The Good, the Ignorant, and the Dumb

Chris George on the foolishness that still guides drug prohibitionists.
NPR’s Planet Money has a podcast posted featuring segments of an interview with Freeway Rick Ross, a big name former cocaine and crack dealer in ’80s and ’90s Los Angeles. They compare and contrast his experiences with economic theory proposed by anti-prohibitionists such as Jeffrey Miron. For the most part, it’s a very entertaining and informative (at least to people ignorant of the effects of prohibition), especially when talking about the price inflation caused by prohibition. It’s definitely worth a listen; however, there were two pretty big issues:

The Ignorant

The interviewers ask Rick Ross what affect risk of getting caught or killed had on the prices he’s willing to charge — apparently little to none. Ross explains that the environment he lived in was one of desperation and uncertainty with a substantial portion of the population doubting they’d even make it past 24-years-old. Essentially, the legal risk of selling prohibited substances didn’t factor into his reservation rate — had it been in the cards, he would have done the same for far less.

This leads the interviewers to tentatively conclude that the risk premium discussed by economists is not actually there. No, economists are correct, or, at the very least, Rick Ross’s testimony is not counter-evidence. Economists are focused on an entire market. We are interested in how prices are determined given the tacit information presented to individuals or organizations. Even if risk is not a factor in the decision making of the downtrodden of inner city LA, it is a factor in why a middle-aged white suburban dad isn’t stepping into that line of business. Sure there are cultural factors, but the entire reason prohibition makes sense is because of the risk component. Ross’s anecdotes actually explain this well: why do the drug markets center in poor areas? Because the disenfranchised are the only ones willing to accept the risk — because they have nothing to lose. Meanwhile, prices remain high while supply is constrained as a result of the legal risk imposed on the more risk conscious. The hosts’ misunderstanding of this appears to be a result of them not actually know the argument very well.

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