Prohibition, Theory and Practice, Part II: Ineffectiveness

Prohibition, Theory and Practice, Part II:
Ineffectiveness

Prostitution has been prohibited in most of the United States (all except for a small part of Nevada) for over a century, but prostitutes can be found working in virtually every town and city in the country. In the cities they even work openly and advertise their services. The police have given up trying to suppress the activity and instead limit their efforts to preventing disruptions of neighborhoods, control of sex slavery and underage prostitutes, and providing a flurry of activity when a member of the city council goes on a morality kick.

The Soviet Union tried to keep its citizens from being exposed to Western “propaganda”. It not only prohibited import or possession of European, American, and Japanese video tapes, it also developed a different format for video tapes and mandated that all video recorders and playback devices use only the Soviet format, meaning that they could not show foreign tapes. The result was the creation of not one, but two black markets: one dealing in smuggled foreign VCRs and the second creating and selling pirated copies of Western tapes copied into the Soviet format. The demand for Western information was so great that entire books were circulated through single copies laboriously retyped with multiple carbons.

One of the most perverse results came from the prohibitory import tax the British imposed on French watch works early in the nineteenth century. The goal was to raise the price of French watches so high as to exclude them from the English market, giving English watchmakers a protected market in which to develop their craft and become competitive. The results were disastrous. Far from driving French watches out of the market, the extremely high price made them a desired prestige item when placed in fine jewelry mounts. The English watchmakers did not use their protection to improve their products, but merely raised prices on the same shoddy goods. The French and Swiss were able to achieve economies of scale and improve production methods so that, even with the excessive tax, they could undercut the low-quality English goods. Today Swiss watches are a world standard and English watches are unknown.

Going down the entire list of prohibitions in Part I would only produce a dreary list of similar failures. One example will begin to make the reasons for these failures clear.

By 1820, both Great Britain and the U.S. had embargoed the international slave trade, and all ships carrying slaves between Africa and the Americas (primarily Brazil and Cuba) were subject to capture and forfeiture. Their officers and crew faced criminal sanctions. Even as late as the 1850s, over 25,000 Africans were transported for sale in Cuba each year. A ship solid and fast enough for the trade could be purchased for under $15,000 or leased for even less. Such a ship could buy slaves for $40 – 50 in trade goods and load about 900 of them. Around 750 would survive the trip and be sold for $1,000 – 1,500 each in Havana, totaling over $750,000[1]. Four or five voyages would allow a captain to retire, fixed for life; and backers or ship owners could easily write off the cost of ships captured by the governments. These numbers are similar to, but less extreme than, those of the drug trade today.[2]

Why do all these attempts at prohibition have such untoward outcomes? They are actually a predictable result of the relationship between supply and demand.

Most prohibitions worked as intended by greatly increasing the price of the commodity affected. But they ignore the radically different effect that the change has on sellers and buyers.
These laws impose penalties, often criminal, on sellers and impose greater costs, including making goods harder to find, transport harder, and risk of injury or death greater due to the increased violence of the business. But they also increase the returns to not only compensate for these increased cost, but also to provide profits much greater than would be possible in a legal market. The imposed sanctions also serve as entry barriers to would-be sellers unwilling to bear the risks of sanctions or injuries. Limiting entry is a form of cartelization that segregates rentes to those sellers who decide to participate. As a result, probably fewer outlets sell illegal drugs, for instance, than sell legal ones, but the illegal sellers are protected at profit levels that would entice many new competitors in a licit trade.

While prohibition can provide strong incentives to certain sellers, its effect on the demand side of the market is much less dramatic. Although prohibition can greatly increase the cash price of the good, the cash price is often only a small consideration to the purchaser. Both the value and the cost of a good must be determined subjectively: from the buyer’s viewpoint.

The example of the high price English taxes imposed on French watchworks is instructive. The expense created an incentive to purchasers who could combine the expensive watch with an even more expensive jewelry case as an item of conspicuous consumption, gratifying the bearer. Looking at the extensive history of sumptuary laws – and their failures – shows how strong the impulse for ostentatious display can be. A modern American driving a Ferrari while wearing Armani clothes, a Piaget watch, and thousand-dollar sunglasses with large designer logos is a good example.

The way to determine the value of a good – and therefore the price a purchaser is willing to pay –- is to look at what that purchaser will forego in order to obtain it. The most striking example is the hard-core heroin addict who is willing to eat out of dumpsters and sleep under bridges – giving up food and shelter -- in order to get his daily fix. No price would be too high for him to pay. In terms of the current market for illegal drugs, hard-core and addicted users probably consume around eighty per cent of those drugs and the large majority of users consume the rest. In terms of policy, that vast majority of users has little effect on the market.

The substitution analysis for those casual users is very different from that for the addict. A social marijuana user will probably make purchases of around a quarter of an ounce, which even at today’s astronomical prices, will cost fifty dollars or less. This expense is no more than the cost of two or three alcoholic drinks with a companion or taking a date to a movie with snacks. Shared joints at home with a DVD movie and popcorn is very competitive with that movie date. If the choice is between marijuana and saving for retirement or next summer’s vacation, the value of those savings when reduced to present value is less than that of the marijuana. As far as medical marijuana is concerned, marijuana is both cheaper and more effective than the six hundred dollars a month that legal Marinol (synthetic THC, marijuana’s primary active component) costs.

Prohibition does not stop the market from continuing. It does criminalize the sellers, making them more violent and unscrupulous and increases the money cost to the purchaser, but the sales still continue.

The next installment will start looking at the unintended consequences of prohibition, and after that, we will look at the effects on law enforcement and the justice system.

[1] Data is taken, passim, from Soodhalter, Ron, Hanging Captain Gordon, NY, 2006. Soodhalter estimates $100 in 1850 to be the equivalent of $4,000 today.

[2] I intend to return to this situation in a later installment on unintended consequences of prohibition.