About a century ago Irving Fisher was the most famous economist in the world, but his predictions contributed to the bad name that economics has today as ‘science’ and that is only surpassed by the bad reputation that astrology has when it comes to predicting the future.
Fisher himself had said in October 1929 that the stock market had reached a “perfect and permanent plateau.” Just nine days later, the stock market crashed, kicking off the Great Depression.
This economist was also a teetotaler and defender of the prohibition or ‘Prohibition’ that was lived in the United States between January 16, 1920 until December 6, 1933 and that prohibited the manufacture, transport and sale of alcoholic beverages.
Fisher’s arguments in favor of prohibition were based on loose studies that indicated that alcohol consumption before work limited productivity. Apart from the moral objections that Protestant groups towards alcohol, many economists wondered if a nation of drunks could compete against a country whose productive force was sober. Anyway … what reasons economists were not lacking for wanting to limit alcohol consumption.
However, Irving Fisher took the figures on alcohol consumption and prohibition with some freedom. It pointed out that the ban had led the United States to produce an additional $6 billion. And, in fact, during prohibition, alcohol consumption only fell by a fifth. In other words, 80% of habitual drinkers continued to consume alcohol without any problem.
This economist assumed – without any hard evidence – that American workers drank 5 beers before going to work. He had done some studies before where he found that drinking a beer on an empty stomach lowered a worker’s productivity by 2%. Thus, multiplying a 2% loss of productivity by five beers, Fisher concluded that regular alcohol consumption lowered the productivity of the American worker by 10%. With these figures in hand, the ban was quite justified for economists.
While it is true that alcohol consumption has serious effects on people’s productivity and health, as well as on relationships between households, prohibition as a solution to the problem of alcoholism is far from being the rational solution.
In 1913 an Italian immigrant living in Chicago came home one night completely drunk and brutally beat his pregnant wife. It is said that as a result of the beating the baby that this immigrant’s wife was expecting was born with horrible malformations. The incident made many women begin to count the effects that alcohol consumption had on their husbands, who beat them, stoned the household money and left them in the most complete helplessness.
Due to this incident, the Movement for Temperance arises in the United States, a Protestant political activism group that defended the total prohibition of alcohol consumption and pointed out that this type of drink was responsible for poverty, loss of productivity and of the breaking of thousands of families.
The prohibition had some success keeping part of society in a state of sobriety and ‘temperance’, managing to socialize many people who had made alcohol consumption a lifestyle. But it also brought great evils: the greatest of them was the birth of organized crime groups with high power and with enough capacity to make alcohol the most profitable of all businesses.
Economists could have avoided the embarrassment of Fisher’s predictions had the theory of rational crime developed in that period in history.
“Rational Crime” is the brainchild of economist Gary Becker, winner of the Nobel Prize in Economics.
Becker argued that making some good illegal simply added another cost to this good that people would have to weigh in their rational choices. So the costs and benefits of doing something illegal have to be taken into account when choosing, including the risk of being caught by the police.
Gary Becker in fact parks his car almost always in prohibited zones because he considers that the police do not take the trouble to observe drivers carefully, and admits that in this sense he commits a “rational crime”.
Rational criminals, Becker says, will provide the prohibited goods at the correct price.
Whether consumers will pay for that good depends on the elasticity of demand. If the demand for a good is elastic, it is understood that it adapts to the available supply.
Suppose for example that a plague kills rice crops. If consumers cannot find rice and instead of buying this product they decide to buy potatoes, the price of rice will remain almost unchanged. This assumes that the demand for rice is elastic because it can adapt to the supply of the product. At the other extreme, we find the demand for products that cannot be replaced by others such as alcohol, drugs and cigarettes. In this case, demand is inelastic because it cannot adapt to changes in supply, so demand remains the same even though the supply of the product is restricted.
In cases where the demand is inelastic, if the supply of the products is scarce, the price of these can be increased and the demand will remain unchanged.
Prohibition thus turned out to be a bonanza for criminals like Al Capone, who defended alcohol smuggling in business terms:
“I give the public what the public wants,” said Al Capone. “I have never had to send a salesperson under pressure for results. Nor have I been able to meet all the demand. “
Black markets change incentives in other ways, too.
Your competitors cannot take you to court for unfair competition, so why not use the means at your disposal to establish a local monopoly? In this context, the wars of the drug cartels are explained because they are the only suppliers of cocaine, heroin and other illegal drugs.
In the 1920s, violence related to the trafficking of alcohol certainly led to prohibition being finally abolished.
The ban also contributes to lower incentives for product quality. If people are still going to buy the product and at a higher price, what is the point of providing safer alcoholic beverages? This also contributed to many drinks sold during the Prohibition era having cheaper and less safe ingredients.
Prohibition laws have inspired economists like Bruce Yandle to coin a term that has become common in a branch of economics called public choice theory: “The Smugglers and the Baptists.”
The idea behind this term is that bans are almost always supported by well-meaning moralists and money-hungry cynics.
Take, for example, the prohibition of marijuana. Who supports it?
According to Yandle’s formulation, “Baptists” are anyone who thinks marijuana is wrong; Smugglers are the rational criminals who profit from the prohibition laws, alongside anyone who makes a profit on the prohibition. Take for example the officials who are paid to enforce prohibition laws, such as policemen, DEA agents, military personnel involved in the fight against cartels, and politicians who obtain money for their campaigns from criminal groups. .
In recent years, marijuana has been falling outside the area of influence of the “Baptists” and the smugglers. Many countries have legalized its consumption and production, causing prices to fall or remain at the same level, while the state collects money through taxes that it can use for more useful purposes than persecuting cannabis producers and consumers.
