DRUG PROHIBITION—A MARKET (?) WITHOUT FORMAL RULES

Despite the intentions of policy makers over the past century and a half, the market for illegal drugs is alive and thriving. Between 2000 and 2010, US drug users are estimated to have spent roughly $100 billion annually on heroin, cocaine, marijuana, and methamphetamine (RAND Corporation 2014, 2). This is more than double the estimated annual expenditure, roughly $41.3 billion (as calculated by Miron and Waldock (2010)), of US state and federal governments on prohibition enforcement. Illegal drug markets manage to thrive despite the lack of formal property rights afforded to them and in direct opposition to formal law enforcement tactics aimed at shutting them down. The lack of formal rights and law enforcement efforts, however, significantly impacts the trajectory and profitable opportunities available in these markets. Entrepreneurs working within these markets must operate within the constraints they face due to law enforcement and must find new ways to innovate in order to remain profitable.

As a result of these constraints, many of the entrepreneurial discoveries that are profitable in illegal drugs markets are centered around how to remain in business without being caught by the police. These discoveries are innovative in the sense that entrepreneurs have found new ways to decrease the risk of capture, but they are not innovative in the same product-improving sense that is associated with legal goods, as they are often associated with socially undesirable outcomes. Innovations in illegal markets are frequently unintended by policy makers and are often only profitable because of the presence of law enforcement. Altering drug-trafficking routes, involving women and children in drug smuggling, recruiting children to sell drugs, increasing the potency of drugs, and developing designer drugs are all innovations geared toward increasing profitability by lowering the risk of detection.

Since the first federal law targeted at drug smuggling was enacted in 1914 (Redford and Powell 2016), the US government has been involved in a variety of drug interdiction operations. Much in the same way a legal shipping company would find the cheapest route by which to ship cargo from one location to another such that it arrives to its final destination with as little damage as possible, illegal drug trafficking organizations (DTOs) do the same. Although they do not pay tariffs or a variety of other costs that are involved with legally shipping a good from one country to another, DTOs incur significant costs to avoid detection, evade capture, and ensure that no one steals the product at any step along the distribution chain. Kostelnik and Skarbek (2013) emphasize that this requires several layers of governance and an intricate reward and punishment system to elicit cooperation. Additional problems and costs can arise for these DTOs, however, when law enforcement discovers a drug trafficking route. In his chapter in Ending the Drug Wars: Report of the LSE Expert Group on the Economics of Drug Policy, Peter Reuter utilizes the “balloon effect” metaphor to describe how interdiction along one drug smuggling route can redirect trafficking activity to a different drug smuggling route (2014, 33). Reuter (2014, 40) notes that while the data that is necessary to test his hypothesis effectively does not exist, it is a helpful, albeit incomplete, metaphor that captures the incentives that smugglers face—“Smugglers, like other profit-making enterprises, have incentives to respond to changes in costs.”

Daniel Mejia and Pascual Restrepo (2014), in their chapter of the same LSE Expert Group volume, also provide evidence of entrepreneurial responses to interdiction operations on the part of individuals involved in DTOs. They comment that “[a]ll in all, the recent Latin American experience shows that when a country is (locally) successful in the fight against drug production and trafficking—which is the exception rather than the rule—DTOs are displaced to other countries where they find more favourable environments to run their operations. The displacement of drug trafficking activities to other countries after successful interdiction strategies are implemented in one country leads to cycles of violence and instability in the receiving countries” (2014, 29). Since evasion is of utmost importance to the business of drug trafficking, the use of routes known to law enforcement poses significant costs and risks. Entrepreneurs working within these DTOs respond to the discovery of a trafficking route by law enforcement by no longer using that route and seeking out alternative routes. DTOs incur significant costs in rerouting drug smuggling operations, as it frequently requires them to do business with new people and cross terrain with which they are less familiar. Despite these costs of transition, these new locations are still preferred and are more profitable than attempting to do business along a trafficking route that is known to law enforcement, as doing so would result in capture and a significant cost to continuing (if not a shutdown of) business.

In addition to altering routes of drug smuggling, interdiction efforts also frequently change the methods by which the drug is transported (especially if alternative routes are not available). Entrepreneurs working within DTOs must be alert to ways of smuggling drugs without law enforcement detection, and sometimes this includes very creative and clever methods. Although by definition all reports by law enforcement and the media regarding seizures of smuggled drugs are unsuccessful attempts, they do provide us with evidence that trafficking entrepreneurs are testing out different methods to avoid detection. In one such seizure, in January 2016, US Customs and Border Protection intercepted 2,493 pounds of marijuana hidden in carrots (US Customs and Border Protection 2016). In April 2011, USA Today reported,

In the past two months alone, inventory confiscated at New York-area airports and ports included opium concealed in porcelain cat figurines, cocaine in bags of freeze-dried coffee, drugs built into the railings of a suitcase, sewn into pants, molded into sneakers, concealed in clothing hangers or packed into the console of a Nintendo Wii video game system. . . . Drugs have been hidden in electrical cords, in a computer mouse, a child’s Mr. Potato Head doll, baby diapers, drug-soaked clothing, toothpaste, cosmetics, fruit that is expertly sliced, gutted, filled with drugs and resealed to look untouched, or in live animals—such as puppies—and of course, in people.

Not only are drugs smuggled in other goods, but they are also ingested by people in order to bypass additional security measures brought on by law enforcement. According to Silverberg, Menes, and Kim (2006), the practice of “body packing,” swallowing or inserting packets of wrapped drugs into one’s person, was first documented in 1975 (541). As the Council on Hemispheric Affairs (2011) reported, “Government efforts to impede drug smuggling have only increased the level of women’s participation in the business because women were less likely to be associated with drug trafficking and, therefore, could sneak past security with relatively small amounts of narcotics in their chests, or swallow pellets containing drugs.” Such tactics can be viewed as innovations on the part of trafficking entrepreneurs to find new methods to get drugs over the border undetected. These methods become entrepreneurial alternatives to help DTOs remain in business when other methods are compromised.

Children are also recruited to work as smugglers. Like women, children are less frequently associated with illegal drug activity compared to men. A crucial difference, however, is that children are not subjected to the same punishments as adults for breaking the law. They are also cheaper labor because children are typically less skilled and have less experience compared to adults. Booth and Fainaru (2009) report that “[a]lthough the exploitation of children by criminals is timeless, authorities say the cartels [in Mexico] are responding to new realities here. They have stepped up recruiting to replace tens of thousands of members who have been killed or arrested during President Felipe Calderon’s U.S.-backed war against the traffickers.” Booth and Fainaru (2009) quote Martin Barron Cruz, a researcher at the National Institute of Criminal Science in Mexico, saying, “These days, youths are joining the drug cartels at an ever-younger age because they’re cheap. . . . It is a question of the market. A kid of 15 ends up doing the same job as a 20-year-old, but for half the money. It is easier for the cartels to dispose of them when they are no longer needed. . . . I say ‘dispose’ because, sadly, there’s no other word for it. They eliminate them, often using another kid of the same age.”

Child involvement is not just isolated to smuggling. Lamar (2001) describes how, during the 1990s, teenagers became significantly more involved in the crack market. He states that “[w]ith the advent of crack, juvenile arrests in New York City tripled, from 386 in 1983 to 1,052 [in 2000]. Detroit-area police busted 647 youths [in 2000], almost twice as many as in 1986. A staggering increase in juvenile drug arrests has occurred in Washington, jumping from 483 in 1983 to 1,894 in 1987.” Lamar’s article supports the idea that drug entrepreneurs respond to law enforcement and adjust tactics to evade punishment, maintain protection, and keep costs low. “There is no provision under our law to mandate restrictive custody for these youths,” describes George Robinson, an Atlanta-based assistant district attorney, in Lamar (2001). Robinson continues, “They’re selling drugs, and we’re just spanking them on the hands.”

Increases in drug potency can also be categorized as entrepreneurial innovations. Since drug punishments are delineated by law enforcement based on drug type and quantity, drug entrepreneurs face strong incentives to traffic and distribute smaller quantities to decrease punishment. Drug entrepreneurs also face an incentive to traffic and distribute smaller amounts of drugs because it decreases the likelihood of detection. However, the smaller the quantity, the less revenue that the entrepreneur can earn, ceteris paribus. This presents the entrepreneur with a trade-off, unless she is able to find a way to alter the drug to increase a consumer or lower-level supplier’s willingness to pay. Increasing the potency is one such way.

Thornton (1998) presents a theoretical framework for, as well as empirical evidence on, the impact of prohibition of goods such as drugs and alcohol during Prohibition. Thornton finds that the average observed potency of marijuana between 1974 and 1984 increased by 800 percent (1998, 733). Since this article, more recent data has been made available. According to ElSohly (2009), the Director of the National Institute on Drug Abuse Marijuana Project, the percentage of Delta-9 THC (the psychoactive ingredient in marijuana), which is used to measure marijuana potency, increased from .74 percentage points in 1975 to 8.49 percentage points in 2008 (8). This is a greater than an eleven-fold increase in the potency of marijuana in thirty-three years. Thornton’s article also documents the impact of Prohibition on alcohol consumption. This data is especially useful as it provides information on alcohol potency during the years, but it also highlights what happened to alcohol potency and consumer behavior after Prohibition was repealed. This allows us to tease out how market behavior was altered as a result of prohibitionist policies. Thornton (1998, 732) documents that distilled spirit consumption as a percentage of total alcohol consumption was on the decline prior to Prohibition, dropping from roughly 80 percent to 40 percent between 1840 and 1920. After Prohibition began in January 1920, Thornton shows that this percentage dramatically rose to roughly 90 percent and remained above 80 percent until the mid-1930s. After Prohibition was repealed, the percentage of distilled spirit consumption as a percentage of total alcohol consumption declined rapidly to around 50 percent.

One final example of entrepreneurial innovation within the illegal drug market is the evolution of designer drugs through malnovation (Redford, forthcoming). Malnovation refers to the induced drug discovery process created by drug scheduling laws. According to Redford (forthcoming, 4), these laws created “new incentives for drug entrepreneurs to: find recreational uses of lower scheduled drugs, seek out and create entirely new or previously unscheduled drugs, and slightly modify the chemical structure of existing, scheduled drugs.” In the instance of designer drug malnovation, illegal drug entrepreneurs, in an effort to avoid legal punishment, operate in a gray area by producing drugs that are not technically illegal because their chemical formulas are slightly altered such that they are no longer the same chemical substance specified on the scheduling list. Redford uses this method of malnovation to explain the evolution of synthetic cathinones (bath salts) in the 2000s and fentanyl variants in the 1980s. This process frequently results in socially undesirable outcomes such as overdose and death epidemics as the variants within the larger drug family are sold under the same street names despite their chemical differences. By using the same street name, drug entrepreneurs are able to sell technically legal forms of drugs in established consumer groups. Over time, however, this can become dangerous and unprofitable as further chemical manipulation takes place, in response to the older variants being added to the scheduling list, thus increasing the heterogeneity in the variants sold under the same street name.

Playing devil’s advocate, without a realistic counterfactual, it is impossible to know whether or not these specific instances of increasing potency, creating designer drugs, hiring women to body pack drugs for smuggling, recruiting and coercing children to smuggle and sell drugs, and altering trafficking routes could have taken place in the absence of Prohibition. We could concoct scenarios in which a legal drug entrepreneur would make similar innovations in response to market conditions, thus making them productive. Legal shipping companies alter trade routes all the time, and shipping smaller quantities of goods is cheaper because they require fewer resources. However, risking a person’s life by forcing them to swallow condoms full of heroin to smuggle over the Mexican border into the United States or coercing a child into selling heroin on a street corner seem unrealistic in a market where such goods could be flown on a parcel plane and sold in a retail store. It also begs the question of why we do not see such things in markets for goods such as marijuana in Colorado, distilled spirits, sandwich bread, or economics textbooks.

 
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