Economics, Liberty, and Drug Legalization

My home state of Washington  will decide on Tuesday whether to legalize small quantities of marijuana.

This measure would remove state-law prohibitions against producing, processing, and selling marijuana, subject to licensing and regulation by the liquor control board; allow limited possession of marijuana by persons aged twenty-one and over; and impose 25% excise taxes on wholesale and retail sales of marijuana, earmarking revenue for purposes that include substance-abuse prevention, research, education, and healthcare. Laws prohibiting driving under the influence would be amended to include maximum thresholds for THC blood concentration.

If the polls are even in the ballpark, it appears the measure will pass.

The “war on drugs” has been an abysmal failure:  since 1970, the addiction rate has remained remarkably stable at between 1 and 2%.  Spending on the “war” since 1970?  $1.5 trillion, with no discernible effect whatsoever on drug usage.  Miron and Waldock estimated that legalizing drugs:

“would save roughly $41.3 billion per year in government expenditure on enforcement of prohibition. Of these savings, $25.7 billion would accrue to state and local governments, while $15.6 billion would accrue to the federal government….the report also estimates that drug legalization would yield tax revenue of $46.7 billion annually, assuming legal drugs were taxed at rates comparable to those on alcohol and tobacco. Approximately $8.7 billion of this revenue would result from legalization of marijuana and $38.0 billion from legalization of other drugs.”

Anybody who has bothered to look at the evidence would not be surprised by the failure of the “war” on drugs.  We have tried prohibition before, and it didn’t work then either (unless your measure of success is Al Capone’s bank account, in which case it seems to have been highly successful).  At least, we were smart enough back then to realize that it didn’t work, and eventually repeal it.

There are two compelling arguments against prohibition: (1) the economic argument, which essentially says that prohibition raises drug prices and enriches the cartels, creating significant violent crime as a byproduct, and (2) the libertarian argument that the government has no business telling its citizens what they are allowed to consume.

Milton Friedman famously made the case along both lines.  Friedman got it exactly right when he said,

There is no logical basis for the prohibition of marijuana…$7.7 billion [replacing marijuana prohibition with a system of legal regulation would save approximately $7.7 billion in government spending on prohibition enforcement, $5.3 billion of which would be at the state/local level] is a lot of money, but that is one of the lesser evils.  Our failure to successfully enforce these laws is responsible for the deaths of thousands of people in Colombia.

Long before, John Stuart Mill laid out the basic libertarian principles on which Friedman’s argument is based.  According to Mill, when an individual harms himself (by taking drugs, for example), we should advise him to change his behavior, but we have no right to use the force of government to stop him:

The distinction here pointed out between the part of a person’s life which concerns only himself, and that which concerns others, many persons will refuse to admit. How (it may be asked) can any part of the conduct of a member of society be a matter of indifference to the other members? No person is an entirely isolated being; it is impossible for a person to do anything seriously or permanently hurtful to himself, without mischief reaching at least to his near connexions, and often far beyond them.

 

If he deteriorates his bodily or mental faculties, he not only brings evil upon all who depended on him for any portion of their happiness, but disqualifies himself for rendering the services which he owes to his fellow-creatures generally; perhaps becomes a burden on their affection or benevolence…

 

But with regard to the merely contingent, or, as it may be called, constructive injury which a person causes to society, by conduct which neither violates any specific duty to the public, nor occasions perceptible hurt to any assignable individual except himself; the inconvenience is one which society can afford to bear, for the sake of the greater good of human freedom.

Friedman discusses the issue in this interview, saying:

I do not believe it is moral to impose heavy costs on other people to protect people from their own choices.

Let’s hope that the Friedman / Mill argument prevails.

Does “Free Market Ideology Mimic Soviet-Style Communism”?

Mike Valente, writing at “Business in a Sustainable Society,” recently posted a piece on the three ways in which “free market ideology mimics Soviet-style communism”:

1. Central Planning and Control:  Aside from erroneously claiming that Adam Smith’s “invisible hand” was a “theory,” Valente goes on to explain how corporate boards exert enormous control over the market.  That may be; but that is not free market capitalism.  Valente is quick to use Smith’s invisible hand metaphor, but has apparently failed to grasp anything else in Smith.  If there is one recurring theme in the Wealth of Nations, it is disdain for precisely the kind of business-government collusion that is so troubling for Valente.

Here is Smith (Book One, Chap 10):

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty or justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.

And here (Book One, Chap 11):

The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers.

Neither the father of modern capitalism, nor any reasonable supporter of the free enterprise system would accept the kinds of rent-seeking, collusive behavior Valente described as legitimate forms of capitalism.  Businesses are always going to seek political advantages when they can, but unless Valente has found a way to modify human nature, the only way to deal with it is through the rules of the marketplace.  And, no, aside from a few cranks, those who believe the market works do not believe it works perfectly or in the absence of rules.

Valente also mischaracterized Milton Friedman’s views by claiming that Friedman was opposed to “any governmental regulation that prevents a private enterprise from achieving its profit goals.”  Yet Friedman (and Smith, by the way) supported a variety of regulations including 100% reserve banking and deposit insurance.   (Take a look at Hugh Rockoff’s paper for some details on Friedman’s views of banking regulations.)

Moreover, Friedman distinguished clearly between economic and political freedom; Valente’s view that he had a simplistic view of the connection between the two is wrong.

2.  Limited Consumer Choice:  Valente’s students apparently argue (much to his chagrin) that consumers can “vote with their dollars” if they are unhappy with the choices offered to them by a seller. His students are right.

Citing this article by Sara Robinson, Valente argues that big box stores have restricted consumer choice.  Robinson explains:

Back in the 1970s, the American retail landscape was still mostly dominated by mom-and-pop stores, which in turn carried merchandise also made by small manufacturers (many of them right here in the US). Not only did this complex economy sustain tens of millions of comfortable middle-class jobs; it also produced a dazzling variety.

The idea that giant global corporations are forcing choices down the throats of helpless consumers is, well, a bit strange.  If consumers really value the mom-and-pop stores that supposedly offered us so much variety (which, in itself, seems implausible), why have the mom-and-pop stores died?  Is it not reasonable to assume that if consumers actually did value the alleged variety offered by the mom-and-pop stores as much as Robinson assumed they do, that they would be willing to pay a bit more for it?  And, if they were willing to do so, how would the global multinationals ever have squeezed mom-and-pop out of the marketplace?

Valente claims that consumers “have no choice but to purchase appliances that will break down in approximately seven years.”  This is based on some strange “optimality equation designed to maximize repeat revenue” (and here I was thinking the objective might be profit rather than revenue).  He goes on: “Companies make more money if they can sell you a new stove every seven years rather than every 30.” Well, in a strange universe where the costs of making 30 year appliances is the same as the cost of making 7 year appliances, perhaps; but we do not live in such a world.  Besides, if producers can always “make more money” by selling appliances that don’t last very long, why would they make appliances that last 7 years?  Why not 6? Or 5?  Or, better yet, 1 year?

3.  The Propaganda Machine:  The bottom line here seems to be that sellers do more than just pitch their wares to us via marketing; rather, they really make us want those things that we do not need!  Marketing promotes a lifestyle, rather than a product.  Okay, perhaps it does.  Even that form of advertising may not be as nefarious as is claimed in the article.  Here’s George Bittlingmayer:

In a similar vein, “noninformative,” or image, advertising can be usefully thought of as something that customers demand along with the product. Customers often want to see themselves as athletic, adventuresome, or spontaneous, and vendors of beer, cars, and cell phones bundle the image and the physical product. When some customers are unwilling to pay for image, producers that choose not to advertise can supply them with a cheaper product. Often, the same manufacturer will respond to these differences in customer demands by producing both a high-priced, labeled, heavily advertised version of a product and a second, low-priced line as an unadvertised house brand or generic product. In baked goods, canned goods, and dairy products, for example, some manufacturers sell one version under their own nationally known label and another slightly different version under a particular grocery chain’s private label.

So, we certainly have our share of consumerism, commercialism and marketing, but advertising does serve some useful functions, including providing information to buyers (at least sometimes).  Valente claims, “It’s no coincidence that one of the largest expense items on a corporation’s balance sheet today is communications, marketing and public relations. It is absolutely mind-boggling to comprehend the sheer magnitude of capital used by corporations on communications to the public.”  Yet, advertising expenditures as a share of GDP have been roughly constant for a century or so.

In the end, free markets do need to reigned in via rules, regulations, etc; crony capitalism, rent-seeking, and collusive behavior are all very real, and they need to be prevented as best we can.  But, the alleged similarities between free market ideology and Soviet-style communism are completely overstated.

The “Reasonable Profits Board”

Via Marginal Revolution, Congressman Kucinich has introduced a bill to limit oil company profits, the “Gas Price Spike Act.”

Here are the important definitions (you can find them in the bill itself here):

The term ‘windfall profit’ means, with respect to any sale, so much of the profit on such sale as exceeds a reasonable profit.

The term ‘reasonable profit’ means the amount determined by the Reasonable Profits Board to be a reasonable profit on the sale.

Specific enough for regulators, I suppose, but let’s hope the Congressman considers taking some time to look at actual data on oil company profits and the determinants of gasoline prices.  He might start with the U.S. Energy Information Administration.  He might also want to consider the consequences of government price controls.

Capping Debit Card Fees

President Obama and Senator Durbin both weighed in today on Bank of America’s new $5 debit card fee.

The President suggested it could be targeted by the new financial watchdog agency.  For his part, Senator Durbin felt the need to tell customers that they should respond to incentives:

“Bank of America customers, vote with your feet.  Get the heck out of that bank. Find yourself a bank or credit union that won’t gouge you for $5 a month, and still will give you a debit card that you can use every single day.”

According to Obama and Durbin (who introduced an amendment to the Dodd Frank Wall Street Reform Act designed to cut the fee merchants pay for transactions from an average of 44 cents per transaction to no more than 24 cents for debt issuers with over $10 billion in assets), we need to prevent banks from imposing transparent fees on debit card transactions even though consumers can (and should according to the Senator) choose another bank if they are charged those fees.

Consider me confused.  If consumers can punish banks that charge them fees they do not like, why exactly do we need to prevent them from charging those fees in the first place?  Those consumers who stay with Bank of America surely won’t like the fee, but they will apparently be willing to pay it for other advantages they might get from remaining a customer.  Those who do not believe those benefits are worth the fee will leave.

Richard Green believes there is no reason to be upset with Bank of America.  I might not go that far, but he’s right that if Bank of America wants to charge for a service, they have a right to do so.  Their customers have a right to find another bank.  Where, then, is the legitimate role for government to cap the fee?