Reporting on the Mexican Cartel Drug War

Why It's Obvious We Are Losing The War On Drugs

Friday, April 1, 2011 |

By: Ed Dolan
Business Insider

Last week The New York Times reported that the drug cartels, after shaking the political and economic structures of Colombia and Mexico to their foundations, are moving into Central America. Just one more sign, as if we needed it, that the United States is losing its endless war on drugs.

No one who has ever taken Econ 101, or read the works of Friedrich Hayek, should be the least bit surprised. The drug cartels are strong because the US strategy in the drug wars makes them strong. Here's why.

First, what we learn from Econ 101. The key concept is price elasticity of demand—the percentage change in quantity demanded associated with a one percent increase in the price of a product. If a one percent price increase reduces the quantity people buy by more than one percent, demand is said to be elastic. If the quantity sold falls less than one percent, demand is said to be inelastic. Elasticity, in turn, determines what happens to the seller's total revenue when the price changes.

If the percentage change in quantity is greater than the percentage change in price, demand is elastic, and revenue goes up when the price falls. (For example, suppose you can sell 100 widgets at $1 apiece and 120 when you cut the price to $.90. Your revenue goes up from $100 to $108.) If the percentage change in quantity is less than the percentage change in price, demand is inelastic, and revenue goes up when the price rises. (Suppose you can sell 100 gadgets at $1 and that you still sell 90 if you raise the price to $1.20. This time it is a price increase, not a decrease, that will increase your revenue.)

What is the elasticity of demand for illegal drugs? Intuition suggests that demand should be inelastic. If cocaine, heroin, and the rest are addictive, people who use them will not find it easy to kick the habit just because the price goes up a bit.

Econometric studies of the question are hampered by the fact that drug lords don't post accurate price and revenue data on their web sites, but such research as has been done tends to confirm the hypothesis of inelastic demand. For example, one survey of the literature found that a 1% increase in the price of cocaine would tend to reduce consumption by only 0.51 to 0.73 percent, solidly in the inelastic range.

This gives us our first clue as to why the war on drugs isn't going so well. The main strategy is interdiction of supply. To the extent interdiction succeeds in reducing supply, it drives up the market price. With inelastic demand, a higher price means more revenue for the drug cartels.

Note that more revenue for the drug cartels does not necessarily mean more profit, because interdiction efforts also raise suppliers' expenses. However, from a public policy point of view, it is the expenses that do the damage, not the profits. If drug lords just earned profits, they would probably spend them harmlessly on fancy cars and villas. It is not so harmless to see their expenses rise.

Those consist largely of salaries paid to thugs who guard shipments and shoot anyone in the way, bribes to officials on both sides of the border, and pay and equipment for more thugs who are assigned to inter-gang warfare, with innocent victims caught in the crossfire. With inelastic demand, a higher price for drugs means more revenue available to finance all of those things. To the extent that is the case, the interdiction strategy on which the war against drugs is based is self-defeating.

The inelastic-demand model of the war on drugs cannot be the whole story, however. In its simple form, it cannot explain the paradox that while drug violence is on the rise, the prices of cocaine and heroin have been falling steadily for decades. How can that be?

One possibility is that demand is elastic in the long run even though it is inelastic in the short run, a pattern that can be observed for other commodities, as well. It is a pattern that accords with the intuition that an addicted user will not forgo the drug even if the price goes up (inelastic short-run demand), but that cheap drugs might, over time, attract new users (elastic long-run demand). For example, one study found that between 1981 and 1995, the price of cocaine fell by a factor of 5 while the number of emergency room admissions mentioning cocaine increased by a factor of 15. (This interesting graph from the study shows the pattern holding for heroin as well as cocaine.)

Although long-run elastic demand could explain why drug cartel revenue has held up in the face of falling street prices, it cannot explain the price decrease itself. The price decrease suggests that some of the cartels' revenue has gone to investments in capital and technology, and that those investments, over time, have shifted the supply curve downward, more than offsetting the efforts of the drug wars to push it upward.

As one example of the willingness of the drug cartels to undertake investment and innovation, consider the development of drug-smuggling submarines. When satellite surveillance and more extensive patrolling raised the risk for surface boats, smugglers began building primitive semisubmersibles that evaded detection by riding just below the surface, but they were not a perfect solution.

The next step is indicated by the recent discovery by the U.S. Drug Enforcement Administration, working together with Ecuadoran police, of a 100-foot fully submersible submarine. "The submarine’s nautical range, payload capacity and quantum leap in stealth have raised the stakes for the counterdrug forces and the national security community alike," commented the DEA's Jay Bergman.

The growing viciousness of the drug wars and their destabilizing impact both on the United States and its allies cannot be explained by economics alone, however. That is where some of Hayek's insights come into the picture. In one of his most important books, The Road to Serfdom, Hayek examines the internal dynamics of totalitarian movements. This passage from the chapter "Why the Worst Get On Top" applies to the case at hand with only minimal editing:

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 . . . and which have to be executed with the same expertness and efficiency as any others. And as there will be need for actions which are bad in themselves, and which all those still influenced by traditional morals will be reluctant to perform, the readiness to do bad things becomes a path to promotion and power.
The point of this is that drug cartels are like normal business in some ways, but not in all ways. If cocaine and heroin were legal products like tobacco and alcohol, their producers' revenue would still respond to changes in price as predicted by elasticity, and increases in revenue would still be devoted, in part, to innovation and capital investment aimed at expanding supply.

But those businesses would not share the extreme badness of the drug cartels. It is not the nature of their products that makes drug gangsters so readily engage in murder, kidnapping, and other forms of mayhem. Rather, the conditions in which skill and enthusiasm in committing acts of violence become a path to promotion and power are created by the very fact that cocaine and heroin are prohibited substances, and those conditions are only intensified the more vigorously the prohibition is pursued.

What is the alternative? A strong case can be made for full legalization of cocaine and heroin, on a par with alcohol and tobacco. (For a sampler, see these items from the Drug Policy Alliance, the Economist, and the Guardian.)

Short of that, a demand-related approach that treated drug addiction as a public health problem, not a law-enforcement problem, would produce less violence abroad and fewer unintended consequences at home than present US policy. At any rate, that is the answer you come to if you look at the problem in terms of Econ 101 and Hayek.

Source: http://www.businessinsider.com/econ-101-hayek-and-why-we-are-losing-the-war-against-drugs-2011-3

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17 Borderland Beat Comments:

Anonymous said...

People are going to do drugs no matter what...even if they are 'all gone' they will huff paint or anything they can get their hands on! They should have a right to also. As adults we should be able to make our own decisions. Legalize the shit...tax it.

Anonymous said...

makes sense/

Anonymous said...

Pro legalization fails to mention the enormous burden on government for government paid rehabs, children being left behind by parents unable to cope, violent crime in and around our cities to obtain the money for drugs since most of the addicts don't have a pot to piss in anyway, continued failed prioritizing of finances leading to more forclosures and the list goes on and on.....and someone still has to produce, manufacture, traffic the shit....The cartels will still be violent over territory and rights....maybe even worse as the government throws their hand into the profits.

Anonymous said...

make addicts and anyone involved in the producing and distribution a crime punishable by execution.
cancer is removed from the body, remove this cancer from our society. Put and end to them once and for all.

Anonymous said...

Good God, don't the liberal druggies ever get tired of arguing futilely for legalization? It isn't going to happen. Get over it.

Anonymous said...

If the USA was NOT a cradle to grave WELFARE state NOBODY,NOBODY would care at all if people used any GD drug they choose, take rat poison,smoke cow shit. BUT as long as I am forced to pay 35% of my hard earned $ in taxes MOST of which goes for SOCIAL SERVICES I will hate the low class DRUGGIES in the USA ,I had rather have my tax money go for jails than see these people at the store buying steaks with their welfare credit cards,have these people clog hospitals,for free care etc.

Anonymous said...

I wonder if cocaine and heroin were to be legalized, would it be possible to grow them here in the U.S. using temperature controlled labs by independent cultivators and thereby, circumvent the need to import it from Mexico? American ingenuity when given the opportunity to exercise its right to progress, could yield great quality results.

Anonymous said...

"Idiocracy" anyone?
Imjustagirl

Anonymous said...

Ending the war on drugs is about as easy as eliminating alcoholism in the U.S, it will never happen. Legalize drugs, well you will have a whole mess of people driving high on meth,coke and marijuana. There is no real solution to this. Raise your kids right and we may be able to prevent this problem for future generations

Anonymous said...

There are already a "whole mess" of people driving high on meth, coke, and plenty of other drugs that alter their reaction times.

I dont know one person who does not do drugs that would start using them if they were legal.

The whole legal v illegal argument is polarized between political ideologies,
But there are no leaders in the western world of any political denomination that will change the laws, they are here to stay.

The biggest oversight between the arguing mass of people is the fact that your average crack head, meth addict, whatever you label them is a very weak person, someone who has in almost every occasion had a terrible life or event happen to them, they are not strong and able to bounce back or "get on with it" and be tough.

These people are weak and often do desperate things to get attention or money for drugs.
The thing they really need is help.

And as the strong ones or reaction is to send them to jail.

Nice!!!!

Anonymous said...

The sad fact remains that even if you arbitrarily doubled all of the drug- and drug war-related deaths in Mexico, the United States and Latin America proper, it would not even fill a thimble compared to the number of deaths and the massive tidal wave of medical complications and expenses related to alcohol and tobacco.

Most people turn a blind eye to this fact.

I'm a fiscal conservative and a voting Republican, but I'm not surprised to see people whining about their 35% income taxes going to pay drug addicts. Such people are idiots because a.) nobody in the US pays 35% income taxes. If you do, you're stupid and too cheap to pay and listen to a decent tax attorney, and b.) you've never been outside the United States, because if you had been, you'd realize that the Brits, Dutch, Germans and Swedes will take you to school about what punitive income taxes are all about.

But it's true. The legalization of drugs is here to stay. It will never be treated as a health issue by Americans because quite frankly our health care system is on its knees because of decades of complacency regarding obesity, alcohol and tobacco. Hard drugs are definitely a worrisome problem, but come on.

Nobody should be worried about China taking over the world in the next 15 years. The reason why is because of a healthcare tsunami coming that their own government will never admit re: tobacco. It's shocking.

Anonymous said...

Wish we could make all the drugs have something in it that makes user sterile and impotent...and turn skin blue!

Anonymous said...

Come on no country will ever win the war on drugs. If there is consumers or demand it will be producers or drug dealers.

Anonymous said...

A lot of ignorant, uninformed comments as always. So lets break it down a little

1. Legalization is not an answer and will do little to curb the problem. Take a look at Amsterdam and it's horrendous addiction rates.

2. The comment about 35% taxes mostly going to social services is crap too. The vast majority of our taxes goes to support the government machine (buildings, staff wages, computers etc) and the military.

3. Since the overwhelming drug problem in this country is abuse of prescription meds (cocaine, weed, meth are a fraction of the total consumed), we can stop all the cartel action and we would still have a drug problem.

4. Taxing drugs - this is, in effect, what Mexico did for decades. Turned a blind eye to the problem while charging fees for the "plaza". Police, military, politicians all got their cut - a created a monster.

All-in-all, there is NO simple solution to this problem. If there were, the cartels would already be out of business. Complex issues, complex problems all take a lot of work to resolve. There is no easy fix. So stop throwing out one line "solutions" that won't do anything.

Anonymous said...

@April 2, 2011 5:01 PM

Its obvious you don't know what you are talking about, just look at prohibition. Wow no easy way to solve the problem. Someone obviously forgot to take history lessons.

Anonymous said...

@April 2, 2011 5:01 PM

You are talking out of your ass.

The Netherlands has much lower drug addiction rates, even with Amsterdam bringing in tons of drugs and drug tourists every year.

AmigoAnónimo said...

41+ years of Nixon-inspired "Drug War" & over a trillion tax payer dollars spent? And my kids tell me that it's easier to get dope than it is a 6-pack? Thank God I taught my kids that dope was bad, because Prohibition certainly isn't keeping dope out of their reach. Am I the only taxpayer that thinks Prohibition is a stupid waste of OUR money & LE resources? Why don't we just chase people who do bad things to other people? It really is that simple. And no, I haven't forgotten about the burden on society created by the dopers...easy to deal with if we spent billions on rehabilitation/education, rather than on LE chasing & jailing such a huge number of people...all because they choose to get high. Isn't choice the foundation of FREEDOM? I don't care what other people do, as long as they leave me & my family alone, & they stay off my lawn. All I know is, after 41+ years & all that money spent, the situation appears worse, not better. When will somebody [anybody] try something different? ANYTHING. But we already know the status quo, although bleeding stupidity, will not change. At least not in my lifetime. Anyone who thinks Prohibition is the answer, wasn't paying attention in history class. It isn't a complicated problem...the answer has been in our grasp for over 70 years.

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