A Free Market in Drugs

Seventh International Conference on Drug Policy Reform, Washington, D.C.

A few years ago, Milton Friedman appeared on This Week with David Brinkley to present the case for drug legalization. Asked if legalization would mean billboards advertising the thrills of crack, he seemed to rebel at the thought. No, he said, there would have to be restrictions on advertising.

I was surprised to hear Friedman say this, since he is one of the world's leading free-market economists and had never, so far as I knew, supported such censorship before. I saw him several months later at a drug-policy conference and asked him about the incident. He assured me that he opposes restrictions on advertising. But when he was asked about crack billboards on the Brinkley show, he saw that a trap was being set. He chose to avoid it by conceding what at the time seemed a relatively minor point. He told me he regretted that choice.

Now, Milton Friedman is a man who, several decades ago, called for the abolition of medical licensing and proposed that educational vouchers be substituted for state-run schools. He has been a persistent and vocal critic of the war on drugs for many years. He is hardly one to avoid controversy. That someone as principled and courageous as Friedman would hesitate in pressing the case for a free market in drugs says something about the rancor that such a proposal is apt to arouse.

This response is rooted in fear–most obviously, fear of rapacious capitalists, powerful drugs, and seductive advertising– but, ultimately, fear of individual freedom. Because it is individual consumers who run the show in a free market, choosing what to buy from whom. Businesses that ignore the tastes and preferences of consumers will not survive very long.

Critics of capitalism argue that businesses do not react to tastes and preferences so much as shape them. Thus Americans were not much bothered by the smell of stale sweat until the makers of antiperspirants and deoderant soaps convinced them it was offensive. They did not hanker for a sweet, bubbly, brown beverage until Coca-Cola came up with one and marketed it nationwide. They were perfectly willing to cross the room to turn off the light until commercials for the Clapper made this seem an intolerable nuisance.

There's no denying that advertising can help to create a desire for a product, especially when that product is new or unfamiliar. But the advertiser has the burden of convincing the buyer that the product will serve a genuine need or make his life more pleasant in some way. After the purchase, the consumer's experience of the product has to be positive enough that he will want to buy it again or buy other products made by the same company.

Despite what you might gather from the brief successes of Pet Rocks and Green Slime, consumers are not infinitely malleable. In this connection, it is helpful to think of yourself and how you react to advertising, rather than some mythical Gullible Consumer. From time to time, you may become interested in a product after seeing a magazine ad or TV commercial and ultimately buy it. But you do not therefore see yourself as a stooge manipulated by forces beyond your control. Whatever led you to consider the purchase, the decision was ultimately yours. And it was based not on foreign impulses but on your own evaluation of your interests. You are not always a perfect judge of those interests, but you are the best judge.

Now let's consider the crack billboards again. To begin with, given the public's very negative impression of smokable cocaine, it's unlikely that any reputable company would be interested in selling it. If some entrepreneurs did decide to market crack, it's unlikely that many people would want to try it. Would you? In any case, most experimenters would probably find they did not like the drug's effects: a quick rush, a short peak, and a steep drop. That profile is not very appealing to a social drug user. Even among current crack users, many would probably prefer the longer-lasting, less dramatic effect of snorting cocaine powder, if they could afford it at black-market prices. And to the extent that legal cocaine finds a broad market, it is likely to be in milder forms still, such as coca tea or old-fashioned Coca-Cola.

This is the pattern that we see in the demand for the currently legal drugs. People generally would rather drink tea and coffee than pop No-Doze, and you don't hear of many caffeine addicts who smoke or inject the drug. In the alcohol market, the trend has long been away from liquor and toward beer, wine, and wine coolers. The liquor companies might wish otherwise, but no matter how much they spend on advertising, people will only buy so much whiskey and vodka. Jack Daniels recently introduced a line of pre-mixed cocktails with an alcoholic content not much higher than that of table wine. In the tobacco market, smokers have been moving to cigarettes with less tar and nicotine. This is the main benefit touted by some brands.

Speaking of tobacco, many people view smoking as a prime example of irrational consumer behavior. But smokers seem irrational only to people who do not share their tastes and preferences. In his recent book Smoking: Making the Risky Decision, the economist W. Kip Viscusi shows that smokers actually tend to overestimate the health risks associated with their habit. The fact that they nevertheless continue to smoke implies that, from their perspective, the costs of quitting outweigh the benefits. Given the availability of nicotine gum and patches, their choice cannot be explained simply by chemical dependence. In any event, even a physical addiction is not an insurmountable barrier; it merely represents an additional cost of changing one's behavior.

If it is possible to accept the risks of smoking in exchange for its pleasures, surely such a choice is possible for users of the currently illegal drugs, which are considerably less hazardous over the long term. Most of the dangers associated with these substances stem from their illicit status. In a black market, quality and dose are unpredictable. Brands are difficult to establish, and legal remedies are unavailable. I'm sure these points are familiar to most of you, but it's worth emphasizing that the remedy is not government regulation. Rather, the remedy is the protection that a free market, backed up by a legal system that punishes fraud and negligence, routinely provides. It's not regulation that deters Seagram's from selling colored methanol in lieu of whiskey or that stops Maxwell House from mixing dirt with its coffee. It's the very thing that critics of capitalism are always warning us about: the profit motive.

You might agree that the market would do a tolerable job of protecting consumers from unscrupulous drug producers but still worry about the costs that users of the newly legal drugs will impose on others by getting into accidents, creating nuisances, burdening public health care, and so on. Some reformers argue that these costs justify special taxes on drugs. The taxes would deter abuse by forcing consumers to recognize the full costs of their behavior. There are several problems with this proposal.

Assuming that we could somehow measure total drug-related costs, dividing that figure by the number of doses sold would not yield anything like an optimal tax. Since only a small minority of drug users impose significant costs on others, such a levy would inevitably undertax abusers while overtaxing responsible consumers. The abusers, who are probably less sensitive to price changes anyway, would be underdeterred, while the responsible consumers would forgo harmless pleasure that would have added to total welfare. Such an approach is inefficient as well as unjust.

It is also unnecessary. When drug users damage property, injure people, drive while intoxicated, or disturb the peace, they are subject to civil and criminal penalties. These sanctions will not always deter, but they are better aimed than a general tax on all users. As for the burden on public health care created by drug abuse, such costs stem from a political decision to subsidize medical services. If taxpayers are upset by the consequences of that decision, perhaps the subsidy should be reconsidered. That makes more sense than trying to recover the cost of the subsidy by imposing special taxes on products that might lead to injury or disease. After all, there is no end to that game. For example, we could tax red meat, motorcycles, and beach towels, because of their association with heart disease, head trauma, and skin cancer, respectively.

Even if government did not subsidize health care, some people would still want it to discourage drug use as a way of protecting consumers from their own foolish decisions. This goal is problematic not only because it denies adults the right to control what goes into their bodies but also because it is impractical. The blunt instruments of taxes and regulations cannot possibly take into account the complexity of actual drug use. They impede moderation along with excess. They assume the guilt of every drug user. They address the costs of consuming mind-altering substances but not the benefits. In short, they are based on the same sort of misguided reasoning that gave us prohibition.