At various times and in various places around the world governments have tried repeatedly to prohibit various things in heavy demand – alcohol, drugs, prostitution, gambling, weapons, etc., etc. Generally such prohibitions have two related effects: (1) the price of the prohibited items goes sky high, and (2) as a result, smuggling becomes highly profitable and flourishes. And by the way, the prohibition generally fails to stem the market in the prohibited goods. In fact, it sometimes stimulates that market.
Why this is so should by now be obvious. There is a demand. Attempts to enforce the prohibition reduces the supply, so the price goes up. This is what always happens when there is more demand than supply of an item. If the demand is strong, the price can get pretty high before people stop buying. At a high price, the profit is enormous (after all the cost of production hasn’t been changed by the prohibition), and quickly attracts a brisk trade in circumventing the prohibition.
We have a prime case study in our own country – prohibition. Between January of 1920, when the Eighteenth Amendment to the Constitution was ratified, and December of 1933, when the Eighteenth Amendment was repealed by the Twenty-First Amendment, it was illegal to produce or sell alcoholic spirits in the USA. This prohibition not only didn’t eliminate alcohol from the US (by 1925 there were reported to be some 50,000 speakeasies serving alcohol in New York City alone!), it provided massive profits to smuggling gangs and encouraged their rapid growth.
Unfortunately this relatively simple lesson in economics doesn’t seem to have been learned, because we are repeating exactly the same mistakes with our decades-long “war on drugs”. We have spent billions fighting the drug trade and the result is that the drug smuggling business is now far larger than it used to be, involving far more people and far more money (more than the gross national product of medium size nations!), and far more violence. Yet in fact most of the drugs involved are exceedingly cheap to produce (marijuana was just a roadside weed before it got promoted to a prohibited, and therefore desirable, drug), and if they sold at their natural “free market price” wouldn’t be profitable enough to interest most potential distributors.
The fundamental lesson of free markets is that prohibiting a good or service in high demand doesn’t take it off the market. It just creates a highly profitable business providing the good or service illegally. The only way to reduce the sale of this good or service is to reduce the demand.
The same logic applies to all the other things we try to prohibit – prostitution, weapons smuggling, trade in ivory, rhino horn and the pelts of endangered species, etc. The only effective way to eliminate them is to reduce the demand - trying to reduce the supply is futile. As long as the demand is there, there will be a market, legal or illegal.
If we really want to reduce drug use, we need to (1) work though education and medical advances to reduce demand, and (2) legalize the sale of drugs, so that the market price drops precipitously and takes all the money out of the trade. This is not a problem that can be solved by moralizing. It was created by market forces and has to be solved by market forces.
Posts
