Demand-Side Narconomics

EconTalk Extra
by Amy Willis
Tom Wainwright on Narconomics... Paul Bloom on Empathy...

border patrol.jpg Illegal drugs appear to be a scourge on many a community, and while wanting to solve the drug problem is laudable, this week's EconTalk guest argues we're going about it all wrong. In his new book, Narconomics, Tom Wainwright of "The Economist," suggests that rather than targeting supply, governments should attend to the demand side of the market for best effect.

What do you think? If the US government were to change the direction of the War on Drugs would it meet with success? And what exactly constitutes success in this case? Should the state be in the business of trying to dissuade people from doing something they want to do, even if they know it's bad for them? Are people really making a free and informed choice when they use? These questions and more emerged from host Russ Roberts's conversation with Wainwright, and we hope their conversation sparked even more questions of your own. And, of course, we hope you'll share your thoughts with us. We love to hear from you.

1. If you could sit down with Wainwright after listening to his interview with Roberts, what's the one question you'd most want him to answer?

2. Wainwright compares Latin American drug cartels to WalMart, arguing they are both examples of monopsony. To what extent does each satisfy that designation? Do the "unseen benefits" Roberts ascribes to WalMart similarly appear with the cartels?

3. Wainwright asserts that the US Border Patrol has provided a tremendous profit opportunity for those cartels interested in diversifying their business model to include "people smuggling." Why does he think this, and how true do you think this is? To what extent do you share Roberts's and Wainwright's pessimism that the US border can ever be secured, and why?

4. How do drug cartels employ "corporate social responsibility?" In this Feature Article, Dwight Lee describes a socially responsible corporation as "one that benefits the wider community beyond its shareholders by donating some if its profits to worthy causes." Does this fit the Latin American cartels Wainwright describes? To what extent would Lee agree with Wainwright's characterization of CSR?

5. How did New Zealand become engaged in what Roberts describes as "an arms race in banning and innovating," and what effect has it had on the market for illegal drugs in New Zealand? How might their approach be more effective? To what extent do you agree with Wainwright that the government has a compelling interest in regulating "highs?"

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COMMENTS (2 to date)
Nick writes:

Reacting to items 1 and 3:

I found Wainwright makes some valid points, foremost among them that consumer countries aren't doing enough to curtail demand for illegal drugs, and that efforts to reduce supply have been considerably more successful than the conventional - and wrong - wisdom about the war on drugs being a failure. As a foreign affairs professional who has worked extensively on this topic, I have been frustrated that so few policymakers are willing or capable of applying economic principles to identify and attack the drug trafficking industry's vulnerabilities. I hope Wainwright's ideas prompt greater interest in this regard.
However, his argument that that it is illogical to invest so many resources in reducing the availability of a raw material (coca leaf) whose value is infinitesimal when compared to the street price of cocaine hydrochloride (the powdered substance we think of as cocaine) misses a much larger point. Eradication is not, as W argues, about affecting upwards the price of cocaine so as to significantly discourage its use. It's about externalities - even if most policy-makers advocating eradication don't realize it.
As we know from our Econ 101, the cost of every good is borne by some combination of the producer, the consumer, and by others who neither produce or use the good. In the case of cocaine, the externalities of producing and distributing coca leaf, coca paste (the intermediate stage) and CHL increase dramatically as we travel along the production chain. Producing coca leaf "costs" agricultural inputs, some stress and anxiety on the part of the coerced farmer, and the severed limbs and, occasionally, lives of persons and animals who stray into an improvised explosive device protecting the coca field. The latter externality is already steep enough, but it gets manyfold worse as the coca leaf becomes cocaine or crack. To note just a few of these additional externalities, there's the massive environmental damage from producing coca paste and HCL as traffickers dump tons of toxic chemicals and waste into rivers and the jungle floor; there are the lives of soldiers and police in the producing countries (even if they mean little to groovy cocaine users), the lives of the desperate who the traffickers employ as mules (swallowing and smuggling condoms filled w cocaine at the risk of instant death if one bursts/leaks); there is the undermining of the rule of law in producer countries through bribery and intimidation; the cost of anti-drug resources, and of course; the lives of the addicts as well as the lives and property of people who addicts victimize to feed their habit.

Law enforcement officials in consuming and producing countries do, actually, debate the costs and merits of attacking traffickers at various points of the production chain. Many reason that they can hurt traffickers more severely by seizing street-ready cocaine than by spraying coca fields. But that debate, too, fails to account for the cost of externalities. Whereas eradicating coca hits the trafficker's pocket only lightly, it "saves" society massive externalities down the road. When we wait to seize more valuable loads of cocaine, we deprive traffickers of a larger chunk of revenue, but the pollution, corruption and lost lives are "sunk" in the enterprise's activity. And for that reason, it still makes economic sense to eradicate coca.

I thought also that Wainwright's analysis - at least what I heard of it in the interview - lacked some rigor in its discussion of the "paradox" of the upwardly sticky price of finished cocaine. There is no paradox, just a faulty analysis that relies on the availability and cost of inputs as the primary determinant of the price of finished cocaine. As Russ points out, there are many goods whose prices bear little relationship to input costs. Cocaine is one such good. It remains expensive because sellers demand a high premium for undertaking the risks involved in selling it. The tougher our enforcement of drug laws, the greater the risk and cost to suppliers and the greater the price which, at the margin, will serve to discourage users. That's a good thing.

To suppress this "unconventional enterprise", governments need to work on various fronts, including reducing absolute demand (such that people wont consume cocaine irrespective of it being "a bargain"), increasing costs and risks to suppliers, such that they are compelled to seek an increasingly high price in the face of falling demand, thus discouraging ever more new users, AND reducing the cost of externalities of cocaine production by arresting the amount produced at the earliest possible point in the production chain, i.e. eradicating coca.

As for issue #3, I find specious the argument that increased border vigilance only serves to divert the alien smuggling business to "really" bad guys, while doing nothing to reduce the clandestine flow of people across the border. Again, higher risk to the coyote (there has to be a special place in hell for these people) means higher cost and higher prices for the users of the smuggler's services. High prices will most decidedly discourage the use of people-smuggling services. When I worked on these issues on the border many years ago I saw plenty of instances of economically rational thought among illegal and legal immigrants. Wainwright cites the hypothetical case of an illegal immigrant woman who is denied re-entry while her children remain in the US. I saw people in exactly the same circumstances choosing, as often as not, to move their families back to Mexico, pending a US citizen child attaining the age of majority and thus the ability to petition their parents as legal immigrants.

Wainwright offers many good ideas and insights on the application of economic thought to these serious social and political problems; it would be a pity for him to debase them for the sake of staying in the good graces of the current fashionable approving view of illegal immigration.

Keep up the great podcast, Russ!

John H Penfold writes:

I haven't read the book. I'll listen when I get a chance but right now I'm in Cali Colombia, where it started and where 50 years ago I was first approached by a guy wanting to sell the US government information on the organization of drug business. No interest at the time in Washington. Some things should be obvious. Illegal narcotics cannot be stopped on the supply side. It is impossible. These are powders that can take any shape. They have been shaped as aspirin and imported in bottles, dissolved as starch and imported in Pierre Caden suits, injected, swallowed, stuffed, flown in big and little planes, submarines, speed boats, live and dead returning Americans. Colombia has two coasts and endless rivers and dense forests and a very enterprising population some of whom are deadly. A lot of it was pushed to Central America and Mexico by President Uribe, But they lost focus and it's back. The cartels make a thousand percent wholesale on small sales on the other side of our border and rat on some of their customers to maintain contact with our drug warriors. Once on our side of the border the profits go to 10000%. The elasticity is what? About that of cigarets? what happens to those 10000% profits with a really big bust? And yet prices don't change. They're better than Amazon at instant inventory replenishment. The war on drugs is insane. Then there's the prescription drugs. and designer drugs. And with the potential profits, endless future innovation. It must be fought on the demand side but that hits middle class kids driven by flabby modern nihilism and standard young people peer dominated stupidity, not addiction. The addicts don't last long. Drug test for everything, especially drivers licenses, scholarships. If we were ever to be so bold as to legalize these toxic substances, we'd have to test anyway. Community service rather than jail, fines, loss of drivers licenses for extended periods. Etc. The only thing that might be worse than current policy would be to decriminalize them. That will leave the non tariff barriers of interdiction but reduce risks and marketing costs. So that is probably what we'll do. Of course treating them like tooth paste or chewing gum with marketing campaigns as we're doing with Marijuana is also stupid. Nothing like exorbitant profits and an endless supply of stupid kids to make sensible policy difficult.

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