The entrepreneurial innovations within illegal drug markets described in the previous section are examples that highlight how Prohibition policies incentivize and facilitate outcomes that help individuals in the illegal drug trade to evade and protect themselves against law enforcement but do not yield positive sum outcomes. Recall that productive entrepreneurship, the form of entrepreneurship that facilitates economic growth, takes place when the pursuit of profit is aligned with positive sum outcomes.

The shift away from productive entrepreneurship does not imply that these entrepreneurs are (irrationally) engaging in activities that yield themselves or their customers less benefit than the costs they incur. Instead it is a way to describe entrepreneurship that does not lead to economic progress and positive-sum outcomes. In “The Substance of Entrepreneurship and the Entrepreneurship of Substances,” March, Martin, and Redford (2016) describe specific forms of entrepreneurship that are either welfare destroying (nonproductive and destructive entrepreneurship) or only welfare enhancing due to an existing institutional impediment (superfluous entrepreneurship). In each of the examples of nonproductive entrepreneurship mentioned in the above section, economic progress is stunted due to the institutional structure.

A necessary condition for individuals involved in the illegal drug trade, including those involved in the drug trade within prison, is to remain in business and not get caught by law enforcement. This strongly incentiv- izes entrepreneurs to remain alert to and invest resources into methods of law enforcement evasion and protection against law enforcement. As prohibitionist policies are enforced, the institutional framework protecting the rights of illegal goods is consistently undermined, and entrepreneurs must continuously find ways to alter informal rights provisions to keep illegal drug trade flowing in ways that they would not have to in the absence of Prohibition. Time, effort, and resources that could be spent on productive entrepreneurial activities (such as ensuring product safety, quality control, effective advertising, developing new drugs that better fulfill consumer wants than previous drugs, etc.) are instead directed at protective and evasive activities, as these are prerequisites for the drug trade to function at all.

Not only does Prohibition limit productive entrepreneurship and innovations such as drug safety, but it also encourages and exacerbates the very violence that it seeks to eliminate. Violence, however, is not a necessary condition for markets operating within informal institutions. Violence and the credible threat of violence is useful in maintaining order within a governance system, but not all systems of private governance require it in order to be effective (see the discussion in the section above on “Drug Prohibition”). Something else has to explain the persistence of violence in illegal markets that is not observed in legal markets. I argue that the enforcement of Prohibition creates an environment in which violence is a useful tool for protection.

The goal of prohibitionist policies is to decrease the overall number of would-be illegal substance users, traffickers, producers, and sellers by increasing the cost of doing illegal business. This cost of participation also changes the relative makeup and desirable qualities of market participants. As a result, markets for illegal goods are frequently populated by individuals who have demonstrated their comparative advantage in evading law enforcement and effectively using violence as well as those individuals whose marginal cost of committing an additional crime is very low. As Miron notes, “Thus, prohibition enriches the segment of society willing to evade the law”

(2001, 841). Existing criminals and those involved in organized crime and illegal enterprises have demonstrated both qualities.

Drug gangs and organized crime groups devise ways to establish and maintain rights primarily through the threat of violence. One of the main ways this is done is through the delineation of territory. The threat of violence and other extralegal forms of punishment are used as a means to enforce or to predate on territory for selling or distributional purposes (Levitt and Venkatesh 2000; Reuter 2009). Drug-selling gangs provide protection for their members engaging in illegal drug transactions. Therefore, gangs and criminal networks with the highest capacity for violence will succeed, so long as their use of violence is not sufficiently high to scare off consumers that are averse to violence and to warrant additional police attention. This provides context not only for why violence is initially useful to groups operating in illegal markets, but also has implications for how protective entrepreneurship evolves over time and to which opportunities entrepreneurs working within this environment are alert.

Knowledge, as we know from Hayek (1945), is dispersed throughout the economy, frequently in tacit form, and can never be known to a single mind. Linking the role of knowledge and ignorance and their role in the market process, Kirzner (1992, 52-53) writes, “The existence of unknown ignorance manifests itself in markets as unnoticed opportunities for pure profits. Such opportunities attract the alertness of entrepreneurs. It is the series of discoveries stimulated by such alertness that constitutes the market process.” These discoveries allow entrepreneurs to cope with the world around them, and in the case of illegal markets, protective entrepreneurs, in the pursuit of profit, are alert to new methods of facilitating governance, protecting rights, and evading law enforcement.

Individuals, however, are not alert to all opportunities always and equally. As Baumol (1990) explains, entrepreneurship is shaped by the institutional framework within which it takes place. As Martin (2011) informs us, entrepreneurial alertness, too, is shaped by the environment, including the institutions, within which the entrepreneur is operating. Martin writes, “One key feature of alertness is that it is not a general ability to perceive profit opportunities. . . . Alertness is specialized to a context of action. If we make the plausible assumption that experience in a ‘line of endeavor’ specializes individuals’ alertness to the context of that endeavor, then we can explain how discoveries can lead to further discoveries. A discovery can lead to further discoveries when it allows an entrepreneur’s alertness to be further specialized” (2011,75-76). In illegal drug markets, entrepreneurs already possess an initial skill set in the efficient use of violence and law enforcement evasion, thus they will be alert to new methods by which they can use these skills in order to achieve a profit. As these discoveries manifest into profit opportunities, illegal drug entrepreneurs’ alertness to violent methods of protection and law enforcement evasion is further specialized. Just like in legal markets with formal rights, once a previously unseen profit opportunity is recognized, the entrepreneur executes a plan that reallocates scarce resources toward their newly discovered higher-valued uses. Real resources are allocated toward more productive ways of evading law enforcement and violent methods of informally protecting rights.

Empirical evidence supports the argument that law enforcement is a primary driver of violence within illegal drug markets. Miron (1999, 79) finds that “the homicide rate is currently [as of 1999] 25 percent-75 percent higher than it would be in the absence of drug prohibition.” Reuter (2009) cites the intensity of law enforcement as a proximate cause for increased violence throughout his article, “Systemic Violence in Drug Markets.” Two examples he provides are through the means of arresting high-level illegal gang officials such that turnover in the organization is higher, leading to greater conflict (2009, 278) and fear of the trading partner being a possible informant (2009, 281). Reuter (2009) also discusses how violence is not only used as a method of rights protection, but that individuals use violence in illegal drug enterprises to move up in the organizational chain of command, as a disciplinary device to hedge against being informed on, and to gain access to transportation routes (275-77). In the absence of Prohibition and the enforcement thereof, concerns about being informed on to the police would not be a concern. Furthermore, if the costs of punishment and the need to evade law enforcement associated with participating in the drug trade were to dissipate in the absence of Prohibition, this would increase the extent of the market, allow for greater specialization, and widen the realm of entrepreneurial alertness to other methods of informal property rights protection. Private methods of arbitration, contract enforcement, and conflict resolution that have worked well in legal industries would now be accessible to the drug industry, providing substitutes for organized crime, drug gangs, and other violent methods of enforcement that were previously relied upon.

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