The war on drugs was declared in 1971 by president Richard Nixon in a press conference that went on
to outline a plan to fight the trade of controlled substances across the world.
Drugs were declared national enemy number 1.
Since then over 1 trillion dollars have been spent on fighting this
battle and by all metrics, it has been money poorly spent.
It’s probably no surprise to anybody that drug related deaths and crimes have done
nothing but rise over the 50 years since Nixon made this declaration.
With the benefit of hindsight, it was pretty easy to see why... you can’t fight the
forces of supply and demand in unregulated markets with m16’s and government agents.
Trying to do so would be like trying to fight a hurricane by dropping bombs on it.
Not particularly effective and if anything it’s just going to cause even more collateral damage.
But perhaps this is all starting to change,
just last week during the election, the people of Oregon also voted on something
else that will potentially have even more influence than who the next president is.
The people of the state voted to decriminalize drugs, all drugs, even the hard stuff.
This might look like waving the white flag in defeat and finally admitting that drugs
have won the war on drugs. But it might also be what we should have been doing all along,
fighting the war on drugs with economics.
To understand what economists mean by this we will need to look at a few key area’s.
Why couldn’t the war on drugs disrupt this market?
What is driving the growth in this market?
And could legalization provide a better solution to dealing with this issue?
Now big disclaimer time in no way do we advocate for or encourage the use of any
type of drug outside of medicinal purposes, but we also realise that people are people
and they are gonna do what they are gonna do, but even still drugs are bad mkay? Mkay!
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Now of course drugs are a big issue around the world, they bring in hundreds of billions of
dollars that will go on to fund the unscrupulous organizations that peddle them while also causing
untold misery to the people that abuse them and the communities affected by them.
But here is the thing, the images that spring into your mind when you think of drug dealing
are probably a result of their illegality.
In the 1890’s sears published a catalog that included an offer to purchase cocaine
for $1.50. This was been sold with less regulations than cough syrups have today.
The public consensus gradually started to shift over the next decades culminating in prohibition
on alcohol being introduced in 1919. At this time a bottle of beer was more illegal than heroin.
The same was true for things like marijuana, which had a federal tax placed on it in 1937
but was still perfectly legal so long as that tax was paid. Over time more and more
controls were put in place to try and curtail perceived social issues caused by drug abuse.
This all started to escalate in the 1960’s where recreational drug use was becoming
more and more widespread particularly amongst groups that were opposed to
the ideologies of then-president Nixon who introduced the controlled substances act.
This is the act that is primarily responsible for the modern image
that drugs have. Before this dealing in controlled substances was akin to
running an underground casino or trading in counterfeit goods.
It was still bad, it was still illegal, but didn’t quite carry the same weight that felony
drug charges do today, both legally speaking and in the public conscious.
None the less these laws were put into place and they stuck around a lot longer than the president
who introduced them. Which weirdly enough probably caused more problems than it solved by trying to
Squeeze the supply
The basis of any market in economics is supply and demand. Hopefully this doesnt
come as a huge shock to anybody watching an economics explained video, but now you know.
We can actually graph this out when we consider the quantity and the price of a good.
The supply line will slope upwards because naturally the more an item sells for
the more people are going to be willing to sell.
The opposite is true for demand, naturally,
items at a higher price will have fewer people willing to or able to purchase them.
Where these two lines cross over is the market equilibrium
which in theory tells an economist how much of an item will be sold for what price.
Now the war on drugs completely ignores the basic
lessons learned by this simple little graph that is taught in economics 101.
You see the demand for drugs, especially highly addictive hard drugs is relitively
inelastic. What this means is that the people that are buying these substances
will continue to buy them no matter how expensive they get, within reason.
We can graph that out here and it makes our demand line go from looking like this to looking like
this. The reason this is so important is because historically the proverbial war on drugs has done
very little to influence this demand, preferring instead to go after the supply of drugs.
Government agencies like the DEA, local law enforcement,
and customs work very hard to take drugs out of supply by busting down doors,
arresting suppliers, and confiscating the contraband.
Billions of dollars is spent every year on this process and that is to
say nothing of the money that is spent on prisons all across the united states,
go and watch our video on the economics of prisons to find out more about that.
The big issue with this supply side attack though is that while it makes the general
public feel good about busting bad guys, it creates a terrible market failure.
All of these busts around the country reduce supply, they might not reduce it by much,
that is really anybody’s guess but they do reduce it none the less.
This drop-in supply will naturally increase the price of the goods in
this market which would normally reduce the total amount consumed,
but as we saw earlier the demands for drugs doesn’t really change with their prices.
So the total quantity of drugs on the street is reduced a little bit through
direct intervention and a little bit through normal demand falloff,
but this impact is pretty minimal and all it really achieves is making these illicit
goods even more expensive, increasing the revenue for the organizations involved in this trade.
Now the business savvy amongst you might note that sure, revenue has increased, but that doesnt mean
that their profits have increased. All of the money and effort they put into getting around
these new agencies costs a lot of money and carries a lot of risk for those involved.
Getting caught peddling controlled substances before the 1970s was bad, but it carried a heavy
fine and maybe a year or so in prison, depending on the quantiies involved. After the 1970s getting
caught with a felony quantity of a schedule 1 drug, was a one-way ticket to federal pound
you in the ass prison for a mandatory minimum sentance measured in years, rather than months.
This meant that operators throughout the entire supply chain demanded more
compensation to make the risk-reward tradeoff work in their favor.
Now all in all it still sounds like this is hurting these organizations, and
it is sort off, but you see it is actually better for this revenue to be turned into profit
which can be harmlessly spent on villa’s and sports cars, rather than fed into expenses
like intricate smuggling operations, arming gang members, and cutting supply with other nastier
substances to eak back more profit from this high cash flow business.
Higher prices will also mean that consumers of these products
will need to earn more money to fuel this addiction, which will inevitably
increase the prevalence of crimes like petty theft, muggings, and robberies.
The problem is that one outcome looks bad politically, nobody wants to see some drug
lord on a new mega yacht, even if the money was better spent there than arming their subordinates.
The second outcome definitely causes more problems for society, but it has the optics
of looking like something is been done. If this is a war then it’s one that is being fought hard.
So far the entire premise of this fight has been built on a perverse version of Say’s Law.
You may have heard the phrase, Supply Creates it’s own demand, which was a theory in classical
economics that the production of goods gave income to people to go out and spend on other goods.
A furniture maker who makes more couches can make more money
to go out and buy more steak dinners, or jetski’s or whatever.
So if you wanted to increase demand for anything you just
increased the supply of anything else and hey presto everybody is better off.
So if you wanted to reduce all the nastiness caused by drugs, reduce supply,
because reduced supply reduces demand bada bing bada boom problem solved. Well no, say’s
law has time and time again been rejected by most modern economists, for a wide variety of reasons,
the easiest way to disprove this theory is that it ignores the fact that some people save money.
That furniture maker might choose to save all the extra money he is making from all of those
extra couches, and then suddenly they can’t afford those extra steak dinners or jetskis or whatever.
Trying to influence a market or an economy from the supply side
is going to have limited effectiveness and just cause a whole lot of negative externalities.
So perhaps the solution is simple, lets give up fighting the supply and instead
Reduce the demand
The 1971 message to congress outlining the war on drugs included a very detailed plan around
devoting more federal resources to the prevention of new addicts
and the rehabilitation of those who are addicted.
This of course did not get nearly as much media attention at the time,
partially because it was seen as a slightly weak stance on criminals and
partially because it was alot more boring the fighting public enemy number one like Rambo.
Due to this government spending on reducing demand through treatment and education
has only attracted 1 percent of the total spending in the war on drugs
Now advocates of direct action will note that law enforcement operations
naturally cost more than making video’s about how drugs are bad
so it is only natural that these operation will attract a larger share of this total spending.
But perhaps this is part of the point. Getting the same return for less of an investment is just
good businesses, if anything this should be an argument for curtailing demand rather than supply.
The problem is, the demand side might be a losing battle as well.
The use of prescription opiates in the united
states has increased by over %300 percent in the last two decades
which is introducing a new pool of customers into a market for highly addictive substances.
Curtailing demand through education and treatment can be effective but it is
nowhere near effective enough to hold back that sort of a direct increase in demand, especially
when people are been given these prescriptions by doctors, and not by some bad man on the street.
This spike in prescription drug sales has almost perfectly coincided with a rise
in opioid-related deaths as people look to continue their prescription
by substituting it for stronger less regulated alternatives.
When we look at our demand and supply graph again this wave of new users introduced
through prescription drugs massively increases demand and while supply does
not always create its own demand, you better believe that demand creates it’s own supply.
This is where Oregon comes back in, by decriminalizing all drugs
the state has effectively taken most of the downwards pressure off supply.
Now the logical fear here is that drug peddlers will be given the keys to the
city to do whatever they want. But that is probably not true for two reasons.
The first is that there will still be laws in place for high level dealers,
so don’t be going out roleplaying walter white in oregon, you will still go to prison. It
also must be noted that even for personal supplies, drugs are still against the law,
they just don’t carry criminal penalties. Think of it as the difference between
blowing a stop sign and engaging in a high-speed police chase.
But the second reason is a little more complex. Even if we were to assume the worst-case scenario
where criminal organizations were allowed to go their merry way with
no intervention from law enforcement all that is going to do is increase supply.
An increase in supply will make these drugs cheaper but here is the thing,
the same type of stubborn price inelasticity that was hurting the
war effort, could also be a huge help by adopting this strategy.
In the same way that an existing addict is going to do whatever is necessary to pay for their drugs
no matter how expensive they are, an otherwise unaffected person is not going to wake up
one morning look at the prices on controlled substances and go “oh man there has never been
a better time to take up Meth” again demand is just not affected by price in that way.
And maybe this is the biggest part of the whole process,
Big money causes big problems.
The direct war on drugs costs an estimated 50 billion dollars every year,
but ontop of that there is the costs of housing prisoners serving time for drug-related offences,
the costs involved in prosecuting these offenses, the costs bourne to society through petty crimes
to fund the purchase of these drugs, the costs of healthcare, the cost of loosing working taxpayers
to addiction the list goes on and on, this entire battle is great at burning money.
Oregon and other advocates of a demand side approach
hope that this system will work to balance the books.
When this law is rolled out next year anybody caught with a controlled substance
will be given an option, either pay a $100 fine, or attend a drug counseling seminar.
The fines will help to offset some of the costs of these treatment seminars
and it also avoids the massive costs of housing people in jail and prison.
The state will also be investing money it raises from the taxation of marijuana
sales to fund programs that will help alleviate the burdens caused by these drugs.
This model is very similar to a select group of european countries,
primarily the Netherlands and Portugal which have adopted similar policies around combating demand,
rather than combating supply.
In fact, Portugal might be the biggest overlooked success story amongst all of this.
In 2001 the nation was in the grip of a dire heroin epidemic,
far worse than even the united states today where around 1% of the population were addicted users.
The nation took the decriminalization route in and in the two decades since drug overdoses in
the country have fallen to the second-lowest in all of Europe. All while saving a lot of money.
Final thoughts
Drugs are bad, and they do all manner of harm to the individuals that use them as
well as their friends, families, communities, and economies all while funding the types of
enterprises that are happy to disregard the strict laws currently in place.
The War on Drugs, may or may not have been started with the best intentions
but by all metrics, it is a war that has been lost.
Continuing to waste billions of dollars a year all while pushing victims to the fringes of society
has shown itself time and time again to be a plan that does not make sense socially, economically,
and finally after decades politically.
Slapping handcuffs on bad guys no doubt feels good especially after witnessing the suffering they
have caused, but these are not the enemies in this war. The war on drugs is a war on market forces,
and unfortunately, that is a war that no amount of money or manpower is going to win.