Book Review: Narconomics

by ketchupduck 6 min read3rd May 202011 comments

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I have often heard that the war on drugs is a failure, but the reason why varies.

Sometimes, the war on drugs is a failure like the war in Iraq is a failure: because it is very hard to nation-build, to create a society that does not produce or consume drugs.

Sometimes, the war on drugs is a failure like the war in Vietnam was a failure: because the opponents, drug cartels, don’t fight like we do.

Sometimes, the war on drugs is a failure like WWI was a failure: we can win the battles but we don’t know how to write a lasting peace treaty.

Tom Wainwright’s Narconomics ropes in elements of the above, but offers another overarching story. The war on cocaine is a failure like the war on alchemy would be a failure.

If you knew how to perform alchemy, to turn dirt from your backyard into gold with just an incantation, would you stop just because the government forbade using the incantation? Cocaine isn’t gold, but only because it's twice as valuable as gold in the US. $385 worth of coca plant leaves in Columbia are worth $122,000 once turned into a kilogram of cocaine and shipped to the US. That’s a 30,000% increase in value. Not exactly alchemy, but close.

To put it another way, if drug cartels lost a half-million dollar plane for each shipment of cocaine to the US, it would increase the final price of cocaine by one percent.

The economics of cocaine, like that of alchemy, are very lucrative. As long as that stands, drug cartels will do anything to keep growing and smuggling cocaine. The war on cocaine is bound to fail for as long as cocaine is in high demand.

Wainwright’s recommendation is simple. To drive profits from cocaine down and criminal entities out, we should legalize cocaine.

Burning coca leaves won’t win the war

Here is an Economics 101 problem: In the year 20XX, a mysterious almond blight kills half of all almond plants worldwide. What happens to the price of almonds?

Easy. Constant demand + restricted supply → increased price.

Now here’s a variation on the same problem. In the year datetime.now().year, the Columbian government, with encouragement from the US, lays waste to about half the coca crops in the country. What happens to the price of cocaine?

Constant demand + restricted supply → ¯\_(ツ)_/¯ nothing much, apparently.

The reason is that coca farmers operate in a monopsony: a single-buyer market. In the US, Walmart is the archetypical monopsony. Because Walmart can sell to almost every house in the US, it has incredible power over its suppliers. If you manufacture whistling lawnmowers, and you want to sell to people who buy whistling lawnmowers, you’re going to have to sell to Walmart. You have no bargaining power; Walmart names its price. From that point on, Walmart’s price (and profit) is as constant as the speed of light. If someday the price of manufacturing lawnmowers rises, the rise will eat into your profit, not Walmart’s.

Similarly, coca farmers have one customer for their crop: the local drug cartel. The cartel names its price. They nod because (a) they are not going to find another buyer for their crop and (b) they don’t want to get shot. The government’s plan of spraying, uprooting, and burning coca plants only serves to make coca farmers poorer; the drug cartel still buys coca plants at the same price it always did.

But let’s grant that this strategy works. The Columbian government’s crop destruction triples the price of coca plants. Will the price of cocaine in the US increase then? It’s unlikely.

Right now, dried coca leaves are worth about ~$1 per kilogram. After their price triples, they would be worth ~$3 per kilogram. As a result, the price of a kilogram of cocaine sold in the US would increase from $122,000 to… $122,770 (+0.6%). This is, to put it mildly, negligible.

Policing drug routes won’t win the war

Cocaine that is worth $2,200 in Columbia is worth $14,500 by the time it is imported into the US. That is more than a 500% increase in value for just changing the (x,y) coordinates of cocaine. Drug cartels will go to great lengths to get that 500% increase in value. As the US border becomes more heavily policed, the value of each remaining crossing point into the US increases wildly. Drug cartels pull out all stops to control a crossing point because a cartel without a crossing point won’t last long. Border cities like Tijuana, Reynosa, and (the one Wainwright focuses on) Ciudad Juárez become hotspots of violence as cartels battle to control their crossing points.

The pervasive violence Wainwright describes in Juárez is breathtaking. To take just a few examples:

  • Wainwright’s driver, Miguel, leaves a lot of room between cars when he stops at traffic lights, because traffic lights are known for being assassination hotspots (assassins can drive up, shoot, and speed away easily).
  • A local cartel, Sinaloa, hung a warning poster on a public memorial to fallen police officers. The poster had names of seventeen police officers. Soon after, it started killing the officers named on the list.
  • The city and federal police were bribed by competing gangs, leading to an assassination where a city cop was shot by a federal cop.
  • A cartel murdered a reporter and broke into her Twitter account to tweet a picture of her dead body as a warning to other reporters.
  • Cartels time murders to happen in the early evening, so that their exploits lead the 6:00pm news.

But again, let’s grant that this strategy works. The US manages to completely seal all border crossing points to cocaine smugglers. Will the supply of cocaine in the US decrease then? It’s unlikely.

Just like the semiconductor industry follows Moore’s law, drug cartels follow the “when one door closes, another opens” law. In the 80s, cocaine would come in on speedboats from the Caribbean to southern Florida. When enforcement got stricter there, cartels started using land crossings at the US-Mexico border. If we shut down those crossings, they’ll likely fly cocaine into the US using unassuming drug mules, as they already do for Europe. The US market is simply too lucrative to be ignored.

Imprisoning offenders won’t win the war

Every country involved in the war on cocaine imprisons people involved with the cocaine supply chain. Some go to absurd lengths, like the US, where 1 in 35 people is involved in the prison system, either in jail or prison, or on probation or parole. Others are just absurd, like Mexico, where prisoners in one Acapulco prison smuggled in nineteen prostitutes and two peacocks. Either way, prisons are not only ineffective, they are counterproductive in the war on cocaine.

One of the biggest challenges drug cartels face is recruiting members to join them. The drug business is violent, messy, and unstable. Not many people would sign up for that life if they had a different option. Drug cartels, out of necessity, have to recruit people who would find it hard to get a job otherwise, and who don’t find a life of crime objectionable. In other words, prisons are fertile recruiting grounds for drug cartels.

Prison gangs go to surprising lengths to create a welcoming environment for new recruits. Not only do they protect their members from competing gangs and promise careers outside prison, they also provide community and structure to their members. A Mexican drug cartel, La Familia Michoacana, makes new members read a Christian self-help book. A Californian prison gang, La Nuestra Familia, lets its members elect their captains; this helps new recruits select leaders that won’t abuse them. The Aryan Brotherhood used to let its members vote on whether assassinations should be carried out.

On the other hand, governments do little to nothing to rehabilitate prisoners and prepare them for a life outside prison. Indeed, some seem to actively work against this goal. The US locks up people for minor offenses that could be better handled without incarceration. The US is also guilty of spending much more money on prison than prevention, like when New Hampshire cut funding for rehabilitation programs, but allowed Keene, a city of 23,000 people, to buy a $286,000 armored car for patrolling the annual Pumpkin Festival. Other countries don’t fare much better. For example, in the Dominican Republic, some prisons don’t provide food, forcing prisoners to ask friends and family to deliver food, which creates opportunities for smuggling drugs or weapons into prison.

All this allows prisons to act as a finishing school that transforms minor offenders into hardened criminals.

The argument for legalization

The simplest argument for legalization is, it has to be better than what we are currently doing.

The current war is doomed to fail because:

  1. The end price of cocaine is so high that most supply-side interventions will not change it significantly.
  2. Even if an intervention does change the end price of cocaine, the demand is inelastic and won’t drop much.
  3. Because demand is inelastic, increases in the price of cocaine just make the market more valuable and alluring.

On the other hand, unleashing the forces of competition into the cocaine market will drive prices down. If prices go down, drug cartels will exit the business. Drug cartels might be bloodthirsty, but they’ve got nothing on Delaware C-Corporations hellbent on maximizing shareholder value.

The example of marijuana is instructive. (The book was written when Colorado and Washington were the only states to legalize marijuana, and focuses on them.) Colorado’s legal marijuana growers have put a serious dent in the drug cartels’ marijuana business. Cartels have to offer lower-potency marijuana at one-third of the legal price to stay competitive. Their revenues were forecasted to drop by 75%. Things are getting so desperate that some cartels have started to use their closely-guarded drug-trafficking tunnels to smuggle migrants into the US. Doing so greatly increases the risk that their tunnels will be discovered and closed, but cartels are desperate for money.

Summary

Imagine that you and Bob are deciding what to get for dinner.

You: I ate a really heavy lunch today, so I want something light for dinner. Are you interested in a salad?

Bob: Let’s get pizza slices instead. They have the most calories per dollar of any takeout food.

You would rightfully think “what the hell?” Bob ignored what you said, and is using a criteria (calories per dollar) that you don’t care about. I felt a little bit like that when reading this book. Wainwright, like Bob, has excellent economic arguments for why the war on cocaine is wasteful, and why cocaine legalization would reduce crime and increase control of cocaine consumption. However, most people who want cocaine to be illegal don’t care about the economics of the cocaine supply chain. They just don’t want their kids and neighbors to be addicts.

Or to put it in economic terms, most people believe that making cocaine legal will have huge negative externalities. There will be costs from people becoming less healthy and less productive because they are consuming more cocaine. There will be costs from people becoming so addicted to cocaine that they commit crimes to get their next hit. There will be costs from living in a world where you have to constantly resist, at least at a low level, the temptation to take cocaine. For most people, these negative externalities are larger and more salient than any benefit of legalizing cocaine.

Marijuana legalization victories, where they’ve happened, have happened because proponents talked about how marijuana is harmless, not how marijuana criminalization is economically senseless. For example, take a look at the FAQ page for the Marijuana Policy Project, a leading marijuana legalization organization in the US. The first question they answer is “Is marijuana addictive?” The other questions also address similar concerns. There is only one question on that page that talks about economics, and even that focuses more on how much money could be gained by taxing marijuana.

This book is weak because it barely touches those concerns. The book deals with every part of the cocaine supply chain, except the final part, where cocaine users use cocaine. Unfortunately, that’s the part of the cocaine supply chain that worries Americans most. Wainwright’s economic argument for drug legalization is compelling, but incomplete.

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