Drugs, Economics of Illegal

History

The United States imposed national alcohol prohibition in 1917 through a constitutional amendment. “Prohibition” was successful at reducing overall rates of alcohol production and consumption. The societal cost of that prohibition was quite high: criminal organizations made fortunes through control of alcohol production, distribution, and sales. Competition between performers in the market was usually violent. Law enforcement was hamstrung by widespread corruption of police and public officials. After the U.S. economy faltered and the major stock market crashed in 1929, the political will to continue prohibition weakened as well. The Prohibition Amendment was repealed in 1933, and states and counties were allowed to regulate alcohol distribution, including the option of prohibiting public sale. To this day, some areas in the country remain “dry”; alcohol there is not available for sale to the public.

The federal government had already prohibited narcotics at that time with the Harrison Narcotics Act (1914). The act was an attempt to control nonmedical [Page 440]use of certain drugs, specifically opiates and cocaine. In 1937, with passage of the Marihuana Tax Act, cannabis was also prohibited. As with alcohol, this prohibition has not been successful at preventing use. It is difficult to gauge precisely how unsuccessful these efforts have been because reliable data on drug use is nearly nonexistent.

The Business of Drugs

At one end of the supply chain are producers, for example, farmers growing opium poppies and lab operators manufacturing drugs like methamphetamine. At the other end are users. In between are transporters at various levels, wholesale distributors, midlevel distributors, and retail distributors or “dealers.” Most business occurs in cash, but some transactions occur on credit or in trade for services. Because illegal markets lack legal recourse to settle business disputes, the trade itself can sometimes be a cause of violence, though this is not typically the case. The bulk of transactions are at the retail level involving minor dealers and do not involve violence. Profits for these dealers are usually small, though some entrepreneurs can move up the ladder and do rather well.

Since the trade is illegal, investing or saving becomes problematic. Asset forfeiture laws in the United States and other nations allow authorities to seize the profits of illicit drug businesses and the assets of accused drug dealers. Thus, it is necessary for those in the trade to “launder” money, that is, hide the source of the money and make it appear to be legal income if they wish to use it safely. They also sometimes have another person (one with a legitimate income) purchase items for them, keeping the deed or title to the item in the name of the other person, the “straw purchaser.”

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