08 Jan 2010

The Connection Between Drug Prohibition and Violence

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If you read a standard economic treatment of drug prohibition, it will probably say that drug dealers become more violent since they can’t use the police and courts to protect their property.

At first that sounds fine, but if you are suspicious of government “services” then you start to wonder. In fact, I think the argument is totally wrong. There are all sorts of commercial transactions that aren’t really backed up by the government; people spend lots of money every day buying things on eBay or Amazon from perfect strangers who live on the other side of the country. In principle you could sue them if they didn’t ship you the jewelry or the rare book or the signed photo of Paul Reubens, but in practice these transactions rely on reputation and the private-sector hosts’ incentives to make sure their customers have enjoyable experiences.

So anyway I’m working on a project for high school kids, and I’m making this general point. A new aspect of this occurred to me and I put it in a footnote, but only Free Advice readers can see it. The rest of the riffraff out there will have to wait until the summer when the book comes out.

Here’s the footnote:

Indeed, if drug dealers could conduct major transactions using electronic payments routed through a universally respected third party, the number of violent drug deals “gone bad” would plummet. Rather than bringing suitcases of cash (along with heavily armed bodyguards) to parking garages in the dead of night, a cocaine retailer could deposit $1 million with a reputable financial institution, which would agree to transfer the funds to a Colombian wholesaler once the retailer had received his goods. (The process could unfold in stages if the Colombians wanted to make sure they weren’t double-crossed.) The reason drug dealers currently can’t operate in this fashion isn’t that they fear a bank will steal their money and then the drug dealers won’t be able to call the police. The first time that happened, nobody—even people unconnected with the drug trade—would use that bank again. In reality drug dealers can’t use the simple mechanism we’ve described because of the risk that the government would seize their funds as “drug money.” So we see that it is not government neglect, but government enforcement of drug laws, that makes violence more appealing in the drug trade.

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