Nothing New Thing Under the Sun: Prohibition, Drugs and the Iron Law

By Tarnell Brown of Econlib.

"Some time ago, roughly four years, I began this series on how drug prohibition only serves to create the public health crisis that such policies are supposed to mitigate. Of course, I never intended for such a large period to lapse between my last article and this one, but I suppose it is a nice demonstration of the difference between intentions and outcomes.

As a refresher, our last discussion highlighted how Prohibition-Era laws such as the Harrison and Volstead Acts begat later laws such as the Boggs Act of 1951 and the Narcotics Control Act of 1956, which begat the modern War on Drugs™. Today, we will explore further the parallels between the two regime paradigms, highlighting why the continuing failure of the drug war is inevitable and wholly predictable; a Pygmalion Effect which creates what it forbids.

When the Eighteenth Amendment was passed in 1920, it was widely hailed as a watershed moment that would reduce crime and poverty, absolve the public of paying for prisons and poorhouses, and save the family from the vagaries of drunkenness. Similarly, when President Nixon declared drug addiction Public Enemy Number One in 1971, it was with his 1969 declaration  to Congress that the full forces of government must be marshaled “to cope with this growing menace to the general welfare of the United States.” Again, the nation was told, we would reduce crime and poverty, lower the scope and costs of incarceration, and stamp out a danger to the American family.

It is a vast understatement to say that these assurances were wrong, and even this is underselling the deleterious impact of these policies. Between 1916, four years before Prohibition, and 1929, four years before its repeal, both the number of cases terminated in Federal courts and the number of prisoners remanded from those courts effectively quadrupled. This, of course, led to a concomitant rise in prison spending due to overcrowding, which was a clear indication that the promised decrease in crime wasn’t coming. While proponents of Prohibition proudly proclaimed that the tide of crime had lessened, minor crimes such as vagrancy and public swearing had decreased by 50%, while more serious crimes rose precipitously; property theft by 13.2%, homicide by 16.1% and robbery by 83.3%. The tradeoff here is one between a decrease in misdemeanors likely to result in a fine or a night spent in the local jail, and felonies which greatly increased the population of state and Federal prisons.

Similarly, claims that the War on Drugs™ would reduce crime have proven unjustifiably optimistic at best. In 2020, there were an aggregate 1.1 million arrests made for drug-related offenses, of which the majority were for simple possession (Cohen, Vakharia, Netherland, & Frederique, 2022). As of 2015, the rate of prisoners as a function of the population has grown from 100 per 100,000 in the period before Nixonian drug policy to over 500 per 100,000 (Pfaff, 2015). As a result, the United States has become the world’s largest jailer, both in absolute terms and in rate. According to Miron and Waldock, expenditures related to drug prohibition – including the increase both in prisoners and the number of prisons/jails needed to accommodate them – now equals or exceeds some $41.3 million annually. 

Despite the increase in crime, prison sentences and the cost of enforcement, Prohibition had more of a shifting effect on alcohol consumption; a thing that is also true of drug consumption patterns under the current regime of criminalization. This shift, the effects of which will be discussed in greater detail in my next segment, is comprised of consumers moving away from a product of lesser potency to one of greater. This phenomenon, known as the Iron Law of Prohibition, is a result of fundamental economic principles; the creation of barriers to both entry and supply creates pressure to minimize volume while simultaneously maximizing profit (Beletsky & Davis, 2017). In effect, bulkier products with a lower degree of potency, such as beer or marijuana, are substituted by more potent, less bulky products that are easier to produce and transport, such as hard liquor and cocaine. While beer and marijuana may still be available on the black market, the price of these items rises relative to their more potent, less bulky alternatives, which tilts demand in favor of the harder stuff.

Despite the rise in crime associated with such illicit activities and the organized institutions that produce the wares, much of the distribution of prohibited items is carried out by small-scale entrepreneurs (Levine & Reinarman, 1991). While many of the headlines tout the defeat of cartels and gangs, the reality is that most of the arrests are those of small-to-mid-tier neighborhood distributors. At any given time, somewhere between 1-2 million individuals are involved in drug distribution within the U.S., while roughly a half million individuals are incarcerated for drug-related activities (Kleiman, Caulkins, & Hawken, 2011). What this means is that the average dealer-distributor spends a year incarcerated for every two to four years they engage in selling. 

A Brief Look at Social Costs

All public policy should be judged by comparing costs to benefits, including costs that are social rather than monetary. While monetary costs are easier to examine – it is a balance sheet problem, after all – social costs are no less important. Between 1973 and 2013, over $1 trillion was spent on drug enforcement in the U.S. alone. Yet, in 2016, Americans spent $150 billion on heroin, methamphetamines, cocaine, and marijuana, which doesn’t even factor in other classes of illicit drugs. Perhaps the most troubling aspect of these sunk opportunity costs is that despite a regime of increasing funding for supply-side enforcement, drug prices have continued to decline over the last four decades.  This isn’t to say that they exist in cost parity with legal substances; their prices are still higher. What it does say is that current policy does little to abate demand.

Moreover, instead of reducing crime, prohibition simply creates more criminals. Everyone involved in the drug market, from supplier to distributor to consumer, is automatically a criminal. Absent the property rights protections and dispute resolution apparatus available via normal legal channels, interested parties must resolve their own conflicts, often leading to violent means. Benson et al. (2001) find that drug enforcement is not associated with a rise in violent crime, but is also correlated with a rise in property crime; not necessarily because those involved in the drug market are committing these property crimes, but because of the opportunity costs associated with shifting resources away from one set of crimes and towards another. 

Just as it was with alcohol during Prohibition, quality control is an issue with illegal drugs. As we discussed earlier, prohibitory laws create incentives to minimize the costs of production and transport while maximizing profit, which in turn trends towards potency as the major concern. Because the product is manufactured by local entrepreneurs, however organized, there are no industry-wide safety standards. Hence, the current issue of heroin laced with fentanyl, for example. This leads to an increase in drug-related overdoses, and other related problems.

These are just a few of the more obvious social costs related to the War on Drugs™.Next, we will take a deeper dive into the issue of social costs."