Transcript Ed Dolan, Econ 101, Hayek, and Why We are Losing the War

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Ed Dolan’s Econ Blog
http://dolanecon.blogspot.com/
Econ 101, Hayek, and Why
We are Losing the War
against Drugs
Posted March 30, 2011
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The Drug Wars Spread
 After shaking the economic and political
structures of Mexico and Columbia, the drug
wars are moving to Central America
 Where to look for clues to why the United
States is losing its endless war on drugs
 Econ 101 and demand elasticity
 The writings of Friedrich Hayek
Photo sources:
http://upload.wikimedia.org/wikipedia/commons/6/67/Cocaine3.jpg;
http://commons.wikimedia.org/wiki/File:Topographic_map_of_Centr
al_America.jpg
Posted March 30, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
Elasticity of Demand
 Price elasticity of demand means the
percentage change in quantity of a good
demanded that is associated with a one
percent change in price
 If the percentage change in quantity is
greater than the percentage change in
price, demand is elastic
 If the percentage change in quantity is less
than the percentage change in price,
demand is inelastic
Posted March 30, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
Revenue and Price when Demand is Elastic
 When demand is elastic, a decrease in
price will produce an increase in
revenue
 Example:
 100 units are sold at a price of $100 for
revenue of $10,000
 If price is cut to $90, 120 units are sold
for reveue of $10,800
Posted March 30, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
Revenue and Price when Demand is Inelastic
 When demand is elastic, a decrease in
price will produce an increase in
revenue
 Example:
 100 units are sold at a price of $100 for
revenue of $10,000
 If price is cut to $90, 120 units are sold
for reveue of $10,800
Posted March 30, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
Elasticity of Demand for Cocaine
 Data on demand for illegal drugs is limited
because of the nature of the market
 However, some studies have been done.
They suggest that demand for cocaine is
inelastic
 One survey of the literature* found
estimates of demand elasticity ranging from
-.51 to -.73, indicating that a 1% increase in
price reduces quantity sold by less than 1%
 Accordingly, revenue from sale of cocaine
would tend to increase when the price
increases
*Link for elasticity estimates: http://www.nap.edu/openbook.php?record_id=9441&page=30
Posted March 30, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
Implication of Inelastic Demand for Policy
 The main strategy in the war on drugs is
interdiction of supply, which tends to shift
the supply curve upward and to the left
 With inelastic demand, we expect
interdiction to lead to an increase in
revenue for drug cartels
 More revenue may not mean more profit,
because costs increase
 However, more revenue means more
money to spend on hiring thugs and
corrupting politicians
 In that sense, interdiction is a self-defeating
strategy that increases, rather than
decreases, corruption and drug violence
Posted March 30, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
Cocaine and Heroin Prices Have Fallen Over Time
 Despite efforts to reduce supply,
prices of cocaine and heroin have
fallen over time
 Possible explanation: Drug cartels
have invested in capital and
technology like drug-smuggling
submarines that have reduced
costs over time despite interdiction
efforts
Follow this link to view the original graph from which
this one was derived
Posted March 30, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
Organizational Effects of Interdiction Policy
 Drug cartels in some respects act like
normal businesses
 Prices affect demand for the product
according to elasticity
 Part of revenue is reinvested in
technologies to improve delivery and
reduce costs
 In other ways they are different
 They recruit people who are not
inhibited by laws or morals
 They use far more violence in pursuit
of profits
 The results resemble the structure of
totalitarian organizations as described
by Friedrich Hayek
Yet while there is little that is likely to
induce men who are good by our
standards to aspire to leading positions in
a [drug cartel], and much to deter them,
there will be special opportunities for the
ruthless and unscrupulous. There will be
jobs to be done about the badness of
which taken by themselves nobody has
any doubt . . . [as a result] the readiness to
do bad things becomes a path to
promotion and power.
Friedrich Hayek, The Road to Serfdom
Words “drug cartel” have been substituted for
“totalitarian organization” used in original
Hayek Photo courtesy of Mises Institute
http://upload.wikimedia.org/wikipedia/commons/7/7f/Friedrich_Hayek_portrait.jpg
Posted March 30, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
The Bottom Line: Why We are Losing the War on Drugs
 As long as demand is inelastic,
efforts to restrict supply have the
unintended consequence of
increasing revenue for drug cartels
 Increased revenues are invested in
hiring thugs, corrupting politicians,
and new delivery technology
 Illegal organizations attract violent,
immoral people who use violent,
immoral business practices
 In these respects, the war against
drugs creates the conditions for its
own failure
Posted March 30, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com