established, and a wave of prohibitions at the state and local level were enacted on alcohol, cocaine, opium, morphine, gambling, and prostitution.

The Progressive Era (1900-1920) marks the pinnacle of American prohibitionism. As America "progressed" to become an imperial power, it did so in part on the international prohibition of narcotics and the Harrison Narcotics Act. The act also helped the medical and drug industries "progress" toward the exalted monopoly status that they now enjoy.

The Progressive Era also witnessed wartime prohibition of alcohol and National Alcohol Prohibition (the Eighteenth Amendment to the US Constitution). Never have so many been deceived about so much by so few. The Eighteenth Amendment and the Volstead Act, which established the mechanism of the amendment's enforcement, would be decisive and negative factors in American life and culture for over a decade.

The failure of Prohibition helped remove it temporarily from public attention. Not only was the "noble experiment" an embarrassment, events such as the Great Depression and World War II dominated public concern. Marijuana prohibition in 1937 was relatively insignificant — a mere side effect of narcotics and alcohol prohibitions.

The current prohibitions against narcotics originated with war and foreign-policy considerations in the Far East. In the 1960s foreign-policy considerations which resulted in war in Vietnam brought about increased consumption of drugs and the ensuing intensified war on drugs.

One early lesson from American history is the unmistakable interaction between war, intemperance, and prohibition. Avoiding war is perhaps the most important thing a government can do to avoid intemperance, addiction, and drug abuse. Conversely, drug abuse and prohibitions are a significant long-term cost of war.

History also supports the finding that prohibition is impossible to achieve in the economic sense. Legislatures do enact prohibitions and establish penalties and enforcement bureaus. The actions of these bureaus to enforce prohibition decrees have an effect, and when a prohibition survives long enough to be enforced it is successful in a political sense. I argue, however, that prohibitions have no socially desirable effect.

Of course prohibition should not be evaluated against a higher standard than other laws. Murder is against the law, but not all murderers are apprehended, convicted, and punished. Likewise, to expect complete or perfect prohibition is unrealistic. Rather, prohibition will be measured against its public-spirited intentions, that is, to reduce consumption of a good in order indirectly to reduce social ills (such as crime, destruction of free will, drug-related deaths) and to promote social goals (family life, democracy, health, and economic development).

To the extent that prohibitions result in increased prices, they produce increased crime and political corruption. Higher prices for a prohibited product also result in the substitution of related products and the innovation of more dangerous substitutes. Prohibited products tend to be more dangerous than legal substitutes in many respects, the result of prohibition, not the product itself.

Therefore, to assume that more severe penalties or increased enforcement will result in the substitution of legal for prohibited products is to make an invalid conclusion. Prohibitions on drugs cause potency to increase. Therefore, the assumption that higher prices achieve the goals of prohibition is unfounded. Given all such considerations, the case for prohibition remains unfounded even if the indirect connection between the consumption of certain products and social ills does exist.

The attempt to understand all human action (as opposed to just commercial activity) as rational represents a revolution in thought. Applied to policy decisions, this revolution is called public-choice economics, and from this perspective it is unacceptable to present prohibition as an ignorant, irrational, or impossible social policy.

Economists now suspect that any net losses to society produced by government policies are the result of rent seeking rather than ignorance or irrationality on the part of policymakers. Rent seeking is a search for privilege and personal gain through the political process. Rent seeking is distinguished from corruption in that rent seeking is legal and corruption is not.

History reveals that prohibitions are indeed classic examples of the co-opting of public-spirited intentions by rent seekers within the political process, thereby explaining the existence of what at first appears to be irrational policies.

This rationality-based method for the study of human action was labeled praxeology by the Austrian economist Ludwig von Mises. His student F. A. Hayek, a Nobel laureate, called it the logic of choice. Contemporary economists will recognize this approach as developed by Gary Becker. Other social scientists, notably political scientists, criminologists, and psychologists, will no doubt recognize this rationality-based approach as one which has become part of their own disciplines.

Although such an outcome is unintentional on my part, this book will prove threatening to many. Some will label the theory in it doctrinaire, apologetic, capitalistic, or liberal. Specialists may find it lacking for neglecting the role of addiction or for failing to consider certain estimates of elasticity, particular chemical compositions, or the role that unusual circumstances have played in particular markets at points in time.

In fact, however, many of the problems that economists and other social scientists have had with prohibition is that they have proceeded with investigation of specific markets without the benefit of a general theory.

One last warning is in order, and it cannot be emphasized enough. The markets in which prohibition has been deployed, such as gambling, intoxicants, and prostitution, have existed for a long time and will continue long after I and my book turn to dust. Prostitution is the world's oldest profession; people have been using intoxicants for as long as history can record; and men and women are risk-taking, fun-loving creatures. Most human beings live for leisure, not for labor. Labor is merely a means to an end.

No matter how deplorable the above activities appear to some, they are "leisure" to others. The only consistently successful method for raising the standards of leisure to higher levels is to allow economic development to take place. Individuals who use certain products or activities to self-destruct have problems far worse than the visible ones. Prohibition of these goods or services will have little impact in such cases.

It is also important to recognize that the problems in these markets (disease, fraud, broken families, and so on) are not the result of a lack of government involvement. Indeed, these markets have been historically characterized by extensive government involvement prior to the enactment of prohibition.

It is hoped that this book will stimulate debate, in both the academic and policy communities, even among those who disagree with aspects of it, and by that debate move us to a more rational public policy.


Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

Follow Mises Institute