A couple of weeks ago on Catallaxy Files a contributor going by the nom de plume ‘I Am Sparticus’ made a couple of posts about the market for drugs (here and here). As an economist and interested observer of such markets this is something of a pet topic for me. I’ve been lurking around the Silk Road—and its various reincarnations—since its inception in 2011. I remember reading the posts at the time and wondering just how something quite so could have sneaked its way onto The Cat. (Then I reminded myself it’s a conservative blog, not a libertarian one.) It’s taken a little while, but allow me to correct some of the author’s errors.
First thing first, economists have been falling over themselves to explain why prohibition is bad and does not work. In fact, “many of the harms typically attributed to drug use are instead due to drug prohibition.” This is just another chapter in The Economics of Prohibition: from alcohol, to narcotics, to marijuana, to tobacco, to whatever other vice. As the Journal of Economic Perspectives put it some 20 years ago: “The bottom line is that a relatively free market in drugs is likely to be vastly superior to the current policy of prohibition.”
All that notwithstanding, now let’s begin at the beginning. Sparticus admits that drugs are still readily available (and can be judged a failure on that metric), but claims that because
the price of drugs, whichever drugs, is higher than they would be without government intervention suggests that “prohibition” is working to some degree.
While it is true that the effect of drug prohibition on drug prices is to make them more expensive, the claim that this is good policy is certainty an interesting piece of mental gymnastics. By this logic, if drug markets were legalised and a 1% ‘prohibition tax’ was levied then the policy would be a success—because, well, the price is higher! All governments are therefore implementing extraordinarily successful prohibitory policies in all markets at all times. There you have it. Actually, the Australian evidence suggests that “rather than being a hinderance to the drugs black market, prohibition acts as an economic multiplier.” Unintended consequences 101.
The author then asks us to consider this purely as an economic issue and makes probably the most correct statement in the whole piece: “I am sure that amongst the Cats out there, are many many better economic thinkers than I.” (Reading the comments, many of which agree with the author, does cast doubt over this, however.) But this is where the real doozy comes in:
It could be argued that the free provision of drugs is a market failure. Let’s not debate this proposition; let’s just assume it for the purpose of this argument.
No. Just no. You don’t get to “just assume” faulty premises like these because they suit your argument. Start from first principles. First, the very existence of a market is not a market failure. This is true for drugs as it is elsewhere. Typically, externalities persist due to the non-existence of a market (or more accurately, because externality-resolving exchanges have been inhibited by transaction costs or outright prohibited by governments). Now consider the author’s claim about externalities:
The costs and benefits of drug consumption are borne not by just the users but by broader society – friends, families, communities.
Well, OK. Name me one kind of activity that does not externalise costs and benefits in this way. One of economists’ favourite examples of an uncompensated positive externality is ‘beautiful people’ (beautiful front yard gardens and privately-provided, publicly-displayed art are others). Being offended by an economist’s comparison of women to objects is another (negative) externality. Should beautiful people receive a subsidy for venturing out into public? Should economists be taxed for asking such questions? You see the game that gets played here: value is subjective and hence anyone can attribute a negative externality to any activity and propose some “scope for government intervention.” Here’s my reinterpretation of Sparticus:
Finally, let’s return to the reciprocity of externality. I made the claim earlier that the imposition of anti-drug policies is actually a negative externality borne by drug consumers. But what of the subjectivity of externality? How can I make such a pronouncement? Surely if the externality exists—and anti-drug policies are inefficient—then drug consumers will themselves find it advantageous to contract to remove them? True enough. But we need to pay attention to the relative imposition of costs here. The argument could be made that because the current policy setting is ‘illegal’ and carries a penalty (as well as some measure of social ostracism), then the transaction costs for drug consumers are higher than for anti-drug commandos.
Again, well may this be the case: all we can really say is that given these constraints the appropriate outcome is the status quo. No externalities either way, right? The upshot is that as the subjective evaluations made by drug consumers (and non-consumers alike) of the costs of anti-drug policy-change—both the costs of putting up with them and of sticking your neck out to change them—then so too will the calculus over anti-drug policy-change, change. That is to say, yes the current policy may be efficient, but as costs and benefits change, the efficient policy changes: from illegal to legal. We only identify externalities by the attempts of individuals to resolve them. Let’s see the efficient outcome reveal itself.