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CHAPTER 25: An Economic Perspective on Illegal Drugs * - Paul Heyne, “Are Economists Basically Immoral?” and Other Essays on Economics, Ethics, and Religion 
“Are Economists Basically Immoral?” and Other Essays on Economics, Ethics, and Religion, edited and with an Introduction by Geoffrey Brennan and A.M.C. Waterman (Indianapolis: Liberty Fund, 2008).
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An Economic Perspective on Illegal Drugs*
Think how many more muggings there would be if muggees sought the experience as eagerly as muggers do! That’s roughly the situation today with the trade in illegal drugs. The law is a weak deterrent because the absence of a self-identified victim drastically lowers the probability of apprehension, conviction and eventual punishment.
Our legislators have responded by adjusting the other factor in the formula for deterrence: severity of punishment. Since twenty lashes if convicted when the probability of conviction is only 5 percent will have about the same deterrent effect as two lashes when the probability of conviction is 50 percent, legislators have increased the penalties to compensate for the ineffectiveness of enforcement. But they have not done so in an even-handed way. Draconian penalties have been legislated only for suppliers, not for demanders.
One can usefully think of the penalty as a kind of tax on a criminal transaction. If the penalty for selling one unit of a drug is a $1,000 fine and the probability of having to pay the fine is 10 percent, then the penalty raises the cost of supplying the drug by $100 per unit. That is how laws imposing severe penalties on sellers, while only slapping the wrist of buyers, manage to deter use. In the jargon of economics, the law will reduce the quantity demanded (by raising the price), without reducing the demand itself. However, this approach has had some disturbing consequences that surely weren’t intended.
First of all, it’s not the objective penalty that increases the cost of supplying drugs, but the subjective weight prospective drug suppliers attach to the penalty. The possibility of ten years in prison will terrify conventional folk but will mean relatively little to someone who “doesn’t give a rip.” People who think of themselves as invulnerable, who believe in seizing the moment and letting the future take care of itself, will heavily discount the penalties with which the law threatens drug sellers. They will consequently be low-cost suppliers with the competitive advantage that this confers in the business of supplying illegal drugs.
What our laws have done, in conjunction with the processes of competition, is eliminate the profit from the illegal drug trade except for people who display very limited concern for their own future, for other people, or for the laws of the land. These people gradually come to dominate the business. That’s what happened between 1919 and 1933 when the United States tried to prohibit the consumption of alcoholic beverages by threatening suppliers without seriously threatening demanders. The demand remaining strong, huge potential profits continued to exist for those who were able to satisfy that demand at a low enough cost. Need I add that low-cost providers of illegal services are generally dangerous people to have in the neighborhood?
I have treated a legal penalty as if it were a tax. In a very important respect, however, it’s quite unlike a tax. Suppliers who pay their taxes are entitled to the full protection of the law. That’s not the case with suppliers whose costs take the form of criminal penalties. The police and the courts are not available to enforce contracts in business transactions that entail illegal trade. Enforcement of contracts must be entirely private. This implies that people who have special skills in the area of private contract enforcement—those who aren’t squeamish about mayhem and murder, for example—will have a comparative advantage in the business of selling illegal drugs. This is another reason for expecting the competitive process to gradually weed out all others and leave the business of supplying illegal drugs concentrated in the hands of persons predisposed toward violence.
We mustn’t speak harshly of all drug suppliers. There is one category of “nice guys” which also has a comparative advantage in the business, namely juveniles. The objective risk and hence the cost of doing business in the drug trade is considerably lower for juveniles than it is for adults because the law is so much more lenient in dealing out punishment to juvenile offenders. This is why they are so actively recruited into the business. Another important but unintended effect of current legal policies, then, is strong pressure upon juveniles to enter a business and social world filled with so many threats to their future: an arrest record, addiction, neglect of their education, and early, violent death.
The law sets itself an imposing task when it attempts to reduce the quantity demanded without reducing the demand. (Educational programs attempt to reduce demand, of course. But does anyone still take them seriously?) A strong demand will almost inevitably generate its own supply, and attempts to restrict that supply through threats directed against suppliers will produce powerful criminal gangs to supply drugs to those who want them and who are willing to pay the price. That price won’t even be very high if the threats are not credible.
The task would be less imposing in a less free society. It is usually possible to punish more of the guilty by being willing to punish more of the innocent. Local governments are beginning to hold the owners of buildings responsible for the illegal drug transactions that occur on their property, even when the owners have no effective way to prevent the activity, and despite the fact that the law itself sometimes prevents the owner from evicting drug traffickers. The property of law-abiding citizens has been seized, condemned and destroyed—essentially because the owners, with their limited resources, were unable to do what the official representatives of society could not do with far greater resources. This practice probably interferes modestly with the flow of drugs.
If we are willing to impose high enough costs on everyone who enters or brings goods into this country, we can probably reduce somewhat the flow of cocaine from South America. We have already experimented with “intercept” operations that managed to raise slightly the street price of contraband drugs at the cost of long delays for every honest citizen attempting to cross the U.S.-Mexican border. Customs officials have also begun to inflict heavy costs on selected importers by delaying and damaging shipments in their search for smuggled drugs. And we have done a remarkable job of tearing Colombia apart by intervening in that country to prevent its citizens from supplying a commodity for which our citizens are willing to pay. All these measures have their effects: huge violations of liberty and fairness and small reductions in the supply of drugs from outside our borders—reductions that can probably be made up quickly through increased production of wholly domestic methamphetamines.
What is it that prompts us to threaten suppliers with everything short of decapitation while refusing to legislate significant penalties on demanders? Is it because so many voters and politicians are themselves at least occasional users of illegal drugs? Is it because we see users as weak and helpless victims? Or is it because, as a basically liberal society, we are reluctant to punish people for behavior that principally damages themselves?
The last possibility suggests a new direction in which policy might try moving. Suppose we committed ourselves to the position that all adult persons have the legal right to mess up their own lives as long as they do not let the costs spill over onto others? They would be legally entitled to purchase and use marijuana, heroin, cocaine, methamphetamines or alcohol but would have no right to impose the costs of their altered mind states on other people who had not consented to bear those costs. Costs imposed on others without their consent are known in economics as negative externalities. The solution to the problem of negative externalities lies in turning the costs fully back upon those whose actions generate them.
What are some of the negative externalities generated by drug use that are clearly illegitimate impositions on others? Criminal behavior is one. Operating a motor vehicle in a drug-impaired state is another. Incompetent performance of tasks for which someone else is paying ought to qualify. And what about using taxpayer-funded medical care services for the treatment of conditions caused by the use of recreational drugs?
Suppose we conditioned bail, probation and parole upon the passing of regular drug tests? (You lose your right to an altered state of consciousness when you commit crimes against other citizens.) Suppose we denied the privilege of operating a motor vehicle to anyone who refused consent to a system for the random drug (including alcohol) testing of motorists? (We would first have to agree that no one has a constitutional right to propel a lethal object through crowds of fellow citizens; it’s a privilege to be granted only to those who earn it.) Suppose we allowed all employers to establish their own employment criteria with respect to drug use and to adopt the means they deemed most effective for monitoring these criteria? (Remember that tough criteria will be costly to any employer because they will contract the available pool of eligible employees.) Suppose we declared that those who impair both their health and their ability to earn income with which to pay for medical care through their use of recreational drugs have no right to taxpayer-funded medical care? (If this is too extreme, we could at least ask whether the promise of free rehabilitation programs doesn’t tempt some people into risky experiments.)
None of these propositions provides a solution to the drug problem, which has no “solution,” in any event, because it is not a single or simple problem. This essay is simply a suggestion for looking at what we are doing in a somewhat different way. Perhaps it offers a middle ground on which those who want to decriminalize drug use and those who want to intensify the war on drugs can meet to converse.
[* ] Originally published in Forum, Institute for Economic Research 1, no. 3 (February 1990). Reprinted by permission of Mrs. Juliana Heyne.